October fears and financial crisis expectations

October, 2011

The world is on the eve of the second Great depression

In October a famous American financier George Soros warned that the great depression was going to repeat. He proposed radical plan of the European financial institutions reformation. His plan of reformation is even more hard-edged and drastic than the six legislative initiatives of Europe rescue that were approved by the European Parliament. The European Commission discusses tax on financial transactions and imposing fines for distortion of statistics. Soros calls for a single economic government for eurozone. European experts believe that these measures will postpone, but not cancel shock in the eurozone. In view of the European crisis Russia will be reeling in shocks.

According to billionaire, ‘the root of the euro crisis‘ lies in the fact that each country in a single zone decides its financial problems by itself. The idea of self-control of the united countries fell short of expectation. Disintegration became the result of integration. Europe fell into two groups, which are debtor countries that are going to the bottom, and creditor countries that are rising up and can dictate their terms to others. Nevertheless, in practice these conditions for the less developed countries are like punitive measures, accelerating their downfall.

In this situation, Europe needs to take three key measures that will help it to gain time for the creation of a new growth strategy, which will help to overcome the debt crisis.

According to Soros, the first measure is to create a single Ministry of finance for the euro zone. The second step should be the granting functions of supervision of national banking sectors to the European Central Bank (ECB). These supervision functions would be granted in exchange for temporary guarantees and constant capitalization support by the regulator. The third measure is that the ECB should allow countries with low rates of growth (such as Italy, Spain, etc.) to carry out refinancing at reduced rates.

Soros noted that the proposed measures did not contravene the Lisbon Treaty and other basic European instruments. Although he does not deny that these measures are radical.

Legal framework for the supervision of the national reform programs was also created. As the President of the European Commission Jose Manuel Barroso reported in October, department ’approved the proposal of introducing a tax on financial transactions in the EU‘. Tax will be charged in case of purchasing shares, bonds, and derivative financial instruments. Barroso said that it would limit speculative operations and will replenish the European budget by 55 billion Euros per year. Brussels plans to ‘issue of the Europe-wide stabilization bonds’. Barroso said that Eurobonds would be stabilization bonds. That means that they will provide benefits for those who plays by the rules to the detriment of those who does not play by the rules.

The largest investment bank does not believe in the bright future

One of the largest investment banks Goldman Sachs made bad forecasts for the world economy growth, the dynamics of the euro, pound, stocks and bonds markets of United States, as well as oil and other commodities. Goldman Sachs expects more ’hostile environment‘ in almost all assets markets at the end of the year. Prices for oil and base metals are falling; gold and silver are rising in price. ’Further deterioration of the economic and financial situation in the euro area forced us to reduce the forecast of world GDP from 4.3% to 3.5% in 2012. In the next few quarters, we expect mild recession in Germany, France, and sharp decline at the periphery of the eurozone,‘- Goldman Sachs said in the report to analysts. The main factor is the spread of the negative impact of debt problems outside the eurozone. First of all this impact affects on the deterioration of credit conditions.

The weakness of the U. S. economy compounds matters. Forecast of world GDP in 2012 is worse than the rates of growth in 2010-2011. Goldman said that this forecast complied with the historical trends. As during the global financial crisis and recession, emerging markets and especially China will support the growth. One of the most important issues of this country remains the question of whether China will be able to maintain high growth rates in case of deterioration in demand in almost all major export markets. The problem is compounded by the fact that in recent months Chinese regulators have been aggressively tightening policy in many ways in order to keep inflation at bay. Global economy will add 3.8%, but not 3.9% as was previously expected.

U. S. stands on the brink of recession

Goldman Sachs estimates the risk of second wave of recession in the U.S. by 40% and waits further actions of the Federal Reserve in order to stimulate economic growth. It is more than likely that these actions will be taken only in the 1st part of next year. ‘Bottom’ will probably be covered in the first quarter of 2012, when the rise of the U.S. economy will be only half a percent on an annual basis.

The crisis in the euro area increases

Goldman Sachs forecasts for the euro area for the next two years are revised with reduction because of increasing financial problems of the region. In 2011 economy of 17 States of currency block will add 1.6% (previously — 1. 7%), and in 2012 will add only 0.1% (previously — 1.6%). Nevertheless, it will happen if we can avoid the worst-case scenarios. Goldman Sachs forecasts for the GDP of most countries are worse than the consensus forecast of the world’s leading economists.

The situation on the markets will be hostile

Goldman Sachs expects more "hostile environment" in almost all asset markets at the end of the year. Bank changed the three-month forecast for the euro to $ 1.38 from the previously expected $ 1.40 and from 108 yen to 106 yen. Pound average rate over the next three months will be $ 1.53, not $ 1.56, as was expected. The rise of the U.S. stock market will be weakened by the end of the year, and the yield of 10-year U.S. government bonds will increase from current 1.75% to 2.25% against the 2.75%, which was expected. Slower growth will be observed in mineral markets. Price forecast for Brent for the end of the year was reduced from $ 120 to $ 112.5 per barrel with the current price of about $ 100.70 per barrel. The average price of European standard label of oil in 2012 is expected to be $ 120 instead of $ 130 per barrel.

$ 50 billion dollars were taken from Russia during 9 months, but...

Outflow of capital from Russia in the third quarter of 2011 amounted to 18.7 billion dollars. This is stated in official files of the Central Bank. In the first quarter of this year, outflow of capital amounted to 21.4 billion dollars, and in the second quarter 9.2 billion were removed from the country. Thus, in January-September outflow of capital from Russia amounted to 49.3 billion dollars. Partially outflow of capital is connected with the fact that in the crisis, investors withdraw funds in less risky assets, primarily in the United States. Reducing of investment rating of U. S. in August 2011 did not make the country more risky in relation to the assets in other countries. The latest influx of capital to Russia was observed before the crisis in 2007 (81. 7 billion dollars). In 2009, capital outflow reached 56.9 billion dollars, and in 2010 it amounted to 35.3 billion.

Despite the impressive figures of capital outflow from Russia, in the first nine months of 2011 the growth of foreign investments in Russia amounted to 20 percent. Total foreign investment into the country from 2009 to third quarter of 2011 exceeded $ 100 billion. Russian prime minister stated that in October. He also expressed confidence that in the near future the Russian State Duma would amend the legislation. These amendments will facilitate investments in strategic sectors in Russia. It is a case of holding additional emissions for foreign investors by enterprises operating in the sphere of subsoil use. Previously, foreign companies were already allowed to buy up to 25 percent of the shares of such companies, but coordinated approvals of government committee are necessary for the holding of additional emissions. It is this agreement that is planned to cancel.

Russia: bank deposits rose by 80% during three years

During the three years that have passed since the global economic crisis, belief level of Russian citizens in the banking system has increased. The size of private deposits in banks increased by 80%. This was reported on the VTB Capital Investment Meeting ‘Russia is Calling‘ in October. Many a man remember that at the beginning of the 2008 crisis, a huge number of depositors withdrew their savings from the banks, ruining the latter and making it impossible to continue lending. Then the Russian authorities decided to give banks as much money as people wanted to get. People realized that they would not be deceived and money came back. On September 1, 2008 the amount of private deposits was nearly 6 trillion Rubles. By September 1, 2011 this amount reached 10 trillion 72 billion rubles. Recently, real incomes are rising.

Bank turned their rates to investors

On the back of a lack of liquidity Russian banks began to raise rates on household deposits. At the height of another cycle of problems it is possible to earn up to 12%. Liquidity for Russian banks becomes more expensive. Bankers complain that the reason is the closing of foreign markets and the rising of prices of external funding. As the result one of the source of funding becomes public, lending institutions are raising rates on deposits. Heads of major Russian banks state that rates on deposits begin to grow. Sberbank CEO German Gref was one of the first who pointed out the tendency of rates growth. Nevertheless, at the moment the head of Sberbank is not ready to announce when the most retail bank can raise rates on deposits.

A month later VTB deputy chairman Herbert Moos drew attention to the inevitability of improving of conditions of attraction of financial public resources in deposits. He also admitted that the bank planned to raise rates. President, Chairman of VTB 24 Mikhail Zadornov also considers the inevitable of increase of interest rates on deposits and credits in the context of lack of liquidity. ’Rates will grow in the fall. The reason is the value appreciation of money, the liquidity situation in the banking sector is difficult,‘ — banker said. According to M. Zadornov, stringent situation with liquidity arose from the crisis in world markets, but not because of the situation with the Russian economy. In the situation when external borrowing markets are closed, the demand for resources within the country grows.

While the major players of the retail market state liquidity problems and make plans to raise rates, smaller players began to ‘decorate’ deposit rates with higher interests. This happened with the Promsvyazbank, CB ’Stroycredit‘, Nomos-Bank, Alfa Bank, MDM Bank, VTB 24, and Home Credit Bank, which increased annual deposits to 12%.

Jose Manuel Barroso: European Commission should conduct economic policy

The European Commission should conduct pan-European economic policy, because European Commission is an independent supranational authority. Jose Manuel Barroso Durran said that, speaking in Strasbourg in October before the European members with the traditional speech about the current state of affairs and strategic priorities of the EU’s executive body. Thus he answered the critics who had accused the head of the European Commission of a complete loss of authority in a situation of debt crisis. He also answered Germany and France, which had offered a mechanism of euro area economic management, headed by EU President Herman Van Rompuy. ’Federalists and markets consider that we must pursue a common policy in order to restore belief in the euro area. It is necessary to combine controls of the euro area, add to the European Monetary Union effective economic union‘ — Barroso said.

‘Among the specific measures of the economic program of the European Commission for the next year is the creation of eurobonds and introducing tax on financial transactions. If the projected law enter into force, it will bring the EU 55 million Euros per year ’ - said Barroso. More than half of the incomes will be allocated to the EU budget; the rest will be allocated to national budgets.

Cyprus will not lose concessional taxation

Cyprus faced the most serious crisis since 1975. At that point in time Turkish troops invaded into the island after a long conflict between Greek and Turkish communities. After that the island was actually divided into two parts. The reason of this crisis is far from political and ethnic conflicts. The thing is that the economy of mainland Greece is bulging at the seams; the prospects of the country withdrawal from the euro zone and default of Athens are seriously discussed at the European level. The Cyprus economy is connected with Greece, which problems affected the status of the island neighbor. The banking systems of both countries are also connected; a number of Greek banks are registered in Cyprus and Cypriot bankers built developed branch network on the mainland Greek.

Explosion at a military base ‘Evangelos Florakis’ deprived the island of electricity for a couple of months, because power plant, which had produced more than 60% of the country’s electricity, stopped. It is serious problem for modern high-tech state. Nevertheless, Cypriots quickly coped with the situation. Tourism sector, which is the second most important sector for the economy of Cyprus, was slightly affected. Tourism from Russia grew up by 50% during the first nine months of 2011.

From Russia with help

Greece problems and the energy crisis forced the government of Cyprus to ask Russia for a loan of $ 2.5 billion. It is clear why the country appealed to the Russian Federation: the thing is that Mediterranean island is a huge business center, serving the interests of Russian business from the largest Russian companies of the energy sector to import-export companies. The negotiations between the Ministries of Finance of the two countries are at the stage of completion and the issue will be settled by the end of 2011. Russia is the main business partner of Cyprus. Who else but Russia will save Cypriot banks if these banks are filled mostly with Russian money?

There is no alternative

Cyprus is a hub of international operational payments for 60% of any significant Russian companies, except state companies. About 30% are accounted for by Baltic countries. Another 10% prefer to serve their offshore accounts in Switzerland or Luxembourg, but these 10% are the largest Russian companies and businessmen. The Swiss or the Luxembourgers are simply not interested in others. They are willing to put up with serving Russian clients despite unknown origin of money, if the turn-round in the accounts exceeds $ 20 million per year. Most of the other businessmen can only work with the Cypriots. As far back as three or four years ago Baltic could compete with Cyprus.

The financial crisis of 2008-2009 put financial systems of the Baltic countries on the brink of collapse. During several months, many banks of Latvia and Estonia were in a coma and delivered payments with delay for weeks or even months. One of the largest Latvian banks set limits of payments in an amount of $ 50 000 per week regardless of the size of account balances. It is clear that such actions discredited Baltic banks, and the majority of Russian money left them. This money was transferred to the Cyprus and now there is no other way for money.

It will not become more transparent

Rumors in the Russian business community began to ooze out immediately after the apparition of the information about credit extension to Cyprus. They said that Cyprus would make substantial concessions in collaboration with Russian authorities for the sake of its financial system. Hot Shots even told about the possible revelation of Russian companies beneficiaries that are registered on the island. In fact, it is not profitable neither for Russian business, which is used to making money in the quiet Cypriot offices nor for officials. Of course active propaganda of closer cooperation on revelation of information about the Russian owners of Cypriot companies will be in evidence. Nevertheless, they will not pass from words to deeds. What is the point of changing the system, which is win-win for everyone?

Ukraine is building waste repository in Chernobyl

On the 5th of October in Ukraine at the Chernobyl exclusion zone the ceremony of the beginning of construction of a centralized repository of radioactive waste was held. Facility will be brought into action in 2012-2013. According to plan ‘ionizing radiation source‘(exhausted nuclear facilities for energy production, nuclear reactors, X-ray machines, details of various equipment) will be brought there. There is more than 400 thousand ’ionizing radiation source‘ in the country. Dangerous stuff will be kept at least 50 years. Construction of storage Kiev is aspiring to reduce dependence on Russia in a strategic industry sector. Ukraine intends to build repository for spent fuel at its own expense. American company remains to be a partner, ‘- expert of the Strategic Studies Institute Olga Kosharnaya told journalists. ’It is entirely different store — she said. — On the web-site Emergencies Ministry it’s clearly indicate that this object is designed to the storage of spent sources of ionizing radiation.’

According to experts, it is not about nuclear spent fuel, but about the materials and equipment used by many Ukrainian enterprises. It is necessary to discard dangerous stuff to centralized repository, in order to avoid environmental disasters and prevent its delivery to the terrorists. That is why this project is financed partially by EU and mainly by the UK government. UK government serves as member of the project of ‘Big Eight’ entitled ‘Global Partnership Against the Spread of Weapons and Materials of Mass Destruction.‘

Fourth OECD Forum was held in Paris at the end October

In Paris the fourth forum of the OECD on the subject of tax transparency and exchange of information was held at the end of October (25 — 26. 10. 2011). More than 100 countries and jurisdictions took part. The question of introduction of new standards for such countries as Bruno, Macedonia, Gibraltar, Hong Kong, China, Indonesia, Japan, Jersey, Macao, Malaysia, Netherlands, Spain, Uruguay, and Vanuatu was discussed. Additional studies on the implementation of the OECD standards have been issued by Mauritius, Monaco, San Marino and British Virgin Islands.

Protest action were held in 82 countries

The movement, named ’occupy Wall Street‘, exceeds the bounds of the United States. In October authorities of dozens of countries all over the world were forced to blunt the attack of demonstrators remonstrating against the impunity of financial institutions and unnecessarily harsh measures of the budget savings. The initiative to hold ‘Day of Anger’ came from members of the American movement ’occupy Wall Street‘. At the beginning of October tens of thousands of opponents of capitalism took to the streets of U. S. cities. Actions were relatively quiet, but police however arrested more than 80 people. At the same time the call for massive protest actions spread through social networks including Facebook and Twitter. As a result more than half a million people took part in mass protest actions across the world. In general, demonstrators occupied the territories near the central banks and large financial institutions. Thousands of protesters gathered outside the building the ECB in Frankfurt-am-Main. They demanded the democratization of the Central Bank and the nationalization of major financial institutions. About 40 thousand people took part in protest actions in 80 cities in Germany. Thousands of protesters took to the streets of London, which is the main financial center of Europe. Among protesters was the founder of Wikileaks, Julian Assange. He said that ’London gets corrupted money" and promised to set up on his website an action against financial institutions in the coming months. Protest actions were held even in the prosperous Switzerland.

More than a thousand people took to the streets of Zurich, Geneva and other cities. Their discontent was referred against the major banks such as UBS and Credit Suisse. According to the protesters, they are unhappy with UBS rescue at the expense of taxpayers.

Large-scale protests were also held in October in Rome. More than 100 thousand people took to the streets. Unlike protesters in other countries, Italian demonstrators conducted themselves in an aggressive way. They broke the windows, smashed cars, and threw eggs at the windows of the UniCredit bank. They even managed to set the building of the Ministry of Defence on fire. In addition to the absolute power of financial institutions, discontent of protesters was caused by government budget expenditures actions. The police who arrested dozens of people could not decide whether ‘bandits from all over Europe’ or anarchist organization ‘Black Bloc’ was to blame for riots. It is interesting that many politicians expressed support for the demonstrators.

Capital deficit damages banks ratings

In the middle of October Moody’s agency downgraded ratings of Swiss UBS and British RBS and Lloyds. In addition, the agency decided to review with negative forecasts for credit scores of Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, Societe Generale, Bank of America, Morgan Stanley and Goldman Sachs. Fitch noted that one or two steps could downgrade their ratings. Goldman Sachs predicts that because of the debt crisis European banks may need about 300 billion Euros of additional capital.

Bank of PRC drives out western banks of the IPO market in Hong Kong

Chinese investment banks gradually occupy the IPO market in Hong Kong, driving out their Western competitors, using a very clever method. In order to attract customers, they promise them to buy-out shares, which were unsold in the result of distribution. Because of possible losses American and European partners do not want to do that. Market share of the IPO occupied by China in Hong Kong rose from 9.3 to 24% from 2008 to 2010. Experts referred this to the fact that more and more Chinese investment banks offer their clients a complete reimbursement of the placement of securities in Hong Kong during the underwriting. It is especially relevant now, when the negative global macro-economic indicators and the growing pessimism of investors are forcing companies to set aside their own IPO in Asia. Thus, China financial companies, which are not burdened with restrictions on the size of their balance accounts and high demands for own capital, try to drive out western investment banks representatives of the Hong Kong market. The positions of western investment banks are traditionally strong there. Having huge advantage of western competitors, Chinese banks are not afraid to take a large number of unsold hares on balance.

U. S. Senate prepares trade war with China

Experts say that in October the U. S. Senate passed the bill, which may trigger a trade war with China and contribute to the further slowdown in world economic growth. According to the bill, the U. S. will be able to impose additional duties on goods from China and other countries, which manipulate its national currency course according to the Washington. Sixty-three senators voted "For" a bill that could be prologue to a trade war with China, 35 senators were against the bill. The bill goes to the House of Representatives, which will render its verdict.

For many years American politicians have been accusing China of understating the national currency, which resulted in the huge imbalance in trade with this country. Up to now the U. S. Treasury Department has not officially accepted China as currency manipulator. In the middle of October U. S. President Barack Obama accused China of international trade manipulating by artificially understated Yuan course.

Navy of three countries supervise the gas mining on the continental shelf of Cyprus

In recent days the ships of at least three states were observed near the exclusive economic zone of Cyprus. This happens due to the continuing bellicose statements of Turkey defending its geo-strategic interests in the Eastern Mediterranean region. According to the observers, Turkey uses patrol motor boats and combat helicopters for close support of researches on oil and gas, which are carried out by a Turkish vessel Piri Reis. This vessel arrived from Izmir to the Eastern Mediterranean region, which is found side by side with the exclusive economic zone of Cyprus.

According to mass media, in addition to the Turks, there are also an American aircraft carrier and naval ships of Russia near the study area. It is reported that in the middle of October, U. S. reconnaissance planes made overflight of Turkish vessel at least twice, and Israeli pursuit planes are constantly monitoring the movements of the Turkish vessels. The U. S. company Nobel Energy, conducting a study of the exclusive economic zone of the country for the benefit of Republic of Cyprus, previously discovered huge gas storages in the Israeli continental shelf. These storages were called Leviathan because of the impressive size, which is 450 billion cubic meters.

Russia: bribe amount quadrupled during the year

Average bribe quantity in Russia amounts 250 thousand Rubles. In the case of especially grave crimes bribe amount grows by 1.5 million rubles. As Ministry of the Interior noted, corruption has been steadily increasing. The average size of bribes in 2010 was 60 thousand Rubles. Bribery provokes other problems. Thus, authorized operatives, arresting the suspected corrupt official, withdraw money, which was intended for the bribe as evidence. These funds are not returned to the owner until the conclusion of investigation, which can last for years. Money is frozen and businessman bears losses.

The Richest Man in the World lost 10 billion dollars

According to the Forbes magazine, the fortune of the richest men in the world, Mexican media mogul Carlos Slim has decreased by $ 10.7 billion during the last 8 months. At the end of February, Slim’s media empire was valued at $ 74 billion, which was an absolute world record for the wealth, which is concentrated in private hands. At the moment Slim is almost caught up with Microsoft founder Bill Gates, whose fortune has increased to $ 4 billion during the same period and in October was $ 60 billion. Slim incurred the greatest loss ($ 7.5 million) because of the stock price depreciation of its parent company America Movil, which price quotation had fallen to 17% from 14th of February at the New York Stock Exchange. In addition, Slim’s fortune was damaged by the slump of exchange of the Mexican peso, which had depreciated by almost 10% relative to the dollar during this period. Finally, the size of the Slim’s fortune was influenced by the decision of the Federal Telecommunications Commission. According to this decision tariff charged by companies for calls from other operators is reduced from 0.95 to 0.35 pesos.

Midland Consult