Is EU aid for Spanish banks sufficient to stabilize the economic situation in the country or will Spain eventually have to ask for a sovereign bailout as well?
With no hesitation, I can say that Spain will need a bailout. Consider this: Spanish banks hold nearly 65% of Spanish sovereign debt; so when the banks become distressed, so too does the Spanish sovereign. To this end, without structural fiscal changes that will alter the economy’s long-term prospects, further bailouts and liquidity injections will do little. While austerity has been painful, fiscal consolidation – lower government spending and higher taxes – is a necessary prescription not only in Europe, but in the United States as well. If bailouts and liquidity injections were the answer, shouldn’t these problems have been long-gone after the European Central Bank’s two longer-term refinancing operations (LTROs) in December 2011 and February 2012, totaling over €1 trillion? Clearly, more needs to be done; and it only appears that a crisis will force leaders into action.
Do you expect the EU debt crisis contagion to hit Italy so hard that it will also be asking for a bank bailout soon?
I’m more worried about some of the smaller dominos falling over first ahead of Italy. But Italy itself is very vulnerable. Just this week, Austrian Finance Minister Maria Fekter said that “Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that, given the high rates Italy pays to refinance on markets, they too will need support.” This candidness is surprising, but in reality, she words should resonate among investors – European leaders throughout this process have consistently understated the severity of the crisis. If this global coordinated intervention actually occurs, it will bide time for Italy; at minimum, Italy has through August to avoid a bailout, if market conditions worsen; at maximum, Italy has through the end of the year.
Do you think that recent unfavorable US employment data might push the Fed into introducing more stimulus in June?
I don’t think the Federal Reserve is going to implement more easing for a few reasons. Primarily, it’s evident that quantitative easing isn’t the “panacea” (Chairman Ben Bernanke’s word choice) that the economy needs; a fiscal fix is needed. This, of course, is unlikely ahead of the November elections, but that doesn’t make it any more likely that more quantitative easing is coming. Secondly, core inflation is relatively sticky: as yesterday’s Consumer Price Index for May showed, core inflation (ex food and energy) maintains its 2.3% y/y pace, above consensus forecasts. With wage growth sticky as corporations continue to try and trim the “fat” and primp up earnings, a higher rate of inflation will further reduce disposable income in the US, and thus, the headline consumption figure. With consumption accounting for approximately 70% of headline GDP, the economy cannot afford to see a further deterioration in income. More quantitative easing will do this and Federal Reserve officials are well aware of this.
Instead, I expect the Fed to announce some form of a continuation of Operation Twist, though it will only go on for another few months. This might be the best play now, because it will continue to depress longer-term rates (which in turn, reduce mortgage rates which should, in theory, help the housing market). Without pre-committing to another large stimulus package is clearly best move right now, and quite frankly, not doing another round of quantitative easing is the best move. This will force fiscal policymakers to quicken the pace of their reforms and, over the long-term, provide the brightest future for the US economy. As the situation in Europe has taught us, countries that rely on cheap credit and assistance from loose monetary policies become overburdened fiscally. The US is headed in that direction, and it will accelerate if the Fed chooses to enact more quantitative easing.
Will the Aussie be able to break above parity or pair will break dynamic support that is forming triangle in 1h chart?
The AUDUSD indeed broke above the parity level but it doesn’t look like an organic break; instead, it was fueled by rumors of a global coordinated intervention yesterday late in the US cash equity session. Even today the AUDUSD continues to climb towards 1.0100, but this may be a red herring; the prospects for this weekend are increasingly bleak. Without global easing efforts, and especially no efforts from the Federal Reserve, it is very likely that the US Dollar regains some of its lost luster in the coming weeks. A ‘calm’ in the Euro-zone crisis and perhaps some more chatter about fiscal stimulus from China could keep the AUDUSD elevated though. To the upside, gains should be capped by 1.0130 (TL resistance on February and April highs) and 1.0250 (200-DMA). Lower, we look back towards parity, 0.9920, 0.9825, and 0.9750.
Do you see the Euro sustaining gains above 1.2550? What is your forecast for the coming week?
The EURUSD has indeed climbed above 1.2550 (currently at 1.2650) but this could be a short trip. The Greek elections pose a significant threat to the stability of the currency, and it is very likely that the results of the election are Euro-bearish (the only Euro-bullish scenario is that New Democracy, the pro-bailout party, wins the election outright and has enough support to have a parliamentary majority in its own right; I peg that a 10% chance of happening and dwindling). For argument’s sake, let’s assume the two likely outcomes are: New Democracy winning the election without majority; and Syriza winning the election without majority. Furthermore, under each scenario, let’s assume that there each outcome accompanies scenarios with: a global policy response; and one without. Thus: ND wins, global policy response; ND wins, no global policy response; Syriza wins, global policy response; Syriza wins, no global policy response.
In “The Brightest Outcome,” where New Democracy wins and there is a global policy response, the EURUSD could trade back up to 1.30 next week. Alternatively, in “The Darkest Outcome,” where Syriza wins and there is not global policy response (yet), the EURUSD could trade to fresh yearly lows near 1.20.
Is Gold liking the new QE?
Gold likes the new quantitative easing rumors, but it doesn’t love them. Gold (as well as the Japanese Yen) is a strong indicator for global easing expectations. Primarily, we’ve seen Gold trend higher (and the USDJPY trend lower) since the abysmal US Nonfarm Payrolls report for May, and Federal Reserve policy officials have certainly been beating the ‘more quantitative drum.’ Gold, during times of crisis, as we saw last fall, will sell-off more quickly than it will appreciate. Cash is king during times of crisis, so even if we see full-blown quantitative easing, if Europe is ‘burning,’ it’s unlikely Gold rallies back towards its all-time highs of $1921.17/oz anytime soon.
--- Written by Christopher Vecchio, Currency Analyst for DailyFX in an interview for FXStreet.com
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com
Judgement day in Athens - Daily Telegraph
And what happens if Brussels just cuts off the money? Greek banks are dependent on funding from the European Central Bank (ECB) and its emergency European Liquidity Assistance (ELA), and the government itself is expected to run out of cash next month.
“The ECB has an obligation to fund all European countries through the ELA, they can’t just stop this, they have to support Greece,” said Stathakis.
I try to imagine the German Chancellor’s reaction if she were confronted with this logic – it is little wonder that tomorrow’s election has been billed as a referendum on Greece’s membership of the eurozone.
The timing could not be worse. Spain’s borrowing costs have surged to record highs, threatening a full-blown sovereign crisis on a far bigger and more dangerous scale. Brussels’ sticking plaster – the offer of €100bn of loans to Spanish banks – was ripped off within a matter of hours. While leaders fiddle over a response, Rome is also starting to burn. Italian borrowing costs have risen in tandem, fuelling the fires of contagion.
To the rest of the world, the first step is painfully obvious: to save Italy and Spain, its third- and fourth-biggest economies, the eurozone must unequivocally back the integrity of the union. President Barack Obama has led demands for Germany and France to bring a real and solid rescue plan at the G20 Summit in Mexico this week.
But before that, Europe’s politicians face their big test –Greece. It is not just Syriza that wants to change the bailout agreements, the mainstream New Democracy and Pasok parties have promised part-renegotiation too, so the gauntlet will be thrown down to Berlin and Paris regardless.
Merkel and her new French counterpart, Francois Hollande, are understood to have delayed leaving for Mexico until Monday morning in case the rerun of Greece’s elections are again inconclusive. But the pair hardly seemed united – on Friday, Merkel took a swipe at Mr Hollande saying his policies could make the crisis worse. Global central banks, including the Bank of England and the US Federal Reserve, are reportedly standing ready to pump liquidity into the markets on Monday morning just in case.
But for Merkel, the obvious step is also the hardest – supporting Greece continues to be an impossible sell at home. Under its bailout conditions, this month Greece is tasked with finding €13.7bn to reduce its deficit and pay its bills but politicians say there is no money. Athens stopped paying bills last month and has warned that pensions will be paid only until July. Yet according to estimates, Greek individuals and businesses owe around €56bn in unpaid taxes.
The situation is incomprehensible for hard-working, careful-saving Germans for whom abiding by the law is intrinsic. With recession looming, the idea of diverting more cash to a nation that will not change is impossible.
German emotions are running high. Last week, Greek television reported that a German couple had walked out of an Athens restaurant without paying the bill saying they had already paid enough to Greece.
Greeks are very aware of the stereotype. One senior European official in Athens said: “I honestly think [the film] Zorba the Greek has dealt one of the most damaging blows of Greece’s modern history. When Germans hear complaints about the bailout conditions, they imagine frolicking Greeks.”
As I wandered around the city’s streets, I sought out Greek business leaders – who certainly are not frolicking at the moment. I found them strong supporters of structural and economic reforms but also united in rebellion against the bailout agreements.
I spoke to shipping tycoons, leading economists, entrepreneurs and trade groups, who said they are ready to work to accept pain to stay in the euro but the international rescue plans have failed and need to be reworked.
They argued that renegotiation was the only possible action, not just for Greece but the rest of Europe too. The current approach has crushed the private sector and has led both to economic collapse and a rise in extremist politics. They warn that without a fundamental volte-face in Brussels, the same fate will be imposed on other sinner states with drastic consequences.
Nicos Vernicos, a fourth-generation shipping tycoon knows about Greek political struggles, as a student he was jailed for leading pro-democracy demonstrations against the junta. He is now also president of the Greek branch of the International Chamber of Commerce.
He told me: “The majority of the Greek people were ready to accept the therapy – until they realised the therapy is wrong; now they don’t want any of it. That’s the reason for the rise of Syriza and the extreme right. One thing is for sure, the therapy has failed.
“The only solution is to negotiate the terms of the memorandum with the Europeans. This therapy is bad for Greece and bad for Europe.”
He was backed by Dr Antonis Kefalas, economic adviser to SEV (Hellenic Federation of Enterprises) who called for a fresh start: “Any new government has to renegotiate the memorandum to extend fiscal targets by two years …Then Greece must produce a valid and believable plan for structural reforms that then have to be implemented. Then Greece and Europe must sit down and work out a new programme for the reduction of debt.”
Whatever else the Greeks vote for tomorrow, one thing is for sure, they will not give any political party the mandate to quit the euro. Perhaps paradoxically, especially for Brits, the greater the pain inflicted on Greece by Brussels, the more pro-European the population seems to become.
After decades of war, civil war and military rule, Greeks now associate stability with Europe – of their 38 years of democracy, Greece has been part of the European Union for 31.
Businesses particularly value the euro and European values which were injected, albeit alongside the continued state bureaucracy and corruption.
Greek shipping, the country’s most famous industry, was largely conducted out of London but the euro had led most to return to Athens, bringing with them valuable foreign currency and jobs.
Despite the pain, most Greeks and almost all business leaders strongly agree that the structural reforms imposed by the troika – officials from the EU, ECB and International Monetary Fund (IMF) –were both necessary and welcome. The work of the EU task force, set up to help Greece execute the agreed reforms in each government department, is particularly popular. For businesses, quitting the euro and returning the drachma is synonymous with moving backwards into corruption and disorder.
Nikolaos Giannetos, the third generation owner of Giannetos, a fashion retailer in Athens, said through a translator: “I don’t want the drachma. Back then Greece had problems and change should have happened before. It was all about children getting positions in government. The political system was all about how we should slice up a cake that we never baked ourselves.”
Economists have argued that a return to drachma would allow Greece to devalue and regain its competitiveness. But the idea is dismissed by Kefalas: “A return to the drachma would lead to successive and radical devaluations. And we do not have a big enough export market to gain.”
Even Syriza shies away from any mention of the drachma. Stathakis said: “We are pro-Europe, pro-euro – we have never felt it necessary to discuss the drachma, never.”
In fact, unlike the patriotism and rows about sovereignty in Spain, for example, Greeks are surprisingly compliant and pro-European. Even so they feel badly let down.
On the streets, Greeks lament that they do not understand the country’s demise. But businessmen are taking up arms because they reckon they do understand – the bailout agreements have crushed the Greek economy and the private sector and are close now to destroying it altogether. They scoff at Merkel’s threats of disorder and catastrophe if Greece does not stick to its obligations, for them disaster has already arrived.
“Greece had bad habits and there was no question reforms were needed,” said Vernicos. “But the reforms imposed in Greece have failed.”
A fact uniting all businesses in Greece is that there is no financing – at all. Greek banks, already struggling, have been crushed, first by being strong-armed into buying Greek government debt and then by seeing 75pc of it wiped out under the €205bn bond restructuring that was agreed as part of the second bailout. “We don’t have a banking system. The banks have lost 95pc of their capitalisation,” said Vernicos. “This is a huge failure.”
International markets have demanded higher and higher rates of interest and now, with the latest expectation of the return to the drachma, have shut to most Greek companies altogether.
Kefalas said: “Because of the uncertainty that exits, trade credit has dried up and insurance has dried up, very large number of companies are closing down …we have a hell of a problem.”
The collapse, he said, has been sudden and dramatic. Demand has evaporated – not just because of the ferocious recession, now entering its fifth year, but due to the sudden impact of the previously vast public sector purse being snapped shut. “Unemployment has risen from 400k to very close to 1.1m – all from the private sector. In the public sector, wages have been cut, but the job losses are from companies shrinking or closing down.”
Giannetos said he has cut his fashion business, founded 103 years ago, to the quick in order to survive. The company still hand-cuts its suits, as it has done since his father took him and his brother to Chicago as teenagers to learn the trade. But in just three years, instead of six shops there are just three; 53 employees have been axed to 35. Profits have plunged by 20pc since 2009 and he has almost halved the price of his suits.
“Luckily we had a warehouse full of cloth and stock so we have survived because we have stopped importing the cloth from Italy and England,” he said. “But energy bills are up, tax bills have soared. My landlord has halved the rent to stop his business closing down.”
Vernicos said that his family shipping business is surviving because, like the rest of that Greek industry, it is a global business funded by global investors and markets.
But he has seen the decimation of businesses from the board of DEH, one of Greece’s biggest electricity providers, where he has been drafted to help. The company, which is 51pc owned by the Greek government, was the biggest company in southern Europe, he says, with 25,000 employees and a turnover of €6.5bn. It is now up for sale as part of the privatisation programme demanded by the bail-outs.
“When it was put up for sale it was worth €6bn, now it’s worth €400m,” he said. “Even the company’s copper wires should be worth €3bn but the business is in bad shape.”
He blames the collapse on the sudden imposition of extra taxes, but also badly thought-out crisis policies. Last autumn, the government extended the time for Greeks to pay their electricity bills from 30 days to 120 days – a move that led to the amount of unpaid bills soaring from €300m to €1.2bn overnight.
He said DEH is not alone. The impact of extra taxes plus a toxic uncertainty over the future of the country has pummelled the value of the Greece’s portfolio.
“According to the memorandum, Greece has to sell 17pc of its stock,” he said. “When the sales were decided the portfolio was worth €1bn, today it is worth €60m. So you understand why privatisations cannot go on in Greece, they must stop until certainty returns.”
At tomorrow’s elections, the demand from Greek businesses is clear – whichever party is elected needs to re-negotiate the bailout agreements. The talks cannot be one-sided, they argue, and require a fundamental re-evaluation by Brussels too.
Kefalas said: “Europe needs to make it clear it will support a unified Europe. Right now, different messages are coming out of Brussels – there are problems in Spain, Portugal, Ireland, Greece – how many problems have you got? It is very clear that the problem is a European one, made at the creation of the euro and those problems are coming home to roost.”
He added: “As long as the markets view the euro, not as a single, unified currency but as an Italian euro, a Spanish euro, a Greek euro, the Greek economy will not stabilise. So we need the uncertainty to stop.”
Vernicos said: “I am pro-European, I want pro-European parties to prevail to show to my European partners that Greece will honour its commitments but they must try to negotiate a better deal for Greece to make the memorandum more realistic. Give us more time. In order to make us more competitive they want to crush – push down prices, wages. We will do this but rather than doing it in 18 months give us two years; prolong the period of adaptation. As it is now, it is not realistic which is why people are voting against it.”
Giannetos said he would vote for the mainstream parties, not Syriza, if only because “the only ones capable of sorting out the mess are the ones who got us into it”.
But he is ready for change in Brussels: “Mrs Merkel is a politician of a certain mentality and ideology. But everyone has to change at the moment so she can. I think she can sense that the world is changing and a new strategy is
going to be required in the EU.” But plenty of Greek businesses would settle for the low-hanging fruit of simply having a clear winner today. George Tsakiris, president of the Hellenic Chamber of Hotels said: “What do we want the most? Peace. Our biggest hope is that there will be a government on Monday morning.”
Race for Finance Minister: After Pranab, who next? - MoneyControl.com
The race to Rashtrapati Bhawan may be over but the hunt has now begun to find a replacement for Pranab Mukherjee in the Finance Ministry. But what is corporate India's expectation from the new minister in this crucial portfolio?
The corporate India is looking forward to a reformer in the North Block. Former Infosys director Mohandas Pai said, "Corporate sector is disappointed with the Finance Minister's Budget which sends back to the pre-reforms days. India Inc is relieved and hoping for a finance minister who will be much more open, transparent and growth oriented."
But who will be that person? The spin-doctor of 1991 Dr Manmohan Singh, the Prime Minister himself, is likely to hold the portfolio temporarily and sneak in some changes he wants.
The other options for the post are:
Jairam Ramesh, 58, Rural Development Minister: An economist, the MIT graduate is seen as close to the Gandhi family. He was one of the backroom players who shepherded the Congress party's election campaigns in 2004 and 2009.
Articulate and media savvy, Ramesh supports cutting fuel subsidies and opening up the supermarket industry, which he opposed earlier.
In a recent interview with a local business daily, he said time for "pussyfooting" on major economic reforms was over and the government needed to "take the bull by its horns".
To his advantage, Ramesh is able to build rapport with alliance partners as well as opposition parties. At a time when the government has been left hamstrung by unruly allies, Sonia Gandhi could settle for a person who can bring partners on board to push divisive reforms needed to revive the economy.
However, he carries an image of being anti-development. As an environment minister, he had red-flagged several mining and infrastructure projects on environmental concerns.
P Chidambaram, 66, Home Minister: A familiar face and a senior party stalwart who held the post during the global financial crisis in 2008.
His deft handling of the situation then, helping India avoid the worst of the downturn, makes him a leading candidate to take over an economy mired in the doldrums.
Although it's been nearly four years since he moved over to the interior ministry, his heart is seen to be in his previous job. Former colleagues from the finance ministry recall him as having an eye for detail and cannot be bluffed.
Considered to be a reform-oriented taskmaster and a market friendly face, Chidambaram enjoys the confidence of both Prime Minister Singh and Sonia Gandhi.
But an image of "intellectual arrogance" has earned him detractors both within and outside the party.
He is also under siege. Opposition parties question his role in a multi-billion dollar telecoms scam that has undermined the Congress-led government. His family is under scrutiny over a controversial telecom deal. Chidambaram, himself, is battling charges of rigging his election to parliament in 2009.
C Rangarajan, 80, Chairman of the Economic Advisory Council to the Prime Minister: Seen as a dark horse in the running for finance minister, he is one of the most trusted aides of Prime Minister Singh.
Rangarajan has worn various hats both within and outside the government, and would bring long experience to the job. Unlike other contenders, he has generally avoided controversy.
He is widely perceived as a hawk who frowns upon expansionary fiscal policy and high inflation, and is an advocate for fuel subsidy reforms and long-pending financial sector reforms. He favours building consensus before allowing foreign investment in multi-brand retail and aviation.
However, Rangarajan is not seen as a political heavyweight, even though he was governor of Andhra Pradesh for six years and was a member of the Rajya Sabha. Congress is seen to prefer a politician who can deliver votes in the 2014 parliamentary elections.
Montek Singh Ahluwalia, 68, Deputy Chairman, Planning Commission: The Oxford-trained economist has been a key figure in Indian economic policy since the mid-1980s. He is an influential adviser to the prime minister and is also India's Sherpa for the G20 Summit.
A supporter of open markets, he has been pushing the government to implement long-pending reforms like ending controls on fuel prices, lifting caps on foreign stakes in the insurance sector and allowing in foreign supermarkets.
He is close to Singh and was a key member of the team that navigated the economy out of the 1991 balance of payment crisis.
Ahluwalia is said to harbour political ambitions and was seen as front-runner for finance minister in 2009, but was thought by Congress to be too market friendly. A lack of political base also went against him.
He has also been hurt by controversies, including the definition of a poverty line at 32 rupees a day.
Anand Sharma, 59, Trade Minister: A lawyer-turned politician, Sharma is perceived to be reform-oriented and enjoys the confidence of the Gandhi family.
He is credited with arresting the slide in India's exports after taking over as trade minister in 2009 through a combination of bilateral trade agreements and diversification of export markets. He has also overseen bold steps to liberalise trade ties with arch-rival Pakistan.
Sharma has been pushing for liberalising foreign direct investment rules and succeeded in getting the government's approval for allowing foreign direct investment (FDI) in multi-brand retail, an initiative thwarted by coalition allies. Permitting FDI in the aviation sector is the next big ticket item on his agenda.
Sharma's stature in the party could be a handicap. He is not seen as a political operator and does not bring a large base of political support. Blame for the embarrassing flip-flop on FDI in retail is often put at his doorstep.
The challenge is immediate and daunting. How to restore India's economic growth miracles, the omens are not good, a farewell to incredible India could also mean a farewell to the party in power.
(With inputs from Reuters)
No comments:
Post a Comment