Having largely disappeared from the market’s scope for the past 6 months, ever since Europe “bent” its rule allowing the bailout of Monte Paschi and several smaller banks despite Italy having the greatest amount of disclosed NPLs of any European nation, moments ago Fitch decided to drag Italy right back in the spotlight when it downgraded Italy to BBB from BBB+, citing “Italy’s persistent track record of fiscal slippage, back-loading of consolidation, weak economic growth, and resulting failure to bring down the very high level of general government debt has left it more exposed to potential adverse shocks. This is compounded by an increase in political risk, and ongoing weakness in the banking sector which has required planned public intervention in three banks since December.“
And some more:
Italy has missed successive targets for general government debt/GDP, which increased by 0.5pp in 2016 to 132.6%. This is 11.2% of GDP higher than the target in the Stability Programme of 2013, the year Fitch downgraded Italy’s Long-Term IDRs to ‘BBB+’, and compares with the current ‘BBB’ range median of 41.5% of GDP. Fitch forecasts general government debt to peak at 132.7% of GDP in 2017, falling only gradually to 129.3% in 2020 in our debt sensitivity projections.
Fitch’s rating Outlook for the Italian banking sector is Negative, primarily reflecting the challenge of reducing the high level of un-provisioned non-performing loans (NPLs), alongside weak profitability and capital generation. The rate of new NPLs edged down to 2.3% in 4Q16, and there is some greater impetus for disposals and write-downs, which has slightly reduced total NPLs. However, sofferenze, the worst category of loans, increased to EUR203 billion in February, from EUR199 billion in October. Total NPLs amount to close to 17.5% of loans and 20% of GDP, and just over half are provided against.
In our view, political risks have increased since Fitch’s previous rating review. Current polls point to a further hollowing out of support for more centrist parties and to a fragmented political landscape that could result in minority government. Risks of weak or unstable government have increased, as has the possibility of populist and eurosceptic parties influencing policy. Greater populism may dampen political appetite for reform, increase the pressure for fiscal loosening, and weigh on investor sentiment.
With France – and much of Europe – already on edge due to populist tensions, is Italian sovereign – and bank – risk about to make a grand reapparance? For the answer, check in when Europe opens on Monday.
Meanwhile, Italian CDS trades at 190bps, wider than Russia, Croatia and almost as wide as South Africa.
Prime Minister Narendra Modi, who on Wednesday took the decision that VIP vehicles should do away with red beacons, said “Every Indian is a VIP”.
Replying to a tweet hailing the government decision, Modi said: “Every Indian is special. Every Indian is a VIP.”
In another post, Modi said: “It should have gone long ago. Glad that today a strong beginning has been made.”
“These symbols are out of touch with the spirit of new India.”
The decision was taken by Prime Minister Modi, who informed the cabinet about it. Soon after the announcement, several ministers removed the red beacons from their vehicles.
The central government on Wednesday announced that no dignitary will be allowed to flaunt red beacons atop their vehicles from May 1, and necessary changes in the laws for the purpose are being brought about.
The scandal over a shady land sale to a nationalist school operator has dealt a rare blow to Japanese Prime Minister Shinzo Abe’s government, unnerving investors counting on continued political stability.
Getting out of hand
The issue boils down to whether an 800 million yen ($7.19 million) discount on land sold to Moritomo Gakuen by the government was appropriate, and whether any political figures were involved in the sale or the approval process for the school to be built on the plot. If politicians did play a role and money changed hands, that could be considered graft.
Moritomo Gakuen chief Yasunori Kagoike alleged political involvement when he testified Thursday before the Diet, but this has been denied by officials who led finance bureaus involved in the deal. Yet government explanations have not cleared up public doubts about the process or the sale price.
“It’s a shame that this couldn’t bring the matter to a close,” a senior government official said after Kagoike’s testimony.
The prime minister’s office led the effort to bring Kagoike before the Diet, seeking to highlight contradictions in his claims. Yet the administrator did not budge even while under oath, putting the onus on the government to explain the sale as well as the role of Abe’s wife, Akie.
Moody’s late on Friday cut its outlook on Turkey’s rating to “negative” as risks to the country’s credit profile have “risen materially” in recent months.
The ratings group noted that the “tense political environment” following the coup attempt last July has “persisted for longer than expected” and that actions taken against various forms of opposition to the government have “undermined the country’s administrative capacity and damaged private sector confidence.”
“Partly as a consequence, Turkey has experienced a further slowdown in growth,” Moody’s added.
Indeed, the economy contracted at a year-on year rate of 1.8 per cent in the third quarter of last year, Bloomberg data show. It is forecast to have picked up to 2.6 per cent in the final three months of last year, but remain below the 4.7 per cent and 3.1 per cent notched in the first and second quarter of 2016, respectively.
Moody’s rates Turkey at Baa1. It previously had a “stable” outlook on the sovereign.
As the vulture pundits in the mainstream media pick apart hollow political scandals, the essential bankruptcy of the federal government looms just ahead. The national debt is creeping toward 20 trillion dollars, and the United State’s largest problem is once again staring the world in the face.
Just before the government was slated to shut down in 2015 (as it did in 2013), Congress was able to pass a delay on the debt ceiling decision until March 15th of this year — Wednesday of this week. Recurring uncertainty caused by events like this has implications that extend far beyond our own borders. The amount of leverage in the current system has already forced foreign holders of U.S. debt to question the real value of America’s full faith and credit.
2016 was a record-setting year for the liquidation of foreign-held U.S. bonds, topping out at nearly $405 billion. The selling was led by China, America’s second-biggest creditor, which currently holds over $1 trillion of U.S. debt, almost 28% of the total held by foreign central banks. They weren’t alone, though, and even the U.S.’ number one lender, Japan, has rolled back their positions to protect themselves as the reality of U.S. insolvency comes into focus. A gradual change has been set in motion, and the global superpower status of the United States may be systematically eroded — not militarily, but economically.
If the government does shut down again, the Treasury Department reportedly has as little as $66 billion in reserves and just enough income from taxes to meet its essential obligations.
Former Finance Minister and senior Congress leader P Chidambaram on Friday questioned the Central Statistical Organisation’s GDP growth figure and termed demonetisation a fixed match between the government and Reserve Bank of India (RBI).
He said demonetisation has interrupted India’s economic story and “to recover from this, it would take between 12-18 months, maybe right up to the end of 2017-18”.
“Look at the CSO’s numbers, it seems nothing has happened to the economy. The dazzle of the number cannot hide the fact that crores of people in the country have been devastated,” said Chidambaram.
“The government has changed the methodology. The Gross Value Addition (GVA), when they add taxes to it and subtract subsidies, they arrive at the GDP,” he added.
Chidambaram further said: “The additional tax revenue is not a reflection of growth. Equally being stingy on subsidies doesn’t impact growth.”
Giving out quarter-wise GVAs of three years, Chidambaram said: “In 2014-15, quarter-wise GVAs were 7.26, 7.91, 6.29 and 6.19 per cent. There is no particular trend. It went up and came down. In 2015-16, the numbers are 7.75, 8.44, 6.95 and 7.42 per cent. Again it doesn’t show any trend.
As China gears up for its annual legislative session, all eyes are on the economy: specifically, how fast the Communist leaders intend China to grow, and what they are willing to sacrifice for that goal.
The most hotly awaited event of the National People’s Congress will come on March 5 — opening day — when Premier Li Keqiang will announce the government’s economic growth target for 2017. Many expect a downgrade from 2016’s goal of 6.5-7% to “around 6.5%,” according to a major bank.
Beijing aims to bring China’s gross domestic product to twice the 2010 level by 2020 — a goal frequently, and mistakenly, taken to be merely an aspirational target. President Xi Jinping has called for the eradication of poverty in China by 2021, the hundredth anniversary of the Communist Party’s formation, and pledged a “great revival of the Chinese nation.” In this context, missing the mark could mean the leader’s downfall.
Doubling GDP over a decade requires 7.2% annual growth on average. Rates that were higher than that from 2011 to 2014 mean the country has only to hit 6.3% during the next few years. Targeting 6.5%, and thus avoiding a steep drop-off from last year’s goal, is a clear attempt to avoid any possible misstep ahead of the party’s twice-a-decade National Congress this autumn, when the group will name its next slate of leaders.
But in today’s China, 6.5% is no slight hurdle. To be sure, exports are recovering thanks to a brisk U.S. economy and a yuan some 10% weaker than at its peak. But areas outside major cities remain mired in vacant housing stock, and private investment is sluggish, leaving public works as one of the only viable drivers of growth.
The Chinese government may reinstate curbs on coal mining lifted last fall, with producers calling for new limits on output amid fears of a coming plunge in prices.
Executives from 19 leading coal companies, among them Shenhua Group, gathered Tuesday for talks at which they agreed to work to prevent a sharp price reversal in thermal coal, which could come in March or April, after the winter heating season ends.
Behind the scenes, the coal industry is discussing with the government a proposal to reinstate the operating limit on mines, according to people familiar with the matter. That order, waived last autumn, drew the line at no more than 276 days a year.
Thermal coal prices turned upward after the Chinese government early last year set a goal of cutting 250 million tons of annual production capacity and imposed the operating limit. Bigger-than-expected capacity reductions of 290 million tons tightened supply more than the market had bargained for, sending the price to a peak of more than 600 yuan ($87) per ton, 60% higher than at the start of 2016.
In response, the Chinese government lifted the operating curbs and told coal producers to raise output. The tightness in supply has since eased, and coal has been fetching around 590 yuan per ton recently.
Moody’s on Friday became the latest ratings agency to lift its outlook on Russia’s credit rating, upgrading it from ‘negative’ to ‘stable’, citing both a fiscal strategy — that is expected to lower the country’s dependence on energy and replenish its savings — and the gradual economic recovery.
The ratings agency had confirmed Russia’s Ba1 rating, which is one notch below investment grade, in April 2016, but assigned it a negative outlook at the time to reflect an erosion of the government’s fiscal savings amid a downturn in crude prices. But on Friday, it said the recovery in the country’s economy following a nearly two-year long recession, alongside the fiscal consolidation strategy, have eased the risks that it had identified last year.
Russia’s deficit-to-GDP ratio is now forecast to narrow by roughly one percentage point per year between 2017 and 2019 and Moody’s said this new target was “achievable” because the government’s “oil price and revenue assumptions are sufficiently conservative”.
The agency, said:
Moody’s now believes that the downside risks identified in April 2016 have diminished to a level consistent with a stable outlook. The stabilization of the rating outlook partly reflects external events, and in particular the increase in oil prices to a level consistent with the government’s budget assumptions. The stable outlook also reflects the plans the government has put in place to consolidate its finances over the medium term, and the slow recovery in the economy following almost two years of recession.
Rival raters S&P and Fitch have also boosted their outlook on the country in recent months, as external risks to the oil-producing nation ease.