02/05/2012 - 11:14

Dust far from settled on European crisis

02/05/2012 - 11:14

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After slipping off the radar, the debt crisis in Europe has now returned.

After slipping off the radar, the debt crisis in Europe has now returned.

THE respite in global financial markets following the European Central Bank’s moves to prop up the banking system is fading.  

As the eurozone slides towards a double-dip recession, elections in several key countries have renewed debate over the wisdom of the austerity measures being imposed.

This debate may affect the outcome of elections in France, Greece and now possibly the Netherlands. 

It could also determine the fate of governments in Portugal, Spain and Italy, which are all struggling to regain credibility with bond market lenders.

Billionaire hedge fund manager John Paulson is reported to be shorting German bonds because he believes the eurozone crisis will get much worse in coming months.

France

Socialist candidate Francois Hollande narrowly defeated incumbent Nicolas Sarkozy in the first round of the French presidential elections last weekend.

Mr Hollande is favoured to win the final round of voting on May 6, although the race will be tight.
Analysts at Denmark’s Danske Bank suggest the French housing market could be set to fall by up to 20 per cent. 

The bank highlights several reasons for this, including waning demand for mortgages, a sharp fall in housing starts, and tightening credit conditions. 

With France and Germany being the key players in the eurozone crisis to date, President Sarkozy and German Chancellor Angela Merkel have been tagged as ‘Merkozy’.

The Merkozy doctrine demands austerity measures from eurozone nations that have requested bailouts from the EU and the International Monetary Fund.

Mr Hollande has indicated that he would renegotiate the current fiscal compact, suggesting he could have a complicated relationship with Ms Merkel, who favours spending cuts.

Political uncertainty has also emerged in the Netherlands after an impasse over budget cuts, causing the Dutch Prime Minister Mark Rutte to tender his resignation.

Greek voters go to the polls on May 6, with the caretaker government of Lucas Papademos set to come to an end.

During his six months in office, Mr Papademos orchestrated the largest sovereign default in history.   

Portugal, Italy & Spain

Investors now see Portugal as the most likely candidate for another bailout, after that nation’s borrowing costs escalated in January.

Portuguese prime minister Pedro Passos Coelho, won power in June 2011, ousting socialist PM José Sócrates. While the Portuguese economy is comparatively small, the nation’s woes are symptomatic of the challenges facing larger eurozone economies, such as Italy and Spain.

Investors are also concerned about Italy, the eurozone’s third-largest economy, despite reforms made by Prime Minister Mario Monti.   

However, should Spain require a bailout, there is concern there will be insufficient funds left over to support Italy if Mr Monti’s efforts fail.

The Spanish economy, suffering from high unemployment and problems in the banking sector linked to the real estate market, has slipped back into recession.

Prime Minister Mariano Rajoy, who gained power only last December, has proposed a €27 billion austerity program. 

Spanish bond yields rose sharply after the government announced it would not meet its 2012 budget deficit goals that had been agreed with the European Union.

Authorities maintain Spain can avoid a bailout.

However, investors fear the nation will require some sort of external support.

The Fitch Ratings report, ‘Spanish Repossessions and Loan Modifications’, says that achieved sales prices on 11,000 repossessed properties in Spain are 48 per cent lower, on average, than valuations at the time of loan origination.

“Fitch expects property prices to continue falling, due to the recessionary environment and severe dislocation of the Spanish property market,” head of Fitch’s structured finance team, Juan David Garcia, said. 

“The speed of the additional correction in prices will largely be driven by financial institutions’ foreclosure management strategies.”

As Spain endures its second recession in three years and unemployment nears 25 per cent, an increasing number of borrowers are failing to meet their mortgage repayments.  

With a rising portion of Spain’s €663 billion ($844 billion) in home mortgages at risk of default, many economists say it is only a matter of time before some of that country’s largest banks will require financial assistance. 

The implication of a financial rescue for Spain for the rest of Europe was the prime topic at last weekend’s International Monetary Fund and World Bank meetings in Washington. 

The big fear is that the EU will need to step in with a Spanish bailout – one much bigger than any of those already extended to Ireland, Greece and Portugal. 

“Retail mortgages are set to become the Achilles heel of the Spanish banking system,” Barcelona-based economist Edward Hugh said. 

Analysts say that a similar rescue for Spain would cost at least €200 billion ($255 billion).
This amount is nearly double the €110 billion previously provided to Greece.

Argentina

To add further financial insult to injury to Spain, in mid-April Argentine President Cristina Fernandez de Kirchner announced a plan to seize control of leading oil company Yacimientos Petrolíferos Fiscales (YPF), by re-nationalising the shares owned by Spain’s Repsol.

In a national address, Ms Kirchner said that, under the bill sent to congress, the national and provincial governments would take control of the 51 per cent of YPF shares owned by the Spanish company.

Spain is one of the biggest foreign investors in Latin America.
Banking groups Santander and BBVA, and telecoms giant, Telefónica, have operations in Argentina.

Ms Kirchner stunned investors in 2008 when she nationalised private pension funds and she also renationalised the country’s flagship airline, Aerolineas Argentinas.

The pension fund seizure and the re-nationalisation of the airline have performed so poorly that ever-more assets are being seized to keep the populist placard-wavers in the streets of Buenos Aires pacified.

The companies involved have described Argentina’s re-nationalisation of YPF as outright pillaging and an attack on their interests. 

YPF’s chief executive, Antonio Brufau, told reporters the company was valued at $17.6 billion, and that Repsol’s stake was $10.1 billion.

Spanish officials protested the Kirchner move, saying Argentina risks becoming ‘an international pariah’ if it takes control of Repsol’s YPF subsidiary.

Becoming an international irrelevance now seems to be Argentina’s lot.
Even in sectors in which it excels, such as farming, companies are heading for the door marked ‘exit’. 

Wesley Batista, head of JBS, the Brazilian food company that is the world’s biggest beef producer, said:

“We’re not going to let ourselves lose money there any longer.”

Spainish Foreign Minister Jose Manuel Garcia-Margallo called the move arbitrary, saying it broke the climate of cordiality and friendship that had existed with Argentina.
He added that Spain would respond with ‘forceful measures’.

The European Commission has warned that nationalising YPF would be bad for Argentina’s investment climate, and has added that it backed Spain in the standoff over the subsidiary.

In light of the Australian federal government’s tax on mining companies, being disrespectful to investors may prove to be a dangerous peril for this nation as well. 

Steve Blizard is an authorised representative of Roxburgh Securities.


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