Fiscal cliff remains unsolved

Britain started to flirt explicitly about the EU leaving scenario. President Obama´s administration was forced to admit after that it is the America’s national interest to have Britain as a part of the EU. These words came after David Cameron admitted that the “Brixit” is now “imaginable”.  I will not be surprised if it is more and more often explicit for Britain not to be part of the EU once the ECB starts its inflation plans and European officials try to save the EU by some kind of socialist planning. The popularity of EU exists is rising. New Catalan President Artur Mas is prepared to call referendum about the exit of the region from Spain in 2014 and plans to create own tax agency and central bank. Silvio Berlusconi admits that the country will be forced to leave the EU unless the European Central Bank gets more powers (from Germans) to ensure lower borrowing costs.

And what could we expect from the New Year 2013? There are some predictions. My favorites are two of them. First on is from Mr. ECB governor Draghi who said that reforms in the euro area have revived confidence and that it will help to foster a recovery in euro area. Optimistic is also Mr. Luis Maria Linde, the Bank of Spain’s governor, who predicts that Spain will have recovered “almost all” the ground lost during the first disastrous years of euro membership. It is a little bit hard to believe because Spain has high unemployment, unbelievable unemployment among youth and bad loans in the country hit a new record when they rose above 11% for the first time in history.

ECB announces change in eligibility of debt instruments issued or guaranteed by the Greek government. Marketable debt instruments issued by the Hellenic Republic and fulfilling all other eligibility criteria shall again constitute eligible collateral for the purposes of Euro system credit operations. But situation for ordinary Greeks have not changed. Many Greeks are seeking job out of the country. In the mean-time Euro-zone member stated that Cyprus badly needs a bailout package but the International Monetary Fund is demanding a debt haircut first. The situation in country is quite alarming because Cyprus was forced to borrow €250 million from the pension funds of state-owned companies this week just to be able to pay the holiday salaries of civil servants.

Mr. Abe won the election in Japan. Many analysts are thrilled because BoJ will be very probably forced to ease its monetary policy. Mr. Abe said that the plan is to have 2% mandatory inflation and 3 % nominal GDP growth which mean that their central bank will have to promise unlimited monetary stimulus. This policy could be successful from the short term but we have to be careful from the longer term. BoJ could buy domestic bonds and decrease the debt of the country but one time in the future will be willing to sell bonds; if nobody buys them or if it writes bonds off it will be the first step for loosing of confidence to yen which could lead to hyperinflation in the country.

Fiscal cliff is the top topics in the US. The Fitch agency warned the US that if they do not solve the fiscal cliff problem the country will lose its triple A rating. Fitch changed its outlook for the U.S. rating to negative last year after Congress and the Obama administration failed to meet a deadline for a plan. I think that Obama and Boehner (Republican leader) will find some compromise. It is a nation issue. But for now the markets stay careful because according to latest news that talks have stalled. Obama’s latest budget offer would raise taxes by $1.2 trillion and increase tax rates for households earning more than $400,000 a year, up from $250,000 in his earlier proposal. Obama’s plan would cut $1.22 trillion in federal spending, including interest savings. Boehner’s “Plan B” would raise tax rates on annual income exceeding $1 million. I think that if spending cuts includes interest savings as one part of the plan it is necessary to involve the FED. Otherwise it would be impossible to save on interests because a huge $16 trillion debt.

Matuš Pošvanc

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