This is what it’s like when a country loses control of its own affairs and has to dance to the tune of the bond market.
Today, March 3, Greek Prime Minister George Papandreou announced another $6.6 billion in budget cuts. The new round of reductions is meant, first, to convince skeptical European Union leaders that Greece is serious about reducing a budget deficit that had climbed to 12.7% of GDP (gross domestic product.) Leaders such as Germany’s Angela Merkel, scheduled to meet with Papandreou on March 5, have refused to offer Greece any concrete aid or guarantees without further action.
But the real audience here is the bond market. Greece has to roll over about $25 billion in bonds in April and May. The bond market could force Greece to pay a ruinous interest rate to refinance that debt or, worse yet, simply refuse to bid at all. The latter would bring the country one step closer to default.
But Greece—or more accurately the average Greek citizen—is going to pay a hefty price to convince the bond market to pony up.
The package sent to the Greek parliament today, and which includes measures to implement both the first and second round of budget measures would:
- Raise the country’s main value-added tax to 21% from the current 19%.
- Increase taxes on fuel, alcohol, and tobacco for the second time this year.
- Reduce spending on education by 5%.
- Freeze pensions for state employees
- Cut the special payouts that Greek workers now receive for Christmas (a month of wages), Easter (one-half of a month) and summer (one-half of a month) by 30%.
- Reduce benefit payments public workers get for seniority or an advanced degree by 12%.
Parliament is expected to vote on the package on March 5. That would meet the March 16 deadline for a review of the country’s deficit reduction plan by the European Union.
As you might imagine, the package isn’t exactly popular with Greek public or private sector workers who feel that they’re being made the scapegoats for a corruption-ridden system that funneled wealth to the politically connected during the boom years. Add in a big measure of resentment toward Germany. Cheap money, the argument goes, enabled Greek consumers to buy German exports—that it turned out they couldn’t afford—and now a Germany that prospered from that export boom is demanding payment in full from a struggling Greek economy.
The major public workers union is planning a protest tomorrow March 4, and has announced a 24-hour general strike (the third of the year) for March 16.
They might have even more to protest by that date. It’s not clear to me that even these cuts will be enough to make the bond market happy. The IMF (International Monetary Fund), for example, has responded to the Greek austerity program with an attitude I’d sum up as “Good start. What else ya got?”
The bond market will tell Greece how it really feels in the next few days. The country is looking to float an offering of about $6.5 billion to $7 billion in the next few days. It’s hoping for an interest rate between 5.5% and 6%. If bond investors demand something close to 7%, you’ll know they’re sending Greece back to the woodshed. And Greeks should prepare for more pain.
Makes me really want to live in a country where the bond markets run the show.
(Unless, that is, I already do.)
Declare bankruptcy Greece! Do it. Don’t give in. Give ’em the finger and start fresh.
“Cheap money, the argument goes, enabled Greek consumers to buy German exports—that it turned out they couldn’t afford—and now a Germany that prospered from that export boom is demanding payment in full from a struggling Greek economy.”
This is basically my explanation for Ford, GM, and Chrysler (plus the loss of focus on the customer). Cheap money made cars appear affordable, so GM et al. built, built, built factories in a race against each other for market share. Then, the Fed jacked up interest rates at breathtaking speed, choked off the economy, and left the auto industry with more capacity than they could ever need.
Cheap money hurts everyone.
Indeed, EdMcGon. What is happening in Greece will happen anywhere, U.S. included, Bernanke be damned. Risk will always be priced appropriately by the market…and risk abounds today. If EU regulators try to end run the market by controlling CDSs on sovereign debt, they will simply confirm the markets suspicions.
georic,
Sorry if I take the Goldman side in the Greek mess, but…Greece made it’s bed. If Greece had been more prudent with it’s budget, they wouldn’t have had to make deals with the Goldman devil.
When I hear about the sweetheart deals the Greek workers have, it is REALLY hard to feel sorry for them. They broke their own country with their absurd demands. The fact they elected politicians who gave into their demands, then turned around and sold the country’s soul to Goldman, leaves me with a sense of gratification, that there is justice when you try to rob your own country’s treasury.
Yet I doubt anyone in the U.S. will learn the lesson, that there is always a price to pay for “free” government handouts…
francolargo,
Since you mentioned BX, there’s a nice synopsis of it at the New York Times:
http://dealbook.blogs.nytimes.com/2010/03/03/at-blackstone-a-rebound-and-more-transparency/
From what I see, BX is an intriguing growth play in this market. It looks like it has set itself up nicely to be profitable at a time when many companies won’t be.
I’ll be dipping my toe into it today. Thanks for the tip!
As is no longer disputed, Goldman Sachs helped build the Greek scam. As a compensation, GS should be made to pay the extra 3%, compared to Germany, the Greeks will have to pay for their bonds. As a side benefit, it would make the amount of money available for bonuses more manageable.
BHP/VALE/FSUMF
Iron Ore Contract Prices to Rise 70%, Nomura Says (Update2)
“http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=FSUMF%3AUS&sid=aXHqjb_KTLT8”
Australia miners gain on iron-ore price
Australia miners gain on iron-ore price outlook
A11:37 PM ET 3/3/10 | Marketwatch
HONG KONG (MarketWatch) — The outlook for Australian mining majors Rio Tinto Ltd. and BHP Billiton Ltd., along with those of other iron-ore producers, has brightened with predictions that ore prices are set for a major increase.
Shares of Rio Tinto and BHP provided support to the Sydney market Thursday after a Chinese newspaper reported the two mining giants, along with Brazilian peer Vale SA (VALE), were demanding a 50% increase in long-term contract iron-ore prices for this year.
The negotiations are expected to be crucial for the miners as well as for the Chinese steel industry, as talks between the groups failed to reach an agreement last year after the China’s steel association demanded a higher discount over 2008 iron-ore prices than those already agreed to by South Korean and Japanese companies.
The failed talks forced Chinese steel mills to either meet most of their iron-ore needs through the spot market last year, or sign individual contracts to buy iron ore at a higher price.
Analysts are similarly forecasting a positive outlook for iron-ore prices this year after strong demand conditions boosted prices over the last several months, with some saying the miners have an edge in the price negotiations.
Morgan Stanley analysts led by Craig Campbell wrote in a report this week that they expect a 60% jump in the iron-ore benchmark price index this year, with spot prices of the mineral averaging $127 a ton.
“We are assuming BHP Billiton [will] roll most of its Chinese customers onto index-linked prices. We understand [BHP] is likely to revoke contracts that have expired due to Chinese steel mills failing to sign new prices in 2009 by the drop-dead date embedded in supply contracts,” the brokerage said.
The analysts said BHP is leading a change in the way bulk commodities are priced, by “moving away from the annual benchmark price system to … a spot market that daily sets a clearing price.”
They said that spot and iron ore index-linked prices are also more suited to the Chinese customers.
Shares of Chinese steel mills have vastly underperformed the benchmark Shanghai Composite index so far this year. In contrast, Australian miners have marginally outperformed the benchmark Sydney index.
In Thursday’s trading, shares of Rio Tinto (RTP) climbed 0.5% and BHP Billiton (BHP) added 1.1%, while Fortescue Metals Group Ltd. (FSUMF) rose 1.2% in Sydney afternoon trading, while the benchmark S&P/ASX 200 was flat at 4,735.70.
The China Daily also reported that Hebei Iron & Steel Group is calling for a a national iron ore company be formed to centralize imports and improve bargaining power.
But Dow Jones Newswires reported Wednesday that the former chairwoman of Baosteel Group Corp. had sharply criticized the proposal as creating a monopoly and violating trade rules.
In Shanghai trading Thursday, shares of Baoshan Iron & Steel Co. slipped 0.2% and Maanshan Iron & Steel Co. (MAANF) dropped 1.4%.
Angang Steel Co. (ANGGY) dropped 1.9% in Shenzhen.
In broader markets, the Shanghai Composite gave up 1% to 3,064.76, Hong Kong’s Hang Seng Index fell 0.5%, Japan’s Nikkei 225 lost 0.3% and India’s Sensex slid 0.1% to 16,988.45.
An interesting interview with a FED Reserve guy on NBR last night. He said that the Greeks would have to pay their debts in EURO, and physical austerity would be their future, also that they would not be allowed to monitize.
He also said any other nations who have overborrowed from the bankers ( USA ) will be in a low inflation enviroment into the future , and that when our time came to pay the banks, it would be in hard currancy, and we will not monitize either.
He said the future of the US economy was that the money they put into the system to bail out the banks will not be allowed to enter the us economy, ( that will hold down employment rates, and inflation ) so we will see high unemployment, with low inflation, and we will be paying the debt back.
special payouts for government workers… geez the nerve. I mean what do they think they are Wall Street types who are paid millions to ruin an economy? Or do they think they are some CEO that gets an obscene paycheck because…
On second thought, just forget I mentioned it.
I had the same thoughts as Southof8. Those special payouts are indeed very special and unique! They need to come down even more than whats in the current proposal.A price has to be paid for such a cavalier spending attitude.
Jim,
Joy Global reported today. any insights on that?
Saw this interesting post on the journal comparing the different strategies employed by Bucyrus and Joy
http://online.wsj.com/article/SB10001424052748704548604575097441277025832.html?mod=googlenews_wsj
Oh, and marr.bo…
If you like dividends you might take a look at Blackstone Group (BX), which has been paying $1.20/share annually and has been range-bound around $13.50/share. The venture capital business model is a little scary, but now that I understand it better I think BX is also a decent value play.
Frank in Mpls.
marr.bo,
You are talking about stock options, which are available from most online brokerages. Speaking as a person who is in the process of learning about them, they are inappropriate for most of Jim’s audience of readers. In other words, risky beyond the imagination of average ‘buy-low, sell-high’ investors. This risk is basically due to the imposition of expiration dates on the contracts. You can’t just guestimate that stock ABC will go up or down or will change in volatility. You have to have a good idea *when* it will change. I have mentioned options trades here but I never invest funds that I can’t afford to loose. …and that’s loose 100% like a ticket on a race horse. I do a little handicapping in a special little ‘gambling account’, and enjoy the action. I’ve even hit a few nice winners. But I could never tolerate that kind of risk in my retirement portfolio. It’s a different league – with completely different exchanges and additional headaches. Caution! I just wanted to make that clear.
At the moment I’m long NUE and also long MT (yeah, risk!) for maybe another day or week. For MT, let’s hope the Greek bonds find buyers.
Interesting article:
‘Why Rescuing Greece Will Change Europe for Decades’:
http://www.piie.com/realtime/?p=1367
WOW! Greek worker’s get two month’s extra wages to kick it at the beach? Private workers put up with that?
Why doesn’t the country just call a spade a spade- their wages are 1/6 higher than as advertised.
In the US, the unions, retired military and millions of others drawing a pension from Uncle Sugar would bitch that their wages and benefits are collectively bargained for and can’t be cut; based on what has taken place in San Diego, they’d win (Roger Lowenstein’s book on GM and SD pension fiascos is great reading). So that avenue is closed to Uncle Sugar. Uncle sugar would just (will just) turn on the presses and print more money. Greek gov workers are probably thinking that’s a pretty good option right about now.
Who gets to decide when to print more Euros? Is every CM country at the mercy of the ECB? No wonder the Brits wouldn’t join- they saw their future, and it is paved with paper. And they don’t have nearly the percentage of workers on the federal payroll that Greece has (I’ve read its upwards of 50% of the work force).
Great article. I’m wondering about these alternate investment strategies. Buying bonds at 7% seems like a great deal, I’d love to have a fixed return of 7%. How do I buy these types of high interest greek bonds, and what is the risk?
I also wonder about negative-sentiment type investments. I’ve heard of “puts” where you buy the option to sell stock at a certain price (much less than the current price) by a certain date. So you can make a lot of money if for example, you buy Bear Stearns “puts” in February of 2008.
How do we buy these and what other types of negative-sentiment investments are there?