Possibility of Seeing White Smoke in August

Once more the attention was focused on Greece’s crisis, in which the highlight was the governments switch to a way less radical position in order to be able to accept the terms required by its creditors. At the end of the month, the third rescue package for 90 billion dollars is being negotiated and with it Greece’s debt will go up to around 340 billion dollars, an amount that generates the almost unanimous criteria that it will be impossible to pay within conventional terms and rates, irrespectively of how tight a belt the Greek nation gets to wear. Also, the Greek cause generates sympathies because it is confirmed that the enormity of the debt is not only due to Greece, the receptor of the investments, is responsible, but also and in good measure the investors, who decided to give it loans through bond acquisition, when it was obvious that the situation was calamitous, what permits thinking that the decision of the lender was based on the certainty that the debt would be paid by Greece with money obtained from future rescue loans. In other words, it is all right for the lenders to suffer as well. As a consequence of the above, it is expected that the negotiation for Greece receiving the new loan will impose less strict conditions of fiscal austerity, more comfortable payment periods, lower rates and, if Germany’s opposition is overcome, a reduction of an important part of the debt at the expense of the investors. Meanwhile, until Greece and the creditor countries don’t reach an agreement during the month of August, regarding the fiscal and tax measures indispensable for the debt to be considered payable and the first deliveries of the loan occur, the F.M.I. will not be part of the group of lenders; it will allow the European countries and the European Central Bank to close the agreements with Greece. In any case, the possibility of seeing white smoke in August has had the effect of increasing confidence in the possibility of other countries such as Spain, Portugal, Ireland and Italy honoring their debts, since it was feared that they could suffer contagion from Greece’s default. This improvement was shown this month with the decrease in interest rates (that is its yields) that the investors have demanded. (Spain from 2.28% to 1.85%, Portugal from 2.89% to 2.39%, Italy from 2.25% to 1.78% and Ireland from 1.65% to 1.20%).

In regards to China, in circumstances in which the world is confronting the deceleration of its growth and raw materials exporting countries, which for this cause have seen the prices and volumes of their exports lower, review their growth projections, a phenomenon that complicated the situation, appeared and compels to pay special attention to it; in these last six weeks, the prices of Chinese corporate shares sold in its stock exchanges, which had gone up more than 130% in the last year, fell thunderously. At the closing of the month the Shanghai SSE index showed 3.663 points, as opposed 5,166 on June 12, that is, a fall of 29%. Had a bubble exploded? Previously there had been speculation that the Chinese government was getting ready to make some decisions regarding State Owned Enterprises (SOE’s); redesign their Boards of Directors to make them more agile and efficient, and/or sell and/or close many of them, all this considering that these, having assets in excess of $16 trillion, represent the main part of the corporate debts with the national banking system, which already reaches 167% of China’s Gross Domestic Product. To confront this phenomenon and be able to sustain the floor of the shares of the state companies, the government had to intervene strongly in the market through massive buying. The idea is to maintain confidence in the source of funds of these SOE’s, formed by more than 90 million Chinese individual investors. The collorary of these events is that who influences the price of the stocks in China is the State, through the decision of providing resources from state banks and from government organization, and not market forces.

Meanwhile, the most emblematic example is the shares of the Chinese State Oil Company, PetroChina, the biggest Chinese company, and the one with the most influence in Shanghai’s SSE, which, in the face of the quick descent of the other shares, had a two digit increase, originated in the buys made by the State organizations.

In the United States and in the rest of Europe, the slow but sure growth continues. In England and the Eurozone, stocks increased between 1.5% and 4%, with an average of 2.2%. In the United States, the numbers are reviewed and establish an annualized growth of 2.3% for this year, which, even though lower than other peak points, is enough to maintain the tendency of lowering unemployment, (200,000 new jobs each month) which is just above 5.2%. The base of this growth is in the consumers’ confidence and their expenditures index, which went up 1.8% on the first trimester, to 2.9 on the second. Because of this, it is possible that the FED will increase interest in September, what is expected to cause no extraordinary perturbation, since it is calculated that this move has been previously processed and digested. Like in Europe, the Dow Jones shares market. S&P 500 had moderate increases, except Nasdaq, which had increases of more than 3%. The US Treasure Bond used as market reference (10- years) went down from 2.43% to 2.19%.

← Back to News Releases