Articles from December 2010



Italy’s debt costs approach danger zone

Italy’s borrowing costs have jumped to the highest level since the financial crisis over two years ago, raising concerns that Europe’s biggest debtor may slip from the eurozone’s stable core into the high risk group on the periphery.
Italy's debt costs approach danger zoneYields on 10-year bonds rose 10 basis points to 4.86pc after a poor auction of short-term debt in Rome.

The Italian treasury had to pay 1.7pc to sell £7.2 billion of six month bills in a thin post Christmas market, up from 1.48pc a month ago.

The spike in rates came as money supply data released by the European Central Bank showed that real M1 deposits have collapsed at a rate of 2.8pc over the last six months in the EMU bloc of Italy, Spain, Greece, Ireland and Portugal, even though they are rising in northern Europe.

Italy’s M1 contraction began later than elsewhere in southern Europe but is now accelerating. M1 typically gives advance warning of economic shifts by six to nine months.

The poor auction in Rome may be a warning sign that EU leaders offered too little to restore confidence at their Brussels summit two weeks ago.

German Chancellor Angela Merkel vetoed the creation of eurobonds or any serious move towards fiscal union, and shot down calls for an increase in the eurozone’s €440bn emergency loan fund. The ECB has so far refused to step in to the breach with overwhelming action.

Italy avoided the sort of property bubble seen in Spain or Ireland and has kept a tight rein on public spending under finance minister Giulio Tremonti. However, the rise in yields looks ominously like the pattern seen in Greece, Ireland, Portugal and Spain when they first began to lose easy access to the capital markets.

Italy is too big to be rescued by a diminishing group of creditor states in the EMU core, should it ever need help.

Public debt will creep up to 120pc of GDP next year – or over €1.9 trillion – a level widely seen as the outer limit of debt sustainability.

The country’s trump card is a high savings rate and low private debt. Total debt is 245pc of GDP, below the eurozone average, and much lower than in Spain, Britain, the US or Japan. This may be the relevant indicator for an economy as a whole.

However, low private debt may equally reflect deep pessimism in a country where growth has been glacial for a decade, productivity has fallen since 1995, and global export share is in steep decline.

London Stock Exchange flotations increase but overall decline in global rankings

The number of new flotations on the London stock market soared by more than 500% during 2010 but there was a huge decline in overall cash-raising amid gloom over a sluggish western economy.
London Stock Exchange flotations increase but overall decline in global rankingsMore than £10bn was raised through Initial Public Offerings (IPOs), though many of the 89 companies involved were based overseas and the numbers were modest compared with those seen before the banking crisis.

They were also a fraction of the global figure which is expected to reach £190 billion thanks to a huge surge in activity around China and the rest of Asia.

The overall amount raised in London in the past 12 months was £23.8 billion, down from £77.4 billion during 2009 and £66.7 billion for 2008.

Among the local companies floating in London was online grocer, Ocado, and SuperGroup, the owner of fashion brand Superdry.

The biggest single cash raising was done by foreign firms including Essar Energy of India which raised £1.3 billion.

The LSE was particularly pleased that it had attracted high profile listings from India, Russia, and the Middle East but there was little comment on the slump in overall cash raising or the fact that some listings had struggled badly.

The price of winning an IPO for Ocado was to slash the starting price and yet shares in the company, whose vans are seen on most high streets, continue to trade below its float price. The same is true of Betfair, the online sports betting operator which floated to great fanfare at £13 a share in October

Overall £ 9 billion was raised through 46 IPOs on the main London market while almost £1bn was obtained through similar moves on the junior Aim market.

The £9 billion raised on the main market compared with more than £20 billion in 2007 and in 2006

The general trading position for stocks and shares over the last 12 months has been relatively good with the FTSE-100 index of top shares on track for a rise of 11% year on year. The same index hit 6,000 points last week – its highest level since June 2008.

But companies have been wary of engaging in secondary cash raising while growth prospects in many sectors remain uncertain. The Aim market showed smaller firms more positive with the total amount raised in 2010 up 12% on 2009.

The amount of activity in London is muted when compared with booming financial centres such as Hong Kong and Shanghai. Agricultural Bank of China raised £14 billion over there recently – the biggest float in history.

Swiss franc reaches all time high against US dollar

The Swiss franc has reached its highest ever level against the US dollar.Swiss franc reaches all time high against US dollarThe dollar dropped to 94.5 Swiss centimes yesterday- an all-time low.

The US currency fell against most major currencies on Tuesday following weak housing and consumer confidence data.

The Swiss franc has risen against both the dollar and the euro ever since the 2008 financial crisis, thanks to its status as a safe haven within Europe.

Markets have perceived the country as being a safe place to park cash, free of the debt worries that afflict some countries in the eurozone and – to a lesser extent – the UK.

The Swiss government is running a modest budget deficit in comparison to its European peers, while the country as a whole enjoys a big trade surplus with the rest of the world.

The franc has played a similar role to the Japanese yen – another currency that has proved a safe haven in the past two years, much to the chagrin of its government.

Like the Japanese, the Swiss intervened to weaken their currency earlier this year, fearing that a rapid rise would make its exports uncompetitive.

But – just like the Japanese government – the Swiss National Bank eventually gave up the effort in the face of an inexorable inflow of private money into its home currency.

Wise Money wishes you a Merry Christmas

Wise Money wishes you a Merry Christmas!

Wise Money wishes you a Merry Christmas

Record spike in EMU default risk after fears of Greek restructuring scare

The cost of default insurance on eurozone bonds has surged to an all time high on reports that Greece is preparing the way for a sovereign debt restructuring after 2013, with tacit support from the EU authorities.
Record spike in EMU default risk after fears of Greek restructuring scareThe disputed claim came as Fitch Ratings downgraded both Portugal and Hungary and placed five Greek banks on negative review.

Fitch cut Portugal’s rating one notch to A+, warning that the economy is caught in a low-growth trap.

Plans to cut the structural budget deficit by 4pc of GDP next year “will be extremely challenging especially if, as Fitch expects, the economy falls into recession next year”.

The Greek newspaper Ta Nea said Athens was examining plans to impose a cut in interest rates on its debt and to extend maturities once the £94 billion rescue deal from the EU and the International Monetary Fund expires in mid 2013.

The proposals stop short of “haircuts” on the principle of the debt and would be done in a co-operative fashion with bondholders. While this would qualify as an orderly restructuring of debt, it is tantamount to default.

Ta Nea said Brussels had given a “green light” to the idea, provided that Greece complies with the terms of its fiscal austerity package and carries out deep structural reforms.

The European Commission denied that it had given its blessing for “any restructuring of government bonds by Greece or anywhere else”.

The claims caused a wild spike in credit default swaps for Greek debt, with ripple effects across the EMU periphery.

Markit’s iTraxx XSov index measuring risk on eurozone sovereign debt surged to a record 208 basis points in intra-day trading, though the moves may have been distorted by a lack of liquidity in the run-up to Christmas.

If Greece becomes the first country in developed Europe to restructure sovereign debt since the Second World War, it breaks a powerful taboo and risks opening the floodgates to serial defaults in southern Europe and Ireland.

Greek premier George Papandreou lashed out at the rating agencies on Thursday as the Greek parliament passed its 2011 austerity budget, accusing them of double standards. “They belittle the efforts of entire peoples and answer to no one,” he said.

Mr Papandreou said Greece had “gone through hell in 2010” but had staved off bankruptcy and would confound the “domestic and international Cassandras of disaster”, but he also took issue with the “myth” that Greece was the target of a foreign attack.

“Our own past errors are to blame, and we must recognise that,” he said.

The budget squeezes a further €18bn in spending cuts and tax rises to bring the budget deficit down to 7.4pc of GDP next year.

The measures are a pre-condition for a €15bn tranche of EU-IMF money in February.

Under the rescue deal, Greece’s public debt will peak above 150pc of GDP by 2014. Since investors cannot see how the country will avoid a debt compound spiral at such a level, Greek bonds are already trading at default levels.

There are more risks to being inside the eurozone than being outside- part 2

Wise Money continues our review that is the car crash called the euro and the options facing those eastern european countries who are thinking of joining the sinking ship.
There are more risks to being inside the eurozone than being outside- part 2While playing the devaluation card may have helped some countries in europe ease the short term pain of the recession, what about the longer term?

“They need to think about other drivers of competitiveness than low cost,” says Erik Berglof, chief economist at the European Bank for Reconstruction and Development (EBRD).

Romania, for example, whose currency dropped 20% last year, has seen a big rise in labour costs wipe out much of its price advantage.

More importantly, the entire region still suffers from a huge “convergence gap” with the West, marked by lower living standards and poorer infrastructure.

Normally this would create the potential for a lot of catch-up growth.

But Mr Berglof says the crisis in the eurozone, the region’s biggest export market by far, is bad news.

If Europe’s leaders fail to deal with the weaknesses in the single currency exposed by the crisis, the continent could face years of grindingly low growth.

And slow growth in Western Europe will inevitably be a serious drag on Eastern Europe’s exports. Selling their wares to other parts of the world could provide an alternative, but only in theory.

“In our region there’s not much of an option,” says Mr Berglof. “It’s like asking Mexico to diversify away from the United States.”

The nearby Russian market may at least be one alternative, as the country has very little manufacturing industry of its own and pays for a lot of imports with all the oil and gas it exports.

But Russia is not a big market, cautions the EBRD economist.

The Central Europeans now do a lot of business selling equipment to West European manufacturers, or playing host to factories that form part of Western companies’ supply chains.

As such, a lot of the European demand for these countries’ exports is actually driven by global demand for the German export machine.

The biggest crisis may instead be faced by their Balkan cousins, the Romanians and Bulgarians, to the south, according to Peter Brezinschek, chief economist of Austrian bank RZB.

“In Central Europe, most foreign investment went into greenfield sites, promoting exports,” says Mr Brezinschek.

But in the Balkans, he says, money poured into sectors such as housing construction, utilities or telephone networks that were oriented towards the domestic economy and did little to improve export competitiveness.

Mr Brezinschek thinks the Balkans would do well to follow the Central Europeans’ lead.

Construction of the Budapest orbital motorway Eastern Europe still needs to build a lot of infrastructure if it is to catch up with the West. But he says there is also still a shortage of basic infrastructure.

“The infrastructure is really terrible,” says Mr Brezinschek, who points as an example to the near absence of motorways in Romania.

He says there also need to be major improvements in energy efficiency.

Mr Berglof at the EBRD agrees that serious investment spending is needed across the whole of Eastern Europe, with one big area being education.

“Managers typically list skills as being the number one obstacle they face,” he notes.

So could these countries copy China’s example, and offset weak export demand by ramping up government investment spending?

“An investment binge is not an option,” cautions Mr Berglof. Why? Because the money simply is not there. Just like their West European counterparts, governments in the region are busy cutting back their spending.

And, says Mr Berglof, private investment spending is also more difficult “in an environment of no very well functioning institutions” – a well-known euphemism for corruption and organised crime.

Borrowing from abroad is less of an option these days. It was an abuse of cheap foreign loans that helped push Hungary and others into the arms of the IMF during the 2008 crisis.

Instead, with their own citizens likely to be a lot more cautious with their money in the coming years, governments will need to find better ways of funnelling those savings into local businesses.

Mr Berglof points out that, unlike many of its eastern neighbours, the Czechs have been borrowing and lending to each other in their own currency – the koruna – for years.

Because of this, “the least affected by the financial aspect of the crisis was the Czech Republic”, he points out.

In its latest transition report, the EBRD recommends other countries follow the same route of financing themselves in their own currency, using their own domestic savings and home grown capital markets.

So is this a tacit recognition by the multilateral agency that euro membership is now off the cards?

“No,” insists Mr Berglof. “It is an important step on the way to the euro.” The Czechs may beg to disagree.

There are more risks to being inside the eurozone than being outside

Wise Money repeats the words of the Polish central bank governor, Marek Belka, earlier this month, echoing the private thoughts of leaders across Central and Eastern Europe.
There are more risks to being inside the eurozone than being outsideMany of them are thinking long and hard about the promise to join the euro that they made (or will make) when they signed up for the European Union (EU).

They will certainly be watching the fates of Portugal, Ireland, Greece and Spain (PIGS) with great concern.

The PIGS are now caught in a euro trap. The boom years swelled their labour markets and their public finances.

Now the bust leaves them uncompetitive and with a major debt hangover.

But the usual cheap cure to these ailments, currency devaluation, is not an option inside the euro.

So does this mean the EU’s newcomers and wannabes have decided to kick their own euro-membership plans into the long grass?

The Czech Republic and Poland, countries with notable Eurosceptic politicians, do not especially want to join the eurozone at all.

Both did very well outside the euro during the 2009 downturn, thanks in part to the sharp drop in their currencies, which helped them keep a competitive edge, he explains.

Poland did not even experience a recession, an almost unique achievement in Europe, though government spending had a lot to do with this.

But for some East European countries it may already be too late to escape the same euro-trap now afflicting their Mediterranean peers.

Although technically outside the single currency, many have pegged their currencies to the euro.

Estonia, which plans to join the euro in January, saw its economy shrink 17% last year after it slashed government spending and refused to devalue the kroon. Its Baltic neighbour Latvia fell a whopping 25%.

For others, notably Hungary, devaluation was not the easy option that it would have liked.

For years, ordinary Hungarians had taken out their mortgages in foreign currencies, such as the euro, Swiss franc or even the yen.

The Hungarian forint was going to join the euro eventually anyway, so why pay the much higher interest rates demanded in their own currency?

The reason, as so many were to discover, is that their foreign currency mortgage payments became unaffordable when the forint lost a quarter of its value.

That gave the authorities in Budapest a nasty dilemma: keep the forint strong and suffer a deeper collapse in exports, or let the forint fall and watch its banking system sink under a mountain of unrepayable mortgage debts.

In the end, they called in the International Monetary Fund (IMF).

UK borrowing figures hit new record lows

UK public borrowing figures have just been released and are, in a word, dreadful. UK borrowing figures hit new record lowsNet borrowing figures were over £4 billion higher than forecast and one would think that these figures will be used to lend political support to the government deficit reduction plan.

Sterling dropped over half a cent against the Dollar on the back of the announcement and continued low consumer confidence data is also weighing on the Pound in early trading.

Festive cheer for Sterling seems to in short supply in the market in the run up to Christmas.

One point worth mentioning was regarding the one day trade forum hosted by China overnight.

In it, Vice-premier Wang Qishan expressed support for the European Unions attempts to control the sovereign debt crisis in Europe.

The news helped the euro claw back some of the losses incurred in the European and American trading sessions, but this morning’s announcement by rating agency Moody’s that it is placing Portuguese debt on review in light of a possible downgrade, means the Euro has started the day on the back foot.

On the plus side for the single currency, German consumer confidence remains high according to figures released this morning. But it has slipped back from highs of a month ago and missed the forecast level of 57.

European Central Bank worries about the rationality of Irish bail out

The European Central Bank (ECB) has expressed worries that the process of the Irish Republic’s £72 billion bail out package could affect its ability to provide further support to eurozone members.
European Central Bank worries about the rationality of Irish bail outThe bank said that flaws in the Irish bail-out legislation could compromise its ability to provide collateral for future funding.

It said it had concerns over the quality of collateral to cover loans.

On Friday, credit rating agency Moody’s cut sharply the Republic’s debt rating.

“The ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the euro system,” the bank said in a recent paper.

It questioned the powers granted to the Irish Finance Minister Brian Lenihan by the draft law “interfere significantly” with the rights of shareholders and creditors of financial institutions.

“Furthermore, the ECB suggests further clarification that the rights of the central bank and the ECB, as creditors of any relevant institution, will not be affected,” the bank said.

It added that the paper, was a response to a request from Mr Lenihan for its opinion on draft legislation granting him extra powers to ensure the Republic’s financial stability.

It said it “welcomed” the request and understood “the need for an accelerated legislative procedure”, but said it would have “appreciated being consulted at an earlier stage”.

Last week, the International Monetary Fund (IMF) approved a three-year loan of 22.5bn euros for the Republic.

The funds form the first part of the IMF’s contribution to the EU and IMF rescue package.

Utilise a Rewards Program when You Shop Online

Online shopping continues to be on the increase. Companies like Adaptive Affinity are offering consumers the opportunity to save time and money, something that is only helping propel this trend.

The issues of time and money are very important to the average consumer. The more we can save on both, the better. Each is very precious to us, and companies have locked on to the fact that through the Internet they can help us save on both.

According to the British Council of Shopping Centres, the time taken to complete your Christmas shopping can be quartered through shopping online. Its research discovered that the average Brit will spend 40 hours Christmas shopping this year, a task that could be done in just 10 hours from tapping at your keyboard.

Adaptive Affinity ensures that this is convenient for you. Whether it is during 10 free minutes at your desk at work, in your own bed with your computer on your lap, or while you’re out and on your phone, the ease and speed is unrivalled when compared with wandering through shopping centres and high streets.

Just like having a reward card at the supermarket, websites are offering the chance to take advantage of their respective rewards programs. For people who regularly shop online, it is simply another perk to get from the process.

Using a rewards program such as Rewards First means consumers are able to get discounts on a wide variety of products. There are discounts at high street stores, selling clothes, electronic goods or household items. There is also the opportunity to get tickets to concerts, musicals, the cinema and the theatre at discount prices.

In essence, a person can cover the entirety of their Christmas shopping online. They can buy the clichéd Christmas sweater for their dad, tickets to a gig for their sister and a spa treatment for their mum. If you want to take your other half out to a show, or to dinner, then there are savings to make there, too.

On the website there will be a list of offers that you can select. These will vary from day to day, and some will understandably get snapped up quickly, so for most it is worthwhile checking on a daily basis. As well as these offers there will be online discount codes. These are a straightforward matter of copying and pasting the codes into the online baskets of your favourite retailers and then receiving the savings. Similar to the online offers, these may change from day to day.

If the Christmas shopping and busy streets are getting too much, then get away from it all and head off for some winter sun. Rewards programs give discounts and special offers on holidays also. There is the same concept with recognised and established brands as there are with the retail offers. You can save money on the flights themselves, the accommodation that you stay in on arrival and the travel insurance as well.

It is not just insurance of the travel persuasion either. A rewards program has discounts on a variety of different insurance plans, from the home to your car, as well as useful financial services. They can also help you keep tabs on your credit score.

Last year, 24 million people shopped online. This research, carried out by the Internet Media Retail Group, helps prove the popularity of online shopping. The concept of online shopping initially took a while to take off, but now that people have become more and more familiar with the Internet, it is increasing rapidly.

Previously there may have still been a lot of people without regular access to the Internet, or people may have been wary about giving out their details online.

With the increase in the number of home computers, as well as the spread of Internet connections, in particular high-speed ones, the increase in online shopping has followed. For those in very rural regions, there is the chance to save a vast amount of money and time from shopping online in the first place, let alone the extra savings they can make with a rewards program.

In terms of online security and consumers’ protectiveness over their bank details and personal information, this is a genuine and valid concern to have. The security concerned with online shopping, however, has greatly improved. As well as people building their trust with well-known brands, payment systems such as Mondex and PayPal have added a sense of security that may have been lacking beforehand. Now the online methods of money being spent, as well as the transit of the products themselves, are a trusted process.

Adaptive Affinity makes sure that you do not get lost among the crowd of West End and Oxford Street, or any of the large shopping centres this winter. It becomes an annual chore to head off into the bitter night and traipse around stores with no clear plan in mind, just hoping that something will spring out in front of you when you eventually see it.

Not only is there time wasted from wandering around shops; online shopping allows you to buy things at pretty much the moment you think of them. The whole process doesn’t have to take more than five minutes. More people will shop online than last year, of that we can be certain. If they are already aware of the savings they will make from doing this, then they should be aware of the further savings they can make with a rewards program.

Becoming a member of a rewards program means being a part of the offers and discounts from the moment you join. With the constant updating of offers, it is possible to save money with every day that you are a member. You can get discounts while you’re still at work, or make further savings while you’re away on holiday (on the trip you also booked at a discount).

It might be something incredibly specific, say three tickets to watch a particular musical. You’ll still be able to find it, however. Or if you’re just (virtual) window shopping, you’re bound to find a bargain suited to you. For both, the process is easy.