Greece

Read the first part of this post here

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.

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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.

Don’t forget to read October 2013 MMI analysis before November’s full report comes out next week!

No wonder Germany suggested taking over the running of the Greek economy early in 2012. They wanted to be sure a major default didn’t start a domino effect that would end at Germany’s doorstep.

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greece olympic stadium ruins

Continued from Part One.

Here are the differences between the Greek side of Piraeus Port and the China-owned Cosco side:

On the Greek side, after a series of strikes in the run-up to 2010, unionized labor had created the unsustainable situation where some workers with overtime were earning $181,000 per year, while Cosco is typically paying $23,300. On the Greek side of the port, union rules required that nine people work a gantry crane; Cosco uses a crew of four.

Yet Cosco employs 1,000 workers and rising, while the Greek side employs 800 and falling, even after a government-enforced, state-employee 20 percent pay cut. Unions claim Cosco operates to dubious safety standards, but accident rates are no worse and equipment is state of the art compared to the Greek side.

To suggest that cash-strapped Greece could not have afforded to invest in the port as Cosco has done is to ignore the fact that Greece has, for 20 years, borrowed to fund all kinds of less viable infrastructure projects, not least of which were the 2004 Summer Olympics.

Case in point — stadiums which now stand in ruins, unused and unmaintained for years. That money would have been better spent in pursuit of viable economic growth.

The Piraeus Port situation is a microcosm of many of Greece’s problems, which in turn can be seen as a wider European malaise involving entrenched working practices, too lax of fiscal policies, and a cultural belief that hiding behind the walls of the European Union somehow protects the old world from the new.

Whereas Greece displays these problems most dramatically, similar examples can be found every day in countries like Portugal, Italy, Spain and France. Europe’s long-term problems beyond debt will take even longer to resolve.

Image source: dohastadiumplusqatar.com

china's cosco containers

Greece is in a difficult situation — no doubt about that.

Pictures of the public rioting on the streets paints a scene of a population driven to extremes by hardship and rightly generates considerable sympathy.

But there is another side to this story, one the Germans in particular have come under a lot of criticism for focusing on so resolutely, and that is of a country living beyond its means.

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Continued from Part One.

According to the Telegraph, over 100 German ship funds have already shut down as the crisis in global container shipping comes to a head, while 800 more funds are threatened with insolvency, according to consultants TPW in Hamburg.

In the UK, Britain’s oldest ship-owner, Stephenson Clark, dating back to 1730, went into liquidation this month, closing the final chapter of Britain’s coal trade and the industrial revolution, citing “incredibly depressed” vessel rates. Like large parts of the German container industry, the firm over-invested in the boom four years ago, betting too much on Asian growth rates.

Germany, however, is said to be the superpower of container shipping, controlling almost 40 percent of the world market; so if collectively they get it wrong, it goes wrong in a big way.

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The Baltic Dry Index (BDI) usually steals the headlines when it comes to discussion of the world’s shipping fleets, and is often quoted when analysis of the global economy refers to international trade.

The Dry Index is a measure of bulk shipping rates and although the Baltic Exchange quotes a range of vessel sizes and types, it is often the large dry bulk carriers carrying iron ore, coal and grains that steal the limelight.

This is hardly surprising; the volume of such bulk commodities is a measure of global economic activity and the rates charged for carrying such commodities are in part a reflection of the level of demand or volumes. But not in total, of course: the supply of space also plays its part as is the case in the current market.

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Another week, another Euro deal.

This time, Spain has secured a $125 billion bailout of its essentially bankrupt banking system, saving it from the consequences of the construction bust – for the time being. But the cost will essentially be passed on to the country’s sovereign debt, exacerbating Spain’s other problem: how to stabilise the government debt ratio.

Indeed, in the latest turn in the Eurozone debt crisis, Gavyn Davis estimates that a bank bailout of  €80 billion, while solving the problem of the Spanish banks, would be at the cost of adding around 11 percentage points to the government debt ratio, taking it to over 100 percent of GDP by 2015. As it is, Spain is paying around 7 percent borrowing costs; with austerity measures still to bite and unemployment at 25%, tax receipts are likely to fall and the situation will only get worse.

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Presentations at the Harbor Aluminum Outlook conference tend to lean towards technical forecasts for aluminum price, inventory levels, and production costs for aluminum. However, equally important are glances at the bigger macroeconomic picture.

And this year, the European debt crisis takes center stage, just over China’s growth declines, and Ed Meir of INTL FCStone, a fixture in the metals analysis world, homed in on Greece, Italy and Spain, and what the US dollar can tell us about where aluminum prices — indeed, all commodity prices — are headed.

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Continued from Part One

The euro is the second most liquid currency in the world after the US dollar, accounting for nearly 40 percent of all daily trades. After that, liquidity in alternative currencies drops sharply, with the yen present in 19 percent of trades, pounds sterling in 13 percent and, the recently popular commodity currency, the Australian dollar, in less than 8 percent. Central banks looking to diversify their foreign currency holdings out of the dollar, which are among the biggest buyers of the euro, have few alternatives.

The worries are over what the knock-on effect of a Greek exit would be, who would be next and where would it end.

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Markets have been driven down this year on fears of a Greek exit from the Euro, but two quick questions: would it really be so bad?   And what would the likely outcome be of a Greek reversion to the drachma?

The euro has not suffered as badly from the debt crisis as the landslide of media coverage would suggest. As a Financial Times article points out, before the Greek elections at the start of May, the euro had barely moved against the dollar for most of the year and yet speculation had been rife about any number of Armageddon scenarios that could engulf the Eurozone.

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Investors are a funny lot.

The phrase “herd mentality” may have been created to describe the behavior of our four-footed friends, but it applies equally well to the investor fraternity.

For months, the prospect of a slowing China and the departure of Greece from the euro have been on the cards, prompting some no doubt to pay close attention to managing their commodity risk — and yet metal prices actually rose in the first quarter. Finally it seems to have sunk in that these are real events the impact not just prices of copper, aluminum, nickel, zinc, etc. — oil, gold and other commodities have also fallen.

Source: Financial Times

Seeing this graph of the Thomson Reuters/Jefferies CRB Index, which tracks all major commodities, only in the last month have the risks of an overly slowing China and the rejection of austerity in Greece been reflected in commodity prices. As the FT reports this week, gold in particular has taken a beating down to a five-month low of $1,563.70 a troy ounce, as investors have reduced positions in “riskier” assets such as metals and moved to G-3 bonds and cash.

Interestingly, central banks remain strong net buyers of gold, monetary policy is expected to remain expansionary and, with China’s gold imports via Hong Kong at an all-time high in March, you have to wonder who has it right.

Worries about slowing growth in China have weighed on base metals, too. In particular, copper is down to the $7,800 range as demand for the balance of this year is taken as being less robust.

At what point do these prices become a buying opportunity for those consumers able to lock in prices for 3-6 months or longer?

We will be looking at aluminum in a separate article, but as a general observation one has to say it’s best not to stand in the way of the herd when it’s on the move — there’s likely more bad news out there, particularly regarding Europe, to keep the momentum going a little longer.