Every week, a business school professor, an expert in his or her field, defines key terms on FT Lexicon, our online economics, business and finance glossary.
Eloy Garcia has been a visiting professor of finance and strategy at IE Business School in Madrid since 2006.
Between 1971 and 2007, Prof Garcia was at the Inter-American Development Bank (IDB) in Washington. His last position was that of Treasurer of the institution, a position he occupied for seven years.
Before joining the IDB, Prof Garcia worked for the Comptroller of the Cerro de Pasco Corporation at its offices in Lima and New York.
Prof Garcia holds a BA in international finance and an MA in economic development from Georgetown University in Washington.
Prof Garcia has been teaching graduate students for the past 25 years alongside his IDB career. He is a professor of international financial markets and development finance and banking at the American University in Washington and professor of financial management and fixed income at the Carey Business School of Johns Hopkins University. He is an occasional professorial lecturer of fixed income management at the McDonough School of Business at Georgetown University.
He was a member of the International Advisory Board of Cass Business School from 2000 to 2009 and currently is a member of its MBA programme board.
This week, Eloy Garcia adds the following terms to FT Lexicon:
Compiled by Emmanuelle Smith
Follow @FTLexicon on Twitter
Debt crisis: live - Daily Telegraph
Fiscal austerity is far beyond the therapeutic dose of 1pc net tightening a year in a string of countries.
There should be no tightening at all in the Netherlands given that it has a huge current account surplus. As Mr Dumas says, this surplus could reach 7pc to 8pc of GDP once budget cuts take hold.
The consequence of Holland’s accelerating downward slide may well be an anti-euro coalition in The Hague this Autumn.
13.43 John Vickers, chairman of the Independent Commission on Banking, on Chancellor's bank reform plan: "On some points - such as [3pc] limits on leverage of big banks - we believe they should go further."
He welcomes that his proposals have been accepted in large part but urges the UK Government "to resist pressure to weaken their effectiveness".
FTSE 100 -0.8pc
CAC -0.6pc
DAX -0.8pc
IBEX +0.3pc
MIB -0.3pc
Dow expected to open flat.
13.35 S&P says a recovery in Spain implies a 25pc fall in house prices.
13.30 BREAKING NEWS...
US initial job claims for the week to June 9 are out. Claims rose to 386,000 from a revised 380,000. Analysts expected a fall to 375,000.
Continuing claims for week to June 2 at 3,278,000 - down from 3,311,000 but misses estimates.
Consumer prices fall for first time in two years, down 0.3pc.
Q1 current account gap widens to $137.3bn.
13.24 Spain's Economy Minister Luis de Guindos said on Thursday that the government would take further measures in coming days and weeks to help bring down a debt risk premium that is seen as unsustainable.
On Thursday the spread between Spain's 10-year bond and benchmark German bunds hit a new euro-era record high of more than 550 basis points.
Meanwhile, Spanish bank BBVA says it does not need state aid.
12.51 Treasury Minister Mark Hoban is giving the banking reform speech instead of George Osborne. He says the euro crisis makes UK bank reform more important and the Government will press for full Basel III implementation, ring-fencing retail banking fom investment banking. Says UK endorses leverage ratio of 3pc for banks. He accuses Ed Balls and Gordon Brown of being the "architects and cheerleaders of light-touch regulation".
Our proposals are ambitious in scale, but balanced in impact. They promote financial stability while supporting sustainable growth and the role of the UK as the world’s leading international financial centre.
Ed Balls, shadow chancellor:
Government estimates UK banks will need extra £19bn to comply with reforms. Estimates cost to banks of implementation is £4bn to £7bn, will lead to drop in value of RBS/Lloyds shareholdings of £6bn to £9bn. Banks given until 2025 to separate pension fund to cope with ringfence.
12.29 OPEC is holding a seminar today. Total chief executive Christophe de Margerie has said that if the price of oil fell $50 a barrel amid an economic crisis, as Credit Suisse said it could, US shale oil production would no longer be profitable and fields would have no choice but to shut down.
Those crying about too much oil on the market, they could cut it off if they wanted to. But they can't afford to... Saudi Arabia, even if they need a high oil price, they can run deficits for years without any impairment to their triple A position, so rich are they in reserves. This what the Saudis are looking at when they now make their judgment. Between their need domestically - of course they would like higher prices and they are not known for leaving anything on the table - but on the other hand the squeeze is probably put on their neighbor and they like that, too.
12.17 Spanish website 20minutos.es is reporting that Spanish PM Mariano Rajoy is holding a crisis cabinet meeting to discuss worsening debt situation.
11.50 Italian government debt hit record €1.95 trillion in April.
Mario Monti, Italian Prime Minister
11.42 Robert Fico, Slovakia's prime minister, has said he will demand Greece's exit from the euro if country fails to honour bailout agreement.
11.39 EuroGroup ministers have reportedly been asked to be on standby for post-Greek election call on Sunday.
11.27 EU says Cyprus has not applied for European aid but it faces very serious imbalances. Cyprus has questioned timing of Spanish downgrade by Moody's.
The EU says it is not up to ratings agncies to decide if the Spanish bailout is a success.
FTSE 100 -0.9pc
CAC -0.9pc
DAX -1pc
IBEX -0.1pc
MIB -0.9pc
11.20 Economist Andrew Lilico believes Spain is a great example of why low bond yields aren't an excuse to borrow more:
Well, Spain should be a salutory lesson. The Spanish economy has been in many ways quite similar to the UK's – a fairly similar level of government debt to GDP; a fairly similar size of banking sector; a fairly similar house price boom in the years preceding the financial crisis. The UK is not Greece, but neither is Spain. And yet Spain has not found itself immune. It did not turn out to be the case that low Spanish bond yields in 2010 were an invitation from bond markets for Spain to borrow as much as it liked. It did not turn out to be infeasible for an economy like Spain or the UK to experience bond yields spiking up from low levels in 2010 to unsustainable levels in 2012.
Next time you hear or read someone say: "there is no risk of a sovereign debt crisis for the UK" or "in the UK it wasn't necessary for us to cut the deficit as far or as fast", remember Spain.
11.05 French Prime Minister Jean-Marc Ayrault: "Italy's situation is not good... France's situation is difficult."
11.04 BBC News Scotland business and economy editor Douglas Fraser:
10.59 The German government and opposition have reportedly agreed for the lower house of parliament to vote on ESM, fiscal pact on June 29.
10.53 This weekend sees a key election in Greece. If the Syriza party wins, it has vowed to tear up the country's bailout agreement, sending the entire euro project into chaos. Here is Syriza's economic programme:
THE ECONOMIC PROGRAMΜΕ OF SYRIZA-EKM
Greek bank shares up 19pc on market talk that pro-bailout parties are likely to win Sunday's election.
10.50 Tony Blair has told the Financial Times that Germany should rescue the euro.
"You look at what the Greeks are being asked to accept: it's beyond tough," Mr Blair said.
10.45 You know things are getting bad when "Spanish 10" is the top trending topic on Twitter:
10.34 Economist Andrew Lilico:
10.28 Megan Greene, senior economist for western Europe and the eurozone at Roubini Global Economics, has said Spain needs a bailout and Italy is next.
10.20 BREAKING NEWS...
Italy has sold €3bn of 2015 bonds at 5.3pc versus 3.91pc on May 14. Highest yield since December.
€837m of Italian 2019 bonds - yield 6.1pc versus 5.21pc on April 27. 2020 bonds at 6.1pc.
Bigger borrowing costs for Italy, bigger problems.
Nicholas Spiro, managing director at Spiro Sovereign Strategy:
Italian auctions are now as nerve-wracking as Spanish ones. While the Treasury tried to mitigate the dramatic deterioration in sentiment by limiting supply at today's sale, the scale of the concessions show how vulnerable Italy's debt market has become. Demand is holding up, just about, but only because of unprecedented domestic financial repression. Unless the ECB steps in very soon to restore confidence, Italy and Spain will no longer have market access.
10.13 As Spanish bond yields pass 7pc, Amy Wilson has looked at why this threshold is so important:
The country could find itself in the position of borrowing more money just to make its interest payments - and, like using a credit card to pay off a mortgage, that does not make it an attractive proposition to potential lenders.
In November last year, Italy's borrowing costs surged past 7pc, eventually costing Silvio Berlusconi his job as Prime Minister and ushering in Mario Monti's austerity government, which has helped to calm the country's lenders.
Even worse, when the yields on Greek, Irish and Portuguese government debt got close to 7pc, those governments had to seek bail-outs from the European Union and International Monetary Fund because borrowing in the market was no longer an option.
10.02 Greek unemployment has jumped to 22.6pc in the first quarter from 20.7pc in the fourth quarter of 2011. Youth unemployment rises to 52.7pc, female unemployment at 60.4pc.
Eurozone CPI fell 0.1pc in May from a 0.5pc rise in April.
Eurozone consumer price inflation set to ease sharply, according to PMIs, providing scope for ECB to cut rates
09.59 BREAKING NEWS...
Spanish 10-year bond yields have hit 7pc - a level widely-believed to be unsustainable.
Italy's at 6.306pc.
09.56 Euro has fallen to a session low of $1.25430.
FTSE 100 -0.9pc
CAC -0.8pc
DAX -0.7pc
IBEX -0.6pc
MIB -1.1pc
Ilya Spivak, currency strategist at DailyFX:
European shares are showing mixed results in early trade as markets continue to tread water ahead of Greece’s election outcome on Sunday. While seesawing sentiment has produced no concrete direction thus far this week, the return of risk aversion appears likely as the weekend nears, with traders turning defensive amid fears that a vote against bailout-friendly parties will lead Greece out of the eurozone.
09.35 Italy is holding a bond auction later today. Will be interesting to see the interest rates.
10-year yield at 6.292pc.
09.02 A new audit of Spanish banks is expected to uncover capital needs of between €60bn and €65bn, ABC reports, citing a preliminary draft of a report by auditors Oliver Wyman and Roland Berger.
The Spanish government has requested up to €100bn in EU aid to recapitalize its ailing banks and has asked for the external assessment to help determine exactly how much they need. The results of the audit are due later this month.
Meanwhile, Spain's banks borrowed €287.8bn from the ECB in May versus €263.5bn in April. That's a new record.
08.56 The FT in Germany has reported that Economic and Monetary Affairs Commissioner Olli Rehn is staying in Brussels instead of attending the G20 in Mexico on Monday.
08.54 Jose Garcia Margallo, Spain's foreign minister, has say it would be a catastrophe if Spain "left Europe".
He calls on the ECB to ease market tension. Adds that Germany should have take a longer view of the crisis.
If they throw one country to the wolves that will affect everyone, so they should have longer-term vision.
08.36 Merkel: "Don't overestimate Germany's ability to save the euro... The debt crisis will be the main issue at the [G20] summit. Our country will be the centre of attention - it's a fact, all eyes are on Germany because we are the biggest European economy and a major exporter."
She adds that the US must reduce its budget deficit. Spain shows EU bank stress test failed.
08.32 Swiss National Bank maintains French ceiling of 1.20 versus euro. SNB ready to buy unlimited quantities of foreign currencies, says further franc gains would have a serious impact and it "will not tolerate" this.
SNB says Switzerland will experience economic slowdown. "Essential" that Credit Suisse to boost capital in 2012.
08.22 German Chancellor Angela Merkel says the IMF must be ready at all times to step in. She adds that the lack of a political union has led to debt mounting, addressing EU union is a "Herculean task" but is necessary.
Merkel says Germany is strong, willing to help Europe and the world. Europe should not opt for quick and easy solution to crisis. Policies are made for citizens, not markets. Spain was right to seek aid for banks as it needed to deal with the consequences of a property bubble. Spanish crisis due to "irresponsible" decade.
She adds that Europe needs more independent supervision of banks and the ECB should take a bigger role.
08.18 European markets have opened. The FTSE 100 is flat, the CAC is up 0.1pc, the DAX is down 0.1pc and the MIB is up 0.1pc
08.15 BREAKING NEWS...
Spanish 10-year bond yields pass 6.9pc.
08.13 Greece's labour and social insurance minister Antonis Roupakiotis has said the interim government can guarantee pensions for July, but not beyond that.
He confirmed that social insurance fund finances were in a poor state and that the largest social insurance fund IKA would need €1.4bn from the state budget to pay for pensions, while the Manpower Employment Organisation would need a further €260m to pay unemployment benefits, despite the fact that only one in five unemployed received unemployment benefit.
08.08 French President Francois Hollande: "Europe is entering a new stage. No more just two people taking all the decisions."
He also warned Greeks that if they vote to move away from international bailout commitments in the upcoming election, they could be pushed out of the eurozone.
I respect the Greek people. They will decide what they want on the occasion of the election. But I must warn them, because it is my duty, because I am a friend of Greece, that if the impression is given that the Greeks want to move away from the commitments that were taken and abandon all prospects of revival, then there will be countries in the eurozone that will want to end the presence of Greece in the eurozone.
08.04 The IBEX has fallen 0.5pc on opening. Spanish bond yields hit euro-era high this morning of 6.886pc. Meanwhile, new figures show house prices in Spain fell 5pc in the first quarter month-on-month and 12.6pc year-on-year - the biggest annual decline on record.
07.47 Quick bit of breaking corporate news. Nokia is to cut 10,000 jobs by the end of next year.
As part of the overhaul, sites in Finland, Germany and Canada will be closed.
Nokia’s handset shipments fell by 24pc in the first quarter, and the company now says second-quarter operating margins at the devices arm will be worse than a loss of 3pc of revenue in the first quarter.
Shares slump to lowest since September 1996.
07.42 Steve Collins, global head of dealing at London & Capital Asset Management:
07.35 The Guardian has reported that analysis by Credit Suisse estimates that up to 58pc of the value of Europe's banks could be wiped out by the departure of the "peripheral" countries.
Few large eurozone banks would be left standing and the banking sector could face a €370bn (£298bn) loss if the euro crisis results in the single currency bloc breaking apart, according to one of the first in-depth analyses of what might happen if the eurozone disintegrates.
07.28 German wholesale price index falls 0.7pc (month-on-month) in May after a 0.5pc rise in April. Not a good start to a day that sees the release of data on Spanish house prices, Italian Government debt, EU and US inflation and US jobless claims.
07.25 BREAKING NEWS...
Spanish 10-year bond yields have jumped to a new euro-era high of 6.886pc this morning, following the Moody's downgrade.
Italian yields are up five basis points to 6.237pc.
07.23 French finance minister Pierre Moscovici says his country will stick to deficit reduction targets in 2012 and 2013, ading that it will be possible to hit them without austerity.
France has made a commitment to its partners to reduce the deficit to 4.5pc in 2012 ... and 3pc in 2013. We will meet these targets.
07.20 Asian stock markets have fallen this morning on signs that the problems in Greece and Spain could spread to Italy.
Japan's Nikkei 225 index slipped 0.2pc, Hong Kong's Hang Seng dropped 0.9pc and South Korea's Kospi lost 0.1pc. Mainland Chinese shares were mixed.
Italy's 10-year borrowing rate rose to 6.07pc yesterday, and the interest rate on its one-year bonds also jumped.
Japan on Thursday revised down its factory output data for April, showing a slight contraction that underscored the nation's anaemic factory activity.
Industrial production slipped by 0.2pc rather than growing by 0.2pc month-on-month due to lower-than-expected output of electronic parts, cosmetics and some beverages including iced and canned coffee, the economy, trade and industry ministry said.
07.18 Meanwhile, the tide continues to turn in Europe, with Germany beginning to open the door to shared debts for the first time in a profound change of policy. Ambrose Evans-Pritchard reports:
“It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office. The official warned that there would be no “master plan” or major break-through at the EU summit later this month.
Mr Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse.
07.16 Moody's wasn't the only one doing the downgrades last night. Earlier in the evening, Egan-Jones (not one of the big three), sent Spain deeper into its "junk" pile, slashing its rating to "CCC" from "B". S&P, Moody's and Fitch still rate Spain at investment grade.
07.11 You can read Moody's statement in full here.
07.10 In a statement last night, the rating agency said:
The decision to downgrade the Kingdom of Spain's rating reflects the following key factors:
1. The Spanish government intends to borrow up to EUR100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system. This will further increase the country's debt burden, which has risen dramatically since the onset of the financial crisis.
2. The Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB.
3. The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.
07.00 The downgrades just keep on coming. A week after Fitch slashed Spain's credit rating to two notches above "junk" status, Moody's last night cut the country to just one notch above junk.
What's more, the rating agency said that it could throw Spain into the junk pile within three months, as it placed the country under review for another downgrade.
06.45 Good morning and welcome back to our live coverage of the European debt crisis.
No comments:
Post a Comment