IMF on Greece: Needs haircut!

AN UPDATE OF IMF STAFF’S PRELIMINARY PUBLIC DEBT SUSTAINABILITY ANALYSIS "

"Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.  "
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"The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM. There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance.  Other options include explicit annual transfers to the Greek budget or deep upfront haircuts.  "

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"The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion. Adjusting our recent DSA mechanically for these changes, and taking into account the agreed weaker growth path for the next two years, gives rise to the following main revisions: a. Debt would peak at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt—at 177 percent of GDP in 2014—is already behind us. b. By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in our published DSA. c. Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term."

Source: IMF , July 14, 2015: GREECE AN UPDATE OF IMF STAFF’S PRELIMINARY PUBLIC DEBT SUSTAINABILITY ANALYSIS

Without any risk or responsibility

Why I would sell the euro rather than buy it...

"Too many leaders do not translate to leadership. Many spoke. None inspired confidence . "

• The European  leadership seems unable to understand the nature of the network of strategic issues facing the Union. They have too many leaders and a seemingly  unrealistic, coordinated strategy.The Germans seem to suggest that the Greeks have no distinctive or core competencies. They have virtually written off the Greek people as unable to exploit any competitive advantage. To be in the German  good books, Greece needs activities processes and skills that are rather difficult for competitors to imitate and therefore underpin competitive advantage.  That is  a difficult order in a country that has nearly 50 % of its youth unemployed.  European supervision will ensure harping on productive employment- which should aggravate rather than mitigate unemployment. ("Fiscal Consolidation"???)The terms of the Greek bailout are significantly tougher than pre- referendum a week ago. In addition to requirements on pensions and sales taxes,  creditor representatives now have full access to ministers and a veto over relevant legislation. So Greece now seems like a European colony. The Asset reconstruction Fund seems old wine in a new bottle. 

• Morgan Stanley says it fears that China might just tip the globe into another recession. The desperation in Chinese regulatory action: the iron handed arrest of a fall in the overheated stock market supports the fears of instability potential. Chinese capital flight might have already occurred. It will not go to Europe but might go to the dollar assets or Australian / Canadian property markets.

• Saudi Arabia is borrowing big time (First time since 2007).  It reportedly has a deficit of about $130bn this year. The  air war on Yemen is taking its toll.  Saudis may already have drawn down near just about 8 % of its forex reserves.  With Iran accord, almost there, oil will run through the streets of glut. 

Sell on the fact ; buy on the rumour. 

This blog is not intended as an Investment Advice. This academic work is without any risk or responsibility.

USA has a winning Strategy and no competitors....

"What is most important  is not what happens but what it means"...

Of late,  USA displays  rare political acumen; its foreign policy strategies are so sagacious and so quietly successful. It has tactically withdrawn from battle fronts in Asia. It has refused to be drawn back despite hidden and direct invitations. It has extended a hand of friendship to Cuba. It is mending fences with a broken Venezuela and its Lat Am neighbours.  It makes the right noises on Africa but does not overtly meddle any more. It lets Israel blast its policies in its Congress even as it delays signing a treaty with Iran. In Asia, while recognizing China as its  major trade partner, it is  laying out a network of potential allies  ranging from India to Japan in an attempt to contain Chinese growth ambitions. USA geo-political strategy manages contradictions so well. 

Much as the US   strategists might like (if not love) it, the middle east is split through  the centre in schism. The division between Saudi Arabia and Iran as respective leaders has vertically split the Middle East.  Heard disbeliefs are severe, unheard discontent elements are several. The post Feb -2011 events have disturbed the very fabric of the Arab society. Democracy  is seeking an agonizing birth.  The polity seems caught between 2 worlds, one refusing to die and the other not bold enough to be born.  Egypt is a classic example of dilapidated nations, fast sinking to be of the status of Jordan, a  dignified dependent on others. It is a self destructive path so often seen previously in Lebanon. As the USA withdraws tactfully in Afghanistan and Asia, there is a rush of power to fill in that vacuum. The power brokers will see destructive engagement.

Economically, Europe is split asunder between the haves and have-nots. Greece imbroglio  has shown off the lack of leadership skills in Germany, and the Germans are USA's economic major competitor at all times. Any peace brokered through the acceptance of Greek proposal would be ephemeral.  It would be a humiliated, restive and helpless Greece that accepts austerity. The mental perspective in an average Greek mind is that Greece has been pushed into a blind alley by Germany. That is not a perspective that would help the integration of / fusion of Europe.  The other peripheral countries have already indicated a resurgence of nationalism. Britain, which has more in cyclical patterns in common with USA and which sulks at Teutonic dominance, would wait to move away from a weakened Europe, with a tacit support from across Atlantic. Bid European Banks too seem to do negatively , thanks to its non adherence to norms of US regulators.

Any semblance of a victory for Germany would strengthen the euro and that should help USA exports.  ( "In particular, the higher foreign exchange value of the dollar that I mentioned, as well as weak growth in some foreign economies, has restrained the demand for U.S. exports." - Janet Yellen  at the City Club of Cleveland, Cleveland, Ohio, July 10, 2015 Recent Developments and the Outlook for the Economy")

Oil is in a situation of glut. So the inventory levels take USA  to a situation of  comfort zone. Even though it might speak  of falling investment in the petroleum sector, it has benefited the USA  customer and left him a wealth effect as real incomes go up. There will be consequential spending in USA which should buoy up the economy further. The wealth effect on the Gulf countries will reduce the accelerated growth of city states like Dubai. Football issues and labour issues have dogged the prosperous Qatar. USA just has to keep it all simmering. With Russians licking economic wounds, and economic bubble woes holding back China, USA  does not have to worry so much. It is far too ahead in the lead of economic strategy.

China, the Asian giant is in a state of limbo with its asset prices falling. The wealth effect of a $3 trillion loss incurring Chinese economy is stupendous. There is more to it than meets the eye in the Chinese policemen enquiring as to who all short sold. Chinese consumers will feel less prosperous after stock market wounds and refrain from buying. It will add to social disquiet too. Internationally, the image is  of a state intervening, fickle tock market in China. Chinese have also to encounter its unstructured capital market products which are patently over-leveraged.   

The Japanese are still recovering from the local  economic harakiri inducing inertia , nay stupor triggered by a recession older than decades. Neither monetary policy nor fiscal policy seems to revive confidence in a fatalistic society.

India , despite good leadership, is held back by a splintered polity. Reforms are delayed by a difficult opposition.  Thus the growth rate of 7.5 % looks great but the economy's moving further, like its infrastructure, is on slow and often pothole ridden roads.  If only its central bankers could talk less and concentrate on banking sector's  non performing and stressed assets, and only if there was more professionalism among its civil servants!

With commodity prices down, (from copper to coal to gold, it is a shortening scenario) and the tigers struggling, there is nowhere to turn to except the dollar assets. May be the Yen may hold some safe haven status being least problematic among competitors. The Swiss are on to negative interest!

Janet Yellen has  indicated that there is a fair  likelihood of a rate hike. The global markets have long factored this in. With the rate hike quarters pruned to probable last quarter, and with just data supported evidence of growth needed, there will be a bee line for US assets. The rest of the world will see a compensatory sell off as the institutional investors shift to USA. The cost burden of the rate hike will be factored in by US  corporations , which are among the most productive technologically.

USA has, it appears,  for its  strategy 'Carpe noctem': 'Seize the night'

Without any  risk or responsibility.