Good opportunities for takeovers

Major US and European stocks indexes signal the rise of investors’ confidence. However, the main economic data such as GDP, inflation and unemployment rates says opposite that economies are still in recession.

The reason of optimism in the equity stocks markets may be explained by increased mergers and acquisitions in 2010. Recession period is a good time for companies that generate steady incomes to exercise takeover strategies as the market value of shares in general are diminished by expectations regarding the economy state. However, most often bidders pay the premium for the targeted companies to obtain the control of the firm because existing shareholders have incentives to sell their shares only if the acquirer offers higher price for outstanding shares. Additionally, when the market realizes that new owners have strategies to increase incomes the market value of the companies rises even more.

So, when takeovers are visibly good news for existing shareholders, could the increased amount of tenders lead to the development of more competitive products and services or is it just a battle between companies that caught a moment of a good opportunity to consolidate their positions in the market and reduce rivals?

The engine of growth

Open markets, discoveries and innovations trigger evolution. Looking at the development of nations we may say that changes and new demands are key drives, whether we talk about emerging or advanced countries. While increasing population in Asia, Latin America and Africa continents stimulates the development of new industries by itself in order to satisfy increased demand and tackle poverty, developed countries need to re-emerge by creating efficiency and higher quality standards.

Recovery of the undermined economies remains a big challenge. Financial crisis and severe competition due to globalization diminished domestic industries and consumption of advanced countries. So, what is next? Restoring industrial competitiveness along with the new job creation?

It is essential for governments solving budget deficit and public finance allocation issues to pay more attention to the unique knowledge and skills their people possess, so that new discoveries and inventions become an engine that attracts investors and stimulates the economy through delivering global benefits of higher living standards.

The China’s combat with growing inflation

China avoided the financial crisis associated with the toxic Western debts, and it has huge reserves generated from trade and capital inflows' surpluses. Thus, is China unbeatable with the control of its capital flows and protected domestic markets?

Despite the strong domination China tackles with the domestic economy overheating and the threat of the growing inflation. So, how the decisions to delay the rise of interest rate and increase in banks' reserves requirements could smooth economic growth?

Higher interest rates usually attract capital inflows and increase amounts of deposits held in banks. Thus, in growing economy conditions when the demand for borrowing is high banks have great incentives to multiply the supply of money that most often leads to even higher inflation. Meanwhile, the increased banks’ reserve requirements should reduce the liquidity and banks’ plans for borrowing.

Moreover, the choice to use additional means such as open markets operations or changed discount policies for commercial banks' short term borrowing from the People’s Bank of China most likely would be better options than considerations regarding the increase of interest rates.

The signals of the yield curve

Interest rates are one of the important factors that are considered in the financial decisions and the yield curve is used to determine the trend of economy. However, the most interesting are the opposite interpretations of the similar movements in the different bond markets.

It is a wonder, that an increase in the US long term sovereign bond yields is treated as a sign of the higher demand for private sector's borrowing and expectations with the economy recovery. While politicians agreed with the extension of the US Bush tax cuts that should support the business development, the government needs to prepare and implement more robust budget deficit reduction plans as smaller taxes may lead to lower budget incomes and even higher debt burden.

In comparison, the increase in the eurozone “peripheral” yields is associated with the risk of the default and higher risk premium that investors demand. So, if different term interest rates for the European sovereign bonds become wider, could it be treated as a sign of the European economy growth?

By the way, if investors expect that the increase in bond yields and cash flows’ spread into equity markets will prevail; it may be a good time for corporations to consider deleveraging strategies.

The lost purchasing power of dollars

Close relationship between the price level and the supply of money is one of the oldest findings that determine the macroeconomic behaviour. However, the US policies have an extraordinary effect to the global markets and economy state of other countries.

The US has an exceptional position as dollars are dominating in the international trade and any changes in the US economy state or currency stability highly impact on the commodity prices. According to this, the ongoing US difficulties to recover economy are harmful to the global economy. The dollar’s devaluation stimulates global inflation as prices of food, energetic resources and other raw materials increase sharply. 

Considering a negative influence of the US policies to the global markets, the additional supply of dollars by implementing QE2 will hardly obey to the US politicians’ economy stimulation desires. The further deterioration of the credibility of the currency most likely will lead to the dollars' withdrawal from international trade and its usage as the world’s reserve currency. So, will the Americans become wealthier with a huge amount of dollars that have not purchasing power?

The implications of the suggested permanent EU rescue mechanism

Let us consider the implications of the suggested permanent EU rescue mechanism that should come into the force after 2013 when €440bn intergovernmental financing facility expires.


Market price of the government bonds mainly fluctuates because of the time approximation to its maturity and fluctuations in interest rates. However, if European Union countries agree on the proposed sovereign debts’ restructuring regime that involves losses for private investors, it will not just raise the yield to maturity of the government bonds and decrease the market price of it. In this case the worse nation’s borrowing conditions is not the main threat of the poor public finance management that country should expect. The more important is the legal consequences of the excessive borrowing. As long as bankruptcy is the transfer of the ownership rights and investors of the country’s bonds are involved in the debt restructuring, the nation's exposure to the lost of its sovereignty.

So, there are two outcomes for further inefficient public finance management. If majority of the EU states reject the conditions of the proposed EU financial rescue mechanism, the people of the country will keep the right to change the leaders. Once the new financial support mechanism is accepted the state’s governance rights may be transferred to more efficient and advanced European countries.

How publicly available information reflects the efficiency of the financial resources’ allocation?

The bail outs of Greece and Ireland and the probability that Portugal and Spain may be the next countries those require financial support to keep the stability of the international banking system contradict the fundamentals that government cannot default and sovereign debt is risk free. As long as investors require higher rates from all other borrowers those carry risk of bankruptcy it raises doubts whether markets are efficient.


The European nations’ problems to tackle sovereign debts automatically increase borrowing cost for corporations, so that it does not reflect the real risk and viability of investment projects that generates positive net present value. Consequently, with the asymmetric information in the bond market when financial resources are allocated to cover excessive government spending and corporations carry government risk, entrepreneurs may delay or refuse to implement less profitable business development projects and that could deepen the stagnation of the European economy.

Thus, is it possible to deny the entrenched perception that the rates of the sovereign debt are the benchmark to determine the borrowing cost for private sector and expect fair borrowing charges if more information regarding the stable state of corporations would be publicly available?