China 2017: Snapshot

China 2017: Snapshot

China is facing some structural problems in 2017, Said Medley Global Advisor (MGA), a research institute of Financial Times.

The first one is whether China’s economy can achieve its re-balance of reducing reliance on investment and increasing consumption in 2017. As the average increasing rate of 6.7% in 2016 is exactly the same as its target (at least according to official propaganda), MGA estimated, household consumption accounts for 1 point percentage more than last year, achieving 39% of the domestic nominal GDP. Even though the percentage is far less than advanced economy, it demonstrates China’s stable development since 2008’s financial crisis.

China Gdp growth

Unfortunately, China is not likely to sustain its increase of household consumption in 2017, as the household income’s increasing rate slows down from 16% in 2011 to 8%, while the dramatically climbing price of house suppresses people’s expenses.

As for the next year, The International Monetary Fund upgraded its growth forecast for China’s economy in 2017 to 6.5 percent, 0.3 percentage points higher than their October forecast, on the back of expectations for continued government stimulus.

Meanwhile, the debt market in china should be highlighted, MGA emphasized, as the ratio of outstanding obligation to GDP is approaching 265%, China’s debt market is always expanding, making the asset riskier, but it’s still quite possible to issue a large scale of debt in 2017. Chinese government set the target to issue from 11 trillion to 12 trillion RMB debt for local government (1.6 trillion to 1.7 trillion dollars)—much higher than 6 trillion in 2016—as to finish the plan of exchange local government’s debt that started in 2014.

In 2017, default of enterprises and bankruptcy are more likely to happen, especially considering Beijing is now leading reform of cutting overcapacity in some industry.


China’s foreign exchange reserves fell from $4tn to $3tn in the past three years despite a persistent trade surplus. The first month of 2017 found China’s foreign exchange reserves fall below $3tn for the first time in the past five years despite Chinese government’s tighter controls on capital outflows. In February, China’s central bank managed to raise the reserves to $3.01tn. This first raise after an 8-month declines in a row indicates Chinese government’s resolution in setting a safety line for its foreign reserves, although there is no consensus on the bottom line number yet among experts familiar with the topic.

Trading Economics forecasts China’s foreign reserves to continue falling below $3tn for the next quarters of 2017. The publication expects the country’s foreign reserves to remain around $2.84tn by 2020.  In the meanwhile, the country’s central bank chief said in a press conference that such decline is a normal phenomenon because the nation does not want that much forex reserves. Despite the decline, China still holds the largest forex reserves in the world, much higher than the runner-up, the chief commented.

State Administration of Foreign Exchange(SAFE) said that China’s foreign reserves will gradually stabilize despite the uncertainties in the international financial market. With China’s growing economic momentum, there will eventually be less control on capital outflow.

Authors: Yiping Zhang and Zhengyi Hu


Spain Overview: Economic Analysis and M&A Market Trends

Spain Overview: Economic Analysis and M&A Market Trends

Overview of the Spanish Market
Spain has the fourteenth-largest economy by nominal GDP in the world, and it is also among the largest in the world by purchasing power parity. The Spanish economy is the fourth-largest in the European Union, and the fourth-largest in the Eurozone, based on nominal GDP statistics (GDP 2016: $1252 trillion). Following the financial crisis of 2007–08, the Spanish economy’s plunged into recession, entering a cycle of negative macroeconomic performance. Compared to the EU’s and US. average, the Spanish economy entered recession later (the economy was still growing by 2008), but stayed there for longer. The economic boom of the 2000s was reversed, leaving over a quarter of Spain’s workforce unemployed by 2012. In aggregate terms, the Spanish GDP contracted by almost 9% during the 2009-2013 period. The economic situation started improving by 2013-2014. The country managed to reverse the record trade deficit which had built up during the boom years attaining a trade surplus in 2013 after three decades of running a trade deficit. The surplus kept strengthening during 2014 and 2015. In 2015, the Spanish GDP grew by 3.2% (one of the highest among the EU economies in 2015). In 2014-2015 Spain was able to recover 85% of the GDP that went lost during recession (2009-2013). In all the quarters of 2016 was registered a strong GDP, with the country growing twice as fast as the eurozone average. According to the IMF forecast, Spain will recover in 2017 all the GDP growth lost during the economic crisis, exceeding for the first time in 2017 the output level that had been reached in 2008.

Economic Forecast: Steady GDP growth for the 4 next years.
Fiscal stimulus and the ease of monetary policy from the ECB has contributed significantly to the growth of Spanish economy in 2016. With a growth of 5.5% over 2015 Spain’s GDP is expected to keep growing at a slower but steady pace for the next 4 years with domestic demand leading the recovery.

Spain GDP

Labour market: An improving but still challenging environment
The recent reshaping of the labour market through a series of reforms actuated by the new government has contributed to improve Spain labour market conditions and to put it in a strong position to capture future growth. Anyway, with an unemployment rate still at about 19% Spain is the second worst economy of the Eurozone in terms of unemployment, with youth unemployment posing a particularly acute challenge for the future of the economy.

Spain Unemployment

Fiscal policy: “little room for future fiscal stimulus”
With a public debt around 100% of the GDP and a deficit slightly below 5% of the GDP Spanish authorities have little room for fiscal expansion. After two years of significant easing of fiscal policy Spain has to find out a way to stimulate growth by shifting the structure of taxations towards growth enhancing initiatives such as education and R&D that are still below levels of peer countries after having been reduced significantly during the crisis.

Political situation: “achieving stability following 1 year without a real government”
After a year without a government Spain has finally achieved a stable political situation. The measures adopted to tackle budgetary austerity and labour market performance appear to have paid off as the economy is expected to grow by 3%. With a government in place, Spain is well prepared for further growth in a European environment where access to cheap financing is available. Furthermore, M&A activity has increased significantly following legislative changes in 2015, which aimed at facilitating the capitalisation of debt and the acquisition of business units from insolvent companies.

Sources:  OECD outlook on Spain economy, Grant Thornton European M&A activity report

 Deals Volume in 2016
The Spanish economy has continued growing during 2016. In 2016, Spanish M&A transactions totalled a range between €88bn[1] and €111bn[2]. The total deal value in Europe reached an amount of €1.502 bn: the Spanish market represented 5,9% of the total deal value in Europe. The increase shown in 2016 was encouraged by factors like those presented in 2015: continued economic growth; low interest rates and increased market liquidity; negative inflation; foreign trade balance; and stable risk premium for the Spanish sovereign debt. According to the M&A Attractiveness Index drawn up by the M&A Research Centre at Cass Business School, Spain has climbed several positions in the ranking of the most attractive countries for M&A purposes.  Spain fell to 26th position in 2012, but is now ranked 16th. If we break in details the total amount of transactions made in 2016 per size and per Inbound and Outbound, we obtain these numbers[3]:

Mid-market transactions showed a 43.5% increase compared to 2015.  Large-sized and small-sized transactions showed a slight increase in value of 4.5% and 1.1% respectively. Inbound investments increased in number during 2016.  The number of foreign acquirers of Spanish companies increased by a remarkable 9.3% compared to 2015 and outbound investments increased by 25.4%.  The most active sector in terms of M&A deals was real estate which increased to 11.6% compared to 2015.  In general terms, the real estate market continues growing as big banks keep unloading assets and tax structures such as Spanish Reits (SOCIMIS) and collective investment vehicles remain appealing to domestic and foreign investors.

Spain Sector

The main M&A transaction that took place in 2016 in Spain was the merger of the Coca-Cola bottling companies for an amount of €20bn.  Coca-Cola Enterprises CCE.N combined with Coca-Cola Iberian Partners (CCIP) and the German bottling business of Coca-Cola to create a new company that is the world’s largest independent bottler of Coke drinks by net revenue. The transaction gave new company, Coca-Cola European Partners (CCEP)[4].

According to the data collected by Thomson Reuters, the top actors per value and numbers are[5]:

Spain M&A Actor

The two Spanish banks Santander and BBVA do not owe their position to any concrete operation. On the contrary: their situation has been created thanks to the sum of many transactions of medium size. “This year has been one marked by the lack of big transactions, but characterised by mid-sized deals”, indicates an executive of a financial institution. “Banks which have the capacity to reach this segment have been very active”, he adds[6].

This lack of big transactions is reflected also on the deal volume of big American banks as JP Morgan and Goldman Sachs. In 2015, the last one was first in this ranking made by Reuters and now it is eight losing 6% of market share. Others American banks have kept their position and in particular Citi is gaining position in this ranking.

Outlook – Trends
One of the biggest player KPMG expects the M&A market in Spain to perk up based on the favourable development of the Spanish economy[7]. According to them investors regained their faith in Spain and see it as a reliable market with an abundant amount of liquidity. In particular, the interest of investors is driven by market growth expectations, legal security, the global importance of Spanish companies and the new reforms that make the Spanish economy more competitive[8]. A study conducted by KPMG shows that investors are 7% more confident to realize M&A activity in 2017 compared to year before[9]. Furthermore, the M&A market capacity is expected to be growing by 14% compared to 2016. Concerning the importance of the sectors, KPMG foresees that most M&A activity will be in consumer goods, health and finance. Consequently, they also expect the number of IPOs to increase. A partner of Magnum Capital, a leading private equity enterprise in Spain, the Spanish M&A market didn’t use its full potential due to uncertainty of the effects of the Brexit and the political instability in Spain[10]. Therefore, his forecast for 2017 is very positive mainly based on the fact that many operations were stopped in 2016 and are expected to be closed in 2017. Baker McKenzie, the second biggest law firm worldwide and specialized in commercial law, predicts the M&A activity to grow by 41% until 2018[11]. This is mainly explained by the competitive advantage resulting out of the labour reform in 2016 that is resulting in growing employment[12]. Also, they expect the IPO activity to grow significantly during the next three years based on the difficulties in 2016[13].

Main challenge of 2017:

1. The first is the normalization of the labour market. The unemployment rate is finally below 20%, and the Spanish economy has been outperforming the rest of the eurozone since 2015. But the good labour market performance cannot hide an hysteresis effect that is changing the quality of the labour market. A real long-term unemployment problem is emerging, together with the loss of human capital that this entails. This means that employability is decreasing, and that much higher growth rates in the future may be needed to keep unemployment on a decreasing trend. The problem of long term unemployment is compounded by youth unemployment, that remains extraordinarily high at more than 40%, and NEET young people can be found especially among the low-skilled, with a serious risk of poverty. Dualism of the labour market is a source of fragility and of insufficient investment and innovation.

2. The second challenge is the fiscal stance, and it is of course related to the debate in Europe. The Spanish government has strongly reduced its net lending (including the structural deficit) that nevertheless remains at around 5% of GDP.  Yet, the Spanish situation clearly needs a more expansionary environment, that could only come from the rest of the Eurozone. Continued austerity will not help with Spain’s most pressing problem, hysteresis and long term unemployment.

3. The effects of the Brexit referendum remain unpredictable.[14] How it will impact the M&A activity in Spain and Europe depends on how Britain will foster the exit and how the process will develop.


Agencia EFE (2017)

Las fusiones y adquisiciones aumentarán un 41 % en España hasta 2018,

Argali Abogados (2017)

Spanish M&A surges again despite obstacles,

Baker McKenzie (2017)

Baker McKenzie prevé para España un aumento del 41 % en M&A hasta 2018,

Europa Press (2015)

El mercado de fusiones y adquisiciones resurge en España, según KPMG,

Expansion (2017)

Las fusiones y adquisiciones crecieron un 20% en España en 2016,

[1] Expansion
[2] Mergers Market
[3] Global Legal Insight
[4] Thomson Reuters
[5] Thomson Reuters
[6] Expansion
[7] This and the following Europa Press
[8] Expansion
[9] This and the following Europa Press
[10] This and the following Argali Abogados
[11] Agencia EFE
[12] Baker McKenzie
[13] Agencia EFE
[14] Here and the following Argali Abogados


Virginia Bassano, Luca Pancari, Andrea Terzi, Felix Oliver Napp

India: A brief analysis of the world’s fastest-growing economy

India: A brief analysis of the world’s fastest-growing economy

We are living really hard times. The fear caused by the growing terrorist activities, the distrust of the stranger induced by rising nationalisms and by a propaganda good at riding the wave of growing frustration, the uncertainty caused by the dissolution of our certainties. Many are the reason that keep investors awake and contribute to the current atmosphere of  anxiety and restlessness.

Nevertheless, there is a safe-haven which seems to be insulated by all these factors and that is living the most prosperous period of its history. A tireless nation that continues its seemingly unstoppable growth process. A bright spot of positive two-digit returns in a world of incredibly low yields.  We are talking of course about India, the fastest-growing large economy in today’s world, whose economy grew at an incredible rate of 7.5% in 2015 – faster than the 6.9% growth observed in China, the former leading emergent economy and currently the third largest economy after the US and EU – and is still expected to grow at 6% in 2020.

Since the Republic constitution in 1950, Indian economy was characterized by heavy state regulation and intervention and by protectionist policies that kept it off from the outside world. In 1991, an acute balance of payments crisis – due particularly to the currency devaluation and the high budget deficit – forced the government, led by Narasimha Rao[1], to liberalize the economy moving toward a free-market and capitalist system.

The large population, the bustling manufacturing sector, the high saving rate and the emphasis on foreign trade and direct investment inflows, contributed to a rapid progress, with an incredible average rate of about 5% GDP growth since then. We can easily see how an investment in the Indian stock market made ten years ago, would have more than doubled our investment. Actually, the chart below compares different stock market indices. We can notice at a glance how both the Sensex and the Nifty (indices of the two Indian stock markets), with an average growth rate of 90%, have considerably outperformed the average of emerging markets (given by the MSCI Emerging Markets Index). Only the S&P500, with a return of 67%, has almost kept up with such huge returns.

STOCK Markets

Since the election of Narendra Modi as prime minister in May 2014 – after a controversial campaign in which the leader of the Bharatiya Janata Party focused on fighting corruption and sustaining economic development – we assisted to a progressive liberalization of the economy, mainly aimed at increasing the attractiveness for foreign businesses. The labor market was deregulated (to make it easier for the employers to hire and fire workers and harder for them to form union), corporate taxes and customs duties were lowered, the wealth tax was abolished, digital infrastructure were built – through to the “Digital India” campaign – and more Foreign Direct Investments (FDI) were allowed in areas like Construction Projects, Cable Networks, Agriculture and Plantation and Air Transportation. The shadow economy has been harshly limited by the demonetization of all ₹500 and ₹1,000 banknotes, in order to crack down the financing of terrorist and illegal activities. A new “Insolvency and Bankruptcy Code” has been issued on May 2016. At last, the huge problem of different taxation between different regions –  past cause of confusion and uncertainty – is being solved as today is under review the single biggest tax reform under the ‘Goods and Services Tax’ or GST bill, whose aim is to create a consistent tax structure across the entire country and one single marketplace.

Moreover, the following initiatives were launched: “Make in India”, to encourage foreign companies to manufacture products in India; “Standup India”, to support entrepreneurship among women and SC and ST communities (Scheduled Castes and Scheduled Tribes); “Startup India”, aimed at promoting bank financing for start-up ventures to encourage entrepreneurship and jobs creation. Large investments have been made in Africa in sector as energy, mining and infrastructure, with the main purpose to reduce the dependence on imported goods such as oil, coal and gold (almost 50% of Indian overall imports).

Furthermore, Modi achieved a drastic reduction of the budgetary deficit – from more than 4% to 3% – at the expense of the funds invested in environmental and social programs as poverty reduction, family, healthcare and education (reduced by almost 15%). As a result, we assisted to an enlargement of inequalities in income distribution[2], mainly because rising inequalities between urban and rural areas.

The economy was spurred even more by the consecutive rate cuts pursued by the Reserve Bank of India, as a response to the preoccupant level of inflation observed at the end of 2013, which reached the peak of 11.5%. The repo rate was lowered from 8% to 6.25% in less than two years.

The measures achieved soon the expected results, boosting the economy (GDP grew at the incredible rate of 7,5% after Modi’s first year as prime minister) and increasing much the attractiveness for foreign companies. The amount of Foreign Direct Investments jumped from $34 billion in 2014 to $44 billion in 2015[3], the unemployment rate dropped to 6.3% in 2016, the time required to start a new business dropped from 33 days to the current 26. Therefore, the IPO activity is expected to rise by more than 40%, while M&A activity should more than double in 2019, above all in sectors as financials, consumer and healthcare. Among the countries with the largest share of FDI inflows to India we can find in first position Singapore, followed by Mauritius Islands and United States. Among the European countries, Netherlands is first in rank, followed by Germany (whose car manufacturers are outsourcing part of the production), UK and France. The main reason behind the huge amount of FDI from Mauritius Islands and Cyprus is the low taxation of these two countries – considered tax heaven – which induced many Europe and US based companies to route their investments into India through these countries, deriving double tax avoidance and tax evasion. By the way, with the renegotiation of the double taxation avoidance agreement (DTAA) with India, this phenomenon is likely to decrease soon.

There are other positive factors behind the Indian growth that justify good expectations. Differently from China, Indian growth has been sustained above all by its internal consumption and a fast-growing middle class[4]. Moreover, we can consider such growth as approximately unleveraged[5]. Therefore, the country can easily increase its debt issuance in the near future, especially considering the high rating of BBB- confirmed by Fitch last summer. Third, the expansion has been demographically propelled. Today, India has still a population growth rate of 1,26%[6], thus by 2050 India’s workforce (people between 15 and 59 years old) is expected to have grown from the current 674 million to a staggering 940 million. On the contrary, China is likely to be facing a shrinking workforce, which will potentially drive up labor costs, undermining its competitiveness against other cheap-labor countries. As a matter of fact, India is already much cheaper with an average hourly rate of only 0,48$ per hour[7], largely due to the very low level of gross domestic product per capita[8]. We have to consider also its people’s ability to speak English and its large pool of computer engineering graduates, which make India a popular destination for outsourcing activities.

As we could see, with the advent of N. Modi as prime minister, many are the initiatives carried forward to increase the attractiveness of India. The results so far are extraordinary and India can really overtake the US as the world’s second largest economy by 2050 according to a recent report published by PricewaterhouseCoopers (PWC).

Nevertheless, many challenges are still ahead. The education sector needs to dramatically improve its quality. Considering the future increase in population, the push to allow more private universities and to allow foreign universities to operate in India will strengthen.

Another crucial point is the delay in the spread of Internet and the smartphones. From this point of view, China has a great advantage against its rival. Since 2013, the Chinese have consistently reported rates of internet and smartphone use that are at least triple that of Indians (71% of Chinese adults report using internet occasionally, against the 21% Indians). The gap is similarly large when it comes to social media use[9].

Much will depend also on the foreign policy that could be pursued under Trump’s presidency, as the US, second largest trading partner of India, count for more than the 15% of Indian exports[10].

Last but not least, the conditions of women are still far by those of civilized countries. Although the Supreme Court of India said that ‘equal pay for equal’ work is an unambiguous constitutional right, the implementation is resulting very difficult[11].

The world is changing fast. Everything seems to be uncertain and unpredictable. One thing is certain, India will not stand by but it will play a leading role.

AUTHOR: Niccolò Ricci

[1] Narasimha Rao was an Indian lawyer and politician who served as the 9th Prime Minister of India, from 1991–1996.

[2] The income inequality reached the worrying level of more than 50% according to the Gini Index. Only China had greater inequality at that time.

[3] An impressive increase of almost 30%! India is currently the first country for FDI after China and US. World Bank Data.

[4] India is ranked 128th according to the Index of Economic Freedom , meaning that the country is less dependent on the external demand and thus more insulated by global evolutions.

[5] Indeed, in 2015 domestic credit to the private sector (percentage of GDP) stood at 52.6 per cent for India, compared to 153.3 per cent for China. Also the government debt is very moderate, with a ratio of roughly 70%.

[6] Well above the rate of China (0,52%) and aligned to those of most African countries, despite the higher degree of development.

[7] “Countries with the cheapest labor”, The Richest. The cheapest country in the world is Madagascar (0.18$ per hour), followed by Bangladesh, Pakistan, Ghana and Vietnam.

[8] India is ranked only 122nd globally (about 6.000$ per person, against an average of 15.000$), World Bank Data.

[9] According to the Spring 2016 Global Attitude Survey, by PEW Research (

[10] China is the largest trading partner of India, followed by USA, United Arab Emirates, Saudi Arabia and Switzerland. Department of Commerce of India.

On the other hand, India is the main counterparty of Buthan, Guinea-Bissau, Nepal and Afghanistan. CIA World Factbook, 2015.

[11] According to the Gender Gap Index 2015, set by the World Economic Forum, India is ranked only 108th. Iceland leads this special rank.

Credibility of Central Banks – A comprehensive analysis of ECB and FED effectiveness

Credibility of Central Banks – A comprehensive analysis of ECB and FED effectiveness

On the 1st of January 1999, the ECB assumed responsibility for monetary policy in the euro area, with the primary objective of maintaining price stability, keeping the euro area’s target inflation rate (calculated using the Harmonized Index of Consumer Price, HICP) below, but close to 2% over the medium term. This objective has even been reinforced with the ratification of the Lisbon Treaty in 2007. Seventeen years later in 2008 the global financial crisis erupted causing the greatest economic recession since 1928. Since then the ECB has been put under additional pressure to advise on regulation and enforce banking supervision while fostering economic growth. Extremely unconventional monetary measures have been taken to achieve this objective and a recover of the economy and productivity.

On the 12th of November 2008, the first measure was implemented by cutting the interest rates for deposits, overnight loans and the Main Refinancing Operations. The two main objectives of this move were to provide greater liquidity to commercial banks and depreciating the currency against the US dollar, allowing a greater competitiveness.

Despite the large amount of capital lent through MROs and LTROs, banks preferred to buy bonds instead of lending to families and enterprises, not fulfilling their function as middleman between the ECB and the real economy.

On the 26th of July 2012, Mario Draghi famously announced that the ECB was willing to do “whatever it takes”. Consequently, launching new measures to support the countries, which were facing economic and financial difficulties. In September of that year the Outright Monetary Transactions (OMT) were introduced.

The OMTs key points were: Unlimited ex-ante bonds purchase quantity; one-year and three-year maturity bonds purchase; transactions performed in the secondary market sterilizing the exceeding liquidity. While this programme was initially controversial, as it questionably occurred outside of the ECB’s legal framework, it did achieve its expected outcomes, as bond yields in the weaker countries declined. On the 5th of June 2014, the ECB announced the first series of TLTROs (Targeted Long Term Refinancing Operations) which linked the amount borrowed and lent (expected mortgages) to private sector, aiming to incentivize banks to increase their lending.

Although the ECB had implemented all these unconventional measures, no significant positive effect had been seen.  The PMI index evolution show a soft recovery ignited by Draghi’s first moves.


That is why on 22nd January 2015 Mario Draghi introduced an extended Quantitative Easing program, the Asset Purchase Program (APP), which allows the purchase of Eurozone government bonds. This programme allowed for € 1,140 billion in bonds to be purchased and lasted 19 months (supposedly, from March 2015 to September 2016), injecting even greater liquidity into the market. The bond purchases provided greater monetary stimulus to the economy while the key ECB interest rates were kept at their lower bound. Furthermore, an easing of monetary and financial conditions occurred, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately aims at helping the economy reach its targeted inflation rate. This move was unexpected from market who rejoiced vigorously, pushing European stock indexes up to multiyear highs. DAX index, the one who benefited the most from the ECB’s new plan topped 12000 points.

After one year of the extended QE program some doubts arose about the effectiveness of the ECB’s monetary policy, raising the credibility of monetary policy issue and igniting criticism from some member states, such as Germany, mainly for the negative impact on people’s savings.

In response, the ECB surprised the markets in March 2016, by cutting key interest rates, expanding the asset purchase program to 80 billion monthly and deferring the end to March 2017. In addition, the percentage of bonds that can be purchased has changed from 33% to 50% and the purchase program includes also some high-rated companies’ shares other than covered bonds and asset-backed securities. Four new TLTROs (TLTRO II) are being issued every three months, starting from June 2016 with an interest rate, which is linked to the participating banks’ lending patterns. The more loans that participating banks issue to non-financial corporations and households (except loans to households for house purchases), the more attractive the interest rates on TLTRO II borrowings becomes.


In a recent statement at the ECON committee of the European Parliament on the 28th of November, Mario Draghi remarked that: “To increase the effectiveness of monetary policy, fiscal and structural policies are needed that reinforce growth and make it more inclusive”, while in his speech ten days before, stated that “Since the onset of the global financial crisis, 2016 has been the first full year where GDP in the euro area has been above its pre-crisis level. The economy is now recovering at a moderate, but steady, pace, while the employment is growing. We remain committed to preserving the very substantial degree of monetary accommodation, which is necessary to secure a sustained rise in inflation.” Despite Draghi’s reassurances, as well as the unconventional and largely expansive measures carried out by the ECB, one can observe that inflation levels are rising, but still at a too slow pace, currently at 0,5%. The same can be said for GDP growth.


The main question to ask is where is large amount of capital that is being injected into the economy flowing, and why is it not boosting growth?

Low interest rates – the rate on the deposit facility is -0.4% while the interest rate on the main refinancing operations is at zero level – should decrease the cost of financing of the banks and lower the attractiveness of government bonds inducing them to lend to enterprises and consumers. Unfortunately, many factors have contributed obstructing the transmission of money to the real economy and restrained the banks from granting loans. First, the banks are not inclined to lend money for three main reasons: the poorer margins on loans, squeezed by the rates at their lowest level; the necessity to keep risks under control which conflicts with the credit standards’ tightening, particularly on corporations, that can even be worsened by the forthcoming introduction of Basil IV, still under discussion, which is considering to impose the use of standardized credit scoring approaches, instead of the more flexible Internal Standards-Based Approach introduced by Basil II, change which will require higher provisions for risks; at last the harsher capital requirements set by Basil III in 2013, which induce banks to immobilize funds that could be alternatively lent.

It seems that the situation is getting better and banks are finally increasing the amount of loans granted. It is noticeable that the increase is faster since 2015, year of introduction of the Quantitative Easing program. The manufacturing PMI Index for euro area, which measures the performance of the manufacturing sector, is climbing up to the 2011 peaks. Therefore, the introduction of stricter credit rating approaches is highly questionable and more flexibility should be given to lenders.


It is also true that the low interest rate policy and the Asset Purchase Program have contributed to the increase in prices of assets and so the reduction of yields, inducing banks to take greater risks in return for higher returns. Indeed, fixed income prices are at their highest while the German 10Y bond yield is only 0,2%, having been even negative last June for a couple of months. 

Another reason behind the lack of effectiveness of the quantitative easing is that it could not have the impact desired, as interest rates at the inception of the program were already very low. The 3-months Euribor rate was hardly higher than zero.

The conclusion is that monetary policy does little to support growth, when not combined with adequate fiscal and regulatory policies. The IS-LM diagram, or Hicks–Hansen model, can help one better understand the current situation. Last but not least, the world today is in what can be deemed as a “liquidity trap”. A situation in which the central banks cannot reduce the interest rates even further, as doing so has no effect on inflation. Policymakers are pushing negative interest rate policies to stimulate growth. Lower rates are designed to spur savers to spend, redirect capital into higher-return (i.e. riskier) investments, and drive down borrowing costs. This is associated with a weaker currency, making exports more competitive. When a “liquidity trap” occurs and rates go negative, a squeeze on the speed at which money circulates through the economy, commonly referred to as the velocity of money, incurs. Therefore, each Euro generates less and less economic activity, increasing deflationary pressure. As consumers see prices decline, they defer purchases, and growth slows. Deflation also lifts real interest rates, which drives currency values higher. If the ECB persists in this policy, pumping more and more liquidity into the economy, then more negative rates could be on the way.


The austerity measures pursued by the European Union since the beginning of the European sovereign debt crisis at the end of 2009, have constrained the member states to lower their debts and the public spending, exacerbating the fiscal policy and worsening the economic downturn. By the way, it seems that, under the more insistent demand by many member states for more flexibility, EU is overshadowing the pursuit of lower deficits, to focus on the boost of economic growth.

On the 8th of December 2016, Draghi announced that the ECB would scale back the monthly bond purchases from € 80 billion to € 60 billion in March 2017, postponing the end until December 2017, reassessing the support of ECB to markets. Moreover, the ECB would consider (but not necessarily pursue) purchases of bonds with yields below the standing facilities deposit rate (i.e. -0,40%), thereby incurring losses for the central bank, if such purchases were to be made. This announcement provided a largely positive reaction on the European equity markets, while European bond market yields fell even lower and the Euro/Dollar had its largest drop since Brexit, depreciating by 1.5%. Following the announcement of the ECB’s future QE plans, reporters repeatedly questioned whether and when tapering would occur and Draghi insisted that members of the governing council unanimously did not consider such measures.

Europe, to help the ECB to fulfill its task, is considering several non-monetary measures. The Capital Markets Union (CMU), strongly supported by ECB, is expected to come into effect in 2018. Commercial banks are currently hesitating to issue new credit, particularly to SME’s – which account for 99% of all enterprises in EU – due to the size of their large balance sheets. The CMU would enable commercial banks to shift risks away from balance sheets by allowing investors (such as pension funds) to invest in securitized loans. However, it must be stringently regulated, to ensure that the quality of the debt being securitized and sold, meets certain standards. A lesson tragically learned by the recent financial crisis.

The harmonization of fiscal policies among EU member states seems still far away and hard to achieve. At last Europe is changing attitude in direction of a greater allowance for deficit spending and public debt, under the requests received by many member states, which questioned the austerity policy.

Unconventional and expansionary monetary policies have been implemented by the ECB in the past years in response to one of the greatest recession in history. The traditional policies are no longer effective and the Central Bank is now experimenting new solutions, which are contributing to the recovery, even if the results are not as good as expected and Europe has not recovered the pre-crisis economic level yet.

European bodies and the ECB are struggling to boost the economy and to increase the cohesion within the European boundaries through a process of continuous change.

However, many are the threats to the future of Europe. The forthcoming elections in France, Germany and perhaps Italy, on the wave of anti-European and nationalist movements, are likely to increase the uncertainties about the solidity and cohesion of the Union, even more after the stunning result of Brexit referendum. Cohesion that is already under pressure and exasperated because of the different interests and views of the member states about serious issues currently under discussion such as the actions to adopt in response of the massive migration wave that is hitting EU borders (and that can even worsen given the current tragic situation in Syria) or the necessity of austerity policies.

Second, the possibility that the extremely expansionary measures can lead to excesses and to a financial bubble likely to explode once there would be a tightening of the policy (house prices in healthier countries are rising sharply).

Furthermore, the effects of the enhanced divergence between the monetary policies pursued by the ECB and the Fed are still unknown and unforeseeable. The Fed has not surprised investors with the last adjustment on December, even if the signal sent by Janet Yellen was little more hawkish than market is used to. The immediate effect has been a strengthening of the dollar against other currencies and a sell-off European bonds, which showed a rise in yields. The Fed funds futures show that traders are now betting on a faster tightening by US Central Bank. Indeed, the Chairman has announced that there will be at least three more adjustments in 2017. It seems that the era of ultra-low yields is nearing its end in USA, where the economy is recovering strongly and even better are performing the financial markets (Wall Street has reached its historical peaks).

The effects for Europe are difficult to predict, but for sure, the quicker the dollar strengthens, the more destabilizing that is. For instance, a huge amount of emerging countries’ bonds is issued in dollars, thus it would be harder to repay it Moreover many commodities are priced in dollars so they would become much more expensive contributing to a slowdown of global economic activity that depends on the consumption of such resources, on the oil price, which is now recovering after having hit its lowest level at the beginning of 2016.


The ECB is dealing with a testing challenge: achieve a recovery of the European economy and productivity within a global environment characterized by slow economic activity and great uncertainties, while experimenting policies never pursued and whose results are difficult to predict. The difficulties and the threats that can obstacle the fulfilment of the mission are many, so are the opportunities that can be taken. There are too many uncertain factors that make useless and speculative every effort to make predictions. Draghi, which will be in charge until 2019, seems to have clear ideas about how to deal with the task and has already achieved very good results, despite the critics.

Would the ECB and EU bodies be able to face the forthcoming hard times, keeping the EU unity and cohesiveness and achieving finally the economic recovery? Stay tuned.


Conor Marriman, Niccolò Ricci and Alessandro Sicilia

On the Rollercoaster – Yearly Recap

On the Rollercoaster – Yearly Recap

The 2015 has been a very turbulent year for financial markets globally. Greece, the unpredictable oil rout and weak growth perspective in China repeatedly triggered waves of sell-offs during the last year. Here a closer look at the main characters or events that set the trends this year.

S&P 500 Yearly PerformanceSP500


The oil rout has started in the middle of last year, when it collapsed from the range $110/100 a barrel to levels close to the post Financial Crisis lows, $35/45 a barrel. Since the beginning of 2015, Oil has been very volatile, trading in a range between $35 and $65 a barrel. Its unpredictable trend affected financial markets on a global scale. The high-yield bond market is under strict observation after the low prices of oil have been pushing a large number of shale gas companies on the verge of bankruptcy. On December 10, Third Avenue Focused Credit Fund closed its $800m junk-bond portfolio due to the slump in bond prices. The energy sector has been dramatically hit by the rout, forcing layoffs, firm aggregation e.g. (Royal Dutch Shell and BG) and Capex reconsideration. Weaker demands from top-tier consumers as China and consistent OPEC plans to keep production high pushed prices down, weakening inflation expectations in developed countries and increasing risks of deflation. Emerging Markets heavily relying on oil exports have to cope with more than halved revenues from the primary source of inflow, currency depreciation and inflation. Brazil is reportedly in recession, Saudi Arabia disclosed a Balance Deficit of 15% of its GPD, envisaging austerity periods in public spending. Oil will still play a major role in 2016, when the ban on Iran oil exports will be lifted and new fresh oil will flood into the market.

WTI 5 Year PerformanceOilSource: Bloomberg


Being the second largest economy in the world, China has set the trend in many occasions this year. The Stock Market crash sparked fear and volatility all over the world. The Shanghai Composite, after a rapid ascent, it started to fall rapidly between June and August, losing almost 40% of its value. Weaker growth perspectives, decline in industrial production, and weaker demand for commodities, especially copper, dragged down global markets, spilling over other asset classes, especially Emerging Markets local currencies. In order to give China exporters a competitive edge People’s Bank of China devalued the renminbi several times during this year. In August, in the wake of the first devaluation, the Yuan reported the largest daily loss in over 20 years. Kazakhstan’s Central Bank, in order to cope with depreciating rival currencies, decided to shift to a free-floating rate. On August 15, the tenge tumbled 26%. These moves raised the risk of a potential currency war between August and September, which eventually fade away.

CNY/USD Yearly PerformanceYuan RenminbiSource: Bloomberg

In the first days of 2016 a dramatic sell-off in China that triggered the circuit breaker mechanism halting trading if losses greater than 7% materialize, produced a chain effect on the Financial System, resulting in the worst first week of trading in history. The S&P lost almost $1 trillion in market capitalization in the first week.

 Central Banks

The Fed and the ECB adopted divergent strategies in terms of Monetary Policy. Improved economic conditions and a more solid labor market in the US pushed the Federal Open Market Committee to unanimously raise interest rates up to 50 basis points for the first time in nine years. The December hike was broadly expected by all market makers, and paved the way for future hikes in the coming years. The ECB, in the opposite direction, eased the monetary policy in December, lowering the deposit rates at minus 30 basis point and prolonging the quantitative easing up to March 2017, with potential further extension. Draghi’s move disappointed market makers, who foresaw an increase in the monthly purchase of  securities, hammering down European Equities. Despite eased policies, inflation in both region is far from targets and the pressure on oil prices seems to further raise the risk of consistent low prices and deflation. Central Banks will still play a key role in the next year in their effort of improving economic conditions and reaching inflation target.

In the first days of the New Year, negative signals coming from the commodity market and China sparked uncertainty and fear over the stability of the financial system. Will the improved economic conditions in Europe and America be able to offset the downside risks coming from the Chinese transitioning economy?


Tancredi Viale, Master Student

The Chinese Turmoil: Intervention or Resurrection?

The Chinese Turmoil: Intervention or Resurrection?

China, the leading country of the BRICS , seems to be experiencing a slowdown.  Despite many experts claim that China’s GDP will rise by $7 trillion in the next decade (the equivalent of “two more Chinas”), Chinese manufacturing was dragged down by a weaker demand for Chinese exports down to the 12 months lowest level of 49.2 in April 2015. However, the main questions remains: how does this correlate with the recent Chinese stock market crash? Economists say it does not.

Shanghai and Shenzhen, the two Chinese stock markets, strongly differs from their global counterparts in terms of investors. In fact, Individual investors account for the 80% of the stock markets, as there is a weak presence of institutional investors. The rising Chinese middle class preferred to invest its savings into the bullish Chinese stock markets as stocks prices have constantly appreciated in the last years. (CSI 300 Index + 84,12% 5 yr). These peculiarities of the market along with the spread use of margin trades (Borrowing money to invest in the stock exchange), makes it clear that the Bubble had to burst soon.

With the Chinese stock markets losing up to $4 Trillion (15 times Greece’s GDP) and going down by 34% from its peak in June, a strategy was needed. After blaming US Investment Banks for bearish recommendations on Chinese stocks, China’s government, central bank and regulators have closely worked upon measures to prop up the stock prices in a very rapid way. On the first place, an unexpected interest-rate cut took place in order to stimulate the liquidity as well as an order for national brokers to pump up government-backed funds in the markets. These financial measures along with a freeze on new IPOs and a stricter regulation on margin trades, although, had only a marginal effect in the CSI 300 index that caught up only by 3,5% from its lowest peak of July 8, while reporting, last week on July 27, the biggest day drop since 2007, -8.43%.


At the moment, the problem regards the stock market only but there is a huge risk that it might turn into a new financial crisis. In fact, so many investors took out loans with financial brokers using stocks as collateral (margin trading) and this trend could affect their capability to pay off their loans. For this reason, 1400 companies were given permission to suspend trading in their shares in order to preserve their value.

Signals of a weakening momentum in the Chinese real economy came in the weekend from the Purchasing Manager Index, which measures the manufacturing activity. The PMI settled July at 50.0 below the consensus at 50.2 and on top of the benchmark at 50.0 that distinguish expansion from contraction. All those signals are driving down all the major global commodities, Copper and Oil on top of the list, while all the commodity currencies are experiencing a brutal depreciation against the dollar, threatening global growth projections.

Chinese PMI


Ludovico Buffo, Master Student


A bubble about to burst? – APAC Overview

A bubble about to burst? – APAC Overview

The monetary expansion policy of the People’s Bank of China fueled the Shanghai, Shenzhen, and ChiNext indices of 95%, 198%, and 383%, respectively, since January 2013. Chinese stock-market capitalization grew from 44% of GDP at the end 2012 to 94% of GDP earlier this month[1], but at the same time the Chinese GDP growth, equal to 7,4%, has slightly slowed at the lowest level since the 1990 and the average ratio price to earnings is 26.

It seems clear that there are enough evidences that prove the presence of financial factors that are threatening the economical rebalance of Chinese economy: from export oriented economy to consumptions. This is the issue. At the beginning of financial crisis, the Chinese political establishment chose to fuel the economy by increasing the public spending and making easier to borrow money.

Therefore, the private debt raised from 100% in 2002 to 200% in 2014[2] and the PBOC tried to stop it by raising the refinancing interest rate until started the first bankruptcies and the slowdown of Chinese economy. The PBOC knows that the economy needs a monetary stimulus but the more the money supply increase the more grows the probability to create a financial bubble.

In order to minimize the possible negative effects of a hard slowdown, the Government is trying to boost the economy by cutting the refinancing interest rate (from 6.5% to 5.0%), deregulating the financial markets (e.g. exchange rate fluctuating) and privatizing most of public companies. The issue is that the more the money supply increase the more the financial bubble grow.

It is sure that the Government will have to face the dichotomy between autocracy and capitalist markets, but how it will face the issue will determine the feature of the Chinese economy slowdown[3]. Anybody should not underestimate the huge challenge to change the Chinese economy into a fully capitalist system, as the MSCI index committee decision to do not list the Shenzhen A shares (for some regulatory framework) show.

Last but not least, the main market mover it will be the dual listing between Shenzhen and Hong Kong stock exchange.


PBOC Interest Rate



Roberto Vacca, Master Student

[1] Cf. “Channeling China’s Animal Spirits”, by Xiao Geng and Andrew Sheng 26/05/2015, available on
[2] See “China’s debt-to-GDP level”, by S.R. 16/07/2014, available on
[3] See “Nouriel Roubini: China Slowdown May Be Sharp”, by Bloomberg 04/02/2015, available on