The lull in Italy after Conte’s appointment was short-lived. The 10-year rate is up sharply while the German rate retreats. The spread is increasing. The Salvona hypothesis for finance minister does not satisfy because of the systemic risk associated to him
Co-authored with Zouhoure Bousbih
The dollar has been gaining ground since mid-April, with investor perception that the Fed would take stronger and swifter action than expected, and this raises a number of difficulties for emerging markets.
The greenback’s surge against all other currencies is a game changer for emerging countries for at least three reasons: expectations of a swift rate hike from the Fed generally trigger capital outflows from emerging countries, which is what we are currently witnessing; the situation also hampers economic prospects due to insufficient liquidity and the ensuing rise in interest rates; these factors combine to further push the currency down and thereby increase the cost of paying off dollar-denominated debt (read my posts here and here to find out more about this deterioration).
This situation is particularly worrying when the current account balance (which reflects a country’s external relationships) displays a deficit, as the flipside to this is high external debt and a situation that is set to deteriorate even faster than elsewhere. This raises the question of financing the current account at a time when the country is suffering capital outflows, and the country in question generally has to up its interest rates considerably, pushing its economy into a downward spiral and ultimately locking it into a crisis.
We have witnessed this situation recently in Argentina, Turkey, Indonesia, South Africa and some other countries, and there is nothing unusual about it, but it is very a costly experience for countries hit by this adjustment.
At this juncture, I feel it is interesting to identify the mechanisms involved in this type of crisis by taking the example of Turkey. The country is currently undergoing this type of adjustment in a very dramatic way and the situation is made even more complex by the prospect of early presidential elections on June 24.
The Turkish crisis Continue reading
Giuseppe Conte’s appointment is the first reduction of uncertainty in Italy. The 10-year rate falls back this morning and the spread with Germany is narrowing. But this is only a first step. Now there is the formation of the government and it will be another matter.
Giuseppe Conte has been appointed Prime Minister by Italian President Sergio Mattarella. The next step is the formation of the government that will reflect the balance of strength between the 5-star Movement and the League.
1 – Conte is the lowest common denominator between the two parties of the coalition. He will not have much room for maneuver. Continue reading
The Italian question remains a concern for Europe, even after the nomination of a prime minister (to be confirmed by the Italian president), who is something of a lowest common denominator between the Five Star Movement and the League. Investors are breathing a sigh of relief, with the yield spread with Germany widening at a comparable pace than last week, as shown in the chart. However, many questions remain.
A number of points are worth raising:
1 – Italian malaise
After just one year it is still too soon to make a full assessment of the Macron presidency, so the question we must answer is whether the measures taken by his government over this first year are the rights one to tackle the changes we have witnessed worldwide.
In part 1 of this series, I outlined the need to make growth more self-sustaining, even in a context of ongoing globalization. I described the need to raise the innovation aspect in our investment, and the necessity of making the labor market more adaptable to better address change. Recent research by Gilbert Cette et al uses a broad international comparison to suggest that high employment protection legislation in France leads to capital-to-labor substitution. This would explain high investment levels in France. However, the authors note that the innovation component of this investment is inadequate and does not sufficiently bolster productivity. Another conclusion of the report is that a more flexible labor market means higher quality capital.
And this equation lies at the very core of the supply question in France: capital needs to be more efficient, while the labor market needs to be more flexible in its ability to adapt. I noted in part 1 that steps taken to support public investment along with government labor market decrees help ease these restrictions and promote an adjustment in supply.
But we have seen two other watersheds in the world economy that the French economy must now address if it is to further integrate i.e. the location of production and the location of innovation.
The second shift is the geographical location of production. Continue reading
The average interest rate on Credit cards was at 15.32% in March. It is its highest level in 18 years. What will happen with higher Fed’s rate and a restrictive monetary policy? It could be damaging for domestic demand