Dear,
New Years eve it’s a good time for looking back and see what’s happened and looking ahead and try to understand what’s coming.
2011
- 1 Year ago two European countries had been rescued (Greece and Ireland).
- 1 Year ago world’s economy seemed to be in the path to recovery.
- 1 Year ago we were told that European Banks (and worldwide banks) were well capitalized.
- 1 Year ago US bonds were triple AAA for the main three rating agencies (Standard and Poors, Fitch and Moody's).
- 1 Year ago we wanted to believe that it was possible to return to the past, that we still had solvency to waste.
2012
- During the 1st quarter of 2012 European banks have to refinance 230.000 million Euros in Bonds (around 1.8% of the European GDP).
- Current estimations of the undercapitalization of European Banks are between 115.000 and 250.000 million Euro, it could be more if economy slows down and default levels increase
- During the 1st quarter of 2012 European countries have to refinance 300.000 million Euros in sovereign Bonds (around 2.5% of the European GDP).
- Rating agencies are warning that main European countries ratings, including France, Austria, Finland, the Netherlands, Luxembourg and Germany (yes, you read correctly, Germany also) are under review, meaning they have a one in two chance of a downgrade within 90 days. http://www.reuters.com/article/2011/12/06/eurozone-sp-idUSN1E7B41IQ20111206
According to the President of the European Central Bank, “pressure that bond markets will be experiencing is really very, very significant if not unprecedented,” http://business.financialpost.com/2011/12/19/unprecedented-bond-pressure-to-hit-eurozone-next-year-says-draghi/
As European Central Bank is not allowed to buy sovereign bonds we have to find an alternative. Let’s give “unprecedented” liquidity to the European banks by 3 years loans program. http://www.washingtonpost.com/business/markets/ecb-making-unprecedented-3-year-loans-to-banks-amid-debt-crisis-tensions/2011/12/21/gIQAXG9i8O_story.html
As a consequence, Euro exchange rate is below 1.3 USD …
… And oil price is over 100$ again.
In fact oil price is very important for understanding the oncoming changes in the financial system.
Simplifying, I’ve heard two groups of opinions amongst economists; either European Central bank and Federal reserve buy more and more public debt (by printing money) so debt will be paid with inflation, or Federal reserve and European Central bank don’t do that so we’ll face a very long recession with deflation.
We must remember that inflation represents “general levels of prices” so it’s an average of the evolution of the prices of many assets, and this can be tricky. If we look at the prices of houses, cars, mega-plasma TV’s, etc. they’re going down in the middle of the recession, but oil price is still high, and oil price has a direct impact in the growth potential of developed economies.
Are the unprecedented liquidity measures of the ECB and the Quantitative Easing programs of the Federal Reserve going to fix this? I don’t think so, in some months will be facing a new recession (maybe it will be called depression at the time) and the effect of these liquidity measures will be over like tears in rain.
We need to learn how to grow without wasting resources; this is not easy and it takes time, that's why we're facing a depression.
By the way, what are European banks doing with the liquidity provided by the European Central Bank? They're depositing the money back in the European Central bank. http://www.guardian.co.uk/business/2011/dec/27/banks-deposit-record-amount-with-ecb?newsfeed=true
Crazy, isn't it? Probably, but that's just another sign that the old model is not working and we have to learn a new one.
Ferran.
New Years eve it’s a good time for looking back and see what’s happened and looking ahead and try to understand what’s coming.
2011
- 1 Year ago two European countries had been rescued (Greece and Ireland).
- 1 Year ago world’s economy seemed to be in the path to recovery.
- 1 Year ago we were told that European Banks (and worldwide banks) were well capitalized.
- 1 Year ago US bonds were triple AAA for the main three rating agencies (Standard and Poors, Fitch and Moody's).
- 1 Year ago we wanted to believe that it was possible to return to the past, that we still had solvency to waste.
2012
- During the 1st quarter of 2012 European banks have to refinance 230.000 million Euros in Bonds (around 1.8% of the European GDP).
- Current estimations of the undercapitalization of European Banks are between 115.000 and 250.000 million Euro, it could be more if economy slows down and default levels increase
- During the 1st quarter of 2012 European countries have to refinance 300.000 million Euros in sovereign Bonds (around 2.5% of the European GDP).
- Rating agencies are warning that main European countries ratings, including France, Austria, Finland, the Netherlands, Luxembourg and Germany (yes, you read correctly, Germany also) are under review, meaning they have a one in two chance of a downgrade within 90 days. http://www.reuters.com/article/2011/12/06/eurozone-sp-idUSN1E7B41IQ20111206
According to the President of the European Central Bank, “pressure that bond markets will be experiencing is really very, very significant if not unprecedented,” http://business.financialpost.com/2011/12/19/unprecedented-bond-pressure-to-hit-eurozone-next-year-says-draghi/
As European Central Bank is not allowed to buy sovereign bonds we have to find an alternative. Let’s give “unprecedented” liquidity to the European banks by 3 years loans program. http://www.washingtonpost.com/business/markets/ecb-making-unprecedented-3-year-loans-to-banks-amid-debt-crisis-tensions/2011/12/21/gIQAXG9i8O_story.html
As a consequence, Euro exchange rate is below 1.3 USD …
… And oil price is over 100$ again.
In fact oil price is very important for understanding the oncoming changes in the financial system.
Simplifying, I’ve heard two groups of opinions amongst economists; either European Central bank and Federal reserve buy more and more public debt (by printing money) so debt will be paid with inflation, or Federal reserve and European Central bank don’t do that so we’ll face a very long recession with deflation.
We must remember that inflation represents “general levels of prices” so it’s an average of the evolution of the prices of many assets, and this can be tricky. If we look at the prices of houses, cars, mega-plasma TV’s, etc. they’re going down in the middle of the recession, but oil price is still high, and oil price has a direct impact in the growth potential of developed economies.
Are the unprecedented liquidity measures of the ECB and the Quantitative Easing programs of the Federal Reserve going to fix this? I don’t think so, in some months will be facing a new recession (maybe it will be called depression at the time) and the effect of these liquidity measures will be over like tears in rain.
We need to learn how to grow without wasting resources; this is not easy and it takes time, that's why we're facing a depression.
By the way, what are European banks doing with the liquidity provided by the European Central Bank? They're depositing the money back in the European Central bank. http://www.guardian.co.uk/business/2011/dec/27/banks-deposit-record-amount-with-ecb?newsfeed=true
Crazy, isn't it? Probably, but that's just another sign that the old model is not working and we have to learn a new one.
Ferran.
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