Category Archives: A Few Euros More

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The ‘Eastern’ Alliance

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An alliance of Russia, China and central Asian nations called today for the U.S. and coalition members in Afghanistan to set a date for withdrawing from member states.

he Shanghai Cooperation Organization, at a summit in the Kazakh capital, said in a declaration that a withdrawal date should be set in light of what it said was a decline of active fighting in Afghanistan.

“We support and will support the international coalition which is carrying out an anti-terror campaign in Afghanistan, and we have taken note of the progress made in the effort to stabilize the situation,” the declaration said.

“As the active military phase in the anti-terror operation in Afghanistan is nearing completion, the SCO would like the coalition’s members to decide on the deadline for the use of the temporary infrastructure and for their military contingents’ presence in those countries,” the declaration continues.

Now what was it Brad Setser was saying about why the Unocal bid was important?

British Retail Sales Continue to Decline

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The latest survey by the British Retail Consortium suggests that retail sales declined in the UK for the third month in a row in June. This is definitely one to watch carefully.

Sales in stores open at least a year fell 0.5 percent compared with June 2004, the London-based lobby group said today. The drop followed a 2.4 percent slide in May and a 4.7 percent drop in April. Same-store sales declined 2.4 percent in the three months through June from a year earlier.

Iraq: British Withdrawal Imminent?

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Two pieces of news on the Iraq front today. The British MOD are reported to be preparing “significant withdrawal of British troops from Iraq over the next 18 months”. In an entirely different context, Ibrahim Youssef al-Shammari has announced that he will act as spokesman for two insurgent groups: the Islamic Army in Iraq and the Army of the Mujahideen.

Fitch and Sovereign Debt

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Sorry if I’m belabouring a rather obscure and generally ‘non-sexy’ issue: government debt in the eurozone. If I am doing this it is because I think something important is happening. I missed this point during the week.

Fitch Ratings on Wednesday lowered to negative its credit rating outlooks for Italy and Portugal ? both among the three weakest countries in the eurozone ? amid concerns about their deteriorating public finances.

The negative outlooks could herald future credit rating downgrades, adding to concerns about economic divergence within the eurozone.

That’s the second time in a week (See the S&P post) that a ratings agency has done this to eurozone government debt. There are three economies in the ‘particularly at risk category: Italy, Greece and Portugal. They are ‘at risk’ not simply because they have substantial debt and/or deficits, but becuase they have this *and* important structural economic problems about the kinds of economic activities they engage in, they have a lack of international competitiveness that a drop in euro value of the order of magnitude we are seeing won’t resolve, that they are going to be forced to reduce their deficits during an ongoing economic ‘growth slowdown’, and that given their ageing populations their mid-term fiscal outlook is between poor and not-sustainable. Maybe we aren’t noticing much evidence of it yet, but the landscape beneath our feet is changing, even while we talk.

Incidentally, Italy has found another big one-off:

Italy’s government will raise as much as 4.1 billion euros ($4.9 billion) selling up to 10 percent of Enel SpA, Europe’s fourth-biggest utility, in the world’s largest share sale so far this year, the Finance Ministry said.

Italy will sell Enel shares at 7.18 euros each to institutions, Finance Ministry Director General Vittorio Grilli said at a press conference in Rome today. That’s 0.7 percent below Enel’s closing share price yesterday. Shares will be sold to individual investors at 7.07 euros each.

The thing is, you can try selling-off the furniture when you have problems paying the mortgage, but you can’t keep doing it forever.

Sovereign Bond Yields

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The FT this morning discusses the state of the bond markets for the ‘weaker’ eurozone economies: Italy, Greece, Portugal. As expected interest differentials between government debt in these countries and German debt is widening, but only slowly. Italy is being evaluated at present as the weakest member. As the FT points out the temperature of the water will be tested again this week when Portugal issue a new batch of debt:

“The expected launch next week of a new 10-year benchmark bond by Portugal, whose credit rating was recently downgraded by Standard & Poor?s, is set to test investors? appetite for debt issued by weaker eurozone members.

Portugal, which on Friday appointed bankers to manage the syndicated bond sale, will be competing for demand against France, which enjoys the highest credit rating available and plans to auction a new 10-year bond of its own next week.

Bond spreads of Portugal, Italy and Greece – the three weakest countries in the eurozone – widened marginally on the back of this. On the week, the spreads of bonds of Portugal, Italy and Greece, widened by just 1.3bp, 0.5bp, and 0.5bp, to stand at 8.3bp, 21.5bp, and 24.5bp, respectively against Bunds.

But they have been widening for several months. Spreads of Italian 10-year paper, for instance, have doubled from 11bp to 21.5bp against the Bund in the last four months.“

Euro Breaks $1:20 Barrier

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I’ve been reasonably quiet about the evolution of the euro during the last couple of weeks. The movement has been a pretty volatile tug-of-war between the general downward drift, and resistance to change. Today there seems to have been a decisive push on one side (maybe because it was a Friday afternoon on a holiday weekend), and the currency seems to have decisively broken the $1:20 level.

There are various reasons why this might have happened, in particular the Federal reserve quarter point rise yesterday plus good manufacturing data and consumer confidence readings for the US economy. And this despite a little bit of rather better news on the eurozone economy front (here, here) . As I have been saying, this is going to be an assymetric process: good news on the US front, or bad news on the eurozone one will always dominate given the underlying fundamentals, and the weaknesses revealed by the constitution votes and the dithering on the SGP. Next frontier: $1:15 probably, but I have no idea how long it will need to get there. It depends on the flow of news. Meantime the fall has pluses and minuses. It will help exporters, but the rise in oil prices will be compounded, and this will only hinder any possible revival in domestic demand.

This piece is a fair and reasonable assessment of the state of play to date.

The Dangers Of A Housing Boom

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Last year 700,000 new homes were built in Spain. A record number, and one which seems disproportionately high for Spains real future housing needs. In all likelihood the Spanish property market will one day crash, and prices drop considerably from their current highs. But what if they don’t? What if we ‘merely’ get a soft landing. This is a question the FT puts today in the US context, but what it says may be even more applicable to Spain. The economy is driven by the construction and property sector, simply slowing-up is going to have repercussions.

As property values have soared so has the level of interest in working in real estate. The number of realtors in the US has jumped by 45 per cent over the past four years to 1.1m, and many have left blue-chip companies or even delayed college to join the property jamboree. More joined the profession last year than at any time since records began in 1975.

Add in jobs in residential construction, furniture and DIY stores and mortgage finance, and the buoyant property market emerges as the main driver of employment growth over the past four years. Economy.com, the consultancy, estimates that about a third of the 2.6m jobs created in that period were in housing-related sectors.

This raises the question of what happens to these workers when the housing market cools.

German Deficit Continues Above 3%

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German Finance Minister Hans Eichel said today that the German deficit would be over the 3 percent limit for the fourth consecutive year this year, and would remain there at least till 2007.

The latest data, from a meeting with state finance ministers, projected this year’s deficit to reach 3.7 percent. In addition, the country is projected to maintain a deficit of 3.4 percent in 2006 and 3.1 percent in 2007, the finance ministry said. On Wednesday, the IMF said as part of its regular review that it expected Germany’s budget deficit this year to be 3.8 percent of
GDP this year.

Italy Given Two Years To Correct Deficit

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As indicated earlier in the week, the EU Commission has given Italy two years to correct its deficit.

“The European Union on Wednesday gave Italy until the end of 2007 to cut its budget deficit in line with euro-zone rules. The EU head office said Italy has been violating the budget rules underpinning the common currency by running deficits above 3 percent of its gross domestic product in 2003 and 2004 and is set to do so this year and next. But due to weakness in the euro-zone’s third-largest economy, the head office said it will give the country two years instead of just one to bring the deficit back in line.”