Archive for July, 2015

China stock market crash

July 27, 2015

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China’s stock market has suffered its sharpest fall since 2007.

The Wall Street Journal reports that the Shanghai Composite Index ended down 8.5% at 3725.56, its second-straight day of losses and worst daily percentage fall since February 27, 2007. China’s main index is up 6% from its recent low on July 8, but still off 28% from its high in June. The Shenzhen Composite fell 7% to 2160.09 and the small-cap ChiNext Closed 7.4% Lower at 2683.45.

This follows a three week rally in response to heavy government intervention which has seen a state-owned fund called China Securities Financial Corp. spending hundreds of billions of yuan in supporting the market and 21 brokerages pledging to support the Shanghai index.

The collapse follows the release of data showing that factory profits in the world’s second largest economy fell 0.3 per cent in June and China’s manufacturing activity for the month of July coming in at its lowest level in 15 months.

But the big worry is that the Chinese government intervention is simply unsustainable. It can’t keep doing it forever.

“Today’s rout in China poured cold water on investor sentiment,” Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc told Bloomberg. “This also revealed the market is still too fragile without government support.”

As reported here, Bridgewater Associates, the world’s biggest hedge fund manager and a long-term bull on the world’s second largest economy, has sent out a note warning that “our views about China have changed as a result of recent developments in the stock market.”

Bridgewater says that Chinese households – which account for about 80 per cent of trading volumes – will be hard-hit by the share market decline, particularly because many households piled into the market when it was at its peak.

Bridgewater also points to the psychological effect of the share market collapse. “Even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity”, it said.

“There are now no safe places to invest and the environment looks riskier, which we would expect to encourage the holding of cash and lessen the marginal effectiveness of easing monetary policy.”

And that could well create instability in China, something the world does not need.

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China recruits banks to prop up stock market

July 18, 2015

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In eye watering news, China’s biggest banks have lent 1.3 tn yuan  to stop the slide in Chinese shares. The money was lent to state-backed China Securities Finance (CSF), which then loans the money to investors for buying shares in a practice known as margin lending (ie they’re buying shares on debt).

This tells us how much the recent rebound in the country’s stock market was reliant on state intervention.

As Paul Krugman warns us, government attempts to stop stock market collapses are bound to fail.

“The general point is that if you believe that officials have the economy — any economy — under control, you’re setting yourself up for a big disappointment. And in particular, it’s invariably a very bad idea to assume that officials know things that outside economists don’t. When it comes to economic policy, everyone has pretty much the same information, and holding public office, whatever its other benefits, does not improve one’s analytical skills.”

But the Chinese government is doing it for a very good reason.

“I believe it’s more political risk. The top authorities are fretting that the sharp pullback could lead to social unrest,”  Zhang Yidong, chief strategist at  Industrial Securities told The Wall Street Journal.

Well-functioning equity markets are created by policies that strengthen the financial and economic architecture, not with those that meddle with prices. The Chinese government doesn’t have a clue.

The point is that by encouraging people to buy shares, by lending them money, the Chinese government is encouraging another market bubble even as the existing one deflates. And that will mean more stock market upheaval.

Tsipras faces rebellion

July 14, 2015

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Greek Prime Minister Alexis Tsipras faces two days of parliamentary argy-bargy in Athens to secure approval for a package of austerity measures that could tear his coalition apart. With the world looking on, Tsipras will have  to submit a bill to parliament on Tuesday containing sales-tax increases and pension cuts that go against his own Syriza party’s pledges.  Syriza lawmakers and members of the Independent Greeks, the junior coalition partner, have said they will rebel against the cuts. Panos Kammenos, leader of the junior partner in Tsipras’ coalition government, called the bailout plan a German-led “coup.”

Without the support from his own party and coalition partners, Tsipras will have to rely on opposition support to carry the legislation needed to keep Greece in the euro.

The Greeks are furious that the EU has let them down.

 In his first interview since resigning as finance minister, Yani Varoufakis took aim at Greece’s creditors and said the austerity will only help the far right, including the neo-Nazi Golden Dawn.

“This has nothing to do with economics,’’ Varoufakis said. “It has nothing to do with putting Greece on the way to recovery. This is a new Versailles Treaty that is haunting Europe again, and the prime minister knows it. He knows that he’s damned if he does and he’s damned if he doesn’t.

“In the coup d’état the choice of weapon used in order to bring down democracy then was the tanks. Well, this time it was the banks. The banks were used by foreign powers to take over the government.”

Meanwhile, Greek public servants will go on strike tomorrow in protest over the draconian bailout conditions.

Summing up, the deal needs to be passed by the hostile Greek parliament, and also supported through six other European national parliaments before they can even start talking about money. This is why Credit Suisse analyst Andrew Garthwaite says there’s a 30 per cent chance that Greece could still exit the Eurozone.

A deal for Greece – at what cost?

July 13, 2015

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And so the Eurozone leaders and the Greeks have hammered out a deal for a third Greek bailout at an all-night meeting.

Greek prime minister, Mr Tsipras, has bowed to pressure to pass tough reform laws, including on tax and pensions, by Wednesday and prepare further rapid reforms this month.

Tsipras finally accepted a compromise on German-led demands for the sequestration of Greek state assets to be sold off to pay down debt. The terms of the agreement were not immediately known.

The Greek leader also dropped resistance to a full role for the International Monetary Fund in a proposed 86 billion euro ($95.78 billion) bailout, which German Chancellor Angela Merkel has declared essential to win parliamentary backing in Berlin.

As the Financial Times put it, Germany had piled the pressure on Greece to implement bold reforms and accept a high level of external economic supervision in return for a rescue.

Luxembourg meanwhile warned Germany that pressing for a Grexit would bring “a profound conflict” with France and “catastrophe for Europe”. Jean Asselborn, foreign minister, told the Süddeutsche newspaper that it would be “fatal for Germany’s reputation in the EU and the world” if Berlin did not seize the chance offered by the Greek reform promises.

But the question is what impact will this have on Greece when more than 60 per cent of the population voted against austerity.

ekathimerini.com reports that Tsipras will struggle to convince his own Syriza party to accept the deal and Labor Minister Panos Skourletis has declared that the terms are unviable and would lead to new elections this year.

Bloomberg reports that the fury on the streets in Athens is palpable.

Nikos Filis, the parliamentary spokesman for the ruling Coalition of the Radical Left, or Syriza, told ANT1 TV Monday morning that Greece was being “waterboarded” by EU leaders

The reaction on social media has seen #ThisIsACoup” becoming the most-trending Twitter hashtag in both Greece and Germany.

Tsipras has shown himself to be a ruthless protagonist. I predict that he is set to sack ministers who do not support his negotiating position and he’ll make dissident lawmakers in his Syriza party resign their seats,

How Greece now threatens the future of the European Union

July 12, 2015

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Talks to save Greece have broken up without a resolution. Deep divisions in the Eurozone have raised questions about the future of the European Union  Europe is now bitterly divided over how or whether to rescue this Mediterranean nation from imminent financial collapse.

Finance ministers from the 19 nations of the euro zone failed to agree on a fresh lifeline for Greece, exposing the fault lines that have developed over extending the deeply troubled nation its third bailout in five years.

As the Financial Times notes,  France has supported the radical Greek government’s latest bid to secure a deal but Euro-hawks led by Germany has formed a chorus of sceptics, raising doubts about Greek premier Alexis Tsipras’s ability to deliver the tough measures he has promised in his new plan. The German finance ministry raised the possibility of a five-year timeout from the eurozone for Greece, according to a finance ministry position paper that leaked on Saturday.

Negotiations were complicated by Finland, after the populist Finns party threatened to resign from the two-month old coalition government if a Greek bailout went ahead.

As a result, the BBC now reports that the full summit of all EU members has been cancelled while “difficult” eurozone talks on bailout deal for Greece continue.

Trust is the sticking point for Europe’s hardliners.

“We’re going to have extraordinarily difficult negotiations,” German Finance Minister Wolfgang Schaeuble said upon his arrival. “Hope built over years on Greece until the end of last year was destroyed at an unimaginable level up until the last days and hours.”

“Can the Greek government be trusted to act do what they are promising, to actually implement in the coming months and years?” Dutch Finance Minister Jeroen Dijsselbloem said. “I think those are the key issues.

What do these divisions tell us about the European Union’s future?

As Andrew Clark reminds us in the Australian Financial Review, the future of the European Union looks difficult even if they get rid of Greece.

Longer-term, the crisis is about the European Union, a loosely confederal group of 28 states, being unable to manage its 19-member eurozone and its single currency, amid roiling markets, mounting debt, growing unemployment, a lack of leadership, and an inward–looking obsession bordering on neurosis.

It all worked very well for many years but it all came unstuck with the advent of the global financial crisis in September, 2008 which saw Eurozone members like Spain, Portugal, Italy and Greece running up massive budget deficits, growth collapsing, and unemployment queues lengthening. Spain and Greece suffered 50 per cent youth unemployment.

Put simply, the European Union has not been designed to handle these sorts of crises and we are now seeing the result.

Tsipras splits creditors

July 11, 2015

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If nothing else, the greatest achievement of Greek Prime Minister Alexis Tspiras is to sow division among the Eurozone creditors. And that puts him in a very strong position.

The Guardian reports that Germany’s ruling coalition appears to be deeply split over Greece’s latest reform proposals ahead of the climactic meeting of EU leaders at the weekend. Senior Social Democrats (SPD), the junior partners in Chancellor Angela Merkel’s government, welcomed the list of concessions from the Greeks but members of her own conservative bloc were scathing about Greece’s position.

Business leaders in Germany are saying Greece has squandered its credibility, and that if Merkel agrees to a third bailout for Greece, she could also be signing up to the continuation of the crisis for years to come, thereby risking her chancellorship.

Old divisions are running deep across the continent, and the Greek crisis has brought them back to the surface yesterday as Europe’s financial superpowers squabbled like children at playtime. Watching gleefully from the wings was the Russian president Vladimir Putin, who took the opportunity to stir the pot by ringing Tsipras and offering to strengthen “Russian-Greek co-operation”.

Wolfgang Munchau in the Financial Times says Tsipras has managed to split the creditors. The International Monetary Fund insists on debt relief. The French helped the Greek prime minister draft the proposal and were the first to support it openly. President François Hollande is siding with Mr Tsipras.

“And that changes the stakes for Angela Merkel,’’ Munchau writes.”If the German chancellor says no now, she will stand accused of taking reckless risks with the eurozone and the Franco-German alliance. If she says yes, her own party might divide similarly to the way the British Conservatives divided over Europe.”

That means one thing. The moment of truth is coming for the Eurozone. And it’s coming this weekend.

Security dangers behind a Grexit

July 8, 2015

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With the banks shut and cash running out in Athens, Greece has turned into a political pawn in the growing standoff between the Western-led NATO, of which Greece is a member, and Russia.

The day after Greece’s historic referendum on the debt relief plan, Russian President Vladimir Putin phoned Greece’s left-wing Prime Minister Alexis Tsipras to express support for the Greek people, cementing the growing relationship between the two that has been building since Tsipras was elected more than six months ago.

The International Business Times reports that Russia has told debt-ridden Greece not to worry if it can’t get money out of the EU, it can borrow from the Brics’ New Development Bank to crawl out of its present crisis.

Russia had already invited Greece to formally join the Brics, formed by Brazil, Russia, China, India and South Africa, as the sixth member.

The Washington Post warns that this could create a security problem for the US.

Emma Ashford at CNN reminds us that Greece has a strategically important location in the southeast of Europe and on the Aegean Sea. Closer ties between Greece and Russia raise the possibility that Athens might permit Russian ships the friendly use of Greek ports. This would be a major strategic concern for NATO, allowing Russia to expand its military influence not only in Crimea and the Black Sea, but to obtain a stronger foothold in the Mediterranean. The Greek-friendly Cypriot government, though not itself a NATO member, already permits such use.

It’s even possible that a Grexit and closer Athens-Moscow ties could lead Greece to withdraw entirely from NATO, moving instead toward closer security cooperation with Russia.

There is precedent: Greece has previously withdrawn from NATO, from 1974 to 1980. While relatively unlikely, a new Greek withdrawal from NATO would result in the loss of strategically placed bases, placing an increasing burden on Turkey to support NATO’s southern security needs.

Germany might want to see Greece out of the EU but a Grexit can create massive security issues. It’s a case of be careful what you wish for.

China enters subprime territory

July 7, 2015

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The Chinese stock market is heading into subprime territory.

As William Pesek at Bloomberg points out, the Chinese government is so desperate to keep stocks from crashing, that homes are now acceptable collateral for borrowing to buy more stocks. Here’s the logic behind the crazy idea: property is difficult to liquidate when assets crash.

As Pesek points, China is sowing the seeds of a time bomb to match its debt and stock bubbles..

“Tying the future of the nation’s housing sector to today’s stock mania is lunacy,’’ Pesek writes. “Why bother letting banks churn out subprime debt instruments, as Wall Street did in the 2000s, when you can turn your whole economy into one?”

The Chinese stock market is really a casino. David Barboza at the New York Times points out that millions of ordinary investors have borrowed money to invest in shares to get rich quick.

“They started to borrow money on margin to buy shares they couldn’t afford. They bet everything on the belief that this was a new era, gleefully believing stocks moved in only one direction,’’ Barboza writes.

“But there is a major difference between the markets in China and those in the other big economies like the United States. In China, mom-and-pop investors, rather than big institutions, make up the bulk of stock purchases. Such smaller players don’t necessarily have the resources to withstand the volatility.”

And so the market is now in freefall. Since mid-June, the indexes have lost around 30 per cent and 38 per cent, respectively burning up a combined $US3.2 trillion ($A4.27 trillion) in wealth. That’s twice the size of India’s stock market.

And millions of ordinary people are going to lose everything because the Chinese Government has mismanaged everything.

Tsipras buckles in to creditors’ demands

July 1, 2015

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In a dramatic day, ,Greece became the first advanced economy to default on loans from the International Monetary Fund after European finance chiefs shut down Athens’s last-minute request for emergency financial aid, only to see Greek Prime Minister Alexi Tsipras coming back with a letter saying he was ready to accept almost all creditors’ austerity conditions in return for a third bailout worth € 29.1. In a letter to European Commission President Jean Claude Juncker, European Central Bank President Mario Draghi and International Monetary Fund Managing Director Christine Lagarde, Tsipras signaled sticking points remain on pensions and tax discounts to Greek islands. Mr Tsipras’ new letter marks a serious climbdown from his last position and suggests he is yielding as his country buckles under capital controls. Greece missed a payment to the IMF on Tuesday and is headed for a July 5 referendum called by the premier on austerity as a condition for aid.

The question remains whether the sticking points are acceptable to creditors. Tsipras is battling ideologues who are hell bent on sticking it to Greece.

In Berlin, German Finance Minister Wolfgang Schaeuble said Greece was sending mixed signals and called on its government to “clarify its position” before negotiations with creditors can resume.

Nonetheless, The Wall Street Journal reports that the markets have reacted favourably although it’s still anyone’s guess what will happen next.

EU leaders are wringing every last concession from the Greeks. Along the way, they are destroying EU values of democracy, solidarity,and prosperity for all.