Lisbon Amendments - The FrancoGerman Plan

Dear Reader,

This week I will report about the biggest economic debate in past 3 days –

The EU Summit in Brussels.

The assembly in the capital of Belgium fuelled a new debate about amendments in the Lisbon treaty, which is effective for not even one year. Especially two countries are pushing the plan to rewrite parts of the treaty.  The demand to tighten the EU rules on national debt is mainly coming from Europe’s most influential countries Germany and France. Both Chancellor Merkel and President Sarkozy are urging other European leaders to accept the need for treaty changes, as the unsustainable debts in the euro zone pose a big threat.

(Source: FAZ)

The idea is to establish an automatic mechanism that would prevent any repetition of this year’s debt crisis in Greece.

The Change would bring sanctions for countries exceeding the limit allowed from the EU’s Stability and Growth Pact (SPG), which is – 60% of the gross domestic product (GDP). Therefore the sanctions in these countries would be tightened increasingly if the concerned ones fail to solve debt problems within months. A serious violation of the EU monetary rules would trigger suspension of the voting rights.

The Greece incident destabilized confidence in the euro currency also threatening the economic stability of other countries in the euro zone. The seriousness of this problem mainly triggered the debate about the amendments.

(Source: Toonpool)

During the crisis the European Union created an emergency fund of £386bn called European Financial Stability Facility (EFSF) to provide protection any member countries in the zone vulnerable to Greek type liquidity issues.

As the ESFS agreement only runs until 2013, the Franco – German plan is to introduce a permanent protection shield to avoid any “Greek-style surprises”, as the BBC Europe Editor of Europe Gavin Hewitt also stated. 

The European Central Bank chief Jean Claude Trichet warned the heads of Europe’s governments “A new rescue system that is designed for future Greece-style bail-outs could inadvertently drive up short-term borrowing costs, imperiling struggling euro zone debtor nations”.

(Source: Focus News)

In my opinion, besides of the warning of Trichet, there are other important aspects to mention. The debate for change is not popular under all the European countries.  Poland’s President Kaczynski for example stated that the idea of suspending a country's voting rights at EU ministerial meetings is "politically dangerous”.

In addition the European Union spend 8 long years to negotiate the Lisbon Treaty. Numerous obstacles and two refendums from the Republic of Ireland have complicated the process. To change or amend the treaty after not even one year and getting the approval of all 27 member states, I think will not be an easy task.  One statement will underline my argument as Belgian foreign minister Steven Vanackere said, "nobody around the table wants to open up the treaty and change it fundamentally".

I think the main reason why Sarkozy and Merkel are pushing that hard to change the treaty and wanting banks to play a bigger role in any future bail-out is that the bill for the Greece crisis proved to be very unpopular at the home countries as the taxpayers ware main participants for the aid packages. 

E.V.

Sources: 

1. Focus 

http://www.focus.de/politik/schlagzeilen/nid_56131.html

2. FT

http://www.ft.com/cms/s/0/cba1de4a-e37c-11df-8ad3-00144feabdc0.html

3. Die Welt

http://www.welt.de/politik/ausland/article10606338/EU-Gipfel-ebnet-Weg-fuer-Vertragsaenderung.html

China – Monopoly of Rare Earths

Dear Reader,

This week I read something, that I personally did not know. It is about the country, which is in the centre  of discussion almost every week – China.

We all know the growing importance and power of this country, but did you all know that this country has the monopoly of rare earths with exotic names like Dysprosium, Yttrium, Terbium and Neodym, which are essential commodities for the high-technology industries to produce Smartphone’s like our precious Blackberry’s and IPhone’s, hard drives, electric vehicles, catalysts and are also used in laser technology or wind turbines?

(Source: USGS)

To be more specific, China controls 97% of the worlds export of rare earths.

The country is cutting back the exports for this rare material for about 40% since the beginning of 2010. According to the government further restrictions are planned for 2011. Since the cutback prices for this precious material have risen tremendously by 2000%. This could be reflected on rising prices for high-tech products in the long term.

(Source: resourceinvestor)

China always knows how to use this kind of advantages for its own good….

…BUT the European Union, United States and Japan, who are mostly affected by this, are considering to interfere. Regarding to the WTO, China is breaking an important rule for global free trade - Setting export quotas are prohibited.

Especially Germany is really concerned about the situation, as the industry heavily relies on these rare earths.

In my opinion, China is seeking to use its monopoly position for political leverage. For example exports set out broadly to Japan in September, as the dispute between Beijing and Tokyo over the collision of a Chinese fishing boat with a ship of the Japanese Coast Guard in a disputed sea area flamed up. Germany accuses the country of using its dominance deliberately. “They are trying to keep the valuable material internally,” says Minister of Trade and Commerce Rainer Brüderle.

Most industries will be out of the rare earths very soon; therefore it would be of high importance that the WTO would intervene to prevent booming prices and dangerous conflicts between the most important industrial countries in the world.

(Source: WTO)

China doesn’t see any contradiction to the WTO rules primarily justified on environmentally protection and a consolidation of its raw material industry.

However, I think that this story will be coming to an end very soon, as China cannot afford this kind of conflict.  The government is already denying any definite plans to cut its export quota for the next year.

There is no such thing,” Jiang Fan, deputy director general of the department of foreign trade at the Ministry of Commerce, told Bloomberg News. “I haven’t heard any policy that China will reduce rare earth exports by 30 percent next year.”

E.V.

Sources:

1. China Digital Times

http://chinadigitaltimes.net/2010/10/china-reins-in-rare-earth-exports/

2. FAZ

http://www.faz.net/s/RubD16E1F55D21144C4AE3F9DDF52B6E1D9/Doc~E12C77B6A04F242EA8EE1D1C4693C1DC8~ATpl~Ecommon~Scontent.html

3. Japan Times
http://search.japantimes.co.jp/cgi-bin/nb20101020a1.html

Liverpool Takeover Sealed!

Dear Reader,

To have a bit of a variety, this week I decided to report on a story from the sports world. To be more specific – Football.

As I was following the FC Liverpool sale on TV and we mentioned this story a week ago in class, I thought everyone would be interested about the result of the negotiations.

Last Friday the US company New England Sports Ventures, owner of the Boston Red Sox, has completed its takeover of FC Liverpool.

After some complications with the former owners George Gillet and Tom Hicks, who had placed a temporary restraining order blocking the sale, finally gave in.

The lucky buyer of the £300m sale, NESV head John W Henry said: “I ma proud and humbled, I cant tell you how happy I am”

(Source: Metro)

Although the sale is over the table; Gillet and Hicks may now take legal action in England to secure damages after dropping a claim lodged in Texas. The American pair was claiming £1bn in Dallas, saying that the deal was “illegal and an “extraordinary swindle” as the club did not take the highest bid on the club. There are rumours that higher bids were rejected as the Club had previously promised an agreement with Henry.

(Source: SportsNews)

Tom Melsheimer attorney from law firm Fish & Richardson stated: We believe that once the English court finally has a chance to hear all the facts, a very different picture will be painted.

However, there was an air of relief as the news of NEVS completed the purchase emerged in the press. This move will now allow major creditors like the Royal Bank of Scotland to be paid the £237m it is owed.

A club statement revealed that this transaction will value the club at £300m and eliminates all of the acquisition debt placed on FCL by the former owners. Consequently the clubs debt servicing obligations will be reduced from £25m-£30m a year to £2m-£3m.

(Source: Dallas-Observer)

As a result Liverpool’s holding company is unlikely new to be put into administration, which would mean a nine point penalty for the football club in the Premier League, placing them in a relegation battle.

Henry, who was spotted inside the law offices of Slaughter and May in central London added: “We are going to do a lot of listening, we have a lot to learn, and we will walk this path together. “


In my opinion, the fuss about the change of the owner influenced the team tremendously. Now that this issue is finally sealed, the club can concentrate on football again. Having the worst start in the history of, it is placed 19th after 8 matches. Looking from an economic perspective, should this sportive dilemma continue the club will forfeit a huge financial loss, by not participating in any international tournament like the Champions League or European Cup. Worst case scenario would be, if the previous american double manage to put the club into administration, meaning a nine point penalty, creating the possibility of being relegated to the second league. Let's hope that this will not happen. 

E.V.

Sources:

1. BBC News

http://news.bbc.co.uk/sport1/hi/football/teams/l/liverpool/9094283.stm

2. The Guardian

http://www.guardian.co.uk/football/2010/oct/15/liverpool-sale-nesv-takeover-john-henry

3. Boston.com

http://www.boston.com/sports/baseball/redsox/articles/2010/10/16/henry_completes_liverpool_fc_purchase/

Deutsche Bank - Postbank Takeover. Culture Clash?

Dear Reader,

This week, I will build on my first blog entry about the Deutsche Bank – Postbank merger. As this week’s discussed topic was about Mergers & Acquisitions, I think this story will give one of the most current examples of two big banks coming to a final decision, after negotiating for several months.

IT IS OFFICIAL - Deutsche Bank bought Postbank, by acquiring just under 30 percent for around €2.5 billion and plans to increase that stake to a majority at a later date. The biggest bank in Germany is taking over Germany’s number one in the mass retail banking market.

(Source: bild.de)

However, some experts regarding to big differences in the company’s cultures criticized the acquisition. “Two different worlds are colliding“ according to Spiegel a business magazine in Germany. "Postbank has a lot of customers who want a cheap current account and nothing else.” “Deutsche Bank's customers tend to be wealthy private individuals with high incomes (Expert Peter of Hohenheim University).”

(Source: MyBridge)

“I don't think Postbank will disappear as a brand, ”said Jürgen Kaeuffer of Semion, a company that measures the most important brands in Germany.

Banking expert Burghof agrees that running the two brands side by side would be the best strategy. “It would make sense if the manager of a small business said 'I'll take Deutsche Bank for my business but my wife and son will use Postbank products,” said Burghof.

Mass versus Elite costumers, Global Player versus Domestic Banker, Friendly and Trustworthy versus Gambler and Profit Maximizer – if you ask me, taking these differences into account it will be really difficult to see these to banks under one roof.

I myself support the idea of keeping these two banks separately, as it could have a adverse affect on the costumers to run both under one name. Aversion to the stock market and Ackermann not being exactly a man of the people could be some aspects to loose customers. Another point is that in the past, Deutsche Bank already failed to divide up its customers among different units within the group with a project called Deutsche Bank 24.

On the other hand Deutsche Bank had to act after it could not come to an agreement with the Dresdner Bank and lost the deal to the Commerzbank, and also lost out its bid for the Citibank, which was acquired by a French bank Credit Mutuel.

Being under pressure Postbank was the last suitable option to keep up with other competitors in the global market.

E.V.

 Sources:

1. Manager Magazin

http://www.manager-magazin.de/finanzen/artikel/0,2828,717252-2,00.html

2. Die Welt

http://www.welt.de/wirtschaft/article3934542/Der-seltsame-Postbank-Plan-der-Deutschen-Bank.html

The May 6 Flash Crash

Dear Reader,

This week I discovered an attention-grabbing article while browsing through the news on Sunday. Why attention-grabbing?, because the headline published on the FT webpage, “Flash Crash was sparkled by single order”, directly caught my eye. I like to read articles with headlines falling out of the line. When I read crash I automatically associate it with the Financial Crisis, but this one is about the United States stock market.

(Dow Jones Traders at the 6th of May)

The story is about a mysterious happening on the stock market on the 6^th of May, where the Dow Jones had the biggest one-day point decline of 998.5 points in the history of this index, as you can also see on the chart below. 

(Source: http://kelloggfinance.files.wordpress.com/2010/05/chart_dow_dip2-top1.gif?w=475&h=246)

300 points of the drop were related to the debt crisis in Greece, but the other almost 700 points were inexplicable for everyone in the financial world. The index lost over 600 points in five minutes at 2.47 pm. on that day and regained most of the drop at 3.07 pm, which means ten minutes after.


I found an interesting video about the mystery of the huge drop, which is worth looking at. 
http://www.youtube.com/watch?v=Ne4cD9UYoo4&feature=related

After five rejected and disproved theories for a possible explanation and five long months, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), published a joint report on the 1^st of October, with the solution for the cause that set of a sequence of events leading to the unusual happening on the 6^th of May. The report found that the cause was a single sale of $4.1 billion in 75.000 E-Mini contracts (electronic stock market future contract) in twenty minutes, by a mutual fund, identified as Waddell & Reed Financial, in an aggressive attempt to hedge its investment position. Due to the debt crisis in Europe the market have been very nervous already, therefore the transaction has triggered a huge sell-off, according to the Final Report.

In my opinion, the vulnerability of the equity market, dominated by the e-traders is the main cause for this type of domino effect. The regulators were not able to explain this type of irregularity for five months, also showing how complex the stock market system is, even for the Commissions supervising these markets.

This so-called ‘Flash Crash’ should fuel a debate on whether a greater regulation on such high speed trading is needed to protect the market from such incidents.

Quoting the SEC and CFTC Chairman’s joint statement “We now must consider what other investor-focused measures are needed to ensure that our markets are fair, efficient and resilient, now and for years to come”, I think that this is a rather nicely formulated proclamation. At the end of the day one of the biggest US stock market indices was hit massively by only one mutual fund, which in my opinion is something to be worried about.

E.V.

Sources:


1. Die Presse


http://diepresse.com/home/wirtschaft/economist/599271/Raetsel-um-USBoersencrash-im-Mai-ist-geloest?_vl_backlink=/home/wirtschaft/economist/index.do



2. FT

http://www.ft.com/cms/s/0/8ee1a816-cd81-11df-9c82-00144feab49a.html

3. FAZ


http://www.faz.net/s/RubF3F7C1F630AE4F8D8326AC2A80BDBBDE/Doc~E68F762A5B7E8470592912B290CE6426A~ATpl~Ecommon~Sspezial.html

The Worlds largest stock sales. Ever!

Dear Reader,

This week’s entry will be analyzing only one article that I found really interesting to share. As I am taking Spanish, as my fourth language in my study program and the current topic discussed is South America, I found this article coincidental, while searching for information about Brazil.

Brazil is the largest national economy in Latin America, the world's eighth largest economy at market exchange rates and the ninth largest in purchasing power parity (PPP), according to the International Monetary Fund and the World Bank.

I think most people are not aware of these facts that Brazil is listed in the top 10 countries for two important economic rankings in the world.

(Source: Euromonitor)

Coming to the story, Brazils state owned oil company Petrobras raised $70 billion in the worlds largest share sale on Friday. Petrobras aim is to invest $224 billion over the next five years to boost their production by 5.38 million barrels a day. Therefore, investors bet on its plans to double output and takeovers like rivals as Chevron Corporation within a decade (For additional info please refer to video - http://www.youtube.com/watch?v=dyO9hJIDuO4&feature=channel) 

After the sale Petrobas became the fourth-biggest company in the world behind the competitors Exxon Mobile Corp, Apple Inc. PetroChina Co. (excluding Apple).

In my opinion the aggressive step of starting investment plans in this category will challenge other global majors in this field as their reserves are being depleted soon, as also stated by Ron Holt, CEO of Hansberger Global Investors.

(Source: Petrobras)

Looking at the potential capital expenditures of $224 billion over the next decades also leans on the discovery of Tupi (near Rio De Janeiro) and the presalt region nearby Libra, which may each contain 8 billion barrels of oil.

(Source: http://www.petroleum-economist.com/images/46/25635/brazil1.gif)

According to the EIA (International Energy Outlook), Brazil will add the highest amount of oil production of any other country outside the OPEC over the next 25 years.

Having outlined some details and the background of the story, I would like to say that I personally found it very appealing to read this article, because it is getting more and more important to be aware of the opportunities that companies of emerging markets can create. Above all, as oil will get rare in the future it seems that there will be a shift in production where companies like Petrobas will get an important role. As the industrial countries are depleting their own resources, they will be more dependent on these companies as it is already happening nowadays, when looking at companies from China (PetroChina) and Russia (Gazprom). 

Another point that I liked about this article was the strategic approach of the company. Raising awareness through a share sale in a category never seen before, getting in the headlines of the media thereby finding potential investors to help realize the big investments in the future – smart moves! 

E.V. 

Sources:

1. WSJ

http://online.wsj.com/article/SB10001424052748704062804575510283210552048.html

2. 247 Wallstreet

http://247wallst.com/2010/09/25/time-for-brazil-two-takes-two-solid-bets-alternatives-pbr-ewz-bzf-brf/S


3. Euromonitor 


http://blog.euromonitor.com/2010/07/special-report-top-10-largest-economies-in-2020.html