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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°146 ▪ 25th May 2018


Is the European Union dying: the case of Italy

Italy, the country in which the Treaty of Rome was signed in 1957 and which today represents the beginning of the European Union, has recently adopted a Eurosceptic government. After the rebellion, and even the revolt, of countries like Hungary and Poland, but also the Czech Republic and Austria, we have seen the United Kingdom leave the European Union. On Monday the 21st of May, the third largest economy of the European Union appointed Giuseppe Conte as President of the Italian Council, he then formed his government. This decision, taken together by the two populist parties, i.e., the Five Star Movement (M5S) and the Northern League (LN), comes to weaken the European construction even more. As Jacques Sapir, the famous French economist, said in a recent paper: “A first lesson must therefore be drawn. To overly focus on the legal aspects, to rely too much on ‘legality’, the European Union has forgotten the importance of legitimacy, which in fact ground the so-called legality. To want too much privilege ‘the state of law’, which is not without merit, one forgot that it was not the completion of the democracy”.

The economic program of the new government should cost the huge amount of EUR 100 billion. With a gross public debt of more than EUR 2,300 billion at the end of March 2018 (i.e., 132 % of Italian GDP), this economic program would certainly make the trajectory of the Italian debt unsustainable. Moreover, the Italian government would of course avoid European budgetary rules by implementing its program. The question that arises is: What are the counter-powers in place? The first one is the Italian President Sergio Mattarella. He is the most legitimate counter-power from the Italian point of view as his power to cause harm is more important than one might think. First, he could refuse that Giuseppe Conte becomes President of the Council. The second one is the European Central Bank (ECB) because the Frankfurt-based institution owns 17% of the Italian gross public debt. Moreover, Italy is too dependent on the European Union’s financial aid to simply ignore Brussels. Last, but not least, financial markets could put pressure on the new Italian government because foreign creditors own 33% of the Peninsula’s gross public debt. Indeed, since the beginning of May, the Italian 10-year bond yield skyrocketed by more than 60 bps, of which 22 bps since the end of the last week.

Who owns the Italian gross public debt?

If counter-powers are likely to put enough pressure on the new populist Italian government, the country will not carry out the structural reforms it needs to regain some fiscal space. However, an “Itexit” remains very unlikely in the near term. At the end of the day, it appears that there is now a kind of irreversible rise of opponents to “this” Europe, i.e., the European Union. The European Union could be dying, at least in its present form, and politicians must consider this agony. In wanting to federate Europe too much, we sometimes forget that it is composed of sovereign states. Financial markets will not forget to remind Brussels and the Italian government of this.

Julien Moussavi, Head of Economic Research – Sources: Beyond Ratings, EC, Eurostat



Sovereign Risk

French GDP growth revised upward for 2017: a snowball effect finally positive?

Main drivers of the French automatic public debt dynamic

The French national institute of statistics (Insee) published Tuesday, May 15 a new upward revision of GDP growth rate for 2017: it should reach 2.3%! This economic growth rebound is mainly explained by a sustained rise in investment by companies (+4.7% YoY). It is combined with a decrease in fiscal deficits and continuously low interest rates due to the ECB’s strongly accommodative monetary policy. These signals are particularly positive for the French public debt sustainability. Indeed, main drivers of the so-called “snowball effect” (automatic public debt dynamic due to contribution of GDP growth rate, primary deficit and real interest rate) are on a positive path and would help to stabilize the debt-to-GDP ratio (even a slight drop from 97% of GDP to 96.8%).

However, the situation is not entirely promising for the French public finances. Indeed, the core CPI remains low (0.6% in 2017 according to the OECD), and would not help to limit a potential increase of government yields in the coming months, following the uncertainty around the European construction (see Julien Moussavi’s Insight). Last, but not least, if GDP growth has been fed by the return of investor confidence, consumer confidence is still rather weak, as private consumption grew only by +1.3% YoY. Given the importance of domestic demand in the French economy, we can question the robustness of this growth in the medium term.

Thomas Lorans, Analyst  –  Sources: Beyond Ratings, Insee, IMF, World Bank, OECD


Should Parisians walk less for better health?

Transport modal shares in 13 cities (% share of trips by mode)

The European Union is taking 6 member states to court for exposing their citizens to too much air pollution. On May 17, it referred Britain, France, Germany, Hungary, Italy, and Romania to the EU’s highest Court of Justice, saying they failed to respect air quality limits and didn’t take appropriate action in time. Germany, Britain and France were targeted for failing to meet limits on NO2 while Italy, Hungary and Romania exceeded limits on particulate matter.

At the same time, Greenpeace published a report comparing 13 European cities in terms of mobility and pollution. In this study Paris is ranked 7/13 due to a high level of pollution, a poor mobility management and a limited road safety. Its only strength is public transportations, with an average of 517 public transport trips made per resident annually and the global network carrying about 3.4 bn trips in 2016. Its annual capacity is only behind London and Moscow. The paradox is that the favorite Parisian means of transport is… walking. Keep calm, breathe, and stop polluting.

Emeric Nicolas, Head of Statistics  –  Sources: Beyond Ratings, Greenpeace

Carbon/Climate Change

Wind curtailment in China

Wind power capacity installed every year in China (2010-2017)

Global investments in renewables have increased again in 2017. Yet, wind installations are stabilizing after a slowdown in 2016 (+47 GW in 2017 compared to +50 GW in 2016 and +64 GW in 2015).

China, as the world’s largest wind market and current leader in terms of renewable investments, plays a role in this slowdown (-18 GW in 2016 and -2 GW in 2017). Wind electricity generation has been steadily increasing in China over the 2010-2016 period. However, as the number of new installations kept growing every year, the inadequate build-up of transmission grid became an issue. Wind curtailment – the act of restricting the energy production compared to the potential of installed capacity – rose to 17% by 2012, to mitigate the mismatch of transmission to the grid. The development of grid networks helped reduce the issue in 2013-2014. Yet, a second rise in curtailment has occurred since 2015 due to the declining demand for electric power from the economic slowdown. Installing renewable capacities is not enough in itself. To be efficient, this must be done in line with the development of appropriate infrastructure.

Claire Hugo, Analyst  –  Sources: Beyond Ratings, Enerdata, Brookings-Tsinghua Center for Public Policy


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