All Eyes on Greece

Not denying the importance of facts occurring in other parts and which have a weight on the world’s economy and finances, especially in the United States and in China, the truth is that the eyes of investors are focused on the development of the events related with the so-called Greek crisis.

In the United States, the coming of summer seems to confirm that the stumble in its economic growth, when it seemed it had stagnated at the end of winter, is being overcome. Now its economy stabilizes on a moderate growth, sales and prices of homes have increases on par with the rest of inflation (which does not show signs of danger) and the unemployment rate is just over 5% and continues to decrease. All of the above allows foreseeing that within an uncertain period, which could be at the end of this year or beginning of the next, the FED will take a measured but progressive increase in interest rates. This measure will end the period begun in 2009 during which many monetary measures were taken to counter the Great Recession and the American economy will flow again independently, that is, without the aid of emergency policies, though always under the careful scrutiny of the FED. As the month of June ends, NASDAQ stocks look better than at the beginning of the year, S&P 500 remains the same and Dow Jones with minus 1%. Ten-year bonuses’ rates went from 2.11% to 2.35% during the first semester.

In China, there is evidence that its growth, which until recently showed percentages over 10% annually, will be around 7% in 2015 and 2016. Nevertheless, the Chinese share market had an acquisitions fever and a subsequent fall during this year. Shanghai’s SSE grew almost 50% until the beginning of June to then fall almost 20% from the middle of the month. Last weekend, China’s Central Bank lowered its interest rates for the fourth time since November 2014 to leave it at 4.85%. Also, it lowered the required reserves ratio (RRR) for small banks with rural clients, improving the systems credit capabilities, which in April, through a similar measure, had added more than 200 billion dollars in liquidity. It is interesting to note, in order to evaluate this situation that in China the monetary authorities concede credit quotas to the financial entities, so the fact that banks have more available liquidity doesn’t necessarily signify increased credit capacity. Nevertheless, it is obvious that the intent is to cheapen the cost of the money with which businesses operate. Hence, observers conclude that the measures taken have had the effect of stopping a deeper fall on stock prices, though, considering that during the first half of the year a bubble could have been developing, attention must be paid to any sign of variation.

The Greek crisis is where attention is focused. Finally, after intense but fruitless meetings between the representatives of the Greek government and the creditor countries and institutions, the agreement which could have allowed for the delivery of the corresponding segment of the rescue loan was not reached, and Greece did not make the payment of 1.54 billion Euros that had to be paid to the IMF within the period ending on June 30. Therefore, the country defaulted legally and Europe and the rest of the world is immersed in the confused wave of enigmas and speculations regarding which will be the next course of events.

The lack of agreement between the creditors and the Greek government put on the table many topics, which independently of the way the Greek crisis resolves, will transcend to the European and World scenarios. On the one hand, the thesis promoted by Germany, which in the moral plane says it's immoral for some to live with others' money, as an answer to Greece’s posture that creditors should review and reduce the amount of the debt, because for Greece to pay it in its entirety would be to sentence the population to a quality of life which is not in accordance with current minimum accepted standards. This creditor position argues as well that Greece needs to adopt internal policies for its fiscal budget (the famous austerity to achieve a 3.5% surplus until 2018), that will allow the government to have enough funds to honor its debts. In the last years the Greek government, in order to cover fiscal insufficiencies for its current and investment expenses, under the weight of retiree pensions, excessive bureaucratic expenses, state investments with operating deficits and other social policies, had become indebted to various European countries (Germany is the highest creditor) through direct loans and also with the F.M.I., and the Greek banks with the European Central Bank. Also, the international banks, and the European in particular, and institutional investors, had acquired hundreds of millions of dollars in Greek state bonds. In sum, 5 years ago, both to facilitate the service of their external debt and to alleviate the emergencies from deficiencies in their coffers, rescue loans were contracted with the European Union, the F.M.I. and the European Central Bank for close to 240 Billion dollars, with conditions required by the lenders in order to stabilize the country’s finances and ensure payment of those loans, which would be delivered by segments, in accordance to timetables related to the debtor’s obligations and with supervision of compliance with the conditions, in such a way that if during the time period, such conditions were not met by the debtor, the loan segments would not be delivered. This is what just happened; the new Greek government rebelled against the remediation or austerity measures imposed by the creditors and when it didn’t receive a segment of the conditional loans, it did not pay on date another loan it owed to the F.M.I., so legally speaking fell in default.

Economic theory, policy and geopolitical issues churn around the current situation, as well as immediate unknown unpredictable effects, all interestingly interconnected.

The current governmental party, the left leaning Syria and their Prime Minister Tsipras, arrived in power at the beginning of this year with a campaign that offered to reject the austerity measures required by the lenders. These not only condemned the population to a privation situation of minimum living standards, but in practice had been counterproductive from the economic standpoint: the fiscal expenditure cuts had reduced economic activity and lessened tax revenue, consequently entering into a negative feedback loop which was taking the country into ruin and making it incapable of paying its debts. This debate continues unabated, not only in political circles, but also in academia, and certainly the austerity thesis loses more and more adepts. In the political arena many views appear: the government of creditor countries have the problem of the non-payment of the loans given to Greece has an impact in their respective collectivities, since in the end it’s their citizens through their taxes who paid for the loans wasted by the Greek citizens. On the other hand, the Greek government took power on a platform of repudiation to undignified impositions to its people and giving in to the renovated conditions would be to contradict the mandate they received when they won the election. But some say at the bottom there is an ideological debate since Syria is a leftist party that wants to end capitalism, though this is denied by Tsipras: “We only want a fair deal,” he affirms. Regarding the possibility of the Greek State opting for staying in default or not complying with the obligations it has with its creditors, who are its European companions, it would be forced to abandon the use of the common currency (the Euro) and issue its own. So the question rises of the viability of the country if it’s marginalized in relations with its neighbors and natural commercial partners. And the following question, which is a consequence of the previous one: if Greece, abandoning the Euro and marginalized from the European Union, reestablishes itself from its problems and demonstrates capability of making itself viable, would it possibly encourage other European countries, those in the periphery, to rebel against the impositions of the creditor countries and to follow a course of action similar to that of the Greeks? This would undermine the basis of the full realization of the European Union, a dream begun in 1957, the first step of which is the implantation of a single currency in 1999, in 19 of the 28 countries that conform it.

The concern with the course of the immediate events is then justified. Greece has had closed banks with many days plus the enforcing of strict capital control in order to avoid a hemorrhage for the local banks. If the Referendum called for July 5 backs the government posture of not conceding essential points that have to do with increased taxes and restriction in public employment and social expenditure, it is possible that the result would be Greece’s exit from the European Union it joined in 1981. In the geopolitical field this could mean its’ moving towards Russia’s orbit, who is on its part, unanimously punished by Europe for its actions in Ukraine, but, closer and more importantly, this would open at the stock exchange level the speculation over the impact of what the significant losses would be for banks and investors in Greek sovereign bonds in Euros, besides the losses that the lending countries, the I.M.F. and the European Central Bank must face, and also, the contagion risk, in the sense that other countries might take similar routes, what would make investors in shares and sovereign bonds of other states go into panic and there could be a run in sales and the consequent fall of European stock exchanges. During the month, the European stock exchanges lost about 5%, which reduced the years' earnings, which had accumulated a high of about 20%. In Asia, Japan and Hong Kong lost around 2% during the month, which reduced the year’s gains of around 16%. Brazil and Mexico quite stable this month, maintaining the years' increase in 9% and 7%. Argentina’s MERV index continued increasing into June (8%) for a 34% accumulated during the first semester.

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