from MacroScope:
Netherlands at core of the crisis
The Netherlands has become the latest country to come into the firing line of the euro zone crisis.
The cost of insuring five-year Dutch debt against default jumped to its highest since January as the government's failure to agree on budget cuts spiraled into a political crisis and cast doubt over its support for future euro zone measures.
Dutch Prime Minister Mark Rutte offered to resign on Monday, creating a political vacuum in a country which strongly backed an EU fiscal treaty.
Five-year Dutch CDS jumped 14 basis points to 133, only a whisker away from the record of 136 basis points hit on November of last year. The premium that investors require to hold 10-year Dutch bonds over their equivalent German Bunds rose to 79 basis points – its highest in 3-years.
Commerzbank's take on Holland:
Elections could be held in September 2012 at the earliest, because the Dutch constitution prescribes a period of 80 days between the dissolution of the government and new elections. In the interim, the government would be unable to get important reforms approved by parliament. This suggests that the 3 pct (budget deficit) target will be missed in 2013 and the country’s AAA rating is at risk.
A Dutch debt auction on Tuesday will provide another test of investor appetite following Monday's selloff.
Bullish Barclays says to buy Portuguese debt
Some bets are not for the faint-hearted. Risky punts are even less so following a sovereign debt crisis, one that has riddled European debt markets for two years. Barclays Capital, however, recommends a particularly unusual bet, one that your parents might baulk at.
It will be of little surprise that Barcap is bullish on the year, advising towards assets that will perform well in an environment of US-led global growth, easy monetary policy and tight oil supplies following reduced tail-risks in Europe curbed by cheap money from the European Central Bank.
Now that the rush of the addictive LTRO money is over and the dust is settling on central banks’ balance sheets, Barcap is brave enough to recommend an unlikely candidate and one of the recent targets of financial markets — Portugal.
Laurent Fransolet, Managing Director of Research at Barclays Capital told reporters at a Global Outlook briefing today:
“One of the top trades that we recommend in the global outlook is to be long on Portugal, which is a little bit of a roll of the dice. It is a fairly high risk, high return strategy. The sustainability of the debt, the fiscal consolidation, the long-term economic performance – these are still questions that remain on people’s minds for the foreseeable future.”
But the investment bank said it took the EU and the IMF at their word on implications following the Greek Private Sector Involvement (PSI) bailout deal.
“After the Greek PSI, we do believe the statement that Greece is unique and that anything will be done for Portugal for as long as needed if Portugal does deliver its side of the bargain — which has been the message by the European officials and by the IMF. In the very near term you probably have some opportunity for Portugal to outperform from what are fairly cheap levels.”
Irish SWF: Died Nov 2010 aged 9
National Pensions Reserve Fund, born April 2001, died November 28th, 2010; survived by a sister, Nama.
Irish Times wrote today an obituary for Ireland’s sovereign wealth fund NPRF, which was originally set up at the start of the last decade to plug future pension shortfalls.
But it never lived to fill this purpose. The 25-billion euro NPRF, which boasts its membership to the world’s elite SWF club, has died a sudden death although it has been suffering a capital haemorrhage last year, when the government amended the rule and used 7 billion euros to recapitalise its battered banks. The grim fate of NPRF also raised concerns about the viability of long-term capital: after all, sovereign wealth funds were billed as a provider of global financial stability as they invest in risky assets in the long-term.
“From its birth, however, there were fears that the fund would flirt with potentially disastrous investments, such as dotcoms, which were fashionable at that time. Indeed, the decision to require the fund’s managers to engage in stock-picking rather than simply acting as a passive “index fund” tracking the whole investment market served to push up costs,” the paper wrote.
“The State’s distinct lack of an ethical investment policy also proved controversial – tobacco vendors Philip Morris, Imperial Tobacco and British American Tobacco; cluster bomb makers such as Lockheed Martin, Raytheon and Thales; and Iraq war profiteer Halliburton were among its hottest stock picks.”
The NPRF suffered a fatal blow on November 28 when the government directed around 10 billion euros of the fund’s capital to prop up “black hole” banks.
I think that this is a very one sided article.
We all know that property values move in cycles and the investments by the Irish National Pensions Reserve Fund in the largest property in Europe, if not in the world, will eventually come around. It is the original developers who will lose out because their equity will not ever recover enough to overtake the continuing interest charges. These interest charges will accrue to the NPRF.
Also remember that they have taken preference shares in the two irish banks and these too will recover in time and generate a capital gain as well as a return of the loan funds.
Rug pulled away on UK bank funding
Britain’s banks may have borrowed over 200 billion pounds from the Bank of England, four times the amount they were expected to take under an emergency liquidity scheme. It leaves them facing a sharp funding strain next month when the rug gets pulled away.
Alastair Ryan, analyst at UBS, reckons banks have taken over 200 billion pounds under the BoE’s Special Liquidity Scheme since it was offered in April. They had been expected to borrow about 50 billion pounds, although estimates were lifted to near 100 billion as wholesale markets stayed closed. The scheme allows banks to exchange hard-to-trade mortgage assets for government bills.
The problem is the BoE isn’t planning to extend the funding beyond a Oct. 20 deadline . If the borrowing from UK banks has been as high as Ryan estimates, it will have eased a short-term problem but shows how much the liquidity is needed. It also leaves even more medium and long-term funding that the banks will need to replace at some point.
European and U.S. central banks aren’t closing their funding windows. By shutting its window the BoE is pinning its hopes on securitisation markets re-opening, but that seems unlikely soon and could force banks to further shrink their mortgage books at a tough time for them and the housing market.
As the deadline looms, UK regulators, criticised for their handling of Northern Rock at the start of the credit crunch, will face mounting pressure to extend the scheme as confidence among UK banks clearly isn’t back yet.
Will invasion of Georgia steel EU into kicking its addiction to Russian oil and gas?
As George Bush might say, the EU is addicted to Russian energy. While no member wants to kick the habit totally, Brussels would like the bloc to reduce its growing dependence.
Even before Moscow invaded Georgia, the main non-Russian route for exporting Central Asian and Azeri crude and gas to Europe, the EU watched Russia’s regular cuts in energy supplies to neighbours with concern.
But EU members have been reluctant to take the hard measures that would allow them to bypass Russia, so analysts think their reliance on Moscow will grow.
What should European countries to ensure it has sufficient oil and gas in the future?
Should EU nations be prepared to put cash behind its energy diversification goals?
Is a common EU energy policy even possible when oil and gas is so important that no country seems prepared to risk its own energy security for that of the bloc?
Tension between the oil and gas producer russia with europe is no new theme. All throughout the cold war they were at odds politically and militarily yet soviet gasprov never missed a shipment to europe from the eastern block.
It will be business as usual for the EU in a short period of time.
