This week's thought-provokers for investors

(PresseBox) ( Zürich, )
Risky assets started the week off on a positive note ahead of the key Greek vote on the austerity package. Equities delivered a positive performance. Most bond markets except the ones in peripheral Europe were subject to profi t-taking. Gold moved sideways, while the EUR strengthened against all currencies.

A fragile majority in the Greek parliament has passed the government's medium-term fi scal austerity plan. Greece should now receive the next EUR12bn bailout tranche in early July. It will cover the country's fi nancing needs until at least mid-August. With this, an imminent default and near-term disaster have been avoided. But the country remains in a precarious position, and major challenges are still ahead.
The next urgent problem is to reach an agreement on a second bailout package, including specifi c plans for some form of debt rollover. There also remain doubts about whether the government will actually be able to implement the austerity measures and how it will manage to sell the EUR50bn in state-owned assets required to obtain a new bailout.

French banks are working on an agreement to roll over 70% of their holdings of Greek debt between now and 2014, President Nicolas Sarkozy said in Paris this week. The agreement is expected to be voluntary. Otherwise it would be seen as a technical default and might trigger a sequence of measures with an unknown but potentially catastrophic result for fi nancial markets around the globe. Mr Sarkozy also said he hoped other countries would follow the plan, which could signifi cantly reduce Greek's near-term funding pressures.
It's no surprise that France wants to take the lead in avoiding a Greek default, as the French banks are the biggest holders of Greek sovereign debt outside of Greece. German banks are likely to follow suit for the same reasons. But the big question remains how auditors and rating agencies react to such a step.

The European Commission is considering expanding its revenue-raising powers to include EU-wide taxes. The introduction of a so-called Tobin tax on fi nancial transactions is a favourite option under consideration in the budget plans of the EU's executive body. The Commission seems to be committed to generating its own revenue to meets its annual spending bill of more than EUR120bn, which would reduce its dependence on national capital starting in 2014.
Commission offi cials insist that any revenue raised by such measures would off set national contributions. But it is unclear whether the self-funding plans might be a door-opener to the (re-)introduction of EUwide taxes and a loss of national tax sovereignty.

Japan's industrial production rose at the fastest pace in over 50 years, as factory output increased 5.7% in May from April and output in the transportation industry rose 36% in the same period. The auto industry was the major driving force in boosting production, as carmakers restored operations at plants after the March earthquake and tsunami. Manufacturers also said they plan to increase output by 5.3% this month and 0.5% in July, according to a survey of companies. The report followed data released earlier which showed that retail sales rose 2.4% in May from April, a sign that consumer demand is rebounding too.
It seems that Japan's manufacturing industry enjoys the fast, V-shaped recovery we anticipated in a special report following the severe natural disaster. But not all Japanese data show signs of improvement. Capital spending and exports dropped more than expected. So don't be surprised if Japan's economy contracts further in Q2 before returning to growth in the second half of 2011.

China's National Audit Offi ce completed a longawaited review of local government debt. The report claims that total local government debt amounted to 10.72 trillion yuan (USD1.7 trillion) at the end of 2010. This fi gure confl icts with the 14.4 trillion yuan the People's Bank of China estimated in a report earlier in June, especially as the PBOC claimed its estimate covered only the "local government fi nancing vehicles" that were set up to handle investment projects for local governments. They are, with a few exceptions, forbidden by law to run defi cits and issue bonds.
The NAO report is obviously politicised and aims to downplay China's local government debt problem. But it reveals some of the country's risky fi nancial practices and calls into question Beijing's ability (or willingness) to manage its debt.

Stefan Angele, Member of the Executive Board Head Investment Management
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