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Good morning,
markets are called to open higher this morning. This is what's happening today:
Markets opened the session negative yesterday after a socialist president was elected in France, the disappointing jobs data out of the US on Friday and the negative news coming out from the elections in Greece where parties which voted against the bailout package are getting most votes from the electorate. But sentiment in the market turned around during the session with banks rallying after Spain said that it would use public funds to bolster struggling banks.
Investors are worried because banks in Spain do not have enough reserves to save them from defaulting should a worst case scenario kick in. If you look at Spain's debt/GDP ratio which is around 70%, is much better than the 120% of Italy. However, the big problem with Spain is the level of defaults. 60% of Spanish debt is lent out to individuals for personal use. Of this 60%, the default rate is negligible because Spanish law is very strict when it comes to debt repayment and people borrowing money know a priori that they can lose all they belongings if they do not pay back their debt. The problem comes from money lent for construction and to businesses which total the remaining 40% of debt loaned out. Of this 40%, there is a default rate of 20%. 20% of all commercial debt result in a total of E100bln. Spanish banks have put aside reserves of E50bln to cater for this E100bln. The Spanish government said that there is need for a cash injection of another E50bln in order to safe guard the banking system in Spain.
Spanish Prime Minister Mariano Rajoy opened the door to using public funds to clean up Spanish lenders and said the government will pass a decree this week to bolster confidence in the banks. “The last thing I want to do is lend public money, as has been done in the past, but if it were necessary to get the credit to save the Spanish banking system, I wouldn’t renounce that,” he said in an interview. He didn’t give details on the decree that will be passed on May 11.
Spain’s government tightened provisioning rules in February to make banks recognize deeper real-estate losses and is now working on a plan to allow lenders to offload written-down assets into separate vehicles. Spain has tried to shield its public finances from the cost of cleaning up the banks and ruled last year that the industry would bear the cost of restructuring failed lenders.
Rajoy said the government hasn’t decided whether public funds will be used and in any case it wouldn’t affect the deficit, which is the third largest in the euro region. Using public funds would be a “last resort,” he said.
“I am not in favor of a bad bank,” Rajoy said. “The main aim of the decree is that there should be no doubts about the situation of Spanish banks.”
France
Hollande defeated French President Nicolas Sarkozy to become the first Socialist in 17 years to control Europe’s second-biggest economy. He pledged to push for less austerity and more growth in the region.
Merkel said she will welcome Hollande in Germany with open arms, while rejecting government stimulus as the way to this discussion is not whether we should pursue consolidation or growth, it’s completely clear that we need both,” Merkel told reporters in Berlin today. Rather, I think the core of the discussion is whether we again need debt-financed economic programs, or whether we need growth elements that are sustainable and oriented toward the economic strength of certain countries.
Greek election
Greece’s political leaders struggled to find the support needed to form a coalition government after voters flocked to anti-bailout parties, calling into question the country’s ability to impose the measures needed to guarantee its future in the euro.
New Democracy won 19% of the total vote and 108 seats in the 300-seat parliament. Pasok, the Socialist party that partnered with New Democracy in securing a second rescue package for the country, trailed in third place with 13% and 41 seats.
Under the terms of the E130b bailout from the European Union and International Monetary Fund, international lenders expect to hear in June how Greece will achieve 11.6 billion euros of savings for 2013 and 2014. Citigroup Inc. economists said the risk of Greece leaving the euro has risen to as much as 75% from 50% before the election.
Should New Democracy leader Antonis Samaras fail to form a government, the onus will fall to Syriza, a coalition of left- wing parties that has vowed to cancel the bailout terms.
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Good day and happy trading!
Kristian Camenzuli
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