The case for uranium

The spot market price for uranium ended 2010 at its highest level for over two years, reversing a declining trend in a year that also saw record spot market activity.

Summary

• Nuclear power generation is today the only viable and credible route to match growing electricity demand in fast expanding economies but also in the West to meet CO2 emission reduction targets.
• A large portion of uranium mines are located in deemed “safe zones”.
• Uranium prices reached their top ahead of other commodities and lagged during the recovery phase: in 2010 and 2011, uranium prices substantially closed up the gap.
• I do not perceive a risk of shortage with expected increase in production from major providers and secondary source (new START agreement in particular) and therefore does not pose a constraint to an extension of nuclear energy; in case of major stress, stockpiles could be used (just below 3 years of mine production at 2010 rate of extraction).
• With incremental production required, prices will continue to move upwards for mines to be economically viable to match demand.
• The price of mined uranium is not as fundamental as oil as a usable combustible.
• 2007 peak was mostly speculative, nothing really happening on the field; actual move is based on fundamentals.
• Uranium shares recovery is spectacular and a correction is overdue. For the long term investor they represent an added leg to the energy/commodity secular theme.

1. Long term trend of electricity consumption/production

The world population without access to electricity amounted to 1.5 billion people in 2008 and will still represent 1.3 billion people in 2030.

According to the International Energy Agency, Electricity is the world’s fastest-growing form of endues energy consumption as it as been for the past several decades. Net electricity generation worldwide will rise by 2.3 percent per year on average from 2007 to 2035, while total world energy demand grows by 1.4 percent per year. This would represent a World net electricity generation increase of 87% (reference case), from 18.8 trillion KWh in 2007 to 25.0 trillion KWh in 2020 and 35.2 trillion KWh in 2035. Non-OECD countries will account for 61 percent of world electricity use in 2035 (non-OECD increasing at 3 times the pace of OECD countries, at 3.3% / year).

The 2007 sector consumption breakdown and annual growth until 2035 are as follows:

Residential	14%	+1.1%/annum to 2035
Commercial	7%	+1.7%/annum to 2035
Industrial	51%	+1.3%/annum to 2035
Transportation	27%	+1.3%/annum to 2035

2. Nuclear power generation

Nuclear power generation represents a small portion of the world total electricity production, whilst increasing from 2.6 trillion KWh in 2007 to 4.5 trillion KWh in 2035 as high fossil fuel prices (particularly from non-conventional sources or difficult to extract conventional ones) and concerns about security and greenhouse gas emissions support the development of new nuclear generating capacity.

Currently, the share of nuclear electricity generation varies widely between regions and within OECD countries, from over 75% (France, Lithunia) to less than 5% (China, India, Brazil, The Netherlands, Pakistan, Mexico, South Africa).

Nearly 72 percent of the world expansion in installed nuclear power capacity is expected to take place in non-OECD countries, particularly China where estimates range widely in both timeframe and capacity; the IEA forecasts China to add 66 GW by 2035 (China announced a total capacity of 40GW – some officials put the figure at 80 GW -in 2020 vs. 10.3 GW end 2010). For reference, in 2006, the world had 435 reactors located in 30 countries producing 370 GW; by 2035, 350 reactors are planned worldwide representing an electricity generation of 330GW. According to the International Atomic Energy Agency, from 2012 ten or more new reactors will be connected to the grid every year, the first time since 1990.

Furthermore, world average capacity utilization rates have continued to rise over time, from about 65 percent in 1990 to about 80 percent today, with some increases still anticipated in the future. In addition, most older plants now operating in OECD countries and in non-OECD Eurasia probably will be granted extensions to their operating licenses. Despite these developments, nuclear electricity will remain a small portion of the total production.

Notwithstanding the difficulty to forecast nuclear plant construction over the long term, the IEA increased by 9 percent last year’s projection.

In addition, new technologies are being developed in the field of micro-nuclear reactors that could match an untapped sector so far. The USA is developing an underground reactor technology of 140MW whilst France is well advanced with small offshore nuclear power plants of 50 to 250 MW.

Still, there is considerable uncertainty associated with nuclear power projections. Issues that could slow the expansion of nuclear power in the future include plant safety, radioactive waste disposal, rising construction, maintenance, and decommissioning costs as well as investment risks, traditional fossil energy prices, and nuclear material proliferation concerns.

3. Uranium demand and supply

According to the World Nuclear Association, the world total production was 50,772 tU in 2009 (55,000 tU estimated for 2010 as production ramps up in Kazakhstan and Namibia):

• About 63 percent of the world's production of uranium from mines is from Kazakhstan, Canada and Australia. 
• An increasing proportion of uranium, now 36%, is produced by in situ leaching. 
• After a decade of falling mine production to 1993, output of uranium has generally risen since then and now meets 76% of demand for power generation. 

World Uranium Production Data
(thousand pounds U₃O₈)

Country	2001	2002	2003	2004	2005	2006	2007	2008	2009
Kazakhstan	5,300	7,368	8,579	9,669	11,327	13,725	17,255	22,153	35,929
Canada	32,540	30,178	27,186	30,150	30,230	25,642	24,636	23,399	26,448
Australia	20,070	17,819	19,686	23,427	24,747	19,742	22,387	21,917	20,752
Namibia	5,821	6,070	5,293	7,898	8,182	8,000	7,485	11,351	12,027
Russia	5,200	7,539	8,189	8,319	8,920	8,839	8,873	9,154	9,266
Niger	7,590	7,997	8,171	8,532	8,041	8,928	8,197	7,883	8,431
Uzbekistan	6,240	4,836	4,602	5,241	5,980	5,902	6,032	6,078	6,315
USA	2,630	2,344	2,228	2,228	2,689	4,106	4,533	3,879	3,778
Ukraine	1,300	2,080	2,080	2,080	2,080	2,080	2,199	2,080	2,184
China	1,300	1,898	1,950	1,950	1,950	1,950	1,851	1,999	1,950
So. Africa	2,270	2,142	1,971	1,939	1,752	1,418	1,401	1,703	1,464
Brazil	151	702	806	780	286	494	777	858	897
India	520	598	598	598	598	598	702	705	754
Czech Rep	1190	1248	897	1071	1061	928	796	684	671
Malawi	0	0	0	0	0	0	0	0	270
Pakistan	60	99	117	117	117	117	117	117	130
TOTAL	93,013	93,951	92,977	104,451	108,441	102,833	107,550	114,373	131,482

Kazakhstan produces the largest share of uranium from mines (27% of world supply from mines), followed by Canada (20%) and Australia (16%). Namibia (+127%) is the fastest growing supplier after Kazakhstan (+352%).

The world's known uranium resources went up 15% in two years to 2007 due to increased mineral exploration since uranium recovery prices in 2003; the known recoverable resources of uranium were 5.4 million tU in 2009 with Australia holding 31% of this total, Kazakhstan 12%, Canada and the US 9% each (based on a market price of USD 130 / kg). This represents 80 years of supply at the current projected new reactors.  The World Nuclear Association (WNA) reference scenario projects world uranium demand as about 77,000 tU in 2015, and most of this will need to come directly from mines (in 2009, 24% came from secondary sources). China alone, would have consumed 15,000 tU in 2010, 27% of world mines’ production. The World Energy Council forecast demand to reach between 105,000 tU and 140,000 in 2030.

World Uranium Requirement Data
(thousand pounds U₃O₈)

Country/Region	2001	2002	2003	2004	2005	2006	2007	2008	2009
USA	47,336	54,664	62,300	50,100	58,300	51,500	49,500	49,100	51,100
European Union	53,024	54,591	54,100	50,400	55,100	53,200	53,600	57,400	56,700
CIS/Non-EU	31,205	30,607	22,700	19,900	21,600	20,700	20,800	15,900	16,500
Asian Pacific	38,435	35,249	37,700	36,400	34,600	35,000	35,300	36,000	38,800
Other	7,089	8,546	8,100	8,100	8,400	10,700	9,100	9,600	10,100
TOTAL	177,089	183,657	184,900	164,900	178,000	171,100	168,300	168,000	173,200

Whilst demand has substantially increased over the past few years to reach an estimated 68,640 tU in 2010 (equivalent to 80,954 tU₃O₈), production has also significantly expanded and, in 2009, covered approximately 76% of utilities’ requirements.^[1]

 The balance is made up from secondary sources including (2009 data between brackets):

• recycled uranium and plutonium from spent fuel, as mixed oxide (MOX) fuel (1500-2000 tU)
• re-enriched depleted uranium tails (a few thousands tU)
• civil stockpiles (150,000 t U – unlikely to be reduced for strategic reasons)
• ex military weapons-grade plutonium, as MOX fuel (10,600 tU₃O₈ / yr)

The following graph suggests how these various sources of supply might look in the decades ahead:

There is no sign of undersupply if the price, like all commodities, is high enough to be economically extracted. The graph below shows the elasticity of price to demand: we are nearing an inflexion point at around 65,000 tU₃O₈ which requires higher market prices to maintain margins. The new START accord signed Saturday February 5 between the USA and Russia aiming at further reducing the nuclear arsenal on both side (the previous one was expiring end of 2013) will also bring additional secondary supply.

4. Uranium price

The perception of imminent scarcity drove the "spot price" for uncontracted sales to over US$ 100 per pound U₃O₈ in 2007 but it settled back to $40-45 over the twelve months to July 2010. Most uranium however is supplied under long term contracts and the prices in new contracts have, in the past, reflected a premium above the spot market.[2]

The year-end price of $62.00 per pound U3O8 reported by uranium market information specialist TradeTech was the highest value reported since September 2008. At the beginning of 2010 the spot price stood at $44.50 per pound, and had been declining since 2008 in line with the global financial crisis. It reached an annual low of $40.50 in March, before prices began to strengthen and the decline was reversed. In November, prices accelerated and the spot price ended the year above $60 per pound for the first time since August 2008. From nadir to trough prices collapsed 71% to recover by 80% to Januray 31, still lagging the other commodities complex, albeit slightly.

USD	CRB index	Uranium	Oil
High	473.97 [Jul-08]	138 [Jun-07]	147.9 [Jul-08]
Low	200.16 [Feb-09]	40.5 [Mar-10]	37.12 [Feb-09]
31-Jan-11	341.42	73	94.28
H to L	-58%	-71%	-75%
L to 31-Jan-11	71%	80%	154%
H to 31-Jan-11	-28%	-47%	-36%

As well as an increasing spot price, 2010 also saw record activity on the uranium spot market with an annual sales volume of 42.8 million pounds. The spot market has not seen activity close to this level since 1990, when spot market sales reached 40.6 million pounds. Record sales volumes were reported in December, which TradeTech said was due to Chinese nuclear power expansion plans and the signing of two new contracts for long-term uranium supply exciting renewed interest from the financial and investment sectors. The spot price for uranium rose again in January for the eighth consecutive month. Thin spot supplies continue to exert upward pressure on the uranium spot price and TradeTech’s Exchange Value is $72.25 per pound U3O8, an increase of $10.25 from the December 31 Value, 70% higher than a year ago[3].

The shift from a buyers’ market to a sellers’ market that began last year gained new momentum in January. A driving force behind this increase is the ambitious nuclear program in China, along with reports in recent months from several producers that they will not meet production targets.

Clearly, the base formation is completed and we have entered a momentum phase.

Uranium tends to substantially outperform and underperform other metals as the graph below shows. Since April 2009, the ratio has moved in a narrow range between 5 and 7, uranium outperforming since April 2010. A very similar pattern applies between oil and uranium.

If we take Cameco as a proxy for uranium shares and compare it to uranium prices, uranium shares have substantially outperformed during the 2008 financial crisis, and from Q3 2009 both have been moving more or less in synchrony.

5. Uranium shares

Since the early 1990s the uranium production industry has been consolidated by takeovers, mergers and closures. In 2009, ten companies marketed 89% of the world's uranium mine production:

Among these, besides Cameco, all large producers are either integrated mining companies or nuclear companies or are state-owned. In addition, approximately 400 junior mining/exploration companies exist. A few investment vehicles are available to play the uranium story, but all ETF are encompassing the nuclear industry as a whole and are therefore not limited to uranium mining companies.

Producers (price as of 04/02/11 or 07/02/11)	Cur	Price	High	Low	From high	From low
Cameco	C$	41.38	59.75	22.14	-30.74%	86.90%
Uranium One	C$	6.42	17.87	0.6	-64.07%	970.00%
Paladin	A$	5.9	10.59	1.63	-44.29%	261.96%
ERA	A$	11.33	28.58	9.35	-60.36%	21.18%
Denison	C$	3.9	16.57	0.69	-76.46%	465.22%
Uranimu Participation Corp	C$	9.39	18.67	4.85	-49.71%	93.61%
Powershares Glob Nuc Energy (ETF)	US$	22.2	29.04	11.47	-23.55%	93.55%
Areva (non-voting shares)	EUR	35.49	83.154	30.51	-57.32%	16.32%

For Areva, investors can only buy non-voting shares, and the company is always subject to French political jittering, but remains the world largest integrated nuclear company.

The fantastic performance displayed by uranium companies has mainly been realized over the past 6 months and a correction is overdue that will provide opportunities to buy.

[Last minute: the correction has started]

__________________

[1] 3 yardsticks to remember:

each GW of increased capacity will require about 200 tU/yr of extra mine production routinely, and about 400-600 tU for the first fuel load

1 t U ≈ 1.179 t U₃O₈ (oxide)

1 kg U₃O₈ ≈ 2.204622 lb U₃O₈

[2] Note that at the prices which utilities are likely to be paying for current delivery, only one third of the cost of the fuel loaded into a nuclear reactor is the actual ex-mine (or other) supply. The balance is mostly the cost of enrichment and fuel fabrication, with a small element for uranium conversion

[3] Less than 20% of the world's uranium supplies are traded on the spot market, rather than under long term contracts, but the price in long-term contracts is often related to the spot price at the time of delivery.

Source:

http://www.iaea.org/

http://www.world-nuclear.org

http://www.iea.org

http://www.worldenergy.org

http://www.cea.fr/

http://www.uxc.com/

http://www.uranium.info/

http://www.world-nuclear-news.org

http://www.cameco.com/

http://www.areva.com

http://www.fullermoney.com

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Monet exhibition in Paris: December 2010- January 2011

For once, nothing about finance or the economy, just a link for a wonderful digital journey into Monet's work during his long painting life:

http://www.monet2010.com/en#/home/

These paintings were in display at at the Paris "Grand Palais" exhibition center.

Enjoy!

Europe and the euro zone at the forefront again

In Europe, the beginning of the year started at full speed from day one.

First, the EU earmarked Estonia joining the euro zone as a proof of the continuing success and attractiveness of the euro as if this event would fool any sensible investor.

At the same time tensions reappeared with spread widening again for PIGS countries debt ahead of Portugal and Spain financings. These debt auctions however went rather well which eliminated the immediate need for action and spreads contracted whilst still at unsustainable levels for the long term.

Finally, the Eurogroup and ECOFIN met in Brussels on the 17th and 18th of January to prepare the head of states meeting due to take place on the 4th of February. The main purpose of these meetings was to discuss potential changes to the European Financial Stability Fund (EFSF) to create a permanent rescue mechanism where 4 options will probably be discussed:

1. Do nothing (suicidal)

2. Increase the size of the EFSF (the preferred solution for many but the Germans so far)

3. Reduce the interest charged on EFSF loans (cosmetic)

4. Increase the scope of sovereign debt purchases (complements point 2)

Whatever, with its endless printing press, the ECB could expand the scope of its purchase of government debt in the secondary market, even if the Germans would hate it. So I do not expect the collapse of the euro zone but for the German blowing the whistle - most unlikely - (I am awaiting the decision by the German High Court of Karlsruhe about the constitutionality of the EFSF): politicians are making the taxpayer pays the highest price to save the euro.

There are many reasons why designing a better system for managing the euro zone is proving very difficult. Virtuous countries rightly want the pain to be felt by profligate ones which in turn try to limit/postpone tough austerity measures, any politician having permanently his eyes on the next poll and being always reluctant to decisively act with unpopular measures, even when necessary. The fundamental problems of the euro zone remain unresolved:

1. Over-indebtedness of sovereign states

2. Toxic assets in banks’ balance sheets

3. Over-leveraged banks

4. Much slower growth in the euro zone than the rest of the world

5. Competitiveness gap between Northern Europe and Southern Europe

I continue to believe that (1) adding debt to an over-indebtedness problem will only postpone the final cure and make it sourer and (2) an early and orderly restructuring of the liabilities of de facto defaulting countries will begin to solve this mess.

This would imply bondholders taking a haircut which might lead to some banks being bankrupt – sensible when the wrong management decisions were taken (ok, the question of imposing haircuts on bondholders has to be addressed); alongside a mechanism should be implemented to ensure that savings will be safeguarded for both individuals and corporations. And I do not take on board the bullshit that banks spread about the need to save them so they can lend to the economy: so why do they have so much sovereign debt on their balance sheet? Because it was an easy way to play the yield curve to replenish their shareholders’ funds investing in sovereign “risk free” debt and continue business as usual despite the rhetoric (a bit a remake of the subprime, but made in Europe this time: no analysis of risk, invest in riskier –but not so risky…- assets for a small yield pickup, instead of doing a proper job). So far, the taxpayer is the only one on the hook: this is neither a balanced solution nor an efficient one. My guess is that the burden of the crisis will be more evenly shared.

This would also result in some pension funds and other bond and money market investment vehicles incurring losses, and so what? Did anybody guaranty pension funds, equity investment funds or individuals for their 2008 stock market losses? No, investors act by either re-allocating assets with other managers or classes, or by waiting (hoping) for a recovery.

As Martin Spring’s writes in his January’s newsletter: “As long as Europe’s toxic debt problem remains unresolved, we can expect further currency crises as speculators seek to profit from politicians’ cowardice like Vikings raiding poorly-defended shores.”

Source:

The New York Time: Support Grows for Larger European Rescue Fund

http://www.nytimes.com/2011/01/18/business/global/18euro.html?scp=1&sq=brussels%2017%20&%2018%20january%202011&st=cse

Winners & Losers in 2010

Source:

Bloomberg via Saxo Bank

Detailed exposure of banks to PIGS countries

he BIS latest publication provides interesting details which are usually kept away from public eyes; I talked to the BIS which confirms that they were able to publish these detailed data following an authorization from Central Banks in Europe. I guess this disclosure had only one objective: to show that Spanish banks gross commitment to banks and public sector in Portugal, Greece and Ireland is minimal at USD 19.2 billion vs a total exposure of USD 98.3 billion, i.e. 20%.

These statistics also confirm my previous analysis of a very low exposure of Italian banks to PIGS countries at USD 76.3 billion, 5.4 X less than France and 6.7X less than Germany. This number is even lower if exposure to banks and public sector only is considered (7X less than France and 9X less than Germany). France and Germany have a total exposure to PIGS of USD 410 billion and USD 512 billion respectively, nice numbers which explains a lot about the Greek and Irish rescues...

The bar charts show that banks have substantially reduced their exposure to the PIGS countries during Q2 2010, even if unevenly (Germany for example cut 25% of its exposure to the non-bank private sector in Ireland whilst increasing it by 5% to banks). I have no doubt that this has continued since, with all the sovereign debt reduction flowing to the ECB balance sheet.

Source:

Bank for International Settlement: Highlights of international banking and financial market activity

http://www.bis.org/publ/qtrpdf/r_qt0703b.pdf

Tracking the Global Economy: United States

The latest release by the FED of St Louis confirms that the economic situation of the US continues to (slowly) improve.

Source:

Federal Reserve Bank of St Louis: Economic Research

http://research.stlouisfed.org/economy/us/gdpdata.html

What did the financial crisis did teach us about the Eurozone?

 

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In any crisis, one can become depressed and see the glass always half empty and not learn lessons, continuing the same mistakes or inventing new ones, even worse. One can also learn from past mistakes and improve.

The financial crisis taught us a few things which were hidden deep within its foundation due to a flush of liquidity, low interest rates, deflation imported thanks to industrial delocalization and the absence of control:

• The Euro is a political currency, not an economic one and will fail if the latter does not dominate the former; please understand me, I do not wish the fall of the Euro, I am just explaining the inevitable if politicians in Europe continue to act blindfolded for the sake of the Eurozone and EU enlargement for themselves.
• Behind the smokescreen of European solidarity, European countries are participating in rescue plans to save first  their banks, second the countries which are bankrupt, not the other way around (why do you think the UK is participating in the bailout of Ireland and not the one of Greece?). Without banks at risk in France and Germany, I doubt we would have witnessed such bailout, in particular Ireland that most European politician abhor (too low taxes to their taste and a former economic success, not like Greece – Europe prefers cheaters).
• The root of the crisis is not addressed with the past and yet to come rescue packages: the one-fits-all does not work without the loss of sovereignty on fiscal and social policies, i.e. the end of sovereign states in Europe – if you don’t control your fiscal policy, you are no longer independent.
• Without a mechanism of automatic sanctions, strong enough to discourage Government not to abide by the convergence criteria (60% debt/GDP, 3% budget deficit), there is no way the Eurozone can work; past experience has demonstrated the lack of courage of politicians in front of voters.
• The all idea of economic convergence behind the Euro has in fact witnessed the contrary with a competitiveness gap increasing between the North and the South of Europe. The rescue packages extended to Greece and Ireland are not solving anything, just adding debt to already overly indebted countries and plunging them into a deflationary spiral making these debts even more difficult to service despite artificially low interest rates. Oh! Yes, we are gaining a few years, as if it were be enough. 

There are two different ways to address over-indebtedness. Whilst Iceland and Ireland had both too much private-sector debt and a banking system massively overleveraged, their response to the crisis has been rather different. As BCA Research analyses it: 

“Iceland and Ireland experienced similar economic illnesses prior to their respective crises: Both economies had too much private-sector debt and the banking system was massively overleveraged. Iceland’s total external debt reached close to 1000% of its GDP in 2008. By the end of the year, Iceland’s entire banking system was crushed and the stock market dropped by more than 95% from its 2007 highs. Since then, Iceland has followed the classic adjustment path of a debt crisis-stricken economy: The krona was devalued by more than 60% against the euro and the government was forced to implement draconian austerity programs. In Ireland, the boom in real estate prices triggered a massive borrowing binge, driving total private non-financial sector debt to almost 200% of GDP, among the highest in the euro area economy.

In stark contrast to the Icelandic situation, however, the Irish economy has become stuck in a debt-deflation spiral. The government has lost all other options but to accept the €85 billion bailout package from the EU and the IMF. The big problem for Ireland is that fiscal austerity without a large currency devaluation is like committing economic suicide – without a cheapened currency to re-create nominal growth, fiscal austerity can only serve to crush aggregate demand and precipitate an economic downward spiral. The sad reality is that unlike Iceland, Ireland does not have the option of devaluing its own currency, implying that further harsh economic adjustment is likely.”

The graph below exemplifies the result of both policies: the winning one is quite obvious…

The major mistake made by Ireland in 2008 was to guarantee the debt of Irish bank.

I disagree with the ECB and many European politicians who do not want bondholders to participate in mending the current crisis: bondholders must take a haircut in a package designed to manage an orderly default of at least the PIGS countries, like any investors they must pay for their wrong analyses and bad investments. It is how capitalism successfully works. The taxpayer should not pay for the private sector.

Politicians and others at the ECB fear that investors would not invest again in European sovereign debt? Bullshit; investors have short memories, and more importantly, good investors are able to do their own analysis of risk/reward profiles; offer them an interesting story and they will invest, otherwise reform yourself to present such a story.

Banks are going to be under pressure? Yes, and so what? They would need additional capital? Ok, raise it with shareholders. Probably unsuccessful due to the sheer size? Sell assets. Not enough? Sell yourself. OMG! We are going to risk loosing control of “national” banks; we can’t do that! Ok, get the taxpayer to become shareholder and get rid of the Management and the Board, then sell back to the private sector at a profit.

I continue to believe that we should not test the German resolve to act as taxpayer of last resort, otherwise Germany will take its currency back accompanied by the virtuous Europe (and France will not be part of it) – just look at the trade balance GDP growth, unemployment, etc. to figure out.

Source:

BCA Research: Iceland, Ireland And The Role Of The Currency

http://www.bcaresearch.com/public/story.asp?pre=PRE-20101202.GIF

A E-bond: a good idea? Certainly not!

Jacques Attali, the former advisor to French President, François Mitterand, has been a strong advocate of E-bond issuance for some time, in particular in his book “Tous ruinés dans dix ans? Dette publique: la dernière chance”. This idea was repeated at the Luxembourg for Finance conference in June 2010 attended by Jacques Attali and Jean-Claude Junker, Prime Minister of Luxembourg and President of the Eurogroup.

Today, in the Financial Time, Jean-Claude Junker and Giulio Tremonti, the Italian Finance Minister, floated the idea of an E-bond. Under the premises that

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Europe must convinced markets and European citizens of the irreversibility of the Euro, their reasoning is as follows:

1. The issuance of E-bond in sufficient quantity would provide investors with a deep liquid secondary market, second only to the US Treasury market.
2. Up to 50% (read at least!) of EU members sovereign debt issuance would come from E-bonds.
3. Up to 100% of debt issuance would come from E-bonds in case exceptional EU members could not access capital markets under “normal” conditions.
4. Sovereign debt could be switched to E-bond at a discount to reflect the credit risk which in turn should strongly incentivize countries to reduce their deficits.
5. A single e-bond market for the Eurozone sovereign debt would reduce the necessity for emergency interventions in the secondary market.
6. “A new market would also ensure that private bondholders bore the risk and responsibility for their investment decisions”. Investors (read banks) would have a better collateral with the ECB by switching from sovereign debt to E-bonds whilst they would take a loss on conversion; this would also ensure transparency regarding solvency ratios.
7. In case of difficulty, the new mechanism would allow borrowing states to be able to secure  funding at better rates than presently and not to be exposed to short term speculation
8. Profits coming from conversion discounts would accrue to the European Debt Agency (“EDA”) that would in turn permit lower rates for borrowers. And the taxpayer would not be in line.

I am afraid in the real world, there is no win-win situation. Let’s review this fairy tale:

1. Fine. In normal market conditions, this might translate in a lower cost of funding, not by a lot, maybe a few basis points, everything being equal.
2. So, they are talking about moving debt from one place to the other: Debt will not be reduced whilst one of the keys to the crisis is over-indebtedness.
3. In case of crisis, more debt could be issued under the EDA, and less at the sovereign level; again, no debt reduction but more debt.
4. Well, I would be interested to know how the discount would be decided/calculated, since if transparency there is, this is quite a key point (more later). And I do not see why countries would be more incentivized to reduce their deficits via the discount mechanism than currently when they are under tremendous stress.
5. The intervention in the secondary market by the ECB was implemented (1) to manipulate the cost of borrowing of the sovereign states and (2) to allow banks to get rid-off of bonds resulting from bad investment decisions. This the path Europe decided to follow, rejected any other solution, as displeasing they might be for their ego.
6. No need of a new market: just let bondholders take a haircut right now. And I do not see any difference for banks taking a haircut in the current situation or via a discount mechanism on conversion. Opacity has not been the result of markets but of continuous intervention by the ECB and refusal by politicians of an organized Greece default and possibly the failure of several banks, meaning shareholders wiped out and bondholders severely affected.
7. Indeed, they would access the market at better rates, since Germany would pay for it via the E-bonds. These E-bonds would result in an increasing cost of financing for virtuous European countries to benefit profligate ones. Believing that the E-Bonds would be at German rate is just plain foolishness.
8. Yes, the EDA would benefit buying at a discount from PIGS countries, but what about Germany or The Netherlands? The EDA would buy at a premium, hence a loss.

 All this mechanism does not address the point: European economies must deleverage. Jacques Attali, a very clever man, sells his idea by stating that the EDA would have no debt and could therefore borrow huge amount of money… Well, hold on and what about existing debt? Would it have disappeared? Would the economy had grown much more? Would the European population suddenly increased much to maintain the per capita debt? Come on, this idea is just to institutionalize the mutualization of the sovereign debt across Europe and its associated costs which in turn would force a fiscal integration (without a social integration, it does not make much sense anyway).

This proposition aims at fostering a European integration much farther whilst the root of the problem -the one-fits-all does not work- is not addressed, and make the euro irreversible.
European politician are not ready to admit their failure. Dogma instead of pragmatism still governs Europe, sadly.

Source:

Financial Times: E-bonds would end the crisis

http://www.ft.com/cms/s/0/540d41c2-009f-11e0-aa29-00144feab49a.html#axzz17LijTvh5

The Eurozone crisis and competitiveness

Several times, I wrote on this blog and in articles that the premises of the construction of the Euro were flawed from the beginning, mixing countries displaying stages of economic development too far apart, increasing debt and artificially low cost of financing creating a smokescreen. I also wrote that, in the absence of a two tier Eurozone (strong countries/weak countries), only a fiscal and social integration, with a loss of sovereignty (a German Europe), was a viable solution since the competitiveness gap has increased instead of decreasing for the past ten years or so: this is at the heart of the current crisis.

All the EU/IMF sponsored rescue packages and ECB intervention -buying PIGS debt from banks to lower their cost of financing and relieve banks which loaded themselves to play the yield curve (encouraged by the ECB)- are not mending the root of the problem: lack of competitiveness of the PIGS countries (I always hesitate do add another “I” for Italy) that will take at least 10 good years to improve.

The World Economic Forum published “The Global Competitiveness Report” which exemplifies this:

Source:

The World Economic Forum: The Global Competitiveness Report http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm