Spain’s tough budget

Spain announces a tough budget, though achieving their 2012 budget deficit target of 5.3% looks highly questionable

Japanese industrial production declined unexpectedly in February. Factory output dropped -1.2% MoM (the estimate was for a gain of +1.3%), well below the gain of +1.9% In January. Unemployment declined to 4.5% and consumer prices rose by a modest +0.1% – a decline of -0.1% was expected. Exports to China declined by -14% in February YoY, the 5th consecutive decline. However, the industrial production decline may well be temporary, as manufacturers are expected to increase production by over +2.5% in March.

Japanese February manufacturing PMI came in at 51.1, higher than the 50.5 in January.;

South Korean February industrial output rose by +0.8%, as compared with a rise of +3.2% in January, though much better than the decline of -0.3% expected. GDP rose by +0.3% in the 4th Q 2011, lower than the +0.4% reported earlier;

German preliminary retail sales were -1.1% lower in February MoM, or +1.7% YoY, much worse than expectations of a gain of +1.1% MoM. There has been a lot of talk about robust German consumption, which these numbers certainly don’t reflect. Personally, I believe analysts are way too optimistic on the German consumer.

French February consumer spending was up by +3.0% MoM, much higher than the forecast of just +0.2%. French February producer prices rose by +0.8% MoM, faster than the +0.5% forecast.

Spanish February retail sales were -6.4% lower YoY, in line with estimates.

EZ March flash CPI came in at +2.6% YoY, slightly lower than +2.7% in February and slightly lower than forecasts of +2.7%

The head of Sovereign ratings at S&P, Mr Moritz Kraemer was at the Greece conference at London’s LSE I attended day before yesterday. Yes, he did suggest that Greece may default – so what’s the big news. Everyone should know that and I’ve been boring all of you about precisely that for some time now. Indeed, if investors don’t know that, what planet are they on. The new bonds exchanged in respect of the old ones, following the recent PSI deal, are trading at distressed levels, also clearly suggesting a further default. However, markets got spooked by the comments from S&P yesterday. Go figure;

The Greek PM states that the country may (read WILL) require more bail out funds. Well what a surprise – I think not. Its going to be tough if they don’t comply with their commitments, which they have not to date. The EZ/IMF are getting totally fed up of Greece – the body language of the IMF representative at the LSE conference on Greece at the LSE revealed all. The Greeks should understand just 1 issue, UNDER PROMISE and OVER DELIVER, rather than their normal practice of precisely the opposite;

Ireland has been relieved of making a cash payment of E3.1bn in respect of the bail out of Anglo Irish bank and NBS. The government will instead issue a bond, which will be bought by Bank of Ireland and will then use the bond as collateral to obtain additional funds from the ECB. Ireland will receive more goodies from the EU/EZ/ECB, as they are the poster child of the EZ in terms of sticking to their commitments. The above deal is all smoke and mirrors stuff, but should be beneficial as no cash really is disbursed and Bank of Ireland benefits from a carry trade play. Following this deal, Ireland hopes to reschedule the rest of the E33bn of promissory notes, issued in respect of the bank bail outs and which, given the above deal, looks likely.

The Irish banks are trying to remove unprofitable tracker mortgages off their balance sheet. If they succeed, the likes of Bank of Ireland should benefit materially.

It continues to be my belief that Ireland will receive other sweeteners from the EU, as will Portugal. The sweeteners should result in the Irish voting in favour of the referendum called to ratify the fiscal compact, even though the fiscal compact will go ahead, even if the Irish vote against it;

The OECD suggests that the UK may have a recession this year. The 1st Q of 2012 is likely to be marginally positive, +0.2% -+0.3% is the current view. Later, who knows, given everything that’s going on. However, the flexibility of having retained our own currency and a BoE who will pull the trigger on more QE if necessary, should ease the pain if we do have a recession, which is possible but not probable, unless those (……) in the EZ cock it up yet again.

UK consumer confidence declined to -31 in March, from -29 in February, worse than the no change expected. The outlook for the next year declined to -30, from -29 in February. Worse still, the index measuring personal finances over the next year fell to -10, from -6. These numbers are similar to the weakest numbers in the 2nd half of 2011;

The EZ Finance Ministers announced that the bail out fund would be enlarged to E700bn as expected, as the E200bn, set aside for Greece, Ireland and Portugal, would not be included in the ESM, which will raise the E500bn – helpfully faster than previously agreed. In addition, ministers agreed that the unused portion of the EFSF (E240bn) could be accessed during a “transitional period”, until the ESM raises its full amount of E500bn, which will not happen until the 1st half of 2014. EU states have also committed E150bn to the IMF over time, which should provide funds (unknown as to the size) to the EZ bail out – hopefully, over E100bn which will be helpful and market positive, though there’s a lot of negotiations to be concluded with likely donor countries, who want greater voting power at the IMF in return for providing funding. Mrs Lagarde stated today that the increase in the bail out fund will “support the IMF’s efforts to increase its available resources for the benefit of all our members” – read the EZ. To put this in context, Italy and Spain alone will have to raise E800bn in the next 3 years. Basically, the EZ announcement contained no real surprises. Mr Schaeuble is claiming that this a E800bn fund, but in reality its E700bn, reducing to a permanent ESM fund of E500bn in due course;

Spain has announced it’s toughest budget in 30 years, including spending cuts of around E17.8bn and tax increases on large companies, together with a freeze on public sector salaries. VAT was not increased and electricity prices were raised by 7.0%. The measures, in total, will reduce the budget deficit by E27.3bn this year, from 8.5% in 2011 to 5.3% (optimistic) this year, claims the government. Central Government spending will decline by 16.9%, some 2 percentage points more than previously indicated. The budget deficit is made up of a Central Government deficit of 3.5% (5.1% in 2011), 1.5% by the regions and 0.3% by local authorities. Last years budget deficit (8.5%, as compared to a target of 6.0%) was mainly due to over spending by the autonomous regions and there must be doubt as to how these regions spending can be controlled. Revenues are projected to increase by E12.3bn !!!!!!. A one off tax amnesty has been announced to try and raise revenues of E2.5bn. The administration is certainly trying, but the targets etc seem unrealistic;

The German representative on the ECB, Mr Asmussen reported that the ECB was exploring the establishment of a bank resolution fund – a great idea and certainly will be needed as a number of EZ banks are intrinsically insolvent – the markets will not provide the necessary funding. Such a measure, if enacted, is long overdue and very positive. Given its Asmussen, I will take this seriously;

US February personal consumption was up +0.8%, higher than the +0.6% expected and the largest rise since July. However, personal income rose by just +0.2%, as opposed to +0.4% expected and the January number was downgraded to +0.2%, from +0.3% previously reported. As a result, the savings rate declined to just 3.7% (4.3% in January), the lowest since August 2009. The price index for personal consumption expenditures rose to +2.3% YoY in February (+0.3% MoM), higher than the FED’s target of 2.0%. Core PCE came in at +0.1% MoM or +1.9% YoY, as expected;

The BRICS nations are demanding greater voting power at the IMF, in exchange for providing additional financing to help the EZ crisis. The Brazilian President, Mrs Roussef accused western countries of creating a “monetary tsunami”, which is resulting in higher inflation for the BRICS. A working group has been established to consider setting up a development bank – well, there going to study that idea for years, I would guess. In spite of all the rhetoric, I would expect a number of the BRICS nations to contribute funds to the IMF to help out the EZ, as it is essentially in their interest that the EZ does not collapse.


Spot Brent is back around US$124. Threats of releasing reserves had and will have (when enacted) a very modest impact. Oil services remain a great sector in my humble view – I’m long.

The Euro rose ahead of the EZ bail out announcement, but has drifted off since then – currently E1.3342. The EZ bail out fund announcement is not enough, though it looks as if the IMF will provide additional support for the EZ bail out fund – will wait for that before considering shorting.

A little bit of window dressing activity in European markets towards the close (futures dropped immediately after the close), but generally a good Q for European equity markets. Germany was up 17%, the UK 4%, though Spain was down 7%, for example.

Have a great weekend.

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