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Posts Tagged ‘debt crisis’

Angst over imminent elections in France, Greece, and even Germany have aggravated investor concerns about stability in Europe.

While French president-elect Francois Hollande and increasingly important alternative parties in Greece offer an alternative to the German-led program of austerity that has aggravated the economic downturn across Europe, an increase in intra-euro antagonism and disagreement makes the union more vulnerable to unexpected political disaster.

But how worried should we really be about the prospect of a Greek government railing against more austerity and a French president less likely to be steamrolled by strict German ideology?

A team of researchers at the Eurasia Group say not so much:

Despite all of this attention, we remain of the view that the political outcomes from May 6 are unlikely to represent a negative turning point in the Eurozone’s debt crisis. Firstly, in Greece, the two mainstream pro-troika memorandum parties, New Democracy (ND) and PASOK, are likely to gather enough votes to command an overall majority in the parliament, allowing them to progress with the bailout’s conditionalities. In France, Hollande’s probably victory is unlikely to have big implications for crisis management: it will be fairly easy for Merkel to sign up to Hollande’s EU growth agenda without conceding, in any material sense, any large part of her fiscal agenda. Meanwhile, despite the gains of the opposition social democrats in Germany, Merkel will end up conceding little on substance, and the opposition’s success will remain confined to symbolic, not substantive, gains, something which the ratification debate in Germany on the fiscal compact clearly demonstrates. In conclusion, while the June European Council will end in a flurry of announcements and initiatives, none will have a serious impact on short or medium term growth prospects. Furthermore, the areas that could make a big difference to growth will remain hamstrung by political impediments, not least in France, despite Hollande’s rhetoric to the contrary.

In essence, they write, we’ll just see more of the same. That means more stability for investors, but does it really mean the euro area should breathe a sigh of relief?

I would argue that it is quite the opposite. While the possibility of political disaster increases with more dissident voices, the fact is that Europe has not responded adequately enough to the crisis in order to dispel the feeling that its problems were about to get much, much worse. Further, the German-led austerity project has focused too heavily on punishment and not enough on growth, producing little material progress in fixing the eurozone’s ills.

Thus the rise of alternative voices in the euro area may actually have a net positive effect for markets in the near- or medium-term, particularly if candidates actually make good on their promises. Sure, it’s possible something wildly unexpected and disastrous could happen—but that just isn’t likely: even Greece still wants to stay in the euro.

The options for ending the crisis without provoking a financial meltdown may be unpalatable to the North, but they are already on the table: eurobonds, more power for the ECB, or a massive bailout fund that leaves nothing to chance. The current leadership continues to write off such measures, and so new voices at the table are the best—if unlikely—hope that they will at least get some attention.

Even so, it is unlikely that such measures will garner support, just as they have failed to garner support in the fast. Suffice it to say: don’t get your hopes up.

NOW READ: 12 Big European Issues That Should Keep You Up At Night >

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So Sarkozy is out, and socialist Francois Hollande will take over in a few days as the next President of France.

Hollande’s victory is causing a lot of brow furrowing due to the fact that he’s anti-austerity, not eager to reform the pension system, and favors higher taxes on the rich.

In short: He seems like a standard-issue European socialist.

So people seem tthink that Hollande is living in some fantasy world, where he’ll be able to conjure cash out of thin air, and ignore the bond market’s demands for cuts.

This is the wrong way to think about it, and people shouldn’t be so alarmed.

The fact of the matter is that there’s no example in Europe, yet, where the bond market has rewarded austerity.

Take Spain: It recently announced fairly severe reform plans, and yields just shot higher. So there’s really no reason to care much about French domestic policy at this point.

What matters in the Eurozone is Eurozone politics and ECB policy. So for example, what has worked (to some extent) have been the ECB’s 3-year LTROs, which have certainly calmed the banking system down. And what might work is a move towards greater establishment of transfers, fiscal union, and Eurobonds. And on that stuff, Hollande is on the right side.

So forget his domestic policies. They’re not at the heart of the matter, and there’s no reason to think that his course will make a huge difference one way or another.

Just focus on Hollande as a force to breakup the “Merkozy” establishment, and perhaps take Europe away from the current destructure policies, which have exacerbated the debt crisis, while also further pushing countries deeper into recession.

For more on the French result, see here >

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May 5 (Bloomberg) — John Paulson, the billionaire hedge- fund manager seeking to reverse record losses in 2011, lost 6.7 percent last month in one of his largest funds as gold-mining stocks dropped, said two people briefed on the returns.

The decline leaves Advantage Plus, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, down 8.8 percent this year, said the people, who asked not to be identified because the information is private. Since inception in 2005, it has gained 15 percent annually on average.

Paulson, 56, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, told clients in February that gold is his best long-term bet, serving as protection against currency debasement, rising inflation and a possible breakup of the euro. Gold miners are historically inexpensive, he said at a meeting with investors last month.

“Over the last 12 months there’s been a disconnect between the buyers of gold bullion, like central banks who are strategic long-term holders of gold, and the buyers of gold equities, who may believe gold prices will fall in the short term,” Paulson said yesterday in a letter to investors. “This disconnect has caused a large discrepancy between the gold spot price and the implied valuation of gold through gold equities.”

Gold-mining stocks in the 64-member S&P/TSX Global Gold Index slumped 7.3 percent in April and 13 percent in the first four months of 2012. In comparison, bullion fell 0.5 percent last month amid concern that Europe’s debt crisis may worsen and that a slowdown in China may curb demand for the precious metal.

Miners Drive Losses

The decline in gold miners also drove losses in Paulson’s Gold Fund, which can buy derivatives and other gold-related investments, Paulson said in the letter. The fund declined 5.3 percent last month and 11 percent this year. Since inception in 2010, it gained 2.8 percent annually, on average.

Armel Leslie, a spokesman for Paulson & Co., declined to comment on the firm’s returns.

Paulson & Co., which manages $24 billion, is the largest individual holder of AngloGold Ashanti Ltd., which lost 6.9 percent last month and 19 percent in 2012. The Advantage Plus fund had a 25 percent allocation to gold-related investments, according to a year-end letter the firm sent to investors.

Paulson & Co. will now send a “brief commentary” along with its monthly performance estimates to investors, Paulson said in the letter. He is seeking to reverse 2011 losses from an ill-timed bet on an economic recovery, which caused him to scale back risk before stock markets started to rally late in the year. About 20 percent of Paulson’s investor base is currently underwater on the fund holdings, one of the people said.

‘Positioned Differently’

Paulson’s funds rose 1.7 percent this year through April 30, a weighted average across all strategies, the firm said in its letter, as funds including Recovery and Enhanced climbed.

The Advantage Fund, which employs a strategy similar to Advantage Plus, decreased 5 percent last month and 6 percent this year. Since inception in 2004, it gained an annual average of 12 percent.

“Compared to last year, Paulson Advantage funds are positioned differently and expect to generate uncorrelated returns from event catalysts, not market movements,” Paulson said in the letter.

The Advantage funds had been mostly invested in shares of banks, insurance companies and other financial-services firms. Paulson & Co. sold its entire stakes in Citigroup Inc. and Bank of America Corp., positions that Paulson had started aggressively building in 2009 as part of his bet that the U.S. economy would recover by the end of this year, in the fourth quarter of 2011.

Recovery Fund

Paulson’s Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic rebound, such as financial services, insurance, hotels and real estate companies, fell 1.4 percent in April and gained 8 percent in the first four months of 2012, the people said. Since its inception in 2008, it has gained 5.4 percent annually.

The firm’s Enhanced Fund, which invests in the shares of merging companies, declined 0.9 percent in April and climbed 12 percent this year. Since the fund began in 2001, it advanced 24 percent a year on average.

Paulson’s Credit Opportunities Fund dropped 0.7 percent last month and gained 4.2 percent in 2012. Since inception in 2006, the fund surged 56 percent a year, which includes a 590 percent jump in 2007, largely because of Paulson’s bets against the U.S. subprime mortgage market, one of the people said.

–Editors: Josh Friedman, Pete Young

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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Mortgages are more expensive for one million homeowners after the Halifax, the Co-operative Bank, Clydesdale Bank and Yorkshire Bank all increased their standard variable rate (SVR) yesterday.

Many mortgages revert to the SVR when a fixed-rate deal comes to the end of its term.

Lenders are increasing their SVRs due to the higher cost of borrowing from European wholesale money markets, which makes it more expensive for them to fund mortgages.

The ongoing weakness in the UK economy and the eurozone debt crisis have also contributed to the changes.

The Halifax has increased its SVR from 3.5 per cent to 3.99 per cent, with mortgage repayments rising by up to £55 a month for 850,000 borrowers.

The Co-op Bank’s SVR has increased by 0.5 per cent to 4.74 per cent while Clydesdale and Yorkshire Banks’ SVR rate has increased from 4.59 per cent to 4.95 per cent.

The Bank of Ireland is also planning to increase its SVR later in the year.

Borrowers affected by the changes are advised to swap to a better deal, but with lenders tightening their borrowing criteria this could be difficult for many.

New mortgage rules will be introduced next year as part of the Financial Services Authority’s efforts to eliminate irresponsible mortgage lending and lenders are already preparing for the introduction of the new regulations.

It is estimated that one in 40 mortgage holders would no longer qualify under the new rules which will require lenders to ask more probing questions to ensure that borrowers will be able to repay their home loan.

Consumer group Which? is calling for banks do more to help customers who are struggling to pay their mortgages.

It also wants the new financial regulator, the FCA, to support consumers and stand up to banks.

The SVR increase is expected to leave 10 per cent of mortgage holders in the UK with insufficient funds to pay for everyday essentials.

Among all the problems the European debt crisis pose to the global economy comes one possible benefit: A much-needed lift for American manufacturers.

The growth in manufacturing, in turn, could help keep gross domestic product from plummeting to the recession levels being seen in Europe.

U.S. companies are far less dependent on trade for GDP growth, so a downtrodden European consumer isn’t as vital to American expansion. Earnings for large companies like 3M [MMM] and United Technologies [UTX]   glistened in the first quarter, thanks in good part to bustling domestic business and some shield from the foreign turmoil. 

The U.S. government releases its initial GDP estimate for the first quarter Friday morning, with economists expecting a gain of about 2.6 percent.

“The net effect is a growth cycle that is likely to favor U.S. sectors such as manufacturing,” strategists at Bank of America Merrill Lynch said in a research note. “The US manufacturing sector may benefit from the wage constraint, cheap resources and inexpensive working capital that the post-credit crunch world provides.”

For investors, the trend is worth watching particularly as industrials and materials both have been solid performers in this year’s strong stock market gains, but have underperformed slightly overall. The industrial sector ranks fourth of the Standard & Poor’s 500′s [.SPX] 10 sectors, slightly beneath the index’s 10.5 percent rise in 2012, while materials have performed slightly better but still below the index’s returns.

“Stocks can perform well in this environment but US manufacturing and (emerging market) consumer will likely outperform commodity and infrastructure theme,” BofA said.

To be sure, there are impediments to manufacturing growth. 

The latest reading on durable goods orders registered a 4.2 percent drop, weighed particularly by a drop in volatile aircraft orders as well as metals, computers a host of other important goods. However, economists cautioned that revisions and seasonal distortions affected the numbers.

In addition, manufacturing reports have showed somewhat decreasing activity in the U.S., but much sharper downturns in Europe, where the Purchasing Managers Indexes showed clearly recessionary readings.

“We’re continually decoupling from Europe,” said Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. “The manufacturing side is really starting to bring things to light.”

Baum said he is adding positions in General Electric [GE] — a minority owner in CNBC.com-parent NBC Universal — for the first time since the financial crisis began.

“The Wall Street pundits are always looking for leadership. Technology has been a leader for a long time, but if you’re looking for a sector, I like the rolling up the sleeves and going back to work theme,” he said. 

Playing the Europe-U.S. economic dichotomy as a zero-sum game, in which one gains at the other’s expense, is tricky given how interconnectedness between the two country’s financial systems.

However, some, including banking analyst Dick Bove, think the business the European banks lose as they need to recapitalize their losses during the debt crisis will help American institutions.

Neil Prothero, economist at the Economist Intelligence Unit, also sees the willingness of U.S. banks to provide credit to business as an important catalyst.

“One of the main differences between the U.S. and Europe is the whole sentiment toward the banking sector,” Prothero said. “Good or bad, the U.S. financial sector is a bit more stabilized and a bit more open to growing in terms of providing credit.”

European GDP is likely to contract by 0.7 percent this year, posing further risks and making the U.S. economy, at least by comparison, seem strong, he added.

“I’m not quite as bullish on the US. But we’re more bullish on the U.S. than the European economy,” he said. “The risks (in Europe) are severely on the down side as far as we can see.”

In the U.S., that could mean opportunity for investors who believe in the manufacturing theme.

“We’re starting to retool, we’re getting back to the basics and the U.S. is starting to do more manufacturing,” Baum said. “That’s going to be a continuing theme.”

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