Archive for the ‘Financials’ Category

PSI Outcome Beats Expectations

In Economics, Financials, Politics on March 9, 2012 at 12:39

Last night history was made. Greece pushed the biggest restructuring in history managing to lift over €100bn off the shoulders of its people and its future generations. The PSI -Private Sector Involvement- has been a vital prerequisite to Greece’s second €130bn rescue package.

Here is a snapshot. Participation in the PSI was 85%. Since it exceeded the 75% threshold, the Greek government can (and probably will) trigger the CACs (Collective Action Clauses) reaching a staggering 95.7% participation (remaining 4.3% refers to non-Greek law bonds). Given a 53.5% of debt write-off on this €206bn privately held Greek debt, this translates into €110bn of debt unloading. Whichever way one looks at it, this is simply extraordinary.

But one also needs to look at the big picture. Today, Greek public debt stands at around 160% of GDP. The PSI along with the second rescue package aim at bringing it down to 120% by 2020. Now, this target is extremely sensitive to two main variables – GDP growth and debt/rescue packages, so don’t be surprised if the Troika revises its estimates upwards or downwards over the next years.

In reality, the PSI and the two bail-out funds, bought Greece extra time to materialize all the essential reforms this country so much needs to jump-start its economy. Remember that in Greece’s case, the first step to growth is to attract investments. Given the circumstances, there is no driver to boost private consumption as there is neither government money nor enough household savings (at least within Greece!). Foreign direct investment is the Alpha and the Omega to this puzzle. Greece needs to think and do big, now.

Now we have the time to do as promised. Make our country and economy investment friendly. Privatize under-performing state-owned firms, tackle bureaucracy and encourage entrepreneurship, open up closed professions that keep prices artificially high, but most importantly, change our mentality, think collectively, think long-term, think business-FRIENDLY. The ball is in our court now.

by DG


Can He Sell Austerity?

In Economics, Financials, Politics on November 11, 2011 at 21:27

A five-day drama to form the new ‘coalition government’ has come to an end. Lucas Papademos will be Greece’s 11th PM and along with his new cabinet, will lead the country through a transitional phase, aiming at securing the 6th and 7th tranches from the bailout funds as well as locking in the new rescue package essential for the country to remain in the Eurozone. The big question however is can this new government deliver what the previous one couldn’t, and can Lucas Papademos succeed where his predecesor failed?

First, let’s get the facts straight. Mr. Papandreou stepped down as the PM after fierce criticism from the general public and threats of defections from his own party. The austerity measures and policies needed to be implemented as a condition by Greece’s creditors are so tough and anti-popular that it is impossible for one party to bear all the burden. After Papandreou’s tactical move to call for a referendum, the two main political parties along with another one from the right wing, joined forces to form a coalition government that would help calm the nation down, and pass all these measures at the minimum possible cost.

The choice of Mr. Papademos as Greece’s PM is something that fills me with pleasure and great expectations. In my opinion, out of the possible candidates that were up for the position, he was the most respectable, competent, and of ‘common approval’ person. His experience is vast, his knowledge on Economics and sovereign crises immense, and most importantly, he knows the European ‘waters’ better than anyone in Greece, having served ten years in the ECB from the post of the Vice President. Having said that, Papademos can definely improve communication with our creditors and the EU in general, and may also open a new discussion on the prospect of renegotiating some of the new package’s terms. In addition, this ‘coalition government’ translates into less appetite for micro-political games and more efforts to deliver constructive results. New Democracy’s involvement, the main opposition party, gives them no more excuses to point the finger at anyone with respect to upcoming political decisions. Less talking and criticism, and more of working altogether for the common good of this country is what oughts to be done.

Nevertheless, there are several features in this new government that make me skeptical over its capacity to deliver. First, is the matter of excessive expectations. Somehow, Greek people have raised the bar too high and think that this is the solution to the crisis. Not quite. Thinks are still on the edge, and we have lost precious time the past five days trying to form this new government. The draconian measures still need to be voted and implemented as quickly as possible. Secondly, Mr. Papademos is a technocrat, with no political experience, someone who hasn’t been tested on similar country-like situations. However, this can work either way, as less politics and more expertise is what this country may actually need. Thirdly, the proper functioning of a government with lawmakers from different parties working together is quite a challenge. Frictions can easily be engendered amongst people with different political motives and ideologies. The last and most important obstacle for this governemnt is that it has an expiry date. Its duration is said to be 3-4 months with national elections on its immediate horizon. Its main aim is to secure the 6th and 7th tranches from the Troika and the adoption of the new rescue package. This is an unrealistically short window for Mr. Papademos to work properly, and it unavoidably builds a pre-election period climate polarizing the public once again, canceling out the essence of this new government of national unity.

‘Restrained optimism’ can best describe my view on this new administration. Setting political interests aside for once and promoting the overall good for Greece will be a big challenge for our political stage. Lucas Papademos is unambiguously someone who knows the right steps to follow but faces a number of obstacles in his track. Selling austerity measures wasn’t easy for Papandreou and won’t be easy for Papademos. The difference now, though, is that politicians have played their part. The ball is in the hands of the Greek people to decide whether they want to accept the measures and stay in the Eurozone, or test their faith with the Drachma.


by DG

Abusing Referendums

In Economics, Financials, Politics on November 1, 2011 at 12:32

It seemed things had been put in order after last Wednesday’s EU summit in Brussels. EU leaders had collectively decided upon a comprehensive rescue package that would help Greece write-down its huge debt, recapitalize troubled European banks, and leverage up the European Financial Stability Facility (EFSF). Even markets seemed convinced that this could work. However, Greek PM, George Papandreou, comes to shake the waters once again. His decision to lead the country to a referendum with respect to the newly agreed rescue deal, fills with extra uncertainty Europe’s future.

Shocking the rest of the Europe’s leaders, Papandreou announced yesterday a referendum that will take place in two months time, which translates into two months of utter uncertainty and further market volatility. This is two months of no progress on solving the European debt crisis, just so that Mr. Papandreou and his party can gain a confidence vote.

If Greek people vote ‘NO’, then Greece will be exiting the Eurozone. If its people boycott the referendum and the turnout is less than 40-50%, Papandreou would have to step down leading to national elections, prolonging the period of uncertainty and poor governance. A ‘YES’, will give him the popular vote to move ahead with the anti-popular reforms and policies, but will definitely not tranquillise the nation as the economy will be in a deep and protracted recession.

This is a rather selfish and naive decision on Papandreou’s part as he attempts to buy some time to calm the nation down and gain some ‘political capital’ to materialise his announced measures. Nevertheless, what is the point of leading your people to a referendum where the question is effectively “Eurozone or Bankruptcy?”. This referendum is an abuse of democracy’s top instrument and is a major threat to Europe’s efforts to try to find a solution to the European sovereign debt crisis. In times when EU leaders have to think big and consciously, Greece’s PM falls short. It’s not too late to reconsider..



by DG

Why Save the Eurozone?

In Economics, Financials, Politics on September 20, 2011 at 15:47

The euro is definitely worth preserving. It’s existence is at the best interest of all of its member states. Conflicts of national interests, the ruthless financial markets, and political miscommunication, are the major threats to the future of this currency. France and Germany, Europe’s most influential states, have an obligation to prevent the demise of the Eurozone.

Consequences of a Collapse

A collapse of the eurozone would not only damage its existing member states but also the EU and the global economy as a whole. Markets would shift attention to Spain and Italy, their yields would explode, and the two countries would default. Their default would, in turn, bankrupt most of the world’s largest banks exposed to their debts. Political tensions would exacerbate market conditions and Europe’s recovery would take too long to happen. The costs would just be ‘too much to take’. A return to national currencies would lead to massive currency devaluations for the illiquid states and further deterioration in their standard of living. Germany has no much of a choice too. Intra-European trade is a main booster to its growth. Abolishing the euro would take away that advantage. A strong and stable currency is of paramount importance in an era of slow growth and high-volume trades. The problem, however, lies on the actual functioning of the Eurozone.

What to Do

Firstly, restructure immediately the debt in the countries that are unable to repay it (i.e. Greece). Secondly, run extensive stress tests on European banks to ensure their capacity to absorb losses from a potential sovereign default. Thirdly, initiate an immediate EU growth plan. Without development, state revenues, employment levels and foreign direct investment will remain suppressed in the EU region. Fourthly, reshape Eurozone’s framework. Urging a fiscal union and reconsidering the Maastricht criteria are critical. Monetary union cannot function properly without a common/unified fiscal plan and proof to that is today’s situation.

The Eurozone has offered its member states great gains over the past decade. It’s the irresponsibility of individual countries and the negligence of the Union that brought us here today. One should be able to see the broad picture. The way I see it, this is a one-way road with no way back. Saving Eurozone should be out of question once and for all.

by DG

click here for interactive maps:

A ‘Currency-Cold War’ in the Making?

In Economics, Financials, Politics on October 3, 2010 at 13:52

Although global economic recovery is underway, it’s also being uneven. On my last post I examined the potential effects of the newly-formed Basel III rules on global recovery and concluded to their minor impact. Today, however, global recovery is facing a new challenge; the prospect of a currency war between two giants.

Back in April 2009 in London, the G-20 agreed on fiscal and monetary cooperation and coordination as well as pledged to “refrain from competitive devaluation”. Now that recovery is evident in most parts of the world, China endeavors to re-stimulate its exports and boost its aggregate growth. The fresh visit of the top Chinese official, Wen Jiabao, in Europe was signaled by his commitment not to reduce China’s European bond holdings, a tactic likely to continue to keep the yuan undervalued.

The US and China have been constantly involved in a ‘war-of-words’ concerning the latter’s exchange rate policy to artificially keep the yuan at low levels and favor its exports. The cheap yuan increases Chinese exports to the US and hurts the competitiveness of US-domestic companies. With US unemployment near 10 percent and growth rates extremely anemic, the US government needs to take drastic measures to contain its trade deficit and improve the competitiveness of its domestic businesses.

Back in June, the People’s Bank of China decided to let their currency float versus the dollar, but since then it has only appreciated by a mere of 2 percent. It was a clever tactic move to gain extra time and ease US outcry with respect to currency manipulation.

Still, US lawmakers are taking their own measures. This past week, they proposed a new currency bill (to be voted after the Nov. elections) that would penalize countries that violated free-trade rules, like currency manipulation. In my view, if this proves to be a pragmatic policy, then a trade war is on its way and there will be no winner as USA and China are two highly-interdependent economies; US-consumers buy bulks of Chinese products and the Chinese government finances the US state by buying large sums of T-bills.

The dollar is under severe global pressure. It seems incapable of absorbing global economic uncertainty. The current state of the domestic American economy cannot back it up and its large trade deficit is a loud testament to its unattractiveness. China has tremendous growth prospects but its huge US bond holdings make it highly-dependent to the USA. China will keep subsidizing its exports until its domestic consumption is active and big enough to be the major driver to sustainable growth.

The rest of the world is like the audience to a drama play. The euro needs to put its home affairs in order first and the other economies simply lack the politico-economic capital to challenge the US or China on that front. Only the Japanese yen can have an active ‘say’ in this friction given its long-suffering from the undervalued yuan. Is this a ‘Currency-Cold War’ in the making? I sure don’t know for sure, but the similarities cannot be ignored; high political tensions, polarized groups, wars-of words, extreme political measures and the fact that the winner, if any, out of this ‘war’ will probably be (or continue to be) the world’s next superpower, all converge to this proposition.

NOTE: next post will probably be on China’s capacity to challenge USA’s politico-economic hegemony(?). Please send us any material or views you may have on this topic on our email in the ‘Contact Us’ section.

Is Basel III a Threat to Global Recovery?

In Economics, Financials, Politics on September 14, 2010 at 20:18

The question to ask here is, do we want a recovery similar to the previous ones in nature so as to end up here once again and start blaming the ‘system’? A rational answer would be NO, but I will get back to that in a bit.

Last Sunday bank regulators and the most important central bankers, met in Basel to decide on the new capital requirements rules to be imposed on banks. Much talk had been done prior to the meeting around the impact those new rules would have on the course of the global economy.

The key point of the Basel III accord is the increase of the tier 1 (core capital) rates from 2% to 4.5%, and the addition of a 2.5% on top of that rate as a conservative buffer for periods of high stress.

Markets responded pleasantly to the new standards given most of the big banks’ positions already fell within those boundaries.  One should remember, however, that credit growth has yet to expand as banks are still insecure about lending to one another. As soon as lending pipes turn on again, banks will then feel the force and restriction of those standards.

Global recovery shouldn’t be affected by the new rules. Yes, lending is essential for a growing economy, but excess lending is to be avoided. Some analysts argue lending and deposit rates will go up in the short-run as banks will now have less funds available to invest and greater need to attract new ones. Truth is, it doesn’t always work that way.. You see, higher capital can help at restoring confidence within the markets. At this point, bad psychology is keeping rates higher. The new rules have the power to reverse this climate and encourage lending in the intra-bank market.

This fresh global recovery oughts to be built upon sustainable credit growth. The Basel rules work two-ways; first, they force banks to limit their risky activity of their business and secondly, it provides them with a compulsory ‘safety net’ in case they get into trouble during the next crisis.

Regulators said those rules are phased in until 2019 which makes the intermediate period very crucial in terms of how will banks behave and whether or not we’re going to have another major crisis until then.

Fiscal Adjustment Set as Top Priority from G20

In Economics, Financials, Politics on June 30, 2010 at 12:13

The G20 summit in Toronto was highly anticipated due to the vast number of threats the global economy is currently facing. China’s move, days before the summit, to slightly appreciate its currency (yuan) was a good warm-up for the summit as it cleared the road for a more constructive discussion focused on more crucial and urgent issues like EU’s fiscal crisis and the financial markets regulation.

Prior to the summit, the US government had asked from Europe not to de-escalate their fiscal spending as this would jeopardize global economic recovery. Response from Europe was negative as fiscal adjustment is the unambiguous top priority of the EU member states. It’s definitely not the time for Europe to be a big spender. Fiscal discipline is far more important as it influences other areas like the the ‘free-falling’ euro and credit spreads (cost at which countries borrow).

USA has to wait a bit more for Europe to match them in the ‘spending gear’. The kind of measures countries will adopt to tackle their fiscal crisis will be different for each of them given the heterogeneity of their economies and dissimilar scale of the crisis in each of these countries. Germany and the UK have been the main advocates of this effort to postpone government spending and make sure that fiscal crises do not spread out to other EU countries.

Europe’s firm stance on curbing the fiscal crisis is really promising as it fashions patience, long-term thinking, and solidarity. The EU oughts to first restructure its domestic affairs and then gear its economy up. The situation could go out of hand, should the EU decide to focus on expansionary fiscal policies and neglect its uncontrollable deficit. On other news from the summit, the G20 ‘froze’ the prospect of implementing an ‘international bank tax’ but committed on gradually setting stricter bank capital requirements from the late 2012. Isn’t that the year the world is supposed to come to an end?!

Decision-Time for the ‘International Bank Tax’

In Economics, Financials, Politics on June 18, 2010 at 15:01

Ever since the global financial crisis burst in 2008, there has been an ongoing debate about the prospect of imposing levies on banks and their transactions to form a fund that would prevent the repetition of potential bank collapses (i.e. Lehman Bros.) that could jeopardise the global financial web. This is one of the hottest topics on the EU agenda awaiting next week’s G20 meeting.

The imposition of an ‘international bank tax’ sounds a very interesting venture to me but rather complicated and risky for the participant countries. First of all, its structure and main features haven’t been clarified yet. What to tax exactly? At what rate? Will there be a common rate across countries? When can the troubled banks make use of the fund? All these are vital aspects of this radical step which ought to be specified as soon as possible.

I see very warmly this prospect of introducing the ‘bank tax’ but I also want to stress the risks of it. The absence of a common/homogeneous ‘bank tax’ across countries is likely to alter the financial landscape and create new imbalances between ‘financial hubs’ causing the massive outflows of funds from those countries with a heavy tax. If Europe, let’s say, sets higher levies on its banks’ turnovers or transactions than the US, the European banking sector automatically becomes less profitable with lower returns which may translate into a vicious circle of less funds available to European banks and slower economic development for the region.

Moral hazard is another threat; the creation of such a fund to prevent bank collapses, may also nurture a more risky attitude of banks, as they can always utilise the fund in case of a potential failure. Last but not least, national governments should use honest criteria in the setting of such a tax that are serving the sustainability of their economy and not their short-term opportunistic goals. For example, economies with wide budget deficits like Greece and Spain, could abuse the ‘bank tax’ to absorb as many funds as they can from their domestic private banks just to achieve a ‘spectacular’ improvement in fiscal position and have the opportunity to brag about it during elections.

I remain optimistic on this issue as I believe that banks have been ‘free-riding’ for decades on peoples’ misinformation and states’ ignorance and impotence. A robust global financial system is the backbone of a well-functioning global economy. We all saw Lehman’s adverse spillovers and hope we wont’s face similar phenomena anytime soon. The ‘international bank tax’ should be homogeneously imposed across economies, on banks’ turnover and not on their transactions as fast money circulation is essential for liquidity. Finally, the funds from this new tax should be carefully and honestly treated, solely for the protection of the domestic and global financial system.