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Last minute offer fails and Greece misses payment to the IMF; sees bailout program end

posted on June 30, 2015 at 6:45 pm

Well, that didn’t work.

The last minute request by the Greek government for a delay in the 1.6 billion euro payment due to the International Monetary Fund today, for billions in debt relief, and for a new two-year bailout program went no where today. And Greece missed the deadline for repaying 1.6 billion euros to the International Monetary Fund. With the end of the day Greece’s existing bailout program expired.

Today’s last minute offer didn’t get any takers.

It was certainly an odd negotiating position.

It’s roughly equivalent to walking into a bank, pointing a loaded gun at your own head, and demanding “Give me all your cash or I’ll shoot.” The hope, a slim one, is that the bank will decide to hand over the money rather than watch you kill yourself.

In its last minute offer the Greek government asked for 30 billion euros in new funding under a new two-year bailout program, restructuring of the country’s debt, and an extension of the current bailout so that Greece wouldn’t miss payments due to the International Monetary Fund and the European Central Bank. The Greek proposal cites Articles 12 and 16 of the treaty that set up the European Stability Mechanism to deal with a financial crisis just like this one. But Article 16 also requires that any new bailout program must include a new memorandum of understanding. It’s exactly that kind of document that Greece and the EuroZone haven’t been able to negotiate in the recently ended talks.

What is the government of Greek Prime Minister Alexis Tsipras thinking

I can see two possibilities

First, it’s possible that Tsipras still believes that Germany, France, and the other EuroZone members are so afraid of Greece leaving the euro that they’ll give in. That would seem to be a misread of Germany’s Angela Merkel and the International Monetary Fund’s Christine Lagarde—and pretty much every other European leader or European Union official, and I don’t think Tsipras is that dense. (Merkel said today, for example, that there will be no negotiations before the referendum vote.

Second, it could be yet another cynical political ploy designed to manipulate the vote in the July 5 referendum. (Just to be clear the Greek government isn’t the only one playing cynical politics in order to appeal to Greek voters.) If, as is likely, Greece’s creditors turn down this last-minute offer, that would give the Tsipras government more evidence that its creditors are to blame for the breakdown of negotiations. And that might, the thinking could go, buttress the No vote on Sunday

So at the end of the day Greece missed its IMF payment. Tomorrow we move to a new stage in the end game to this crisis when the European Central Bank will decide what to do about supporting Greek banks.

European markets closed down but not with anything resembling yesterday’s plunge. The German DAX Index closed lower by 1.25% and the French CAC was down 1.13%. Spain’s IBEX 35 ended lower by 0.78% and Italy’s Milan market was off 0.48% at the close.

Shanghai enters a bear and that’s not good for global markets looking for an end to Greek-debt crisis plunge

posted on June 30, 2015 at 12:00 am
stocks down 2

Anyone looking to see whether financial markets are done tumbling as a result of the chaos in Greece and the possibility that the country will fall out of the euro after the July 5 referendum isn’t getting any solace from early trading today in China.

As of 10:40 Tuesday morning in Shanghai, the Shanghai Composite Index was down another 4.68%, falling to 3863 from Monday’s close at 4053. That was itself down from Friday’s close at 4193.

The Shanghai market, which had been flirting with a bear market, has now joined the Shenzhen and ChiNext markets in full bear mode. The index is now down 25.2% from its June 12 high.

What we’re seeing in China’s mainland markets is a wave of selling by traders who have bought stocks on margin.

Some of that selling is being driven by domestic forces—efforts by regulators to reduce shadow margin lending and fears by Chinese traders that the government isn’t going to support the market to the degree assumed just a few weeks ago.

But some of the selling is a reaction to global trends that say the financial markets are a riskier place than they seemed just a few weeks ago. Trends here include a sudden end to complacency over an eventual deal in the Greek debt crisis and a worry that, with a potential exit from the euro by Greece, we’ve entered uncharted territory. From this perspective, the continued plunge in mainland markets is of a piece with cash flows into the yen by traders looking for a safe haven and the drop in stock markets in Spain and Italy that accelerated at the end of Monday trading in Europe.

It’s always possible that European markets will bounce when they open on Tuesday, but I find it hard to see how any bounce could hold given the degree of uncertainty introduced into the financial markets there over the last few days. At the moment (11:15 p.m. Monday night in New York) it looks like Greece will miss the 1.6 billion euro payment to the International Monetary Fund due on June 30. (Which, technically, wouldn’t count as a default since a default needs to involve a private creditor instead of an agency such as the IMF.) Speculation will then turn to the European Central Bank decision on Wednesday about whether or not to continue the current emergency liquidity assistance program for Greek banks. On Monday the central bank refused a request from the Greek government for an addition 6 billion euros in assistance to Greek banks, but the ECB did keep the current credit line in effect. The read right now is that the central bank will keep that credit line intact on Wednesday because the alternative would be sending the Greek banking system into insolvency.

But unfortunately for the nerves of traders and investors that’s only a consensus market view and not a guarantee.

In the Greek debt crisis it’s now all about the July 5 referendum

posted on June 29, 2015 at 11:56 pm

It’s now all up to the July 5 referendum but, as you might expect, the Greek government and its creditors don’t agree on what a No or Yes vote would mean.

Greek Prime Minister Alexis Tsipras is urging a No vote in the country’s July 5 referendum. A vote against accepting the latest terms on offer from the country’s creditors doesn’t mean that Greek would have to leave the EuroZone or the euro, he argues. A No vote would lead to the resumption of negotiations, the Prime Minister insists, with Greek negotiators speaking from a position of greater strength after Greek voters rejected the deal offered by creditors.

A No vote, the other 18 members of the EuroZone are warning, would mean a Greek exit from the euro. Germany’s leaders including Angela Merkel have been adamant today in casting the referendum as a Yes or No vote for either the euro or the return of the drachma.

A Yes vote, EuroZone leaders insisted today, is a pre-requisite for any resumption of negotiations.

Prime Minister Tsipras has said repeatedly before today that his government would respect a Yes vote and would implement any program required after that vote. But strongly voiced skepticism that creditors would believe anything promised by a Syriza led government has led to hints from Tsipras that he would resign after a Yes vote in favor of a new government of technicians to carry out an agreement.

The markets in Europe and elsewhere didn’t start the day in a positive mood but sentiment darkened as the trading day closed in Europe. The German DAX Index, for example, was down 2.66% near noon in New York but finished the day off 3.56%. The biggest equity retreat came in Italy—down 5.17% for the day in Milan—and Spin—where the IBEX 35 closed lower by 4.56%.

Markets around the world were unnerved by events in Greece—China’s Shenzhen Composite Index fell 5.78%–but it looks like the worry ended the day focused on what a Greek meltdown would mean for countries such as Italy and Spain that face their combination of large debt loads and sluggish growth.

Weak dollar AND weak yen–how long do these trends run?

posted on September 19, 2013 at 7:46 pm

The Federal Reserve’s decision not to begin tapering off its monthly $85 billion in purchases of Treasuries and mortgage-backed securities sent the dollar even lower against most global currencies. Today, September 19, the Dollar Index fell to a seven-month low. The dollar fell against the currencies of most U.S. trading partners—except Japan. And it looks like the dollar will stay under pressure for at least the next few sessions.

The big question is how long this trend lasts. If you think it will run for a while, then you want to join in on the rally in emerging market stocks that has accompanied the rally in emerging market currencies such as the rupee and real. If you think the run is getting a little over-extended—the euro is, after all at levels against the dollar that have marked resistance in the past BUT and it has recently broken above resistance at $1.345 to close today above $1.35—then this is a time to take some profits.

A lot will depend, in my opinion, on how big a scare Washington politics throws into global financial markets. I can’t imagine overseas investors rushing to move into dollars in the face of rhetoric threatening a government shutdown and a default on U.S. debt. I’d say current trends could hold for a couple of weeks yet, but I wouldn’t be rushing to add new positions that depend on dollar weakness right here

The one currency that is running against the weak dollar tide is the Japanese yen. The yen initially climbed on the Fed’s no taper decision—rising to 97.75 on the news—but then fell all the way back to 99 yen to the dollar and finished today at 99.42. (Remember that since the yen is quoted in yen to the dollar, a higher number is a sign of a weak yen and a smaller number means the yen is getting stronger.) The thinking seems to be that the recent Japanese trade deficit will push the Bank of Japan to further weaken the yen in order to boost Japanese exports. I continue to think that the yen will finish 2013 at weaker levels than current trading and that leads me to continue to hold positions in Japanese stocks such as Toyota Motor (TM) and Mitsubishi UFJ Financial Group (MTU). Both stocks are members of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of both Mitsubishi UFJ Financial and Toyota Motor as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/


German election Sunday could mark peak for euro

posted on September 19, 2013 at 7:07 pm

Yes, Virginia, there is potentially market-moving news from someplace other than Washington D.C.

German voters go to the polls on September 22.

If this were a U.S.-style Presidential election Chancellor Angela Merkel would win in a walk. Her personal approval rating stands at 65%. And her Christian Democratic Union party leads its biggest and nearest rival by 15 percentage points.

But this is a parliamentary election. And while Merkel will easily win reelection to her seat and while the CDU (plus its Bavarian sister party the Christian Social Union) is likely to take at least 40% of the vote, there’s a good chance that Merkel won’t win enough seats to form anything other than a coalition government. With the Free Democratic Party, a partner in Merkel’s current coalition government, looking unlikely to win the 5% of the national vote that’s required to gain any seats in the Bundestag, the shape of that coalition could get pretty strange with the most likely odd-bed follows being Merkel’s CDU and the opposition Social Democratic Party.

Whether that coalition—or any coalition–will be able muster the consensus needed to meet EuroZone challenges is likely to get a quick test too. Greece, despite progress toward producing a primary budget surplus (that is a budget surplus not counting interest on the national debt) looks like it’s going to need either a small bridge loan or a big bridge loan and debt reduction in late 2013 or early 2014. Portugal looms as an even bigger problem with the country needing to raise $15.8 billion euros ($21.4 billion.) It’s almost impossible for the country to raise that much in the bond markets meaning that Portugal will almost certainty need a second full bailout program at the end of 2013 or in early 2014.

Quite a set of challenges for a Chancellor who has run a campaign sort-of-promising, wink-wink that German taxpayers won’t have to pony up big money for more bailouts in 2013 or 2014 or 2015

And the bailouts aren’t the only challenge in the EuroZone that Merkel will face post-election and maybe not even the biggest. Read more

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