Tag Archives: Greece

News That’s Fit To Punt – 10/May/2012

The Greek Situation

The elections held last weekend in France and Greece tell us a lot where things are going. Where they’re going is not to a better place but to more chaos and turmoil. The French have kicled Nicolas Sarkozy out of office, and installed a Socialist President who will wind back on the austerity and aim for growth. The Greeks have not only hung their parliament, they have sent in extremist parties who promise to junk the deal made by the previous government.

What nobody is saying is how magically this growth is going to manifest for France and at the same time cut back on France’s deficits, let alone how the Greeks are even going to be able to form any kind of government to deal with the impending drying up of funds.

One sympathises with the ordinary Greek voter – sold down the river by their politicians years ago, they now have nobody to turn to but the extreme fringe. This is kind of how the Nazis got a foothold in the Weimar Republic back in 1933, 4 years out from the crash of 1929. Not that the Greeks are about to re-arm and invade the rest of Europe, but we can see the rise of the extreme parties in Greece as a kind of history repeating. This is how it goes.

In the short term, this is leading to talk of Greece leaving the Euro. The laughable thing is that polls in Greece reveal they don’t want to leave the Euro. So if we’re to get this straight, they don’t want to pay back money they owe, but they want to keep all the benefits from being part of the EU. I can really see that one working….not.

The Budget & The Libs

Wayne Swan brought down a predictably beige budget, claiming a $1.5b surplus. The basic gist of this year’s budget is that a lot of high income earners are going to have their perks cancelled. Tony Abbot predictably jumped up and called it ‘class war‘, which is inflammatory rhetoric, but I don’t know if Tony Abbott knows of any other kind. I don’t normally talk about the budget every year, but I thought it was worth mentioning that along with Joe Hockey’s notion of entitlement, it’s a bit rich of Tony Abbott to call this budget ‘class war’.

There’s a deeper problem with the conservatives even reaching for the term – as their American brethren do – because if there really is a class war, then it means there is a class system operating in our society. Forget the myth of an egalitarian Australia, if Tony Abbott is saying there is class war being waged by the ALP, then that sure as hell means there is a class system in Australia, and that the Liberal Party approves of this class system and would like it to continue undisturbed.

So, without being as inflammatory as Tony Abbott, is this really what he wants us to understand when he uses the term ‘class war’? That Tony Abbott thinks there is a class system in Australia and that it is a good thing and by logical corollary, egalitarianism is not something the Liberal Party support? I tell you, Occam’s razor says the simpler explanation is no, he’s just an idiot.




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News That’s Fit To Punt – 08/March/2012

Thought We Were In The Clear Did We?

One of the mysteries of the GFCs and the stupendous amount of mass debt that we as a civilization accrued, and brought down Lehman Brothers, Bears Stearns Northern Rock and all of Iceland amongst other things, is what happened to all those CFDs and CDOs. It turns out a lot of municipal councils bought them exactly because they were rubber-stamped AAA by the ratings agencies. And yes, those would be the very same ratings agencies suddenly handing out very tough marks to governments of the world here and there; but once upon a time before the GFC blew things up, they would rubber stamp AAA on to all kinds of things at the behest of the banks.
Today’s lovely article then is this one here about Ku-ring-gai Council, and how it is hounding the one councilor who dared to ask what the huge hole in the accounts were and why these CDOs were blowing these holes into their accounts.

His interest in the matter of CDOs was first aroused in 2007 when he noticed a $1 million loss in Ku-ring-gai Council’s investment portfolio.

“All councillors have a duty under the NSW Trustees Act 1925 to investigate finances,” he told BusinessDay. Although, he didn’t actually know at the time what a CDO was, he began asking questions of the then Mayor and the council’s Director Finance.

“They wouldn’t admit that they had bought derivatives. But then, who would know what a derivative was?” As far as Hall and his fellow councillors knew, the councils were just supposed to buy AAA-rated investments. He has some sympathy for the original investments, just not with the way it had been handled since.

“Well-backed investments, was what we were told. CDO lines such as Oasis and Black Rock. Both of those are gone now. Maple Hill was another. That’s still alive.”
Ku-ring-gai also bought the deadly Rembrandt CPDO’s from the local arm of Dutch bank ABN. These were even more poisonous than a regular CDO and are subject of the above-mentioned court battle.
When Ku-ring-gai was approached to join the action, it found it owned a different issued note (no2) .

“The Rembrandt No.3 note lost 90 per cent of their value within one year,” says Hall. “With the No 3 note suffering a 96 per cent loss, ABN came back to my Council and said, we can save yours if you put in another 200 per cent of your original investment and we will capital guarantee your product with quarterly paid interest, to maturity in 2016”.

Lehman had struck similar deals, one by one with its various council clients whose investment values were plummeting. “Restructuring” it was called and it often involved buying more of the same product but with the promise of greater security. Hall said it was another form of gambling but using public money.

Tony Hall didn’t see this as much of a deal. After all, ABN was later bought by Royal Bank of Scotland (RBS) which was bought by the UK government and whose ownership may soon change hands again soon. “The prospect of having such a commitment honoured seemed to be a risk”.

The article then goes on to describe the council turned on Mr. Hall even though he was trying to bring to light just how exposed the council was to the GFC. Unfortunately, there are $300million dollars of these CDOs still waiting to blow up , owned by assorted councils. When they do blow up, these councils are going to be incredibly distressed all of a sudden. Which would be a rather interesting sight to behold but only if you like watching slow motion train wrecks.

Tony Hall is proposing a debt swap with the NSW Government to get the councils out of the mess but one wonders if the current NSW Government is philosophically capable of seeing the merits of the argument when the remedy essentially amounts to what conservatives called a moral hazard back in 2008 when the GFC was kicking in.

Whatever the case, you know it’s going to be the tax payers who will pay for these losses through raised rates by councils or heavier duties imposed by the state government. Of course it will have knock-on effects as asset prices will have to fall in the wake of such payments. If you thought we dodged the GFC bullet, perhaps we only kicked the can down the road. The ramification of these CDOs blowing up in the faces of our councils is going to be very expensive for our country. It goes to show the GFC really hasn’t played itself out at all.

The article is worth a read, if you can stomach the scary nature of it.

In Case You Were Wondering, Greece May Yet Default Totally

The ugliness that is the Greek situation rolls on. Today is the day the debt swap deal has to take place. The problem is that the deal set in place months ago back in December may still topple over if not enough of the creditors sign up for the deal.

So this is it. After three years of high drama, the European Union is staring at its first ever sovereign default and, ironically, unlike every other deadline so far, this one looks set to be adhered to.
At 8pm GMT tonight (7am, AEDT, Friday morning), the authorities will know – or have a very good idea – how many of Greece’s international creditors have accepted its 206 billion euro ($256 billion) bond-swap offer.
The results will probably take a few days to come out – Athens has to put its decisions through Brussels’ sluggish decision making processes – but this time it isn’t up to the politicians so the possible outcomes are clearer.

So if more than 86% don’t sign up for the deal, it could all fall apart. It’s hard to understand what that *means* because as Bill Clinton famously observed, “that would depend on what you mean by ‘mean'”. If it’s short of 86% who sign on for the miserable debt swap that socks 69% of value off the bonds, then there is no deal and Greece defaults ‘totally’. Banks immediately go into crisis, global credit seizes up, the clock of financial sectors hits midnight and everything turns into a pumpkin. Which is fine, because you can take that pumpkin, issue a derivative against the pumpkin maturing and on-sell it in debt parcels…

Anyway, jokes aside, the Greek government is pretty adamant about the “this deal or no deal” stance. You can hardly blame them. After two years of being told what nincompoops they are for not being able to manage their finances (and, yes they are the said nincompoops), and having the deal thrust at them from the ‘The Troika’ of the IMF, World Bank and the ECB, and having to push through hideous austerity measures one after the other (against the will of their own people) to attempt to meet these demands, just to get a cash float, it would be hard to imagine the same crew of people would be sympathetic to stragglers who want a better deal. Everybody wants a better deal, but in these circumstances, nobody’s going to get one. Would you be open to separate side deals if you had to live through the torment and insults of the Greek leaders for the lats two years?

So, there you have it. Debt swapping, even if agreed upon is this aggravating. Can Ku-ring-gai and other councils even stomach a single directive from the NSW Government if they had to undergo a debt swap deal? One wonders.

Where Did All This Water Come From?

Jeez that was a lot of water.

Sydney has suffered its heaviest rainfall in five years, bringing the city’s transport system to a halt and causing hundreds of rescues and evacuations.
About 120 millimetres of rain fell on parts of the CBD this morning, with the Bureau of Meteorology’s Observatory Hill weather station recording its highest daily rainfall total since 2007.
In the city’s west, 146mm fell on Merrylands.

There’s a La Nina going on at the moment so we’re bound to get a lot of rain. but parts of NSW are seeing rain that hasn’t been seen in 160 years. As anomalous weather events go, citing 160 years is pretty wild. You shouldn’t really expect to see weather events that happen in that scale of time in one’s lifetime. We’ve seen worst in 30year events followed by worst in 60 year events. now we’re hitting once in 160 years. It’s worth pondering if this is even statistically normal in a lifetime to witness so many events that smash record books. Either that or the weather is on steroids, competing for something.

What nobody is saying is that all this water is now in the system thanks to global caps melting. There are a bunch of idiots who still want to argue that there is no such thing as man-made climate change, but this mad rainfall event can serve as an extra data point.

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News That’s Fit To Punt – 01/Feb/2012

Citizen Rinehart

The richest woman in Australia, Gina Rinehart has set her mind on buying into Fairfax, the company that owns the Sydney Morning Herald, and the Age, amongst other mastheads. The response coming out of the Fairfax stables has been interesting.

Here’s Michael West:

The Murdoch press is already favourably disposed to the Minerals Council view of the world while Rinehart’s politics are said to be strenuously ideological in the fashion of her late father Lang Hancock. Rinehart control of the Fairfax mastheads could have a dramatic influence on politics in this country.
Any tussle, then, for the venerable Fairfax mastheads would entail not just economic considerations, but community and political issues too. These issues would play into the hands of the institutional shareholders who would no doubt demand recompense for parting with the major mastheads and the effect this could have on the attendant Fairfax transactional businesses, which feed off the enormous online traffic.

Apart from matters of price, then, there would be much focus on the likely direction of Fairfax editorial. And some ideas from Lang Hancock in his book, Wake Up Australia, provide some hints, such as how “we can change the situation so as to limit the power of government”.

“It could be broken by obtaining control of the media and then educating the public,” he wrote.

There were several ideas on how to gain control of the press. One was for Australian retailers to refuse “to give advertisements to any paper which did not support a change in the constitution to reduce government to an absolute minimum”.

“Control of the press could also be obtained by several of the big mining groups banding together with a view to taking over one or more of the present giant newspaper chains which control the TV and radio channels, and converting them to the path of ‘free enterprise’,” he said.

That’s pretty sobering. the SMH might be transformed into a broadsheet with even sillier, shallower, more fascist tendencies than a Murdoch rag. I think it would be the end of public discourse in Sydney.

Here’s a link to what politicians think:

Political reaction to the news of mining billionaire Gina Rinehart’s increased stake in Fairfax Media has been mixed with Opposition treasury spokesman Joe Hockey saying he is “comfortable” with the move.

But the Australian Greens have described the trend towards a handful of individuals owning swathes of the media as “dangerous”.

Communications spokesman Scott Ludlam says concentrated media ownership by individuals means Australia is unhealthy for democracy.

Senator Ludlam says the national laws against concentration of ownership in the media are now far too weak after being “gutted by the Howard government”.

The Greens Senator claimed Ms Rinehart has “indicated a desire to have more influence over national affairs” and that she had “campaigned against Labor’s mining tax to protect her own commercial interests.”

Interesting how Joe Hockey is merely comfortable. You’d think he’d jump up and down with joy at the thought that a right wing nutjob is trying to seize editorial control of the SMH.

For the record, this is Gina Rinehart’s view on several subjects:

Mining tax:
“[The Minerals Resource Rent tax] damages investor confidence and renders formally attractive and value-adding projects less viable”.
“One of the issues that needs to be tackled is the cost, risk and time lost on approvals, permits and licences before revenue can be earned, [which] has very greatly increased in Australia, making it almost impossible for small companies to carry and comply with such burdens,” Mrs Rinehart said.
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“If our costs get out of kilter through excessive taxation or excessive regulation on top of our other high costs we already have, this is just making it more difficult.”
Carbon tax:
“We must drop these taxes or we risk the bureaucracy becoming the only growth industry in Australia.”
“After this unnecessary shock to investment and exploration the carbon tax (and MRRT) is causing, we should also demand from our politicians that they introduce legislation that requires a majority by referendum before they can introduce any new taxes or tax increases.”

God help us all from this woman’s political views.

Anyway, I note all this because it was interesting how the SMH kept spitting out bits and pieces about Rinehart today as the story unfolded. It ain’t over ’til the fat lady sings and at the moment she’s busy buying up shares.

Between An Angry Devil And A Poison Deep Blue Sea

It just gets worse and worse over in Greece and by extension, Europe.

All leaders of the euro zone are insisting that forcing private creditors to take a hit on Greek bonds constitutes a “unique” event, for fear of causing contagion. But spreads on Portuguese bonds are rising to alarming levels, and the outlook for Italy and Spain is still wobbly.

“An inability to tackle a problem the size of Greece inspires little confidence in the ability of the EU to tackle Italy and Spain,” says Sony Kapoor, head of Re-Define, a financial think-tank in Brussels.

Germany parried demands, from Mr Monti and others, to enlarge the firewall by merging the existing temporary European Financial Stability Facility (EFSF) and the permanent new European Stability Mechanism (ESM). This would enlarge the fund from €500 billion ($659 billion) to €750 billion. Mrs Merkel said the matter should be discussed in March, as decided in last December’s summit.

March, says Angela Merkel. The Economist suggests the investors should take more losses.

What is the best way out of this mess? Step one is to force private bondholders to take more losses. They have been treated with kid gloves so far because European governments insist the debt deal must be voluntary, thanks in part to a misplaced fear of triggering credit-default swaps. That must change. Discard the veneer of voluntarism and Greece can be tougher on its creditors. It should pass a law that retroactively introduces collective-action clauses into all domestic-debt contracts (making it easier to impose debt deals on recalcitrant bondholders). If it does this now there is still, just, enough time to organise a big, coercive, but orderly, restructuring of Greek bonds by March 20th.

So mark that date down as the date hell will break loose on the markets again. 20th March.

While I’m at it I think it’s worth linking to this little thing from Boris Johnson.

Now in the old days, before the euro, there was a simple solution that allowed the Italians to keep producing cars of the same quality and to keep unit costs down. It was devaluation, and if you look at the postwar career of the lira (and just about every European currency) against the Deutschmark, you can see how it worked. As the mark appreciated, it was more expensive for Italians to buy a German car; and as the Italian currency fell, Italian cars remained a good buy in Germany. The tragedy now is that this option is closed off for the euro-zone members – and look at the Italian car industry.

Manufacturers can no longer use the lira to compete on price, and they are being utterly stuffed. Italian car sales fell 15.3 per cent in December, while sales of German cars grew 8.8 per cent. The Italians now produce fewer cars than the British do, and their markets are being relentlessly gobbled by Audis and Beemers and other beautifully engineered machines from Germany.

It is worth pointing out again that the Germans get a great deal out of the Euro for being the Euro in that it lowers the prices of their exports significantly; which is exactly why Angela Merkel is running around trying to save the Euro because the Germans stand to lose a lot if and when the Euro breaks up and they have to reissue the Deutsche Mark, and it appreciates like the Yen and suddenly nobody on the planet can afford German products except “the 1%”. It might be cheaper to buy all of Greece than to keep haggling over its debt.

Property Bubble Babble

I know this blog has gone in weird directions at time in pursuit of interesting tidbits to do with the GFC, and I have to say one of the weirder aspects of the GFC has been the sustained property bubble in Australia. It’s so weird, people are used to this bubble but as I pointed out yesterday, there’s no real reason for Australia’s real estate to be so much more pricier than other parts of the world. yes, it’s really nice here in parts, but so are Greek Island Villas that come in cheaper than some flats in long-established suburbs in Sydney.

Anyway, I got this link from Skarp today which points out 4 reasons why there is a bubble going on, tangential to what the other fellow Professor Steve Keene says. Embedded in it is this link here, which is sort of prequel to the other link. The take away message is that it wasn’t the non-recourse lending in America that led to the subprime problem, it was the extreme lending. Housing prices don’t always go up, and in the long view of history, any tie that it does is an anomaly. There is no housing shortage as claimed by the peak bodies, and Australian banks have not lent conservatively as claimed, which feeds back into the recourse lending argument.

I do want  to point to this bit:

Rational discussion about the state of the property market is fraught. Many outspoken bubble deniers are conflicted by their interests in industry and government. Many – not all – are employed by, consult for, manage, and/or own organisations with a direct interest in maintaining the status quo of an overvalued property (land) market. These institutions are primarily commercial lenders, investment banks, real estate intelligence firms, insurance, real estate agents, Treasury, the RBA, vote-seeking politicians, and the mass media.

Skilled and intelligent specialists, trained in neoclassical economics in leading US institutions, did not see their enormous housing bubble until it burst in front of them with horrendous consequences. What makes Australia’s “experts” any more competent?

As investor Jeremy Grantham has noted: “Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.”

All this is to say it’s worth looking at the Australian housing market with a good deal of scepticism. Even if prices don’t collapse, it’s hard to make a case that it’s going to keep going up. If I were an investor, I’d be looking at another asset class.

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Dreaming Of Greek Island Villas

Different Spin

Just a weird, weird thought for today. Would you move to Greece?

I don’t know if you’ve ever looked, but today Mrs. Pleiades showed me a bunch of photos of Real Estate available in Greek Islands. Hey, I’m no millionaire or anything, but you can dream. What caught my eye was the price tags on some of these gorgeous places. Take this one here in Ithaca, home of Odysseus. Or this seaside villa for 850k Euros. How about this 270k Euro cottage in Corfu? They’re absolutely beautiful places. I know Greece is in a lot of turmoil but consider this for a moment. If you had a bit of money and you could own one of these sorts of places, and wouldn’t starve and had all the amenities of a good life available, would it really matter to you that the Greek government is insolvent?

Apparently wealthy Germans flock to the Greek Islands.  guess it’s their equivalent of the Gold Coast. You can see why. So it is hard not to imagine that the Germans get something out of Greece being a member of the European Union and by extension, a member of the Euro.

I’ve been pondering this tangle of facts all afternoon. People are busting a gut buying a 2 bedroom flat in Sydney. For the same money, you could theoretically buy an amazing piece on some Greek Island and just stare at the beauty all day and all night. Okay, I know you’d need some cashflow but the point is how good is a 2 bedroom flat in Chatswood or Pyrmont, let’s say, compared to a villa on a Greek Island? If you need evidence that the Greeks really are in trouble, this has to be it; and in turn if there’s any evidence that Australian property is way, way overpriced, then this must be it.

But it cuts in all sorts of different ways. Imagine being a poor Greek person. If all this was around you and you couldn’t buy in because foreigners came all the time to buy it out, why the hell would you stay? No wonder they like the European union where they can get to work anywhere. If they got kicked out of the Euro zone, they would still have their real estate bought up by foreigners, but they would lose that freedom to go work anywhere in the Eurozone. No wonder the polls in Greece say they don’t want to quit the Eurozone.

It would be a shame if the Euro were to implode as a result of all the debt woes and bad faith negotiations. The fall out from that is going to be awful. But maybe all those Island properties would become even more affordable – then what are you going to do? 🙂

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What The Hell Are They Thinking In Athens?

More Drama Than Drachma

I’m trying to get my head around the logic of why (oh why) the Prime Minister of Greece George Papendreou would propose a referendum on the rescue package.

First Mr Papandreou had to confront a hostile cabinet (although it has since endorsed the idea of a referendum). Then he faced the threat of a rebellion by his Panhellenic Socialist Movement (Pasok). And on November 2nd he will miss the opening session of a three-day confidence debate in parliament: Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, have summoned Mr Papandreou to emergency talks in Cannes. They will try to dissuade him from what one western European observer called “political suicide and financial ruin for Greece”.

Pasok lawmakers erupted in fury at the idea of a referendum, which may be held as early as December, but could not happen at all if the Greek government loses the vote of confidence. Two socialist backbenchers said they would henceforth sit as independents, reducing the party’s parliamentary majority to a bare minimum of 151 seats in the 300-member chamber. A third socialist deputy, former development minister Vasso Papandreou (no relation), said she had asked Greek’s president Carolos Papoulias to call a meeting to organise a government of national unity. It would push through fiscal and structural reforms, then take the country to elections. “Greece faces imminent bankruptcy,” Ms Papandreou warned. Separately, six veteran Pasok members urged the prime minister to resign, saying he was “taking Greece back to the 1950s”—a grim period in the country’s history, which was marked by widespread poverty and mass emigration.

Politicians from both sides of the aisle have joined the call for a snap election. Antonis Samaras, leader of New Democracy, the conservative opposition party, said that elections are “a national imperative”. A referendum “would put the country and the future of Europe at risk”. Alexis Tsipras, leader of the leftwing Syriza faction, also called for elections, saying Mr Papandreou “is finally being dragged to the polls under asphyxiating popular pressure, but it will be an election, not a referendum.”

It’s a real head-scratcher as to what he thinks such a referendum would achieve, but off he goes, mouthing off this referendum. Naturally stocks took a nose dive everywhere, which is neither here nor there; although I really do want to point out that even if it doesn’t look like altruism, the European Union is going a considerable way towards trying to bail out a reckless Greek government that went and squandered what it borrowed. It might not look like it but Sarkozy and Merkel went to great lengths to hammer out an agreement to ave Greece from itself. Now Papendeou has taken that fragile agreement and tossed it to the dogs, so to speak. And by dogs I mean those people baying for a change in Greece just so it doesn’t have to go through with the austerity measures. It’s a bit like he’s gone and metaphorically spat in people’s faces, now that he’s secured agreements from them to save his metaphorical house on fire.

And I’m asking myself, what rational reason could he give for throwing all of that out the window? What the hell is he thinking? Is he seriously thinking it’s a realistic choice to let the people decide and if the people decide to default, then history would somehow absolve him? Because if that’s the idea, he’s not only out of his depth, he’s out of his tree.

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China In The Spotlight

More Than Reading Tea Leaves

Okay, non-movie related entry today. Sorry guys, but this stuff keeps being so interesting, so bear with me.

Time Magazine had this article today, pondering the likelihood of China being able to help out Europe as the global financial crisis part 2 unfolds.

China certainly has the cash on hand ($3 trillion in foreign exchange reserves) to make a difference. It also seemingly has a strong interest in keeping global markets afloat. But that wasn’t the take I got at a lunch this week in Hong Kong with a regional banker, an economist, and a Hong Kong politician.

For one thing, frugal Chinese citizens aren’t keen on spending their country’s savings to bail out profligate Europeans, they said. Beijing is already under enough pressure to spend more of its export cash on its own people. The government and China’s sovereign wealth funds also aren’t sold on the idea. That’s partly because China doesn’t feel as vulnerable to Europe’s debt crisis as we might think.

That sounds oddly familiar. For one thing, the Germans don’t want to spend the money to bail out the profligate Greeks but in their instance it can be argued that they should seeing that the Euro actually keeps Germany sheltered from a much more fluctuating and volatile currency. Some have done the sums and think that a re-issued Deutschmark would appreciate 30% above where the Germans are trading, putting a massive dent in their exports.  So an argument can be made that the lazy Greeks are in part keeping the Germans in business, even if they owe too much money.

Furthermore, there’s this interesting article here.

The concerns about Europe’s banks have been simmering in the background for some time. Economists have warned that at the core of the euro zone crisis is an unstable support system: Poorly capitalized banks were holding up poorly financed governments, which in turn were expected to back the poorly capitalized banks. As the sovereign debt crisis has escalated, sucking in giant Italy, those fears have only inched closer to becoming reality. Many influential voices have proclaimed that Europe’s banks just don’t’ have the level of capital necessary to withstand a one-two punch of slowing growth and widening debt crisis. They could end up taking a massive smack from losses on their holdings of European sovereign debt.

Right. And when the European banks start really failing, what is that going to do to Europe which is China’s great export market? Hot on the heels of that article is this article here in Yahoo7.

“Everyone is getting more concerned about risks accumulating domestically (in China)” said Ju Wang, a fixed income strategist at Barclays Capital in Singapore.

The implications for Australia are huge. Although BHP Billiton and Rio Tinto have both issued bullish statements about demand from China for our natural resources booming for at least another decade, experts say that producers such as our miners are often the last to know when demand from customers falls off a cliff.

If China’s property market continues to fall, building will stop abruptly and demand for Australian iron ore will plummet because most of our goods go towards building China’s infrastructure.

“This is certainly a big issue and one we cannot afford to be complacent about” said Shane Oliver, chief economist at AMP Capital.

“The biggest concern are the loans from outside the banking sector that fuelled the property boom. But there are risks across the economy and it could have a big impact on our exports. China needs to look at loosening monetary policy sooner rather than later to help stop so many investors borrowing from unregulated lenders.”

In other words, China actually needs Europe to sort out this Greek sovereign debt mess because if it doesn’t, it has as much to lose in the ensuing global recession. One can’t say with any confidence that wise heads will prevail in the Euro debate or the US policy debate, let alone who-know-what that passes for policy setting in Beijing. So strap yourselves in for the double-dip recession and hope like hell it doesn’t devolve in to wars and destroy the world.

The Dark Crystal Ball Says…

This one is from Pleiades, and everybody who is vaguely interested in where things are likely to go should have a read of it.

Unless Germany moves quickly to reverse its current account surplus – which is very unlikely – the European crisis will force a sharp balance-of-trade adjustment onto Germany, which will cause its economy to slow sharply and even to contract. By 2015-16 German economic performance will be much worse than that of France and the UK.
If Germany does not take radical steps to push its current account surplus into deficit, the brunt of the European adjustment will fall on the deficit countries with a sharp decrease in domestic demand. This is what the world means when it insists that these countries “tighten their belts”.

If the deficit countries of Europe do not intervene in trade, they will bear the full employment impact of that drop in demand – i.e. unemployment will continue to rise. If they do intervene, they will force the brunt of the adjustment onto Germany and Germany will suffer the employment consequences.

For one or two years the deficit countries will try to bear the full brunt of the adjustment while Germany scolds and cajoles from the side. Eventually they will be unable politically to accept the necessary high unemployment and they will intervene in trade – almost certainly by abandoning the euro and devaluing. In that case they automatically push the brunt of the adjustment onto the surplus countries, i.e. Germany, and German unemployment will rise. I don’t know how soon this will happen, but remember that in global demand contractions it is the surplus countries who always suffer the most. I don’t see why this time will be any different.

About a week after I set down these “predictions”, and two days after I finished this point, I saw in the Financial Times that German growth has already hit a wall. Expect to see a lot more articles like this over the next few years.

The rest of the article makes for fascinating reading.

I was thinking the other day that there is far more debt than there is money in the economies all combined. So at some point somebody is going to be stuck with the un-payable debt, and that will lead to all kinds of conflict. There’s really nowhere to run in the markets or even outside of it. The money you hold might evaporate in policy-led inflation; the assets you hold might devalue severely. The governments you vote in might have to tax you harder than you thought. And none of this would add up to what would be enough.

Ultimately we’re going to end up like Argentina in the late 1990s. You wouldn’t be able to insure anything because insurance companies will die back. All those Woody Allen jokes about insurance salesmen will sound quaint on that day. It’s all in the cards. We live in interesting times, that’s for sure.

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The Greek Mess

Euro-Sceptics Party On

There’s probably no greater joy in a sceptic’s life than the ‘I Told You So’ moment, so one imagines there is a great deal of champagne corks going off in the private residences of Euro=Sceptics back in the 1990s for a point well-proven. At this juncture in time, it is really hard to refute the claims that the Euro zone and the Euro currency with it was unworkable without binding agreements on expenditure. To be sure, a country like Greece was always going to be the test case and Greece has failed with spectacular style. Now, as it threatens to unravel the Euro with it we’re seeing some articles appearing saying it could unravel the whole Euro project.

Most economists think Greece has no chance of paying the debt it already owes, currently approaching €340 billion ($500 billion) or 160% of GDP. Earlier this month, Standard & Poor’s credit-rating agency cut Greece’s rating to CCC, the lowest in the world and only two notches away from the benchmark default rating. Over the next few weeks, fellow E.U. members are expected to offer Greece further bailout funds, probably around €120 billion ($170 billion), but again the consensus is grim, with analysts figuring that this is a delaying tactic at best.

At some point, the E.U. may have to bite the bullet and accept that Greece will default on its debt in some way. “The debt burden and interest rates are simply too much,” says Zsolt Darvas, a research fellow at Bruegel, a Brussels-based economic think tank. “Unless the E.U. is ready to fund Greece up to infinity and forever, then Greece will have to default on its debt.”

That’s Time Magazine. The Economist has a raft of articles about Greece but this one that goes into detail but has this to say about the various scenarios:

Least damaging for Greek banks in the short term would be some form of agreement among creditors “voluntarily” to roll over their holdings of government debt. But that would not reduce the country’s debt burden. Nor would it allow Greek banks to reduce their exposures.

A second option could be some form of “soft” restructuring in which Greece extended the maturities of its debt while still promising to repay it in full. This is the option favoured by Germany. A rescheduling would reduce the net present value of the debt held by Greek banks, which might lead to impairments. But there would probably be only a limited impact on capital because accounting rules give banks wide latitude in calculating the net present value of the bonds, enabling them to reduce the hit they would take to capital.

A rescheduling of a specific chunk of their government bonds, such as those maturing between 2012 and 2014, would have an even smaller effect and could be easily weathered by the country’s biggest banks, according to Standard & Poor’s. Such losses could probably be absorbed by existing capital and, if need be, topped up by the €10 billion set aside in Greece’s 2010 bail-out package to recapitalise banks in a Financial Stability Fund.

A more radical third option, a “haircut” on the value of Greek debt, would have a significant impact on Greek banks because losses would have to be recognised immediately. Some analysts use a simple rule of thumb, given that holdings of Greek government bonds are about twice as large as their capital buffers, of doubling the size of a haircut to arrive at the reduction in capital. A haircut of about 20% would leave banks standing but probably in need of capital injections greater than those already budgeted for. A haircut of 50%, close to current market values for ten-year Greek bonds, would largely wipe out shareholders and require a significantly larger bail-out to recapitalise the banks (see chart). None of Europe’s leaders likes this option but it would be money well spent if it put Greece’s debt on a sustainable path.

That is to say, if it all works, the Greeks won’t run on their banks and neither will the Germans or French. That’s some serious ‘contagion’ they’re talking about and trying to stave off. Closer to home, the SMH had this article.

The Greek predicament is a system failure. Democracy works only where accountability bites, where taxing and spending within a given time frame are related to voting for party representatives. It arose in Greek city states, where people knew and could discipline each other in the arts of war and peace.

European union requires richer nations to subsidise poorer ones. These cross-subsidies, especially those supporting sovereign debts in Greece, Portugal and Ireland, enjoy no democratic accountability. They are the creation of banks and browbeaten ministers at late-night meetings. The ministers are the FIFA of high finance, an oligarchy in thrall to lobbies and special interests.

I assumed that one day Germany would get fed up with having its war guilt exploited by a spendthrift Europe. But that day is not today. German and other banks need Europe’s taxpayers to bail out their Greek and other loans. Everyone seems to agree that what should happen will not happen – that is a shrinking of the euro zone, a devaluation of Europe’s peripheral ”currencies” and a corresponding cut in their indebtedness. Germany and France, joint custodians of ”Europe”, are not ready for such a step.

It goes on to soundly chastise the EU, the ECB and the bankers, but it seems moot. You can just tell the joy in watching the Euro stumble so badly over Greece, bitten hard by the reluctance to do due diligence on a country that was totally unlike Germany.

As per the events in Iceland, perhaps the best article of them all is this Michael Lewis article in Vanity Fair which had this choice bit:

Just now the global financial system is consumed with the question of whether the Greeks will default on their debts. At times it seems as if it is the only question that matters, for if Greece walks away from $400 billion in debt, then the European banks that lent the money will go down, and other countries now flirting with bankruptcy (Spain, Portugal) might easily follow. But this question of whether Greece will repay its debts is really a question of whether Greece will change its culture, and that will happen only if Greeks want to change. I am told 50 times if I am told once that what Greeks care about is “justice” and what really boils the Greek blood is the feeling of unfairness. Obviously this distinguishes them from no human being on the planet, and ignores what’s interesting: exactly what a Greek finds unfair. It’s clearly not the corruption of their political system. It’s not cheating on their taxes, or taking small bribes in their service to the state. No: what bothers them is when some outside party—someone clearly different from themselves, with motives apart from narrow and easily understood self-interest—comes in and exploits the corruption of their system.

If the story of Iceland before it was about the strange aberrant behaviour of the Icelanders when thy found themselves at the centre of finance, then it appears that the story of Greece is that just about everybody in Greece was in on looting their own government, but now that the day of reckoning has come, they can’t figure out why they have to pay up. It’s laughable really if there weren’t so many high finance types caught in the eye of the needle, trying to squeeze money from spend thrift debtor Greeks. Michael Lewis is right to the extent that there isn’t a culture in Greece that would enable them to begin paying off that debt. It’s a write-off, baby.

On the face of it, defaulting on their debts and walking away would seem a mad act: all Greek banks would instantly go bankrupt, the country would have no ability to pay for the many necessities it imports (oil, for instance), and the country would be punished for many years in the form of much higher interest rates, if and when it was allowed to borrow again. But the place does not behave as a collective; it lacks the monks’ instincts. It behaves as a collection of atomized particles, each of which has grown accustomed to pursuing its own interest at the expense of the common good. There’s no question that the government is resolved to at least try to re-create Greek civic life. The only question is: Can such a thing, once lost, ever be re-created?

And there’s the rub. It would actually be interesting in a really sadisitic sense to see what would happen to a country should all its banks fail and suddenly it couldn’t afford to pay for any imports, couldn’t get loans except at high rates and see what happens. It would be terrifying and brutal – but that’s exactly the option the Greeks are staring down and there are still people opposed to the austerity measures. One can only attribute this to valuing the short term over the long term so much, they’ve totally discounted the long term consequences. But if the Euro-Sceptics really are right, then this might have to be the way it goes. Somewhere, Maggie Thatcher and John Major are laughing, although it’s really hard to see the fun in the chaos.

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