Bull and bear: Quelle surprise! Another Greek bail-out looks inevitable - The Share Centre Blog

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Michael Baxter

Bull and bear: Quelle surprise! Another Greek bail-out looks inevitable

Written by: Michael Baxter on August 21st 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Quelle surprise! Another Greek bail-out looks inevitable. Germany scores over Eurozone debt crisis. Investment bankers’ tax and over work. Mexico sees Q2 disappointment

Quelle surprise! Another Greek bail-out looks inevitable

If you were one of those people who believed every word spouted by the great and the good within the Eurozone; those who insist that the region is on the slow road to recovery, and all it needs is time, then you may be feeling surprised. If you are not, and this morning you feel a new sense of alarm  … well… Bear is surprised that you are surprised.

You may recall that in the bottom left hand corner of Europe there is a country called Greece, and not so long ago Greece had terrible problems. The solution we were told was austerity. Its government needed to make cut-backs. Its people needed to start paying their taxes. And that’s it. Do that and Greece would be back on the road to prosperity in less time it takes to read ‘The Last Days of Socrates’ by Plato. (It is not a long book.)

So there you have it. Relax; all is well in most of Europe. All will soon be well in Greece.

Hold on just a second, what is this? News just in: Wolfgang Schaeuble, Germany’s finance minister, has admitted Greece will need another bail-out.

He was on the campaign trail – the German election is but weeks away – and he admitted to it. But then again he said relax, there will be no more hair cuts for Greece. Some might recall thoughts of Sweeney Todd. He only needed to cut your hair once.

While on the subject of the Eurozone and its debt, Capital Economics has been doing some number crunching, and reckons that in order for Greek public debt to fall to less than 90 per cent of GDP within 20 years, growth needs to average 5.4 per cent a year.

For Portugal, Ireland, Spain and Italy, it depends. If each country sees its primary balance at the expected 2013 level, then growth for each country over the next 20 years will need to be 6.0 per cent, 7.5 per cent, 3.0 per cent and 6.5 per cent respectively. If each country can achieve a primary budget in balance, then required growth per year over the 20 years will be 4.7 per cent, 4.1 per cent, 3.0 per cent and 2.3 per cent.

If those growth rates cannot be achieved, then somehow each country will have to make even more drastic cuts.

Do you think those growth rates are likely? In each and every case, the only way the PIIGS are likely to get debt down to less than 90 per cent of GDP is if they receive a big reduction in debt via a write-down – or a hair cut in other words – while at the same time receiving investment. A cheaper currency might help too.

Listen very carefully. Did you hear anything? One thing is for sure, you did not hear the sound of a penny dropping. The great and the good within the Eurozone don’t seem to be close to grasping this.

PS:          Right now the focus is on emerging markets. How will they cope if rates rise in the US? The answer is that in some cases they won’t cope well; in other cases the market venom is overdone. But what about the Eurozone? How will Greece et al manage if rates rise, and bond yields rise. For that matter how will Holland, with crashing house prices and massive levels of household debt, cope?

Maybe we can take solace in the fact that Mario Draghi has promised to do whatever it takes. To achieve his aim and do whatever it takes to save the euro, all he needs is pair of scissors, so he can get snipping away at debt.

Germany scores over Eurozone debt crisis

There are certain facts in life. Germany will win penalty shoots outs. Or as Gary Lineker once put it in describing football: “Twenty-two men chase a ball for 90 minutes and at the end, the Germans always win.” After that humiliating thrashing administered by Brazil over Spain in the summer and Bayern’s Munich’s trashing of Barcelona in the Champions League, it looks as if Germany provides Europe’s only real hope of winning the next World Cup. As far as Europe and football are concerned, it appears Linkeker is right: Germany always wins.

But would that principle, let’s call it Lineker’s Rule, apply to the economy too?

German Social Democrat Joachim Poss posed a question, and now Germany’s finance ministry has answered it. It turns out that Germany has done rather well, and indeed is still doing rather well, out of the finance crisis. According to figures produced by the finance ministry in response to the Poss question, between 2010 and 2014 the German government is expected to save 40.9 billion euros via cheaper interest rates – thanks to the Eurozone crisis.

It’s all down to our old friend money. It has to go somewhere. Investors don’t want to put it in Greece – not without a massive return – and so they don’t, but they are more than happy to put it in Germany even at a very low return. Remember that at times the yield on some German bunds was negative.

So where does that 40.9 billion euros number come from? It is the difference between actual and budgeted interest payments.

Now it might sound like sour gripes to ask Germany, in the interests of making football more interesting, to share some of its players across other European countries, but sharing the proceeds of low interest rates, perhaps by using its credit standing to get rates lower in other countries does not seem quite so unreasonable – or does it?


Investment bankers’ tax and over work

Investment banking is not well thought of these days. Imagine the scene. You are at a party and someone asks you: what do you do for a living? You reply: ”I am an investment banker,” and all goes quiet. A chill wind blows across the room. Icy stares meet your gaze.

But now a truly tragic case forces us to reconsider this view. Moritz Erhardt was on week six of his seven week internship at Merrill Lynch, he had completed three all-nighters on the trot – reports say he had worked until 6am for three nights in a row – when he collapsed at home and tragically died.

All of a sudden investment bankers seem like victims. And they are indeed victims, a point that has been overlooked for too long.

None of us are rational. We are driven by motivations that come from the subconscious. We have all done or said things which we later thought were stupid.

But when ambition, high rewards, and impossible deadlines imposed by bosses – who themselves are set impossible targets – combine, the result is a very dangerous cocktail.

The ‘Independent’ headlined: ‘Slavery in the City’. That may seem like an over the top comment. Investment bankers, unlike true slaves, can of course quit. But in a way it is right. We are slaves to our own irrational drivers.

But given the work practises that the tragic death of Mr Erhardt has highlighted, we have to question how desirable it is for investment banking to be conducted under such high pressure stakes. No wonder the City has made such disastrous moves in recent years. No wonder its outlook is so short-term.

And this surely strengthens the case for regulation. Not just regulation to protect us all from the excesses of finance, but to protect investment bankers themselves, including to protect them from themselves.

Mexico sees Q2 disappointment

We all know that Brazil has problems, but Mexico is different. As the whole re-shoring thing gains momentum two of the big beneficiaries are likely to be Mexico in Latin America and Poland in Europe.

Mexico GDP in Q2 of this year rose by just 1.5 per cent on a year ago. That was worse than expected.

It was also better than Q1, but…

Data for Q1 was revised downwards, and Q2 was boosted by one-offs – for one thing it has two more working days than in the same quarter in 2012. Capital Economics calculates that after deducting seasonal factors, the economy actually contracted 0.7 per cent quarter on quarter.

Bull:       But if and when the US economy recovery accelerates, Mexico is set to see a sharp boost in growth. Mexican inflation is falling – down from 4.1 per cent in June to 3.5 per cent in July, and the government has reforms in the pipeline.

Capital Economics is forecasting growth of 4 per cent next year and 4.5 per cent in 2015.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Germany bund yields and euro crisis, greek haircut, investment banks overworked, Mexico GDP

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