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IMF Urges Eurozone to Set Up a Joint Budget to Avoid Economic Shocks

According to a report released yesterday by IMF, Eurozone should set up a joint budget to help avoid economic shocks and to prevent weak members (from Ireland to Cyprus) from experiencing severe recessions.


The report notes that the joint budget could be worth up to 2.5 percent of the bloc’s output of about 10 trillion euros ($13 trillion), or about 200 billion euros. However, to make this plan viable, Europeans should agree to give up national sovereignty by affecting more money and power to joint institution.


It’s clear that the report’s proposals go far beyond what is currently envisioned in Europe and would face political and legal hurdles. Indeed, stronger economies, especially Germany, are likely to reject them as an introduction through the backdoor of permanent transfer payments to financially weaker countries. The concern remains that countries benefiting from the payments would be less willing to make unpopular reforms.


Some extracts from IMF report:


“Addressing gaps in EMU architecture could help prevent crises of such magnitude in the future, while supporting current crisis resolution efforts.”
“Such a fund would collect revenues from euro area members at all times and make transfers to countries when they experience negative shocks”
“Yet, political backing for a clear roadmap remains elusive, with views on the contours of a fiscal union differing widely among euro area members”


Eight Reasons Why the Fed Will Not “Taper” in September

Wide divergences among economists are felt in polls showing conflicting results concerning the evolution of Feds’ asset purchase program at the next FOMC meeting (Sept. 17-18). The latest poll (Sept. 6) published by Bloomberg suggests that a majority of economists are expecting a slowdown in the Fed buyback program in September:


The Fed will start to cut the monthly asset purchases at the Sept. 17-18 meeting, paring them by $10 billion, according to the median of 34 responses in a Bloomberg survey on Sept. 6, after the jobs data. That’s unchanged from an Aug. 9-13 poll.

However, the NABE (National Association of Business Economists) survey shows contradictory results to the extent that only 10% of economists expect “tapering” at the coming FOMC meeting:


The economists appear to be more cautious in their outlook than Wall Street banks and even some Fed officials that have looked to the central bank’s September 17-18 meeting as a point to begin easing the pace of bond purchases, currently at $85 billion a month.
Only 10% of 220 economists polled expect the wind down to start before the end of September. The survey found 39% expect the first tapering of purchases in the final three months of 2013 with the remainder saying the Fed will hold off at least until 2014.


Concerning the next FOMC meeting, my conviction remains the same since May 25, I do not expect any announcement about a slowdown in the Fed purchase program. Notwithstanding the fact that the expansionary Fed policy poses risks to financial markets’ stability, especially with the increasing volume of speculative positions (corporate high yield, jumbo loans…), at least eight reasons are legitimizing a wait-and-see policy in the short term:


1/ The lack of short-term agreement on fiscal issues, more specifically on the “continuing resolution” and the 2014 budget. Currently, Republicans insist on keeping automatic budget cuts which will take effect during the 2014 fiscal year (starts on October 1st) and will reach $109B (0.6% of real GDP).


2/ The threat of automatic budget cuts, which outcome would not be known from the end of September, comes at a time when growth has been low since the beginning of the year. Indeed, even with an upward revision of the 2Q GDP to 2.5% (QoQ annualized), GDP should increase by 3.1% in 3Q and 4Q to meet the projected 2013 growth defined by the Fed in June (ie 2.45% from 2012 4Q to 2013 4Q).


- Now, if we look at the latest statistics (retail sales, industrial production, durable goods orders…), the trend remains weak and thus far behind the Fed’s target which is partly linked to a slowdown of the buyback program. As a witness, here‘s what Bernanke said at the June press conference:


“If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year”


3/ The signals from the residential housing market are deteriorating. The recent rise in mortgage rates (highest since April 2011) weighed very negatively on refinancing activity (13 declines recorded in the last 16 weeks) but also on new home sales (-13.4% MoM in July). There is no doubt that existing home sales should fall in August, according to the pending home sales’ decline in July (-1.3% MoM).


4/ Inflation is broadly in line (PCE inflation) or below (PCE Core Inflation) the Fed’s forecasts made in June. Anyway it remains well below the 2% target, which is the medium-term reference.


5/ Regarding the labor market, it must be recognized that since the set-up of the buyback program (September 2012), pace of nonfarm payrolls has improved whereas unemployment rate has decreased. However, the last report (August) underlines that the short term momentum of NFPs is weakening and is still below the threshold of 200K which is not a minimum acceptable for Fed:
-> Moving average 3 months: 148K
-> Moving average 4 months: 155K
-> Moving average 5 months: 164K
-> Moving average 6 months: 160K
- Also, as pointed out by the Fed members during the last Fed Minutes, qualitative indicators, namely the number of long-term unemployed (more than 27 weeks), the number of full-time jobs or the “underemployment rate”, are only improving slightly. Similarly, the decline in the unemployment rate is mainly explained by a fall of participation rate (lowest since Aug 1978) which is not a good thing.
6/ The Syrian conflict could create uncertainty to the extent that the debt ceiling has not been raised. The fact is that military action could increase  public spending above expectations and therefore could reduce the time remaining to politicians to find a compromise. Currently, according to Treasury Secretary, the deadline sould be reached by mid-October.
7/ During the G20, IMF noted that currently emerging economies are seen as particularly vulnerable to a tightening of US monetary policy and  recommended that policy makers be ready to handle a rise in financial instability. In this context, Fed could choose to give more time to other policy markers.
8/ Fed communaction: The Fed members have not yet defined criteria or thresholds which would impact the asset purchase program.
- Moreover, since last FOMC, almost all members (voters and non-voters) have instisted on the fact that “tapering” will be only dependent on data which were clearly weaker than expected. The last Beige Book comfirms that activity continued to expand at a modest to moderate pace during the reporting period of early July through late August.
- Finally, some people forget that voters are more “dovish” that non-voters and that they give less press interviews.
- All Fed members’ speeches concerning QE and economic activity since the last FOMC meeting (July 30-31) are available here.

Political Mess in Portugal Threatens Eurozone

Portugal’s Finance Minister Vitor Gaspar, the architect of the country’s €78bn bailout plan, resigned on Monday. According to some press reports, Vitor Gaspar submitted his resignation as pressure mounts on the government to ease its austerity measures responsible of the skyrocketing unemployment and Portugal’s third year of recession. Mr Gaspar’s departure comes shortly before the next review of the country’s bailout by its creditors, the European Union and IMF, to start on July 15.


As a consequence, Former Treasury Secretary, Maria Luis de Albuquerque, was appointed Portugal’s Minister of Finance by Prime Minister Pedro Passos Coelho, the office of President Cavaco Silva announced Tuesday morning.


Yet, on Tuesday evening, Portugal’s ruling centre-right coalition has been left in disarray after Foreign Minister Paulo Portas, leader of one the two government parties, tendered his resignation less than 24 hours after Vítor Gaspar quit his post. State news agency Lusa reported that Portas has sent a letter to the PM saying he disagreed with Gaspar being replaced as finance minister with Maria Luis Albuquerque. The problem is that Portas heads the small rightist CDS-PP party which guarantees the government’s majority in parliament.


Nevertheless, Prime Minister Pedro Passos Coelho told the nation late on Tuesday that he did not accept Portas’ resignation and would continue to head the government to ensure political stability.
In parallel, according to local media, two more Portuguese ministers from the junior ruling coalition party were ready to resign on Wednesday, deepening turmoil that could trigger a snap election and avoid Lisbon to meet Troika goals what could lead to default.


More from Reuters:


Multiple newspaper radio and television reports said Agriculture Minister Assuncao Cristas and Social Security Minister Pedro Mota Soares will follow their CDS-PP party leader Paulo Portas who tendered his resignation on Tuesday. Party officials were not available to comment as the party’s executive commission was in a meeting.
With no solution imminent, Portugal’s bond and stock prices slumped further. The returns investors demand to hold 10-year bonds surged to above 8.1 percent for the first time since November and the PSI 20 stock index slumped 6 percent, led by sharp losses of over 10 percent in banks’ shares.
Coelho’s decision to reject his foreign minister’s resignation puts the responsibility for the government’s survival squarely on the shoulders of Portas, who now has to decide whether to stay in his post or pull his rightist CDS-PP party out of the coalition. Without the CDS-PP, the center-right government would lose its majority.
“One thing is certain, the prime minister is going to do everything to stay on, giving all possible concessions to Portas,” said political scientist Antonio Costa Pinto. “Failing that, however, we can hardly avoid an early election.”
“We see early elections as the most likely outcome at this stage, even if we cannot fully rule out support from some CDS MPs and the continuation of the government,” Barclays’ economist Antonio Garcia Pascual said in a note.