Tags: Greece | austerity | debt | crisis

Greece's Austerity Proposal Makes No Reference to Sustainability

Friday, 10 July 2015 10:12 AM Current | Bio | Archive

A lot positivity fueled by hopes in many places thanks to Greece’s proposal to the EU and its creditors, and to a much lesser extend the fact the “rigged” Chinese markets rose again today.

On Greece, in my opinion, Michael Fuchs, Vice-Chairman of the CDU/CSU parliamentary group of which the German Chancellor Mrs. Merkel is naturally the leader, nailed the Greek situation in an interview on BBC radio: “We have to be very careful because honestly, because I have a little bit of a problem to trust it because what is the difference between Sunday (when 61 percent of the Greeks said no in the referendum to austerity) and today? ... on Sunday the Greek people voted against these measurements … We need to make sure that the debt sustainability is now served, if that is not functioning it doesn't make sense.”

Anyway, the Greek government has asked for a three-year bailout loan of at least 53.5 billion euros (probably billions more) and has offered in return a 13 billion euros package of reform and spending cuts, which include pension savings and tax increases, which is interestingly very similar to what the creditors already presented on June 26, but that was overwhelmingly rejected by last Sunday’s referendum. Interestingly, the Greek proposal makes no reference whatsoever to (1) debt sustainability as well as (2) debt relief, which goes completely against how the IMF sees things.

1. In case Greece would get now what it asks for this would mean, among other negative points: Greek debt will rise once again, which already stands at 323 billion euros that was already considered by the IMF as unsustainable at the end of June. In the IMF report on the subject we read: “It is unlikely that Greece will be able to close its financing gaps from the markets on terms consistent with debt sustainability … Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks…)

2. The Greek economy will get extra negative shocks because of the now proposed higher corporate, personal and indirect taxations.

I really wonder what the rationale is for all the optimism we see at this moment and how, last but not least, the Greek 61 percent “No” voters will react the 180 degree change of direction on austerity by the Greek extreme-leftist government.

Just to mention one thing when they write in their proposal to the creditors: “… increase the rate of the tonnage tax and phase out special tax treatments of the shipping industry…” they know very well that is “practically” undoable.

I agree the Greek shipping industry that employs 200,000 people and represents 7 percent of the economy while the Hellenic fleet accounts for 19 percent of all the tankers in the world and has also the most valuable fleet that is estimated at $106 billion should pay taxes.

But in our “real” world there is no place for wishful thinking and it’s a fact Greek ship owners could extremely quickly register both their ships flags’ and ownership in e.g. Panama where foreign ship owners pay no income taxes at all and where there are no minimum tonnage requirements before anybody can register a vessel.

I personally remain skeptical for a “good, honest and sustainable” outcome for Greece on or even before Sunday. I also keep wondering who would trust the actual Greek government and therefore, I still prefer to wait and see before evaluating the whole situation.

On China, any investor could probably do better by remaining extremely cautious because on Chine we don’t have the full picture yet while it should not be overlooked that about 40 percent of their stocks have now been suspended for trading while the China Securities Regulatory Commission has now also banned major company shareholders from selling their shares for 6 months.

All that said, Fed Chair Mrs. Yellen will speak today in Cleveland on the U.S. economic outlook, which hopefully will enlighten us somewhat where the economy is heading. This comes after the IMF in its latest “Article IV Consultation with United States” stated: “… the weaker outturn in the first few months of this year will unavoidably pull down 2015 growth, which is now projected at 2.5 percent. Stronger growth over the next few years is expected to return output to potential …”

Long term investors should do well keeping in mind the IMF expects U.S. GDP to grow 2.5 percent in 2015; 3.0 percent in 2016; 2.7 percent in 2017; 2.5 percent in 2018; 2.3 percent in 2019 and 2.0 percent in 2020. Of course, these are expectations, which are subject to regular revisions.

No doubt, in case we get a solution on Greece, and it won’t matter if it would be a good one or a bad one, risk-on will go ballistic.

Gambling is free, but as Bret Harte said: “The only sure thing about luck is that it will change.”

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A lot positivity fueled by hopes in many places thanks to Greece's proposal to the EU and its creditors, and to a much lesser extend the fact the "rigged" Chinese markets rose again today.
Greece, austerity, debt, crisis
Friday, 10 July 2015 10:12 AM
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