Global Investing

Euro periphery: Lehman-type shock still on cards

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece — rising debt and weak economic growth pushing the country to seek a bailout — as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.

JP Morgan uses analysis based on quantifying the impact of financial market developments and monetary policy actions on economic activity. The main variables the analysis uses is: the three-month LIBOR rate, the yield on investment grade corporate bonds, the spread of high yield corporates over that of high grade, real equity returns, the change in the real exchange rate and bank lending standards for businesses as reported in loan officer surveys.

According to JP Morgan’s calculations, the 838 basis-point rise in the peripheral HY spreads implies a drag of -2.2 percent of GDP relative to what it would otherwise have been, had the HY spread unchanged.

January in the rearview mirror

As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures – thanks to Scott Barber and our graphics team.

The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world’s central banks.

The ECB’s near half trillion euros of 3-year loans  has stabilised Europe’s ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it’s also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It’s also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..

from Davos Notebook:

Groundhog Day in Davos

groundhog

The programme may strike a different  note -- this year's Davos is apparently all about Shared Norms for the New Reality -- but much of the discussion at the 41st World Economic Forum annual meeting in Davos this month will have a distinctly familiar ring to it.

Last January, the five-day talkfest in the Swiss Alps was dominated by Greece's near-death experience at the hands of the bond market and recriminations over the role of bankers in the financial crisis, as well as worries about China's rapid economic ascent and a lot of calls for a new trade deal.

Fast forward 12 months and not much has changed.

Ireland has joined Greece in the euro zone's intensive care unit and Portugal and  Spain are getting round-the-clock monitoring. The annual round of bankers' bonuses is once again stirring up trouble. China looms larger than ever on the global stage, after overtaking Japan in 2010 to become the world's second-biggest economy. And trade ministers who signally failed to make headway last year say they really must get down to business when they meet on the sidelines of Davos this time round.

from MacroScope:

Europe’s over-achievers and their fall from grace

Ireland's fall from grace has been rapid and far worse than that of its counterparts, even Greece. But life in the euro zone has still been one of profound growth, as it has for most of the other peripheral economies.

Take a look first at the progress of  PIGS (Portugal, Ireland, Greece and Spain) GDP since 2007 when the global financial crisis took hold. In straight comparisons (ie, rebased to the  same point) Ireland is far and away the biggest loser. Portugal is basically where it was.

Scary

But now take the rebasing back to roughly the time that the euro zone came together.  First, it shows that Ireland's fall is from a very high place. The decade has still been one of profound improvement in cumulative GDP even with the last few years' misery. But it is front loaded.

PIGS, CIVETS and other creature economies…

Given the ubiquity of BRICs and PIGS, it seems everyone else in the financial and business world is attempting to conjure up catchy acronyms to group economies with similar traits. All with varying degrees of success. BRITAIN-WEATHER/

HSBC chief Michael Geogehan has been championing ‘CIVETS‘ to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa as the next tier of developing economies poised for spectacular growth.

Evoking the skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia is not exactly auspicious but then it will probably be less offensive than the porcine moniker for Portugal, Italy, Greece and Spain. The collective term — with permutations such as PIIGGS to include Ireland and Great Britain among the list of debt-ridden countries — has been denounced by politicians in Portugal and Spain.

from MacroScope:

Should central banks now sell gold?

Central banks in debt-strapped countries have a golden opportunity ahead of them, if you will excuse the pun, to help their countries' finances by selling their yellow metal holdings.

At least, that is the message that Royal Bank of Scotland's commodities chief Nick Moore has been giving in recent presentations -- and he thinks it might happen.   The gist is that gold is now at a record price but banks have not come close to  meeting their sales allowance for the year.

Under the Central Bank Gold Agreement there is a quota of 400 tonnes that can be sold by central banks within a 12 month period and with only about three months to go in the latest period less than 39 tonnes has been sold.  At today's price that remaining 361 tonnes is worth some $14 billion.

Swine flu shakes Spanish property bargain hunters

It must be tough to be a Spanish homeseller right now.

 

Just as investors pluck up the courage to once again dip a toe in the Mediterranean housing market, along comes a killer flu pandemic that keeps bargain-hunting foreigners thousands of miles from a purchase.

 

Earlier this week, Palma Property Auctions – one of Spain’s biggest holiday home auctioneers – said rising swine flu fears among clients had forced it to shelve its eagerly-awaited summer sale.

 

 “We had nine concrete cases of people who called us to say they wanted to have a look at a property and possibly take part in the auction, but they were not going to because of swine flu,” Daniel Westerlund, a spokesman for Palma Property Auctions, told Reuters.

Will Spain face Russian ire for snubbing LUKOIL’s Repsol bid?

If Lithuania’s experience is anything to go by, Spain may regret its declaration that it would rather Russian oil company LUKOIL did not buy a major stake in its largest refiner, Repsol.

  

Russian oil company LUKOIL is in talks to buy around 30 percent of Repsol, one of Western Europe’s five largest non-government controlled oil companies by market value, sources close to the matter say. Analysts think the move could be a prelude to a full takeover, which would be the largest overseas acquisition by a Russian company.

 

Spain‘s Interior Minister Alfredo Perez Rubalcaba said on Tuesday he would prefer a different buyer. Rubalcaba didn’t say why LUKOIL was persona non grata in Madrid but analysts think the company’s nationality is the reason.