After Greece and Spain, S&P downgrades Portugal
After Greece, and Spain, it’s now Portugal. S&P has lowered the country’s sovereign ranking from AA- to A+, due to a lack of structural reforms in the country (which is a bit strange to us, since this the lack of structural reforms in that are not exactly a recent phenomenon. FT Deutschland reports that this latest downgrade has led to near panic among investors, some of whom fear the disintegration of the euro area, and who have responded by selling euro assets. Euro/dollar is now back down to $1.28. The good news is that US markets rallied again yesterday after the slump on inauguration day. The bad news is that risk measures are still extraordinarily high. The iTraxx Crossover index for junk-bond CDS now trades now 1045bp. This is pretty extraordinary.
There is also more bad economic news from Spain. El Pais has the story that last year, the number of tourist to Spain decline by 1.7m, or 2.6%, with more declines likely this year, as the crisis hits the economies of the rest of Europe. Given that construction and tourism were the pillars of Spanish economic growth, this is further factor bearing down on economic performance this year.
Greek bond spreads reach record high
The premium at which investors want to buy Greek government bonds over benchmark German Bunds hit a record high yesterday, reports Kathemerini. The Greek/German 10-year spread touched 273 basis points, the most since before the inception of the euro. Meanwhile, orders for Greece’s 5-year benchmark euro bond have exceeded €5bn with the issue likely to be priced at mid-swaps plus 260-270 basis points.
The pound in your pocket…
… is still worth the same. Unfortunately, the pound’s value against the dollar is $1.37, the lowest level since 1985, the FT has calcuated, quoting analyst who now foresee a full funding crisis, with bond auction flopping, and the country heading for bankruptcy, a view that was balanced in the article by a few staunch optimists.
The FT also gives some space to the views of Jim Rogers, one of the co-founders of George Soros Quantum Fund, who says the UK is essentially finished, as it has nothing to sell anymore. He says the property market is turning down faster than anywhere else. The only assets the UK used to have, North Sea Oil and the City of London, are essentially depleted. The financial centre is moving to Asia, and there is no reason to expect it to return back to the west. He forecasts further weakness in sterling against the dollar and the euro.
Germany to change stock option law
FT Deutschland has an article this morning that Germany is cracking down on executive stock options, making a number of legal changes to ensure that options will in future reflect long-term, not short-term performance. The first change is that managers will only be able to cash options after four years, as opposed to two years now, and that the decision has to be taken by the entire supervisory – which could be sued in case of abuse. The government is still debate whether to lift the zero bound – i.e. whether managers have to pay back money in case their companies make a loss.
East Europeans banks are putting pressure on ECB
The FT has the story this morning that a group of eastern banks, led by Austria, is lobbying the ECB and the EU to extend their anti-crisis policies to ease the credit crunch. The group of nine is urging Brussels and the ECB to extend support beyond the EU’s new member states, to prospective members, such as Serbia, and even Ukraine to provide a greater stability in the entire region. The group has previously kept a low profile, but the financial situation now appears to be deteriorating.
Annualized rate of Chinese growth is down to 6.8% in Q4
The deterioration of the Chinese economy has been dramatic in the last quarter of 2008, as the annualised growth rate dropped to 6.8% in Q4, bringing the total annual rate down to 9%, a seven year low. See the FT for more details. The worry is, however, the economic performance in the current year, which is likely to be much worse. The article quotes estimates of 5-6%, which would be consistent with a very severe recession, given the growth of the country’s industrial population.
This is what global re-balancing looks like
Brad Setser has an excellent analysis of the latest US Treasury capital account data, showing a sharp fall in global demand for US assets, with lots of scary graphs. He makes the bond that foreigners had been mostly buying bonds, that private demand has effectively collapse, that public-sector (central banks, SWFs) is shifting from long-term into short assets, while demand growth is also slowing, and may be falling. He concludes that the US will eventually have to turn into a net exporter. Since a current account deficit requires a capital account surplus, he says it is not clear at all, how the world will in future finance large deficits any longer.
Artus on the ineffectiveness of the French stimulus
Patrick Artus has a very good oped in Les Echos arguing that the French stimulus package in this crisis will prove to be ineffective. The economic crisis implies that in USA, Europe and even in China we have reached the peak of private indebtedness and that we now face a definite loss in economic activity due to less debt financed consumption. To compensate for this, governments would need to envisage a permanent increase in public debt, which is hardly an attractive or feasible option. Bailouts of the car sector will not stimulate the economy as a whole either. The only way forward is either a rise in purchasing power of raw material importing countries or a redistribution of productivity gains towards labour in form of higher real wages. However, since productivity increases in France are only 1%, the political efforts should concentrate on policies that raise productivity, such as research, education, support of innovative enterprises and better infrastructure.
Skidelsky on business cycle theory
If you want to read a brilliant popular critique of business cycle theory, Robert Skidelsky (hat tip Mark Thoma) has produced a fine polemic in Project Syndicate. In the theory, a positive technological shock through innovation leads to a higher level output, according to the theory, while a negative shock works in the opposite direciton. In the first case, people asks to work more, in the second case, they demand more leisure – market-driven responses to the cycle fluctuations. He said the reasoning may just about be applied to the dot.com bubble, which was set off by innovation, but not to this bubble. He makes the point that the abundance of credit set off this boom, but it was not caused by some innovation. Credit was the innovation.
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