Let’s begin with currency wars once again. Why? It is a real current issue. Look. Francois Hollande urged partners within euro zone at the beginning of the week that strong Euro is nothing for France and for others as well. He said that „The euro should not fluctuate according to the mood of the markets,” and that “A monetary zone must have an exchange rate policy.” Germans responded exactly the day after. The spokesman of the government just mentioned that they are prepared for discussion but they are definitely persuaded about the necessity of the fluctuation of rates. They don’t “think that an exchange rate policy is an appropriate instrument to boost competitiveness. It may set some short-term impulses, but nothing sustainable.“ The end of the week came. And He just said: “Euro rate face down” and so it happened. No it was not God it was just a Super Mario Draghi, president of the ECB and he just gave an indirect signal that further interest-rate cuts remain a possibility. His words have this power, at least for now. It seems that market actors believe him everything he says. The same story was with the Outright Monetary Transactions Program. The ECB was prepared to buy any amount of debt of problematic euro member’s states but have not spent a cent on it. How long will markets and people believe in purchasing power of Euro? Only future tell us.
European leaders made a deal about the EU budget on Friday, very early morning after the 25 hours marathon of discussions. The outcome is explained as David Cameron´s victory. But I am not so sure. On the one hand there is a spending ceiling of 960 billion euros down from the proposal of 1.047 trillion euros and which is 34 billion down compare to 2007 – 2013 budget. But it is only plan. Not a reality as we know from Slovak example. Cameron also won a symbolic battle on 1 billion-euro reduction in salaries and administrative costs for employees of the EU. The budget story could not be at the end because four biggest parliament political fractions made a conjoint statement that they cannot accept proposed budget because it is not pro-growth oriented. They emphasize that the real negotiations just start now with European Parliament which could agree or disagree with the budget. Parliament cannot made changes to it. So we will see.
The Cyprus rescue plan is still in danger. Germany’s opposition Social Democrats (SPD) set up some conditions to bailout Cyprus as German´s general Election Day is closer and closer. And there is allegedly growing numbers of rebels in Merkel´s camp as well. He generally demands that Cyprus must change legislation concern its tax laws and Cyprus must join other euro member states to institute a financial transaction tax. So we will see what is really happen but I bet on changing laws and bailout program.
German industrial production raised 0.3 % compare to November data but still declined 1.1% on yearly base. The economy is allegedly rebounding from a contraction. Really? As you see it depends on how you look at the data – monthly or yearly perspective. It is a beauty of statistics. Slovak industrial production fell by 4.4 % on yearly basis which is pretty pessimistic especially concerning the public finance situation in 2013.
As we mentioned many times a Chines data are some kind of alchemy. According to Sandy Cutler Executive officer of Eaton Corp. is China´s GDP two times smaller than official numbers are (7.8%) based on the other data from the country as a significant decline in electricity and consumer consumption.
As Congress enacted a law to suspend debt ceiling till May 18th 2013 the Treasury announced that it will need to raise some $331 billion a new debt till the end of the March. In other words the total debt could hit 105 % of GDP on March 31st if we assume 1 % grow in Q1 GDP. The total amount of debt will be $16.763 trillion or maybe more understandable $16,763,000 of millions or approximately worth of 10 million pieces of the most expensive cars in the world. But do not worry. If the FED is continue to buy treasuries at the same pace as expected in 2013 it is able to buy in a pessimistic scenario the US debt worth of 64% of all new debt. Everybody consider this as sustainable policy, at least for now. Government spend, FED creates money ex nihilo (out of nothing) and buys treasuries to sell them sometime in the future once better economic conditions will occur. And the only unsolved question is when does it happens because just social security system unfunded liabilities are predicted to double to $3.2 trillion in following 10 years. And just by the way and to make picture clearer. The current federal social program spending is bigger than current federal revenues – it is also a reason why the US must borrow. So when will exactly better tomorrows come?
Matúš Pošvanc