Monday, February 27, 2012
Friday, February 24, 2012
After Europe Now China is a cause of Worry
An exclusive preview of an economic report on China, prepared by the World Bank & government insiders is alarming:
China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms. "China 2030," a report set to be released Monday by the bank & a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.
It is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. And it challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's 2nd largest economy has steadily expanded.
The report warns that China's growth is in danger of decelerating rapidly & without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking & elsewhere, the report warns, and could prompt a crisis, according to those involved with the project. It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship. The Chinese government must decide "whether it wants state-led capitalism dominated by giant state-owned corporations or free-market entrepreneurship."
Current forecasts by the Conference Board, a U.S. think tank, see the Chinese economy growing 8% in 2012 & slowing to an average annual growth rate of 6.6% from 2013 to 2016. Economists argue that China's annual growth rate will begin to "downshift" by at least 2% points starting around 2015. While some reduction in growth is inevitable—China has been growing at an average of 10% a year for 30 years—the rate of decline matters greatly to the world economy. With Europe & Japan fighting recession and the U.S. experiencing a weak recovery, China has become the most reliable source of growth globally. Commodity producers count on China for growth, as do capital goods makers, farmers and fashion brands in the U.S. and Europe.
How much the report will help reshape the Chinese economy is unclear. Even ahead of its release, it has generated fierce resistance from bureaucrats who manage state enterprises, according to several individuals involved in the discussions. China's political heir apparent, Xi Jinping, now vice president, has given few clues about his economic policies. Analysts expect the high-profile report will encourage Mr. Xi and his allies to discuss making changes to a state-led economic model that has alarmed Chinese private entrepreneurs while creating tension between China and its main trading partners, including the U.S.
Currently, state-managed enterprises tower over the Chinese economy, dominating the nation's energy, natural resources, telecommunications and infrastructure industries. Among other things, they have easy access to low-interest loans from state-owned banks.
China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barriers to private firms. Currently, many state-owned firms have real-estate subsidiaries, which tend to bid up prices for land, and have helped to create a housing bubble that the Chinese government is trying to deflate. The report also recommends a sharp increase in the dividends that state companies pay to their owner—the government. That would boost government revenue and pay for new social programs, said those involved with the report. Chinese and U.S. economists say that dividend money from profitable state-owned firms now is often directed to unprofitable ones by the State-owned Assets Supervision and Administration Commission, or SASAC, which regulates the firms and tries to ensure their profitability.
China is vulnerable to a sharp slowdown, said Jun Ma, a Deutsche Bank China economist, because it relies too heavily on industries that copy foreign technology and doesn't produce enough breakthroughs of its own. South Korea was able to keep growing rapidly after it hit a per-capita income level of $5,000—about where China is today—because it pushed innovation. However, China lags behind South Korea badly in patents produced per capita, he said.
Chinese local governments often draw much of their revenue from the sale of land, rather than from taxes. The report urges that Chinese social spending be funded more by dividends from state-owned firms and by property, corporate and other taxes.
China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms. "China 2030," a report set to be released Monday by the bank & a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.
It is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. And it challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's 2nd largest economy has steadily expanded.
The report warns that China's growth is in danger of decelerating rapidly & without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking & elsewhere, the report warns, and could prompt a crisis, according to those involved with the project. It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship. The Chinese government must decide "whether it wants state-led capitalism dominated by giant state-owned corporations or free-market entrepreneurship."
Current forecasts by the Conference Board, a U.S. think tank, see the Chinese economy growing 8% in 2012 & slowing to an average annual growth rate of 6.6% from 2013 to 2016. Economists argue that China's annual growth rate will begin to "downshift" by at least 2% points starting around 2015. While some reduction in growth is inevitable—China has been growing at an average of 10% a year for 30 years—the rate of decline matters greatly to the world economy. With Europe & Japan fighting recession and the U.S. experiencing a weak recovery, China has become the most reliable source of growth globally. Commodity producers count on China for growth, as do capital goods makers, farmers and fashion brands in the U.S. and Europe.
How much the report will help reshape the Chinese economy is unclear. Even ahead of its release, it has generated fierce resistance from bureaucrats who manage state enterprises, according to several individuals involved in the discussions. China's political heir apparent, Xi Jinping, now vice president, has given few clues about his economic policies. Analysts expect the high-profile report will encourage Mr. Xi and his allies to discuss making changes to a state-led economic model that has alarmed Chinese private entrepreneurs while creating tension between China and its main trading partners, including the U.S.
Currently, state-managed enterprises tower over the Chinese economy, dominating the nation's energy, natural resources, telecommunications and infrastructure industries. Among other things, they have easy access to low-interest loans from state-owned banks.
China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barriers to private firms. Currently, many state-owned firms have real-estate subsidiaries, which tend to bid up prices for land, and have helped to create a housing bubble that the Chinese government is trying to deflate. The report also recommends a sharp increase in the dividends that state companies pay to their owner—the government. That would boost government revenue and pay for new social programs, said those involved with the report. Chinese and U.S. economists say that dividend money from profitable state-owned firms now is often directed to unprofitable ones by the State-owned Assets Supervision and Administration Commission, or SASAC, which regulates the firms and tries to ensure their profitability.
China is vulnerable to a sharp slowdown, said Jun Ma, a Deutsche Bank China economist, because it relies too heavily on industries that copy foreign technology and doesn't produce enough breakthroughs of its own. South Korea was able to keep growing rapidly after it hit a per-capita income level of $5,000—about where China is today—because it pushed innovation. However, China lags behind South Korea badly in patents produced per capita, he said.
Chinese local governments often draw much of their revenue from the sale of land, rather than from taxes. The report urges that Chinese social spending be funded more by dividends from state-owned firms and by property, corporate and other taxes.
Friday, February 10, 2012
Nifty Yearly Report 2012
India Nifty: Nifty if we look from the past trend the formation has been repeating and the move was according to the past move. Looking the fall from the point a of 6240 to point b at 5725 the retracement of a-b has seen by 76.4% testing 6206 level where point c was seen. There after the fall was seen, this was 161.8% expansion of a-b from point c testing point d at 5173 level. After testing the level of 5173 reversal in price was seen and point e was seen at 5968 which as 76.4% retracement of d-e similar formation of previous fall a-b and rise to point c. after completing the retracement of 76.4% at point e selling was confirm and tested the lower level point f at 5182 which was previous bottom point d, just forming the double bottom formation confirm the short reversal. After reverting from point f the rise was similar to previous one which retraced by 76.4% of e – f where point g at 5750 was confirmed to get top out and reversal in the price was seen. Looking at the past performance the market has retraced by 161.8% expansion after the retracement by 74.6%, which states that 161.8% expansion of e-f from point g which need to test the level of 4536 where point h has been seen. But some consolidation was seen before testing the target where 4700 was the support taken twice reverted from the support level but was not sharp enough and after testing the level of 4536 point h which confirm the expected move reversal in price was seen and has moved shapely where the retirement as seen by 76.4% of g-h where the expected move is seem to get exhaust from where the reversal can be expected. Today we have seen the market has tested the level of 5450 level which is exactly coming to 76.4% retracement of g-h and is confirming the point i at 5448 and reversal in price can be expected from here.
As we have been looking the fall which is seen by 161.8% in the past, and on the same basis if we calculated the further move with expansion of g – h from i which bring the lower target of 3500 level in medium term. On the fall to reach the lower target there will be short pull back at various support levels with profit booking on the way to test the target. Further on the long term chart dating from 2004 bottom 1240 and 2009 bottom at 2500, taking the trend line which is also showing market need to give a correction and the level again comes at 3500 which is 161.8% expansion of the last formation and the time frame is getting decided where the bottom is expected by December 2012 or max by February 2013. Following in the long term chart explaining the bottom to situation and the long term positional buying opportunity at lower level where nifty may again test the all time high at 6340 and crossover above will bring NIFTY in FIVE DIGIT in following years.
Nifty looking at the long term chart from 2004 onwards with the level of 1260 has given a sharp rise and with the corrective move has tested the level of 6340, there after the crash of 2008 it made a bottom of 2525 level at point c and sharp reversal was seen but failed to cross the high which it posted at 2008 and point d was seen again at 6340 level and again reversal was seen in after taking short support of 4500 bounce was seen. Looking at the lower rising trend line its expected that market will test 3500 level covering the gap which is formed during the rise and also the previous corrective 161.8% expansion confirming the lower target to be achieved by the year end around.
Positional buying is advice at the level of 3500 around plus or minus 200 points where I am looking nifty to cross the double top of 6340 and move and trade in Five Digit in next Four to Five years.
Wednesday, February 8, 2012
GOLD LIKELY TO SEE A CORRECTION
Considered one of the safest assets,gold will probably become even more appealing to investors this year as its price is likely to come down
Shobhana Chadha
The glitter of the yellow metal could probably continue to lure investors this year too,especially those who are wary of the choppy equity markets.Last year,gold provided a splendid return of 31.1%.However,investors shouldnt be overjoyed seeing the performance of the commodity since its not a true reflection of its worth.In fact,the metal is basking in glory because the rupee is weakening against the dollar.According to data gathered from Bloomberg,the metal delivered returns of only 10.52% last year in dollar terms.
The inflated returns of Indian investors were due to the falling rupee.This is why experts are warning investors not to go overboard with gold.Many believe that the prices of the noble metal are poised for a significant correction.The magnetic appeal of gold remains weak in the near term.
Several factors are at play that can influence gold prices in the coming months.Heres a look at some of them.
A strong dollar
The greenback is regaining its safe haven appeal due to the ongoing economic uncertainty in the Eurozone,and this is likely to have a negative impact on the demand for gold.With caution over European economic status,investors will prefer holding dollar-denominated cash rather than any other financial asset, says.Investors are increasingly losing faith in the future prospects of the euro.According to Bloomberg,the Dollar Index,a measure of the dollar against six major currencies,has surged 6.05% since 28 October 2011.Considering the gravity of the global economic scenario,experts believe that the index will continue to go up.On the other hand,the yellow metal has witnessed a change in course.As investors are moving away from gold,the dollar prices have already fallen by about 16% since the record high of $ 1,900 per ounce on 5 September 2011.The magnitude of the decrease indicates that the asset class is already on the brink of a bear phase.Gold prices may see a consolidation or correction in the first half of 2012.
A slump in real demand
The demand for physical gold is cooling off.According to the third quarter report of the World Gold Council (WGC),global demand for gold jewellery slumped by 10% in the quarter as compared to the previous year.India,which is the worlds largest market for gold jewellery and gold bars and coins,witnessed a corresponding decline of 26% and 18% in tonnage demand in the two segments as compared to last year.Experts are attributing the dampening consumer enthusiasm to heightened volatility in gold price.Real demand is reducing because of the high price of the metal.I hold a very negative view regarding the performance of gold in 2012, says Sandip Sabharwal,CEO,PMS,Prabhudas Lilladher.
Affirms Arindam Ghosh,CEO,Mirae Asset Global Investments: The actual demand for the metal cannot justify its price level. According to him,gold is not a productive asset class,which is why the fund house has not launched a gold fund despite the euphoria over it.
Demand driven by investment
Gold prices are in a bubble.The asset class is dangerously inflated due to speculative positioning, says Ghosh.The WGC report shows that while the overall demand for gold rose by 6% in the third quarter as compared to the previous year,the increase was primarily fuelled by the investment demand.The demand for gold exchange traded funds and similar products rose by 58%.The surge in the price of any commodity cannot be driven by investment and speculative demand alone, says Sabharwal.
Despite this increase,a sharp recovery in gold prices in the fourth quarter was restricted due to poor investor sentiments.In fact,it seems that globally,the investment and speculative demand is beginning to wobble as gold is increasingly being seen as overbought.Many experts are developing a firm view that the rally in the metal will consolidate,if not correct.
A recent report by Bloomberg stated that many hedge fund managers have sold gold in 2011 and speculators in the New York futures have not been bullish on the commodity in the past 31 months.Investor George Soros,who made $1 billion in one day in the currency market,had cut 99% of his holdings in the first quarter of 2011.All these factors will adversely impact the investment demand to a large extent as even this channel was largely driven by the long-term,safe-haven appeal of gold,which has deteriorated in the past few months.
Magnitude of correction
Experts have their own grades of pessimism.I expect gold prices to fall by 20-25 % by the end of the year, says Sabharwal.Ghosh expects an even more severe correction and believes that it is long overdue.The price level of the commodity should come back to the mean price level of the past five-six years, says Ghosh.This would result in a correction of 33-38 % from the current levels.
On the other hand,i have a more moderate estimate.He sees a correction of up to 11% in gold prices in the first six months of 2012 as the prices may touch 25,000 per 10 gm.Thereafter,he expects the prices to rally by about 14-19 % in the remaining half of the year with target price levels of 28,500-29,800 in the domestic market.If the rally continues,the commodity could test the level of 31,800 per 10 gm in the later part of the year
However,he does not rule out the possibility of a drastic correction like the one witnessed by oil prices in 2008.The prices fell from around $150 to about $30 in just six months.If the pressure on gold prices continues,there is a likelihood of global hedge funds and speculators going short on the commodity and prices seeing a massive plunge.However,we hope that some solution will emerge for the European crisis which should help stabilise sentiments by the second half of the year.Currently,gold is performing more like a risky asset than a safe haven.
Should you book profits
If you intend to hold only for three six months,then yes,book profits.But if you plan to stay invested for three-five years,there is no need to worry as the long-term fundamentals of gold remain unchanged.Though gold serves as a hedge against inflation,it should only be used as a diversifying element in the portfolio.Dont rely strictly on current trends.Assets under management data of the past few months shows that investors are allocating larger amounts to gold.This is not an ideal move as it is not the time to enter gold in a big way, says Sabharwal.Those considering gold with a longer time frame in mind should enter the gold market in a staggered manner.A lump-sum investment can be made at around 25,000 levels.
Shobhana Chadha
The glitter of the yellow metal could probably continue to lure investors this year too,especially those who are wary of the choppy equity markets.Last year,gold provided a splendid return of 31.1%.However,investors shouldnt be overjoyed seeing the performance of the commodity since its not a true reflection of its worth.In fact,the metal is basking in glory because the rupee is weakening against the dollar.According to data gathered from Bloomberg,the metal delivered returns of only 10.52% last year in dollar terms.
The inflated returns of Indian investors were due to the falling rupee.This is why experts are warning investors not to go overboard with gold.Many believe that the prices of the noble metal are poised for a significant correction.The magnetic appeal of gold remains weak in the near term.
Several factors are at play that can influence gold prices in the coming months.Heres a look at some of them.
A strong dollar
The greenback is regaining its safe haven appeal due to the ongoing economic uncertainty in the Eurozone,and this is likely to have a negative impact on the demand for gold.With caution over European economic status,investors will prefer holding dollar-denominated cash rather than any other financial asset, says.Investors are increasingly losing faith in the future prospects of the euro.According to Bloomberg,the Dollar Index,a measure of the dollar against six major currencies,has surged 6.05% since 28 October 2011.Considering the gravity of the global economic scenario,experts believe that the index will continue to go up.On the other hand,the yellow metal has witnessed a change in course.As investors are moving away from gold,the dollar prices have already fallen by about 16% since the record high of $ 1,900 per ounce on 5 September 2011.The magnitude of the decrease indicates that the asset class is already on the brink of a bear phase.Gold prices may see a consolidation or correction in the first half of 2012.
A slump in real demand
The demand for physical gold is cooling off.According to the third quarter report of the World Gold Council (WGC),global demand for gold jewellery slumped by 10% in the quarter as compared to the previous year.India,which is the worlds largest market for gold jewellery and gold bars and coins,witnessed a corresponding decline of 26% and 18% in tonnage demand in the two segments as compared to last year.Experts are attributing the dampening consumer enthusiasm to heightened volatility in gold price.Real demand is reducing because of the high price of the metal.I hold a very negative view regarding the performance of gold in 2012, says Sandip Sabharwal,CEO,PMS,Prabhudas Lilladher.
Affirms Arindam Ghosh,CEO,Mirae Asset Global Investments: The actual demand for the metal cannot justify its price level. According to him,gold is not a productive asset class,which is why the fund house has not launched a gold fund despite the euphoria over it.
Demand driven by investment
Gold prices are in a bubble.The asset class is dangerously inflated due to speculative positioning, says Ghosh.The WGC report shows that while the overall demand for gold rose by 6% in the third quarter as compared to the previous year,the increase was primarily fuelled by the investment demand.The demand for gold exchange traded funds and similar products rose by 58%.The surge in the price of any commodity cannot be driven by investment and speculative demand alone, says Sabharwal.
Despite this increase,a sharp recovery in gold prices in the fourth quarter was restricted due to poor investor sentiments.In fact,it seems that globally,the investment and speculative demand is beginning to wobble as gold is increasingly being seen as overbought.Many experts are developing a firm view that the rally in the metal will consolidate,if not correct.
A recent report by Bloomberg stated that many hedge fund managers have sold gold in 2011 and speculators in the New York futures have not been bullish on the commodity in the past 31 months.Investor George Soros,who made $1 billion in one day in the currency market,had cut 99% of his holdings in the first quarter of 2011.All these factors will adversely impact the investment demand to a large extent as even this channel was largely driven by the long-term,safe-haven appeal of gold,which has deteriorated in the past few months.
Magnitude of correction
Experts have their own grades of pessimism.I expect gold prices to fall by 20-25 % by the end of the year, says Sabharwal.Ghosh expects an even more severe correction and believes that it is long overdue.The price level of the commodity should come back to the mean price level of the past five-six years, says Ghosh.This would result in a correction of 33-38 % from the current levels.
On the other hand,i have a more moderate estimate.He sees a correction of up to 11% in gold prices in the first six months of 2012 as the prices may touch 25,000 per 10 gm.Thereafter,he expects the prices to rally by about 14-19 % in the remaining half of the year with target price levels of 28,500-29,800 in the domestic market.If the rally continues,the commodity could test the level of 31,800 per 10 gm in the later part of the year
However,he does not rule out the possibility of a drastic correction like the one witnessed by oil prices in 2008.The prices fell from around $150 to about $30 in just six months.If the pressure on gold prices continues,there is a likelihood of global hedge funds and speculators going short on the commodity and prices seeing a massive plunge.However,we hope that some solution will emerge for the European crisis which should help stabilise sentiments by the second half of the year.Currently,gold is performing more like a risky asset than a safe haven.
Should you book profits
If you intend to hold only for three six months,then yes,book profits.But if you plan to stay invested for three-five years,there is no need to worry as the long-term fundamentals of gold remain unchanged.Though gold serves as a hedge against inflation,it should only be used as a diversifying element in the portfolio.Dont rely strictly on current trends.Assets under management data of the past few months shows that investors are allocating larger amounts to gold.This is not an ideal move as it is not the time to enter gold in a big way, says Sabharwal.Those considering gold with a longer time frame in mind should enter the gold market in a staggered manner.A lump-sum investment can be made at around 25,000 levels.
Wednesday, February 1, 2012
Ten questions about the European crisis Commentary: Two years in, the crisis still makes no sense
NEW YORK (MarketWatch) — I must be very stupid.
I have been watching this European financial crisis for two years now. And it still doesn’t make any sense to me whatsoever.
When it started out, I figured that it would soon become clear. But it hasn’t. It’s getting worse.
Am I alone? Am I the only person baffled? Does everyone else understand this?
Here are my questions.
Reuters
A commercial street in Athens. Greece has repeatedly flirted with bankruptcy in recent months.
1.Why would anyone lend their money to Greece for 30 years at 3.5% interest? That’s the rate being insisted on by the Greek government in the current negotiations with its bondholders. But that’s less than the rate Australia and New Zealand — countries with some of the strongest finances in the world — pay for 10 year money. Would Greek prime minister, Lucas Papademos, lend his money on these terms? If so, will he agree to do so as part of the negotiations? And if not, why should anyone else?
2.If Greece gets to pay 3.5% interest on its debts, as a reward for defaulting, why would the Irish continue to pay 7.2% for not defaulting? Why would the Spanish pay 5.7% and the Italians 6.5%? Why won’t they look at this deal and say, “We’d like the same thing”?
Click to Play
Should you bet against the Davos consensus?
The yearly meeting of journalists and economists at Davos might come up with common themes, but should one bet against the Davos consensus? Michael Casey discusses on Markets Hub. (Photo: VINCENZO PINTO/AFP/Getty Images)
3.Why on Earth did the European Union leaders try to make a big stand over Greece in the first place? It was always a lost cause. And it is a tiny country anyway. Its economy accounts for less than 2% of European Union’s gross domestic product, and its debts for less than 3%. Why didn’t they draw the line around somewhere more defensible, like Ireland?
4.Am I mistaken, or couldn’t we have reached this point two years ago? It seems that we have spent the last two years hearing about the European Union’s attempts to prevent Greece from defaulting. Unless my eyes deceive me, this looks like Greece defaulting.
5.How exactly is the imposition of new austerity rules on depressed countries like Greece, Italy, Spain and Portugal going to help them recover? You don’t have to be a raging Keynesian to think that bringing in “tough new budget rules” at this moment is like throwing an anvil, instead of a life preserver, to a drowning man.
6.Owners of Greek debt are being told that unless they accept haircut on their loans as part of a “voluntary” agreement, they will have a deeper haircut imposed upon them by fiat. Could someone in the European Union please explain the use of the word “voluntary” here, and how it differs from the word “blackmail”?
7.Why don’t the Greeks just leave the European Union and relaunch the drachma? They could devalue, regain their autonomy, and restore growth. Great Britain boomed after it left the European currency union in 1992. And being outside Europe hasn’t hurt the Turks: Their economy and their stock market have done much better than the E.U. since their talks to join the union got bounced five years ago.
8.Why do we keep talking about “bailing out Greece” when we are really bailing out the French and German banks who lent them money? The Greeks have already had the money, and spent it. They aren’t really being bailed out at all — least of all if the “bail out” means making their lives even more miserable. Shouldn’t Angela Merkel and Nicholas Sarkozy be required to admit that we are talking about bailing out some of their constituents, and not the Greeks?
Click to Play
Art of the farewell workplace email
For better or worse, employees who quit or get fired or laid off are crafting their own farewell emails to colleagues. Sue Shellenbarger reports on Lunch Break. Photo: AP.
9.If you come right down to it, why are the European Union, the European Central Bank and the International Monetary Fund even intervening in this at all? If some banks were foolish enough to lend to the central bank of Greece on the same terms they lent to Germany and Sweden, isn’t that their problem? And if Greece must renegotiate the terms of the debt, isn’t that really a private matter between the Greek government and the banks? Why shouldn’t Greece just be allowed to default and go through Chapter 11, the way American Airlines is doing? We would not expect the EU to intervene, say, to settle a contractual dispute between the Greek government and a company hired to collect the trash in Athens or run the airport. Certainly, international institutions can reasonably step in to settle markets in a panic, or to provide emergency liquidity, but that is a totally different matter from intervening in these contracts.
10.People who bought credit default swaps — insurance — on Greek debt did so in order to insure themselves against a Greek default. Counterparties sold them these CDS insurance contracts in order to earn a return on their money in exchange for taking a risk. Clearly Greece is going to default by any common sense definition. If the European authorities rig this process so that it is not a “technical” default, simply in order to avoid triggering payouts on these credit default swaps, how is that not an act of theft against the owner of those contracts, and in favor of the seller?
I’m sure the answers to these questions must be obvious. I look forward to hearing them.
I have been watching this European financial crisis for two years now. And it still doesn’t make any sense to me whatsoever.
When it started out, I figured that it would soon become clear. But it hasn’t. It’s getting worse.
Am I alone? Am I the only person baffled? Does everyone else understand this?
Here are my questions.
Reuters
A commercial street in Athens. Greece has repeatedly flirted with bankruptcy in recent months.
1.Why would anyone lend their money to Greece for 30 years at 3.5% interest? That’s the rate being insisted on by the Greek government in the current negotiations with its bondholders. But that’s less than the rate Australia and New Zealand — countries with some of the strongest finances in the world — pay for 10 year money. Would Greek prime minister, Lucas Papademos, lend his money on these terms? If so, will he agree to do so as part of the negotiations? And if not, why should anyone else?
2.If Greece gets to pay 3.5% interest on its debts, as a reward for defaulting, why would the Irish continue to pay 7.2% for not defaulting? Why would the Spanish pay 5.7% and the Italians 6.5%? Why won’t they look at this deal and say, “We’d like the same thing”?
Click to Play
Should you bet against the Davos consensus?
The yearly meeting of journalists and economists at Davos might come up with common themes, but should one bet against the Davos consensus? Michael Casey discusses on Markets Hub. (Photo: VINCENZO PINTO/AFP/Getty Images)
3.Why on Earth did the European Union leaders try to make a big stand over Greece in the first place? It was always a lost cause. And it is a tiny country anyway. Its economy accounts for less than 2% of European Union’s gross domestic product, and its debts for less than 3%. Why didn’t they draw the line around somewhere more defensible, like Ireland?
4.Am I mistaken, or couldn’t we have reached this point two years ago? It seems that we have spent the last two years hearing about the European Union’s attempts to prevent Greece from defaulting. Unless my eyes deceive me, this looks like Greece defaulting.
5.How exactly is the imposition of new austerity rules on depressed countries like Greece, Italy, Spain and Portugal going to help them recover? You don’t have to be a raging Keynesian to think that bringing in “tough new budget rules” at this moment is like throwing an anvil, instead of a life preserver, to a drowning man.
6.Owners of Greek debt are being told that unless they accept haircut on their loans as part of a “voluntary” agreement, they will have a deeper haircut imposed upon them by fiat. Could someone in the European Union please explain the use of the word “voluntary” here, and how it differs from the word “blackmail”?
7.Why don’t the Greeks just leave the European Union and relaunch the drachma? They could devalue, regain their autonomy, and restore growth. Great Britain boomed after it left the European currency union in 1992. And being outside Europe hasn’t hurt the Turks: Their economy and their stock market have done much better than the E.U. since their talks to join the union got bounced five years ago.
8.Why do we keep talking about “bailing out Greece” when we are really bailing out the French and German banks who lent them money? The Greeks have already had the money, and spent it. They aren’t really being bailed out at all — least of all if the “bail out” means making their lives even more miserable. Shouldn’t Angela Merkel and Nicholas Sarkozy be required to admit that we are talking about bailing out some of their constituents, and not the Greeks?
Click to Play
Art of the farewell workplace email
For better or worse, employees who quit or get fired or laid off are crafting their own farewell emails to colleagues. Sue Shellenbarger reports on Lunch Break. Photo: AP.
9.If you come right down to it, why are the European Union, the European Central Bank and the International Monetary Fund even intervening in this at all? If some banks were foolish enough to lend to the central bank of Greece on the same terms they lent to Germany and Sweden, isn’t that their problem? And if Greece must renegotiate the terms of the debt, isn’t that really a private matter between the Greek government and the banks? Why shouldn’t Greece just be allowed to default and go through Chapter 11, the way American Airlines is doing? We would not expect the EU to intervene, say, to settle a contractual dispute between the Greek government and a company hired to collect the trash in Athens or run the airport. Certainly, international institutions can reasonably step in to settle markets in a panic, or to provide emergency liquidity, but that is a totally different matter from intervening in these contracts.
10.People who bought credit default swaps — insurance — on Greek debt did so in order to insure themselves against a Greek default. Counterparties sold them these CDS insurance contracts in order to earn a return on their money in exchange for taking a risk. Clearly Greece is going to default by any common sense definition. If the European authorities rig this process so that it is not a “technical” default, simply in order to avoid triggering payouts on these credit default swaps, how is that not an act of theft against the owner of those contracts, and in favor of the seller?
I’m sure the answers to these questions must be obvious. I look forward to hearing them.
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