MarketLine Blog

Posts written by Roberto Holler

Brexit – the meaning of a messy divorce for the Euro area.

MarketLine

The lending channel between many industries and banks in the Euro area has been far from normal since 2008. This factor puts Britain in a better position to negotiate Brexit next year. The Euro area will embark on a period of further unprecedented slowdown by detaching itself from the world’s fourth largest economy. Credit to industries coming from the banking sector is key for the region to grow as the single currency area has a bank-based model as opposed to a capital market model. Debt financing to companies is largely… Read more

An inconvenient truth about the euro area

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The creation of the euro area was a mistake. Top ranks of business and political classes in Europe were expecting an explosion in trade and economic activity following the creation of the single currency area in 2002. The euro would lubricate the integration of the newly formed euro area. It would be possible to achieve higher levels of growth and long-term prosperity. Unfortunately, the real GDP of the euro area increased only by 1.8% per year between 2001 and 2006 and by merely 0.2% per year within the 2007 -2015… Read more

EU before Brexit – looking underneath the headlines

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Data from eurostat puts the number of unemployment in the Euro area at 16 million in 2016, close to 10% of its population aged between 18 and 74 years of age. This is equivalent to the entire population of the Netherlands or 8 times the population of Paris. Clearly, the number of Europeans struggling on a daily basis is much higher than the official figure coming from the eurostat. This is because any person that works at least one hour per week is considered to be employed. The failure to consistently reduce… Read more

UK Economy – held back by euro area Treaty

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The Maastricht Treaty has been slowly asphyxiating any possibility of sustained economic recovery in Britain. It has been partially responsible for the erratic recovery of manufacturing, production and construction industries. The Gross Domestic Product (GDP) of Britain peaked back at pre-crisis level in the second quarter of 2013 driven mainly by the growth of the services industry. This industry is 13 per cent larger in value compared to 2009 (figure below). Production, construction and manufacturing industries are on average 7% smaller than their pre-crisis levels. The majority of UK industries… Read more

British Economy – structurally damaged?

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Large-scale lending has become a key component for the economic growth of Britain’s economy since the 1980s. It has aimed to incentivise British consumers to permanently increase their borrowing rates and consumption. This practice has boosted the profitability of the British financial system by an unimaginable scale. It has generated a permanent stream of cash flowing from consumers to the banking system based on the acquisition of mortgages and consumer credit to purchase durable and nondurable goods. It has also helped households to navigate through a prolonged period of house… Read more

Gas and Electricity in Great Britain – Competitive market illusion

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A nationalized energy industry had operated in the United Kingdom for more than 40 years but it was gradually reformed with the introduction of market liberalization in the 1980s. Market liberalization was followed by a large-scale industry privatization fully completed in 1998. The competition injected in the industry through these reforms has been concentrated on generation and supply of gas and electricity. However, evidence from the Office of Gas and Electricity market (Ofgem), the body responsible for the regulation of the system, shows that the market is far from competitive…. Read more

Greece’s policy mix: austerity failure and unfairness

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In the 1980s, Europeans and Americans started to get hooked on debt to afford their lifestyle. Newly available bank loans, a wide range of mortgages and credit cards suddenly became a necessity. At that time Robert Dall, a mortgage trader at Salomon Brothers, started to mix two or more types of mortgages together and re-sell them in the global financial markets. In an interview with BBC Panorama in 2015, Dall pointed out that “some mortgages were real and others were phoney” and “the market did not understand the difference between… Read more

Will the new Mitsubishi Regional Jet (MRJ) erode Embraer’s market share?

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In the 1990s, Embraer and Bombardier identified a gap in the production of an aircraft sized for efficient operation in the regional jet market in Europe, Asia, Africa and, particularly, in the United States. Regional American airlines were increasingly demanding an aircraft designed specifically to serve markets that can be optimized with 37 to 110 seat capacity equipment. The production of Embraer Regional Jet-145 (ERJ-145) launched the company into the lucrative regional jets market in 1996, only two years after privatization. Prior to 1996, Bombardier was the sole player in… Read more

A new dynamism for major European economies

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The expansion of household debt in Europe in the 1980s, 1990s and 2000s was unprecedented by historical standards and the economic growth of European countries has become partially dependent on it. The numbers from the Bank of International Settlements (BIS) and Marketline analysis reveal that the outstanding credit from the banking system to European households increased more than 170%, in nominal values, from US$4tn in 1995 to more than US$ 11tn by the end of the 2000s. In the UK alone, household debt is running at US$2.4tn which represents an… Read more

Greece – Another Case of Expansionary Austerity Failure

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The public austerity program forced upon the Greek population by the European Commission, the European Central Bank, and the International Monetary Fund (Troika) has depressed the economy instead of leading to an economic expansion, under the mantra of “expansionary austerity” policies. Five years of austerity involved drastic reductions in public expenditure, public sector redundancies and tax increases in the context of the worst global contraction of more than 60 years. As the Greek Prime Minister, Yanis Varoufakis, explained in a recent article published on the Project Syndicate website, the hard-line… Read more

Prosperity based on debt

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A large number of European governments were keen to embark on the deregulation of the financial sector in the 1980s. The deregulation in Europe was initially proposed in the United Kingdom by the Prime Minister Margaret Thatcher and, subsequently, adopted by a large number of European governments. It opened up the doors to the addiction of European consumers to credit. Waves of bank loans and mortgages became available to consumers and it quickly turned into a necessity. Later on, it became clear that banking in Europe turned into a highly… Read more

Hit hard by austerity measures

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The rate of unemployment is closely watched by the government as an important measure of success or failure of economic policies. According to the Office of National Statistics (ONS), unemployment in the United Kingdom declined from a peak of 2.65m in December 2011 to 1.84m in February 2015. Close to 800,000 workers found a job between December 2011 and February 2015. Additionally, according to BBC news, ONS also claims that “the employment rate now stands at 73.3%, the highest rate of people in work since the ONS began keeping records… Read more

Recovery based on more debt: is it worth it?

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Government authorities in the United States (US) have been given an indirect go-ahead for American consumers to splash out their borrowed dollars in an attempt to push the demand for manufacturing goods produced in the US. The result couldn’t have been more predictable. Americans consumers promptly responded in a very positive fashion. The total volume of their outstanding debt reached $13tn in the first quarter of 2014. As we learned from the recent crisis, this pile of debt could potentially drag the entire economic system to a standby for years… Read more

Is there a recipe to boost manufacturing sector growth in the Eurozone?

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In 2010, the US Federal Reserve (Fed) launched its Quantitative Easing (QE) program with the aim of re-establishing credit conditions by accelerating inter-bank lending and, consequently, supporting business and consumers to have access to relatively cheap loans. The policy was designed to support the overall level of economic activity in the United States, raise inflation and employment to levels consistent with the Fed’s maximum employment and price stability mandate. The announcement that it would artificially create money by increasing its liabilities was seen as an unorthodox monetary policy by mainstream… Read more

Is Quantitative Easing (QE) a good detox for banks?

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International financial markets became dysfunctional and credit dried up following the collapse of major banks and insurance companies in the US and UK in 2008. At that time, commercial banks were desperate for cash to cover their asset and liability mismatches. In response to highly negative events, the Bank of England (BoE) launched the Quantitative Easing program, with the aim of re-establishing credit conditions by increasing inter-bank lending and, consequently, supporting the overall level of economic activity. Did it work? Apart from the increase in unemployment rates, the major risk… Read more

Stagnation shouldn’t be the “new normal”

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The latest World Economic Outlook published by the International Monetary Fund includes a mind-blowing chapter on the perspectives of global real interest rates. Generally speaking, interest rates adjusted by inflation have strongly declined since the 1980s. Ten year bond rates have dropped from a peak of roughly 12% per year in the 1980s to a lower bound close to zero in recent years. To a large extent, a more integrated economy and financial sector have generated global influences responsible for the decline in real interest rates. In fact, contrary to… Read more

Commonalities between Japan, United Kingdom, US and the Eurozone – Fixing the Financial System but not necessarily the Economy

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The Bank of Japan (BoJ) was the first central bank to adopt quantitative easing (QE) to fight the upsurge of a deflationary path in 2001. At that time, the feeble GDP reflected the collapse of aggregate demand following a financial crisis in the late 1990s. The most vicious side effect of a collapsing aggregate demand was a generalized decline in prices and production, which was already a reality in Japan at the beginning of the 2000‘s. In response to highly negative events, the BoJ launched the Quantitative Easing program (QE),… Read more

Euro Area Malaise

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The pace of economic recovery in the Eurozone is yet to gain momentum. Real Gross Domestic Product, which is the gross income of the entire region, rose by 0.1% in 2013, following a decrease of 0.4% in 2012. However, according to the latest projections of the European Central Bank, “a gradual recovery in domestic and external demand is expected to be the driving factor behind the projected sustained increase in activity in 2014.” Let’s not forget that the financial crisis has had a permanent impact on the Gross Domestic Product… Read more

Heartbreaking Policy Choice

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The pace of the economic recovery in the Eurozone should have been dictated by an active policy aimed at expanding the loans base to consumers. The expansion of loans to consumers would have been translated into more consumption, investment and, consequently, economic growth. This policy choice is an economic reality in the United States and the United Kingdom but not so in the Eurozone. The increase in government expenditure, which was the other policy option available to reduce the size of the economic contraction, had been discarded a few years… Read more

Less scope for free market economics

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The Prudential Regulation Authority was created to be an arm of the Bank of England and to promote the safety and the soundness of individual banks, building societies, credit unions, insurers and major investment firms. Ultimately, PRA will keep a very close eye on financial institutions to ensure that the bank bailouts of the last few years won’t happen again. The authority set up a 3% leverage ratio threshold, which forces banks and building societies to have at least £3 of own capital to support £100 of lending. Interestingly, after… Read more

Banking sector in Europe. Never ending recovery.

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The Eurozone is still facing considerable financial instability according to a European Central Bank press release from July 13th. Austerity policies adopted by many European governments in the aftermath of the Greek crisis of 2010 increased its financial instability by suppressing the nascent economic recovery seen between 2009 and 2010. Fortunately, the prolonged assistance from the European Central Bank (ECB) reduced the level of bankruptcies in the financial system to a bare minimum. Fiscal policies, most notably tax increases and government cuts, that came in to force after the Greek… Read more

Is monetary expansion fuelled by Quantitative Easing boosting the construction sector in the United Kingdom?

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The Bank of England has flooded commercial banks with money in the aftermath of the financial crisis. The aim of its policy has been to inject money into the economic system and consequently increase investment and consumer spending. How does monetary expansion work? Since March 2009, the bank has bought government debt from pension funds, commercial banks, insurance companies and non-financial firms. Commercial banks selling their government debt to the central bank in exchange for cash should be depositing more money into their own reserves. This extra capital should then… Read more

Embraer targets the US

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There is widespread disappointment with the recovery of the US economy, but the American economic stimulus is rendering more fruits then the fiscal consolidation packages undertaken by European governments. This is reflected in the difference in new business opportunities currently presenting themselves on either side of the Atlantic. During the economic free-fall of the developed world, the European and the American market shared a comparable decline in the Gross Domestic Product (GDP). However, the GDP in the US is showing a more robust increase than many European countries, with the… Read more

Embraer in the US market

MarketLine

According to the International Air Transport Association’s (IATA) financial monitor, airlines share prices were 3% higher than the FTSE Global All Cap in the first 4 months of 2013. Its share prices are outperforming the market as investors are optimistic about the short-term recovery of the industry. The recovery of the share price is particularly strong in the US. It has risen by 35% this year following the improved financial performance of the American airline companies after the implementation of restructuring plans. The combined net profit of the American airlines… Read more