Even the start of the new week did not put a smile on the face of stock investors. The German DAX stock index is down 0.6 % today. Geopolitics is haunting again. US Defence Secretary Lloyd Austin said that the United States would not hesitate to intervene if an organisation or country wanted to spread the conflict between Israel and the Palestinian radical movement Hamas to other areas of the region. Either way, the conflict will stress investors twice.
The first is that heightened geopolitical tensions will push stock investors to sell off. At a time when conflict is escalating, they don't want to pour more money into risky investments. Secondly, developments in the Middle East will mean higher oil and fuel prices. This will translate into a slower unwinding of elevated inflation in the US. And that will encourage the Fed to keep thinking about raising interest rates. The best evidence of this is that the yield on the 10-year US Treasury note has been holding near the 5% level in recent hours. This is a phenomenon not seen since 2007. A bet on more expensive credit will also not be good for equity markets. But it will also support the dollar. It has stopped depreciating and is holding near the 1.060 USD/EUR level.
On the old continent, debts were dealt with. The European Union's debt fell to 83.1 % of GDP in the second quarter from 85.9 % a year earlier, according to Eurostat. That may sound like hopeful news. But when we read the statistics, the joy leaves us. In the Czech Republic, we are moving in the opposite direction - debt continues to increase. At the end of the second quarter it reached 44.3 per cent of GDP. A year ago it was 43.5 per cent. We can console ourselves with the fact that Greece continues to have the highest debt in the EU, where it reached 166.5 per cent of GDP, followed by Italy with 142.4 per cent and France, where the debt is 111.9 per cent. A total of six EU countries have debt levels above 100 per cent of GDP. We are not there. But on the other hand, there is a deteriorating trend in the state of Czech public finances. From this point of view, we are much worse off than most other European countries.
But nobody seems to mind. A few days ago, the Standard & Poor's rating agency even confirmed the Czech Republic's creditworthiness rating at "AA-". Moreover, the agency also kept the rating outlook unchanged, which remains "stable". Standard & Poor's overall rating of the Czech public debt has therefore remained unchanged since August 2011. The rating agency was satisfied with the promise of the consolidation package and the fact that the Czech economy has been freed from its dependence on Russian energy.
However, nowhere is it written that the profligate behaviour of the rating agencies will not be counted later and at the same time. Moreover, we must remember that we are living in a time of high central bank interest rates. It follows that countries are also financing themselves much more expensively than in previous years. The Czech Republic is currently borrowing for 10 years at 5.0 %, Slovakia at 4.3 %. To sum up: we do not share the "debt optimism". In our view, the deterioration of the Czech public finances will in the long run hamper not only the Czech economy but also the Czech crown.
Markéta Šichtařová
Next Finance s.r.o.
Debts were dealt with on the European continent
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