This week's thought-provokers for investors
The IMF revised its global output forecast up slightly and warned about growing risks for global fi nancial stability. Global output will expand by about 4.4% in 2011, according to the latest forecast. The IMF also expects growth in the advanced economies to slow to 2.5% from 3% last year. The forecasts show that the world is in a two-speed economic recovery, with a slow recovery in the advanced economies supported by a strong recovery in the developing markets. The key risks are high unemployment, banking problems in the developed economies and risks of overheating in the emerging markets, according to the IMF.
These forecasts show how fragile the recovery is. If the rapidly-growing countries slow too soon, the laggards will not be able to compensate for the impact of that slowdown.
The European Financial Stability Facility (EFSF) successfully raised a fi rst bond for EUR5 billion at a yield of 2.8%. Demand for the bond was strong, with investors placing orders for a total of EUR40 billion. The bond has a triple A rating and off ers an extra yield over German Bunds.
This is a major sign of confi dence. It also proves that market expectations are pricing in a lot of hope that EU policymakers will put into place strong reforms.
Debt raised by the eurozone's new bailout fund will have to be recorded in the national government accounts of the participating countries, the EU's statistical offi ce decided on Thursday. The already stretched national balance sheets will therefore have to carry the additional burden of money borrowed to bail out other member countries with the EFSF.
If the EFSF lends money to "peripheral" countries in trouble to buy back distressed debt and that debt ends up in the national government accounts of other member states like Italy, Germany and France - how far are we from issuing global European bonds?
In an eff ort to bolster confi dence in the Spanish fi nancial sector, Spanish banks will be forced to raise more capital to have a minimal core capital ratio of 8%. Elena Salgado, Spain's fi nance minister, said that the recapitalisation needs will not exceed EUR20 billion. According to Mrs Salgado, strong banks like Santander and BBVA already have an average core capital of 8.5%, well above Basel III. Most of the work will have to be done by the local cajas. The bank of Spain has already forced various mergers and reduced the number of cajas from 45 to 17. The cajas will soon disclose their loan exposure to the property and construction sector and face a stress test from the EU.
Will the new stress tests give more questions than answers? This would certainly not boost confi dence.
India is continuing to aggressively fi ght infl ation, raising interest rates by 25bp. This lifts the repo rate to its 2008 high of 6.5%. India already fought infl ation last year by hiking rates six times. Yet due to rising food prices, prices overall have not fallen.
It remains questionable if monetary policy can cope with supply-side driven infl ation. Infl ation could well prove to be pretty sticky.
S&P downgraded Japan to a AA- rating with a stable outlook. The downgrade is due to a lack of a "coherent strategy" to address the nation's debt problem. Japan's public debt is two times the country's gross domestic product. Bond futures and the currency came under pressure due to concerns that the downgrade will push up borrowing costs for Japan.
Various economists have questioned sovereign debt as the world's risk-free asset. Now the fi rst step by a rating agency raises the question of which sovereign debt really is safe.
After the protests in Tunisia, the Arab world is facing more demonstrations, with unrest growing in Egypt this week. Egypt's fi nancial markets have been subject to strong turbulences. The equity market corrected sharply this week, and the currency tumbled amid the uncertain situation.
What if people in other countries try to copy what we have seen in Tunisia? It is important to give the citizens of developing countries a perspective and the feeling that everyone has a chance to participate in the upswing.
Stefan Angele, Member of the Executive Board Head Investment Management
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