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.
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.
“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.
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
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.
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.
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.
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
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.
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?
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.
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.
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.
2014 saw a number of geopolitical developments that spooked the markets. Generally negative, they created uncertainty and increased risk for investors and consumers alike, not always in metals but sometimes in stock markets that then impacted investor sentiment in metals and other commodities.
Think the Ukraine-Russia situation, ISIS in Iraq, tension between China and Japan in the South China seas, the Ebola epidemic and China’s falling property market. What could 2015 hold? One potential source of instability is back to our old friend Europe.
A degree of political and, hence, economic stability appeared to have been achieved in Europe this year, fears periodically salved by Mario Draghi’s “we will do whatever it takes” assurances – which actually amounted to nothing, but have been enough to ease tensions and allow sovereign bond rates to drop to comfortably low levels. Yet there is lack of alternative investment opportunities forcing money into sovereign debt as the only source of any yield. Some parts of Europe still have serious problems and events this week suggest one has the potential to blow up big time around the New Year.
This week the Prime Minister of Greece, Antonis Samaras, announced a surprise snap presidential election following months of stalemate and infighting among his coalition partners. His governing coalition holds 155 votes, he needs 180 and is hoping to persuade 25+ independent and fringe party ministers to support him. If he fails to win sufficient support for his candidate, an early general election could follow, which investors fear will bring to power the radical left Syriza party. The prospects of a Syriza government promptly sent the Athens stock market into freefall, triggering the steepest drop since 1989, falling 12.8% according to an FT article.
Source: The Financial Times
Syriza wants to renegotiate the country’s sovereign debt and hike public spending, moves which would put Athens at loggerheads with its creditors the FT says, while quoting Charles Robertson, chief economist at Renaissance Capital as saying “A possible Syriza election victory may force the Euro-zone to choose between a fiscal union (debt write-off for Greece) or the first Euro exit.”
Would the US, Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don’t think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy already has the lowest unemployment rate in Europe.
The villain here is not Germany, but the Euro. Arguably, if Germany left the Euro, one could see some immediate corrective swings occurring. Germany’s new currency would rise dramatically against the “new” Euro, and the remaining Euro countries would benefit from a massive devaluation in their currency, boosting competitiveness.
Unfortunately, there would be no one to fund the hundreds of billions of dodgy loans and outright debt the area is saddled with. Because what is oft overlooked is the fact that Germany has been the largest contributor to the European Stability Fund and the European Central Bank. German guarantees supporting the existing bailout fund amount to €211 billion ($285 billion). The ESM will require a capital contribution from Germany. If the ESM lends its full commitment of €500 billion ($675 billion) and the recipients default, Germany’s liability could be as high as €280 billion ($378 billion).
As the FT points out, the size of these exposures is huge in relation to Germany’s GDP of around €2.5 trillion, and German household assets estimated at €4.7 trillion. Nor is Germany without its own problems. It has substantial levels of its own debt (over 80% of GDP), an ageing population, and deteriorating dependency ratios, to compound its problems.