Sarkozy launches French sovereign wealth fund
Sarkozy announced yesterday a series of measures in support of business. The most outstanding one is the set up of a new “strategic investment fund” to stop French companies from falling into the hands of foreign “predators”, reports the FT. The new fund will be operated by Caisse des Dépôts et Consignations – the country’s existing sovereign wealth fund – but would be “more active, more offensive, more mobile” in defence of French industrial assets. Further measures are the temporary elimination of the “taxe professionnelle”, a local business tax, that will save companies a €1bn a year. The tax is one of French industry’s biggest bugbears because it is levied on a company’s fixed assets, deterring new investment. Sarkozy also wants a state-backed “reinsurer of last resort”, a provider of credit insurance for companies if the market dries up and appointed a “credit mediator” to help companies that suddenly find their credit lines withdrawn or terms tightened to negotiate with their banks. Francois Fillon admitted that the support packages will lead to a “slightly higher” deficit, reports Le Monde.
Jean Francis Percresse writing in Les Echos looks at Sarkozy’s two rescue plans, the one for banks announced a month ago and the latest for businesses. The main difference is one of concept for the state: While in the bank rescue plan the state only overtakes an insurance role, it becomes an actor with the business rescue plan. With the new plan the state becomes investor, entrepreneur and protector. This change in concept is far away from the fundamental ideology of the French right and even the government will find it hard to follow. It is part of Sarkozy’s instinctive nature, coexisting alongside his liberal spirits.
Karl de Meyer in Les Echos looks at the relationship between Sarkozy and Merkel, the two opposite characters and political strategists in Europe. He argues that while the relationship was never good, tensions intensified lately, a game of provocation and arrogance, that could have negative effects for both countries. Between 2005 and 2007 Angela Merkel was the primus inter pares of the old Europe. But Sarkozy managed to transpose his activism on Europe benefiting from the outbreak of the financial crisis during the French presidency. Merkel is condemned to say no, but by rejecting Sarkozy’s initiatives sometimes without further explanations she risks being suspected as a systematic and egoistic obstructor. De Meyer calls on both to avoid the loss of energy with these petty plays and to enter constructive talks instead.
Was that it? Money markets rates are turning again?
4.96, 4.95, 4.921% - the three month Euribor interest rate is getting better, but very, very slowly. And in the US, the trend reversed yesterday– 3-month treasury yield is down a little, TED spread is up again, from 2.50 to 2.58%. So this looks like the multi-zillion dollar/euro global rescue packages may have prevent a global financial meltdown but have done not much more. The iTraxx crossover yesterday broke through 800bp setting another record of risk-aversion. The FT notes that 800bp is equivalent to an insurance premium of 40% over a five-year period. (You pay €800,000 per year, or €4m to insure against the default of a basket of bonds worth €10m.) The FT argues that the markets are just divorced from the reality of the risk, as they were during the times, when the itraxx crossover traded at well below 200bp.
Lucas Zeise on the German rescue plan
There are increasing signs that the German bank rescue plan is not working. Lucas Zeise makes the point that the money market is still frozen, and that the biggest mistake of the German plan had been the voluntary nature of bank rescues, which has led to the perverse situation that so far only one state-owned bank, BayernLB, has asked for new funds. Zeise says the German government made the mistake to ask the banks to co-draft the rescue plan, rather than forcing banks into recapitalisation, as the British and French have done.
ECB promises rate cut
Rate cut preannouncements do not come much clear than this. Jose Manuel Gonzales-Paramo, a member of the ECB’s executive board, said the ECB “diminish rates without adding to inflationary risks in the medium term”. In other words, there will probably be a 50bp rate cut at the next ECB council meeting on Nov. 6. But the FT reports that the ECB is not yet ready to give the all-clear on inflation yet. The ECB remains concerned about a return of higher oil prices, and wage settlements, as well as rising fiscal deficits.
Sweden cuts interest rates
Sweden, which participated in the co-ordinated 50bp rate cuts a couple of weeks ago, has cut rates by a further 50 basis points to 3.75%, and promised that more rate cuts were in the store. The central bank’s inflation forecast is now 2.1% for 2009, bang in line with the target. The bank said if the financial crisis deteriorated, it may be necessary to cut the repo rate by more than is assumed in the current asssessment, the FT reports.
Smoot Hawley on steroids – Baltic Dry Index now down 90%
Remember the Smooth Hawley Act in America, which raised tarifts on some 20,000 import goods in 1930? Yves Smith of Naked Capitalism makes the point that the non-acceptance of letters of credit for international shipping, could mean a Smooth Hawley on steriods, as it has the potential to kill off international trade. The Baltic Dry Index, a measurement of shipping costs, has fallen to 1149 points, down 90% of its peak in May.
Spain wants to take part at summit
El Pais reports that Spain wants to take part at the November Washington G-8 Plus summit, and has so far successfully solicited the support of Gordon Brown and Nicholas Sarkozy. The Spanish government feels this is a matter of pride, as its economic performance has now surpassed that of Italy.
Funny Composition
A Fistful of Euros also makes the piont that the G20 is a strange composition to handle this particular crisis. The G20 does not feature most of the countries in need of potential bailout: Spain, Hungary, Iceland, Baltics, Pakistan. The blog asks given the general uselessness of summits, does this one have any hope of success?
Has the US been in recession for over a year?
Well, quite possibly, if you take a broader vierw of recession than just a dip in GDP. Floyd Norris of the New York Times (aka Brad DeLong) noted that the coincident indicators are down by 1.2% from October 2007. In past recession, this indicator was always down by 1% or more. The indicator uses four components: real income, employment, industrial production, and wholesale-retail sales.
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