Tag Archives: Eurozone

ANZ: Greece Could Affect Oz Banking

30 Apr

Yesterday I posted about how vulnerable Australia’s banking system is to the spreading debt contagion in the Eurozone. It seems that ANZ chief Mike Smith shares the concern for the same reason – our banking system’s heavy reliance on getting funding from the international markets, which are again beginning to freeze up due to concerns about counterparty risk.

From Business Spectator:

Australia and New Zealand Banking Group Ltd (ANZ) chief executive Mike Smith has warned that sovereign debt problems in Europe have the ability to affect Australian markets.

Speaking to reporters after the bank’s first-half results were released, Mr Smith said the “contagion issue is now very real”, in reference to Europe’s sovereign debt problems.

Mr Smith said the crisis may affect Australia in terms of its dependence on access to the international credit market, and said the concern was very relevant to businesses across the country.

“I think it will probably have an effect on equity and credit markets, but credit markets I think is more relevant to the Australian situation,” he said.

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OECD: Greek Crisis ‘Like Ebola’

29 Apr

From Bloomberg:

European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.

With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.

As OECD head Angel Gurria likens the crisis to the Ebola virus, Europe may need to come up with a plan equivalent to the $700 billion Troubled Asset Relief Program deployed by the U.S. after the collapse of Lehman Brothers Holdings Inc. “It is perhaps time to think of policy options of the last resort in the current sovereign crisis,” said David Mackie, chief European economist at JPMorgan in London.

“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television yesterday. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”

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‘Shock And Awe’ Needed To Save Eurozone

29 Apr

Following close on the heels of the extraordinary revelation by Ben Bernanke that the US Federal Reserve has printed $1.3 Trillion out of thin air to buy toxic Mortgage Backed Securities and prop up the US economy, now the European Central Bank may have to invoke emergency powers in order to engage in massive money printing to prop up the collapsing European bond markets.

From the UK’s Telegraph:

The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

“The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.

This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.

But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.

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Greek Default Could Have Lehman-Like Impact

29 Apr

The rapidly spreading Greek debt contagion poses a very real and present danger to the Australian banking sector, and thus to our economy. Why? Because our banking system is desperately overreliant on sourcing its funding from the global capital markets.

From The Big Chair:

The chief executive of National Australia Bank, Cameron Clyne, referred last week to Australian banks’ dependence on wholesale funding markets as their Achilles heel.

The Treasury secretary, Ken Henry, has also talked about Australian banks not being “well insulated” from the fallout of events like the Lehman Bros collapse, and the International Monetary Fund has said Australian banks are exposed to rollover risks on their short-term wholesale funding.

On average, Australian banks are sourcing just under a third of their funding from overseas wholesale markets and still too much of their existing borrowings are short term.

Australian banks are among the more vulnerable plays in the world to another Lehman-style event because of their dependence on overseas wholesale markets, which have proven already they can freeze up for extended periods.

It is these very same wholesale markets that are now trembling with trepidation at the consequences of the Greek – and now Eurozone – debt crisis.

From the UK’s Independent:

Why does Greece’s debt crisis matter to the rest of us? The answer, in a word: contagion.

If Greece defaults or crashes out of the euro it will send an almighty shockwave through the global capital markets. First of all, French and German banks, which are estimated to hold up to 70 per cent of Greece’s debt, will register writedowns. If their exposure is great enough, they could even go bust.

The fear that commercial banks were on the verge of failure was responsible for the last credit crunch as financial firms grew wary of lending money to each other at anything other than penal interest rates. If that fear of failure returns, we might witness another savage contraction in lending. And another credit crunch would open the way for the long-feared “double dip” recession.

Most Australians remain oblivious to this threat of another, much larger wave of the GFC. Doubtless this is largely because our “experts” continue to tell us that the GFC is “over”, while preaching the dawning of a “period of unprecedented prosperity”, and downplaying any concerns for this country. Just as they did in 2008 when they all completely failed to foresee the onrushing first wave of the GFC.

From The Australian (Feb 2010):

Investor confidence was roiled in recent weeks on fears of sovereign default in Europe and some signs that the broader global economic recovery was slowing as policy stimulus measures wound down.

Dr Debelle (Assistant Governor of the RBA) said risks that still existed did not relate to Australia or Asia, however, where bank balance sheets remained in sound condition – instead they referred to banks in Europe and the US, where poor macroeconomic conditions were expected to weigh on loan books.

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Greece Downgraded To Junk Status

28 Apr

Readers will be aware that I’ve been highlighting news about the Greek debt situation for some months. As a member of the European Monetary Union, and the Eurozone country with the gravest debt situation, it was always likely to be the first domino to fall.  Now it has.

From AAP:

Greece’s debt has been downgraded to junk status by Standard & Poor’s amid mounting fears that the debt crisis in Europe is spiralling out of control.

In a statement on Tuesday, the agency says that it is lowering its rating on Greece’s debt to BB+ from BBB- – that means that the country’s debt does not carry the investment grade tag.

The agency is also warning debtholders that they only have an average chance of between 30 to 50 per cent of getting their money back in the event of a debt restructuring or default.

European stock markets and the euro sank on Tuesday amid growing fears that the Greek debt crisis will spread to other weak eurozone countries, with Portugal now in the firing line.

“It can really be summed up in one word – contagion,” said CMC Markets analyst Michael Hewson.

The markets fell after Standard & Poor’s, a leading international ratings agency, downgraded Greek sovereign debt to junk status and cut Portugal’s long-term credit score by two notches.

The London stock market dived 2.61 per cent, the Frankfurt DAX sank 2.73 per cent and the CAC 40 in Paris plunged by 3.82 per cent. The Lisbon stock market sank by 5.36 per cent and Athens plunged six per cent.

The euro, which has been rocked for months over the debt drama in Greece, plunged again against the US and Japanese currencies, falling to $1.3250 from $1.3378 a day earlier and to Y123.46 yen from Y125.72 on Monday.

….

“Greece’s fiscal problems, and the market’s lack of confidence in dealing with them, are spilling over to other countries seen as having a kindred fiscal spirit,” said Patrick O’Hare at Briefing.com.

Greece has asked the European Union and International Monetary Fund to activate a three-year rescue package worth up to E45 billion ($A64.98 billion) in the first year.

However, the bailout is shrouded in uncertainty, with Germany insisting that Athens must first demonstrate how it plans to get its public finances in order before it gets the money.

“It is still the uncertainty surrounding this Greece bailout,” added Spreadex trader David Rees.

To compound matters, the EU/IMF rescue package may not be enough to resolve the wider problem of debt, according to VTB Capital economist Neil MacKinnon.

“The markets are worried that any fresh EU/IMF package to cover Greece’s funding needs in the short term are not enough to resolve the problem of worsening debt sustainability,” MacKinnon told AFP.

“Double digit interest rates and triple-digit debt levels are a recipe for debt restructuring and eventual default.”

The Greek debt crisis also unnerved Wall Street, with the Dow Jones Industrial Average sliding 1.24 per cent, Nasdaq shedding 1.44 per cent and the Standard & Poor’s 500 index declining 1.57 per cent.

The first domino has fallen. Who will be next? And just how far will the contagion spread?

Barnaby Joyce began speaking out about the risks to our economy from excessive debt both here and in other countries as early as October last year. For this, he was ridiculed and smeared by our know-nothing media and “expert” economic commentariat, and by the pompous “authorities” in government, the Treasury, and the RBA.

All of these utterly failed the Australian public, by their complete failure to foresee the on-rushing first wave of the GFC in 2008.

Now they are failing us all over again, by their naïve and arrogant dismissal of the potential global impacts of the rapidly spreading Eurozone debt crisis.  They seem to believe that because our island “escaped” the first wave, that somehow means we will miss the next (bigger) one as well.

Barnaby Is Right.

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Greek Debt Woes Rising

8 Apr

From the Associated Press:

European stock markets fell Wednesday amid mounting concerns about Greece’s debt crisis while U.S. shares drifted lower as the Dow Jones industrial average fell short of breaking above 11,000.

Once again, Greece took center stage as investors continued to fret about the country’s ability to pay off its debts — the ten-year spread between Greek and Germany bond yields stood at 4 percentage points, having earlier hit 4.12 percent, its highest level since the euro was introduced in 1999. The spread is also way up on the 3 percent level when the EU agreed on an aid program that would involve the International Monetary Fund.

“All of this puts a question mark over longer term debt sustainability as well as the threat of contagion elsewhere in the eurozone,” said Neil Mackinnon, global macro strategist at VTB Capital.

With fiscal retrenchment due in Greece, as well as Portugal and Spain, there are also mounting concerns that the debt crisis will weigh on eurozone economic growth for a long time yet, particularly as lower demand for German goods could squeeze the eurozone’s biggest economy.

“This does not look like a sensible strategy and will likely end up in economic slump for the eurozone generally alongside the risk of deflation,” said Mackinnon.

Worries about the strength of the eurozone economy were stoked further on Wednesday with the news that economic growth ground to a halt in the last three months of 2009 as output stagnated in Germany and contracted once again in Italy.

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PIMCO Fears UK ‘Debt Trap’

2 Apr

From the UK’s Telegraph:

The US bond fund PIMCO has warned that Britain risks a vicious circle of rising debt costs as global investors demand a penalty fee on gilts to protect against inflation.

Bill Gross, the fund’s chief and emminence grise of bond vigilantes, said the UK was on its list of “must avoid” countries along with Greece and others in eurozone’s Club Med.

The flood of British debt is likely to “lead to inflationary conditions and a depreciating currency”, lowering the return on bonds. “If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap,” he wrote in his April monthly note.

Mr Gross said the UK is not yet in crisis but gilts are sitting on a “bed of nitroglycerine” and must be handled delicately.

Michael Saunders from Citigroup said the UK has “no credible medium-term path back to fiscal sustainability”.

UPDATE:

From Reuters –

PIMCO Sees UK Downgrade

PIMCO sees Europe’s action on Greece as ineffective in fixing the country’s problems, while Britain’s sovereign debt rating could be downgraded within a year, a top executive of the world’s largest bond fund said.

Scott Mather, head of global portfolio management at Pacific Investment Management Co (PIMCO), told a briefing in Taipei on Thursday that the company was underweighting UK, U.S. and pan-European 10-year sovereign bonds.

“Miracles are needed in the next six months in order to keep economic growth in the developed world,” Mather said.

Last month, PIMCO said it was maintaining its negative stance on British gilts because the amount of debt the country would have to issue in the future should lead to inflation and a depreciating currency.

The country’s record-high debt has caused disquiet among investors, and Standard & Poor’s has put the country’s top-notch triple-A rating on a negative watch.

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Only US Collapse Can Save The Euro

30 Mar

From Zerohedge:

For once, some actually good insight from a CNBC guest. Philip Manduca, Head of Investment of the ECU Group, discusses Greece and the very severe implications of what the final outcome will look like. “Trichet (Ed: President of the European Central Bank) said the Greeks are crooks, and they’ve been lying about the numbers. There is a deeply embedded corruption within the Eurozone. Combined with the endemic European socialism and there is just no way you are going to get spending cuts and tax raises and maintain a GDP that makes any sense of the percentage aspect of debt to GDP. So the whole show is wrong. This is an intractable situation, this is going to continue on and on. The only hope for the Eurozone, and the Euro as a currency, is that someone takes the spotlight soon, and that may be the United States.”

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China Says Greek Debt Crisis ‘Tip Of The Iceberg’

26 Mar

From the Sydney Morning Herald:

The euro slumped Thursday to a fresh 10-month low after a senior Chinese central bank official warned that the Greek debt crisis was just the “tip of the iceberg.”

Analysts said the comments, and a debt downgrade for Portugal on Wednesday, suggested the crisis was widening to take in the entire eurozone project.

“The fact that Zhu Min, the deputy governor of the People’s Bank of China, felt compelled … to call the Greek debt crisis ‘the tip of the iceberg,’ is as good an indication as any of how rapidly fundamental concerns are growing about the eurozone,” said analyst Neil Mellor at Bank of New York Mellon.

“Indeed, this comment might well signal the point that we stop talking about a ‘Greek debt crisis’ and start talking about a ‘Eurozone structural crisis’ instead,” Mellor said in a research note to clients.

Please take the time to browse the recent posts on this blog.

Our financial authorities – RBA Governor Glenn Stevens, Treasury Secretary Ken Henry, and the Labor Government – are all convinced that the global financial crisis is ‘over’.

They have publicly declared that Australia is all set for a new, multi-decade mining boom (thanks to China), that will provide us with a “period of unprecedented prosperity”.

They have ridiculed Barnaby Joyce, our only politician with the courage to publicly raise questions about the state of the rest of the world’s economies, and what calamity that might mean for Australia, since last October.

And, all of them (except Barnaby) completely failed to predict the GFC in the first place.

Yet, our media and the public believe that everything is fine.  That the Government can just keep right on borrowing around $2bn a fortnight, to continue squandering on a massive, rushed and bungled “stimulus”.

Barnaby is right.

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Labor Less ‘Creative’ Than Greece

19 Mar

From the Korea Times:

The Greek crisis is a textbook example of the interconnectedness of the global economy and the foreign policy environment.

For most of the last decade, the Greek economy grew faster than others in the euro area. Yet, the country’s balance sheets worsened.

(Sound familiar?)

So, when the global recession hit, and the Greek economy contracted by 2 percent in 2009, international bond markets panicked, fearing that Athens was going to have trouble meeting its obligations. By mid-February the Greek government was paying three percentage points more to borrow money than the interest rate charged Germany, worsening the mismatch between Greek revenues and expenditures.

Wall Street bears some of the blame for this mess. Goldman Sachs and possibly other American financial institutions reportedly helped Athens understate its true indebtedness through the creation of innovative financial instruments.

The Rudd Government has used a more traditional way to understate our true indebtedness. ‘Creative accounting’. Or ‘cooking the books’.

First, Rudd Labor has made changes to the ‘methodology’ used for reporting Gross Domestic Product (GDP).  And they have applied those changes to all the previously reported Budget numbers too.  The result?  A “substantial increase” in Australia’s GDP.  As much as (eg) 4.5% per annum added to the real, inflation-adjusted GDP that was originally reported in the Howard Government’s 2006-07 Final Budget Outcome.

The benefit to Rudd Labor in making this “substantial increase” to GDP in the historical data, is that their spending (as a percentage of that GDP) looks lower.  Their annual spending growth (as a percentage of GDP) looks lower. Their debt (as a percentage of GDP) looks lower. And, their Interest-on-debt (as a percentage of GDP) looks lower too. This explains why Rudd Labor politicians always love to quote everything in percentages. “As a percentage of GDP”.

Second, Rudd Labor has also changed the ‘methodology’ used to calculate the inflation-adjusted value of ‘real’ spending growth.  This was a sudden decision, for the November 2009 MYEFO budget update. The result? The Rudd Government’s reported ‘real spending growth’ is a whopping 30.1% lower under their new calculation method.

Finally, Rudd Labor lies about the GFC whenever it needs to defend its massive spending spree. They have repeatedly told the public that “the GFC punched a huge hole in our projected revenues”.  But the official Budget documents show that this is a lie.  In the May 2009 Budget, the estimated government “Receipts” were only 2.7% lower than for the previous year.  And by the November MYEFO update, government revenues were expected to be slightly higher than for the previous year.

Please follow those links. View for yourself the actual Budget documents that show how Rudd Labor have ‘cooked the books’.

You will see that, unlike Greece, our Labor Government does not need to hide our true state of indebtness through the use of creative financial instruments.

They use good old-fashioned ‘creative accounting’ instead.

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