Greece and China…double crisis

Posted: July 7, 2015 in Uncategorized

Greece.

Still no sign of contagion and today, 7 July the negotiators are meeting again.

For a successful solution they must come to an agreement this week as the Greeks are literally running out money and you could have riots in the streets by the weekend.

The European Central Bank is adding pressure to come to an agreement (or kicking Greece out) as it just increased the “haircut” needed to access the Emergency Loan Assistance to 60% (at 61% there is the bail -in….which means similar to Cyprus the depositors will have to forfeit part of their own savings!).

From UBS and Mason Stevens what happened to Cyprus.

UBS believe that it is likely that once liquidity capital restrictions are inevitably enforced, the eventual relaxation of imposed capital restrictions to be a prolonged and gradual process constrained by depleted liquidity buffers. While circumstances in Cyprus were different, it took >1 year to remove ATM limits and > 2 years to lift the remaining restrictions. The introduction of capital controls occurred in the context of the rescue package agreed between Cyprus and the Troika, first announced on March 17, 2013. The program included measures necessary to recapitalize the local banking sector. As part of the program, Cyprus agreed to introduce a one-off tax on deposits. The initial proposal suggested a levy of 6.7% on deposit amounts of < €100k and a 9.9% tax on deposit amounts > €100k. Given disagreements over losses on small retail deposits, the scheme was revised. The final agreement applied a 47.5% haircut to all balances >€100k and incorporated a bail-in of equity holders, bond holders, and large deposits at Laiki Bank.

PS Now those limits have been gradually taken off during last year (so 2 year of capital restrictions)

China

China is more scary. All the measures taken on Saturday did not really work. Yes the Index was up…but only on the blue chip level. All the rest went down.

China will not accept meekly a market rout as Western country were doing before the Global Financial Crisis (now specially the FED and Bank of Japan are playing a massive role in this rally.

In order to understand why China cannot accept a market collapse, you need to see the situation.

We are in a very different position from when China had other market collapses. Participation is much higher, but more important is that all the Chinese reforms are aimed and sustained by the Chinese Consumer.

Without an increase of Chinese consumer spending the entire Chinese theory to become a self sustaining world super power will collapse, including their aim to become a world reserve currency.

China will do whatever they can to avoid a market crash…otherwise the Chinese Dream is finished.

And they are in panic  as you can see from  the great falls in oil and iron ore.

And Australia should hope they get it right thanks to our smart politicians (all parties) we are in it up to our necks!

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