There are still some optimists

It is Christmas time and we do not have for you so many stories. But if somebody thinks that nothing is going on is definitely wrong. The IMF predicts that France will miss its 2013 target for a budget deficit of 3% of GDP. It is much more probable that France will have 3.5% deficit due to the weaker than expected growth. But France need not worry about the sanctions which are connected with missing this target because The European Commission will very probably propose giving France, Spain and very probably to other several euro zone states more time to cut their public deficits below the target limit of 3 % of GDP. We are quite accustomed that the EU rules are no rules at all and that the EU will bend its own agreements once again. The only thing which could be surprising is that this time it was quite fast. The proposal should come on February. The only optimist about France is German Finance Minister Schaube who said that he is “certain that France will fulfill its obligations“.

The Spanish Bankia did not prepare for its shareholders very beautiful Christmas present. That is for sure. The Spanish bank announced that loses will be much higher than expected and it wiped out 350,000 shareholders, pensioners and small savers among them. Some of them lost everything as the value of the bank shares has dropped 80% since July 2011. One of the outcomes of the crisis in the Spain is also high unemployment. Many unemployed can no longer service the loans they took to purchase apartments, houses and commercial space during the boom years prior to the crisis. The outcome is very depressing. Some 400,000 eviction proceedings have been opened in Spain since 2007 and only 94,502 repossessions were registered in 2012. And this is also one of the reasons why the banking sector in Spain records extreme loses due to the collapsing of housing market.

Austerity measures are not very popular among many politicians and representatives of international organizations as well. International Monetary Fund head Christine Lagarde has claimed for example this week that Germany need not so much austerity. She said that she is afraid about the growth of Germany because German Finance Ministry is allegedly working on a far-reaching package of spending cuts (e.g decreasing contributions to health fund or aic connection of retirement age with life expectancy) and tax hikes (12% VAT tax hikes on food and public transportation) to prepare country for the potential constitutionally anchored debt brake.

Incoming Japan Prime Minister Mr. Abe called for strong monetary easing policy and weakening of Yen to support the economy. The sources from the Bank of Japan said that it will not be necessary to change the BoJ law and that the BoJ will make some compromises. Mr. Abe is prepared also for vast public spending. The fact is that this policy could bring from the short term period growth. But the BoJ must be prepared to do anything. Why? It has quite strong competitors in the rest of the world. One of them is the FED which announced $1 trillion easing per year. So fight the FED (or US dollar) means that the BoJ will need almost to double its holding of government treasuries which are $1.2 trillion today.

It is the most probable that the so called fiscal cliff will not be solved till the end of the year. President Obama summoned political leaders to a White House three days before a year-end deadline but the pessimism was the prevailing mood. He did not propose anything else and Republicans held the same unchanged position – not to increase taxes for higher incomes. The session was called on the evening on December 30th but there is still no proposal on the table. The US Treasury department will take some accounting steps which save approximately $200 billion and give to the government two another moths for negotiations. But we have to be aware of the fact that fiscal cliff is nothing in comparison to the whole picture of the US public finance situation. The debt is over $16 trillion; the budget deficit was more than $1.2 trillion just for the last year and unfunded liabilities (political promises to the US citizens in Medicare, Medicaid, social security and other social programs) are estimated on $86 to $120 trillion (lower estimates assume that government can stop the growth of these programs in the long-term, something that has not yet happened for the reason that the system lacks any controls to do so). And that is the end for today and this year. Happy New Year 2013! I am sorry but I am not sure whether it will be better than this one.

Matúš Pošvanc

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