Spiga

Update from EU and the Stronger Dollar

According to press reports, Jacques Chirac is preparing to sell the French government's controlling stake in France's three main motorway operators with the intent of raising US$13.4 billion. That money is desperately needed to keep France's public debt from breaking through the Eurozone target of 3% of gross domestic product yet again.

It's not the only thing up for sale. France and Germany, strapped for cash and short on economic growth, are about to let go of considerable blocks of assets. Utilities. Real estate. Even the remaining shares in what used to be the government-owned postal services.

In and of itself, we're big fans of privatization. But in this case, it's tough not to swallow hard at the realization that the governments of the EU's core economies are selling off what could be revenue-generating assets because of existing (and in all probability dynamically expanding) financial obligations - and their apparent inability to revive their ailing and export-dependent economies.

One can't help but wonder: When will they start selling off their gold reserves?


***With oil still uncomfortably close to US$60 a barrel and the euro's purchase power down 11% against the dollar this year, the European Central Bank is seeing enough inflationary shadows in the mist to justify staying in bed. Chances for a cut in European interest rates are falling with every cent the euro sheds against the dollar - at least as far as the lending aspect is concerned.

Because the interest rates offered to depositors are about to be slashed by the private baking sector in Euroland. Several direct banking institutions are about to lower interest rates. ING Diba, the German subsidiary of the Dutch ING, just reduced rates from 2.50 % to 2.25%. (To compare: US subsidiary ING Direct just raise its rate to 3%.)

CC-Bank reduced its rate of 2.6% to 2.3%, GE Money Bank went from 2.75% to 2.50%, while DHB Bank already reduced rates from 2.75% to 2.5% on July 1.

Of course, as the chances for an increasing macro-cyclical dollar valuation are rising, dollar-denominated deposits yielding even 2.5% to 3% (with at least a short-term chance of rising rates) are becoming more attractive to yield-hungry investors.

I wouldn't be surprised to see capital inflows into US equities and financial institutions to pick up considerably over the next three months.

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