The European Commission’s released a package of new actions for growth, governance and stability on the 23rd of November, 2011. The new economic priorities for the next year set out in the 2012 Annual Growth Survey are underpinned by two Regulations to tighten economic and budgetary surveillance in the euro area and a Green Paper on Stability Bonds. Taking into account the European economy’s stagnation, excessive sovereign debts and rising borrowing costs those simultaneously affect financial stability of the European Union’s region, strengthening monitoring of strategic development and budget discipline is an inevitable step. However, despite of well understood and accepted fundamentals of sustainable development, the recurrence to basics is sluggish.
The AGS indicated five priorities for 2012 involve pursuing differentiated growth-friendly fiscal consolidation, restoring normal lending to the economy, promoting growth and competitiveness for today and tomorrow, tackling unemployment and social consequences of the crisis, modernising public administration. The goals for 2011 were focused on fiscal consolidation, labour market reforms and growth-enhancing measures. So, the Europe 2020 Strategy adopted by the EU leaders in 2010 which foresees the re-launch of the Single Market, Aligning the EU budget and EIB lending with the Strategy and a new trade strategy improving global market access for EU companies alongside with the Integrated Guideline which set out a framework for the strategy’s incorporation into the National Reform Programmes and introduced European Semester for economic and fiscal policy coordination, enforced the implementation of the EU’s economic policy with comprehensive assessment of macroeconomic climate, progress of structural reforms and competitiveness of the member states as well as the overall financial stability. Moreover, the Euro Plus Pact which was agreed in 2011 by euro area leaders and was joined voluntary by other 6 European Union’s states obliged countries to increase competitiveness and employment as well as to contribute further to the sustainability of public finance and financial stability.
Going back further and analysing the scope of strategic decisions in the EU it could be mentioned the Stability and Growth Pact adapted in 1997 and aimed to ensure budgetary discipline as well as Lisbon Strategy for Growth and Jobs launched in 2000. The history of the EU is full of other strategic cooperation decisions with a clear evidence of great visions. However, as long as development ideas foreseen of former and current leaders are clear to themselves, do the rest of the community understand the objectives, the reasons of necessary reforms and the effective measures required to implement in order the competitiveness of the region and wealth of community were maintained in the global economy development context?
The moral hazard and the resistance to pursue consistent strategic reforms led to the following: excessive sovereign debts, downgraded credit ratings, derived mistrust in the financial markets and vulnerability of financial stability, increased borrowing costs and loss of economic competitiveness.
About Me
- Asta Pravilonytė
- Every manager can call him or herself a good strategist if he or she only works within an environment that is favorable; however, it is only in times of stress that one truly learns what one's capabilities are!
Friday 25 November 2011
Monday 14 November 2011
The borrowing costs of European structural reforms
Greece and Italy changed their leaders to restore fiscal discipline. Lucas Papademos, former Governor of the Bank of Greece and Vice-President of the European Central Bank, replaced Prime Minister George A. Papandreou in the 11th of November, 2011 to implement conditions set by European leaders on the 26th of October related to 130 billion European bailout and manage a voluntary debt swap, Prime Minister of Italy Silvio Berlusconi resigned in the 12th of November, 2011 after the 45.5 billion-euro austerity package was approved in parliament and Mario Monti, former European Union Competition Commissioner, is going to form a new Italian government. So, could those changes convince the markets about mastering sovereign debt crisis?
Both new leaders are respected economists whose contributed to the development of European Union. Hence, their understanding of the Union’s benefits and current issues as well as involvement in solving domestic structural reforms required to manage sovereign debt crises could be a successful step. It seems likely that new leaders of Italy and Greece have strong relationships with the EU institutions and their authority may be accepted by domestic citizens. Consequently, it could lead to the greater European unity through smoother critical decision making and decision implementation which is necessary to keep monetary union.
It is expected that if banks accept write-down of 50% on their holdings of Greek government bonds Greece's 350- billion euro debt may be reduced by 100 billion euro and the ratio of Greek debt-to-GDP could fall from 160% to 120%. Current Italy’s debt amount of 1.9 trillion euro which is about 120 percentage of GDP.
Italy auctioned 3 billion euro five year government bonds today and that was an opportunity to check the markets’ reaction on changed leadership. However, lenders in the markets may not be particularly interested in the successors. Whenever considerations involve lending, investors take yields into account. Italy’s demand for additional funds is clear, so massive sales of currently held Italian bonds increase yields and reduce their price. Consequently, the European Central bank is induced to buy Italian government bonds in order to relieve borrowing costs.
It seems that markets will be convinced about governed sovereign debts once countries do not need to borrow at all.
Both new leaders are respected economists whose contributed to the development of European Union. Hence, their understanding of the Union’s benefits and current issues as well as involvement in solving domestic structural reforms required to manage sovereign debt crises could be a successful step. It seems likely that new leaders of Italy and Greece have strong relationships with the EU institutions and their authority may be accepted by domestic citizens. Consequently, it could lead to the greater European unity through smoother critical decision making and decision implementation which is necessary to keep monetary union.
It is expected that if banks accept write-down of 50% on their holdings of Greek government bonds Greece's 350- billion euro debt may be reduced by 100 billion euro and the ratio of Greek debt-to-GDP could fall from 160% to 120%. Current Italy’s debt amount of 1.9 trillion euro which is about 120 percentage of GDP.
Italy auctioned 3 billion euro five year government bonds today and that was an opportunity to check the markets’ reaction on changed leadership. However, lenders in the markets may not be particularly interested in the successors. Whenever considerations involve lending, investors take yields into account. Italy’s demand for additional funds is clear, so massive sales of currently held Italian bonds increase yields and reduce their price. Consequently, the European Central bank is induced to buy Italian government bonds in order to relieve borrowing costs.
It seems that markets will be convinced about governed sovereign debts once countries do not need to borrow at all.
Thursday 3 November 2011
MF Global’s bankruptcy – a fail or a mirage?
A mission of MF Global to bring superior market access as well as to provide the powerful trading and hedging solutions to its clients came to the end with the authorization of the board of directors to file for Chapter 11 Bankruptcy Petition on October 31, 2011. According to the quarterly report, MF Global experienced a $191.6 million net loss and Moody’s Investors Service and Fitch Ratings cut the firm’s credit rating to the junk. MF Global announced that regarding to the Europe’s debt crisis, its $6.3 billion worth Short-Term European Sovereign Portfolio deteriorated and the company failed to raise additional capital. However, making loss in derivatives’ trade is almost impossible.
Strike price and date of expiry matter in derivatives’ trading as long as puts, calls and forwards are related through the put-call parity. This relationship gives flexibility to transform derivatives and gain from whatever the circumstances in the markets are. Moreover, according to the balance sheet for the second quarter of 2011, Revenues, Net of Interest and Transaction-Based Expenses comprised $205.9 million which shows that performance from its main activities was profitable. Additionally, the $133.5 million worth Employee Compensation and Benefits made up more than a half of net revenues, the $6.3 billion short-term European Sovereign Portfolio comprised 15% of the $41.05 billion total assets while the $1.2 billion total equity accounted for 2.9% of the total assets.
Bloomberg reported that MF Global performance is under investigation by U.S. regulators after it filed for bankruptcy protection. The news that the company violated requirements to keep clients’ collateral separate from its own accounts was published on the 1th of November and more mismatches regarding publicly available information and reality may be discovered.
Strike price and date of expiry matter in derivatives’ trading as long as puts, calls and forwards are related through the put-call parity. This relationship gives flexibility to transform derivatives and gain from whatever the circumstances in the markets are. Moreover, according to the balance sheet for the second quarter of 2011, Revenues, Net of Interest and Transaction-Based Expenses comprised $205.9 million which shows that performance from its main activities was profitable. Additionally, the $133.5 million worth Employee Compensation and Benefits made up more than a half of net revenues, the $6.3 billion short-term European Sovereign Portfolio comprised 15% of the $41.05 billion total assets while the $1.2 billion total equity accounted for 2.9% of the total assets.
Bloomberg reported that MF Global performance is under investigation by U.S. regulators after it filed for bankruptcy protection. The news that the company violated requirements to keep clients’ collateral separate from its own accounts was published on the 1th of November and more mismatches regarding publicly available information and reality may be discovered.
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