Posts Tagged ‘greece’

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Asia is in crisis mode. Europe, or so it appears, is in recovery mode. In Asia we are set to see a re-run of 1997, or so they say, when Asia suffered one very nasty crash. In Europe years of pain are set to pay dividends, or once again so they say. Yet, look beneath the surface and things look different. Asia today is nothing like Asia in 1997. Parts of Europe on the other hand do.

Déjà vu. We all get it from time to time, but presumably it is an illusion. It has been theorised that we may get that feeling of that having done or said something before, because our subconscious can perceive something before our conscious. Déjà vu when applied to Asia may be an illusion too.

At the moment many are trying to draw a lesson from the 1990s. In 1994, the US Federal Reserve began a cycle of tightening monetary policy. As US interest rates increased, money flowed from the so-called tiger economies of South East Asia into the US. The 1997 Asian crisis resulted. The IMF stepped in. Some countries, that had previously seemed to be on an unstoppable road to riches, suffered a very nasty recession/depression.

Many fear a repeat of this today. The Fed is set to tighten. The biggest victim to date has been India. Brazil, Turkey and Indonesia have also seen sharp currency losses. Indonesia’s central bank has responded by increasing rates four times in just a few months. Don’t forget, however, that despite the severity of the 1997 crisis, within a short time frame output across South East Asia had passed the pre-1997 peak. It will be like that again. Indeed Indonesia, perhaps along with the Philippines, is one of the most interesting territories in the world right now – from an investor’s point of view that is. This time around savings rates are higher in South East Asia, while external debt – especially in the case of Indonesia, the Philippines and India – is relatively modest.

Contrast this with what is happening in the euro area, where many countries in the region are facing the tyranny of a fixed exchange rate, which is causing the recession/depression to drag on and on.

But the latest Purchasing Managers’ (PMIs) Indices relating to Europe look promising. The PMI for Spain hit a 29 month high, for Italy it was at a 27 month high. Ireland’s PMI was at a 9 month high. For Greece the story is sort of better still; the PMI is now at a 44 month high.

However, the Greek PMI still points to recession. In Spain, Italy and Ireland the growth looks only modest. Just remember that these countries have massive levels of unemployment – especially in Spain and Greece. For them to cut government debt to the levels required, they have to impose austerity for years and years.

And just consider what might happen, if the markets expect an even higher return on the money they lent to troubled Europe as rates rise in the US.

The markets are panicking over Asia. They should perhaps be looking towards Europe.

© Investment & Business News 2013

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Fear. In different times greed is just as important. But right now, and across most of Europe, fear is the key driver. Money sloshes around, and all that those who control it want to do is limit the downsize. They are trying to mitigate against fear. And so afraid are they, that at times they have put money in assets that give negative interest rates, just to feel safe. This has been rather good news for Germany, because while fear has driven money away from Greece and Spain and co, making the government cost of repaying debt in these countries seem prohibitive, in Germany it has been quite different. Fear has boosted Germany coffers. And a new report tells us that the boost has been dramatic. This is why.

The euro crisis just won’t go away. In Germany they are sick of it too, and with good reason. Germany has done nothing wrong. Its work force has worked hard, saved for retirement, and what is wrong with that? Yet they are being punished; they are told that to atone for their sins of working hard and saving for the future, they must pick up the tab for indebted Europe. Yet, there is another way of looking at this, according to data produced by Germany’s own finance ministry, because the country has made a tidy profit from the euro crisis.

It all boils down the fact that money has to go somewhere. Corporates are saving. Across much of Europe, households are saving. Where does the money go? One thing is for sure, putting it in Greek bonds is risky. Spanish, Italian and Portuguese bonds don’t seem much safer either. But German bonds, in contrast, feel as safe as a safe house in a land with no crime. In fact so safe are German government bonds or bunds, perceived to be, that there have been times when the yields on some of them have been negative. So actually, Germany has done rather well out of fear created by the euro crisis – or should that be the other way around – a euro crisis created by fear? But can we put a number on how well?

German Social Democrat Joachim Poss wanted to know how much, and, as a man in power, he got an answer. The Germany finance ministry responded to Poss’s question by getting the abacus out and making some calculations. The ministry took its estimate for interest payments on its debt, and subtracted from that the actual interest. From its calculations it drew the conclusion that between 2010 and 2014, it will save 40.9 billion euros thanks to interest rates being lower than expected, which is thanks to money flooding into German bunds for the sake of safety.

This is a rather important point. Right now, Italy is posting a primary budget surplus, meaning its government is spending less than it receives before deducting interest on debt. If it was paying the kind of interest on debt that the German government pays, Italy would be close to being in surplus. And that in a nut shell is the case for euro bonds; that is to say for all countries in the euro area to raise money by using the same bonds, backed by each and every government. You can see why Germany does not like that idea, but then again, a monetary union with one central bank controlling monetary policy, cannot really work unless governments pay the same interest on their debts.

But the data relating to German savings on its debt does not tell the full story. The fact is that German exporters, the drivers of its economy, have done well out of the euro for another reason. If Germany still had the Deutsche mark, the currency would surely have risen sharply in recent years. By sharing a currency with the likes of Greece, Germany has enjoyed a massive terms of trade benefit.

So actually, for Germany there have been plenty of upsides to being in the euro, which is why it is right that it pays for the downsides too.

© Investment & Business News 2013

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There are two types of haircuts people dread. One involves a barber called Sweeny Todd and pies. The other involves debt. Of the two types of haircuts, the former never seems to be justifiable, the latter can be. And would you believe it, the latter may be back on again for the euro area. It is the story that the powers that be in the euro region want to die. It is the story that won’t die because when it comes to facing up to reality, euro leaders are as clueless as Bruce Willis’s pate is hairless.

Wolfgang Schaeuble, Germany’s finance minister, has owned up to a truth. Hard data tells an even more unpalatable truth, but the great and good in the euro area seem to be unable to spot this truth even when it is staring them in the face

Elections are difficult, and for those at the top in politics they are especially challenging. You can feel sorry for Wolfgang Schaeuble. The German election is but weeks away, and Mr Schaeuble was on the campaign trail. No doubt he was pressed hard; no doubt he would rather have kept quiet, but it spilled out anyway. Greece, admitted Mr Schaeuble, will need more money. But, he added, it won’t have any more of its debt cancelled. It won’t, to use the emotive word that has come to mean debt write-off, experience a haircut. Meanwhile, Capital Economics has done some number crunching and drawn conclusions to make the hairs stand up on the most follically challenged person.

Let’s assume that Greece, Spain, Portugal, Ireland and Italy can maintain their future fiscal deficits at their expected 2013 level. Then, according to Capital Economics, in order for each country to reduce government debt to 90 per cent of GDP within 20 years they must average annual growth of 5.4 per cent, 6.5 per cent, 6.0 per cent, 7.5 per cent and 3.0 per cent respectively. If they could somehow find a way of moving their primary fiscal budget into balance (primary in this case means before interest), the required growth would be 5.4 per cent, 2.3 per cent, 4.7 per cent, 4.1 per cent and 3.0 per cent.

In other words, the only way they can realistically bring their debt down is if the economies manage a pretty remarkable 20 years of impressive growth. What they really need, of course, is one of those haircuts, and investment. Or do they?

The EU’s economic and monetary commissioner Olli Rehn said that what Greece needs is more time. No new money, no haircut, just more time to repay its debts.

Angela Merkel chose to avoid the topic, and just to answer the question: will Greece need more money? she said, again on the campaign trail: “Greece has been making very, very good progress in recent months and we want that progress to be continued.”

Well is it making progress? Most of us had that written about us in our reports when we were at school. “Making good progress,” may be appropriate when applied to a seven year old, but it seems a tad patronising when applied to Greece.

The truth is that the Greek crisis just goes on and on. And it will continue to go on and on, because its targets are impossible. What it needs is a cheaper currency, less debt and more investment. Maybe it can get away without the cheaper currency if there were more money transfers between Germany and Greece. Then again, you only need to look at how some regions of the UK are impoverished to see how even full political union cannot fix the problem of regional economic disparity.

Sorry, to repeat a message that was stated here three years ago. But the euro is very much a part of Greece’s problem, and no matter how many haircuts it receives; no matter how much investment it obtains, without a cheaper currency the recovery may never happen.

© Investment & Business News 2013

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The last couple of days has seen news on the UK to delight all but the most cynical. Alas it has also seen news to make the cynical look smug, and say ‘I told you so’.

The good news relates to trade. Exports of goods in the second quarter of 2013 reached £78.4 billion, the highest on record. Okay, imports were up too, rising to £103.3 billion, the highest level since the three months to November 2011. But when it comes to records, ‘best ever’ would normally be seen to score the ‘best in 18 months’.

The UK’s deficit in goods and services in June was £1.5 billion, the lowest deficit since January.

But the real encouragement relates to exports outside the EU. In June exports of goods outside the EU rose, while imports fell. In fact exports to non-EU countries increased by £1.3 billion (10 per cent) to £14.2 billion and imports from non EU countries decreased by less than £0.1 billion (0.2 per cent) to £16.8 billion.

Within the EU, exports of goods also rose, but not by as much (£0.9 billion or2.3 per cent), while imports increased by £0.3 billion or 0.6 per cent to £52.9 billion.

In Q2, UK exports to the US rose by £348 billion while imports were £96 billion, and exports to China were up £153 billion while imports shrunk by £17 billion. The rise in UK exports to China seems to be part of a trend. They have risen sevenfold since 2002.

Don’t over-egg the trade data; it is good, but not brilliant. It is encouraging, however.

Less pleasing was data compiled by the House of Commons Library at the request of the Labour Party. It found that since 2010, of the 27 countries in the EU only three have seen real wages (that’s wages after inflation) fall so steeply. It turns out that UK wages, after inflation, have fallen by 5.5 per cent since 2010. Only in Portugal, Greece and Holland have wages relative to inflation fallen more than that.

Those two sets of data show the two sides of the UK economy at the moment. There are signs, albeit not overwhelming signs, of exports leading recovery. But as long as wage rises continue to lag behind inflation, the UK’s economy looks fragile. Much of the growth we are seeing is coming on the back of consumers spending more, which itself occurs because they are once again running up debts.

The fix lies with getting productivity up, and that surely depends on more investment. That is why George Osborne’s approach to creating growth via rising house prices is dangerous, but we don’t seem to have learnt from past lessons.

Not enough investment and rising house prices were characteristics of the UK economy before 2008. They are becoming characteristics again.

© Investment & Business News 2013

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Beware of the TROIKA bearing gifts. The TROIKA is the collection of letters we use to describe the IMF, ECB and EU Commission and the organisations that, have clubbed together to provide money to Greece.

And everyone, with the exception of people living on Mars and members of the TROIKA, knows that the conditions imposed on Greece in return for providing more loans have caused the country to suffer economic depression. The IMF has already broken ranks, and said the TROIKA should have realised that Greek debt was not sustainable much sooner than it did, and should have agreed a haircut, in the process greatly alleviating Greek pain, at around a year earlier than it did.

Now a trio of economists – Dimitri Papadimitriou, Gennaro Zezza, and Michalis Nikiforos – have produced a model based on stock flow analysis, which suggests that Greek unemployment might rise from the horrendous 27.4 per cent level it is currently at, to 34 per cent by the end of 2016.

The lexicon is bare. Words fail. If 27.4 per cent is horrendous what is 34 per cent unemployment?

The three economists say Greece needs a kind of latter day Marshall Plan. They are right. Austerity in some sectors of the Greek economy, in particular the public sector, has to be tempered with equally significant levels of investment.

If Greece was Germany, global leaders would not agree to such austerity because they would fear the political repercussions. But this is little Greece. It may have been a superpower 2,500 year ago, but Alexander is dead, Sparta defeated, and the TROIKA vents its fury like the Titans escaped from Hades. For more see: A New Stock-Flow Model for Greece Shows the Worst is Yet to come 

© Investment & Business News 2013

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House prices might be rising in the UK, but that is not what’s happening across most of Europe.

According to new data from the EU Commission, house prices across the Eurozone fell 2.2 per cent year on year in the first quarter of this year. Across the EU they fell 1.4 per cent.

Among the Member States for which data are available, the highest annual increases in house prices in the first quarter of 2013 were recorded in Estonia (+7.7 per cent), Latvia (+7.2 per cent), Luxembourg (+4.3 per cent), and Sweden (+4.1 per cent), and the largest falls were seen in Spain (-12.8 per cent), Hungary (-9.3 per cent), Portugal (-7.3 per cent), and the Netherlands (-7.2 per cent).

In France they were down 1.4 per cent. They fell 5.7 per cent in Italy, 3.0 per cent in Ireland, and 0.4 per cent in Cyprus.

The latest data for Germany is not yet available, but in Q2 2012 they rose 2.3 per cent, year on year.

According to recent OECD data, when comparing average house prices to rent, they are 71 per cent above the historic average in Norway, 64 per cent more than average in Canada, 63 per cent more in Belgium, 61 per cent in New Zealand, 38 per cent in Finland, 37 per cent in Australia, 35 per cent in France, 32 per cent in Sweden, and 31 per cent in the UK.

Prices to rent are below the historic average in the US, Japan, Germany, Italy, Czech Republic, Greece, Ireland, Iceland, Portugal, Slovak Republic, Slovenia and Switzerland. In the case of Japan, Germany, Greece, Ireland, Portugal and Slovenia they are less than 80 per cent of the average relative to rents.

© Investment & Business News 2013

Those who like to tint their spectacles with roses saw reason to cheer. The Eurozone economy appeared to be on the slow march to recovery. Oh boy it was slow, and the signs of recovery were subtle, but they were there. Then yesterday it began to look as if was all going to blow up.

There is a consensus across much of the euro area that pain just can’t be avoided; that recovery can only occur if first we have pain, then more pain, and then – just to be on the safe side – a bit more pain. But, or so goes the consensus, the people realise this; they are willing to make the sacrifices, and recovery will follow – just be patient and let hard work and fortitude carry the euro through.

Last year Stein Ringen, a sociology professor at Green Templeton College Oxford, penned a piece for the ‘FT’. He said: “Economists are no more likely always to agree than any other experts but there was a remarkable unanimity as the crisis unfolded: Europe was on the edge of the abyss; bold and rapid action was needed from strong governments.” But, in his bullish article, he added: “Against this storm stood a remarkable woman, Angela Merkel, insisting no quick fix was available. She has been proved right.” He then talked about how the solution turned out to be “steady work and steely brinkmanship.”

The article was written on March 27 last year. At that time there was a consensus across the euro area that predictions of doom had been disproved. There was one snag with the optimism of that time: subsequent events showed it to be ill-informed. In fact, the euro area has been in recession/depression ever since.

Then earlier this year, in another one of those ‘told you it would be all right’ type statements, José Manuel Barroso, president of the EU Commission, said: “[The] existential threat against the euro has essentially been overcome.” He concluded: “In 2013 the question won’t be if the euro will or will not implode.” Or take this piece in ‘Bloomberg’, written in January this year, Why Austerity Works and Stimulus Doesn’t http://www.bloomberg.com/news/2013-01-07/why-austerity-works-and-fiscal-stimulus-doesnt.html

The author Anders Aslund said: “After five years of financial crisis, the European record in Northern Europe is sound, thanks to austerity, while Southern Europe is hurting because of half-hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.”

So, was there evidence to back-up these claims? Was austerity working?

Of late there have been signs – small signs, but signs nonetheless – of improvement. Take Markit’s latest Purchasing Managers’ Indices (PMIs) for both manufacturing and services. The word high features prominently. For Ireland the composite PMI for June rose to a five month high; it hit a three month high for Germany; a 24 month high for Spain; a ten month high for France, and a 21 month high for Italy.

So that was encouraging.

Spanish manufacturing now appears to be out of recession, with the latest manufacturing PMI for Spain hitting 50 – a 26 month high – a score which is meant to be consistent with zero growth. Furthermore, recent trade data showed the first trade surplus for Spain in 40 years.

On the debt front, central government debt in Greece is well below target so far this year, and much better than during the corresponding period last year. Ireland appears to be on course to meet its targets for this year.

This is where the good news finishes, however.

Sure, Spain posted its first trade surplus in 40 years, but this was largely down to plummeting imports. In other words, the surplus was a symptom of economic depression. Sure the PMIs are looking better, but they still suggest the euro area is in recession – a very deep recession in some cases, including – by the way – France and Italy.

As for debt, total external debt (that’s public and private owed to creditors abroad) is 168 per cent of GDP in Spain, 200 per cent of GDP in Greece, 227 per cent in Portugal, and 410 per cent in Ireland.

Debt maturing in 2013 or 2014 in Greece equates to 21 per cent of GDP in Greece and Portugal, 23 per cent in Spain, and 32 per cent in Italy.

Unemployment, especially in Greece and Spain, remains at levels that can only really be called horrendous.

How can hard work save these countries when there isn’t the work for people to do?

But we now appear to be entering a new era; one in which monetary policy will slowly tighten. If the Fed raises interest rates in 2015, as it suggests, what will this mean for the euro area?

Bond yields soared in Portugal yesterday on the latest political uncertainty following the resignation of two government ministers. They also rose sharply in Greece, which is also facing a political challenge at the moment, after the Democratic Left pulled out of the Greek coalition following the closure of State TV, in another government attempt to reduce spending. Yields were up in Spain too.

The good news, albeit small comfort for many, is that Angela Merkel seems to have woken up to the plight of the euro area’s unemployed youth. Post German elections – assuming she wins that is – there is even a chance she will rein back on pressure for more austerity.

The truth is that austerity is not working. Sure parts of the economies across much of Europe need a radical overhaul, and indeed could do with some austerity measures. But other parts of the economy need stimulus, and they need big stimulus. Nothing short of a latter day Marshall Plan will do.

But the ECB has been a disaster – fretting over inflation when deflation was a bigger danger.

Maybe, the ECB will mend its ways, but the signs are not good. If the Fed tightens, the euro may come under pressure relative to the dollar, and in such an environment it is hard to imagine the ECB announcing quantitative easing, even if this is what the region needs.

Alas, thanks to policy errors, and an ill-founded sense of confidence – even a head in the sand mentality amongst many decision makers in the euro area – it is no longer the euro that faces a so-called existential threat, it is the EU itself, and that is tragic.

It is not too late to save the project, but only massive investment, perhaps funded by the ECB printing money, will do it.

© Investment & Business News 2013