Monday, January 2, 2012

Financial Review 2011 Q4: EU Break-up vs Stronger Integration?

The below article is the final extension to our quarterly reviews: Financial Review 2011 Q3: Spreading Crisis, Financial Review 2011 Q2: Crisis Recurred as well as Financial Review 2011 Q1: Rising Inflation Concerns. The following records the key events in financial and business news, in table form, for the 2011 fourth quarter (Q4: October to December):

Oct. 2:Greece announced to miss its fiscal deficit budget targets set by the EU (European Union) and IMF (International Monetary Fund) this year and the next on worse-than-expected recession, but EU still said to accept this fiscal deficit slip with the difference to be covered later in 2012-combined target.
Oct. 3:Euro receded as Euro-zone further deferred its decision on paying the 6th loan installment of Greece bailout fund (EUR 8 billion). EU then once again decided to put this batch of bailout fund on hold until after 26th this month.
Oct. 5:Steve Jobs, the co-founder of Apple and also the creator of the innovative iPods, iPads and iPhones, passed away at the age of 56 (1955 - 2011).
Oct. 6:(1) BoE (Bank of England) Monetary Policy Committee (MPC) unexpectedly increased size of quantitative easing by 37.5% from GBP 200 billion to GBP 275 billion. Under this so-called QE2 for U.K., BoE would resume asset purchase program for 4 months starting from October 10, 2011 due to the recent tensions in global economy. You may compare it with QE2 for U.S.: Inflation Warning.
(2) ECB (European Central Bank) resumed its unlimited 12 and 13 months fixed interest-rate tender funding to Euro-area banks through two longer-term refinancing operations (LTROs) before end-2011, and also restarted buying debts (worth EUR 40 billion) from November 2011 to end-October 2012 through the covered-bond (debts typically backed by mortgages) purchase programme (CBPP2).
Oct. 7:Fitch downgraded sovereign-debt credit ratings of Spain (from AA+ to AA-) and Italy (from AA- to A+).
Oct. 10:Franco-Belgian DEXIA became the first Euro-zone bank needed to be rescued and dismantled throughout the current European debt crisis. In the next 10 years, DEXIA would receive state guarantees up to EUR 90 billion (60.5% from Belgium, 36.5% from France and the remaining 3% from Luxembourg).
Oct. 11:(1) U.S. Senate passed a 'Currency Exchange Rate Oversight Reform Bill' to threaten China politically for more RMB appreciation. Read also: 2011 RMB Forex target.
(2) U.S. Senate rejected the American Job Creation Act proposed by Obama on September 8, 2011.
Oct. 12:(1) China State Council studied and identified 9 new fiscal and financial measures to support SMEs. Read more: New Measures to support SMEs
(2) Hong Kong intervened the housing market by re-launching Home Ownership Scheme (HOS). Read more: HK to re-launch Home Ownership Scheme.
Oct. 13:(1) Six emerging markets (BRICS - Brazil, Russia , India, China Hong Kong and South Africa) planned to cross-list their equity indexes derivatives products by June 2012 on their Stock exchanges Alliance including Brazil's BM&FBovespa, Russia's MICEX and RTS exchanges, India's National Stock Exchange of India and BSE Ltd, and China's Hong Kong Exchanges and Clearing Ltd (HKEx). For more HKEx actions, please read: Hong Kong as Leading Chinese Financial Centre.
(2) Slovakia became the last Eurozone country to approve the expansion of EFSF (European Financial Stability Facility) program.
(3) Standard and Poor's (S&Ps) downgraded Spain sovereign-debt credit rating to AA- from AA.
Oct. 14:China Central Bank (PBoC) and Ministry of Commerce (MOC) launched cross-border RMB FDI (Foreign Direct Investment) pilot program. Read also: New Milestone For RMB Internationalization.
Oct. 17:Chinese Gold and Silver Exchange (CGSE) in Hong Kong launched Renminbi Kilobar Gold, the first-ever offshore RMB-denominated spot gold product.
Oct. 18:(1) Moody's warned to downgrade France sovereign-debt credit rating in the coming months, as the financial strength of French government had weakened and became the weakest country that still possess the top AAA rating.
(2) Moody's downgraded Spain sovereign-debt credit rating to A1 from Aa2.
(3) EU announced to ban naked credit default swap (CDS) trading for European sovereign debts.
(4) Dow Jones launched two new regional indexes, Asia Dow and Europe Dow, based on the similar methodology being used by the DJIA (Dow Jones Industrial Average) in the U.S.
(5) Baosteel, the China stated-owned steel giant, became the first domestic non-financial company to issue offshore RMB-denominated bond in Hong Kong.
Oct. 19:China Ministry of Finance (MOF) announced a pilot program to technically allow 4 local governments (Shanghai, Shenzhen, Zhejiang and Guangdong) to issue bonds directly on their own, the first time in 17 years, with the initial bond issuance quota not exceeding RMB 22.9 billion in total. Read also: PRC Government Key Targets and Work Plan for 2011.
Oct. 20:Libya ex-leader Col. Muammar Gaddafi was killed near his birthplace of Sirte.
Oct. 21:(1) Japan national overall budget hit a record JPY 106.4 trillion for the current fiscal year after Japanese government passed an extra JPY 12.1 trillion budget plan for reconstruction of infrastructure damaged by the massive earthquake and tsunami in March and also for measures to cope with its strong currency
(2) Greece parliament passed a new round of austerity plan including an increase in property taxes and a cut in state-owned enterprises.
Oct. 24:Obama proposed to use administrative measures to assist U.S. underwater (negative-asset) homeowners to refinance their mortgage loans.
Oct. 25:(1) China premier Wen Jiabao signaled to 'fine-tune' economic policies, the first time since No Loose Monetary Policy starting December 2010.
(2) China Banking Regulatory Commission unveiled supplementary details of 'CBRC 10 Rules' issued in May to support SMEs. Source: CBRC 10 Rules (Part II). For more about CBRC policies, please read: Analyzing China Banking Regulatory Policies.
(3) EU finance ministers meeting further postponed to decide its 6th installment of Greece bailout fund.
Oct. 26:(1) Germany parliament approved leveraging European Financial Stability Facility (EFSF) fund, but disapproved ECB to continue buying bonds through the secondary market program (SMP) after the EFSF leveraging.
(2) Thailand flooding, the worst in 50 years, badly hit the capital city of Bangkok.
Oct. 27:(1) EU Summit concluded to (a) increase default rate of Greece debts to 50% from 21% voluntarily by private sector. (b) increase size of European Financial Stability Facility (EFSF) fund to EUR 1 trillion through leveraging. (c) increase core tier 1 capital ratio of European banks to 9% by June 2012.
(2) China State Council approved a pilot program in Shanghai to replace business tax with asset value-added tax (VAT), in order to reduce tax burdens for selected transport and modern service sectors starting from January 1, 2012. For more Shanghai recent actions, please read: Shanghai Strategic Plan Until 2020.
(3) BoJ (Bank of Japan) announced to further increase its asset purchase fund to JPY 20 trillion and the size of its quantitative easing package to JPY 55 trillion.
Oct. 31:(1) Greece prime minister George Papandreou suddenly announced to call a public referendum on whether the country should accept the latest EU bailout plan.
(2) MF Global went bankrupt for its huge losses in European sovereign debts, the largest U.S. financial institution to collapse since Lehman Brothers in 2008.
(3) BoJ (Bank of Japan) directly intervened the forex market at 75.3 (USD/JPY) level by selling JPY 10 trillion, the second time in recent 3 months and the largest intervention amount ever, to counter rapid Yen appreciation. This time BoJ once again accepted no re-absorption of the extra monetary liquidity injected into the financial system.
Nov. 1:(1) China Ministry of Finance (MOF) started lifting business tax and value-added tax (VAT) thresholds for SMEs (small-and-medium-sized enterprises) significantly to RMB 5K - 20K (was RMB 1K - 5K). For more measures to help SMEs, please read: Credit Crisis for SMEs in China.
(2) Reserve Bank of Australia (RBA) turned to cut interest rate by 0.25%, the first time since April 2009.
Nov. 2:(1) Germany Markit's PMI (Purchasing Managers Index) sank to 49.1 in October, its first manufacturing sector contraction since September 2009. Read more: Global PMI Warning: Which Country Can Save the World.
(2) Italy became the first G8 country accepting intervention by IMF to monitor its implementation of fiscal and economic reforms.
(3) Greece prime minister George Papandreou cancelled his earlier proposal of public referendum amid strong opposition.
Nov. 3:European Central Bank (ECB) new president Mario Draghi announced at his first policy meeting to cut benchmark interest rate by 0.25%, in order to support the deteriorated Eurozone economy.
Nov. 4:(1) Financial Stability Council (FSC) listed 29 systemically-important international financial institutions including HSBC, JP Morgan Chase and Citigroup as the top too-big-to-fail banks, and hence requiring to raise extra core capital adequacy ratio up to 2.5%.
(2) CME Group cut open contract margin requirements by 25%-40% to maintenance levels for MF Global customers until November 17, 2011.
Nov. 9:(1) Italy 10-year bond yield hit a euro-era record high of 7.5%, exceeding the alarming level of 7%.
(2) Local government of Jefferson county in Alabama went bankrupt, the largest U.S. municipal bankruptcy ever.
Nov. 10:Russia completed a long-lasting accession process for an entry as a new member in WTO (World Trade Organization) after 18 years of negotiations.
Nov. 11:Italy parliament passed a new package of austerity measures including pension reform.
Nov. 15:Shanghai Municipality became the first Chinese city to issue local government bonds on its own. For more about Shanghai debts, please read: Potential Risks of China LGFV debts.
Nov. 16:Moody's downgraded credit ratings of 12 Germany public-sector banks including Landesbanken, DekaBank and HSH Nordbank AG etc.
Nov. 21:(1) U.S. Democrats and Republics supercommittee in Congress failed to agree on an additional USD$1.5 trillion fiscal deficit cut, and hence will automatically cut only USD$1.2 trillion in 10 years as proposed on July 31, 2011.
(2) Moody's warned to downgrade France sovereign-debt credit rating outlook from stable to negative.
(3) Hungary became another new eurozone country to seek EU-IMF bailout and financial aid.
Nov. 22:(1) People's Bank of China (PBoC) returned bank reserve requirement of 5 rural credit cooperatives in Zhejiang province back to a standardized level by cutting their RRR (reserve requirement ratio) by 0.5%. For more measures to help 'Three Rural', please read: Top Ten Focus Areas for PRC Government in 2011.
(2) Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE) agreed to merge, with Tokyo's purchase of Osaka, as the 3rd biggest securities exchange in the world behind the NYSE Euronext and Nasdaq OMX.
(3) South Korea parliament passed a controversial U.S.-Korea Free Trade Agreement (FTA).
Nov. 23:(1) HSBC (Hong Kong and Shanghai Banking Corporation) announced that its preliminary China PMI (Purchasing Managers Index) hit a 32-month low of 48. You may also interested in: Fears of Chinese Economic Hard Landing.
(2) Australia lower-house approved to impose a 30% 'Minerals Resource Rent Tax' on iron ore and coal mining sectors starting from July 1, 2012.
Nov. 24:(1) Fitch downgraded sovereign-debt credit rating of Portugal to junk status.
(2) Moody's downgraded sovereign-debt credit rating of Hungary to junk status.
(3) S&P's downgraded sovereign-debt credit rating of Egypt from BB- to B+ for the ongoing political unrest and turmoil.
Nov. 25:S&P's downgraded Belgium sovereign-debt credit rating to AA from AA+.
Nov. 28:Fitch downgraded the U.S. sovereign-debt credit rating outlook from stable to negative after U.S. Democrats and Republics supercommittee in Congress failed to agree on an additional USD$1.5 trillion fiscal deficit cut in the next 10 years.
Nov. 29:(1) EU finance ministers finally decided to offer Greece its 6th installment (worth EUR 8 billion) of bailout fund.
(2) EU finance ministers amended and relaxed the EFSF rules to allow buying debts directly in primary market, to offer 20-30% guarantee through fixed credit protection to new euro-zone sovereign debts, and to allow leveraging its firepower of up to EUR 250 billion.
(3) Standard & Poor's (S&P's) downgraded credit ratings of 15 global banks and upgraded credit ratings of 2 Chinese stated-owned banks (i.e.: Bank of China and China Construction Bank) after applying its new rating methodology that favors stronger governmental support.
(4) American Airline, the 3rd largest air carrier in the U.S., went bankrupt.
(5) Hong Kong Telecom Trust became the first-ever business trust listed in China. Read more: Stock Analysis of HKT Trust.
(6) Fitch upgraded sovereign-debt credit rating of Australia from AA+ to the highest possible Triple-A (AAA).
Nov. 30:(1) PBoC cut RRR (reserve requirement ratio), the first time since December 2008, by 0.5% to 21%, equivalent to unfreezing approximately RMB 400 billion into the market. Read also: Why PBoC Prefers Using Reserve Requirement Ratio.
(2) Six central banks (U.S., Europe, Swiss, Canada, U.K., Japan) jointly announced a coordinated intervention to provide USD liquidity through currency swap operations at a reduced overnight interest rate of 0.5% (was 1%) offered by the U.S. Federal Reserve until February 1, 2013.
(3) Thailand central bank cut interest rate by 0.25% to 3.25% in order to restore market confidence after the recent severe flooding.
Dec. 1:China official PMI (Purchasing Managers Index) fell to 49 in November, the first contraction of PRC manufacturing activities since March 2009.
Dec. 5:(1) S&P's put 15 euro-zone countries, including Germany and France, on credit rating watch negative.
(2) CME Group announced to accept offshore RMB (i.e.: CNH in Hong Kong) as clearing collateral through HSBC for all futures trading contracts starting from January 2012.
(3) Italy parliament passed a new plan for fiscal austerity (worth EUR 20 billion) and economic growth stimulus (worth EUR 10 billion).
Dec. 6:S&P's put the currently AAA-rated EFSF (European Financial Stability Facility) on credit rating watch negative due to the potential downgrade of all euro-zone countries including Germany and France.
Dec. 7:S&P's put the EU (European Union) on credit rating watch negative.
Dec. 8:ECB cut benchmark interest rate by 0.25% to a historical low level of 1%.
Dec. 9:(1) EU Summit: (a) U.K. refused to join the new treaty for deeper EU fiscal union. (b) The EU permanent bailout fund, ESM (European Stability Mechanism), will be operated a year earlier by July 2012 (thus in parallel with EFSF), but ESM will not be given a bank license and its capacity will be capped at EUR 500 billion. (c) Euro-zone countries agreed to provide totally EUR 150 billion loans to IMF as its firepower to deal with the European sovereign-debt crisis.
(2) Moody's cut credit ratings of top 3 French banks (i..e.: BNP Paribas, Credit Agricole and Societe Generale).
Dec. 13:Hong Kong successfully signed CEPA (Closer Economic Partnership Arrangement) Supplement VIII with the mainland central government (Source: CEPA is the Future of Hong Kong).
Dec. 14:China Central Economic Work Conference unveiled the direction of 2012 China macroeconomic policies. Read more: Five Main Tasks of China Central Economic Work Conference.
Dec. 16:(1) Moody's downgraded Belgium sovereign-debt credit rating to Aa1 from Aa3.
(2) China formally published regulating rules for RQFII (RMB Qualified Foreign Institutional Investors) pilot program (with initial quota of RMB 20 billion) to allow offshore Hong Kong companies to invest 80% of the quota (RMB 16 billion) in the mainland fixed-income markets and the remaining 20% (RMB 4 billion) in the mainland stock markets. Read also: New Programs Benefiting Both Hong Kong and China.
Dec. 21:ECB lent a record amount of EUR 489.1 billion to European banks at a low interest rate of 1% for 3 years through LTRO (Longer-term Refinancing Operations), attempting to pump liquidity to encourage banks to buy Eurozone sovereign government bonds by the so-called 'Sarkozy carry-trade'.
Dec. 25:Japan announced to start buying China RMB sovereign government bonds through foreign exchange reserves to counter USD depreciation risk.
Dec. 30:Spain announced to miss its fiscal deficit budget target this year, and hence decided a deficit cut plan worth EUR 15 billion by reducing government spending as well as raising income-tax and property-tax.

In 2011 Q4, you may easily note that most of the important financial news were relating to European sovereign-debt crisis and there already had signs that EU (European Union) might break-up after the EU Summit on December 9, 2011. Although the EU Summit eventually came up with a new treaty for deeper EU fiscal union, U.K. already refused to join this new treaty. Going forward, it is possible that a few more EU countries, including U.K. of course, will not be able to join this new treaty in 2012 due to domestic opposition. Such an EU partial break-up, however, will not be the end of the whole story. The remaining EU countries will still join together for stronger fiscal integration and we sincerely hope, at the end of the day, it will stabilize the Eurozone and even give birth to a stronger Euro!

UPDATE - Next article: Financial Markets 2011 Review: Insights for 2012


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