Sat, 27th May 2017

Anirudh Sethi Report


Archives of “debt crisis” Tag

The Financial Media Was Wrong on Greece… and They’re Wrong on the Next Crisis Too

Let’s talk about the Greek issue.

More than enough ink has been spilled on this from the mainstream financial media. However, I do think we there are a few key takeaways we should note from this whole debacle.

1)   Elements of the financial media is either unbelievably lazy or completely complicit in helping to maintain the illusion of success for the Centralized powers (large governments and Central Banks).

2)   The political class and Central Banks are unable to resolve debt issues in any meaningful way.

3)   The real “bottom” or level of “price discovery” is far lower than anyone expects due to the fact that the run up to 2008 was so rife with accounting gimmicks and fraud.

Regarding #1, it is worth noting that the Greek Crisis actually first started in 2009 when the country’s credit ratings were cut by all three credit rating agencies: Moody’s, Standard and Poor’s, and Fitch.

The first actual request for a Greek bailout came in April 2010, over five years ago. Since that time, Greece has received two formal bailouts, its credit ratings have been dropped to “junk,” and its GDP has collapsed over 20%: an amount roughly equal to the economic collapse experienced by Argentina during its 2000-2001 crisis.

Throughout this entire process, the financial media media has run thousands of articles proclaiming the Greece crisis was “over” or “fixed.”

Below is a spate of headlines from this period.

Creditors offer Greece six-month bailout reprieve as Tsipras weighs response

Greece’s international creditors are aiming to strike a deal to stop Athens defaulting on its debt and possibly tumbling out of the euro by extending its bailout by six months and supplying up to €18bn (£12.9bn) in rescue funds.

The negotiators representing Greece’s lenders are also proposing to pledge debt relief for the austerity-battered country – but officials stressed that a breakthrough hinged on a positive response from the Greek prime minister,Alexis Tsipras.

Negotiations were continuing on Sunday night, hours ahead of crucial gatherings of eurozone finance minsters and leaders in Brussels, which Angela Merkel, the German chancellor, François Hollande, the French president, and Tsipras are expected to attend. All three leaders spoke over the weekend, with contributions from European commission head Jean-Claude Juncker.

The crisis meeting was convened in an attempt to ease Greece’s debt crisis before a critical €1.6bn payment to the International Monetary Fund falls due next Tuesday.

Eurozone still poses risk to global recovery, says OECD

Pier Carlo Padoan, the OECD’s chief economist, said he expected growth in the 17-nation bloc to be negative this year, despite several countries showing signs of recovery.

Mr Padoan said the single currency area, which emerged from its longest recession in more than 40 years in the second quarter, remained “a considerable source of risk” to the global recovery, though he added that the systemic risk from the eurozone’s debt crisis had subsided.

He added that while countries should continue to implement austerity policies, automatic stabilisers such as unemployment benefits should be allowed to kick-in if economies stalled. Mr Padoan also urged policymakers to tackle high jobless rates.

“There is no doubt that policy priority number one in the euro area is fighting unemployment. Let’s not fool ourselves and expect unemployment to come down in a stable fashion,” he said. Read More 

Angela Merkel’s election win is reward for weathering the euro crisis at home

Angela Merkel’s triumph in winning a third term with such an improbably high margin sets her and Germany apart in Europe.

More than three years into the European Union’s worst ever nightmare, Merkel, uniquely in the eurozone, has been rewarded for her handling of the currency and sovereign debt crisis. Everywhere else voters have punished governments.

Her victory demonstrates the gulf between Germany and the rest of the EU and the eurozone, although it is not clear what impact her third term will have on the direction of the crisis.

Merkel’s second term coincided exactly with the euro crisis. As she was forming her coalition with the Free Democrats in October 2009, Greece went belly-up, prompting deep doubts about the common currency and the survival of the EU

She has been resented and criticized across Europe for her crisis management and responses. Berlin became alarmed at the resurrection of the “ugly German” stereotype in neighbouring countries. But German voters have voiced their approval.

As Bill Clinton famously remarked, “it’s the economy stupid”. And Germans have given Merkel a third term because, despite big problems forecast for the future, German living standards, jobs and prosperity have remained stable while mayhem has struck across large parts of the eurozone. Read More 

Swiss National Bank maintains cap on the franc

The Swiss National Bank has just released its latest monetary policy assessment and, as expected, its affirmed the cap on the Swiss franc at SFr1.20 per euro.

The SNB notes that the Swiss franc is “still high” in its statement:

The SNB stands ready to enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities, and to take further measures, as required.

Important background – the Swiss government earlier on Thursday hiked its 2013 growth forecast from 1.4 per cent to 1.8 per cent, and its 2014 forecast from 2.1 per cent to 2.3 per cent, noting that the recovery appears to be bedding down in Europe.

Here’s an excerpt from the upbeat statement released from the State Secretariat for Economic Affairs in Bern: Read More 

ECB a step closer to decisive power, but not close enough

At last, the European Parliament has approved the European Central Bank’s role as the eurozone’s single banking supervisor – albeit only from October 2014. But as banks in southern Europe again show signs of weakness, far faster progress towards banking union is essential.

In June last year, banking union was urgently required to restore calm to the eurozone’s financial sector. But as the bloc’s sovereign debt crisis eased, the plan – including the Single Supervisory Mechanism project – lost momentum.

But with ECB accountability to Strasbourg now sorted, today’s agreement on a single supervisor is a proper step towards eurozone banking union. True, such a union remains bedevilled by such significant (but linked) matters as the depth of members’ pockets (hello Germany) and the extent to which members’ banks have yet to come clean about their asset quality (hello Spain). Read More 

India runs risk of sovereign debt crisis: Christopher Wood, Chief Equity Strategist, CLSA

Chris Wood’s view on India is sharply at odds with the current market cheer that’s been engendered by the dramatic recovery in the rupee, the surge in stocks and an increasingly sunny outlook. CLSA’s chief equity strategist is holding out against getting swayed by a change of sentiment that’s just about a week old after all.

Still, some of his comments in an interview with ET seemed counter-intuitive. For instance, he declared that “India in the Asian markets remains most at risk of a sovereign debt crisis”, but argued against the contention as well. “This is despite the fact that India does not have a debt market reliant on foreign capital, given the lack of foreign ownership of rupee debt. The foreign ownership of Indian government securities was only 1.61 per cent at the end of March, though it is up from 0.88 per cent at the end of March 2012. In this sense, India is not directly correlated into emerging market debt dynamics.”

The best hope for the Indian stock markets would be a worsening of the country’s economic crisis, he argued. Why? Because that will improve the chances of Gujarat Chief MinisterNarendra Modi emerging as BJP’s prime ministerial candidate, according to Wood. As for the current woes of the Indian economy, he said they were “self-inflicted due to continuing lack of investment cycle and deprecation of the currency against the dollar”. Read More 

US investors pile into European equities

US investors have pumped more money into European equities than at any time since 1977 in a big vote of confidence for the region and its ability to recover from the sovereign debt crisis.

Pension funds and other big US groups invested $65bn in European stocks in the first six months of 2013, the highest in 36 years over that time period, according to research compiled by Goldman Sachs’ European strategy team from US Treasury data.

 Early signs of economic recovery and rising business confidence have restored the faith of US investors in Europe as hopes grow that markets can rally further on a wave of stronger earnings in the second half of the year.

Eddie Perkins, chief investment officer of international equity at Goldman Sachs Asset Management, said: “The economic story makes Europe a good bet. We expect European equities to keep rising as the continent recovers.” Read More 

The Current Emerging Market Crisis Is Nothing Like The Emerging Market Crises Of The Past

It does seem like it’s déjà vu all over again. As emerging market governments burn through their foreign exchange reserves in an effort to support local currencies in the midst of massive capital outflows, the headlines are eerily reminiscent of the 1990s or early 2000s. Say, for example, in 1991, when India had to fly its entire gold reserve pile to London as collateral for a loan. Or in 2001, when a debt crisis, capital flight and a bank run forced Argentina to freeze domestic bank accounts and default on its international debt. But is today’s news just a replay of crises past? Not in the slightest, says Robert Parker, a senior adviser to Credit Suisse and a member of the bank’s Investment Committee.

It’s not that the players are different. India is once again grabbing the lion’s share of nervous headlines today due the fast-falling rupee, its large budget and current account deficits, high inflation and relatively anemic growth. And Brazil, Mexico, Indonesia and Thailand are all experiencing currency pressure that does seem shockingly familiar. But that’s where the similarities end. One big difference: most of the larger emerging market economics have made significant structural adjustments that leave them much better able to deal with today’s capital outflows than they were in previous crises. “The circumstances are very different,” Parker said. “The key question is, ‘Are we going to have, as we had in the 1990s, a range of sovereign debt defaults?’ And the answer to that is, no.” Read More 

EUROGROUP HEAD: It’s Safe To Assume Greece Will Need Another Bailout

Greece’s financial troubles will not end in 2014 and it is therefore realistic to expect the debt-laden country will need additional money from the euro zone before it can return to markets, the head of euro zone finance ministers said.

 International lenders estimate that Greece will need around 10-11 billion euros ($13.1-14.4 billion) from the second half of 2014 to keep it going next year and in 2015.

But several euro zone governments are reluctant to extend any further loans because of negative public opinion, with voters tired of bailing out other countries after three years of the sovereign debt crisis.

“As far as the potential need for a third program for Greece is concerned, it’s clear that despite recent progress, Greece’s troubles will not have been completely resolved by 2014,” Jeroen Dijsselbloem told the European Parliament. Read More