The private wealth-GDP ratio dilemma

The private wealth-GDP ratio dilemma

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 5th of December.

A critical factor that is often overlooked in the debate over fiscal transfers from the wealthy north to the impoverished south is the relationship between sovereign debts and private wealth, particularly the ratio of GDP to private wealth.

While the ECB has announced its support for bringing down borrowing costs for peripheral countries, the irony is that many struggling economies have equal or higher private wealth (household assets minus liabilities) to GDP ratio than their northern counterparts.

Consider the case of Spain; it had a private wealth to GDP ratio of six to one before the crisis struck. Italy’s private wealth to GDP ratio stands at five to one while the country’s private wealth to public debt ratio is highest among the G-7 countries. By contrast Germany, Europe’s largest creditor, has a private wealth to GDP ratio of only 3.5.

This discrepancy has now taken the centre stage in the debate on battling the crisis. Policy makers are asking whether taxpayers from Europe’s more economically sound north should show “solidarity” to their troubled southern neighbours. A high private wealth/GDP ratio, they argue, point towards low tax revenues and countries should call upon their own taxpayers to fund some of the national debt before seeking external help. Also, the debtor countries may issue tax-free bonds for its citizens to keep borrowing costs low, they reason.

It’ll be unfair of Spain or Italy to expect that Nordic taxpayers would be funding their long term debt requirements when they are yet to explore their own resources. Rather it will seriously undermine the currency block’s cohesion and force members to opt out of the eurozone membership because it’s no longer worthwhile.


GBP/EURO – 1.2272
GBP/US$ – 1.6104
GBP/CHF – 1.4904
GBP/CAN$ – 1.5962
GBP/AUS$ – 1.5372
GBP/ZAR – 14.1420
GBP/JPY – 132.44
GBP/HKD – 12.4822
GBP/NZD – 1.9508
GBP/SEK – 10.6232

EUR: Euro has made significant progress against the US dollar over the past 24 hours, pushing through the 1.3100 level and hitting a six week high in late afternoon trading yesterday after Greece announced it would spend EUR 10 billion to buyback bonds at a price range that topped market expectations. Also a lower than expected Spanish unemployment reading boosted confidence in the eurozone in general. However, moods went dour after finance ministers from the 27 member union failed to reach an agreement over the proposed banking regulator. The euro however, has made gains against sterling overnight and the GBP/EUR pair opens at 1.2278 today morning.

USD: The greenback gained traction against the cable towards the end of yesterday’s session after hitting a four week low earlier. The GBP/USD pair had slipped below the 1.6100 level in late evening trade, but has pared losses overnight to open at 1.6110 this morning. UK construction PMI reading for November printed below expectations yesterday though it failed to have much of an impact on the British unit. We have the ADP Employment data report coming out of the US today and traders will try to second guess the all important non-farm payrolls release due on Friday. The non-manufacturing PMI data is also due later in the day and markets would expect a better score than yesterday’s disappointing manufacturing PMI reading. Traders in the UK will focus on the Chancellor’s autumn budget statement for hints of further QE from the BoE.

Have a great day!


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