GERMANY: INDUSTRIAL ORDERS IN FREE FALL

German industrial orders in free fall
This is getting worse. In January, Geman industrial orders were down 42% in January yoy, according a report in the FT, which said that these were first hard data to show the breathtaking plunge in the German economy continued at the start of this year. The data underlined a collapse in demand from emerging market economies, and some of Germany's traditional export markets. Domestic orders were 31% per cent lower, foreign orders were down 47%. Month on month,January's orders were 4.5 per cent lower than in December, on a seasonally-adjusted basis. That compared with double-digit contractions in months immediately after the collapse of Lehman Brothers.This may show that the economy is bottoming out, but this is probably due to some stabilistion of domestic demand. French deficit at 5.6%The French government expects a public deficit of 5.6% for 2009 (5.2% in 2010) reports Les Echos. This is the highest deficit in 16 years. Finance minister Lagarde defends these figures saying that these are extraordinary times forcing the state to engage in extra spending while suffering from the outfall in tax income. The biggest items are the support for the car industry (€6.9bn) and shortfall in taxes (€7.5bn). Prime minister Francois Fillon meanwhile pleaded for austerity and promised to get the deficit back to 4% in 2011 and 2.9% in 2012. In a separate comment Dominique Seux argues that amid these record levels,only matched by Spain and the UK, the government cannot blame it all on the crisis and the fall in fiscal revenues. Seux argues that France is a pathological case in the sense that for the last 30 years France never saved in good times allowing an ever rising public debt. This is why one cannot trust Fillon's newly declared ambitions. Curr, French bonds trade 0.58pp above German bonds.US unemployment shoots upBloomberg reports that US companies shed 697,000 jobs in the US in February, according to the ADP Employer Services measure, a survey based on payroll data. The increase was larger than economists had forecast and followed a fall in payroll data of 614,000 for January. (Note treat this as an indication only. Those ADP are sometimes erratic).The Labor Department report is due out in two days, and Bloombery says that its own survey also suggests a cut in payrolls, for the 14th consecutive month, putting total jobs losses so far at more than 4.2 million. Dollar strengthens as banks deleverage

It is interesting that while this originated in the US, the dollar continues to strengthen. The FT reports that the dollar rose to a three-year high against a basket of currencies on Wednesday. Analysts put deleveraging as the main reason, though one analysts points out that the most intense period of European banks closing funding positions for US subprime and other US structured products was over. Against the euro, the dollar rose to a four-month peak of $1.2455.Tax blitz in IrelandThe Irish Independent reports that the Irish government plans across-the-board tax hikes and major cuts in public services in an emergency Budget this month as a desperate attempt to find cash for a new €4bn hole in the public finances. The crisis Budget will broaden the tax base, bringing low income workers into the tax net and increasing the tax paid by middle and higher income earners by the end of the month. On the expenditure side investment projects are likely to be cut. The tax take in January and February was 24 per cent lower than in the same period last year, while the number claiming unemployment benefit was at its highest level since October 1997, having risen 87 per cent in the past 12 months (from FT).
Reform of EU globalisation fonds meets resistance The European Commission proposed to extend the EU globalisation fonds amid fears that unemployment will rise up to 10% in Europe. The current provisions limit the access to the fonds for retraining to workers at risk of unemployment from companies, which had a minimum of 1000 job losses as a result of globalisation. Another condition is that half of the financing had to come from national sources. The Commission now wants to extend access by lowering the number of job losses to 500 and national co-financing to only one quarter. Germany already voiced its objections as it expects spending to increase significantly beyond the €500m limit, reports the FT Deutschland. Other member states like the UK, the Netherlands and Scandinavians also critical. A critical assessment of Italy's new unemployment schemeWriting in RGE Euromonitor, Paolo Manasse comments on new Italian unemployment scheme, negotiated between the central and local governments to share the costs of an unemployment-insurance, that covers private sector workers who do not fall under existing schemes, such as part-time and temporary workers. The deal will soon leave the Italian government with an unpleasant alternative: managing a redistributive conflict between the South against the North, or contributing more money. The reaons is connected to the European Social Fund, which is also a contributor. To exploit the ESF at its fullest, approximately 725 million euro should be transferred from the poor (but less crisis stricken) regions of the South the rich (but more crisis hit) regions of the Centre-North.
How credit default swaps amplified lossesWriting in the FT Satyajit Das writes about the effects of credit default swaps on bank losses. Those products were intended to provide loss insurance, but they did the opposite. He writes that CDS contracts on Freddie Mac and Fannie Mae were "technically" triggered as a result of the conservatorship necessitating settlement of around $500bn in CDS contracts with losses totalling $25bn-$40bn. Government actions were specifically designed to allow the companies to continue to fully honour their obligations. The triggering of these contracts poses questions on the effectiveness of CDS contracts in transferring risk of default.In the case of Lehman Brothers the total volume of CDS contracts was $400bn-$500bn, but only $150bn of the CDS contracts were hedges. The CDS contracts amplified the losses as a result of the bankruptcy of Lehmans by up to 50 per cent.
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