Tuesday, May 29, 2012

From one addiction to another...

During the last couple of decades, global economy and markets were increasingly dependent on private and public credit, until the credit bubble exploded in 2008.
Now, this conventional support of economy through credit is not relevant anymore and dependence moved to government/central banks stimulus and bailout.

Some examples ?
- Asian and international stock and commodities markets expect China to introduce more stimulus to boost the economy ;
- Spanish Banks are now expecting a bailout from the Spanish government that will probably have to fund it through European and international rescue programs ;
- Markets in the US are hoping for a new QE3 program and Eurozone for a new LTRO ;
- Japan is in a permanent situation of QE.

Global economy is so addicted to government stimulus and bailout that it is difficult to imagine stability without it. And it will certainly take a lot of time to break this dependence.
Have a nice stimulus day !

Friday, May 18, 2012

Apocalypse Fairly Soon : a severe warning from Paul Krugman

Read this article of Paul Krugman published yesterday the 17th of May in The New-York Times.
The economist and Nobel prize of economy asks European governments to stop half-measures that buy time and to implement real reforms of governance in the European Union.
He also urges the European Central Bank to provide open-ended financing and accept several years of 3-4% inflation.
The biggest cost of European policy failure would not only be economical for Europe and for the world, but would probably be political through the empowering of extremism.
Have a nice reading !

Wednesday, May 16, 2012

Why is Greece on its way to chaos ?

The reason to be extremely pessimistic about the future of Greece is very simple.
According to recent polls, the outcome of the next round of General Elections to be held on the 17th of June is crystal clear : if a majority will be possible in order to rule the country (which is not certain at all), it will be formed by extreme-left parties.
In other words, the choice is between no government and an extreme-left government opposed to the austerity program that was the counterpart of the bailout agreements.
Who will be ready to lend money to Greece in this situation ?
Bankruptcy and possible exit from the Eurozone are now the most probable outcomes for Greece, except if the European leaders agree to considerably soften the conditions imposed to Greece in exchange of the bailout program. But this is not probable because of the total absence of trust towards Greece capacity and will to repay its debt in the future.
Chaos is approaching !

Thursday, May 10, 2012

10Y German Bund at record-low yield

Yesterday the 10 year German Bund reached the record-low yield of 1.50%.
This is the illustration of the financial world today : so much liquidity and so few safe assets.
Have a great 1.5% day !

Monday, May 7, 2012

Political nightmare in Greece

New Democracy and Pasok having together only 149 seats, these two democratic pro-european parties don't reach a majority in Greek Parliament. All other parties represented in Parliament (see results here above) are opposed to the European project.
Will Greece still be part of the Eurozone / European Union in the coming months ? I would not bet a euro on that...

Reading of French Elections

Some thoughts following the election of François Hollande of yesterday the 6th of May :

- The result is quite tightened (51.6 / 48.4), showing the absence of great enthusiasm for the program of Mr. Hollande ;
- The Socialist Party (party of Mr. Hollande) has received the support of extreme-left, mainly from the party of Mr. Mélenchon called "Front de Gauche" which gained 11.1% during the first round : apparently, about 80% of the voters of "Front de gauche" voted for Mr. Hollande in this second round ;
- Mr. Hollande also received the personal support of Mr. Bayrou, the leader of the centrist party called MODEM which gained 9.1% during the first round : about 30% of the voters of Mr. Bayrou voted for Mr. Hollande in this second round ;
- The winner of the first round, the extreme-right party Front national of Marine Le Pen (17.9% in the first round), did all what it could in order to prevent a victory of Mr. Sarkozy : its hope is to profit from a re-arrangement of the political landscape in the right side of the spectrum after the defeat of Mr. Sarkozy and his party UMP ;

So we can say that despite explicit and implicit supports Mr. Hollande received from extreme-left, centrist and extreme-right parties, his victory is quite shy. I noted also that his speeches yesterday after the results were cautious and sober.


Conclusions : the victory of M. Hollande is hiding a more significant evolution of the French electorate that is the success of extremist parties. We are not in a situation that is comparable to what happened yesterday in Greece of course, but the trend line is similar in my view.

Thursday, May 3, 2012

Greece : be worried, be very worried

This is the title of a note of 2 May 2012 by UBS Investment Research about the coming general elections in Greece.
The political landscape in Greece can be characterized by one word : fragmentation. About 10 different parties are expected to reach the minimum score in order to be represented in the Parliament (3%). Each one of the two major parties (New Democracy and PASOK) will probably face difficulties either to negotiate a coalition agreement with numerous smaller parties or to form a coalition together. This latest scenario is nevertheless the most likely.

If and when a new government will be formed, its agenda will be particularly heavy :
- Renegotiate agreements with the IMF and the EU, as the leaders of New Democracy (Mr. Samaras) and of PASOK (Mr. Venizelos) have explicitly stated ;
- Implement near-term austerity measures of about 3 bn €, according to IMF ;
- Decide additional spending cuts for 2013 and 2014 of approximately 5.50% of GDP in order to reach the primary surplus target of 4½ percent of GDP by the end of 2014 ;

Moreover, the new government will have to deal with this difficult agenda very quickly : the submission of a medium-term spending plan is expected by the end of June, the same time as the next Troika review is likely to take place.

If Greece is unable to deliver what has been promised, a scenario where IMF would stop payments is very likely. In that situation, it would be equally difficult for the Europeans to keep funding Greece.
 If this happens, a new round of the Greek drama would start.

To be followed with worry...