Russell Lee Hollywood, California. Used car lot. 1942
Look, it’s very clear where I stand on China; I’ve written a lot about it. And not just recently. Nicole Foss, who fully shares my views on the topic, reminded me the other day of a piece I wrote in July 2012, named Meet China’s New Leader : Pon Zi. China has been a giant lying debt bubble for years. Much if not most of its growth ‘miracle’ was nothing but a huge credit expansion, with an outsize role for the shadow banking system.
A lot of this has remained underreported in western media, probably because its reporters were afraid, for one reason or another, to shatter the global illusion that the western financial fiasco could be saved from utter mayhem by a country producing largely trinkets. Even today I read a Bloomberg article that claims China’s Q1 GDP growth was 7%. You’re not helping, boys, other than to keep a dream alive that has long been exposed as false.
China’s stock markets have a long way to fall further yet. This little graph from the FT shows why. The Shanghai Composite closed down another 1.27% today at 2,927.29 points. If it ‘only’ returns to its -early- 2014 levels, it has another 30% or so to go to the downside. If inflation correction is applied, it may fall to 1,000 points, for a 60% or so ‘correction’. If we move back 10 or 20 years, well, you get the picture.
That is a bursting bubble. Not terribly unique or mind-blowing, bubbles always burst. However, in this instance, the entire world will be swept out to sea with it. More money-printing, even if Beijing would attempt it, no longer does any good, because the Politburo and central bank aura’s of infallibility and omnipotence have been pierced and debunked. Yesterday’s cuts in interest rates and reserve requirement ratios (RRR) are equally useless, if not worse, if only because while they may provide a short term additional illusion, they also spell loud and clear that the leadership admits its previous measures have been failures. Emperor perhaps, but no clothes.
Every additional measure after this, and there will be many, will take off more of the power veneer Xi and Li have been ‘decorated’ with. Zero Hedge last night quoted SocGen on the precisely this topic: how Beijing painted itself into a corner on the RRR issue, while simultaneously spending fortunes in foreign reserves.
[..] how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning. The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate hike as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:
In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.
Said otherwise, SocGen is suggesting that China has sold $106 billion in Treasurys in the past 2 weeks! And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.
In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!
The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.
And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.
Ambrose Evans-Pritchard, too, touches on the subject of China’s free-falling foreign reserves.
The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash. Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting. Wei Yao said the strategy of the Chinese authorities is unworkable in the long run.
If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous. She said China can use up another $900bn before hitting safe limits under the IMF’s standard metric for developing states.
“The PBOC’s war chest is sizeable, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long,” she said. Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion. “There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.
It is a dangerous game they play, that much should be clear. And you know what China bought those foreign reserves with in the first place? With freshly printed monopoly money. Which is the same source from which the Vinny the Kneecapper shadow loans originated that every second grandma signed up to in order to purchase ghost apartments and shares of unproductive companies.
And that leads to another issue I’ve touched upon countless times: I can’t see how China can NOT descend into severe civil unrest. The government at present attempts to hide its impotence and failures behind the arrest of all sorts of scapegoats, but Xi and Li themselves should, and probably will, be accused at some point. They’ve gambled away a lot of what made their country function, albeit not at American or European wealth levels.
If the Communist Party had opted for what is sometimes labeled ‘organic’ growth (I’m not a big afficionado of the term), instead of ‘miracle’ Ponzi ‘growth’, if they had not to such a huge extent relied on Vinny the Kneecapper to provide the credit that made everything ‘grow’ so miraculously, their country would not be in such a bind. It would not have to deleverage at the same blinding speed it ostensibly grew at since 2008 (at the latest).
There are still voices talking about the ‘logical’ aim of Beijing to switch its economy from one that is export driven to one in which the Chinese consumer herself is the engine of growth. Well, that dream, too, has now been found out to be made of shards of shattered glass. The idea of a change towards a domestic consumption-driven economy is being revealed as a woeful disaster.
And that has always been predictable; you can’t magically turn into a consumer-based economy by blowing bubbles first in property and then in stocks, and hope people’s profits in both will make them spend. Because the whole endeavor was based from the get-go on huge increases in debt, the just as predictable outcome is, and will be even much more, that people count their losses and spend much less in the local economy. While those with remaining spending power purchase property in the US, Britain, Australia. And go live there too, where they feel safe(r).
I fear for the Chinese citizen. Not so much for Xi and Li. They will get what they deserve.
Greece will need €74 billion ($82.55 billion) in fresh funding, the three institutions overseeing the eurozone bailout program said in their assessment of the country’s request for a new aid package, according to three European officials. The €74 billion could include €16 billion from the IMF, should the Washington-based institution decide to participate in the new aid program, the officials said. A fourth official said some funding could come from Greece raising money on debt markets. Two officials said the institutions found Greece’s proposals for new overhauls and budget cuts to be a basis for negotiating a new bailout “under certain conditions.”
The development indicates some of the struggles that could lie ahead this weekend, when eurozone finance ministers and leaders meet to decide on how much money they are willing to commit to keeping Greece in their currency union. The institutions’ assessment was sent to eurozone finance ministries Saturday morning. In the early hours on Saturday, Greece’s Parliament passed the new proposal, which included cuts to pensions and tax increases, with the backing of 251 out of 300 lawmakers. The vote was supported by center-right and center-left opposition parties, while 17 lawmakers from Prime Minister Alexis Tsipras’s own left-wing Syriza party failed to support their own government, with two voting against Mr. Tsipras and others abstaining or staying absent.
Eurozone finance ministers are set to meet Saturday to decide how much more money and political capital they are prepared to spend on keeping the flailing country afloat. Only unanimous agreement on the amount of new rescue loans and debt relief to grant Athens will allow the country to avoid full-on bankruptcy and Greek banks to reopen Monday with euros in their tills. Some European officials cautioned that even a broad deal this weekend could collapse later once it comes to nailing down the details and implementing the new measures. The two sides “might end up in agreement in principle,” said one official. “But whether [a bailout] program [is] ever accepted or money disbursed is another thing.”
Greece’s international creditors told national finance ministries early Saturday that they believe the country is eligible for another support program, according to a European official. An official familiar with those talks said new financing needs had been the most divisive issue during that quality check.
If Greece and its European partners reach a deal on a third aid programme on Sunday, it will still have to be approved by at least eight different national parliaments. And the German Bundestag will even get to vote on it twice. If in most countries, despite certain grumblings, approval of the deal is not really in any doubt, the matter is more complicated in countries such as Slovakia and Latvia. And opposition would grow if the deal includes a write-down of Greece’s debt. In the Netherlands, lawmakers will decide themselves whether to hold a vote or not. The Irish government doesn’t have to ask for parliamentary approval, but it could choose to seek lawmakers’ backing. A majority would near-certain given its majority in the assembly.
The parliaments of Belgium, Luxembourg, Cyprus, Lithuania, Italy, Spain and Portugal will not hold a vote. Neither will the parliaments in Malta or Slovenia, as long as the total financial aid to Greece does not increase. That is unlikely to be the case, if the money comes from the European Stability Mechanism, which euro members paid into in 2012. Slovenian lawmakers will, however, vote if there is some write-off of Greece’s debt. Slovenia has the largest exposure to Greek debt in the euro area as a proportion of its GDP, so parliament may be difficult to convince.
Greece’s Left-wing Syriza government has agreed to draconian austerity terms rejected by the Greek people in a landslide referendum just five days ago, capping one of the most bizarre political episodes of modern times. Prime minister Alexis Tspiras sought to put the best face on a painful climbdown, recoiling from a traumatic fight that would have led to Greece’s ejection from the euro as soon as Monday. He implicitly recognised that the strain of capital controls and economic collapse has been too much to bear. “We are confronted with crucial decisions. We got a mandate to bring a better deal than the ultimatum that the Eurogroup gave us, but we weren’t given a mandate to take Greece out of the eurozone,” he said.
Hopes for a breakthrough set off euphoria across Europe’s stock and bond markets, though Greece still has to face an emergency meeting of Eurogroup ministers on Saturday, and probably a full-dress summit of the EU’s 28 leaders on Sunday. A top Greek banker close to the talks said there is now a “90pc chance” of clinching a deal, thanks both to intervention behind the scenes by a team from the French treasury and to aggressive diplomacy by Washington. Inflows of tourist cash means that there is still €2.75bn of liquidity available, enough to keep ATM machines stocked until Monday night. Greeks will be able to withdraw the daily allowance of €60. Pensioners will continue to draw €120 a week. “We are preparing to open up branches for normal banking services next week. Capital controls will last for a while but not for as long as in Cyprus. The situation is very fluid but we don’t think we will need a major recapitalisation of the banks,” said the source.
An estimated €40bn of money stashed in “mattresses” should flow back into deposits as confidence returns. One or two of the weaker banks may need a capital boost of €10bn to €15bn, involving a potential “bail-in” of savings above the insured threshold of €100,000. Any deal almost certainly means the European Central Bank will lift its freeze on emergency liquidity for the Greek financial system as soon as Monday, entirely changing the picture. Syriza accuses the ECB of deploying “liquidity asphyxiation” to bring a rebel democracy to its knees. The ECB freeze has been a controversial political and legal move – given the bank’s treaty obligations to uphold financial stability – and is likely to be dissected by historians for years to come.
A final deal to end the long-running saga is still not certain. The outcome depends on how much debt relief the creditor powers are willing to offer, and whether it is a contractual obligation written in stone or merely a vague promise for the future. Yet the broad outlines are taking shape after Syriza agreed to three more years of fiscal tightening, with deep pension cuts and tax rises, and a raft of “neo-liberal” reform measures that breach almost all the party’s original red lines. Panagiotis Lafazanis, head of Syriza’s Left Platform, protested bitterly, saying it would be better for Greece to restore sovereign self-government and return to the drachma. “The most humiliating and unbearable choice is an agreement that will surrender and loot our country and subjugate our people,” he said.
Party insiders did not hide their disgust, though Mr Tsipras managed to quell a full-scale mutiny. “It is a total capitulation. We never had a ‘Plan B’ for what to do if the ECB cuts off liquidity and the creditors simply destroyed our country, which is what they are doing,” said one Syriza veteran. “We thought that when the time comes, Europe would blink, but that is not what happened. It should have been clear since April that the markets were not going to react to Grexit.” Yanis Varoufakis, the former finance minister, said he would back his successor and close friend, Euclid Tsakalotos, but only for the next two days. “I will reserve my judgment. I have serious doubts as to whether the creditors will really sign on the dotted line and offer substantive debt relief. My fear is that they will make all the right noises, but then fail to follow through, as in 2012,” he told The Telegraph.
Did Prime Minister Alexis Tsipras betray his principles and cave in to Greece’s creditors? Or did he fight valiantly and succeed in establishing that his nation’s debt load is not sustainable and has to be reduced? Those were the questions being asked across Greece on Friday in the wake of Mr. Tsipras’s abrupt decision to give the creditors nearly all of what they have sought throughout the long and contentious negotiations over keeping Greece afloat. From the halls of Parliament to streets filled with people who have suffered through five years of severe economic hardship, Greeks were struggling to process the news, gird themselves for further budget cuts and assess what they had gotten for their efforts to stand against the European orthodoxy.
Some Greeks said they felt betrayed by what they saw as a quick about face. Hundreds of people marched in Athens on Friday night in a rally organized by the Communist Party to protest the reversal of the “no” vote in Sunday’s referendum. A Twitter trend was formed under the hashtag #ExplainNoToTsipras, with some wondering what the point of the referendum was. “And this whole time I thought it was Merkel who was bluffing,” one user wrote, referring to the expectation that Chancellor Angela Merkel of Germany would blink first in the showdown with Mr. Tsipras. In Parliament, opposition parties took to the floor to excoriate Mr. Tsipras’s latest proposals as even worse than those that Greeks rejected in the referendum.
They chided him as naïve for thinking that he would get a better deal from the creditors than the opposition parties had when they ran the country – though early Saturday lawmakers did vote to approve his new package of proposals. “We have to vote yes,” said Harry Theoharis, a member of the new To Potami centrist party. “It’s a bad deal, but it’s this deal or catastrophe.” Evangelos Venizelos, the former leader of Greece’s Socialist Party, even asked Mr. Tsipras’s finance minister whether he would, in effect, apologize for past statements suggesting that the previous government had been incompetent. Early in the day, the government released a photograph of Mr. Tsipras smiling and receiving a standing ovation after briefing members of his Syriza Party on the state of his negotiations with European officials.
But later, on the chamber floor, one Syriza member, Rachel Makri, took the microphone to criticize the new deal and announce that she would not vote for it. “Under no circumstances will I approve proposals that align with the lenders by 80%,” she said. Ms. Makri added that the proposals were what 60% of voters on Sunday had rejected. The mandate from the referendum, she said, would not allow reductions in pensions, one of the concessions made by Mr. Tsipras.
Oxidation can have destructive effects, like rusting. But it’s a process that has great benefits too: it lowers the risk of cancer, improves metabolism, increases the production of energy, and helps weight loss. Could the Greek people’s Oxi vote and its effect on the EU have healthy qualities too? Not likely now, given Syriza’s decision to perform a backflip: the Prime Minister Alexis Tsipras is presenting a memorandum to the Greek parliament that is similar, if not harsher, to the one rejected in the referendum. I’ve heard a lot of odd things in the streets of Athens recently. Foremost among these is the view that we’re heading for an imminent Grexit. We see now that the chances of this happening are about as great as a meteorite hitting New York City tomorrow morning.
I have even wagered a souvlaki (extra onions, no sauce) with a friend, another teacher at the high school where I work, that a new memorandum will soon be signed between Greece’s “radical left” Syriza government and the EU-ECB-IMF troika. All along I’ve maintained Syriza will perform a backflip. As of course, will the establishment in Berlin, Brussels, Frankfurt, and New York. After all, who needs a Grexit? Do German and French banks want a Lehman Brothers-style domino effect financial disaster? Is China interested in seeing Greece forced out of the eurozone? Has the Red Dragon’s huge China Ocean Shipping Company – Cosco – leased the gateway to Europe only to find that the port of Piraeus is no longer in the eurozone? Russia, embattled and politically isolated with tremendous problems of its own?
Or does the United States want Greece out of the EU, with a potentially tempestuous geopolitical seachange at the crossroads of three continents? President Barack Obama and IMF boss Christine Lagarde do not appear to. Even Germany is showing greater “flexibility”. And this makes sense. How could Angela Merkel and her Finance Minister Wolfgang Schäuble be such blind eurocrats as to be motived only by the thirst for revenge — to punish the Greek voters who stubbornly asserted their right to adopt polices incompatible with their obligation as a member of the eurozone?
For European leaders gathering in Brussels Sunday to find a way to keep Greece in the euro, the credibility of a half-century of economic and political unification is on the line. Failing to find a solution to Greece’s five-year debt crisis would be arguably the greatest setback in the history of what proponents call “the European project.” Europe’s integration, born in the aftermath of World War II, was always designed to be permanent and irrevocable, the better to make future conflict impossible. A so-called Grexit would dramatically undermine those principles. Even as a proposed deal has taken shape, the EU’s cohesion is under assault on multiple fronts. “This crisis, it seems to me, is calling into question all that the European project has achieved,” said Giles Merritt, secretary general of the Brussels research institute Friends of Europe.
The Greek turmoil “has really showed us where all the weaknesses lie,” he said. In the U.K., Prime Minister David Cameron has promised a referendum on membership in response to relentless criticism of the EU by members of his own Conservative Party and much of the media. In France, Italy, and Spain, populist parties hostile to integration are gaining increasing support, some of them questioning the single currency as well as the pro-European consensus that’s dominated their politics for decades. The leaders of all 28 EU states will try to decide this weekend whether to grant Europe’s most indebted country a new bailout in exchange for economic reforms and spending cuts. France is trying to broker a compromise between Prime Minister Alexis Tsipras’s left-wing government and more hawkish countries like Germany and the Netherlands.
Investors were hailing the possibility of avoiding a breakdown of the most fundamental principle of the European project: its irreversibility. The first sentence of the Treaty of Rome, the 1957 founding document of what is now the EU, described its intent to “lay the foundations of an ever-closer union among the peoples of Europe.” As the EU grew to become the world’s largest trade bloc and granted citizens the right to work in every member state, leaders differed widely over how far and fast integration should proceed. The toughest question: whether it should focus on political union or primarily on trade and economics.
The continuing euro crisis is providing Europe with some tough Greek lessons. First, Europe must avoid overreach. What was politically feasible on the eve of monetary union in the late 1990s is proving less economically sustainable today. Greece should never have been admitted to the euro in 2001. It did not qualify. The numbers were largely fabricated. By 2004, the Greek government confessed its budget deficit was 3.8%, not the statutory 3% required for admission. The euro zone refused to question Greece’s membership, though. This was compounded by years of economic profligacy and endemic political corruption. In addition, a feeding frenzy ensued through an influx of short-term money seeking big profits and readily available credit. Since the EU’s inception, the prospect of membership has carried enormous leverage.
After all, if aspiring member states were able to meet European standards – often achieved by instituting sweeping economic and political reforms – they would win a ticket to first-world status. The inclusion of Spain, Portugal and Greece in the 1980s, and the post-Cold War accession of former communist states of Central and Eastern Europe, were history in the making. The vision of modern Europe’s founding fathers, including German Chancellor Konrad Adenauer, who rebuilt his country into a powerful state after World War Two, and Jean Monnet, the key economic architect of European unity, was becoming a reality. The current woes, however, prove even Europe has its limits. The EU must now be more realistic about its ability to deliver on and manage expectations.
The euro zone needs to get its existing house in order and streamline its institutions. Any talk of further expansion must be placed on hold for the foreseeable future – with the exception of the western Balkans. The security factor still looms large there, particularly in the states of former Yugoslavia. More than 20 people died in Macedonia in May after violence broke out between government forces and an ethnic Albanian paramilitary group. The incident sparked fears of renewed ethnic conflict in the region. Even in pursuit of geopolitical aims, however, the EU must insist on full compliance with accession standards.
Greece’s financial drama has dominated the headlines for five years for one reason: the stubborn refusal of our creditors to offer essential debt relief. Why, against common sense, against the IMF’s verdict and against the everyday practices of bankers facing stressed debtors, do they resist a debt restructure? The answer cannot be found in economics because it resides deep in Europe’s labyrinthine politics. In 2010, the Greek state became insolvent. Two options consistent with continuing membership of the eurozone presented themselves: the sensible one, that any decent banker would recommend – restructuring the debt and reforming the economy; and the toxic option – extending new loans to a bankrupt entity while pretending that it remains solvent.
Official Europe chose the second option, putting the bailing out of French and German banks exposed to Greek public debt above Greece’s socioeconomic viability. A debt restructure would have implied losses for the bankers on their Greek debt holdings. Keen to avoid confessing to parliaments that taxpayers would have to pay again for the banks by means of unsustainable new loans, EU officials presented the Greek state’s insolvency as a problem of illiquidity, and justified the “bailout” as a case of “solidarity” with the Greeks. To frame the cynical transfer of irretrievable private losses on to the shoulders of taxpayers as an exercise in “tough love”, record austerity was imposed on Greece, whose national income, in turn – from which new and old debts had to be repaid – diminished by more than a quarter.
It takes the mathematical expertise of a smart eight-year-old to know that this process could not end well. Once the sordid operation was complete, Europe had automatically acquired another reason for refusing to discuss debt restructuring: it would now hit the pockets of European citizens! And so increasing doses of austerity were administered while the debt grew larger, forcing creditors to extend more loans in exchange for even more austerity. Our government was elected on a mandate to end this doom loop; to demand debt restructuring and an end to crippling austerity. Negotiations have reached their much publicised impasse for a simple reason: our creditors continue to rule out any tangible debt restructuring while insisting that our unpayable debt be repaid “parametrically” by the weakest of Greeks, their children and their grandchildren.
In my first week as minister for finance I was visited by Jeroen Dijsselbloem, president of the Eurogroup (the eurozone finance ministers), who put a stark choice to me: accept the bailout’s “logic” and drop any demands for debt restructuring or your loan agreement will “crash” – the unsaid repercussion being that Greece’s banks would be boarded up.
A total of 84% of Greeks want to keep the euro, an opinion poll released on Friday showed, with just 12% favoring a return to the drachma, as the country races to clinch a cash-for-reforms deal with its creditors. The poll by Metron Analysis for Parapolitika newspaper showed that although the overwhelming majority of those polled want to remain in the single currency, 55% said it was the right choice to vote ‘No’ in last weekend’s referendum on tough austerity measures.
SYRIZA maintained a commanding lead over the opposition conservatives with 45.6% of Greeks saying they would vote for the leftist party of Prime Minister Alexis Tsipras were there to be parliamentary polls, up from the 36.3% the party garnered in January’s election. The center-right New Democracy has seen its support drop from 27.8% to 22.7%. It was not immediately clear when the poll was conducted.
I have to admit that I was flummoxed by the political developments in Greece this week. After winning a referendum based on rejecting the Troika’s terms, Tsirpas capitulated to those same terms—if anything, to somewhat harsher terms—less than a week later. I have given up believing that Syriza was executing a straightforward political strategy—negotiate to get less extreme conditions plus some debt relief—and can now see only 4 other interpretations:
• One of two Byzantine political strategies;
• Absolutely no strategy and chaos that appears Byzantine; or
• They were broken by the EU and have capitulated.
The Troika’s strategy, on the other hand, is pretty straightforward to interpret: an intention to either break Syriza or (preferably) force them out to office, to be replaced by a more compliant party; and an imposition of austerity for both moral reasons, and because, as Ordo-Liberals, they actually think that hard work and reform are all that are needed. Interpreting what’s going on with Syriza is only of peripheral interest: unless they do something absolutely stunning, like default on all their debts and introduce the Drachma overnight, what happens in Greece will be determined by the Troika. So I’m going to address those who support the Troika’s approach first with a plea based on a medical analogy.
Schaeuble’s diagnosis is that market correction of a mis-pricing of Greek risk was the cause of the crisis, and to end it Greece must regain the trust of the international community by undertaking serious reforms. Spreads will fall, and growth will occur, once these reforms are in place. Let’s assume that is correct. What is then being undertaken on Greece is like an emergency medical procedure, from which the patient is expected to emerge cured and stronger. This medical operation analogy can be carried further: when you are undertaking surgery on a patient, what do you do to their vital physical systems? You anaesthetise their brains and nervous systems so that they don’t feel the pain, and you give them an ongoing blood transfusions to make up for the blood lost during the operation.
Is this how the Troika’s program is being administered? It would be, if the huge changes to legal and taxation and subsidy and workplace and privatisation rules were accompanied by allowing a substantial government deficit. The cash flow from the deficit would soften the blow on Greek businesses and societies as they made the painful transition from rules befitting a patronage state across to those of an efficient, modern society.
Russian President Vladimir Putin warned of dangers to the global economy from U.S. borrowing while saying Greece isn’t solely to blame for its debt crisis. “It’s a serious problem not just for the United States but for the whole world economy,” Putin told reporters Friday in the Russian city of Ufa in response to a question on the prospects of the biggest developing nations. “Debt exceeds gross domestic product there.” Putin said he’s concerned about Greece and hopes its crisis will be resolved soon, reiterating that Prime Minister Alexis Tsipras hasn’t asked him for financial aid. Even so, he said Russia has the resources to help its partners. Putin is battling his own economic woes after sanctions over Ukraine and a drop in oil prices triggered Russia’s first recession in six years.
This isn’t the first time the Russian leader has attacked U.S. economic policy: he’s previously derided the “dollar monopoly” that allows the U.S. to act like a “parasite” on the global economy. The ruble is the second-worst performer against the dollar in the past year among more than 150 global currencies tracked by Bloomberg, with a 40% dive. Russia’s central bank resumed purchases of foreign-currency assets in May, planning purchases of $100 million to $200 million a day to replenish reserves. The U.S. ratio of government debt to GDP will fall to 104% in 2018 from 105% in 2014, the IMF predicts. Russia drained its foreign-currency stockpiles as fighting raged in Ukraine and global energy prices plunged. That hasn’t left the government in a position where it can’t assist its allies, according to Putin.
Russian reserves were $359.6 billion as of July 3. “Russia, of course, is able to offer help to its partners regardless of today’s difficulties with the economy,” he said after a meeting of the Shanghai Cooperation Organization. “We’re helping some countries.” Putin said Russia and Greece, both of which are majority Orthodox Christian, have a special relationship. Being a euro member, the government in Athens is unable to take measures such as devaluation to help revive its economy, according to Putin. “Greece is an EU country and within its obligations is conducting rather difficult negotiations with its partners,” he said. “Mr. Tsipras hasn’t approached us regarding aid. And that’s generally understandable because the numbers are big and we know what’s at stake.”
Germany is at last bowing to pressure as a chorus of countries and key institutions demand debt relief for Greece, a shift that could break the five-month stalemate and avert a potentially disastrous rupture of monetary union at this Sunday’s last-ditch summit. In a highly significant move, the European Council has called on both sides to make major concessions, insisting that the creditor powers must do their part as the radical Syriza government puts forward a new raft of proposals on economic reforms before a deadline expires tonight. “The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors,” said Donald Tusk, the European Council president.
This is the first time Europe’s institutions have acknowledged clearly that Greece’s public debt – 180pc of GDP – can never be repaid and that no lasting solution can be found until the boil is lanced. Any such deal would give Greek premier Alexis Tspiras a prize to take back to the Greek people after they voted by 61pc to 39pc to reject austerity demands in a landslide referendum last weekend. While he would still have to deliver on tough reforms and breach key red lines, a debt restructuring of sufficient scale would probably be enough to clinch a deal, and allow him to return to Athens as a conquering hero. The Greek parliament is due to vote to ratify the measures on Friday. German Chancellor Angela Merkel said “a classic haircut” is out of the question, but tacitly opened the door to other forms debt restructuring, conceding that it had already been done in 2012 by stretching out maturities.
The contours of a deal on Sunday are starting to emerge. Syriza has requested a three-year package of loans from the eurozone bail-out fund (ESM) – perhaps worth as much as €60bn – and is reportedly ready give ground on tax rises and pension cuts. Germany’s subtle shift in position comes as the United States, France, and Italy joined in a united call for debt relief, buttressed by a crescendo of emphatic statements by Christine Lagarde, the head of the IMF. “Greece is clearly in a situation of acute crisis, which needs to be addressed seriously and promptly. We remain fully engaged in order to find a solution to restore stability, growth and debt sustainability,” said Ms Lagarde.
You can’t exaggerate the importance of France’s decision to align itself with Greece before this weekend’s crisis meetings. As Wolfgang Munchau correctly notes in the Financial Times, Prime Minister Alexis Tsipras has finally succeeded in dividing the creditors. A split between Germany and France, no less, and on an issue as momentous as this – on the course of the entire European project – isn’t just any division. Ignore all the expressions of bewilderment over Tsipras’s acceptance of terms he and his country just roundly rejected. That’s all beside the point. He had already capitulated – weeks ago – on the larger part of the fiscal obligations in the creditors’ last offer. He was holding out for a commitment to debt relief now, rather than talks about it later.
That’s the condition he’s dropped, and rightly, because a consensus has finally emerged that debt relief, one way or another, will follow if some kind of deal is done. In return, he’s secured France as an ally against Germany. That’s a pretty good deal for Greece. The much more consequential U-turn is in Paris. Suddenly, Tsipras’s promises on fiscal policy are “serious, credible,” according to President Francois Hollande. In truth, of course, they are exactly as serious and credible as they have been for the past five months. Even if Tsipras becomes a born-again fiscal conservative and actually tries to keep these promises, he’ll fail – and everybody knows it. A tightening of fiscal policy as the economy falls further into recession is anti-growth and fiscally counterproductive. Those primary-surplus targets that the creditors want carved in stone are almost impossible to hit.
The crucial thing about the new Greek proposals is not that they’re significantly different from the last set, but that French officials helped to shape them. In this long and convoluted saga, that’s a stunning development. Instead of the usual pre-emptive dismissal from German Finance Minister Wolfgang Schaeuble – saying the new offer has nothing new, is worthless, and what do you expect from the Greeks? – we have a pre-emptive declaration of breakthrough from Hollande. This by no means guarantees success. Certainly, the chances of a genuinely good outcome – softer fiscal targets, prompt agreement on debt relief, and a fully functioning lender of last resort – are still vanishingly small.
But the likelihood of a bad agreement, one that keeps Greece in the euro system and lets its banks reopen without resolving the underlying problems, has surged. I maintain that a bad agreement of that kind is somewhat better than none, and since those sad alternatives are all the EU seems able to contemplate, I suppose I shouldn’t complain. The question for France is, what took you so long? If Hollande had intervened this forcefully five months ago, the savings for European taxpayers, to say nothing of Greece’s citizens, would have been colossal. The question for Berlin is, how much does your alliance with Paris still matter to you?
In a dusty field that straddles the Greek-Macedonian border, quite where one country ends and the other begins is not entirely clear. But several Macedonian soldiers in the area are very certain. “Get back,” one shouts through the darkness, herding hundreds of refugees a couple of metres further south from where they stood a moment ago. “Get back to the Greek border.” The crowds shuffle briefly backwards, and the soldiers seem satisfied. “Please,” a Syrian mother calls back, a toddler in her arms. “We are a family. Where should we go now?” It is a filthy spot, filled with the detritus of past travellers. Surrounded by farmland, the only lighting comes from a nearby train track, and the only bedding is the sand the woman stands on.
“You must sleep here,” the Macedonian replies. It is an alarming order – not just for these refugees, who have walked 40 miles to reach this point, but for the people of the country they have just crossed. Greece has received nearly 80,000 refugees this year, a record figure that has seen it overtake Italy as the primary migrant gateway to Europe. Migrants are arriving in such high numbers by dinghy from Turkey that the authorities – already battling an economic crisis – cannot feed, house, or process their paperwork fast enough, leading to bottlenecks on the Greek islands. One factor helping relieve the pressure was the constant stream of refugees out the other side of Greece, near the northern border town of Idomeni, into Macedonia.
But in the past fortnight, the Macedonian government has begun to regulate the flow. Until a few days ago the route had been blocked for a whole week – raising the spectre of a refugee bottleneck at both ends of Greece, at a time when the country is struggling to support its own citizens, let alone a record wave of refugees. “At a certain point there were more than 2,000 waiting there,” says Stathis Kyroussis, head of mission for MSF, one of the few aid groups helping migrants in this remote area. “People started getting angry, and big groups of two or three hundred tried to force their way through.” By his account, Macedonian soldiers had to use their truncheons to maintain order, and fired in the air to keep people back. “This fact of sealing the border,” says Kyroussis, “coupled with the fact that the flows from the island have really exploded, means that we’ve had many more people coming to Idomeni, and not many passing through.”
This is the talk I gave at the FT/Alphaville conference in London last week. A number of people asked me to send the PPT to them, and I got buried in other work and the emails are long lost in my Gmail queue. My apologies to those correspondents to whom I haven’t replied directly.
If you thought the Goldman Sachs banker who did the deal to get Greece into the euro might have been chased out of the City of London, think again. Antigone Loudiadis, more widely known as “Addy”, has been richly rewarded by the bank for her dealmaking prowess and now sits atop one of Europe’s fastest growing insurance companies, Rothesay Life. The 52-year-old, who lives with her family in a vast stucco house in west London, was one of the brightest stars in Goldman’s Fleet Street headquarters. While she lists her nationality as Greek, her education was as English as can be. Schooled at Cheltenham Ladies’ College, she went on to Oxford University before joining JPMorgan, and then Goldman, gaining partner status in 2000.
Colleagues describe her as “fiercely clever”, although by some accounts, she was simply fierce. It is said some of her staff would pretend to be on the phone when she walked past them in the office to avoid her infamous rollockings. Although her Continental twang remains hard to place, her fluency in Greek and strong connections in the country were instrumental in winning the lucrative mandate to create the financial deals that would flatter the country’s debts. Christoforos Sardelis, former boss of Greece’s Debt Management Agency who worked on the trades with her, told Bloomberg she was “very professional – a little bit aggressive as is everyone at Goldman Sachs”. But she was trusted by the government which, it should be remembered, was far more right wing than the Syriza party.
What it most liked about her seems to be the way she could magic away the country’s dismal financial position. The trade she came up with is reported to have made the bank hundreds of millions of dollars, although only Goldman knows the true figure. Reports suggest she was paid up to $12m a year by the time she was named co-head of the investment banking group. Not that it wasn’t a stressful job. In an interview in 2005 she told the Wall Street Journal she was “your typical Type A workaholic smoker” with a “stressful schedule”.
Goldman Sachs faces the prospect of potential legal action from Greece over the complex financial deals in 2001 that many blame for its subsequent debt crisis. A leading adviser to debt-riven countries has offered to help Athens recover some of the vast profits made by the investment bank. The Independent has learnt that a former Goldman banker, who has advised indebted governments on recovering losses made from complex transactions with banks, has written to the Greek government to advise that it has a chance of clawing back some of the hundreds of millions of dollars it paid Goldman to secure its position in the single currency. The development came as Greece edged towards a last-minute deal with its creditors which will keep it from crashing out of the single currency.
Goldman Sachs is said to have made as much as $500m from the transactions known as “swaps”. It denies that figure but declines to say what the correct one is. The banker who stitched it together, Oxford-educated Antigone Loudiadis, was reportedly paid up to $12m in the year of the deal. Now Jaber George Jabbour, who formerly designed swaps at Goldman, has told the Greek government in a formal letter that it could “right historical wrongs as part of [its] plan to reduce Greece’s debt”. Mr Jabbour successfully assisted Portugal in renegotiating complex trades naively done with London banks during the financial crisis. His work helped trigger a parliamentary inquiry and cost many senior officials and politicians their jobs. It also triggered major compensation payments by banks to the Portuguese taxpayer.
Mr Jabbour, who now runs Ethos Capital Advisors, has also helped expose other cases including allegations against Goldman Sachs and Société Générale over their dealings with Libya relating to financial transactions that left the country’s taxpayers billions of dollars out of pocket. Both banks deny wrongdoing. Based on publicly available information, he believes the size of the profit Goldman made on the transactions was unreasonable. Scrutiny and analysis of the documents and email exchanges could give Greece grounds to seek compensation and assess if the deals were executed for the sole purpose of concealing the country’s debts.
The Obama administration is caught in a trap as it tries to bring home a trade deal with its Pacific Rim partners. Some of the chief beneficiaries may be big drug companies like Novartis, Roche Holding, and Pfizer while the losers could be consumers in both the U.S. and the region. The administration says it’s bound by congressionally imposed instructions to try to get as much current U.S. law as possible into trade accords – including stringent protections for patented drugs that it’s repeatedly tried to ease at home to encourage more cost-saving generics. The disconnect has put U.S. negotiators in the position of pushing provisions in the 12-nation Trans-Pacific Partnership that would preclude the administration from making further attempts to win the legal changes.
It also has negotiators pressing the region’s developing countries to sign onto a schedule for adopting the stronger rules, reversing previous exemptions to allow them easier access to cheap medicines. Even though U.S. Trade Representative Michael Froman says the talks are “in a closing mode,” American proposals for tough intellectual-property protections for drugs are meeting resistance from Australia, New Zealand, Canada and other Pacific Rim nations. Chile’s foreign minister, for one, has said flatly that his country won’t accept some key provisions. At stake: hundreds of billions of dollars or more in extra costs that consumers may have to pay if the proposals make it harder for cheaper generics to win approval.
That, or the loss of protections sought by the U.S. for movies, music and software as well as drugs if no agreement is reached on the deal’s intellectual-property provisions. “The USTR’s drug proposals are an astonishing effort to require other countries to adopt policies that aren’t in their best interests and lock in policies here that the Obama administration doesn’t support,” said Frederick Abbott, a Florida State University law professor and veteran consultant to the World Health Organization and the United Nations on health and trade issues. Negotiators returned to bargaining this week to try to wrap up the most ambitious trade deal in at least a generation covering about 40% of global output. In the U.S., any final accord must be submitted to Congress for an up-or-down vote with no amendments allowed.
U.S. negotiators want to win makers of advanced drugs 12 years of exclusivity for data that might otherwise help competitors produce similar, cheaper versions. The administration has repeatedly sought to cut that period to seven years in domestic law. Negotiators are also seeking language to make it easier for the big drugmakers to win “secondary” patents to strengthen their control over products. The administration has proposed changing U.S. law to make it harder to get such add-ons.
The first picture has emerged of Chinese buying patterns in Auckland’s pressure-cooker housing market — and it suggests a powerful, big-spending influence. Real-estate figures leaked to the Labour Party, which cover almost 4,000 house sales by one unidentified firm from February to April, indicate that people of Chinese descent accounted for 39.5% of the transactions in the city in that period. Yet Census 2013 data shows ethnic Chinese who are New Zealand residents or citizens account for just 9% of Auckland’s population. The percentage of Chinese buyers in the sales figures rises with the price of houses, peaking at just over 50% for those that sell for more than $1 million.
A similar trend appears in a frequency comparison of buyers’ names — Chinese names make up about eight out of the 20 most common ones among Auckland residents but fill 19 of the top 20 places for house buyers. It is not known if the Chinese buyers were based here or overseas. Labour housing spokesman Phil Twyford claimed the data, which represents 45% of all Auckland sales over the three months, showed for the first time the scale of an issue that was pricing first-home buyers out of the market. “It’s staggering evidence that strongly suggests there’s a significant offshore Chinese presence in the Auckland real estate market. It could not possibly be all Chinese New Zealanders buying; that’s implausible.”
It seems everyone in Auckland has a story to tell about Chinese buyers wanting their house. One elderly Takapuna man was startled to hear a Chinese syndicate was interested in buying his well-established family home. His place wasn’t even on the market when a real estate agent door-knocked the 82-year-old last month, said a relative. “A Chinese syndicate was wanting to buy a series of sections to build a block of apartments. The hard-sell was on apparently, but thankfully he resisted the temptation.” A few suburbs away in Birkenhead, another real estate agent cold-called, leaving his card in the front door of a huge, stately white house, also not on the market.
“It was the smiley face (on the card) which made me call him,” confessed the owner, who had just finished extensive renovations on his three-level wooden villa. “He said ‘we’ve got Chinese buyers’. So we’ve got a CV of $1.9 million but I asked for $3 million. I haven’t heard back.” It’s not surprising the owner deliberately pushed the price up. The willingness of overseas-based Chinese buyers to pay above the odds has become the stuff of Auckland legend – a perception enthusiastically fuelled by many agents. “Our Chinese buyers helped us [at] Harcourts Flat Bush push the house price even higher in East Auckland yesterday and set a new record high price,” agent Tom Chen wrote to his clients in June about an auction, which he said was “again, dominated by Chinese buyers” with “a much higher budget”.
Chen told the Weekend Herald he meant Chinese people who live here, not foreigners, but the evidence suggests most of the big money is coming from overseas. Local agents aggressively market Auckland houses throughout Asia to Chinese buyers, who can borrow money at much lower interest rates. In April, an ad on a Singaporean radio station promoted Auckland as “an investor’s dream”, with no land tax, stamp duty or capital gains tax. In 2013 a Chinese TV producer offered local sellers commercial spots in Asian markets “to get the attention of the majority of the affluent Chinese community”.
The trend has even alarmed some real estate agents – Barfoot and Thompson’s Ian Thornhill raised concerns in 2013 when a Chinese investor with “surplus funds” bought an Epsom house, reportedly for more than $2 million, and then left it empty. “I don’t think it’s a good thing at all,” he told the Herald. “Kiwis are getting really upset. They can’t compete with Asians who have the money and they pay more … It’s as plain as the nose on your face, what’s happening in the auction rooms each week.”