Silk Road’s sagging rail freight signals economic turning point for China

CHONGQING — The trans-Eurasian railway route linking the bustling industrial metropolis of Chongqing, southwest China, with Duisburg, Germany, has been operating as a key infrastructure component of China’s “New Silk Road” trade expansion strategy.

But the modern incarnation of the legendary Silk Road trading route is now providing additional evidence of China’s increasing economic woes.

The number of trains has increased since the beginning of this year. Currently, one freight train per day carries products like laptops, printers and auto parts via a series of transnational railway tracks stretching over 11,000km across six countries including also Russia, Kazakhstan, Belarus and Poland.

But growth of freight volume transported through the rail network, which opened in 2011, is losing steam, in tandem with economic slowdowns in both China and Europe.

The volume of Europe-bound freight during the first three months of this year actually sagged from the previous year, mainly due to declining shipments of laptops destined for European markets.

The dip in freight on the route, which has been promoted as a main driver of Chinese President Xi Jinping’s “One Belt, One Road” initiative, reflects China’s struggle to upgrade its industrial structure amid the weakening of its once red-hot economic growth.

Currently, a train takes 13-14 days to travel the entire route from Chongqing to Duisburg. But Liu Wei, deputy general director at the Chongqing branch of China United International Rail Containers, said a bypass to be completed in 2017 will shorten the journey to 12 days.

In 2015, a total of 156 runs to Russia or Europe and 89 to Chongqing were operated. The number is expected to increase to 350-360 return trips in 2016, effectively a daily service, according to the city of Chongqing.

About half of the freight bound for Europe is laptop computers and printers manufactured in Chongqing and exported by such companies as Hewlett-Packard and Pegatron, a major Taiwanese contract electronics manufacturer.

Chongqing has attracted a bevy of electronics makers because of its relatively lower wages. The city now accounts for 40% of global production of laptops and printers, according to one estimate.

Looking inland

In recent years, manufacturers in coastal areas have been heading into China’s vast interior in pursuit of lower production costs, powering the expansion of cities like Chongqing. The trend has been expected to make rail freight an even more appealing freight-transport option.

But Chongqing’s growth seems to be hitting the wall. While Europe has been stuck in prolonged economic doldrums, the global laptop market has been shrinking since it peaked in 2011.

The total volume of freight handled at the Chongqing rail container terminal amounted to 384,600 TEUs (20-foot equivalent units), little changed from 384,000 standard TEUs in 2014.

Europe-bound freight posted an on-year decline in the first quarter, according to China United International Rail Containers.

Another factor behind the fall is weaker exports of auto parts and other products to China amid the country’s economic slowdown.

Unlike shipping, rail transport is vulnerable to changes in economic conditions in areas along the route because it is much more difficult to change rail routes.

If it wants to continue growing briskly, Chongqing needs to become a manufacturing hub of products with higher value added or nurture new industries with greater growth potential, such as biotech industries.

With assembly workers’ average monthly wage now being 3,000-4,000 yuan ($460-613), Chongqing is finding it increasingly hard to attract business.

Faltering growth of freight transported on the trans-Eurasian railway system symbolizes China’s uphill battle in its efforts to accelerate its economic evolution.


Eurozone Current Account Surplus At 8-Month High

The euro area current account surplus increased to an 8-month high in September, data from the European Central Bank revealed Thursday. The current account surplus rose to EUR 29.4 billion from EUR 18.7 billion in August. It was the highest since January, when the surplus totaled EUR 30.6 billion.

The surplus on goods account increased to EUR 29.8 billion from EUR 22.1 billion. At the same time, the surplus on services remained unchanged at EUR 4.5 billion. At the same time, primary income advanced to EUR 4.8 billion from EUR 3.8 billion and the deficit on secondary income narrowed to EUR 9.8 billion from EUR 11.6 billion in prior month.

The 12-month cumulated current account surplus for the period ending September was EUR 303.5 billion, equivalent to 3 percent of euro area GDP. On an unadjusted basis, the current account surplus surged to EUR 33.1 billion from EUR 14.6 billion in August.

In the financial account, combined direct and portfolio investment recorded increases of EUR 23 billion in assets and of EUR 33 billion in liabilities.

Source: RTT News, Hellenic Shipping News

EU poised to delay landmark financial markets reforms

The European Union’s major reform of financial market rules faces a delay of a year to January 2018 to give the financial services industry more time to prepare, a senior European Commission official said on Tuesday.

The principles of the so-called MiFID II legislation, aimed at changing the way financial markets operate, were agreed at the global level during the 2007-09 financial crisis, with key changes including the move of private trading in derivative instruments onto electronic platforms to improve transparency and curbing the size of trading positions which can be taken in certain commodity markets.

The United States has already introduced extensive changes to market regulations under its Dodd-Frank Wall Street Reform and Consumer Protection Act and a delay in the European legislation would raise the prospect of distorting competition in some major cross-border markets.

Europe’s new Markets in Financial Instruments Directive II, which all banks, brokers and asset managers must comply with, also contains measures that are important to laying the groundwork for the EU’s capital markets union (CMU) project aimed at making it easier for European companies to raise funds in the capital markets instead of relying on bank lending.

But Martin Merlin, a director in the European Commission’s financial services unit, said the preliminary technical view was that a delay was needed, “if we want to have a smooth and effective implementation”.

“We will need to decide what the scope and duration for that delay should be,” Merlin told the European Parliament’s economic affairs committee. “Maybe the simplest and most legally sound approach would be to delay the whole package by one year.”

Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), told the committee that a delay may be needed given the complexity for regulators, banks and brokers to adapt IT systems to the new rules in time for the 2017 start date. The new rules call for far more reporting of transactions to regulators.

The Investment Association, a UK trade body for asset managers, called in September for a one-year delay to rethink the new transparency rules for bond markets.

“The Commission’s public comments today are an indication of the scale of work for the whole marketplace to implement the many changes required under MiFID II, with particular regard to IT systems and coding,” said Richard Metcalfe, the Investment Association’s director of regulatory affairs.


ESMA delivered over 900 pages of detailed rules to the European Commission in September in what the watchdog has called the EU’s biggest securities reform since MiFID 1 came into force in 2007 after also suffering a delay.

The EU executive has to scrutinise the documents while dealing with calls from lawmakers and member states to amend core elements like the size of the curbs on commodity positions, the extent of bond market transparency, and how far to bring the trading arms of energy companies within the scope of MiFID.

Parts of the reform could be delayed given it was now “unfeasible” to meet the timetable for some elements, Maijoor said.

There have been rumours of a delay for some weeks but confirmation from ESMA and the European Commission triggered anger among committee members who blamed foot-dragging at ESMA and the EU executive.

“I am more than just surprised that at this stage we are having this kind of discussion with the Commission and ESMA,” said Markus Ferber, the German centre-right lawmaker who steered MiFID through the European Parliament.

Anneliese Dodds, a British centre-left member said financial lobbyists will scent a chance to re-open hard-won compromises.

The financial industry will be happy with a delay, added Philippe Lamberts, a Belgian Green Party member. “I am not from the financial industry, I am a legislator and I am not amused at all,” Lamberts said.

But Merlin said it would be extremely dangerous to re-open MiFID and a delay would take the form of a simple legislative proposal to change the law’s start date.

EU lawmakers, ESMA and the European Commission will hold further meetings to discuss a delay. Backing from EU states would also be needed but Britain, France and Germany have already called for changes.

Source: Reuters , Hellenic Shipping News

Financial Talking Points: Is Greece’s financial turmoil over?

Greece may be out of the headlines but the government’s biggest bail-out challenges are yet to come.

Under the terms of its third €86bn international rescue deal, the Syriza-led government will have to jump over a number of hurdles to qualify for new rounds of creditor cash.

So far, the newly-elected government of prime minister Alexis Tsipras has managed to pass a raft of “prior action” bills through parliament. They include imposing penalties on early retirement, paving the way for a bank recapitalisation, and introducing a controversial property tax.


Other areas, however, such as a contentious 23pc VAT rate on private school fees and kick-starting plans to privatise the country’s ports, are likely to be pushed back.
In total, Athens will have to satisfy at least 48 “milestones” to successfully complete its first bail-out review in return for a €2bn tranche of rescue money.

Meanwhile, the economy continues to lumber under capital controls and is suffering from endemic social problems, most notably chronic unemployment.

The latest labour market figures for the eurozone show that only a pitiful 8.6pc of unemployed Greeks managed to find work in the second quarter of the year, compared to three months prior. That’s lower than some of the poorest parts of the non-EMU Europe – Bulgaria, Poland and Macedonia.

chart (1)

The numbers reflect a particularly tumultuous period in the country’s eurozone future, when crisis talks bought the economy to a halt.
But the longer-term trend is clear. Athens and its environs also hold the ignominious title of the long-term unemployment capital of Europe.

It has raised fears that Greece is succumbing to a dangerous phenomenon economists call “hysteresis”. This is when cyclical unemployment becomes permanent and impairs future economic growth.

Greece may manage to stumble through its latest raft of bail-out hurdles and stay afloat for the forseeable months, but it is likely to be a long time before its economic prospects are on the up.

Source: Telegraph, Hellenic Shipping News

The Other Greek Economy

Four months ago, Greek politics dominated the news. Even the Chinese stock market downturn, in which the Shanghai index dropped by over 30 percent in the month leading up to the Greek referendum, took a far backseat to Athens on every broadcast. Greece’s own stock market fell nearly to 26-year lows at the time, was shut down for five weeks in July, and then, immediately upon reopening, set a modern record by losing more value in a day than even Wall Street had on Black Monday in 1987. Even today, the Athens index is 11 percent lower than it was during its midsummer hiatus.


The media’s focus has completely flipped since then: it is now China’s economy and its impact on commodity prices that has the world’s attention. Even the re-election of Greek Prime Minister Alexis Tsipras and his political party Syriza a month ago barely made a blip in American news coverage, falling well behind other stories like the visits of Pope Francis and Xi Jinping to the United States, migrant and refugee flows into Europe, and the Volkswagen (VLKAY) emissions-hiding scandal. One wonders if the Greek economy will soon grab the global spotlight once more as it has periodically been doing for almost a decade now, or if new media and economic patterns are emerging instead.

This article is not just about Greece, however, but rather is also about the world’s only other Greek-speaking state, Cyprus. The Greeks and Greek Cypriots have a lot in common with one another, financially speaking. Both use the euro as their currency, both have been struggling with severe bailout-related crises , and both depend quite heavily on imported oil. (See the two graphs below; also, notice in the graph above how the Athens stock market index responded to the two US invasions of Iraq, which at the time many investors worried would cause the price of oil to spike).


This dependence on imported energy, like that of other struggling European countries such as Spain and Portugal – and in stark contrast to Scandinavia, Britain, the Netherlands, and most of Eastern and Central Europe, which produce a lot more of their own fossil fuels or have less energy-intensive economies – has generally been overlooked in the popular narrative of the Eurozone crisis, which has instead tended to emphasize cultural differences that exist between northern and southern European countries. Yet while it has been much more common to explain Europe in terms of thrifty, efficient Germans and nifty (or shifty) tax-dodging Greeks, energy prices was perhaps nearly as significant a factor in weighing down Europe’s Mediterranean economies relative to northern Europe when oil was still well over $100 a barrel.


Even Italy, which unlike other southern European economies is a mid-sized oil producer in its own right, with a slightly higher oil production than Germany or than the combined oil production of France, Spain, Turkey, and Greece, has still been hurt by energy economics, as it is the world’s third largest natural gas importer and was a leading investor in Libya at the time that Gaddafi was overthrown. Still, Italy’s unemployment rate has not been nearly as high as Spain’s or Greece’s in the past decade (though notably, when oil prices were low around the turn of the millennium their unemployment rates were roughly the same), and it has even been lower than Southern France’s.

This year, in contrast, when oil and gas prices have plunged, Spain has been the fastest-growing economy in Western Europe, experiencing a bigger GDP gain than it has in any year since 2007. Portugal and France are also thought have grown by a relatively decent amount, and Italy to have avoided recession. The two Greek economies are looking at Spain and hoping for a similar much-needed bounce.

Cyprus, or, more accurately, the 63 percent of Cyprus’ territory and 76 percent of Cyprus’ population that is governed by Greeks rather than by Turks , retains close ties to mainland Greece. Cyprus and Greece tried to unite formally in 1974, prompting a Turkish invasion of the island, and today Cyprus remains dependent on Greece for an estimated 20 percent of its trade as well as much of its foreign investment. Had the Eurozone Grexit actually occurred as many expected it would, it could probably have triggered a “Cyprexit” as well, which doesn’t quite have the same ring to it.


Cyprus’ relations with Turkey remain poor, meanwhile, and Turkish-inhabited Northern Cyprus continues to go diplomatically unrecognized by every country in the world outside of Turkey. That said, in 2008 the wall between Greek Cyprus and Turkish Cyprus that ran through the largest city on the island, Nicosia, was taken down, and in 2014, a decade after a failed reunification referendum in 2004, reunification talks were renewed between the two sides.

Now could be a good time to think about investing in Cyprus, not only because of how un-repeatably poorly it has done in recent years or because of the “White Swan” possibility that it could surprise the world by signing a deal that would finally reunify its two estranged halves, but also because its economy could perhaps benefit more than any other in Europe from today’s lower oil prices.

Indeed Greece, as well as other nearby countries like Serbia, Bulgaria, Croatia, and to a lesser extent Turkey, could similarly benefit from the mix of relatively low oil prices and extremely low expectations. Growth in these countries could also benefit Cyprus by association, particularly if technology increasingly allows Cyprus to become even closer with its fellow Greeks in Greece, Turks in Turkey, or other Slavic and Turkic peoples throughout the region or the world. (Cyprus is located about 900 km from Athens, where around a third of Greece’s 11 million people live, and 750 km from Istanbul, which is the world’s fifth largest city by some measures. Cyprus is, in fact, located closer to Moscow, Lahore, or Addis Ababa than it is to its fellow Eurozone members in Dublin or Lisbon).

Cyprus’ general stock market index has already fallen by 24 percent in the past year and by over 90 percent since 2011, so it might now be possible to pick up some valuable Cypriot assets for a cheap price.


Here are ten other things about Cyprus and Greece to consider:

1.Cyprus speaks English better than most other European states (with the exception of Scandinavia, the Netherlands, Switzerland, and Austria, which are also excellent at English) because it was controlled by Britain from 1878 until 1960, maintains a British air force base today where over 8,000 Brits continue to live along with their families and thousands of Cypriot employees, and has a large international tourism sector. Cyprus’ neighbors, namely Greece, Israel, and Lebanon, are also great at English. Egypt, another former British-ruled neighbor that attracts lots of tourists, is not too bad at English either, and is getting better because its population is still extremely young.


2.Cyprus and Greece are both not too dependent on exports of goods and services , compared to other European countries. In fact, as the graph below shows, Greece is the only small economy not to be dependent on exports; the others six countries closest to the top of this list are Europe’s six largest economies. Not being too dependent on exports is probably a good thing for Greece and Cyprus right now, considering that economic growth in Europe and the world has not been strong this year.


You will notice, for example, that Ireland is by far the most dependent on exports, which may be part of the reason it was hit especially hard during the global financial crisis and recession around 2008. In contrast, Turkey, which may be the least export dependent, bounced back strongly from the global recession, notching an estimated nine percent GDP growth in both 2010 and 2011.

3.Cyprus, even more than Greece, is economically dependent on tourism. Going forward, both hope to attract aging northern Europeans – including Russians, who like Greeks are both Slavic and Christian Orthodox – fleeing the winter and now being able to vacation abroad more easily because of technologies like the Internet. With Russia having frigid winters, a population of 144 million (by far the largest in Europe), and a Baby Boomer cohort that is now almost 60 years old on average and mostly cannot afford to travel to more distant and more expensive summer vacations in places like Spain, Italy or France, Cyprus and Greece are hoping for a big tourist increase in the years ahead.


One area to look to here is Turkish-Russian relations. Turkey has become the biggest destination for Russian tourists in recent years, but if the relationship between the two regional powers deteriorates again as historically it has on many occasions (in fact they have already begun to in the past week ), more Russians could be steered toward Slavic lands in Greece, Cyprus, and the Balkans instead, as well as toward Egypt which has been Russia’s second most popular tourist destination in recent years.

Another place to look is the Caucasus: any renewed militancy in that region could threaten Russia’s tourist infrastructure build-up in Sochi along the coast of the Black Sea. The same is true for the Balkans, where dormant conflicts in tourist havens like Croatia could, if they were to turn violent once again, make Cyprus and Greece more appealing alternatives.

4.It is difficult, and in a certain sense effectively impossible, to find good statistics on the length of countries’ coastlines , as a result of the coastline paradox . That being said, I have given it a rough shot, and come up with the following stats:


It shows that, along with the remote New Zealand-Australia-Papua New Guinea region in the southern Pacific, the Greece-Cyprus-Croatia region has by far the world’s longest warm-climate coastline per capita.

Even Turkey, with a population of 74 million, does not do too badly in this respect since it has lengthy coasts along the Mediterranean, Aegean, and Black Sea. Considering how much people like owning seaside land, this could be a good characteristic to have. Nearby Italy also does decently, because of its long peninsular shape and its islands of Sicily and Sardinia, which are the only two Mediterranean islands with a larger population than Cyprus.

5.According to the World Bank, Cyprus has one of the lowest “total age dependency ratios” in the world and, with the exception of Slovakia, the lowest total age dependency ratio in all of Europe. The total age dependency ratio measures the number of people in a country aged 15 and under or 65 and older relative to those aged 15-65. Cyprus has very few children or seniors relative to the size of its working-age population, which is arguably a very good thing to have. (Greece, on the other hand, does not have this, as you will notice on the graph below). Cyprus also has the lowest share of its population aged 80 years old or older in Europe with the exceptions of Slovakia and Ireland.


Cyprus’ neighbors – Israel, Lebanon, Turkey, and Egypt – have even smaller shares of their population aged 80 years or older. (Greece, in contrast, has the highest share in Europe with the exception of Italy, which is likely part of the reason its public finances are so strained. Other troubled economies like Spain, Portugal, and France are at the very bottom of this list, along, notably, with Germany). And the same is true of the “Old Age Dependency Ratio”, which is the number of people a country has aged 65 years and older relative to those it has aged 65 years or younger.


6.Outside of Scandinavia or the former Soviet Union, both Greece and Cyprus have some of the most land per capita in Europe , as can be seen in the graph below. So too do some of their neighbors, like Turkey and other Southeast European countries. This relative wealth of land could be good for Greece and Cyprus, but there is also a catch: Greece, and especially Cyprus, are lacking in freshwater. Indeed as the second graph below shows, Cyprus is the most water-strained country in Europe.


And of course, many of Cyprus’ Middle Eastern neighbors are in very poor shape on this front as well, though some, like Israel, are trying to come up with technological solutions for their freshwater shortages – and both seawater desalination and wastewater treatment are significantly cheaper to do when energy prices are cheaper as they have become in the past year.

Two months ago, by the way, Turkey finished constructing a freshwater pipeline to Northern Cyprus which, at 80 km long, is the longest underwater water pipeline in the world. It is supposed to have a significant effect upon Cyprus’ agricultural production. Greek Cypriots are wary of becoming dependent on this pipeline, however, and Turkey is far from being rich in freshwater itself.

7.This graph below shows that Cyprus’ economy performed abysmally in 2014 and especially in 2013 , yet is expected to finally start growing again in 2016. Greece, meanwhile, already started growing again in 2014 and is forecast to do so even more in 2016 while Cyprus’ closest neighbors, Lebanon, Israel, Turkey, and Egypt, are expected to grow quite quickly in 2015 and 2016.

Other Mediterranean economies, particularly Spain, are also expected to recover from their poor performances in recent years, and Russia is expected to start growing again in 2016 after the sharp contraction it has been experiencing in 2015. Three other countries in Cyprus’ general neighborhood, Syria, Ukraine, and Libya, have of course also been doing horribly in recent years, and will hopefully recover as well.


8.Britain has had very strong economic growth this year compared to many other countries in Europe or the developed world. This could help Cyprus since the two countries retain ties in a number of different ways, even beyond the tourist or banking sectors. Britain is in fact home to a large Greek Cypriot diaspora, most of (the first generation of) which left the island when the Turks invaded in the mid-1970s. Today the Cypriot population in Britain is about 20-25 percent as large as that of Greek Cyprus itself. With London and Cyprus over 3,000 km apart from another, British economic growth as well as distance-shrinking technologies like the modern Internet could help the Cypriots benefit from their British connections.

Another country with potentially close ties to Cyprus, as we have already discussed, is Russia. Russia’s economy had a bad year as oil and other commodity prices fell, but it is nevertheless expected to start growing again at a fairly decent pace in the years ahead, at least relative to more developed Western European economies.

Moreover, it is not impossible that Russia’s slowdown could actually benefit Cyprus, if wealthy Russians worried about their domestic situation decide to start parking more of their assets abroad in these countries. That said, Russians may be less likely to do so than they used to be, because in 2013 the Cypriot government used the excuse “it’s just the money of shady Russians” in order to help justify its seizure of cash from Cypriot bank deposits in accounts with over 100,000 euros in order to pay off Cypriot’s debts.

9.Cyprus has resources it can use to play a role in the global battle against coal production . As of 2011, it generated more solar power per capita to heat space or water than any other European country: 611 W per capita , compared, for example, to 385 W for Austria and 253 W for Greece, and 120 W for Germany, which were some of the other top solar producers in the region. Cyprus and Greece also potentially have wind power because of their long coastlines per capita and because of Greece’s windy cliffs and hilltops.

Cyprus, and perhaps Greece as well, may also have large reserves of offshore natural gas. The Eastern Mediterranean around Cyprus has been the site of some of the world’s largest discoveries of late, not only in Cyprus, but also in neighbouring waters off the coast of countries like Israel. Less than a month ago, in fact, the Italian energy company ENI (E) may have found the Mediterranean’s largest discovery ever in Egyptian waters not too far from Cyprus’. The Egypt gas find could put Cyprus’ gas production dreams at risk, though in theory it could also help justify the construction of an underwater pipeline to Europe that both countries could feed their gas into.


At present, Cyprus faces logistical challenges in exporting its gas to Europe, particularly if it does not want to be dependent on exporting via a yet unbuilt pipeline that would run underwater to Turkey, which has an estimated construction cost of 3 billion dollars, in comparison to the estimated 10 billion dollar gas liquefaction and export terminal that it has been considering building instead.

Still, its gas could ultimately prove valuable if, for example, Western Europe’s relationship with Russia continues to deteriorate, if gas production in fields in the North Sea continues to drop , if its gas supplier Algeria undergoes any political instability like it faced in the 1990s as its leader Abdelaziz Bouteflika (who has ruled since 1999 and is now thought to be 78 years old) continues to age or passes away, or if government pricing of carbon emissions rise a lot and thus make gas ever more desirable than coal.

10.Cyprus’ position next to the Suez Canal , which was expanded this year , puts it in a position astride some of the world’s major shipping lanes. By sea, Cyprus is halfway between Mumbai and London, and halfway between New York and Kuala Lumpur. Cyprus’ ability to leverage its central shipping position to become a significant manufacturing economy has thus far been limited by its lack of a sizeable labour force, as its population is barely more than a million. Going forward, however, as machines become used more and more in the industry, Cyprus’ manufacturing could perhaps take off, if – a very big if – it can produce a skilled workforce to run its industries and cheap energy to power them.

Greece, similarly, has an enviable position near Suez and at the point where the Black, Adriatic, and Mediterranean seas converge, and has more natural harbours and sheltered seas than perhaps any other country in the world. It is in fact these protected coasts which allowed its city-states and kingdoms to dominate regional commerce throughout most of antiquity, and to have more registered merchant vessels in the present day than any other country in the world apart from China.


In theory, Greece could save ships traveling between Asia and Europe from taking their usual lengthy detour through the western Mediterranean and northern Atlantic. The Greek port of Piraeus next to Athens already handles more containers ever year than all but three other ports among Mediterranean EU countries and eight other ports in the EU as a whole. By 2016 it may become the Mediterranean’s largest port. As of 2013, according to Eurostat, Greece handled approximately 5 percent of the European Union’s “gross weight of seaborne goods handled”, which is a lot considering that Greece only accounts for an estimated 1.3 percent of the EU’s overall GDP.


Similarly, Russia could be likely to look to Greek ports as a way of carrying out trade that bypasses the Turkish Straits that separate the Black and Mediterranean seas as well as the Scandinavian-controlled Skagerrak Strait that separates the Baltic Sea and Atlantic Ocean. Given Russia’s escalating involvement in the Syrian civil war, which is hurting Russia’s relationship with Turkey while at the same time making it need to send supplies into the Mediterranean through Turkey, Russian access to Greek ports could become especially important.

In order to do this, however, Greece would need to overcome the political and geographical challenges of transporting goods overland between Greek ports and European (or Russian) markets via Southeastern Europe. In addition to logistical challenges, doing so would also represent a direct challenge to the established megaports of the Netherlands and Belgium, as well as to the hopes of Italy which would like to achieve a similar goal for the coast along its own southern heel.

That said, there may actually be some reasons for Greece to be hopeful in this area. Greece’s ports are roughly 20-40 percent closer the Suez Canal by ship than southern Italy is, and Greece has far more and better sheltered harbours than southern Italy does. What Greece really needs, however, is a much cheaper way of transporting goods via its rugged mountain roads, as well as a cheaper way of transporting goods intermodally so that it would not be too expensive to unload goods at Greek ports, take them by land to the Danube River (which is 400 km from Thessaloniki and 850 km from Athens), and then load them back on to barges or trains in order to get them to their final destinations in Europe. (The Danube-Main-Rhine canal was completed in 1992, and can handle barges up to 190 metres long and 11.5 metres wide, with a depth of 2.7 metres).

I don’t want to dig in to this topic here, but I suspect there are technological reasons to think that both of these challenges might actually be overcome in the not-too-distant future. In fact it may wind up being the political factors, rather than the purely logistical ones, that are more difficult for Greece to get past. In particular, Bulgaria, Romania, or Hungary could put up formal or informal trade barriers that make it difficult for such a trade corridor to become prominent, and the former Yugoslavian countries in the Balkans could be too unreliable to provide alternative overland routes.

Source: Seeking Alpha, Hellenic Shipping News

Eurozone Private Sector Activity Picks Up in October

Activity in the eurozone’s private sector picked up in October, a surprise development that suggests the currency area’s modest recovery has yet to be weakened by slowdowns in China and other large developing economies.

The European Central Bank Thursday signaled that it is prepared to undertake another large stimulus package that could include more bond purchases and a cut to the already negative deposit rate.

In a news conference, ECB President Mario Draghi promised a “reassessment” of the adequacy of the stimulus being provided by policy makers during their December meeting. The reference to December was noteworthy because central bankers typically shy away from setting expectations too high for action at a particular time.

But the case for additional stimulus is based in part on worries that slowdowns in China and elsewhere will weaken demand for eurozone exports, and in turn, the recovery. That would make it more difficult for the ECB to meet its goal of raising the annual rate of inflation to its target of just under 2%.

Signs of economic contagion from China and other emerging markets appear to be fairly limited and are acting more like a cap to the upside of the recovery rather than delivering a slowdown,” said Giovanni Zanni, an economist at Credit Suisse.

However, Mr. Zanni said the pickup in activity wasn’t strong enough to alter the view of policy makers that more stimulus is needed.

Data firm Markit surveyed more than 5,000 businesses across the eurozone during October. Its composite purchasing managers index–a measure of activity in the manufacturing and services sectors–rose to 54.0 in October. A reading below 50 indicates activity is declining, while a reading above that level indicates it is increasing. Economists surveyed by The Wall Street Journal last week had forecast a decline to 53.3 from September’s reading of 53.6.

However, the surveys found that new orders were at a six-month high, an indication that activity is unlikely to weaken significantly in coming months. The pickup in new orders was driven by the services sector, which is more reliant on domestic demand, while the growth of new manufacturing orders eased, possible a sign of weakening overseas demand. Businesses demonstrated their confidence in a sustained recovery by hiring additional workers.

Despite the rise in the PMI, Markit said it continues to point to economic growth at around the 0.4% quarter-to-quarter rate recorded in the three months to June, while hiring isn’t happening quickly enough to significantly reduce high levels of unemployment in the eurozone.

And despite the slight pickup in activity, businesses cut their prices for the first time in three months, partly in response to declining costs as commodity prices weaken. The ECB said on Thursday it was worried that it may take longer to raise inflation to its target because of falling commodities prices.

“The renewed fall in output prices meanwhile suggests that inflation will remain in negative territory as we head toward the end of the year, ” said Chris Williamson, Markit’s chief economist.

Consumer prices were lower than a year earlier in September, the first such drop since the ECB launched its program of quantitative easing in March, under which it will buy more than a trillion euros of mostly government bonds until September 2016.

Markit’s surveys pointed to a pickup in France, which has lagged behind other parts of the eurozone economy this year. The surveys also recorded a pickup in Germany, in contrast to recent data that suggested the economy may be slowing in response to weaker demand for its exports from developing economies.

Source: Dow Jones, Hellenic Shipping News

Eurozone Banks Take Advantage of QE

Eurozone banks have used new money pumped into the economy by the European Central Bank through its huge bond-purchase program to make loans, according to latest central-bank data.

The ECB’s Bank Lending Survey said Tuesday that eurozone banks also eased lending standards to firms in the previous quarter and expect to continue to do so in the current quarter.

The news that banks are exploiting the extra liquidity provided by the central bank should bolster confidence among ECB policy makers that the bond-buying, or quantitative-easing, program is working amid worries about falling prices and faltering growth in the eurozone.

The ECB holds its regular monetary policy meeting on Thursday, this time in the Mediterranean island nation of Malta, with most economists expecting no change in policy for now. They do think an expansion of the ECB’s ?60 billion ($68.4 billion) monthly purchases of bonds is likely later this year or early next year.

The survey data bolster other ECB reports that show that lending volumes have increased in recent months, even though growth is still at a moderate pace. Data released last month showed that loans to firms and households grew in August on an annual basis.

Policy makers and economists have said that the lending channel is one of the areas in which the ECB’s large-scale bond buying program can most clearly claim success. Speaking in Lima, Peru earlier this month, ECB head Mario Draghi said that the ECB’s bond buys “together with other monetary policy measures?has a favorable impact on the cost and availability of credit for firms and households, contributing to the euro area recovery and a gradual rise in inflation.”

In its latest lending survey, the ECB found banks have loosened credit terms slightly more than expected. “Banks reported a further net easing of credit standards on loans to enterprises in the third quarter of 2015,” the survey said, adding that this “was stronger than the previous survey round’s expectations.”

The survey found that the net percentage of banks reporting an easing of credit standards on loans to firms in the third quarter was -4%, after -3% in the second quarter. The figure is calculated by subtracting the share of banks reporting easier terms from those that tightened them.

The survey showed that 7% of banks said that they had eased standards, while 3% said they’d tightened them. The other 90% said the standards remained largely unchanged.

For the current quarter, “banks expect a further net easing in credit standards on loans to enterprises.”

By contrast, the report said that standards on loans to households for house purchase “tightened measurably” in the third quarter.

The survey said that banks “reportedly used additional liquidity from the [ECB’s QE] program to grant loans over the past six months.”

The survey said that net demand for loans to firms “continued to increase” in the third quarter and “banks expect a further considerable increase in demand from enterprises in the fourth quarter of 2015.”

Source: Dow Jones, Hellenic Shipping News

Forget about mega-merger of Europe’s biggest banks

European bankers are complaining that the continent’s investment banks are being pummelled by their US rivals. This is true. Some believe that the only way to compete might be to merge several players into a regional champion. This won’t happen. What’s more, it wouldn’t solve the problem even if it did.

Frédéric Oudéa, chief executive of France’s Société Générale, argued in the Financial Times that a handful of “robust” US universal banks “are gaining market share abroad while strengthening their positions at home”. John McFarlane, the chairman of Barclays, suggested that the only way to fight back would be to combine the investment banking arms of the biggest European firms to create a regional champion.

It’s true that European banks are shedding jobs, selling off assets and nursing their frail balance sheets. On Thursday, Deutsche Bank warned that it will make a €6.2bn loss in its third quarter because of writedowns and may cut its dividend this year for the first time since 1957. Credit Suisse is reportedly contemplating a “substantial” capital raising. These are not the actions of companies in rude health.

Meanwhile, US banks are on the charge. Mr Oudéa points out that the top five US investment banks have increased their share of the global wholesale financial market from 48pc to 59pc over the last five years.

There are a number of reasons for this transatlantic divide in banking fortunes. Banks around the world were hit hard by the credit crunch. But the fallout in the US was shorter and sharper because the authorities there forced American banks to raise capital, shrink their balance sheets and start getting into shape for the new regulatory environment: many were compliant with Basel III – the main international banking rulebook – long before the deadline.

European banks, by contrast, have been allowed to stagger on, not least thanks to the European Central Bank’s efforts to keep the eurozone intact by flooding the region with cheap funding. New rules, some more strident than in the US, have been drawn up. But, because European consensus can take a while to develop, they’ve only recently been finalised and many have yet to be implemented.

The upshot is that, seven years on from the credit crunch, the nettle of European bank restructuring remains decidedly ungrasped. The Royal Bank of Scotland has dramatically scaled back its investment banking operations (mostly because it was in state-ownership and forced to by the Treasury); the Swiss banks, beholden to a particularly tough domestic regulator, have also got out of a few unprofitable business lines; and, erm, that’s about it.

US banks have also benefited from the post-crisis regulatory agenda. Different countries reacted to the credit crunch with different rules, resulting in what the consultancy Oliver Wyman has described as “regulatory Balkanisation”. International banks must now treat their operations in each country as separate entities with their own capital buffers and liquidity, which has effectively put the decades-long process of financial globalisation into reverse.

This is annoying for all banks. But it is least annoying for those banks with the biggest home markets. And the US, which in any given year is the source of somewhere between a half and two-thirds of global investment banking profits, is the largest of them all. US banks have turned their profitability into the economies of scale that allow them to compete on a global stage.

None of these trends will be reversed by attempts to create a pan-European investment banking champion.

In July next year, the US will introduce new rules for what it calls “foreign banking organisations”, requiring them to set up bank holding companies, comply with local leverage rules and pass certain liquidity tests. This will make it even harder for international firms – however big they might be – to compete in the El Dorado of investment banking.

And, while it is true that the European Union has roughly the same economic clout as the US, its capital markets are still only about half the size (something that Lord Hill’s capital markets union, launched earlier this month, is attempting to solve). What’s more, the fees that banks earn for capital markets work in Europe are much lower than in the US. The global playing field won’t be level any time soon.

It is unlikely that mergers will solve the other big problem facing most European banks: a lack of capital. Credit Suisse appears to be in the weakest position on this front, especially when it comes to common equity tier 1 capital (the most important kind). But UBS, the big French lenders and Deutsche Bank are all similarly afflicted. Merging two or more large banks with not enough capital merely creates a very large bank with not enough capital.

Despite moves towards a banking union in Europe, the continent remains a patchwork of competing interests. The national restrictions on capital and liquidity are unlikely to be relaxed anytime soon. The picture is further complicated by the fact that two of the countries with the largest banks – the UK and Switzerland – aren’t part of the eurozone.

Talk of a pan-European champion sounds like a riff on the long-running pleas for less regulation. It is a distraction from the real issue. As the Chinese proverb almost has it, the best time for European banks to get their houses in order and improve their capital positions was five or six years ago. The second best time is now.

Source: Telegraph, Hellenic Shipping News

The long shadow of the financial crisis

There is a grim lesson to be learnt from the latest report on the world economy by the International Monetary Fund (IMF). The financial crisis still casts its long shadow over global growth. Our analysis shows that global output in 2015 will be around $12 trillion lower than what the IMF had implicitly assumed in its April 2011 edition of the World Economic Outlook (WEO). Think of it as the opportunity cost of the global economic slowdown.

It is now six years since the global economy came out of the deepest recession since the end of World War II. The IMF says in the new WEO released this week that it expects global output to grow by 3.1% this year, its slowest rate of expansion since 2009. Economists have taken to worrying about hysteresis—or how the impact of prolonged sluggishness will hurt economic prospects over the long term. Is it too soon to ask a tough question: Is the global economy in the middle of a lost decade?

In the advanced economies, according to the IMF, growth has been lower than projected in the past four years. The actual output growth in 2011-14 has been a full percentage point lower than was projected in the April 2011 edition of the WEO. Notably, while economic growth was overestimated, employment growth was underestimated. Even though unemployment is still high in many advanced economies, employment intensity of growth has increased, which has helped bring down unemployment. The reason: a slowdown in labour productivity. That is because the jobs created in recent years have been temporary and not very productive. There has also been a slowdown in total factor productivity. Therefore, it is likely that the advanced economies will continue to grow at below potential as they cope with changes induced by the financial crisis, such as lower investment and muted demand.

Meanwhile, emerging markets are not in a good spot either, and their growth is expected to slow down for the fifth consecutive year. While China is slowing as it rebalances its economy away from investment, a large number of developing economies are battling difficulties because of the decline in global commodity prices and their dependence on exports. Since commodity prices are expected to remain weak in the foreseeable future, these economies will be exposed to pressure on their economic growth, fiscal condition and currency management. The expected rise in US interest rates will further complicate matters. A reversal in capital flows, and its impact on currency and corporate balance sheets, will only increase the downside risk in commodity-exporting developing countries.

Highlighting the risks that the emerging economics face, the IMF has said: “Vulnerabilities and financial stability risks in emerging market economies have likely increased amid lower growth, recent commodity price declines, and increased leverage after years of rapid credit growth.”

So, where does India stand in an environment where both developed and developing economies are facing their own set of challenges, leading to lower aggregate global growth? Slower global growth will definitely affect prospects for the Indian economy but, overall, conditions have become favourable for India compared with the situation prevalent a few years ago. Inflation has come down, the current account is under control and government finances are in a better shape. However, challenges to growth still persist. The stress in the corporate and bank balance sheets is a major issue which has also been touched on by the IMF. Mechanisms will have to be devised to reduce the stress, particularly in banks, so that they are in a position to fund growth once again. Policymakers will also have to ensure that they don’t land up in a similar position once again.

Further, the government will have to proactively intervene to remove supply side constraints which will also lead to more investments and improve growth prospects. India should also use this opportunity of cheaper commodity prices and lower cost of capital in the global market to step-up activity in the infrastructure sector. Since the external environment is likely to remain challenging in the near to medium term, policymakers in India would do well to focus on maintaining macroeconomic stability and improving the overall competitiveness of the economy.

Source: Livemint, Hellenic Shipping News

Seeping pessimism holds back euro zone recovery – ECB’s Praet

Pessimism is holding back the euro zone’s economic recovery as firms withhold investment, and reforms, particularly to boost productivity, are needed to shift long-term expectations, European Central Bank chief economist Peter Praet said.

The ECB’s job is to support demand as long as necessary to work through weak cyclical conditions, but its accommodative policies can only buy time for policymakers to address real institutional weakness, said Praet, who also sits on the ECB’s executive board.

Euro zone growth is picking up pace but only slowly, a process the ECB has called “disappointing”. The IMF sees GDP expanding by just 1.6 percent next year, up from an expected 1.5 percent this year, far below levels seen before the bloc’s double-dip recession.

“The economic environment is characterised by seeping pessimism about the prospects for long-term growth,” Praet told an economic conference on Thursday. “It holds back a stronger recovery, as uncertainty about the future can feed back into weaker investment today through expectations and confidence channels.”

Hoping to kick-start inflation and growth, the ECB launched a 1 trillion euro plus asset-buying programme earlier this year. But the results have been modest so far, especially as oil prices lower inflation and China’s slowdown reduces growth.

Greece, Cyprus, Italy, Portugal, Slovenia and Spain – all considered laggards in the bloc – have taken vital measures to improve competitiveness but it is not yet enough, Praet said.

“Further reforms will be needed to decisively shift expectations, in particular in the priority area of raising total factor productivity, which is ultimately what drives long-term growth,” Praet said.

The euro area needs to remove regulations that encourage firms to stay below a certain size and has to make it easier for new firms to enter markets and non-productive ones to exit, Praet said.

Capital markets also need to be reformed so capital can be more easily reallocated between growing and shrinking firms, he added.

While the ECB’s measures, including its quantitative easing scheme were unprecedented for a relatively young institution, they were necessary given that the bank found itself in a situation when some observers considered it “the only game in town”, Praet added.

The ECB’s job is to support demand for as long as necessary to work through weak cyclical conditions, but governments need to use this time to enact the measures that make growth sustainable, he said.

Source: Reuters, Hellenic Shipping News

Authors: Balazs Koranyi, Hugh Lawson