Germans Are Reluctant To Give Greeks A Financial Weapon

Will it backfire?

Wednesday, April 21st saw Reuters publish not one, not two, but six articles on the Greek debt mess.

Basically, they discussed what could be an amusing procedural hiccup for the planned Greek bailout. Papandreou’s “gun on the table” strategy could jam, ironically because of a German political dilemma.

The German Chancellor Angela Merkel faces some pretty stiff opposition to bailing out what many Germans consider to be a rogue spending state. (Surprise!)

Both the (left leaning) opposition party and the Bavarian sister of the (right leaning) governing party have expressed the desire to drum up some opposition. The Bavarians for ideological and financial reasons and the opposition for political opportunism, as they face an upcoming election race in the state your editor was born in.

The amusing thing about all this springs from the fact that Angela doesn’t want to commit to a bailout until after the election:

“If Germany pledged aid immediately after the election, that would leave 10 days to secure parliament’s approval before a key trigger event for markets tracking Greece’s efforts to manage its debt – the May 19 refinancing of an 8.5 billion euro bond.”

“They’re really playing it close. What they need is the money a few days before the bond comes due” on May 19, said Christian Keller, a strategist at Barclay’s Capital.”

Supposedly there is a serious risk that the German political process could be drawn out enough to make the Germans turn up late to the bailout party. Not to worry, the French and the IMF will save the day. With “177 billion Euros in debt coming due over the next 5 years”, it’s going to be a blast, to say the least.

But what of the Greeks themselves? The crisis is about them after all.

They are apparently too busy protesting to pay their taxes:

“Hundreds of dockworkers blocked passenger vessels at Greece’s largest port, Piraeus, on Wednesday to protest the austerity measures.”

Maybe there were German taxpaying tourists on the boats, who wanted to see for themselves where their money would be going. They may just get to see what they are looking for on a grand scale:

“About half a million Greek civil servants are planning another 24-hour strike on Thursday.”

Wow, half a million civil servants! And those are just the ones protesting!

Run for the hills – the lender is coming

The most concerning news of the week was when the IMF reported that everything was A-OK and the world would grow by over 4% this year. When the IMF says that, it’s time to run for the hills. Having ruined many developing nations with their loans, the IMF now has its fingers in the Greek pie as well.

2 bubbles remain

The Australian housing bubble seems to be getting a lot of press lately. The World Socialist Web Site (WSWS) has thrown a real left ball* with its article on the matter:

“Household debt in Australia is now a higher percentage of GDP than in the US. If Australia has so far dodged the worst effects of the global crisis, this is because its private sector has not yet-in stark contrast to the rest of the world-deleveraged, that is, reduced its ratio of debt to assets. Such a development could be triggered by a significant fall in house prices, the first signs of which might be now emerging. Despite the housing bubble, the number of mortgages entered into by owner-occupiers (as opposed to investors) fell for a fifth consecutive month in February and was 22 percent down from the June 2009 peak.”

* cross between “coming out of left field” and “throwing a curve ball”

Wednesday’s Markets and Money pointed out that even the heroic International Monetary Fund has decided to have its two cents on Australian property:

“In its Global Financial Stability Report published last night Australia time, the IMF wrote that, “The dramatic rise in residential property prices in recent years, especially in Australia, Ireland, the Netherlands, Spain and the United Kingdom has heightened concerns of an asset price bubble and thus the likelihood of a sharp price correction.”

A more reliable evaluation comes from Jeremy Grantham, who has done a detailed study of bubbles and concluded that two remain: The UK and Australian housing bubbles. Check out an interview of him here – but be warned the interviewer is awful. Grantham also has some harsh words for central bankers, which makes the interview doubly worth watching.

Gen Y is coming to their property buying senses and may be the first to stop buying into the sucker’s game of relying on capital gains and ignoring cash flows. But it may not be by choice. The Age reports:

“More young Australians see themselves as lifelong renters as the dream of home ownership fades, a new survey has found.

“The prospect of onerous debt has soured the hopes of more than half of generation Y members surveyed in a poll of new home buyers and perspective purchasers this month.”

Regardless of whether it’s a rational response to unaffordable housing, or just the end of a bubble, homeowners could soon be hit hard if Gen Y doesn’t start buying. Especially overleveraged and invested “home” owners. Funnily enough, gen Y might find themselves with relatively affordable housing when it’s all over. Hopefully the bubble mentality will have disappeared for good.

But poor Steven Keen will already have done his walk to “Kossie-oscar“. Perhaps we will see an Australian version of this musical soon.

What’s on the horizon?

To make sure the media focused its attention on financial reform and not the apocalyptic volcanic dust cloud, the Democratic majority of the U.S. Securities and Exchange Commission (SEC) decided to sue Goldman Sachs last Friday. It did so in time to gain some attention for the passage of the Dudd, sorry Dodd Bill, a financial reform piece of legislation authored (sort of) by the retiring Senator from Connecticut, Christopher Dodd. The SEC move caused an impressive sell off in the market and a lot of anxiety about the future exposure of banks and brokerages to similar lawsuits.

Markets and Money regular Eric Fry reported on Tuesday that, when “you shine a light on a cluster of cockroaches, they scatter and hide. But when you shine a light on a cluster of investment banking con men, they simply stare back and reply, “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”

Dan explained what happened here. Not that it’s much of a revelation.

“The product was new and complex,” explained Robert Khuzami, a director from the SEC’s Division of Enforcement, “but the deception and conflicts were old and simple.”

The implications for several other investment banks, which happen to have very similar cases against them in progress already, could be huge. Why Goldman Sachs gets all the press isn’t entirely clear. Especially considering that their case deals largely in CDSs, not CDOs, which means there has to be a counter party betting the opposite way and clients would have known this. The fraudulent aspect still stands though.

Who is really getting bailed out?

Something that has been lost on the press and their readers is the nature of a bailout. When a company, or a country, requires a bailout, they aren’t getting the money for themselves. That money goes to the creditors. Otherwise they wouldn’t need a bailout.

Kris Sayce in our sister publication, Money Morning, pointed out where the UK taxpayer’s money went in the Royal Bank of Scotland bailout:

“It turns out that of the billions of dollars the UK taxpayer gave to Royal Bank of Scotland, USD$841 million of it went to Goldman Sachs to pay for the losses incurred by the bank from its investment in the collateralised debt obligation (CDO) structured by… the “fabulous” Fabrice Tourre.”

Can you guess who AIG’s single largest creditor was? Yep, Goldman Sachs. So AIG gets bailed too. And the Treasury Secretary just happened to be a former Goldman Sachs CEO…

When you bail out a company (or country), you pay their creditors. The attention should be on them.

Are you wondering who Greece’s creditors are yet? We know Goldman is involved in Greek CDSs again, which they used to help hide Greece’s debt levels.

Yu’an us to Revalue?

The focus of Dan’s Tuesday article wasn’t volcanic ash or fraud. It was the process of turning Australian dirt into Chinese steel. Obviously, the engineering side isn’t terribly relevant to the Markets and Money. Besides, in a free market that takes care of itself once you have demand for steel. So that is what the Chinese government went about doing – creating demand. Communist planning, capitalist execution. But how is it working out for them?

Quite well so far… Just like with subprime up until 2007. So Dan reckons it’s just a question of timing:

“The basic economic question at stake is how long can you keep producing things in excess of demand for a political objective?”

Funnily enough, American congressmen don’t want to wait and find out. They want the unfair subsidy of currency manipulation to end now. “I want, I want!”

Everyone is telling them that the Chinese don’t respond well to pressure. Maybe President Obama should make a statement outlining how cleverly China has managed to build up such huge dollar reserves. Then the Chinese could happily make a return gesture and use the reserves to bid up the Yuan.

But reverse psychology doesn’t come with much political glory when it’s successful. And political glory is the Holy Grail for a politician. (Surprise!) Playing golf apparently comes a close second.

We wish Barack Obama would do nothing but play golf and leave the people to their tax day tea parties. But when it comes to elections, image is everything and actions mean little. Some politicians are so good at creating an image of themselves in people’s minds, they can even act directly contrary to their supposed values without destroying their image.

A few are so good at this that they manage to be remembered for their image, despite having enacted laws that directly contradict what they supposedly believed in. Ronald Regan and Herbert Hoover are two of these. Supposedly both free market, low debt enthusiasts, they did the opposite in office. But they are still remembered for their rhetoric, not their policies.

Shopping for Banking Regulations in Basel

The Basel Committee has got the Big Four bank’s knickers in a twist. Actually, it’s more their capital that’s being twisted. Because Aussie banks hold large amounts of mortgages without securitising them, they cannot be sold quickly, creating liquidity issues. This makes them different from those successful banks in the UK and US. (Another eight US banks failed last weekend.)

So having been shown up by the financial crisis, the Basel Committee is having another go. Dan discussed it here.

But why not tie banks to the mortgages they make? That would stop them from making stupid ones… Oh, that’s right, the banks pay the campaign bills.

Back to the Boomers

According to Tim from Canada, the Baby Boomers blamed for many countries abysmal fiscal finances were in fact victims, not villains:

“With the greatest respect, the baby boomer generation did not start this collapse into the abyss.

“Again, with the greatest of respect, the Roosevelt generation perfected what was created during the era of the creation of the Federal Reserve.

“The baby boomers, because of our sheer size, merely paid for the mistakes of the Roosevelt generation. Social Security and Medicare, the twin monster which will destroy America, were not created by the baby boom generation. However, the baby boom generation did get to pay to keep the Roosevelt generation in a manner they could not afford and never could. The Roosevelt generation grew old and died on the backs of the baby boom generation.

“The baby boomer generation have made their share of mistakes, but the creation of the abyss facing your great nation was created during the generation of one of your most revered Presidents, Franklin D. Roosevelt.”

For the theorists

The article introducing the gold and silver fraud to our readers has generated some interest. A UK reader wrote in wit the following:

“Dear Mr. Hubble,

“Your comments about Andrew Maguire are interesting. In Britain we found it curious that after the hit and run accident to Mr. and Mrs. Maguire the driver had two other collisions in his anxiety to get away from the scene. The police, using a spotter helicopter, finally apprehended the driver but much to everyone’s fascination, refused to release the driver’s name, or that of his employer. The driver now seems to have disappeared without being charged???”

There is a movement in America that believes President Obama is not constitutionally eligible to be President. The claim is that he wasn’t born in America, banning him from the position. But now the Arizona state government is onto the case:

“The Arizona House on Monday voted for a provision that would require President Barack Obama to show his birth certificate if he hopes to be on the state’s ballot when he runs for re-election.”

Oh … bummer.

Have a great weekend.

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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