The World Moves On
We continue to look at the possibilities arising from the Sovereign Debt problems
in Greece.
It looks like Germany has got its way, or about 75% anyway. Agreement has been
reached that Greece will not actually get the next tranche of bailout money as a
single payment. This has been the case in the past.
This time the monies will be heading for an escrow account, held on Greece’s
behalf. Greece will then have to ask for money to be released as is necessary.
This is one step back from Greece relinquishing government budgetary control to
the EU, and will relieve investment market fears of a default, whilst controlling
exactly where these monies get spent.
Both the French and German leaderships are hailing this as the best solution
available, and certainly more favourable than a Debt Commissar, as had been
suggested as a possible solution recently.
However, other European leaders grow increasingly angry at the delays being
introduced by the Greek administration being unable to agree on an austerity
package. This is required to secure the money in the first place.
These delays have been damaging, and do nothing to avoid a disorderly default.
This has meant that the meetings required for the final rescue package to be
agreed have been delayed to today.
One positive note has come out; it appears that progress has been made between
the Greek Prime Minister and the main lenders involved in the bailout – the IMF,
European Commission and European Central Bank. This progress hints that
perhaps a repayment structure is close to agreement, again this hinges upon the
Greek parliament agreeing to the austerity measures that will be needed to make
repayment affordable.
So, with that in mind, what else is going on in the background?
A somewhat overlooked story is the possibility of the UK using its EU veto for the
second occasion. This time the problem is not financial, but centres around the
introduction of European Arrest Warrants. A petition, signed by 100 Conservative
MP’s, is circulating Westminster, urging the UK Prime Minister to veto this change
in legislation. If this happens the UK could be seen to be further moving away
from the rest of Europe and the effects that could have in the European
investments markets should not be overlooked.
Elsewhere, China has received a fresh warning from the IMF over its potential
growth should Europe fall into a deep recession. The IMF warned of a 4% drop in
Chinese growth should Europe go into recession.
This level of growth will not be enough to support the Chinese job creation
program. This would undermine the Communist government’s powerbase and
make it difficult to remain in power in face of large scale unemployment in the
country.
There are ways to avoid this. Reducing taxes, increasing the home building
program, improving social services or offering subsides on large consumer
purchases are some of the ways China could steer their way to a safer position.
An IMF report suggest that these steps would see China achieve a 7.2% growth
even if Europe slips into a deep recession leaving Chinese export markets in
decline.
So among all this bad news, is there a positive anywhere?
Yes, and we come back to the USA again. The dollar remains a currency of choice.
Recent unemployment figures have been encouraging, even if the seasonal
adjustment has warped the numbers somewhat, the fact remains that the
unemployment rate from this time last year has fallen.
Several larger US companies have demonstrated better returns than expected
and increased optimism. Albeit with an eye on what is happening in Greece. For
this observer we are still in a period of uncertainty, and with no clear final
solution on the Sovereign Debt problem, that situation looks set to continue.
Hopefully, by the end of this week we will have a better idea of what the solution
will be, and more importantly where that will leave the world.
How does this affect what we do as a company and where we think investments
should be placed? Our Discretionary Portfolios remain uncorrelated and defensive
in their make-up. Until we see a move towards a period of sustained growth we
shall remain in this position with client money.
If you would like to find out more about our approach and services, as ever please
contact us at discretionary@fundadvisers.com
For more details about structured investment products, discretionary
management services & all other investment products in Luxembourg contact us
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