Greek Debt Restructuring on the Horizon

Despite the massive financial aid granted by the IMF and the EU that amounted to 110 bn euros, debt restructuring is still considered to be a necessary step towards de-levereging or just stabilising debt level in the Greek economy. The recent aid package can only buy Greece a limited amount of time (a year may be). Efforts to contain debt escalation should start as soon as possible. Unlike fiscal deficits and inflation, debt can’t be tackled within couple of years. It’s accompanied with a dynamism and a momentum that needs time to be broken (debt set to rise to 150% of GDP by 2012). This is why an upcoming debt restructuring seems like a natural trajectory.

Debt restructuring is like a partial default. It occurs when an economy struggles to fully repay its creditors and negotiates with them the prospect of prolonging the maturity of those debts or even cutting down interest payments. Either way, this works as an unavoidable loss to the creditors. 338 bn euros is the Greek debt held by other countries, most of which is by banks and the respective public sector. It is hence easy to imagine the catastrophic domino effect that a potential default would trigger in the European inter-bank community.

Some analysts, however, counter-argue the debt-restructuring prospect claiming that the ECB has been aggressively buying Greek bonds which reduces the risk exposure of other private institutions on Greek debt. In my view, this isn’t enough to prevent a debt restructuring given the already wide exposure of foreign banks to the Greek debt and the increasing uncertainty that this dilemma generates amongst banks. Right now, few are the banks which have revealed their size of exposure to Greek bonds and this creates a blurred environment with respect to which institutions are in a dangerous spot or not.

Debt restructuring has been a frequent phenomenon in recent economic history. Russia’s and Argentina’s debt rescheduling in late 90s and early 2000 were deemed necessary but apparently insufficient in deterring the subsequent defaults. Greece has to negotiate its debt as soon as possible for two main reasons: 1) achieve faster results in its ‘fiscal discipline’ process and 2) save the markets from all the drama and speculation, that cultivates uncertainty, on whether it will actually act or not on that front.

How to Raise Public Awareness

Here is a thought for all the fiscally struggling economies and their frustrated people to reduce the chances of such future similar crises. Place an electronic board with the economy’s main macroeconomic indices, on a central point of a city (like a public square or outside the Parliament). Come on Greek people, make this happen! Check out USA’s one here..

http://www.usdebtclock.org/

European Lifejacket Offered to Greece

President of the EU Herman Van Rompuy announced yesterday that EU leaders had reached an agreement on helping Greece tackle its debt crisis. EU rules forbid the collective bail-out of a Euro member state but the scale and urgency of the Greek crisis has forced EU leaders to improvise. No deal-specifics have been given yet but it is obvious that rules and foreign involvement will be greater than ever in the Greek economic affairs.

German Chancellor, Angela Merkel and French President Nicola Sarkozy have clearly established their intentions to stand by Greece and assist in solving the problem as soon as possible in order to preserve the sustainability of the Eurozone and the EU as a whole. Greece has been suffering from ballooning fiscal deficits (12.7% of GDP) and mounting debt payments which account for almost 12% of its GDP every year. The government looks for raising 53 billion euros from the debt markets to repay previous debts.

In the midst of all the economic mayhem going on, EU leaders have given hope and courage to the Greek people who have been struggling for decades to enjoy lasting prosperity. The credibility of the Greek government and its economy were smashed after it surfaced that past administrations had been cooking the country’s books to contain deficit and debt levels.

The underlining reason behind this agreement is the realisation of the EU leaders that the Greek crisis has severely impacted European debt and equity markets destabilising the recovery trend of many other member states. Euro has plummeted to a 14-month-low against the dollar as uncertainty for the Greek case is still prevailing within the markets.

Let me just remind you that as distinguished economists, like Krugman and Roubini, have stated, a Greek default is not a realistic scenario. Having said that, the purpose of the aforementioned EU agreement is clearly to calm down the markets and highlight the unity and solidarity of the Union, something that was intensively questioned within the EU parliament per se.

Greece has been Europe’s playing doll and until Europe grows up, that doll will be an everyday experiment.

by the Self-Seeker

The Greek Crisis: Behind the Scenes

*It’s been a while since I last posted on this blog due to my busy schedule and the global unfortunate events – apologies to the loyal readers.

Greece has been at the centre of interest the past month on its possibility of defaulting on its national debt and jeopardising the sustainability of the monetary union. Investors have been speculating on that scenario on the Greek equity and debt markets which unavoidably makes an impact on the Euro.

My perception of things is the following. Things are indeed bad for the Greek economy. An above 12 percent of GDP fiscal deficit, over 120 percent debt and reluctant banks to lend money and assist in the recovery of the economy can not describe a prosperous economy. I might say this is the worst economic crisis for Greece since the 1999 stock market bubble. Media have accurately drawn this frame for the state of the Greek economy on that front. But,..

Does this justify the ‘pandemonium’ that is taking pace all over the media and the markets. Is really Greece threatening the monetary union to the extend that ejection should be considered? The answer is NO! With great frustration I have noticed certain British papers devoting great share of their front page on the Greek case, exerting harsh criticism on the government and the EU as a whole. It comes as natural to presume that the ‘Greek debacle’ and its exposure in all media is a product of a Eurosceptic-driven propaganda that aims at hurting the Eurozone and subsequently the Euro.

Markets and media are much smarter than we might think. There never was, nor will be in the the short future a possibility of default of the Greek economy (see Roubini, Krugman), yet some people and institutions fill the market with lies and false impressions in an effort to mislead and manipulate it at their benefit and Eurozones’ expense.

What is more, how come people focus on Greece and not on Spain, as professor Roubini said, which is a much bigger threat to the Eurozone? Is it a matter of who can take more punches on the stomach or a matter of who is easier to manipulate and speculate on? Whatever that might be, certain people are playing dirty games against Greece which happens to be the innocent victim of a market conspiracy. I can’t seem to remember last time David was portrayed as Goliath..

by the Self-Seeker

Dubai Debt Crisis: a Case to Review Recovery?

On Wednesday the 25th, Dubai World, a government-owned company that manages and supervises government’s investment portfolios, announced a six-month deferral on $59 billion of its total $80 billion debt. The announcement came just before a long vacation for the markets and immediately triggered a sellout in equity markets across the world.

The view is, now, rather blurred in terms of the sustainability of recovery. Gordon Brown and Nicolas Sarkozy poured oil on troubled waters reassuring the global economy was strong enough to absorb a shock of such a magnitude. What is more, international banking institutions are unlikely to be hit by, given their weak exposure to Dubai debt.

Abu Dhabi has already assisted indirectly through the UAE Central Bank and two private Abu Dhabi banks, with $15 billion and is expected to pledge more funds.

Although this is the biggest debt crisis since Argentina in 2001, its effects will seemingly be contained within regional grounds. The Dubai crisis per se is not capable on jeopardising global recovery. The nature of the problem however, raises concerns about the future of other highly indebted nations such as Ireland. A series of debt crises would be a derailing factor to recovery.

by the Self-Seeker

Latin American Inflation Fears

My persistent interest in the dollar highlights its paramount importance in the course of the global economy. As the world’s major reserve currency, the dollar value effects extend across the world. Emerging markets seem to be also potential victims of the weak ‘greenback’ as dollar-driven asset bubbles spread towards the continent.

In an effort for Latin American states to stabilise their currencies against the dollar, central bankers have been buying foreign reserves which in turn has increased the money base fuelling domestic inflationary expectations. The Brazilian government has imposed a 2 percent tax on capital inflows destined to its equity and debt markets, to ease the frenetic surge of its currency. Brazil’s ‘real’ has risen more than 30 percent against the dollar this year.

Latin America is expected to grow at almost 3 percent next, much quicker than the developed world. If Latin America is to avoid another currency-crisis, officials should be very cautious on the accumulation of reserves as this may lead to uncontrollably rising inflation and future depreciating pressures on their currencies. Manipulating their interest rates may engender homegrown deficiencies and risk future currency stabilisation. The weak dollar is shucking Latin America’s blood deep and slowly.

by the Self-Seeker

 

Fed’s Plan on Exit Strategy

With the debate on the existence of asset bubbles escalating, analysts are forecasting Fed’s next move on the conduct of monetary policy. This week, Fed’s Vice Chairman, Donald Kohn, said there were no signs of an asset bubble and pledged to continuing expansionary monetary policy. When the time comes and the Fed decides its time to curb inflationary expectations, there is a consensus it will rely on raising the interest paid on banks’ reserves.

Congress granted the right to the Fed to pay interest on banks’ reserves on October 2008 in an effort to address the issue of undercapitalisation in the broader crisis-context. With the Fed paying higher interest on banks’ reserves, it creates a floor on their portfolio returns and forces banks to keep their money with the Fed in case market returns are lower. The objective here is to reduce banks’ aggressiveness and contain their risk-appetite. It also works as an indirect way to withdraw funds from the markets and reduce the likelihood of asset bubble build-ups.

Tagged along to this untested monetary policy, the Federal Reserve is also expected to engage in ‘open market operations’ and sell T- bills for a short-term period to private banks. Federal Reserve Bank of St. Louis President, James Bullard, anticipated that the Fed will not increase key rates until 2012, arguing Fed’s policy record on similar occasions of the recent past.

I happen to find this new policy of higher interest on banks’ reserves a very interesting approach on this issue as it works as the middle solution between the opposing challenges of inflationary expectations and growth. It manages to set a lower boundary on market liquidity without directly forcing money withdrawal and threatening the economy with contractionary spiral effects. Depending on market returns and macro levels, the Fed can accordingly adjust the interest and better influence liquidity.

by the Self-Seeker

Weak Dollar Fuels Oil Price Hikes

Despite record-high inventory levels (rose 4.3 per cent in OECD countries on annual basis), oil prices have exhibited a strong positive momentum primarily driven by global recovery led by the emerging economies. However, Exxon Mobil’s CEO and Chairman Rex Tillerson told CNBC that a big boost comes from the weak dollar.

As oil is priced in dollars, the cheaper ‘greenback’ makes oil more affordable and attractive to investors. What is more, oil can also act as a hedge between commodities and the dollar. Oil has more than doubled to above $70 from its $30 lows but is still half of its all time highs back in July 2008. In Tillerson’s view, the weak dollar is contributing about $20 to $25 dollars to the overall oil prices at the moment.

This week, IEA revised oil prices slightly higher for 2010. It also warned that persistent higher prices may derail economic recovery. But is that truly the case? Not necessarily. Firstly, oil prices would have to climb above $140 a barrel to start erasing growth and secondly, even if growth was halted, prices would fall rapidly, supporting a quick recovery.

One should be more worried about the dollar value than the price of oil as its side-effects on the economy are deeper and more complex.

by the Self-Seeker