Category Archives: Financial Markets

Britain, Economic, Europe, European Union, Financial Markets, Government, Italy, Politics

Italy’s populist vote and the uncertainty of the euro

EUROZONE CRISIS

IN a continuation of a wave of populist voting following Brexit and the election of Donald Trump, Italy has now followed suit. The ousting and forced resignation of Matteo Renzi, a very successful prime minister in Italy, adds yet more resonance to an EU that is breaking at the seams.

Despite what Marine le Pen, the far-right leader of France’s National Front, would like to portray, Italy’s revolt was not particularly based on an anti-EU stance. The top populist parties in Italy, Five Star and the Northern League, are not opposed to membership of the EU itself but they are averse to the Eurozone.

Nevertheless, it will hardly be seen as a ringing endorsement of the actions of the EU. The issues that have driven this latest referendum result – fears over the waves of refugees from Africa, a desire to rise up against the establishment, and unhappiness over the way the economy has been managed – are the same dissenting signals that we have seen elsewhere.

It is the economic impact that we have most to fear from the Italian result. There is also the issue of what that might mean for the negotiations over Britain’s exit from the EU. The Italian economy is far from healthy, despite marginal improvements in unemployment rates, and the banks remain weak. The country’s debt-to-GDP ratio, at a staggering 133 per cent, is second only to Greece’s in the Eurozone. Despite Italy being the Eurozone’s third largest economy, the country has contracted by around 12 per cent since the financial crisis of 2008.

President Sergio Mattarella will be anxious now to ease fears of instability. But regardless of what action he takes there will be a delay as the markets adjust. In reality, he remains helpless as to what he can do to ease those fears. How long that period of instability lasts is the biggest uncertain factor the markets face. Financial markets do not like uncertainty or instability.

There is a risk that the failure of a major Italian bank, such as the troubled Banca Monte dei Paschi di Siena, could set off a wider crisis. Making the banks strong enough becomes more difficult amid political ambivalence.

That could well provoke another crisis in the euro, at a time when Britain will be in negotiations about its withdrawal from the EU. The fusion of these events is not going to help any new euro crisis or aid Theresa May and her government getting a favourable Brexit deal.

The most telling comment yet has come from the German finance minister Wolfgang Schaeuble, who has said there was no reason for a euro crisis but that Italy urgently needs a functioning government. Startling. Mr Schaeuble infers that a currency crisis was not inevitable. Unfortunately, ending the uncertainty is more than just an Italian problem.

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Economic, Europe, European Union, Financial Markets, Government, Russia, Society, United States

Tough Western sanctions hit Russia…

RUSSIA

Europe has imposed the toughest sanctions against Russia since the Cold War, sending the rouble into a tailspin and prompting warnings that British firms will be hit hard.

EU leaders have agreed to embargoes against vast sectors of the Russian economy, designed to cripple its banks, energy firms and defence capabilities.

The most drastic measure will prevent Russia’s banks from issuing stocks or bonds in Europe, potentially forcing them into the arms of the Russian state for support.

Nearly half of the bonds issued by big state-run Russian lenders are in European markets. There will also be a blanket ban on all future arms sales to Moscow.

Another eight names of individuals and three firms will be added to an EU blacklist, meaning they will be subject to asset freezes and travel bans. Of those, four are described as personal ‘cronies’ of President Vladimir Putin.

President Barack Obama said the US has also expanded sanctions against Russia. He added: ‘If Russia continues on this current path, the costs on Russia will continue to grow.’ EU leaders said Russia would be shown that ‘destabilising Ukraine, or any other Eastern European neighbouring state, will bring heavy costs to its economy’.

‘Russia will find itself increasingly isolated by its own actions,’ they added. ‘Illegal annexation of territory and deliberate destabilisation of a neighbouring sovereign country cannot be accepted in 21st-century Europe.

‘Furthermore, when the violence created spirals out of control and leads to the killing of almost 300 innocent civilians in their flight from the Netherlands to Malaysia, the situation requires and urgent and determined response.’

The rouble crashed to its lowest level since early May against the dollar as leaders prepared to implement the new sanctions.

Downing Street conceded that the British economy, particularly financial services, would suffer.

BP warned sanctions could ‘adversely impact our business.’ BP has a 20 per cent stake in Russian energy giant Rosneft.

Moscow is likely to retaliate , with one group of Russian lawmakers suggesting banning international accounting firms and consulting groups from the country. Targets were said to be Deloitte, KPMG, Ernst & Young, PwC, Boston Consulting Group and McKinsey. David Cameron said: ‘We want to make it clear that Russia’s behaviour in destabilising another country – Ukraine – is unacceptable.’

In another dramatic escalation of tensions between Russia and the West, Mr Obama has accused Putin of conducting tests in violation of a 1987 nuclear missile treaty.

Mr Obama wrote to the Russian leader protesting about a breach US officials described as ‘a very serious matter’.

 

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Britain, Economic, Europe, European Union, Financial Markets, Government, Politics, Society

The sanctions on Russia should not be borne solely by London…

EUROPE

Germany and the rest of the Eurozone trade far more with Russia than Britain does. Our European partners buy billions of pounds worth of oil and gas, hugely profitable cash-flows which props up the regime of Vladimir Putin.

Yet, Europe’s proposed sanctions on Russia have been carefully designed to inflict as much damage as possible on the City of London, while shielding other economies from collateral damage. The stench of hypocrisy fulminates through the corridors of power.

The aim of the European establishment is to punish Mr Putin, whose behaviour has been appalling. But the cost should not be borne solely by London. According to Europe’s plans, German companies will still be able to sell their wares with relative impunity; Italy will continue to receive their energy supplies courtesy of Moscow; and, France will deliver its warships to Russia as promised. The bulk of the cost will be paid for by British workers who will lose their jobs to satisfy Europe’s desire to be seen to be acting and doing the right thing.

This is the latest example of the European elites showing their expertise in turning every crisis to their advantage. The higher echelons of the European establishment are clearly seeking to use the need to punish Russia as an excuse to intensify their long-standing campaign against the City.

The EU often makes grandiose claims about being a global force for democracy and human rights. Splendid as those values are, time and time again the EU reveals itself as merely an alliance of competing national interests. On matters of global conflict, Brussels not only struggles to produce a united front, but also often ends up pursuing its own internal vendettas instead. This prejudice is seen within the corporatist view of the Eurozone elites when, for example, they are happy enough to sign massive energy deals with corrupt and authoritarian regimes, but don’t either like or understand the workings and mechanisations of genuine free markets. The creation of the single currency too saw much of the financial activity previously conducted in Frankfurt and Paris shift to London.

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Effective sanctions should mean moving beyond the freezing of Russian assets in EU capitals and foreign travel bans on Mr Putin’s inner circle. Financial services, defence, and energy are some of the areas that should come under tighter sanction.

Financial sanctions operate in two ways. They restrict the access of Russian companies to working and investment capital, impeding not just their growth but their continuing activity, so hurting the Russian economy. They also make overseas investors much less likely to continue investing in Russia, with a similar effect. Defence sanctions, essentially the sale of Russian military equipment to other EU members, has the same consequence with the additional value of Russia becoming increasingly isolated. Sanctions on energy can range from tougher regulatory action to an effective blockade on the sales of oil and gas to the EU. Germany’s recent withholding from Gazprom of permission to use a pipeline is illustrative of the effectiveness of such action.

Further sanctions like these would, however, act like a two-edged sword. Certainly, they will injure Russia’s economy, but they will also wound Europe. Some parts of Europe could not get through a winter without severe difficulties if homes and offices were not heated by Russian gas. Some economies remain distinctly shaky and probably wouldn’t want to commit to a sanctioning agenda that would likely rebound on their own trading position.

Of course, it is only right that where Mr Putin’s regime can be targeted, given his ongoing refusal to face up to the consequences of his support for Ukraine’s separatists, such action be taken. Weaning Europe from its addiction to Russian gas is one real way to punish the Russian president and his cronies. Germany gets around a third of its gas and oil from Russia. Given that energy accounts for around 68 per cent of Russia’s exports, an opportunity to hit the regime hard should have been taken by now.

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