Fri, 01st July 2016

Anirudh Sethi Report


Archives of “government debt” Tag

UK Gilt yields hit 1% for first time ever

UK 10-year Gilt yields have fallen to 1 per cent for the first time in history as the reverberations of Britain’s vote to leave the EU spur investors to seek out the safety of haven government bonds.

In spite of warnings that the UK faces a credit rating downgrade as the result of last week’s referendum, UK government bonds are still considered a haven from wider market turbulence, helping to push the government borrowing rates to new lows

Economists argue that low yields reflect investor belief that the Bank of England will be forced to keep interest rates low or cut them lower given the country’s weak economic prospects – bad news for pension funds and insurance companies that rely on the securities to meet future liabiltiies and are struggling to deal with lower returns.

Moody’s changes outlook on UK sovereign rating to negative from stable, affirms Aa1 rating- Full Text

Moody’s Investors Service has today changed the outlook on the UK’s long term issuer and debt ratings to negative from stable. Both ratings are affirmed at Aa1.

Today’s rating action reflects the following key drivers:

1. The majority vote in favour of leaving the European Union (EU) (Aaa, Stable) in the referendum held on 23 June will herald a prolonged period of uncertainty for the UK, with negative implications for the country’s medium-term growth outlook. During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth. Over the longer term, should the UK not be able to secure a favourable alternative trade arrangement with the EU and other countries, the UK’s growth prospects would be materially weaker than currently expected.

2. While the UK’s institutional framework will not change, Moody’s considers that policy predictability and effectiveness of economic policy-making — an important aspect of institutional strength – might be somewhat diminished as a consequence of the vote. The UK government will not only need to negotiate the UK’s departure from the EU but will likely also aim to embark on significant changes to the UK’s immigration policy, broader trade policies and regulatory policies. While we consider the UK’s institutional strength to be very high, the challenges for policymakers and officials will be substantial.

Long rates in global decline as growth hopes fade

Long-term interest rates, one of the most closely watched economic vital signs, are falling worldwide as yields on nearly half of the world’s stock of government bonds sink below zero.

Amid depressed corporate expectations for growth, investment remains sluggish despite ultralow borrowing costs. Central banks’ exertions at the levers of monetary policy are doing little to move the needle on the economic speedometer.

 Japan’s benchmark 10-year government bond yield plumbed an all-time low of minus 0.155% on Friday, breaking a record set April 21. Prices of government debt around the globe rose on a tide of buying driven by concern over a possible British exit from the European Union. Yields on nearly 80% of outstanding Japanese government bonds have sunk into negative territory.

Worldwide, the average yield on government debt fell to a new low of 0.73%, according to Barclays index data.

In Germany, the yield on 10-year Bunds has fallen to a record low just a few basis points above zero. Benchmark short-term rates have turned negative in France, Italy and elsewhere in Europe.

Even in the U.S., which is one rate hike into a tightening cycle, the 10-year Treasury yield has retreated to a four-month low of above 1.6%.

Waiting to ‘explode’

Mizuho CEO Warns Japan Sales Tax Delay Is “Admission Abenomics Has Failed”

It has not been a good “second coming” for Shinzo Abe, whose first stint as prime minister of Japan ended in disgrace in 2007 after an allegedly crippling bout of explosive diarrhea forced the then-prime minister to resign. To say that Abenomics has been a dismal failure would be an understatement:  unable to boost inflation, unable to boost wages, plummeting trade with both exports and imports crashing to post crisis lows…

… and lately failing miserably to boost the stock market after Kuroda’s epic debacle with Japan’s NIRP lunacy, Kuroda had one loophole: a tiny fiscal stimulus in the form of delaying the once-already delayed sales tax.

The only problem: over the past few months, Kuroda had trapped himself when he said that the only conditions under which he would delay the sales tax would be only if “another global economic contraction or Lehman-style market shock jolted the Japanese economy.

UK’s Treasury: Brexit could cause the pound index to fall 12-15%

UK Treasury report on Brexit

  • Could push up jobless by 520k-820k
  • Could lower real wages by 2.8-4.0%
  • Could raise inflation by 2.3-2.7 PP
  • Budget deficit could rise 24-39bn
  • Would put tens of thousands of finance jobs at risk
  • EU vote has already pushed sterling lower
  • Treasury model assumes BOE keeps base rate unchanged
  • A Brexit vote would result in a marked deterioration in the economic security and prosperity

Cheerful reading for a Monday morning. These are the details from the UK Treasury report on the short-term impacts of Brexit.

Their longer term report is far worse;

Greece posts bumper $2.4bn budget surplus

Here’s something you don’t hear very often. Greece’s public finances are in very healthy shape.

Over the first four months of the year, the Greek treasury boasted a primary budget surplus of €2.4bn. This surplus, which does not include debt interest repayments, came in well above a forecast of just €566m, according to the Greek Ministry of Finance.

After more than 16 months in office, the Syriza government is managing to do exactly what its creditors demand – cut spending and raise taxes. The €2.4bn surplus was also better than the €2.1bn reached over the same period last year.

Athens’ coffers were boosted by better than expected tax revenues, which came in €325m above target at €14.11bn from January to April. Spending meanwhile came in at an impressive €2.28bn below target.

Squabbling over the state of Greece’s primary budget surplus has emerged as the latest sticking point between its international creditors.

IMF agrees $1.5 billion bailout for Sri Lanka to avert balance of payments crisis

The International Monetary Fund (IMF) has reached agreement with the Sri Lankan government for a $1.5 billion bailout to help the island nation avert a balance of payments crisis.

The three-year loan will require IMF board approval in June, the global lender said on Friday, and is subject to Sri Lanka implementing reforms, including streamlining the tax code and reducing a bloated deficit.

“The Sri Lankan authorities and the IMF have reached a staff-level agreement on a 36-month Extended Fund Facility (EFF),” for a $1.5 billion loan, Todd Schneider, IMF mission chief for Sri Lanka, said in a statement.

The agreement comes as debt-laden Sri Lanka faces a looming balance of payments crisis due to heavy foreign outflows from government securities and high external debt repayments.

Sentiment on financial markets was bolstered by the IMF deal, helping the rupee currencyLKR= trade firmer and stock index .CSE rise nearly 1 percent in early trade.

Sri Lanka’s foreign exchange reserves have fallen by a third from their peak in late 2014 to $6.2 billion at end-March.

Foreigners sell most India debt in a month as yield benefit ebbs

Indian sovereign bonds are losing some appeal as their yield advantage over Treasuries diminishes.

The extra yield investors demand to hold the South Asian nation’s 10-year notes over similar-maturity US debt fell to 556 basis points on Monday, the least since early January, data compiled by Bloomberg show. The gap was as high as 616 in February. Foreign holdings of local government and corporate securities dropped by Rs1,590 crore ($239 million) on Monday, the most since 29 March.

The narrowing spread reflects both diverging monetary policies in the two nations and India’s success in reining in inflation. The Federal Reserve raised interest rates in December for the first time in a decade, while the Reserve Bank of India has lowered benchmark borrowing costs five times since the start of 2015.

The yield on Indian sovereign bonds due January 2026 was little changed at 7.47% in Mumbai, according to the RBI’s trading system. The rupee rose 0.1% to 66.5250 a dollar, ending a three-day losing run, prices from local banks compiled by Bloomberg show. The currency is down 0.6% this year in Asia’s worst performance.

Overseas holdings of rupee-denominated bonds have decreased by Rs4,160 crore in 2016, according to data from National Securities and Depository Ltd. Even so, Western Asset Management Co. plans to buy more Indian sovereign debt, which still offers the second-highest yields among major Asian markets after Indonesia

Fitch Affirms Japan at ‘A’; Outlook Stable -Full Text

Fitch Ratings has affirmed Japan’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘A’. The issue ratings on Japan’s senior unsecured local-currency bonds are also affirmed at ‘A’. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at ‘AA’ and the Short-Term Foreign-Currency IDR at ‘F1’.


Japan’s ‘A’ IDRs reflect the following key rating drivers:

– The key factor constraining the rating is high and rising government debt. Fitch expects gross general government debt to reach 245% of GDP by end-2016, by far the highest ratio of any rated sovereign. Fitch’s projections indicate the government debt / GDP ratio will stabilise in 2020 at about 247%, not far above the current level. However, high indebtedness and weak nominal growth leave the projections highly vulnerable to economic or financial shocks.

– The Japanese sovereign also has a large stock of assets. General government financial assets were worth about 112% of GDP at end-2015, including gross official foreign reserves worth about 31% of GDP. However, the agency focuses on gross debt for assessing solvency in its sovereign rating methodology. Moreover, Japan’s net indebtedness is also high and rising. The OECD estimates Japan’s net financial liabilities at 132% of GDP at end-2015, jointly second-highest in the 28-nation group with Italy (BBB+/Stable). The rise in Japan’s net liabilities as a ratio to GDP between 1995 and 2015 was the highest in the group – 87 percentage points (pp), ahead of Greece (73pp) and Portugal (70pp).

India : Fiscal deficit expected to be below 3.9 per cent for FY16: Finance Ministry

Finance Ministry on April 1 said the fiscal deficit for 2015-16 is likely to remain below 3.9 per cent of the GDP on the back of tax receipts and realisation from disinvestment. Stressing that the government remains committed to the path of fiscal consolidation, the Ministry said “as per initial estimates, the fiscal deficit for 2015-16 is expected to be within 3.9 per cent”.

As per the fiscal consolidation roadmap, the fiscal deficit for the current fiscal has been pegged at 3.5 per cent of the GDP. Receipts of tax revenues are also on track and the 2015-16 revised targets are expected to be fully met when the bank scrolls are fully accounted for, a statement from the Finance Ministry said.

According to revised estimate, Rs 7.52 lakh crore was estimated to come from direct taxes (corporate, and income tax) and another Rs 7.03 lakh crore from indirect taxes (customs, excise and service tax) in 2015-16. With regard to disinvestment target, it said, Rs 25,000 crore has been achieved for fiscal ended March 2016.

The revised estimates announced in the Budget 2016-17 pegged the disinvestment receipts from minority stake sale in PSUs at Rs 25,312 crore, as against the target of Rs 41,000 crore. It did not expect any revenues from strategic stake sale. As regards plan expenditure for 2015-16, it is expected to be around Rs 4,70,000 crore. This is higher than the budget estimate of 2015-16 and also higher than the actual plan expenditure in 2014-15, it said.