Portugal Hits Junk Status

Just over two years ago I suggested that UK retailers were heading for more difficult times, as I highlighted the intended departures of Sir Terry Leahy from Tesco and Stuart Rose from Marks and Spencer.  These two grandees of British retailing, I surmised were calling it a day because they knew that life was abut to get incredibly tough.  In the week Tesco issues its first profits warning in 20 years, seeing an immediate 16 per cent wiped off its share price and its stock’s market capitalisation fall by around £5 billion.  The Tesco retailing juggernaut clearly appears to be faltering and the new Chief Executive has announced that the group’s frenetic store building programme will be reined back and there will be a much greater influence placed on Internet growth. Like similar UK based supermarkets Tesco is involved in a massive UK stores expansion programme, which has been increasingly questioned by investors. In the non-food market, it’s increasingly clear that its main rivals will be the likes of Amazon.  

During the week warnings were also given from Argos, Mothercare and Halfords that Christmas trading was particularly hard, with volumes only supported by heavy discounting.  This is clearly seen in the announcement from the British Retail Consortium in the week which reported that shop prices grew at their lowest pace in 16 months in December as retailers slashed prices, in particular on electrical goods, clothes and footwear in the run up to Christmas.  In the month, price inflation fell to 1.7 per cent year on year from 2 per cent in November, well below a peak of 2.9 per cent reached in June.  Non-food inflation dropped to a 2 year low of 0.3 per cent from 0.8 per cent in November and are likely to show year on year falls in 2012, when the effects of 2011 rise in sales tax drops out of the annual comparison.  Food price inflation rose to 4.2 per cent from 4 per cent in November, although this was below levels earlier in 2011 and the BRC said it expects falls in 2012.  Food retailers’ growth profit margins have fallen to 5.7 per cent from 8.6 per cent between 2006 and 2011, the BRC added.  Overall, the BRC reported that total sales by volume rose by 4.1 per cent due to the discounting, although on a like-for-like basis, which strips out the impact of new floor space, sales grew by 2.2 per cent.

 

The Bank of England left UK Monetary Policy unchanged on Thursday, with economists predicting it will approve a further bout of stimulus for the struggling economy next month.  The rate setting committee concluded its 2 day meeting with a decision to leave the Bank’s key interest rate at a record 0.5 per cent, where it has been since March 2009, and the target for its asset purchase programme remains at £275 billion.  Minutes from the meeting will be released on January 25th.  The MPC had revised its stimulus programme in October 2011, with a decision to purchase an additional £75 billion worth ofUK government bonds, following the completion of its previous £200 billion programme, which had finished in February 2010.  Most believe that February is the most likely month for further stimulus, as the final purchases from the last stimulus programme will then have been completed.  It is also expected that inflation will have continued to fall, reducing the criticism that it still remains at double the Bank of England’s target of 2 per cent, with November’s inflation figure recorded at 4.8 per cent.  The Bank, however, continues to maintain its forecast that inflation will fall to around 1.5 per cent before the year end. Prices charged by U.K. companies at the factory gate registered their first monthly fall for a year and a half in December, official statistics showed on Friday, reinforcing expectations that inflation is poised to slow sharply in 2012. The Office for National Statistics said output prices for domestic sales of manufactured goods declined 0.2% in December compared with November, driven by lower prices for petroleum products, chemicals, drugs and machinery. Tobacco, alcohol and clothing prices were all flat. Factory gate prices last fell on a monthly basis in June 2010, and the last time a larger fall was registered was in November 2008. Output prices were 4.8% higher in December on an annual basis, compared with a rise of 5.4% in November, the lowest annual rate of producer price inflation since December 2010. Economists had expected output prices to rise 0.1% on the month and 5% on the year. The UK economy will remain weak for the foreseeable future, but recession is not inevitable, according to the latest quarterly service by the British Chamber of Commerce.  In the final quarter of 2011, it believes that growth across the manufacturing and services sectors was minimal and with a muted climate for investment in the next three years, due to concerns over incoming business and profitability, the best likely outcome for the economy in the first quarter of this year is stagnation.  Business confidence fell in the survey in both the manufacturing services sector, whilst investment plans and employment outlooks for early 2012 also declined.  Service firms were the most pessimistic about profit margins since the second quarter of 2009. 

 

It would appear that the UK economy probably missed going into recession in the last quarter of last year, although the jury remains out as to whether or not contraction will be recorded in the first quarter of 2012.  At the end of last week the leading think tank, the National Institute for Economic and Social research, estimated that UK economic growth halved last year and ground to a halt in the final quarter of 2011.  It estimates growth was just 0.1 per cent over the October to December period and this follows news that industrial production declined for a second successive month and by more than expected in November.  Output from industry, which includes energy and mining, as well as manufacturing, fell 0.6 per cent in November to a level 2 per cent lower than a year earlier.  The Office for National Statistics also revised down its estimate for industrial output in October, to show a 1 per cent decline when compared with a 0.7 per cent previous fall.  Within the sector, manufacturers trimmed output by 0.2 per cent in November, following a 0.9 per cent fall in October, underlying the fragility of the sector that the government hopes will lead Britain’s recovery.  Overall, production is now 3.5 per cent below its peak it said at the start of 2011 and some 12.5 per cent below its pre-recession level.  Official government numbers on fourth quarter GDP will be announced on 25th January.  The UK economy stands on the edge of contraction, with businesses’ turnover expectations falling for the fourth month in December, according to the BDP Business Trends report. Peter Hemington, partner at BDO, said: “It is apparent that the UK economy has reached a crunch point. The Government must respond decisively if the UK is to avoid a period of prolonged contraction." In another worrying trend, theUK’s trade deficit widened unexpectedly in November, as a drop in Britain’s exports widened the trade deficit.  The official numbers show a widening of £0.7 billion to register a shortfall of £8.6 billion in November, as exports to non-EU countries fell and imports from non-EU countries rose to a record high.  The market had been looking for a deficit of £8.3 billion.  The numbers also showed an upwardly revised deficit of £7.5 billion in October.  In November, despite the ongoing European crisis, there was a slight rise in exports from the UK to its most important trading area.  Exports to the European Union moved up by £0.1 billion, whilst exports to non-EU countries fell by £0.4 billion from October. Exports of goods fell 1.5% to £25.7bn, while imports rose 1.1% to £34.4bn, boosted by big purchases of chemicals and crude oil. The ONS said that chemicals imports, including medical products, rose 12 percent on the month to 4.5 billion pounds, the highest since records began in January 1998. The value of oil imports rose to £4.652 billion, also a record high, though the balance of trade in oil narrowed as exports also rose. Britain’s two taxpayer owned banks are likely to have to make another £33 billion worth of provisions on top of the £100 billion impairment charge that has been taken over the past 4 years, according to a research note from Barclays highly rated baking analysts in the week.  My concern remains that if this is the case then the two will require further funding and this is likely to come only from the public purse.  According to HM Revenue & Customs last year Income tax receipts hit an all-time high of more than £153bn, with VAT and most drink and tobacco duties also reaching new peaks, the total paid by taxpayers during 2010/2011 increased by 10pc on 2009/10 to more than £447bn, close on the pre-credit crisis peak for total revenues of £451bn in 2007/2008.In addition to record receipts from income tax, last January's increase in the standard rate of VAT to 20pc boosted returns from £70bn to £85bn. Changes to National Insurance Contributions (NICs), including doubling the top rate paid by employees with income above £42,484 a year, lifted returns from NICS to nearly £97bn. Since January last year, people who earn more than £100,000 lose £1 of personal allowance for every £2 of income above that threshold until the personal allowance is withdrawn altogether just before income reaches £115,000. More than £31bn of taxpayers’ money has been wasted across government departments in the past two years, according to an audit by The Times. The scale of the inefficiency is more than twice the extra £15bn of cuts for 2015 onwards announced by George Osborne, the Chancellor, in November and more than a third of the £81bn cuts needed in this Parliament. An analysis of more than 70 reports from the National Audit Office (NAO) and parliamentary select committees found at least £31.8bn of wasteful overspending since 2009. The waste comes in areas ranging from welfare and capital projects to farm payments. Some of the figures are annual and ongoing, others relate to projects that have been delayed or abandoned. The Royal Institute of Chartered Surveyors reported on Tuesday that while property transaction levels held up in December, due to an increase in the number of new properties for sale, house prices continue to decline.  A balance of -16 surveyors reported house prices fell in December compared with -17 in November, although it was the smallest fall since June 2010.

  

Nigeria's government and labour unions have failed to end a paralysing nationwide strike over high gasoline costs, in a nation vital to US oil supplies, as The Petroleum and Natural Gas Association of Nigeria has threatened to stop all oil production. Nigeria, which produces about 2.4m barrels of crude a day, is the fifth-largest oil exporter to the US. A strike that began last Monday has paralysing a nation of more than 160 million people, with the root problem being gasoline prices. The government stopped subsidies that kept gasoline prices low on January 1, causing prices to spike from $1.70 per gallon to around $3.50 per gallon, with the costs of food and transportation also largely doubled in a country where most people live on less than $2 a day. Anger over losing one of the few benefits average Nigerians see from being an oil-rich country, as well as disgust over government corruption, have led to demonstrations and violence that has killed a number of people. Iran said on Saturday it had evidence Washington was behind the latest killing of one of its nuclear scientists, state television reported, at a time when tensions over the country's nuclear program have escalated to their highest level ever. In the fifth attack of its kind in two years, a magnetic bomb was attached to the door of 32-year-old Mostafa Ahmadi-Roshan's car during the Wednesday morning rush-hour in the capital. His driver was also killed. U.S. Secretary of State Hilary Clinton denied responsibility and Israeli President Shimon Peres said Israel had no role in the attack, to the best of his knowledge. Separately Iran has warned its Gulf neighbours to not make up for any shortfall in its oil exports under new Western sanctions, its OPEC representative said in comments published on Sunday. Mohammad Ali Khatibi said Iran would consider any Gulf member of the Organisation of Petroleum Exporting Countries that "cooperate with the adventurous (Western) nations in substituting Iranian oil to be accomplices." If they did so, "one cannot predict the consequences," he was quoted as saying. Saudi Arabia has reportedly told a senior US lawmaker it stands ready to increase its current oil output of 10 million barrels per day should new sanctions curb Iranian oil exports. Saudi Arabia's oil minister, Ali al-Naimi, said in Sunday's edition of his country's al-Watan newspaper that "Saudi Arabia is able to produce 12.5 million barrels per day to meet the needs of the world market and satisfy any increase in demand from consumer countries." U.S. and European efforts to cripple Iran's finances by discouraging or banning countries and firms from importing its oil have been proceeding, though China, Iran's biggest customer, is reluctant to oblige and other countries too fear that to stop purchasing Iranian crude could badly hurt their own economies. Japan's policy on Iranian oil was left in doubt on Friday after the prime minister distanced himself from his finance minister's pledge to reduce oil imports in support of the U.S. push. February futures of light sweet crude closed at $98.70 a barrel on the New York Mercantile Exchange. The threat of food inflation, a serious concern for emerging countries last year, is starting to recede as high prices for grains tempered consumption and better crop yields in Europe and Russia helped refill stocks. The UN’s Food and Agriculture Organisation said on Thursday its food index had fallen last month to its lowest level in more than a year, reflecting reduced inflation across Asia. At the same time, the US reported that its domestic production and stocks of corn, a key commodity for the global food chain, were higher than previously thought, sending prices sharply down. Gold for February delivery closed at $1,630.80 an ounce on the Comex division of the New York Mercantile Exchange. Gold futures prices had gained 2.5% in the three sessions and Thursdays fall left it up 0.9% on the week.

 

The number of Americans losing their homes fell 34% last year to its lowest level since 2007, according to Realtytrac. About 1.9m homes were put into foreclosure in 2011, as December foreclosures hit their lowest levels in 49 months. Although it warned that the decrease was in part due to lenders holding back on proceedings amid scandals involving the foreclosure industry and warned that there were signs that lenders were beginning to push through delayed foreclosures towards the end of 2011. "We expect that trend to continue this year, boosting foreclosure activity for 2012, though still below the peak of 2010," it reported. The housing market news came as more economic data underlined the fragility of the US recovery. Retail sales over the Christmas period proved to be weaker than expected, with a 0.1% increase compared to a 0.2% forecast. Excluding auto, gas and building materials, retail sales fell 0.1% in December, marking the first decline since May 2010. US Consumer Credit expanded by more than expected in November, rising by $20.4bn during the month compared to the $7.0bn increase forecast, pushing the annual rate of increase to 9.9%, from 2.9% in October. The U.S. trade deficit widened for the first time in five months in November, as rising oil prices lifted imports and exports to the euro area slumped. The U.S. deficit in international trade of goods and services jumped 10.4%, the biggest gain since May, to $47.75 billion, the Commerce Department said on Friday. The October trade gap was revised down to $43.27 billion from an initial estimate of $43.47 billion. The trade gap was much higher than forecast, as Economists had expected the deficit to rebound to $45.2 billion. U.S. exports to countries using the euro fell 6.9% in November, pushing up the deficit with the euro area by 20.8% to $8.36 billion. The Easing of global oil prices since the summer had helped to bring down the oil shortfall, but oil futures are now back above $100 a barrel.  Oil prices resumed their rise in November, with the average price of imported crude climbing $3.66 to $102.50 a barrel. This drove crude imports to $27.29 billion from $26.01 billion in October. Crude import volumes rose by roughly 3 million barrels to 266.2 million barrels

 

Chinese imports rose at their weakest rate in more than two years in December, signalling that growth might be slowing in the world’s second biggest economy and fuelled optimism that policymakers would take more aggressive action to prop up domestic demand. Chinese imports rose 11.8 per cent in December from a year earlier, nearly half of November’s 22.1 per cent. Export growth stabilised at 13.4 per cent year on year and this leftChina with a $16.5bn trade surplus on the month and $155bn on the year, its third consecutive annual decline.  The 2011 trade surplus shrank from $181.51bn in 2010, the customs agency said in a statement, reflecting the turmoil in Europe and the US. Exports rose 20.3pc to $1.899 trillion in 2011, compared with an increase of 31.3pc in the previous year, while imports rose 24.9pc to $1.743 trillion, much slower than the 38.8pc growth in 2010. Chinese vehicle sales grew just 2.5 per cent last year, as the withdrawal of government stimulus measures tamed the exuberance of the world’s auto market. Last year US sales were estimated at 12.8m units, below China’s 18.5m. In 2012 China is expected to grow to a 20m vehicle market. China's inflation rate fell for the fifth month in a row in December as Prices were up annually by 4.1%, down from a 4.2% annual rate a month earlier, according to the Consumer Price Index released by China's National Bureau of Statistics on Thursday. This marked the slowest level of inflation since September 2010and is a welcome slowdown for both the China's government and consumers, as prices were up 6.5% in the 12 months ending July. Last year, taming rapidly rising prices was one of the Chinese government's top priorities and Officials tightened credit in the country's financial system, and tried to slow the domestic housing boom. Now that economic growth seems to be slowing and the inflation rate is coming down, policymakers there expected to shift their focus. In general, food cost 9.1% more in December than it did a year earlier, a slightly higher inflation rate than in November, but still down significantly from a 14.8% inflation rate in July. Shenzhen, a major manufacturing hub in southern China, will increase its minimum wage by 13.6 percent in February despite warnings from factory owners the move could deal another blow to exporters already reeling from a sharp drop in Western orders. WhilstChina's leaders are aware of the pressures on exporters facing shrivelling orders from a debt-stricken eurozone, surging production costs and currency appreciation, they've also pledged to lift migrant factory worker wages after a number of recent high profile strikes. Shenzhen which borders Hong Kong will hike its minimum monthly wage to 1,500 Yuan (£153.43) on February 1.

 

The European debt crisis continues to rumble along and whilst record levels of cash have been parked by banks at the European Central Bank, rather than being lent to other banks for fear that they may not be safe. In the week for the first time in living memory a six months German bond auction saw investors pay the German government to look after their money.  Germany auctioned €3.4 billion worth of six month bonds at an interest rate of -0.0122. Such unprecedented action is a clear indication of the strains within the European banking sector and whilst there was a glimmer of hope for some investors following successful Spanish and Italian bond auctions and the fact that the European Central Bank not cut interest rates yet again, I remain very pessimistic about a successful European outcome.

 

During the week Germany and France increased pressure on Greece to find a solution to its debt crisis, warning that the country will be denied a crucial €130 bailout, unless it can reach an agreement with bond holders.  The Greek Prime Minister has warned that Greece will go bankrupt in the next 3 months if this money is not received.  Greece must redeem a €14.4 billion euro bond on March 20th and all analysts agree it will be unable to do so, unless the IMF and EU approve the second €130 billion bailout and this is dependent on a deal with creditors to cut the countries debt by imposing a 50 per cent haircut on €206 billion worth of privately held bonds.  Greece has already received €73 billion from the first bailout package of €110 billion announced by the European Union and the International Monetary Fund and which was approved in May 2010 to help the country stave off bankruptcy.  The European President, Mr Draghi, has admitted that European economic activity was still weakening, but said that there were “tentative signs of stabilisation”. The week has started well following much better than expected. There were better than expected bond offerings in Spain and Italy and even the Greeks were holding fruitful talks with their creditors, some were even suggesting that the crises had turned a decisive corner. But on lunchtime on Friday the 13th came stories out of Germany (was this the Bundesbank again?) that the ratings agency S&P had chosen to detonate the bomb that has been waiting to go off for the past five weeks, this was a debt downgrade of eurozone countries. S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each. The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status. It put 14 euro-zone states on negative outlook for a possible further downgrade, including France,Austria, and still triple-A-rated Finland, the Netherlands and Luxembourg. S&P has given nearly all the countries it downgraded a "negative outlook", meaning there is a one in three chance of a further cut in 2012 or 2013. It says refinancing costs for some countries will stay high, credit will be hard to come by and growth will slow. Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook. Germany’s economic recovery went into reverse at the end of last year but the country still notched up 3 per cent growth in 2011, twice as fast as in the US and the rest of the eurozone. In the week the statistics office reported that 201 had seen only a modest slowdown from the 3.7 per cent growth seen in 2010, which was the fastest since the country’s reunification in 1990. Economists this year expect to see sharply slower growth or even stagnation, with the Bundesbank forecasting that growth will slow to 0.6 per cent in 2012, before picking up to 1.8 per cent in 2013. Last year also saw Germany’s public sector deficit fall to just 1 per cent of GDP, down from 4.3 per cent in 2010, bringing the country clearly back below the 3 per cent limit set for eurozone member states.

 

So France has lost its coveted AAA status, although the downgrade was only one notch, not two as had been threatened. Fitch, the French owned ratings agency had insisted earlier in the week that France was safe as far as it was concerned and had suggested Italy was nearer a downgrade. The European Central Bank was active in the bond markets on Friday afternoon buying Italian debt as one consequence of the downgrade rumour was that Italian bond yields started to climb back towards 7% where they had fallen from during the course of the week. I expected further upward pressure on most European debt this week.  attempts by the French establishment to persuade S&P, Moody's and Fitch that Britain was more deserving of a downgrade have failed and French borrowing costs will rise. For Sarkozy, months away from a presidential election, the news that France is being downgraded is disastrous. "If France loses its AAA, I'm dead," Sarkozy told aides in October, according to Le Canard Enchaîné. The president has staked his re-election on convincing France that he is the only person to save it from economic doom and the rating cut will seriously dent his image. With the Socialist François Hollande leading the polls and Marine Le Pen of the extreme right Front National biting at his heels, Sarkozy is under severe political pressure over the recession and unemployment. Last year the Sarkozy camp defined the AAA as the holy grail of France, not just a point of pride but the cornerstone of protecting the French social model and generous social safety net. Alain Minc, the economist and Sarkozy advisor, called the AAA, which Paris has clung to for 36 years, a "national treasure" and Defending the rating had became Sarkozy's mission as he raced between international summits, claiming he would save the eurozone and solve the sovereign debt crisis. Without its AAA, which has not balanced a budget since 1974,France will have to pay billions of Euros a year in extra interest payments. With low to non-existent growth, a vast social security deficit and a serious hole in state finances after decades of the French state living beyond its means and the downgrade means France will find it harder than ever to rein in its state finances.  Sarkozy is already committed to bringing down France's public spending to within the 3% limit imposed by the European Union by 2013. The government has already voted on a series of austerity measures, including savings of €65bn by 2016, announced in November, on top of a €12bn deficit reduction package announced in August. In addition the government has said it needs to make savings of €100bn-plus to balanceFrance's budget by 2016. All this at a time when the country is gearing up for elections, unemployment is at a 12-year high and the economy has virtually ground to a halt. Political rivals have been quick to attack. Socialist François Hollande, has said it was the Sarkozy government that had been downgraded, to and the far-right Front National, said it was the beginning of the end for the euro and the shattering of the "myth of a president who protects". Given thatParis is bankrolling no less than a fifth of the purported “big bazooka” bail-out fund the so-called European Financial Stability Facility, monetary union is now on very thin ice. The €440bn European financial stability facility is only as strong as the governments underwriting it and its own AAA rating now looks under serious threat. That will make it far more difficult for Europe's governments to persuade overseas investors, such as China andBrazil, to put their own money at risk by subscribing to the EFSF, as was envisaged. The Eurozone’s rescue fund uses guarantees from its member countries to raise funds in financial markets. If those backer countries are seen as less creditworthy, so is the fund and it could well be downgraded too. That will make it more difficult and more expensive to raise money from financial markets and other countries outside the eurozone. The fund has already committed large sums to Greece, Ireland and Portugal and will need to raise more money should Italy and Spain need the same kind of help. Britain should however not be too confident because if the UK economy goes backwards into recession it will not be long only before the rating agencies contemplate a downgrade here. A senior German lawmaker on Friday accused ratings agency Standard and Poor's of playing politics, saying the U.S.agency should also downgrade Britain if it downgrades France. Michael Fuchs, deputy leader of the parliamentary group for Chancellor Angela Merkel's Christian Democrats, said S&P had a distorted view of the euro zone and that downgrades of its member states were politically motivated.

 

With European Business and consumer confidence, already trending down the downgrades will further weaken the eurozone even though it is already on course for a nasty double-dip recession this year.  This downturn will now be that bit deeper and longer and is not helped by a global economy which is slowing. On the foreign exchanges, the euro fell sharply against the dollar to a 16-month providing a cheaper currency which will be a boost forEurope's exporters. A toxic mix of austerity, slow growth and rising debt means that these will not be the last downgrade in 2012, and although Germany emerged unscathed this time it too will come under scrutiny, as  Germany's export-led growth is terribly vulnerable to an economic recession in the  eurozone. Berlin will now come under increased pressure to release the funds required to keep monetary union together. Sarkozy's expected electoral failure in about 100 days is likely to make Angela Merkel even more wary about doing anything that could cause a German downgrade, as German Elections next year are drawing closer and her weak coalition is very vulnerable.   She is therefore likely to be even more uncompromising in negotiations with countries seeking further bail-out funds, a scenario which is likely to go down well with the Bundesbank. Germany's Liberals, junior partners in Chancellor Angela Merkel's government, denied on Saturday a report they were discussing an exit from the coalition. Any Such a move by the pro-business Free Democrats, currently at historic lows in popularity polls, would break up Merkel's government at a critical moment inGermany's efforts to resolve the euro zone debt crisis. Business weekly Wirtschaftswoche had reported that the FDP leadership was evaluating arguments in favour of ending the coalition and new policies that would prove popular amongst Germans. The party, which has been out of electoral favour for almost two years after scoring 14.6 percent in the 2009 election, has been polling below the 5 percent threshold needed to enter parliament since September and a growing band of analysts believe that the party could be threatened with extinction unless it turns its fortunes around fast. News late on Friday that talks in Greece with its private-sector creditors have so far failed to reach an agreement on a debt-reduction deal is also a blow, although the Talks are set to re-start on Wednesday. The unexpected breakdown of crucial talks between Greece and its private-sector creditors took the country a step closer to bankruptcy  and Officials in Athens have warned of dire consequences for "Greece and the Greek people, Europe and Europeans" if the long-overdue debt restructuring deal is not resolved soon. The breakdown was attributed to disagreement over interest payments on the new bonds.With Greece facing massive debt repayments on 20 March, the agreement is vital for averting a disorderly default. The bond swap deal, which aims to cut Greece's debt pile by €100bn, is also a condition for releasing up to €130bn of further rescue funds for the near-insolvent nation.Greece's credit rating did not change in S&P's review of eurozone countries as it is already considered to be deep into "junk" status. The Washington-based Institute of International Finance (IIF), representing global bond holders, released a statement shortly after the breakdown saying the discussions had "paused for reflection". The institute, which is negotiating on behalf of the banks, insurers, hedge and pension funds that have bought up Greek debt, said: "Despite the efforts of Greece's leadership, the proposal put forward, which involves an unprecedented 50% nominal reduction of Greece's sovereign bonds in private investors' hands … has not produced a constructive consolidated response by all parties." adding "We very much hope, however, that Greece, with the support of the euro area, would be in a position to re-engage constructively with the private sector with a view to finalising a mutually acceptable agreement on a voluntary debt exchange." The Greek finance minister expects the talks to reconvene on Wednesday when Charles Dallara, the IIF's head, returns to Athens. It had been hoped that the discussions would be concluded by the time monitors from the International Monetary Fund, European Central Bank, and EU, the "troika" of Greece's bailout lenders, arrive in Athens on Tuesday as The second rescue package of €130bn relies on their evaluation of the nation's fiscal progress. The debt restructuring, the largest attempted in the eurozone, is aimed at bring Greece's debt down to more sustainable levels, reducing it from 160% of GDP to 120% of national output by 2020.  Germany, which has largely bankrolled Greece's rescue programmes so far and is critical going forward, believes that the debt deal would make the prospect of a second bailout more palatable for German taxpayers who are already incensed at having to fork out for what they see as profligate southern Europeans.

 

Growth in most of the world's major economies is likely to slow further, according to a leading indicator for November published by the Organisation for Economic Cooperation and Development on Thursday. The OECD said its monthly indicator pointed to more slowing in the mostly industrialised OECD area, the 17-nation euro area and the top five Asian economies as a whole, although it recorded a slight turn for the better in Japan, the United States and Russia. For the OECD as a whole, the index dipped 0.1 points to 100.1, leaving it marginally above a long-term average represented by a figure of 100. Within the euro zone, where the index dipped to 98.3 from 98.7, one of the more significant drops was in Germany, down 0.8 points at 97.9, slipping further from the long-term average. China dipped 0.1 points to 100.0, while an Asian aggregate grouping the five economies of China, India,Indonesia, Japan and South Korea dipped 0.2 points to 98.9. The threat of fresh economic turmoil and social upheaval could put at risk the gains produced by globalisation, the World Economic Forum said on Wednesday. In its annual assessment of the outlook for the global economy, the WEF set the scene for its meeting in Davos later this month by warning that the "seeds of dystopia" were being sown. The growing number of young people with little chance of finding a job, the increasing number of elderly people dependent on states deeply in debt and the expanding gap between rich and poor were all fuelling resentment worldwide, the forum said in its Global Risks 2012 report. "For the first time in generations, many people no longer believe that their children will grow up to enjoy a higher standard of living than theirs," said Lee Howell, the WEF managing director responsible for the report. "This new malaise is particularly acute in the industrialised countries that historically have been a source of great confidence and bold ideas." The survey of 469 global experts identified chronic problems with government finances and severe income inequality as the most prevalent risks over the next decade. The study said early hopes that closer global integration would inevitably lead to higher living standards for all were at risk of being dashed by trends that left large numbers of people fearful about the future. The study said the policies and institutions of the 20th century no longer offered protection in a more complex and integrated global economy. With U.S. markets closed Monday for Martin Luther King Day, global investors will be watching Europe very closely on Monday in the wake of S&P's downgrades and The biggest test of market sentiment could come during debt auctions for the newly downgraded nations. On Monday, France wants to sell €8.7 billion of debt. Spain and Germany are also planning on selling debt in the week. More than two years into the crisis, bailouts of Greece, Portugal and Ireland, the creation of an emergency fund and a slew of continent-wide austerity measures have once again failed to calm fears of a eurozone breakup. Last month European leaders, except Britain, agreed a "new fiscal compact" by March to tighten budget discipline and deepen integration in order to convince markets that there would be no repeat of the crisis. But Standard and Poor's, in addition to removing France and Austria out of the exclusive club of AAA-rated nations, warned that "a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating." EU leaders plan to discuss how to help growth and jobs at their January 30 summit, but the new fiscal treaty will also be high on the agenda. After years of near zero fiscal oversight in the EU, the pact would require governments to enshrine balanced budgets in their constitutions and threaten more automatic sanctions against countries that run excessive deficits. German Chancellor Angela Merkel, who has championed stricter budget rules, said on Saturday that the downgrade means Europe must quickly implement the new treaty, "and not try again to soften it." The ratings agency's move has also fuelled doubts about the Eurozone’s ability to boost its bailout fund, the European Financial Stability Facility. Originally created with guarantees totalling 440 billion Euros, the EFSF only has 250 billion Euros left after bailing outPortugal and Ireland and not enough for Italy or Spain if the Eurozone’s third and fourth biggest economies need help. EU leaders agreed last year to leverage the fund to one trillion Euros, but they have failed to attract any interest among private investors and foreign governments. The end of 2011 was generally used productively by the ECB to buy some time, by cutting interest rates and by offering vulnerable European banks cheap funding for three years.But the S&P announcement demonstrated the problems and why it is far too early to assume the worst is over. Just five eurozone countries – Italy, Spain, Ireland, Portugal and Greece – have around €200bn of debt maturing between now and April and the question remains will they be able to refinance, pulling back from the brink of insolvency, but in the case of Greece it may already be too late as clear German fatigue was already starting to show before Fridays downgrades and the stakes have just got worse.  The rising borrowing costs that many countries will face in the wake of these downgrades will have repercussions across the eurozone. There are worries, for example, that rising borrowing costs for Italy mean it will sooner or later need to apply for help from the EFSF. If it does, and drops out of the fund as a backer, there are serious implications for key guarantorsGermany and France. Their obligations to the rescue fund would rise and put fresh pressure on their credit ratings. Europe's banks, which are heavily exposed to eurozone bonds, are in turn likely to face a fresh wave of downgrades as a result of S&P's actions. Sarkozy is in an election year and will have to be seen to be doing something to restore Frances AAA rating and the last thing he wants to be doing is to be giving even more money toGreece. At the height of the crisis over the threatened Greek referendum, when George Papandreou was forced out of power, Sarkozy said it had been a mistake to admit Greece to the eurozone. A badly wounded Sarkozy and the willingness to dig even deeper by governments across the rest of the zone will now be critical in determining whether Greece becomes the first member to crash out of the single currency by defaulting, the first by a western nation in nearly 70 years.

 

Equity markets continue to, I believe, live in a Disneyesk World and are ignoring the real effects in the economy where, following on from Tesco’s profits warning in the week, I expect many more profit warnings over the coming weeks, as companies pull together their 2011 year end numbers and realise that they will fall short of market expectations.  Greece is increasingly going to be the focus for investor attention, ahead of the bond redemption in March. Also in the coming weeks we have crucial meetings between both the French and Italian governments on labour reforms with their respective labour Unions.  In both cases, I do not believe that the Unions are going to welcome requests for more flexibility, longer working hours and the very real prospect of job losses.  The resulting industrial action is the very last thing that countries in this predicaments need and it will only, in the shorter term, see industrial activity fall in already weak economies, pushing them further into recession. The dwindling numbers of creditors willing to lend to increasingly troubled European governments will subsequently be asking for higher interest payments on the money that the governments desperately need in order to maintain current public spending, which even after the well documented austerity remains significantly ahead of revenues. 

 

Against all the above the New Year’s euphoria looks very misplaced.

 

 

 

 

 

 

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Ratings agency Standard & Poor's has downgraded nine eurozone countries. All except Slovakia were also put on negative outlook, meaning there is a one in three chance of a further cut in 2012 or 2013

 

FRANCE Down one notch, AAA to AA+

 

AUSTRIA Down one notch, AAA to AA+

 

MALTA Down one notch, A to A-

 

SLOVENIA Down one notch, AA- to A+

 

SLOVAKIA Down one notch, A+ to A

 

CYPRUS Down two notches, BBB to BB+

 

ITALY Down two notches, A to BBB+

 

PORTUGAL Down two, BBB- to BB (now junk status)

 

SPAIN Down two notches, AA- to A