Markets News Monday: G-20 finance ministers' communiqué "utter fudge and drivel"
By Finfacts Team
Feb 21, 2011 - 8:59 AM

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President Barack Obama joins a toast with Technology Business Leaders at a dinner in Woodside, California, Feb. 17, 2011. Apple's Steve Jobs is on the left of the President and Oracle's Larry Ellison is opposite him.

G-20: Lex in the Financial Times says today that most of the communiqué agreed by the Group of 20 finance ministers over the weekend in Paris, was utter fudge and drivel. Every second sentence seemed to end with “taking into account national circumstances."

The finance ministers and central bankers of the leading developed and emerging countries, concluded talks in Paris on Saturday by listing the yardsticks they will monitor to see whether imbalances are forming. Among them: budget deficit levels, the external imbalance and private savings rates.

IMF Managing Director Dominique Strauss-Kahn welcomed a compromise agreement on how to measure global economic imbalances but said stronger policy action was still needed to ensure the world gets the “right kind of recovery.”

Speaking after finance ministers and central bank governors from the world’s leading advanced and emerging market economies met February 18-19 to consider how to take forward moves to create a more stable global economy, Strauss-Kahn said that "while we have recovery, it is not the recovery we want." Although, on average, global growth has resumed, it is uneven - -both across and within countries.

"So we need really strong policy action to deliver the right kind of recovery,"
Strauss-Kahn told reporters, "one that not only addresses global economic imbalances but also leads to better outcomes for everyone."

At the G-20 ministerial meeting, the first under the French presidency, ministers decided on a set of indicators to measure imbalances in the global economy, in the wake of the worst recession for more than 60 years, and said that they aimed to agree by their next meeting in April on indicative guidelines against which each of these indicators will be assessed.

Uneven recovery

Strauss-Kahn said that in parts of the world - - in Asia, and Latin America, countries were doing well. Even in Africa, many countries had recovered faster than in previous crises and expected to see 4.5% growth. But in advanced economies, the outlook for the United States was uncertain and Europe had a lot of problems, particularly in the Eurozone.

Within countries, unemployment remained high, especially in the advanced economies. While the world had put the financial crisis largely behind it and was recovering from the economic crisis, the social crisis was still there. "Growth without jobs is not meaningful to the man in the street," Strauss-Kahn said, "so we are far from having done our job"

Beyond unemployment in the advanced economies, major issues to be addressed included the risk of overheating in the emerging markets and the problems of increased food and fuel prices, which he noted were now as high as they were in 2008, and a threat particularly for low-income countries and for vulnerable people everywhere.

Major issues requiring action

Strong policy action was needed both nationally and internationally. More needed to be done to reform and repair the financial sector. He said that while important reforms have been undertaken, there was a risk that the financial system would return to "business as usual." In particular, he said that while steps had been taken to improve regulation, much more needed to be done on supervision and cross-border resolution of financial institutions. He also noted that, to discourage excessive risk taking by the financial sector, the IMF had proposed the idea of both a financial sector contribution and a financial activities tax, but sadly these had not been taken forward.

Income distribution was also an issue requiring further attention. He noted for example that while Egypt and Tunisia had experienced positive overall growth rates, they had also faced major problems in inequity. "So we need to do more on income distribution."

Outcomes of the G-20 meeting

At the Paris meeting, ministers agreed on a set of indicators to measure global imbalances and said that they aimed by their next meeting in April to decide on indicative guidelines against which each of these indicators will be assessed. The goal is to make the global economy more stable. According to the G-20 communiqué, indicators will comprise:

  • public debt and fiscal deficits;
  • private savings rate and private debt; and
  • the external imbalance composed of the trade balance and net investment income flows and transfers, “taking due consideration of exchange rate, fiscal, monetary and other policies.”

When the Federal Reserve ends its quantitative easing program, John Noonan, senior FX analyst at Thomson Reuters, says China will face more pressure from other emerging markets to allow its currency to strengthen. He speaks to CNBC's Oriel Morrison:

Economic View: Spike in ECB emergency funding explained by Anglo and Irish Nationwide; Goodbody's chief economist, Dermot O’Leary, comments  -- "According to reports over the weekend, the spike in emergency overnight ECB funding at the end of last week, that was originally put down to a 'fat-finger' error, is actually due to two Irish banks that are in wind-down.

While the Irish banks have continued to be a thorn in the side for the ECB, the most recent use of ECB liquidity is easily explained. The reason stems from the recent announcement that the deposits in Anglo Irish Bank and Irish Nationwide will be auctioned off. The matching assets which will be hived off – primarily government bonds – were being used as collateral at the ECB’s main liquidity facilities.

However, these assets can no longer be provided as collateral as they must be available for when the auction process is complete, which appears to be imminently. Essentially, this is simply a shifting of liquidity operations (at a higher cost), rather than a further intensification of the domestic banking problems. Nevertheless, it is abundantly clear that funding pressures remain intense, given that close to €180bn in funding is being provided to the Irish banks through a combination of the ECB (€126bn) and Central Bank (€51bn).

Key elements of the IMF/EU Memorandum of Understanding include the completion of stress tests, liquidity assessments and the injection of capital. With a deadline for these and other conditions set at end-Q1, we can expect a significant amount of newsflow on the banks over the next four to five weeks. Of course, this week will be dominated by the run-up to Friday’s General Election, with Fine Gael continuing to gain momentum in the latest polls in the weekend press."

China has been slow to raise rates in the last few years due for fear of derailing the global economic recovery, Brian Jackson, Senior Emerging Markets Strategist at Royal Bank of Canada told CNBC's Oriel Morrison. He shares his expectations for further tightening:

PMI surveys likely to indicate pace of euro area recovery continued into Q1: Davy economist, Conall Mac Coille, commented - - "Today's release of purchasing manager indices (PMIs) for France, Germany and the euro area are expected to show that the pace of the euro area recovery was maintained into the first quarter of 2011. The euro area composite index, capturing both the manufacturing and services sector, is expected to post a reading of 56.9, slightly down from the 57.0 reading in January but still well above the neutral 50 level. The euro area manufacturing PMI is expected to fall from 57.3 to 57.2 with the services PMI flat on the month at 55.9.

At the country level, the PMIs for both manufacturing and services are expected to fall slightly on the month in Germany while those in France are expected to rise. The German IFO Business Climate Index, also released today, is expected to remain at close to its highest level in over a decade. Taken together, the PMI and survey should paint a positive picture of overall growth prospects in the first half of 2011.

In the UK, Friday's retail sales data indicated growth of 1.9% in January. And this sharp rise comes despite the increase in the value added tax rate by 2.5pp to 20%, implemented at the beginning of the month. The strong bounce-back in January suggests that much of the 0.8% decline in December was probably related to the bad weather. So reading the underlying pace of activity of the UK economy in the first quarter is likely to be difficult as the temporary negative effects of the December snow unwind. Today's release of the Rightmove house price index will be watched to see if the slowdown in the housing market continued into February. If so, the prospects for the UK consumer will be less rosy than Friday's retail sales data suggest."

President Barack Obama talks with Facebook founder and CEO Mark Zuckerberg before a dinner with Technology Business Leaders in Woodside, California, Feb. 17, 2011. Also pictured, left to right, are Carol Bartz, Yahoo! President and CEO; Art Levinson, Genentech Chairman and former CEO; Steve Westly, Founder and Managing Partner, The Westly Group; and Eric Schmidt, Executive Chairman and CEO of Google.

Iceland: The President of Iceland, Ólafur Ragnar Grímsson, on Sunday referred bill of legislation authorizing the Minister of Finance to ratify agreements to "guarantee (a) repayment by the Depositors' and Investors' Guarantee Fund to the UK and the Netherlands of cost incurred in payment of minimum guarantees to depositors in branches of Landsbanki Íslands hf. in the UK and the Netherlands, and (b) payment of outstanding amounts (the shortfall) and interest on these obligations," or so-called Icesave agreements, to a referendum.

The Parliament of Iceland, Althingi, had passed the bill of legislation on the February 16th with strong majority; 44 members of Parliament out of 63 were in favour.

According to the Icelandic Constitution a referendum on the bill will now take place as soon as possible as subsequent of the President's decision.

Finfacts report from Feb 17, 2010:Icelandic parliament supports latest deal with UK/ Netherlands on Icesave €4bn debt issue

Asia Markets

The MSCI Asia Pacific fell 0.5% Monday.

Japan's Nikkei 225 climbed 0.14%; China's Shanghai Composite gained 1.12%; Australia's S&P/ASX 200 Index slid 0.74% and India's Sensex slipped 0.50%.

Asia benchmarks

Finfacts Reports

Irish General Election 2011: Vote for single party Fine Gael majority government on Friday
German growth remains robust in 2011; ECB's benchmark interest rate expected to rise to 1.75% later this year
All-Ireland survey shows costs rising for business; Economic recovery amongst exporters likely to be jobless
US Inequality: Wage gap widened over past 30 years; Lowest 10% of earners got 5% inflation-adjusted rise in 1979-2009
UK retail sales volume grew by 1.9% in January - - underlying trend lower

In Europe, the Dow Jones Stoxx 600 is down 0.38% in early trading Monday.

The ISEQ has dipped 0.46% in Dublin.

CRH is down 0.76%; Elan has slid 1.43%; AIB has dipped 3.55%.

European Benchmarks

Irish Share Prices

Irish Stock Market Capitalisation by Company

Key Index Performance Statistics

Euribor Rates

AIB Daily Report

Bank of Ireland Daily Report


The euro is trading at $1.3682 and at £0.8428.

For live currency updates, check the right-hand column of the Finfacts home page.

The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.


The Baltic Dry Index, a measure of shipping costs for dry commodities, hit an all-time High of 11,771 on the 21st of May, 2008. From that time it reversed and on the 5th of December, 2008 it hit a low of 663 - - close to a 1986 low.

The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009. The index averaged 59% lower in 2009 than a year earlier.

On Thursday, July 15, 2010, the index  fell for the 35th straight session, by 9 points, or 0.537%, to 1,700 points, Bloomberg report.

On Friday July16th, the BDI rose 20 points or 1.12% to 1,700 to break the 35-session losing streak.

On Friday last week, the BDI rose 9 points or 0.71% to 1,301.

The Financial Times reported earlier in January, that Australia’s flooding and fears of ship oversupply has pushed down a gauge of the cost of hiring ships to carry coal, iron ore and other dry bulk by nearly half since October to the lowest level since the aftermath of the financial crisis. The Baltic Dry index, the widely watched measure of dry bulk charter rates, fell to 1,453, nearly half the 2,784 peak reached on October 27, 2010.

Crude oil for March 2011 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $87.78 per barrel, up $1.58 from Friday's close. In London, Brent for March delivery is trading on the International Commodities Exchange at $104.26. The North Sea benchmark accounts for two-thirds of the global market.

The margin between the US benchmark WTI (West Texas Intermediate) used on the New York Mercantile Exchange and Brent is over $16 a barrel.

The FT said last Friday week that a surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed the value of the benchmark against other yardsticks. The International Energy Agency said on Thursday that with “few relief valves” to cut the stock overhang in Cushing, the price dislocation “may persist for months [or years] to come”.

Gold spot price

The spot price of an oz of gold is trading in New York at $1,397.50, up $8.40 from Friday's close.

Bank of Ireland (Closing Price €0.38); Preference dividend payment and trading update; Goodbody's Eamonn Hughes comments  -- "On Friday, BOI updated the market on its dividend payment on the preference stock and its recent trading performance. On the preference stock, the main issue is the payment of €214.5m relating to the NPRF preference shares in the bank. However, the group trading environment highlighted weakening underlying trends at the bank.

On the funding front, BOI indicated that customer deposit volumes have remained stable since the end of November, which is welcome. We suspect the mix has been stable domestic retail, lower corporate/commercial deposits and higher UK based deposits through the post office joint venture (which the bank says has performed ahead of expectations). However, the maturity profile of its wholesale funding has continued to deteriorate and the loan to deposit ratio looks to have nudged up a further low double digit%age from the 160% figure guided at the end of November.

At the operating profit line, pre-provision guidance has nudged up from €0.9-0.98bn to €0.98-1.05bn. We understand that this relates to two issues – (i) higher ECB funding levels has provided a fillip to the margin and (ii) a slightly better performance on the cost side. While helpful, the first point is clearly unsustainable.

On the asset quality front, the news was less welcome, but absolutely no surprise. Firstly, BOI is sticking with its guidance that 2010 non-NAMA impairments will be lower than 2009 (the peak, according to the bank). However, the bank has highlighted a cumulative additional €1.1-1.25bn in impairments/provisions in its trading update. There are (i) about €170m of additional impairment provisions through its AFS, (ii) about €0.3bn of additional provisions on its NAMA transfers to date and (iii) possibly additional provisions of circa €600-800m on the €4.1bn of transfers relating to loans below €20m to transfer this year, above the previous guided 42% haircut target (figure likely to be 15-20%age points higher).

We note that the regulator previously indicated a 12.5% core tier 1 target for BOI in his €2.2bn capital assessment last November that could roll back to 10.5% if there were additional impairments, providing flexibility to absorb an additional capital hits of €1.6bn (2% of €79bn RWAs). So the bank has already eaten into three-quarters of this capital flex. However, firstly, we believe a 10.5% core tier 1 target is still too low for the Irish banks given the stresses they face. In addition, the bank still has to make it through the PCAR and PLAR, which will likely drive higher requirements as the macro environment continues to weaken. Finally, restructuring plans will also require about one-third of the loans of the domestic banking system to be de-leveraged, which in our view will require further capital impairment, raising requirements further. Investors should remain wary of being involved until these plans are clarified."

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