The way ahead is not yet clear
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The way ahead is not yet clear

The ratings agency Fitch has once again warned the US that its triple-A credit was not consistent with its rising debt burden, but suggested that no decision would be made until 2013.  

Fitch has already tagged a negative outlook onto US sovereign debt, but the warning is a fairly soft one in the circumstances, not least because S&P has already stripped the US of its top status back in August.   Naturally, the eurozone crisis has taken the headlines for much of the second half of this year, but the US situation should not be ignored. Video:

That said, the dollar’s reserve status, the low level of treasury yields and the upcoming US election will most likely ensure that the issue of debt sustainability in the US is not tackled in 2012.   Europe should be acting as a stark warning to the US on ignoring debt sustainability, but in all probability, it won’t.

Guest post by FxPro


Size doesn’t matter for the ECB. The ECB advanced EUR 489bln of funds to European financial institutions in the first of its 3yr long-term refinancing operations yesterday, but more important than the size of the operation is what banks do with this cash. The dichotomy between size and use explains why the euro struggled to maintain its initial positive reaction to the news. One factor behind the larger than expected take-up (twice what was forecast) is the easing of collateral rules announced earlier in the month, the ECB now appearing decidedly unfussy as to what it accepts. The amount of banks participating was also very large – nearly three times the number of bidders vs. the 1yr tender seen towards the end of October. But what happens to all this cash is by far the most important issue. Some of Europe’s political elite would like it to be invested in eurozone debt, bringing yields down to more sustainable levels. However shareholders may have something to say about this, along the lines of banks digging their own graves. Furthermore, data from the EBA show that banks have offloaded around EUR 65bln of sovereign bonds in the first nine months of the current year. Will a freeing-up of nearly EUR 1bln of funds (average for participating banks) be enough to change their mind and turn them into net buyers? Some may be hoping for this, but there would be every reason to accuse banks of repeating the financial mistakes of up to 2007 when they loaded up on sub-prime debt. In the coming days, watching both bond yields and also daily ECB borrowing and lending data will be key to getting a sense of where this cash is going.

The devil and the deep blue sea. UK gilt yields managed to fall to a record low yesterday, but this ‘good’ news comes with a heavy price because fiscal austerity, together with declining real incomes and rising unemployment, continue to weigh heavily on the consumer. According to the latest survey from GfK NOP, consumer confidence fell last month to the lowest level since February 2009. Also, consumers remain very wary of their financial situation, suggesting that spending will remain circumspect for some time to come. More positively, though, the Chancellor’s fiscal consolidation program remains essentially on track, with the latest public sector borrowing figures once again below expectations. For the fiscal year-to-date, the net borrowing requirement of the public sector was down more than GBP 15bln on the previous year. So, fiscal policy is doing its job in terms of attempting to protect the UK’s credit rating and contributing to lower borrowing costs, but at the cost of scuppering spending. Unfortunately, austerity is a necessary evil.

The going gets tough in China. The pressures currently weighing on the Chinese economy are all too evident in the recent stock market performance with main indices down double digits in percentage terms over the past month vs. gains in Hong Kong, Japan and most other Asian bourses. The latest comments from Premier Wen have offered some solace to markets, allowing the yuan to strengthen a touch against the USD, but overall China is still facing severe headwinds that are only likely to increase as we move into the new calendar year. Wen acknowledged that sound growth was accompanied by the fact that China was “facing many new situations and problems”. We’ve written about these quite extensively over the past few weeks, but you can also include the rapid turn-around in the domestic property market, with prices falling in many cities, and many projects yet to be completed. The authorities have also faced considerable downward pressure on the yuan as funds have been repatriated out of China by investors concerned about deteriorating domestic conditions. China has long wanted to re-balance its economy so that it is less reliant on investment and exports, shifting towards one based more on domestic demand. But this is not an easy transition to make at the best of times, and even more so when global demand is waning. Furthermore, there is every indication that China is now suffering the consequences of the over-investment of recent years, which could well further undermine this rebalancing aspiration. Further policy-easing from China can be expected next year and even before the Chinese New Year towards the end of January.

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