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This week's thought-provokers for investors
Sovereign debt in Ireland, Portugal, Greece and Spain came increasingly under pressure after Ireland formally requested a bailout last weekend. However, the bailout remains highly uncertain as parts of the Irish government may yet withdraw support, putting the rescue in jeopardy. Details of the plan would see Ireland nationalise more of its banking sector and receive an EUR85 billion bailout. As part of the deal, the amount of capital held by Irish banks will increase from 8 to 12% to reassure those who hold accounts at the banks. The UK, which is not in the eurozone, will off er an additional EUR7 billion in support of Ireland as part of the deal, but the chancellor also insisted that Britain would not be part of a permanent bailout mechanism for eurozone countries. The euro initially moved higher on the news of the Irish bailout, but the gains later all but melted away. Pressure on the currency remains high, as fears of contagion of Portugal or Spain persist.
Portugal was subject to more bad news when it was confi rmed that the country's defi cit was larger than expected. Portuguese government expenditure rose by 2.8% in the fi rst ten months of 2010 over the same period last year. This shows that austerity measures have so far had little impact on public spending. The government said that state spending had increased despite a 17.3% cut in public investment and a rise in value-added tax, largely because of a 4.9% increase in the cost of interest paid on public debt. Despite these disappointing fi gures, offi cials said Portugal would still meet its commitment to cut the budget defi cit from 9.3% of GDP in 2009 to 7.3% this year.
The government's austerity measures have met with growing opposition as recent forecasts indicate unemployment could rise above 11% next year. But if risk premiums on Portuguese government bonds remain at their current high level, there is a substantial risk that Portugal may also have to resort to an EU bailout.
The crisis appears to be spreading to Spain also, with Spain's 3-month bill auction falling well short of the expected sale size (EUR3.26 billion vs EUR4-5 billion indicated, at an average yield of 1.74% vs. 0.951% before).
Is Spain the next big problem to watch out for? Remember that the country has an unresolved real estate problem and is the fourth biggest economy in the eurozone, which might make it "too big to bail" for the existing bailout fund.
Business confi dence in Germany rose in November, bringing the IFO business climate index to 109.3 points, the highest level in 20 years. The IFO is based on around 7,000 monthly survey responses from fi rms in the manufacturing, construction, wholesale and retail sectors.
Apparently German business leaders expect only little impact from sovereign-debt and banking problems within the eurozone and are betting on a gradual and prudent exit strategy.
The US economy grew at a 2.5% annual rate in the third quarter, more than estimated, as companies increased shipments abroad and Americans boosted spending. The revised increase in GDP compares with a 1.7% rise in the second quarter.
This is still, by historic standards, only a half-speed expansion, and the growth is not fast enough to reduce unemployment signifi cantly.
The Fed scaled back its outlook for the US economy through 2011, saying GDP will grow only 2.4%-2.5% this year. This is down sharply from a previous projection of 3%-3.5%. Next year, the economy will expand by 3%-3.6%, the Fed said, also well below the forecast made in June. Fed offi cials project that unemployment will not change much this year, averaging between 9.5% and 9.7%. The current unemployment rate is 9.6%.
The darker view helps explain why the Fed earlier this month decided to launch another round of stimulus measures. The central bank plans to buy USD600 billion in Treasury bonds over the next eight months in an eff ort to lower interest rates and spur spending.
Stefan Angele, Member of the Executive Board Head Investment Management
Stefan Angele is Head of Investment Management at Swiss & Global Asset Management (formerly Julius Baer Asset Management) and member of the Executive Board. He joined Julius Baer Asset Management in September 2006 as Managing Director and Head of Asset Allocation & Fixed Income. Before joining Julius Baer, he held various positions including Head of Institutional Asset Management at Zürcher Kantonalbank. He also worked in Portfolio Management and Private Banking at Credit Suisse. He graduated in economics from the University of Zurich. He also holds a Swiss Federal Diploma for Financial Analysts and Portfolio Managers and is a Certifi ed European Financial Analyst (CEFA).
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