July 14th update
A unanimous agreement has been reached over the Greece crisis in Brussels. Not only were the tax increases, greater VAT coverage and pension reforms in the list but a 50 billion euro fund of public assets to be held in Greece as collateral – and ready for privatisation – was added in the last day of negotiations. Perhaps the only concession PM Tsipras won was that there had been for a call to hold the new fund’s assets in Luxembourg and not Greece.
The debt has been restructured but not forgiven so the Debt to GDP ratio is 177% which is far too high ever to be paid back. The problem has not gone away forever, but the euro seems safe for now. The Greece parliament must pass the bill by Wednesday night and some of the reforms must actually start this week. With the opposition likely to vote unanimously for reform again, the Syriza party only needs a handful of votes from its side to get the reform package across the line. There is a timeline that has been set for the euro zone to navigate over the next few months.
ATM withdrawals have been limited to 50 euros (from 60) in most places owing to a lack of smaller bills held in banks! The emergency (ELA) funding of banks looks set to maintain the status quo while the details are worked out this week.
It looks like the future negotiations and payments are a done deal. As a result, world markets surged overnight and our SPI futures index was up 99 points when Wall Street closed this morning. Compare that to yesterday when our market fell 40 points at the open only to then surge 90 points during the day and then to fall 70 points to finish down ???18 points on the day! That’s called intra-day volatility caused by rumours and news snippets – otherwise known as fear.
Since Greece secured ‘the worst deal possible’ there will be social and political turmoil in Greece for a long time but the third bail-out is all but secured. Greece has been ring-fenced.
It has been argued that some of the tensions in these negotiation date back to the Treaty of Versailles in 1919. Germany was forced to agree to reparations for private damage to all the European countries it invaded during the First World War. The current value of that impost would now be well over $US400 billion in today’s prices. The renowned economist John Maynard Keynes said at the time the burden was far too great. Hyperinflation and economic woes ensued for nearly two decades.
What’s happening in China?
The Shanghai Composite gained another +2.4% on Monday making the three-day rally over +13%. This rally continued despite the proportion of companies being held in a trading halt being reduced from over 50% to 36%. Nevertheless, this is a manipulated market and not a measure of China’s economy. China’s trade data released yesterday beat market expectations. Reuters reported that an official China newspaper printed a +6.8% GDP growth estimate which is pretty much a leak for tomorrow’s release. That’s close enough to the 7% target and the China economy is expected to pick up in the second half of the year.
On a separate note – the Financial Times reported that Saudi Arabia just raised $4billion on the bond market because of the slump in oil prices. Don’t times change?
In conclusion, we did experience some market volatility as we expected over these last three weeks but no long-run damage has been done to our market or economy.
Since the crisis now seems to be over, we will probably suspend these daily updates – until the next crisis! I hope you have found them helpful in dealing with the fears that some of you might have been experiencing.
Ron Bewley PhD, FASSA
Woodhall Investment Research