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what-a-french-downgrade-means-for-the-euro-zone

 

31/01/2012

European leaders held their 17th summit in two years as the bloc battles to resolve its sovereign debt problems.

In Brussels 26 of the 27 members are expected to sign up to a fiscal treaty including a balanced budget rule written into constitutions. However Britain will not be included as its government has rejected the move.

Then there is the creation of a permanent rescue fund. Everyone is expected to sign a treaty creating the European Stability Mechanism – which is due to become operational in July.

In a bid to tackle the bloc’s rising unemployment numbers the summit wants to focus on creating jobs and growth. Leaders are likely to announce up to 20 billion euros of unused funds from previous budget years that will be redirected towards job creation especially among the young.

But over shadowing everything is the continuing Greek crisis. Negotiations between Athens and private investors over the restructuring of 200 billion euros of Greek debt are at last making progress. The EU is waiting for the deal before it will handover a second critical tranche of bailout funds.

 

 

What a French Downgrade Means for the Euro Zone

 

  • The most immediate impact of a downgrade is higher borrowing costs for the countries that have come under the chopping block. With 10 year bond yields at 3 percent, France can afford to pay more. 
  • However the bigger problem aside from hurting Mr. Sarkozy’s re-election bid is that a downgrade of France will most likely lead to a downgrade of the EFSF. S&P put the long term credit rating of the fund on creditwatch negative in early December so they are certainly open to the idea of lowering the fund’s rating. In fact they said if they were to lower the rating, it could be by up to two notches. 
  • Germany and France, the two largest countries in the Euro zone contribute 80 percent of the guarantees and over-guarantees from AAA rated countries to the EFSF. With France losing its AAA status, only EUR293 billion of the EUR451 billion would be valued at AAA. As a result a downgrade of the EFSF would come almost automatically. The only way to avoid a downgrade would be if the Germans committed more funds to the EFSF, which is unlikely. A downgrade of the EFSF would mean a higher borrowing cost for the facility which would undoubtedly be passed onto trouble nations, making it even more difficult for them to meet their financing needs – a slippery slope that the Europeans will have to contain quickly. 
  •  European bonds are not the same as U.S. Treasuries – Treasuries are often perceived as some of the safest investments in the world but investors do not feel the same about German and French bonds. Euro may be seen below 1.25 in the coming week, at present the 18 moth low at 1.2622 is a good support. 
 

PERFORMANCE OF CLASSIFIED ASSETS DURING JANUARY TO DECEMBER 2011

 

:OBSERVATIONS

 

1.     The above chart shows the yield variations in various specific asset categoriesrelating to the period Jan to Dec 2011.

2.     The BSE SENSEX was the worst performer having dropped by 24.65%, the region’s highest fall in any full calendar year after the 52.54% drop in calendar year 2008.

3.     GOLDhas performed well in the first three quarters of the calendar year offering a return of 35.2%, but had fallen sharply by 18.38% in the last quarter, knocking down the overall gains to 10.32% during the year.

4.     SILVER has gained 61% in the first quarter but surrendered all its gains in the last three quarters by 71% with highest fall recorded in the second quarter by more than 35%, making the overall losses to around 9.89% during the calendar year 2011.

5.     On account of slowing economic growth, the base metals fell sharply by over 20% during the above period. The slowdown in china also weighed on the sentiment.

6.     On account of 13 successive rate hikes by RBI from March 2010 to tame the domestic inflation, the yield on 10 year G-Sec had jumped to 8.97% in the last week of November and recorded a negative 6.79% return during the entire year.

7.     The US economic recovery in the form of lower unemployment, increasing business confidence, slight improvement in the housing sector was noticeable in the last quarter and the benchmark DowJones (DJIA) gained by 5.52% during the above period, closely tracking the gains of S&P 500.

8.     Crude gained by 8.44%, as a result of a cut in OPEC production and prolonging tensions in the MENA region.

 

crude oil old

24 June 14

Crude oil prices  in the U.S. and around the world are hitting highs last seen in September amid the ongoing crisis in Iraq as militants of terrorist group Islamic State in Iraq and Syria (ISIS) continue seizing cities and oil refineries in their march toward Baghdad.

Here are seven ways that rising oil prices will impact global economies:

1.       Growth in the eurozone, dragged down by France and Germany, is grinding to its slowest pace of growth in six months, according to a June survey released Monday. About 5,000 companies across the currency area and in the manufacturing and services sectors reported higher input prices and specifically higher oil prices as “a key cause of rising costs,” according to survey compiler Markit. Apparently, oil prices are not yet high enough to weigh down manufacturing and service sectors in the U.S. and China, where Markit surveys found conditions are reviving despite fears of a slowdown.

2.       India is dependent on oil imports for more than three-fourths of its needs, and about 13 percent of its imports come from Iraq. That means Asia’s third-largest economy, whose stock market has performed among the best in the world this year, could see an economic crisis unfold if oil prices don’t fall again. Since India subsidizes many fuels like diesel and kerosene, aiming to shield the poor from price fluctuations, the government must compensate losses to fuel retailers. Every dollar increase in the oil price raises the subsidy burden by about $997 million, an Indian oil official told the Wall Street Journal.

3.       The price of gasoline in the U.S. is closely pegged to the international price of oil. In general, a $10 increase in the oil price will cause a 25-cents rise in gas prices. (This is known as the Hamilton-to-a-Quarter Rule, a ten-dollar-bill with Alexander Hamilton’s face to a quarter.) This rule only roughly estimates the national average price of gasoline, and prices always vary by region. For example, gas prices soared past $4 a gallon in California on Sunday, but are around $3.80 in Michigan.

4.       Another handy rule: a one-penny shift in U.S. gas prices generally leads to a $1 billion increase in American household energy consumption. If gas prices rise by a dime, that’s a $10 billion increase in household energy consumption. Analysts have said gas prices could rise 5 to 10 cents this summer if the turmoil in Iraq continues.

5.       Since energy, particularly oil, is about 10 percent of the consumer price index, a 10 percent increase in energy prices increases inflation by an additional 1 percent (added to an economy’s inflation from other factors), according to Deutsche Bank chief U.S. economist Joseph LaVorgna.

6.       Rising oil prices also hits gross domestic product. In general, a $10 increase in the price of oil cuts 0.2 to 0.3 percent from GDP. That means, so far the uptick in oil prices is causing about a 0.15 percent decline in global GDP. The International Monetary Fund estimated in January that global GDP would grow at about 3.7 percent this year.

7.       The global economic recovery will be weak and unsustainable as long as oil prices remain above $100 per barrel, according to the macroeconomic think tank Capital Economics. Julian Jessop, head of commodities research, said June 20 that if the unrest in Iraq drags on like the civil war in Syria has, he expects even with Western oil reserves and increased output from Saudi Arabia adding to global oil supply, prices could settle at $120 per barrel “for an extended period.”

 

 

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