Sensational headlines are becoming commonplace in the financial world. Once the preserve of the gossip rags or mass circulation dailys, it seems that drama has become the daily grist of the financial media. We are in strange times indeed.
The reason for this note is to consider just how well Australia is positioned right now, by considering the cirumstnaces surrounding the current hunting ground of global vultures – Greece.
In Athens, three people were killed when protesters threw bombs into the bank that they worked in. What is leading people to such extremes? If we avoid the philosophical issues surrounding the distribution of wealth within a society, we can ponder the more finite condition of financial markets in Greece, to guage the conditions that would lead to premeditated murder on the streets.
Greece has been and currently is, the target of the world’s largest bet. Last time i checked, there was around $10,000,000,000 put up in bets that the Greek financial system would fail – currency, debt and sharemarkets. In other words, the entire financial fabric of the country. That is sufficient money to fund a great deal of the problems that Greece finds itself with – but we should avoid looking for too much irony in this situation and focus on the dollars (because that is what this site does). There are good arguments for suggesting this speculation has nothing to do with the underlying problems, and raw capitalism says you should be able to take advantage of such situations, as the speculators are not actually causing the problems. There are equally valid arguments that bets placed without exposure to the underlying assets are a rather dangerous instrument and when used as a benchmark for risk assessment, are simply too open to manipulation. Let’s sidestep that particular argument for the moment…
2 year loan notes for Greece currently yield 16%, which is 26 times greater than Germany’s (figures taken from Bloomberg.com’s article here).
A great deal of this is obviously driven by speculation, as the powers-that-be in the European Union have confirmed they will help Greece (even though Germany’s politicians are apparently having to argue the case to their electorate). The dollars involved aren’t big on the EU scene. Germany handed over €100 billion top prop up Hypo Bank alone, so contributing 30% of a €110 billion rescue package (spread over a few years) is hardly going to strain their finances. The electorate and populist politicians can rant all they like about irresponsible Greek fiscal behaviour but they can’t deny that Germany is the No.1 beneficiary of the reduced value of the Euro, caused in part by this Greek spending. If Germany were not part of the EU then their currency would arguably be seen in a similar light to the US$ and the Japanese Yen¥ and, as a secure currency would be elevated in relative value – potentially destroying the recovery of Germany’s export market. Most people are not aware that Germany has long been the world’s largest exporter and that Euro currency weekness is very much to their benefit.
And so the EU debates and discusses what they will and won’t do with the black sheep of the family – all the while people in Greece are going through enormous social unrest. It is almost gossip-rag stuff. Except that it is real, and if not resolved then the money lined up against Greece will find more money to start working on the other countries in the EU that are apparently also “weak”. This measure of weakness is becoming more pathetic every day. The United States is arguably “strong” solely because it is the only reserve currency available. The financial position of the country does not support it holding that role. The UK government has acknowledged that the country will face a decade of difficulty as they try to extract themselves from the financial ruin caused by runaway financial markets. How could people now be looking (apparently, and as the financial gossip-mongers would have us believe) to the UK sterling as a “safe” currency compared to the Euro? There are some great articles out there on the tensions created within the EU by the huge desparity between the poorer and wealthier members.
Australia is perceived as a major beneficiary of the recovery of the Chinese economy, and especially of the huge stimulus measures introduced to reverse the impact of the global financial crisis. While some fear that the end result is a Chinese real estate bubble instead of a US real estate bubble, there is no denying the help it has provided in keeping Australia out of recession so far.
Let’s just hope that the government of Australia are aware of the history of market crashes (consider the Panics of 1873 et al), and the potential to exacerbate problems through inaction or poorly thought-out action. Hint – increasing taxes on an individual sector of the economy that is doing well (ie, ripping $9bn a year from resource companies making profits), while increasing the costs of funding to every borrower in the country (rising interest rates – you could argue that this is not the governments’ problem, as interest rates are set by the RBA. However, Governor Stevens made it very clear in his latest announcement that there are dangers to the overall economy but he has to increase the interest rates because the government is doing next to nothing to address the housing issues in Australia). This is particularly opinionated of me, as there are always alternative causes and outcomes but there is little doubt that policy decisions taken while there is potential for economic ‘double dips’ must be considered more carefully than normal.
Let’s hope that economic policy decisions moving forward are aimed at keeping us away from some of the problems besetting Greece, and not close to them.