Greece

“Moody’s downgrades China,” proclaims many a recent headline, while the accompanying article warns that a credit explosion will continue even as growth slows. Sounds serious, doesn’t it? Should we be concerned?

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Ratings agency downgrades are nothing new. The U.S. had a downgrade earlier in this decade, as had the U.K. and many other countries. Life goes on, and even for countries with large external borrowings, costs rarely rise by much — if at all.

There are exceptions, of course. Just think of Greece and many of the Southern European states whose borrowing costs rocketed. But the cause was not only downgrades. In the case of those countries, there had been a profound and sudden loss of market confidence in their ability to service their debt. And therein lies one of the issues for China.

Although China’s economy-wide debt is already 256% of GDP and rising, much of it is funded internally. It is not reliant on overseas investors, and as such is easier for the Bank of China to manage. According to a report in The Telegraph, China’s government debt-to-GDP ratio is expected to rise only gradually to 45% by the end of the decade, which is in line with similar countries rated at an “A” investment grade.

The downgrade has so far been confined to Moody’s, which dropped China’s rating by one notch from Aa3 to A1, keeping it apparently within investment grade territory. Moody’s pressed Beijing to accelerate supply-side reforms as the country faces challenges in the years ahead of an aging population, slowing productivity growth and the legacy of excessive state led investment.

Growth is predicted to slow to 5% from current 6.7% levels by the end of this decade. But while that is “poor” for China, it is still exceptional for any other country of comparable size. Read more

What with news of the terrorist massacre in Manchester reverberating around the world, while President Donald Trump first snuggles up to the Saudis and then to the Israelis — it is hardly surprising that news of yet a fourth Greek bailout has failed to make much headway in the headlines.

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News that the International Monetary Fund (IMF) is working on a compromise with Greece’s creditors that would smooth the way for a €7 billion ($7.8 billion) disbursement of rescue cash all sounds rather calming and reassuring. But rest assured Greece is in danger of yet another default this summer as it seeks to get its hands on the latest tranche of an €86 billion rescue package to meet debt obligations this July.

According to an article in The Telegraph, Greece’s debt currently stands at nearly 180% of gross domestic product. The Greek economy fell back into recession in the first quarter of 2017, and it is an economy that is still some 27% smaller than in 2008, crushed under the EU-IMF austerity program.

According to the Associated Press, the IMF has argued that the Eurozone forecasts underpinning the Greek bailout are too rosy and that the country as a result should get substantial debt relief so it can start growing on a sustainable basis. The Greek economy has spent more time in recession than growth since the financial crisis.

The Eurozone, on the other hand, has so far ruled out any debt write-off, saying it would rather extend Greece’s repayment periods or reduce the interest rates on its loans after the bailout next year. Germany and the Netherlands are keen to avoid debt relief, probably because they do not want to set a precedent that others such as Italy could turn to later to solve their own problems. Read more

We have all heard about the Greek crisis by now.

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On Wednesday, Greece formally asked for a three-year bailout. The European Union’s leaders have given a Sunday deadline on whether formal negotiations on this bailout program make sense or not.

So, How Will a Resolution Impact Metal Prices?

First, let’s start with: Greece is not China. Greece is not a major producer or consumer of metals. Therefore, its economic situation doesn’t have that big of an impact in the supply and demand balance of any base metal.

Some argue that a Greek exit could worsen the European economy. That, in theory, could deteriorate global demand for metals, driving metal prices down. Nonetheless, others (including me) think that a Greek exit would be beneficial for both Greece and Europe.

Austerity measures have already proven to be painful for the country over the past few years, leading to its economy slowing further, making its deficit even worse. A Grexit, however, would leave Greece with the ability to print money, which would increase inflation but allow Greece to meet its national obligations in a potentially more viable way than raising taxes and reducing pensions.

In either case, these are just opinions, no matter how informed they are. There is no obvious answer for the question since we don’t even have a precedent to compare the situation to. A national default in a currency block such as the Eurozone is truly unprecedented. Moreover, the longer-term costs — and any possible benefits — could take years to become apparent.

What This Means For Metal Buyers

Therefore, in the short/medium term, we believe that whether Greece exits the euro or not is irrelevant when it comes to metal prices. The only thing that matters is how the market will react to the news, which we don’t yet know. That Greece is in a bad situation is already well known, maybe any change from its current position will only be taken as positive. Who knows?

We are, however, keeping an eye on the euro exchange rate. A further depreciation of the euro against the dollar would normally be bad for commodities. So far, we are seeing the dollar remain strong against the euro and this seems to favor a continuation of the bearish market commodities such as metals are in.

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Metals, especially copper, experienced plummeting prices Monday as the world reacted to Greece’s no vote on whether or not to accept more austerity measures from the European Union. The Organization for Economic Cooperation and Development (OECD) also came no closer to phasing out coal subsidies for member nations.

Greek Debt Crisis Hurts Metals, Other Commodities

Most commodity prices suffered on Monday after Greece rejected terms for a bailout and top consumer China unleashed emergency measures over the weekend to prevent a full-blown stock market crash.

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“The thing to watch is the Euro/Dollar exchange rate. If the dollar starts going up as a result of what happened, that would exacerbate an already bearish commodities and metals markets,” said MetalMiner Executive Editor and Co-Founder Lisa Reisman.

Brent crude fell below $60 per barrel on Monday, to levels last seen in April. Chinese steel prices are now at their lowest since the peak of the global financial crisis in 2009, with futures down 70% to around 2,000 CNY per metric ton. Read more

So the Greek tragedy rolls on; expect considerable volatility this week, certainly on European markets and for the Euro currency following the Greek government’s decision to announce a bank holiday for more than a week.

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The country’s stock-market was suspended and automated teller machine withdrawals across Greece were capped at €60 (US $66) as banks began to run out of money. Many Greeks have already begun resorting to the barter system as they are simply unable to obtain more cash. Read more

Greece seems to be teetering on the edge yet again.
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We wrote last year, and this year,  as the Greek crisis waned and the international media assumed the problems had been solved that Greece had the potential to come back and make a re-appearance and it certainly has.

ECB, IMF, World Bank Troika

If the troika of the European Central Bank, the International Monetary Fund and World Bank don’t agree on a way forward to release further funds, Greece will default on it’s €1.5 billion repayment due to the IMF at the end of June and the €3.5 billion due to the ECB on July 20.

These are sizable sums of money for a government with no reserves and struggling to meet monthly wage bills, let alone pay suppliers for goods and services, an obligation it has foregone for some months now.

A last minute reprieve may be on the table with proposals the leftist Syriza government coalition has put forward this week. Finally these include proposals to address at least one of two key sticking points. First is raising the pension age to 67, the sticking point is the time frame, both when to start and when the process should conclude.

What Syriza Wants

Athens wants it to be phased in up to 2025 but the troika want it faster. Still, it is at least being discussed now and shows potential. Greek pensions are probably un-payable in the long run as this graph below underlines. Ultimately, a state pension has to fall somewhere in relation to the country’s ability to pay and Greece can’t afford for workers to retire in their early 60’s or sooner and then receive anymore than a subsistence pension; the reality is the country can’t afford it.

In their defense, it should be said, according to the Greek government, 45% of pensioners receive monthly payments below the poverty line of €665. The pensions aren’t generous in overall terms, only in relation to the country’s ability to fund them and the relatively early age that they start.

Screen Shot 2015-06-23 at 08.36.23

Source: Financial Times

The other sticking point is Greece’s value-added tax and raising taxes, in general. The troika want 23% VAT rates to be applied on pretty much everything except food and medicines which would be taxed at a lower rate, but Athens is proposing a number of other sectors be included in the lower rate including energy. But Syriza is also proposing to squeeze businesses further by increasing corporation tax with a one-off 12% tax on corporate profits above €500 million.

The VAT Question

The FT estimates it would raise an additional €945 million this year and another €405 million next year, but would eventually be phased out. The sticking point on the VAT is energy according to a Market Watch report with Athens adamant the VAT should not be more than 13% as this impacts the poorest in society disproportionately but the irony is no one is paying their energy bills, anyway. Last week, the Greek electric power authority reported that its unpaid bills reached €1.9 billion in 2015, more than enough to meet the IMF’s end of month payment on its own.

A more lasting proposal from the government is to raise overall corporate taxes from 26% to 29%, bringing in an additional €410 million next year – assuming companies pay it, of course. Tax revenue is one of the fundamental problems in Greece, whether corporate or private, tax receipts have collapsed particularly among individual taxpayers as people have simply failed to fill in tax forms while they wait to see what happens.

Meanwhile, defaults on bank loans are widespread, around 70% of restructured mortgages aren’t being paid and the banking system is freezing up. Government tax revenues for May were €1 billion short of the budget target exacerbating the state’s problems in trying to meet even day-to-day payments.

In the medium- to longer-term, Greece will need debt relief. To suggest the country can pay off its debts over the next 10-15 years is to consign Greek society to long-term austerity and, as we have seen with the election of the Syriza government, they won’t accept that.

For now, Europe will, for the sake of the Euro and appearances, muddle through with yet another 11th hour fudge. But Athens’ proposals will not be met in full. Pension payments will be higher, tax receipts will be lower and until Germany faces up to debt relief this problem will not go away.

Not that Greece couldn’t leave the Euro. It could and both Europe and Greece would survive but, politically, Euro block politicians do not want to admit the model is flawed and will continue to seek ways of keeping the shambles together. We don’t see a Grexit at this stage. It could come down the road, although northern European politicians are clearly getting more than exasperated with the situation, they are likely to find a way to make it work. Or at least keep the show on the road and continue to advance good money after bad in the hope something will turn up or it won’t blow up until they are out of office.

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There are several potential sources of financial shock to markets this year but for the financial markets an exit from the Eurozone by Greece, while potentially serious, seems to have slipped from the headlines as being very unlikely of late.

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Earlier this year, the press was awash with dramatic headlines on the probability that Greece’s new leftist government, led by the Syriza party, would lead the country out of the euro in protest at the punitive terms placed on the people in return for Europe’s continued support.

Kicking the Greek Debt Problem Down The Road

The domino effect of other ClubMed countries voting in equally anti-austerity parties was raised as the nuclear result of a Greek exit. But the rounds of meetings between Greece and the Troika got so tedious and the progress so glacial that the markets began to lose interest as the problem of how Greece was to repay its debts seemed to be kicked down the road. First by weeks, then by months.

But it would be a mistake to think that the problem has gone away. Central to Greece meeting its terms is the ability of the state to raise sufficient taxes to meet debt repayments when they come due. Read more

We have briefly covered Greece’s decision to vote in the far left “anti-austerity” Syriza party in posts this week, mentioning the short-term impact it has had on copper and gold prices.

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In truth, though, the outcome of the election had been largely priced into both commodity prices and foreign exchange rates, so although the euro weakened on the news it has not crashed. Switzerland’s removal of the Franc’s peg to the euro had more impact and the European Central Bank’s annnouncement of a quantitative easing program was equally disruptive. But Syriza’s election and formation of the government with the help of the far-right Independent Greeks party will certainly start a period of considerable volatility in European markets as negotiations are conducted in the glare of publicity, and no doubt behind closed doors, about Greece’s future in the European single currency.

The new Greek government has started positioning itself ahead of negotiations with Greece’s creditors and some would argue they have nothing to lose. There are many voices urging Greece to simply default on everything, leave the Euro and launch a new devalued Drachma but that is clearly the nuclear option and will be held as an unspoken threat during negotiations.

Read more

This is part two of an examination of the political and economic ramifications of the election of Greece’s far-left Syriza party. Read part one if you missed it.

Any failure to meet austerity commitments to the European Central Bank, International Monetary Fund and European Commission next month by Greece will see the next tranche of loans not being paid by the troika of at the end of February. As liquidity from the ECB to Greece’s banks dries up, a banking crisis will ensue.

Not surprisingly, private money is already heading for the door, some €8 billion of deposits have been pulled since November when the election was called. So, who will blink first? Syriza or the troika?

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It is clear voters in Germany, Finland and the Netherlands, do not want their taxes used to underwrite a blank check for countries that get into financial trouble.

“Ultimately, this is a clash of democracies, rather than a clash of ideas,” Mats Persson, director of Open Europe, a research organization in London is quoted by the New York Times as saying. “Voters in Germany and Greece want very different things.”

More than that, he adds this understatement: “Germans and Greeks have fundamentally different views on how to run an economy.” Don’t they just. But you can see the Germans’ point of view. Of all the bailout money provided to Greece, Germany has been the largest contributor.  Their contribution is all in the form of loans that have not yet fallen due.

If Greece defaults, the German taxpayer will largely foot the bill. Nor does the European Union want to set a precedent by allowing Greece to renegotiate its position and end the austerity drive but maintain the bailout funding. The risk of contagion, not for an exit but for a renegotiation, is high. In Spain Podemos, a party similar or at least highly sympathetic to Syriza, leads the opinion polls and national elections are due next year. Germany really can’t afford for a major relaxation of rules for repayment or the drive to collect more taxes and balance the books. As they see it, if they let Greece off the hook Spain could be next, then Italy and you can bet France would be right behind.

So, we are set for a clash of ideologies, and at the moment neither side has given the slightest hint they intend to back down. Inevitably that is going to cause considerable foreign exchange, stock market and, by association, commodity volatility, particularly in Europe. Banks across the region will be seen to be at risk, some of whom have been major players in commodity financing. If they cut their risk profile to shore up their positions they may well start with commodity financing. Syriza has won an important victory, but a new chapter of European instability is only just beginning.

Europe is once again in the news as a cause of fear in the financial markets. This time it’s not due to Greece or any of the Club Med countries but more due to the EU economy and the Euro as a whole.

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The value of the euro fell to its lowest level in years this week, hitting $1.19 a 15% fall from May and the lowest level since 2005, In response European stocks fell sharply amid uneasiness about whether the region is on the verge of a new economic and financial crisis.

Source NY Times

Source: NY Times.

Stock markets were already under pressure from falling oil stocks as Brent crude hit a 5-year low, interpreted by many as a sign that global demand has collapsed resulting in a glut of oil driving prices down. The markets are betting on the European Central Bank (ECB) introducing sovereign and corporate debt purchases at their next meeting on January 22, a form of “Quantitative Easing.”

Indeed, in the New York Times Jean Pisani-Ferry, an economist who serves as a policy adviser to the French government, is quoted as saying the markets have already priced in the introduction of QE and if the ECB fail to act, the consequences could be dire.

“Disappointing those expectations would bring an abrupt and damaging unwinding of positions: Long-term interest rates would rise, stock markets would sink, and the exchange rate would appreciate,” he wrote.

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