Archive for February, 2015

Well we are on the final showdown for this round on Friday.

This is important not because of the bailout, but because there is a current run on Greeks Banks (Euro 11 billion were withdrawn in December and a staggering  Euro 56 billion in January and I do not have the numbers from February.

The banks survive only due an Emergency facility called ELA – but as the Euro is printed in Europe….the ELA has almost finished its reserves.

Probably (and that is what the market hope and why everything is so eerily calm) there will be an extension (say 6 months). The only issue the agreement in the wording of the communications as  both Merkel and Tsipras have to look like winners in front of their on electorate. So clauses and details are very important.

The real issue is that the six month delay, buys just time as it is a situation that is not solvable.

This is a great article from Fidelity Investments, a large US investment firm – which definitely has more time and resource than me and shares my ideas.

What do you think Alexis Tsipras, the prime minister heading Greece’s new left-wing, anti-austerity but pro-euro government, did immediately after being sworn in as leader of the ruined country? Why, antagonise as many Germans as he could, of course.

On January 26, the day after elections allowed Tsipras’ left-wing Syriza party to form a ruling coalition with the fringe right-wing, anti-austerity Independent Greeks party, the 40-year-old Tsipras sped to the National Resistance Memorial at the Kaisariani rifle range memorial in Athens. That’s where in 1944 the Nazis executed about 200 Greek partisans in retaliation for the killing of the German general Franz Krech by resistance fighters. In his customary tie-less suit, Tsipras laid red roses on the memorial stone as veterans watched. In case anyone brushed aside Tsipras’ symbolic act, a spokesman for Syriza said Tsipras’ homage displays “the desire for Greeks for freedom, for liberty from German occupation”.[1]

German oppression today, according to Greeks, comes in the form of the bailout-enforced austerity that has destroyed their economy (nearly a quarter of GDP has disappeared since 2007) and created near-30% unemployment without curtailing government debt.[2] Tsipras’ deed, among other actions, was designed to show how serious he is about pursuing his mandate to overturn austerity and to default on debt repayments. The pity is that the leaders of the EU, Germany and other eurozone countries are determined not to cave into Greece. They would like to help Greece more, no doubt, but national politics won’t let them.

Investors be warned: a showdown looms over Greek public finances that could result in a Greek exit from the euro and a Lehman-style shock for the world. While all the bickering is going on, nervous Greeks could propel the fate of Greece out of control of the leaders of either side and a euro exit would become a near-certainty. Bear in mind that there is one outcome that Europe’s elite will never admit they fear in the showdown with Greece and it’s not a Grexit per se.

To be sure, European leaders are good at fudges that soothe bond investors – there’s no better one that Mario Draghi’s bluff to do whatever it takes to save the euro, as though a pretend central bank can control voters and the governments they elect. A default that’s called anything but a default would be the standard European incremental response to the EU standoff with Greece. This, however, would only be a short-term solution, perhaps only buying a few months before a bigger confrontation. Maybe the approach of a dénouement could prompt the statesmanship European politicians need to display if they are to complete their half-hearted monetary union. But the implementation in January of quantitative easing by the European Central Bank – whereby national central banks buy 80% of the bonds and only purchase their government’s debt to ensure no inadvertent debt sharing – only showed how politics in Europe is shaping as every country for itself rather than a shift towards closer union. The nationalistic politics forcing brinkmanship over Greece denotes a more dangerous phase in the five-year-old eurozone debt crisis. As UK Chancellor George Osborne said: “It is clear the stand-off between Greece and the eurozone is the greatest risk to the global economy.”[3]


In 1953, representatives from 20 creditor countries met in London and agreed to write off about 50% of the debt Germany had incurred between the two world wars. Greece, despite holding grudges from three years of Nazi (and Italian) rule from 1941 to 1944, was a signatory to the London Debt Agreement. That’s the barbed background behind Syriza’s call for German Chancellor Angela Merkel to sanction a 50% write-off of Greece’s public debt.

Greece sure needs some debt relief for Athens’ debt stands at least 170% of GDP in gross terms (and 165% in net terms) even after the biggest default in history. In 2012, private creditors “voluntarily” accepted writedowns of more than 100 billion euros (A$148 billion) on Greek debt. Their acquiescence avoided triggering the credit-default swaps tied to Greek debt, fireworks that would have ricocheted around the global financial system.

The problem for Greece is that it’s hard for any country to reduce its debt ratios once debt exceeds GDP, even when interest rates are low, a government is running a budget surplus and an economy is still expanding. IMF projections for Greek achieving sustainable finances are based on Athens realising a budget surplus before interest payments equal to 4% of output even though such austerity shrinks an economy.[4] So a default by Athens – and any change to loan conditions is a default – is inevitable. It’s whether one is acceptable or not to the EU and eurozone governments. The problem is that Greece’s debts are now largely held by public bodies; an estimated 80% is held by the European Central Bank and other eurozone governments. Thus taxpayers throughout Europe would incur losses from a Greek default.

Berlin and other creditor nations won’t easily allow Syriza to trump the EU in these negotiations for three reasons. The first is that Germans are losing faith in Merkel’s assurances that their wealth won’t be blown on lazy southerners. Their confidence has been undermined: firstly, by the ECB agreeing to quantitative easing in defiance of the Bundesbank and Germany’s business establishment; and, secondly, by Syriza’s victory. Even though she is under international pressure to do so, Merkel can’t easily succumb to another defeat so soon after these setbacks for that would inflate the popularity of the new anti-euro Alternative for Germany party that is taking votes from her coalition to her right. The second reason creditor nations will stay stubborn is that if Greece were to be successful in negotiating a default, other indebted countries would demand the same kindness, especially as Italy, Spain and Portugal would lose taxpayer money on a Greek default. Lastly, a Greek default would boost support for the anti-euro and anti-EU populist parties that are already thriving in indebted countries such as France, Italy and Spain by promising similar solutions.

If Berlin and Brussels won’t budge during negotiations, then Athens must. The problem is that even a disguised default for Greece in the form of extended and less-onerous repayment terms may not pacify Greek voters and leave Syriza vulnerable to charges that it has broken elections promises within months of governing.

The EU and creditor countries, so far, insist that Athens stick to legal agreements with previous Greek governments that set a timetable for repayments and for reforms to be enacted in return for about 240 billion euros’ worth of loans from the ECB, the EU and the IMF. If Tsipras’ coalition misses payments or violates bailout conditions by fulfilling his election promises to halt privatisations, boost the minimum wage and rehire public servants, the EU could snap support for Greece. A reluctant Greek exit from the euro would probably result.

Hardline EU policymakers are acting in a way that presumes that Europe’s rescue fund and the ECB’s quantitative easing would protect the other 18 euro users from any jolts from Greek somehow readopting the drachma. Thus a game of bluff and brinkmanship is commencing in the Balkans that could spin out of control like the crisis in the Balkans did 101 years ago.

The drachma twist

One of Greece’s negotiating strength in default talks is that the government is now operating a budget surplus before interest payments (from a deficit of 19% of GDP in 2009) and the country is running a current-account surplus, two favourable preconditions for non-payment. Tsipras’ coalition appears to be betting that thunderbolts from Greece ditching the euro, the country’s pivotal geopolitical position on the edge of Europe and Germany’s long-term export benefit of keeping alive the euro (for any new Deutsche-mark would soar) will lead to an EU backdown during talks for new loans that Athens needs to meet repayments scheduled in coming weeks and then around mid-year.

The problem for the EU and Athens as they squabble, bluff and threaten each other is that a bank run appears underway in Greece that could prove fatal for Greek membership of the euro. It is likely to accelerate for what rational Greek wouldn’t try and send his or her euros to other European banks or stash them at home while there is doubt about whether their euros might be switched into less-valuable drachmas?

It is estimated that withdrawals from Greek banks by Greek residents ranged from between 10 billion to 20 billion euros in January, in a banking system that held 160 billion euros at the end of 2014.[5] All Greek banks can do in response is apply for emergency lending assistance from the central Bank of Greece, which can only meet these demands with ECB approval. It is estimated that Greek bank requests for such aid increased to 57 billion euros in January from 11 billion euros in December.[6] The problem is that the ECB can only agree to this aid if Athens sticks to its bailout conditions.

Any reluctance on the part of the ECB to help Greek banks – in essence, a mammoth political decision for the ECB to take – would only intensify the run on Greek banks. Without the ECB’s sanction for emergency aid, Athens would probably be forced to enact capital controls, nationalise its banks and print its own currency to keep its banking system alive.

It’s likely that the Brussels and Berlin, seeing that their austerity policies could trigger more political havoc across Europe, will yield to Greece via some fudge that appears to, but doesn’t, protect EU taxpayers – voters are more sensitive to losses from defaults than to lower or even imaginary returns from repayments endlessly extended. What, then, would the future hold for Greece, even if austerity was eased? Not much, according to many, for the Greek economy is uncompetitive and its banking system is unstable, being full of bad debts and vulnerable to self-perpetuating runs. While many warn that its birth would be catastrophic, a new currency would help solve both problems. A lower exchange rate would restore competitiveness and the Bank of Greece would be able to act as lender of last resort to the banking system (as well as run an independent monetary policy). Roger Bootle, the executive chairman of the UK-based Capital Economics, says it’s possible to paint an outcome where, under the new drachma, an export-led economic recovery could help mend government finances. “Even if there had to be a short-term hit to living standards, if the devaluation were well managed, after a couple of years people should be demonstrably better off,” he said.[7]

And that would pose a fresh danger to the euro. A thriving drachma-using Greece could spell the end of the euro for, oh so quickly, other indebted governments in charge of uncompetitive and deflating economies would take this path – especially as the next countries to ditch the euro would get the greatest competitive boost. If national leaders resisted, voters would soon dispatch them for anti-euro parties that are prepared to antagonise Germany and Europe’s political elite any which way they can.


In Ukraine the Minsk agreement has been signed.

It is practically a Russian victory and the direct presence of Vladimir Putin confirms the substance of the agreement.

The reality is more foggy, as usual.

The ceasefire is very much on the line of the September agreement which was not respected.

The other real counterpart of the conflict (US) has not been invited and did not participate.

There are a few point that are not clear (as the latest “contact zones” have been left out.

The agreement is very important as – if the US start sending weapon to Ukraine -we will find ourselves with a full on Cold War with all the consequences. And nobody will be spared as cyber and economic warfare are now part of the standard weapons.

Staying in Europe, but going south, Germany and Greece seems to work on a compromise working the classic European magic of saving face for both side of the conflict – without solving anything as everything is just a debt reclassification.

Magic until the population will rebel. But as I always says until 2017 with the French election and the potential victory of Marie Le Pen, we will be probably safe.

Then we could have a new French revolution of sort – not as violent, possibly.

Aussie Dollar and currencies

Posted: February 12, 2015 in Uncategorized

The Aussie Dollar finally fell and will continue falling for a while (currencies cycles are usually pretty long.

The average target is US 70 cents.

Definitely it is a great advantages for international exposures (on average, last year, the currency contributed approximately 16% for the Australian investor).

Moreover now the Aussie Dollar is starting to show weakness not just versus the US Dollar, but also the Euro, Yen and Asian currencies including Yuan (in its trading band).

The major beneficiaries is the healthcare sector, but also mining had some protection from the commodities fallout as most commodities trade in USD.

On the other side of the coin, the strength of the US Dollar is starting to impact the US. In March, US earning season, we will really be able to quantify how much damage the currency did to the US.

The biggest issue of the weaker Aussie Dollar position is that is crowded trade.

What you mean by that? Because it is so easy to predict there a lot of geared short positions against the Australian Dollar.

If a unforeseen event (or unlikely as a real Greece exit from Europe) would take place, any short position against the Australian Dollar could unwind very fast – provoking a strong and fast rally in the Aussie Dollar

President Obama is asking for a three year Islamic State war resolution.

He says that it is just to have a more clear backing for a long ongoing campaign (funny on the news you read only about the defeats of Islamic State. Yes there are defeats, but there are also huge intakes of new recruits from the Western World and advances in Afghanistan and Yemen).

So the idea is more of the same, just a “regularisation of the position”.

If you go and read the Bill it is very open ended…it does not exclude boots on the ground nor the fact of limiting operation to Syria/Iraq.

In reality it is more a “carte blanche” to do whatever it takes to attack Islamic State (which by itself is a not well defined enemy) for the next three years.

Definition of Carte Blanche: unconditional authority to do whatever it takes to reach an objective

The internet is abuzz with the CNN slip up (you can find it on youtube) where the commentator said that Ukranian pro US troops where fighting Pro Russian rebels.

And that is the truth as I already said in May 2014.  There is at least a part of American funded Greystone mercenaries fighting at least some Hundred Wolves Cossacks Russian paramilitary fighting each other as in the Cold War.

The main issue here for the world, it is that President Obama seems to be in the process to authorize military equipment to be sent officially to Ukraine.

This fact – instead of scaring Russia, would precipitate the rise of the Cold War 2.

Already several Russian military analyst declared that this would be perceived as a direct US involvement in the Ukrainian war.

A few consequences would soon follow.

A potential Russian (rebel or not rebel) invasion before the US military could start to tilt the balance.

Russia will give advanced weaponry (now kindly negated) at least to China, Iran and Syria. As a lot of pain for Russia comes from the Saudi I would not be surprised if Russia would use the Houthi (Yemen pro Iran rebels that defeated the pro Saudi-US government) to create issues for the Saudi (which it would have the nice effect, for Russia, to increase the oil prices)

Recently President Putin is courting Greece, Egypt and Cyprus – all countries of geostrategic importance (plus several other in South America (Argentina, Brasil) and Asia (Vietnam, india, China).

Also the Arctic, with its resources, is already an untold (by the media) battleground between US, Russia, Norway and Canada – at least.

So we are really going back to the old Cold War.

European Union: battlelines 2015

Posted: February 9, 2015 in Uncategorized

There are essentially two battlelines forming in Europe at this moment.

On one side there is the Cold War reloaded where the US wants to give army to Ukraine government,  but it is opposed by Germany and specially France.

The Russian rebels are massing troops near Mariupol to create a bridge to Crimea, before the US decides to send armies to Ukraine

In the meantime Russia is courting Greece and Cyprus is offering military bases to Russia.

On the economic side, Greece and Germany have somewhat hardened each position.

Germany just say Nein!

Greece looked for allies (France, Italy), but found only nice words as no one is willing to upset Germany.

The Podemos (Spanish left party similar to the Greek Syriza) in a Sunday poll looks like having the edge in the end of year Spanish election.

Even Alan Greenspan, ex US Fed chairman, went to the mix in an interview declared he cannot see how Greece could stay in the EU (and he also thinks that the Euro cannot last much longer, unless there is stronger integration).

And the UK Treasury Chief Osborn, on Sunday,  admitted that the UK is preparing for the financial instability that an eventual Grexit could create.

The other day the BCE pulled away a refinancing facility for the Greek banks.

The move has been subtle, but practically raised the staked for both Greece and Germany.

Greece now does not have any more mean to finance itself after 28 February (well probably could last till 10 March). At that point it would really have no choice but print its own money and print New Dracma and leave the European Union, for real.

It raised also the stake for Germany. The stake of Germany is more political than economical. It raises the possibility that other countries leave the European Union (which is the free market  trade market that let Germany prosper).

Why they did this? Just to push the two parties to more conciliatory modes.

Yesterday meeting between Greek and Germany was a clear Nein from the Germans…but the real push is towards a three month agreed extension to come to a solution.

It will just buy some time.