German shift on austerity would risk 'wrong' lessons

2015 ◽  
Keyword(s):  
Euro Area ◽  
Credit Rating ◽  
Bond Yields ◽  
Trade Surplus ◽  
Fiscal Stimulus ◽  
Content Type ◽  
Black Spots ◽  
Angela Merkel ◽  
Deficit Financing ◽  
The Government

Significance Chancellor Angela Merkel faces a rising tide of euro-area members in favour of a policy shift away from austerity and possibly towards more favourable debt deals for euro-area black spots. Adding to the pressure for change, her own voters may prefer a slower pace of debt reduction: German government debt has already been falling as a percentage of GDP -- from over 80% in 2010 to under 77% at the end of 2014 -- and debt is starting to fall in absolute terms as well. The government has delivered enough stabilisation (ie, austerity) and growth to tame the 2009-10 debt surge and maintain its AAA credit rating, but is now over-achieving in terms of its own tough targets because the greater-than-expected fall in debt interest costs is pushing the budget into surplus. Some modest spending adjustments look likely to curb this windfall surplus, yet many will argue that more could be done to re-energise the sluggish economy -- and boost the euro-area. Impacts The plummeting euro will provoke another rise in German exports (already near 50% of GDP) and tensions over Germany's bulging trade surplus. While a fiscal stimulus and/or higher wage payments could address these tensions and raise imports, there is no sign of such action. Germany's critics are gathering support to end austerity, to the point of ignoring the risks of deficit financing and reneging on debts. Ultra-low German bond yields, encouraged by the prospective supply fall, are dragging down euro-area yields, delivering wider benefits.

Weaker euro-area may affect Emerging Europe

2016 ◽  
Keyword(s):  
Euro Area ◽  
Credit Rating ◽  
Emerging Market ◽  
Corporate Bond ◽  
Bond Yields ◽  
Content Type ◽  
Central Eastern Europe ◽  
Political Risks ◽  
Government Bond Markets ◽  
The Uk

Subject The fallout in Central-eastern Europe (CEE) from Brexit. Significance While CEE government bond markets are being supported by investor expectations of further monetary stimulus in response to the uncertainty stemming from the UK decision to leave the EU ('Brexit'), the zloty is suffering from both its status as one of the most actively traded emerging market (EM) currencies and concerns about the policies of Poland's new nationalist government. A sharp Brexit-induced slowdown in the euro-area economy would put other CEE currencies and equity markets under strain. Impacts The ECB's full-blown QE is helping keep government and corporate bond yields in vulnerable southern European economies historically low. Uncertainty generated by Brexit reduces the scope for further US interest rate hikes later this year, lifting sentiment towards EM assets. The Brexit vote will increase investors' sensitivity to political risks, auguring badly for Poland. Poland has already suffered a downgrade to its credit rating mainly as a result of the interventionist policies of the PiS government.

Low global volatility is hiding credit risks

2017 ◽  
Keyword(s):  
Euro Area ◽  
Sovereign Debt ◽  
The United States ◽  
Bond Yields ◽  
Fiscal Stimulus ◽  
Content Type ◽  
Election Result ◽  
Credit Risks ◽  
The Uk ◽  
Equity Index

Subject Downward pressure on bond yields. Significance Government bond yields rose in late 2016 as a result of higher inflation and expectations of US fiscal stimulus. However, although GDP growth is picking up in the euro-area, the United States and Japan, inflation pressures remain subdued and US fiscal plans have been delayed. Combined with falling political risk in the euro-area, this has pushed yields down and the global stock of negative-yielding sovereign debt is rising again. Moreover, ultra-accommodative monetary policies continue to supress yields, distorting asset prices and contributing to the mispricing of credit risk. Impacts China’s attempts to crack down on financial leverage is seen as a bigger risk by Bank of America Merrill Lynch than a euro-area break-up. Despite the uncertainty of the UK election result, markets have been calm and the S&P 500 equity index hit a new intraday high on June 9. The loss of momentum behind reflation trading has led the dollar index to fall by 5% this year and it will remain under pressure. US technology shares fell sharply on June 9, raising concerns that their surge this year leaves them overvalued and at risk of a correction.

Volatility undercuts bitcoin’s effort to go mainstream

2021 ◽  
Keyword(s):  
Market Structure ◽  
Euro Area ◽  
Market Price ◽  
Central Banks ◽  
Equity Market ◽  
Bond Yields ◽  
Fiscal Stimulus ◽  
Content Type ◽  
Bubble Bursting ◽  
Dot Com

Significance Bitcoin is benefiting from the growing institutionalisation of the investor base for digital tokens, and the appeal of crypto-assets as a hedge against the debasement of currencies by money-printing central banks. Having reached an all-time high of USD41,823 on January 8, bitcoin, the world’s most widely traded cryptocurrency, has since lost nearly 20%. Impacts Wild price swings and the lack of a central market structure will limit bitcoin’s ability to challenge gold as a hedge against inflation. The S&P 500 equity market price-to-earnings ratio is near its highest since the 2000 dot-com crash, raising fears of the bubble bursting. The prospect of more aggressive US fiscal stimulus is driving a sell-off in treasuries, raising fears of a disorderly rise in bond yields. Europe’s COVID-19 resurgence raises the prospect of more stimulus, but also the scope for more tension about this among euro-area states.

Assessing sovereign risk: the case of rich countries

2014 ◽  
Vol 6 (3) ◽  
pp. 212-225 ◽  
Author(s):  
Norbert Gaillard
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Debt Crisis ◽  
Sovereign Debt Crisis ◽  
Bond Yields ◽  
Content Type ◽  
The Great Recession ◽  
Market Participants ◽  
Investment Grade ◽  
Rich Countries

Purpose – This paper aims to shed new light on the inability of credit rating agencies (CRAs) to forecast the recent defaults and so-called quasi-defaults of rich countries. It also describes how Moody’s sovereign rating methodology has been modified – and could be further improved – to solve this problem. Design/methodology/approach – After converting bond yields into yield-implied ratings, accuracy ratios are computed to compare the respective performances of CRAs and market participants. Then Iceland’s and Greece’s ratings at the beginning of the Great Recession are estimated while accounting for the parameters included in the new methodology implemented by Moody’s in 2013. Findings – Market participants outperformed Moody’s and Standard & Poor’s in terms of anticipating the sovereign debt crisis that hit several European countries starting in 2008. However, the new methodology implemented by Moody’s should lead to more conservative and accurate sovereign ratings. Originality/value – The chronic inability of CRAs to anticipate public debt crises in rich countries is dangerous because the countries affected – which are generally rated in the investment-grade category – are substantially downgraded, amplifying the sovereign debt crisis. This study is the first to demonstrate that Moody’s has learned from its recent failures. In addition, it recommends ways to detect serious threats to the creditworthiness of high-income countries.

Chinese state land ownership speeds up development

2015 ◽  
Keyword(s):  
Local Governments ◽  
Land Ownership ◽  
Easy Access ◽  
Property Development ◽  
Fiscal Stimulus ◽  
Content Type ◽  
Land User ◽  
Perverse Incentives ◽  
Near Term ◽  
The Government

Subject State land ownership and the implications for development in China. Significance The government owns all land in China -- one of the reasons that the country claims still to be a 'socialist' state, despite the role of markets in most areas of the economy. A de facto land lease system has emerged in which land 'use rights' are traded. However, the rights of the owner -- the state or local government -- take precedence over the rights of the land user. As a result, requisitioning land for infrastructure or property development is much faster than in countries with a genuine land market. Impacts In the near term, local authorities' easy access to land will make infrastructure-based fiscal stimulus measures faster to execute. The tight timeframes of China's urbanisation goals are more plausible given the government's powers over land. Local governments' power to expropriate land creates perverse incentives and opportunities for corruption. Reforms to make the system more market-oriented are likely in the long term, but will be gradual.

Negative bond yields will fuel global equity rally

2016 ◽  
Keyword(s):  
Stock Market ◽  
Sovereign Debt ◽  
Asset Prices ◽  
Central Banks ◽  
Oil Price ◽  
Bond Yields ◽  
Fiscal Stimulus ◽  
Government Bonds ◽  
Content Type ◽  
Risk Appetite

Significance The gains in global equities stem from the expanding universe of negative-yielding government bonds, which now account for nearly a third of the stock of global sovereign debt. This is pushing yield-hungry investors into riskier assets, despite concerns about the sustainability of a stock market rally with weak fundamental underpinnings and central banks' ultra-loose policies driving asset prices. Impacts Sterling will remain under pressure because of the BoE's aggressive monetary easing, both conventional and unconventional. The recent oil price rebound will support equity valuations and risk appetite. Fiscal stimulus will benefit stocks in the construction and defence sectors.

Ghana's IMF bailout to persist despite souring ties

2016 ◽  
Keyword(s):  
Central Bank ◽  
Budget Deficit ◽  
Credit Rating ◽  
Gdp Growth ◽  
Content Type ◽  
Bank Financing ◽  
Electricity Crisis ◽  
Manufacturing Activity ◽  
The Government ◽  
The Imf

Significance Earlier this month, the government passed a bill allowing for central bank financing of the budget deficit, contravening a core requirement in its agreement with the Fund. Earlier breaches led to the fourth tranche of the bailout (worth 114 million dollars) being withheld. Impacts Other donors will withhold aid disbursements until the impasse between Accra and the IMF is resolved. The electricity crisis will continue to undermine manufacturing activity, contributing to disappointing GDP growth. Ivory Coast's pro-business reforms mean it could attract investors deterred by Ghana's economic woes. Prolonged tensions with the IMF coupled with a deterioration its Ghana's fiscal metrics may drive a credit rating downgrade.

Hardening German attitudes on Greece risk a rupture

2015 ◽  
Keyword(s):  
Central Bank ◽  
Euro Area ◽  
Capital Controls ◽  
Financial Assistance ◽  
Content Type ◽  
Bank Deposits ◽  
Reform Programme ◽  
System Collapse ◽  
Greek Government ◽  
The Government

Significance Pressure is intensifying on the negotiators representing the Greek government and its creditors -- most importantly Germany -- to reach some form of agreement allowing the release of sufficient financial assistance for Greece to meet its payment obligations due by the end of June. However, the governing Greek coalition does not appear stable enough to adopt the reform programme demanded by its creditors. Meanwhile, German economic opinion on Greece is hardening, in the gathering belief that the risks to the rest of the euro-area from any concessions to Athens are now greater than those of a possible rupture. Impacts If the Greek negotiations drag on, the government may have to introduce capital controls to stem the outflow of bank deposits. Greece's central bank remains reliant on the ECB to continue authorising ELA, but opposition to ELA in Germany is growing. If the ECB withdrew ELA, Athens's choices would be to meet its creditors' demands, see a financial system collapse or exit the euro.

Morocco's phosphate company is set for an export surge

2017 ◽  
Keyword(s):  
Credit Rating ◽  
Rapid Development ◽  
Atlantic Coast ◽  
Production Capacity ◽  
Value Added ◽  
Tax Credits ◽  
Content Type ◽  
International Credit ◽  
The Government ◽  
The Impact

Significance Meanwhile, the Office Cherifien des Phosphates (OCP), Morocco’s government-controlled phosphate company, has started production in a new fertiliser unit at its main processing and export centre in Jorf Lasfar, on the Atlantic coast. Morocco’s traditional phosphate industry has been eclipsed in recent years by the rapid development of new sectors such as the automotive and aeronautical industries, which are similarly oriented towards exports. Impacts OCP’s fertiliser production capacity will increase by 50% during 2018, boosting the value added to its phosphate mining activities. Increased volumes of exports of phosphates and fertilisers will counterbalance the impact of relatively low international prices. Once the new cycle of investment is complete, OCP will be in a position to pay back tax credits it has received from the government. Repayment of tax credits would boost OCP's international credit rating.

Malaysia will see more autocratic governance

2018 ◽  
Keyword(s):  
Credit Rating ◽  
Prime Minister ◽  
Content Type ◽  
International Credit ◽  
The Government ◽  
The Cost

Subject Malaysia under Prime Minister Mahathir Mohamad. Significance The new Pakatan Harapan (PH) coalition led by Prime Minister Mahathir Mohamad has sought to reform drastically the country’s politics. Its focus on tackling corruption has included pursuing former Prime Minister Najib Razak over the 1Malaysia Development Berhad (1MDB) scandal; Najib denies all charges against him. Impacts The government will allow global investigations into 1MDB funds to accelerate. A substantially higher debt-to-GDP ratio (80%), as per new calculations, will increase the cost of future borrowing. Economic confidence-building measures will secure Malaysia’s international credit rating. Contractual penalties may force the government to delay rather than cancel infrastructure deals with Singapore and China.

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