Rising oil prices are putting Royal Dutch Shell (RDSa.L) under pressure to execute its landmark $70 billion deal to buy rival BG (BG.L) as soon as possible before investors in BG start to take a more critical look at the terms.
Announced three weeks ago, the deal was seen as a bold bet by Shell on the oil price recovering to $80-$90 per barrel within three years, justifying a 50 percent premium the Anglo-Dutch giant agreed to pay for BG in the biggest oil merger of the decade.
The cash and share deal followed a relatively low oil price of around $55 per barrel during the first three months of 2015.
That means the conversion rate was arguably more favorable for Shell shareholders as its stock is more resilient during periods of cheaper oil. BG stock tends to perform better when the oil price recovers because it eases concerns over the development of expensive projects, such as in Brazil and East Africa.
Since the cash and stock deal was first discussed by Shell and BG’s executives over a phone call in mid- March, the price of oil has risen by 25 percent to $65 per barrel.
Given that the deal was based on the average share price of BG stock in the three months to April 7, BG’s shareholders risk feeling they are not getting full value for that oil bounce.
“The maths would suggest that were the oil price at or above $80 then Shell would be snaring BG for a very attractive price,” said Matthew Beesley, head of global equities at Henderson, which has $81 billion under management including BG’s stock.
“While the total determination is of course dependent on the level of Shell shares at the time of issuance to BG shareholders, above $80 its not inconceivable that BG shareholders could start to agitate for a higher bid or indeed a competing bid,” added Beesley.
BG investors will receive 383 pence in cash and 0.4454 Shell B class shares for each of their BG shares. At current prices, that values BG shares at around 13 pounds, a premium of around 12 percent to where they now trade.
Shell, which reports its first quarter results on Thursday, declined to comment.
Ivor Pether, senior fund manager at Royal London Asset Management, which has $82 billion under management including Shell stock, said he believed that even at $75-$80 per barrel the deal worked for Shell both strategically and financially.
“If the oil price shot up to that level while the deal was completing it could prompt some debate about the value being offered to BG holders. But you would have to believe the oil price rise was here to stay,” he said.
“I don’t expect major regulatory hurdles, but the timetable isn’t clear yet,” Pether said adding that Shell needs clearance from anti-trust authorities in Brazil, the EU, Australia and China before it can issue offer documents to BG’s shareholders.
Shell has said it does not expect major obstacles in obtaining anti-trust clearance but has indicated it could extend into 2016 given the complexity of talks.
“With CEO Ben van Beurden loudly espousing the strategic rationale of the deal and the role it can have in foisting change upon Shell, they’ll be looking to get it approved by regulators and closed as soon as they can – just in case,” said Beesley.
Van Beurden is determined to make Shell a mega-player and the merger with BG will allow Shell to overtake its top rival U.S. ExxonMobil (XOM.N) as the largest hydrocarbon producer as early as 2018 thanks to new huge fields in Brazil and Australia.
Van Beurden has already traveled to Brazil, where he met with the country’s leadership as well as Trinidad, where BG has large gas facilities.
China and Australia will be next on the agenda as the Shell leadership is perfectly aware of the pressures the rising oil price has created, according to industry and banking sources.
Back when the deal was first discussed, it wasn’t only the oil price but several other factors, which helped Shell persuade BG’s board it was the right deal.
“The stars really aligned back in March,” one senior source familiar with the discussions said.
Several days before Van Beurden called BG’s veteran chairman Andrew Gould to offer the deal, BG’s stock fell heavily on news that rival Portuguese firm Galp saw delays to projects in Brazil because of an ongoing corruption probe.
However, in the past few weeks the general mood in the oil market has improved, with most industry watchers saying prices could rise further from now on.
Source: Reuters (writing by Dmitry Zhdannikov; Editing by Keith Weir)
The outlook for most of the rich Gulf Arab economies has dimmed for this year and next as oil prices have remained relatively low, according to a Reuters poll published on Wednesday that showed economists cutting their forecasts.
Heavy state spending and strong private consumption are cushioning the impact of a plunge in oil export revenues.
Nevertheless, some construction and economic development projects are being suspended, cooling economic growth.
Saudi Arabia’s gross domestic product is now projected to expand 2.6 percent in 2015, according to the median forecast in the poll of 18 analysts, instead of the 3.2 percent foreseen by the previous poll in January. Last year, GDP grew 3.6 percent.
In 2016, Saudi GDP is expected to grow 3.0 percent instead of the previous forecast of 3.2 percent.
A rebound in the past few weeks has taken Brent crude oil LCOc1 to four-month highs around $65 per barrel — still far below last June’s level of $115, but significantly above late March prices of about $55. This improvement may not yet be fully reflected in economic forecasts.
But Monica Malik, chief economist at Abu Dhabi Commercial Bank, said growth forecasts for the region might still be lowered again later this year as cheap oil slowed more development projects.
“If there is no greater recovery of the oil price, there may be more downside risk in the medium term,” she said.
Saudi King Salman unexpectedly carried out major reshuffles in the line of succession and his cabinet on Wednesday, after the poll was conducted. The economic policy significance of the changes is not yet clear.
This year’s growth forecast for the United Arab Emirates, which is less reliant on oil because of Dubai’s diverse economy, has been cut to 3.4 percent from 3.8 percent, and next year’s to 3.7 percent from 3.9 percent.
Qatar is expected to be by far the best-performing of the six Gulf Cooperation Council economies, as the world’s top natural gas exporter steps up a vast infrastructure building program. Qatari GDP is projected to grow 6.7 percent this year and 6.4 percent next year.
Although the Gulf economies are managing to continue growing in an era of cheap oil, it is at a heavy cost to their state finances. Five of the six GCC states are projected to record budget deficits this year and next.
The forecast for Saudi Arabia’s fiscal deficit this year has been raised to a massive 14.8 percent of GDP from 11.1 percent predicted in the last poll, while next year’s deficit is expected to be 10.6 percent of GDP.
The UAE is forecast to run a deficit of 4.1 percent this year and Kuwait of 5.0 percent. Only Qatar is seen staying in the black, with a surplus of 1.8 percent.
Saudi Arabia has already started running down its financial reserves stored abroad to cover its budget deficit. Its reserves are so huge that it could continue to do this for years; the UAE and Kuwait are in similarly fortunate positions.
But the financial reserves of Oman, projected to run a fiscal deficit of 11.7 percent of GDP this year, and Bahrain, with a forecast deficit of 12.0 percent, are much smaller. They may be forced into painful spending cuts in coming years if oil prices stay below $70 a barrel.
Source: Reuters (Polling by Kailash Bathija and Sarmista Sen; Editing by Andrew; Heavens)
Iran needs to attract foreign investment to be able to develop its ageing oil fields, a senior Iranian oil official says.
“Only by foreign investment, could the installations of these [ageing] fields be rebuilt,” Iranian petroleum ministry’s SHANA news agency quoted Gholam-Reza Manouchehri, managing-director of Iranian Offshore Engineering and Construction Company (IOEC), as saying.
He said that Iran’s domestic resources are “not enough” for renovating oil fields which have long been producing oil.
Most Iranian oil fields are in the second half of their production cycle and enhanced oil recovery (EOR) methods are needed to recover more oil from them.
Foreign oil companies hope that a final nuclear deal between Iran and six world powers would end in the lifting of sanctions on Iran and facilitate investment in the oil and gas-rich country.
The sanctions were imposed on Iran at the beginning of 2012 by the US and EU claiming that there is a military aspect to Iran’s peaceful nuclear program; an allegation Iran categorically rejected.
The Islamic Republic and the P5+1 group of countries – the US, the UK, France, Germany, Russia and China – reached an interim agreement on the Islamic Republic’s nuclear program in the Swiss city of Geneva last November, which led to relative loosening of sanctions against Iran, paving the way for further cooperation in various economic fields, especially in energy sector, between Iran and other countries.
Following the Lausanne understanding Iran’s oil industry officials said international companies have voiced interest in taking up projects in the country’s oil industry.
Manouchehri also said Iran’s new model of oil contracts should be attractive enough to persuade foreign companies to bid for Iran’s projects.
A petroleum ministry committee has been modifying the terms of oil contracts in order to sweeten them for foreign companies. The new model, known as Iran Petroleum Contract (IPC), is replacing buyback deals.
Under a buyback deal, the host government agrees to pay the contractor an agreed price for all volumes of hydrocarbons the contractor produces.
But under the IPC, National Iranian Oil Company (NIOC) will set up joint ventures for crude oil and gas production with international companies which will be paid with a share of the output.
China’s biggest banks posted their slowest first-quarter profit growth in at least six years as a cooling domestic economy squeezed lending margins and led to a jump in soured loans.
The results reflect the extent of the slowdown in the world’s second-largest economy which is facing its smallest rise in a quarter-century this year as China advances a goal of transforming itself from investment-led to consumption-led growth.
To counter the slowdown, China has twice cut interest rates over the past six months, in a bid to encourage lending to credit-hungry small- and medium-sized enterprises and the agricultural sector.
The rate cuts helped drive down the net interest margin – the difference between a bank’s borrowing rate and interest earned on loans – at China Construction Bank Corp (CCB) , the country’s second-largest lender by assets, to 2.72 percent from 2.8 percent in the previous quarter.
It was the first fall in the margin – a key determinant of bank profitability – in three quarters for CCB, according to results released on Wednesday.
Bank of China Ltd (BoC) , the fourth-largest lender in the country, also saw net interest margin drop to 2.22 percent from 2.25 percent in the previous quarter.
“The net interest margin is the most important variable for earnings growth for the Chinese banks,” said Jim Antos, bank analyst at Mizuho Securities Asia in Hong Kong.
Net profit for the five biggest state-controlled banks, including No. 1 Industrial and Commercial Bank of China Ltd (ICBC) , grew less than 2 percent, unthinkable a few years ago when they routinely rose in double-digits.
The slowing profit growth comes at a time when competition for banks is growing from the shadow-banking sector and full interest rate liberalization is on the cards.
But other measures by Beijing to stimulate lending may mean banks’ performances could stabilise in coming quarters, some analysts said.
In April, China lowered the amount of reserves commercial banks must keep, freeing up funds for lending. And sources told Reuters that the central bank was considering purchasing assets from commercial banks, which would inject liquidity, which was denied by the bank.
Steps like those are expected to improve the volumes and margins of banks, analysts said.
“Growth will mainly be driven from volume, from loan growth,” said Edmond Law, a banks analyst at UOB Kay Hian (Hong Kong) Ltd.
ICBC, which is also the world’s biggest bank by market value, posted its slowest net profit growth for the first-quarter in more than eight years, at 1.4 percent.
CCB and BoC both posted their slowest first-quarter net profit growth in six years, at 1.9 percent and 1 percent, respectively.
China’s banks also saw sharp rises in soured loans.
ICBC saw bad debts rise to 1.29 percent at end-March from 1.13 percent at end-December, while Agricultural Bank of China , the country’s third-largest, saw its climb to 1.65 percent from 1.54 percent over the same period, its highest in over three years.
Source: Reuters (Editing by Muralikumar Anantharaman)
China will open about 80% of its state-owned companies to private investment as part of a plan to reform the state sector, local media reported Wednesday, citing a government researcher.
The government has drafted a plan to cut state domination in most of its economy, leaving 10 companies considered key to state interests solidly in state hands, Li Jin, a researcher affiliated with the state-owned Assets Supervision and Administration Commission, told Guangzhou-based publication Time Weekly.
The 10 companies that would remain overwhelmingly state-controlled include one military group, six suppliers of resources–such as the China Grain Reserves Corp., China Grid Corp. and the three big oil firms–as well as the three telecommunication network operators, the report said.
The State Council, or cabinet, is leading the state-sector changes, the weekly cited a commission official as saying.
It did not give a timetable for the reform but the report is generally in line with previous reports of changes planned for the state sector.
Some state companies have been struggling due to overcapacity and their own inefficiency. Profits of state-owned companies dropped 29.3% in the first three months of the year, much steeper than the 2.7% decline in profits for the entire industrial sector, official data showed Monday.
The government is also planning a new wave of mergers in the state sector that will reduce the number of companies owned by the central government by nearly two-thirds, the Economic Information Daily reported Monday.
The cheap, young labor and strategic location of Myanmar, Cambodia and Laos are set to draw increasing numbers of manufacturers to Southeast Asia, which will eventually displace China for the title of “world’s factory.”
The transformation will be part of the rise of the Association of Southeast Asian Nations to become the “third pillar” of regional growth after China and India, ANZ Bank economists led by Glenn Maguire reckon. By 2030, more than half of 650 million people in Southeast Asia will be under the age of 30, part of an emerging middle class with high rates of consumption.
“We also believe Southeast Asia will take up China’s mantle of the ‘world’s factory’ over the next 10-15 years as companies move to take advantage of cheap and abundant labor in areas such as the Mekong,” ANZ said.
What will likely assist this shift is the connection between low-cost labor in places like Myanmar, Cambodia and Laos, cost-effective manufacturers in Thailand, Vietnam, Indonesia and the Philippines, and sophisticated producers in Singapore and Malaysia. Southeast Asian nations have resolved to establish the Asean Economic Community by the end of 2015 to enable the free movement of goods, services, capital and labor between the 10 member states.
Together, the Southeast Asian nations could lift intra-regional trade to $1 trillion by 2025, ANZ estimates. Foreign direct investment into Asean from the major economies could climb to $106 billion in 2025, having already eclipsed investment into China for the first time in 2013.
“Most of Asean’s member countries lie at the junction of the Pacific and Indian Oceans,” ANZ noted. “The land-based members of Asean sit between the two most populous countries in the world – China and India. Access to these land and maritime routes allows Asean to participate in Asia’s expanding production network.”
Growth in China’s vast factory sector likely stalled in April, a Reuters poll showed, reinforcing persistent sluggishness in the economy and arguing the case for more policy easing.
The official Purchasing Managers’ Index (PMI) is forecast to edge down to 50.0 from 50.1 in March, according to the median forecast of 13 economists in a Reuters poll.
A reading above 50 points indicates an expansion in activity while one below that shows a contraction on a monthly basis.
The flash HSBC/Markit PMI released last week showed factory activity contracted at its fastest pace in a year in April, suggesting that the economic slowdown was intensifying despite increasingly aggressive policy easing by the central bank.
The private survey focuses more on smaller firms, while the official reading concentrates more on larger, state-owned companies.
“The government’s policies to keep the economy growing at a steady rate have not passed on to the real economy yet,” said Hwabao Trust analyst Nie Wen.
“April PMIs were usually higher than (March) in previous years. But since demand was sluggish this year, companies tended to consume inventory rather than expand their production. Therefore, the PMI is expected to decline a bit.”
Weighed down by a property downturn, factory overcapacity and high levels of local debt, China’s economic growth is expected to slow to a quarter-century low of around 7 percent this year from 7.4 percent in 2014.
The economy grew at its slowest pace in six years in the first quarter of 2015 and weakness in key sectors suggested the world’s second-largest economy was still losing momentum in April, intensifying Beijing’s struggle to find the right policy mix to shore up activity.
The PMI factory numbers will be released on May 1, alongside the official services PMI.
Other data so far this year have indicated that the economy has lost steam despite two interest rate cuts since November, two reductions in the amount of money banks must keep in reserve and repeated attempts by the central bank to reduce financing costs.
Source: Reuters (Reporting by Judy Hua and Koh Gui Qing; Editing by Kim Coghill)
Greece’s government is considering selling stakes in its two largest ports as a concession to reach an agreement with its lenders and unlock bailout funds, a government official said.
Prime Minister Alexis Tsipras’s new leftist government had sought to cancel significant terms of Athens’ bailout program, calling it a “crime” to sell off strategic national assets.
But hard-pressed for cash and with its euro zone partners and the International Monetary Fund demanding policy concessions before they agree to release remaining bailout aid, the government has softened its stance.
“The negotiating team wants a deal with lenders and we are willing to sell Piraeus and Thessaloniki ports, 51 percent stakes,” a government official told reporters.
“This has not been decided but in order to reach a deal we may do it.”
Earlier this month, Economy Minister George Stathakis said the government had no plans to sell a majority 67 percent stake in Piraeus Port but would seek investors for a joint venture with Greece retaining a substantial stake.
Cut off from markets and fast running out of cash to pay salaries, service loans and redeem maturing debt, Athens has only days left to reach a cash-for-reforms deal.
Compromises the government is willing to consider in its bid for a deal include value-added tax rates and some pension reforms.
“We are open in the negotiations to look into the VAT rates and pension issues,” the official said.
Athens could consider a flat VAT rate on all goods and services except foods and books and adjustments in the supplementary pensions, but not cutting those which are below 300 euros a month.
On increasing the minimum wage, a campaign pledge, the official said Athens would consult with the OECD and the International Labour Organisation before taking any action.
“We are flexible,” the official said.
Another government official said mass layoffs and pension cuts were still among the government’s red lines.
Source: Reuters (Reporting by Lefteris Papadimas; Writing by George Georgiopoulos; Editing by Janet Lawrence/Ruth Pitchford)
We’ve a warning in the British papers this morning that travelers to Greece should make sure that they carry some cash money with them. Cash as well as debit and or credit cards, as there’s a possibility that the Greek banks might turn off the ATM machines. It should be said that this is actually a possibility but it’s still something of a remote one. If the Greek banks do end up doing that then that would be a sign that the current debt negotiations have been grossly mishandled. To the point that Greece is engaged in an unplanned and not necessary exit from the euro. And while that is a possibility, indeed the one that I think is the most likely form of Grexit (although not at all the most likely outcome from the whole process) it’s still not likely in the overall scheme of things. But this really is the advice that’s being handed out over here:
Holidaymakers to Greece are being advised to take euros in notes and coins in case an escalating debt crisis prompts the country’s banks to switch off their cash machines.
The Greek tourist board in London said that while it anticipated no immediate problems, visitors should avoid relying solely on credit cards or local ATMs.
Travellers should take “enough money to cover emergencies and any unexpected delays”, the Foreign & Commonwealth Office added. Travel experts recommended taking around three to five days’ worth of spending money in euros, alongside credit and debit cards.
Then again, there are travel experts who say you should always take a few days cash with you anyway, just in case something else happens: anything from a power cut to being stuck in an airport where everyone else has drained the ATMs can lead to a need for cash.
In the background here though there is a real and actual worry. We all know that Greece has the huge debt burden and they’re struggling to be able to repay it. OK, there might be some out there who don’t know this but they’re not likely to be reading Forbes really. And there’s various ways in which this debt burden can be dealt with which is what is being discussed in all these meetings between the Eurogroup (the people the money is generally owed to) and the Syriza led Greek government. Essentially, there could be a write off of the debt, Greece could run a large primary budget surplus for a few decades and pay it off or the terms of the debt could be changed to make the burden, while seemingly the same, less onerous in actuality. The negotiations are really about which mixture of these three is going to happen. Syriza wants a cut in the burden and only a small, not large, primary surplus, the Eurogroup would probably accept a change in the terms but not a change in the surplus or the burden itself. Thus the difficulty of the negotiations.
In the background there’s the simplicity of default. The negotiations don’t end up going anywhere and so Greece simply declares that it cannot pay those debts. End of. It’s what happens next that affects the banks. For they are being kept alive by a special form of lending from the ECB, the so called “ELA”. If they don’t get that then they’ve got no euros to put into the ATMs. and the Greek government doesn’t have the power to print more euros (neither physically, although it has a printing press it’s not allowed to print more) or electronically. So, if Greece defaults, and one of the people it could default to would be the ECB itself, does the ECB go on lending to the Greek banks or not?
Here it all gets a bit tricky. Formally, the E in ELA stands for “emergency”. This means that it can be used to cover liquidity issues but not solvency ones. And the Greek banks would be insolvent in the event of a default. So, according to one reading of the rules the ECB should cut off the banks at that point. But another reading says that the ECB can do pretty much whatever it wants to preserve the euro as a system. Meaning that it can over ride that emergency bit if it wishes.
The end result of all of this is that the Greek ATMs closing down is a conceivable part of the end game. I would certainly, if I were to travel to Greece, make sure I did have some of that cash about me. But while this is conceivable it’s still a long, long way from being likely or even probable.
Euro zone officials sought to wring policy concessions from Greece on Wednesday to unlock urgently needed aid after Athens said it would present a list of reforms for legislation to show it is serious about implementing its promises.
The draft bill was not expected to include major novelties beyond measures already discussed with EU and IMF lenders, but Athens is hoping it will speed up slow-moving talks and permit at least an initial deal to ease its searing cash crunch.
The reforms, including some privatizations and tax steps, were to be outlined to senior euro zone finance ministry officials in Brussels on Wednesday. They will be assessed in more detail when technical-level teams from Greece and the lenders meet on Thursday, Greek government officials said.
Despite lenders’ scepticism, Greece’s government is hoping an interim deal can be struck before a May 12 payment of 750 million euros to the IMF that Greek officials have suggested could be difficult to make without more aid.
However, a senior euro zone official involved in the talks said that to secure any deal, Greece would have to make a substantial concession on at least one of three disputed issues – pensions, labor market reform and taxation.
“We need to see a very significant policy move on the Greek side this week to recreate confidence the process,” the official said, speaking on condition of anonymity.
“It could be pensions, it could be the labor market but … they have to pay the political cost. The Eurogroup wants to see that political cost being paid.”
The lenders have said a partial disbursement of frozen aid is not possible until Greece has presented and implemented a full list of reforms. Athens is hoping an initial deal will prompt the European Central Bank to loosen restrictions that prevent Greek banks from buying more Treasury bills.
“We are now aiming at a ‘minimum’, let’s say, agreement in which we combine some things that we will agree to implement immediately with the relaxation of the ECB restrictions,” Deputy Prime Minister Yannis Dragasakis told Sto Kokkino radio.
The ECB has kept Greek banks afloat but on a tight leash while talks with lenders continue. It raised the cap on emergency liquidity assistance available for Greek banks by 1.4 billion euros to 76.9 billion euros on Wednesday, a banking source told Reuters.
Figures published by the ECB showed that the Greek banks continued to leak deposits in March, but at a slower pace than in the first two months. The euro zone official said they were still well capitalized, but their fate hinged on the continued solvency of the Greek government.
The discussion with lenders on detailed legislation is meant to underline the government’s serious intent, after the lenders accused Prime Minister Alexis Tsipras’ government of dragging its feet and failing to produce results.
The euro zone official said it was vital that Greece discuss the legal texts with its partners before putting them to parliament and not just present a “take it or leave it” package, immediately leaked to the media, making negotiation impossible.
The proposals will include tax and public administration reforms, a tax on television broadcasting rights and on TV advertisements, a Greek official said. Tourists on popular Greek islands will be required to use a credit card for transactions of more than 70 euros in an effort to crack down on tax evasion.
The creditors have demanded that the rate of value added tax applied on those holiday islands be the same as on the mainland.
It was not immediately clear if the government planned to cede more ground on such issues in this week’s talks.
One official said the government would try to break the deadlock on the labor market by pushing back its plan to raise the minimum wage, a move the lenders oppose.
Deputy Labour Minister Dimitris Stratoulis reiterated that Athens would not agree to demands for further pension cuts.
“Our government is making every possible effort right now to have a positive deal, which will respect our program, which will respect the main principle of our program since we took power, which is to put a brake on wage and pension cuts,” he told Mega TV.
The draft bill is expected to be discussed at a cabinet meeting in Athens on Thursday, a finance ministry official said. Once approved, it would then be debated in parliament.
EU paymaster Germany, which has taken a hard line, said it expected talks would be speeded up now that Greece had reshuffled its negotiating team.
Source: Reuters (Additional reporting by Deepa Babington, Angeliki Koutantou and Lefteris Papadimas in Athens; Writing by Paul Taylor)
If fear of Europe-wide financial wildfire was Athens’ trump card in its standoff with euro zone creditors – then the card has now turned up a dud.
The merits of ruling socialist party Syriza’s demands aside, its brinkmanship in renegotiating the painful terms of its international bailout always required one key element – a financial version of the old Cold War doctrine of ‘mutually assured destruction’.
A reprise of 2010/2011 would have seen any threat of Greek default or euro exit infecting markets everywhere and sending government borrowing costs across Italy, Spain, Ireland and Portugal soaring, heaping pressure on the Eurogroup to move closer to Athens’ demands to prevent a systemic euro collapse.
“Whoever gets scared in this game loses,” Greek Prime Minister Alexei Tsipras said this week as a three-month impasse threatens cash shortages ahead of critical debt repayments.
But the much-feared financial contagion – dubbed ‘euro crisis 2.0′ by forecasters at the turn of the year – has not materialized for euro zone governments sitting across the table.
And few if any investors expect the talks to be electrified by any sudden market blowout – eye-watering gyrations in local Greek markets notwithstanding. Borrowing costs across the euro zone hover near record lows, euro zone equities are within a whisker of 7-year highs and the euro currency has held in a five-cent range for two months.
That’s all the more remarkable given how negative markets have turned on the outlook for Greece itself.
Almost half of all investors polled by German research group Sentix this month expect Greece to leave the single currency within 12 months, while the survey’s index measuring the risk of contagion to other parts of the euro zone fell to a record low.
“Greece is not capable of derailing the euro zone recovery nor is there a real risk of contagion to the periphery,” reckons Wouter Sturkenboom, strategist at the $272 billion asset manager Russell Investments.
Most scenarios sketched by banks and fund managers still center on some progress in talks or some protracted limbo involving some limited Greek default within the zone.
But even though exit is now a real risk, the gloomiest forecasts look mild compared to the chaos of three years ago.
Goldman Sachs says ‘Grexit’ – which they don’t expect to happen – could see Italian and Spanish 10-year bond premia over Germany more than trebling to as much as 400 basis points.
That’s about 200 basis points shy of peaks hit during the winter of 2011/12. And given German 10-year borrowing rates are near zero, those spreads would imply nominal borrowing costs for Italy or Spain 300 basis points below peaks of three years ago.
Critical is the fact that foreign private exposure to Greek assets has dwindled since the default of 2012 and the bulk of Greek debts are now owed to other euro governments, the ECB and International Monetary Fund.
But regional calm is mainly thanks to several euro-wide emergency firewalls – such as the European Central Bank’s Outright Monetary Transactions or the European Stability Mechanism – built painstakingly over the past four years.
Chief among them is the trillion euro bond buying, or ‘quantitative easing’ program launched just last month.
“QE is probably the primary defense against contagion,” Deutsche Bank economist Mark Wall told clients.
By accident or design, the ECB’s rationing of QE via its so-called ‘capital key’ has an in-built stabilizer of its own.
That model means the ECB is set to buy more bunds than anything else with its 60 billion euro per month splurge to September 2016. But, partly as a result, three quarters of all bunds now yield less than zero and a quarter of that universe is illegible for QE purchases because yields are under the -0.2 percent threshold below which the ECB refuses to buy.
That has two implications. Any prior euro shock typically herded euro domestic investors to the perceived safety of bunds. Now they face blindingly expensive securities that even bond guru Bill Gross last week called the ‘short of a lifetime’.
But more powerfully, the growing inability of the ECB to buy bunds will likely force it to alter its capital key and skew purchases more toward the large, higher-yielding peripheral bond markets of Italy and Spain – further protecting these markets in the event of any Greek shock in the interim.
Without a spike in borrowing rates, shocks to business confidence and investment that whacked equity markets last time round are muffled.
It’s possible mutual or hedge funds shift money out of the bloc altogether. But the main result of that would be pressure on an already weakened euro exchange rate – a move likely cheered rather than booed in the rest of Europe as it underpins economic recovery and wards off deflation.
Some say the bigger risk from Syriza’s rise to power was political rather than financial contagion – emboldening anti-austerity movements across Europe, such as Podemos in Spain, and stoking euro scepticism and existential threats to the currency.
But chaos in Greece, no financial shock elsewhere and no concessions from Brussels could well have the opposite effect.
“There is no other Greece and there isn’t quite another Syriza,” JPMorgan economists told clients, pointing out the only popular anti-austerity party seeking euro exit was Italy’s Northern League. “The disorder unleashed by Greece’s exit would probably dampen support for these parties and reduce rather than increase the odds that others follow its lead.”
Source: Reuters (Graphic by Vincent Flasseur and Marius Zaharia; Editing by Anna Willard)
Fed: Slowdown Due to Transitory Factors
Federal Reserve officials attributed the economy’s sharp first quarter slowdown to transitory factors, in effect signaling an increase in short-term interest rates remains on the table for the months ahead although the timing has become more uncertain.
The Fed now needs time to make sure its expectation of a rebound proves correct after a spate of soft economic data. That means the odds a rate increase by midyear have greatly diminished, a point underscored by the Fed’s statement released Wednesday at the conclusion of a two-day policy meeting.
“Economic growth slowed during the winter months, in part reflecting transitory factors,” the Fed said. The Fed also said that although growth and employment had slowed officials expected economic activity to return to return to a modest pace of growth and job market could continue to improve, “with appropriate policy accommodation.”
The gathering concluded a few hours after the Commerce Department reported the U.S. economy grew at a 0.2% annual rate in the in the first quarter. It was the worst performance in a year, pocked with evidence of a slowing trade sector and anemic business investment. The report also showed annual consumer price inflation slowed in the first quarter.
For now, the Fed isn’t signaling any shift in its policy stance. It repeated it would keep its benchmark short-term interest rate, the federal funds rate, pinned near zero, where it has been since December 2008. Officials in March opened the door to rate increases later this year, by removing from the policy statement assurances rates would stay low.
The policy statement said, as it did in March, that the central bank would raise rates when officials become reasonably confident that inflation is moving back up toward the Fed’s 2% objective and as long as the job market continues to improve.
Officials sought to acknowledge the recent economic downshift in their policy statement, while keeping their options open. The pace of job gains moderated, the Fed statement said, and measures of labor market slack were little changed. Business investment softened and exports declined.
The statement also said officials saw the risks to the outlook were balanced — an important sign that they aren’t at this point alarmed about the first quarter slowdown. Many officials believe that conditions are ripe for consumer spending to pick up in the months ahead, in part because employment, incomes and confidence have risen and falling gasoline prices have boosted household purchasing power.
The statement pointed to strong gains in inflation-adjusted household incomes and consumer sentiment, underscore this view.
Nobody dissented at the meeting. It was the fifth time in 10 meetings run by Fed Chairwoman Janet Yellen with no dissents.
The Fed’s assessment of the economic backdrop was in some respects similar to its assessment at its March 2014 policy meeting. Then as now the economy appeared to have stumbled during cold winter months. This time the temporary headwinds included a strike at West Coast ports in February.
Fed officials thought the 2014 slowdown was a temporary blip and in that case proved to be right. Economic growth picked up in the second and third quarters of last year.
This time, however, the backdrop is more complicated. Falling oil prices have crimped investment in the nation’s oil patch, evidenced by falling rig counts in places such as Texas and North Dakota. Moreover, a surging dollar is putting downward pressure on import prices and restraining inflation, in addition to pushing up the price of exports and hurting the trade sector.
The Fed said, as it has before, it expects the economy to resume growth at a moderate pace and inflation to gradually rise back toward 2%.
European Central Bank policymakers have yet to formally discuss any plans to make Greece pay more for the emergency funding that is keeping its banking system afloat, Governing Council member Ardo Hansson said.
Greek banks have been drawing emergency liquidity assistance (ELA) from the country’s central bank, a funding lifeline provided in exchange for collateral. The ECB has been raising the cap on the funds weekly, most recently on Wednesday by 76.9 billion (£55 billion) euros, a banking source told Reuters.
European authorities are growing increasingly concerned about Greece’s ability to meet its financial obligations as a standoff over economic reforms between the government and its international lenders drags on.
Hansson said the issue of haircuts – the size of the discount applied to the nominal value of the ELA collateral – was being examined at a technical level within the ECB.
“I think other colleagues (on the Governing Council) have said that at one point it will come to the table as well, but an exact date I can’t say right now,” Hansson told a news conference.
The ECB declined to comment last week on a media report saying staff at the central bank had prepared a proposal to increase the haircut on the collateral.
Hansson, who is also Estonian central bank governor, added there was no reason to consider the idea of Greece defaulting on its debt.
“All sides have said that they don’t see …(a Greek default) as a desired outcome,” he said.
“The discussions have been difficult and frustratingly slow, but still nobody has indicated that they are pursuing any other plan (than reaching a funding agreement).”
Greek authorities had said they intended to respect their debt obligations, “so I see no reasons to speculate on other scenarios.”
Source: Reuters (Reporting by David Mardiste; Editing by John Stonestreet and Larry King)
While the risk of Greece missing a debt payment in coming weeks is rising in the absence of an agreement with creditors, this may not necessarily lead to default, or euro exit, at least not immediately, analysts say.
Some officials already alluded to this possibility, with ECB’s Constancio telling European lawmakers a default doesn’t automatically mean Greece must give up its euro membership, and economic affairs commissioner Moscovici ruling out preparing plan B in case of Greek failure. Greece can continue on without a deal until possibly late July when ECB loan repayments come due, analysts from HSBC to BofAML say; capital controls and a parallel currency may allow the country to carry on for a few months before reality sinks in. Here is a potential sequence of events:
There’s little clarity whether Greece can drum up enough funds from local authorities to meet its commitments in May; Kathimerini newspaper reports the govt needs an additional €400 million to pay salaries and pensions this month. Mid-May may well be “crunch time” for any Greek resolution, as May 11 Eurogroup meeting coincides with another payment to the IMF the following day, Bank of America Merrill Lynch analysts wrote in note dated April 20. Greece may have enough cash to meet May 12 payment to IMF after requisitioning local govt funds, writes Chris Attfield, strategist at HSBC; “hard deadline” is July 20, when bond held by ECB comes up for redemption. Only certainty is Greece won’t be able to pay ~€7 billion in interest payments and bond redemptions to the ECB in July and August without a deal, analysts at BNP write.
A “SOFT” DEFAULT
Medley says it’s possible Greece could default with the acquiescence of its creditors provided Alexis Tsipras’s government is cooperative on fiscal targets. Key issue is whether or not a missed payment to the IMF would automatically trigger a suspension of ELA, according to BofAML analysts.
There are ways to keep Greek financial system minimally functional even after a missed payment for some time, according to BofAML. A missed IMF payment would technically be considered a default by IMF board only after 30 days. ECB may “look the other way” for some time as the monetary policy branch that decides on ELA doesn’t assess the solvency of the banks; level of forbearance from creditors will depend on political developments. Although it’s possible a missed IMF payment wouldn’t constitute default, the EFSF could still decide to call in its loans, Citigroup says. Publicly all parties say there is no deal to allow Greece to miss a payment to the IMF or default, a senior Greek government official said.
ECB and ELA
ECB would be more likely to suspend ELA in case of a missed payment on ECB loans, HSBC’s Attfield writes. Cutting off ELA would be fastest route to an exit, UBS analysts Justin Knight and Nishay Patel write. ECB is said to discuss raising haircuts on Greek collateral on May 6, same day Greece has to to pay back €201 million in IMF loans interest. Coeure said failure to repay debt in a timely manner could “make it more difficult for banks to obtain liquidity”. JPMorgan economist Malcolm Barr says legal framework doesn’t give much clarity on what the central bank would have to do in such an event.
Unlikely ECB would take this step without political backing, Barr says. Fitch analysts say comments from ECB speakers suggest a restriction of ELA isn’t certain on a default.
If the ECB did choose to cap ELA, it could spur Greek authorities to impose capital controls to prevent further deposit outflows, Barr says. This needn’t escalate an exit either and this “frozen conflict” where capital controls are in place, official debts aren’t being paid, and the economy worsens could last for months. Credit Suisse analysts say capital controls add to contagion risk via the banks; for now, stock markets remain sanguine as exposure to Greece has been cut.
Greek lenders outside of Greece have been ordered to exit all exposure to Greek state bonds and treasury bills.
Ultimately, the government may have to introduce a parallel currency, such as IOUs, for certain payments. BofAML analysts say this is only likely to provide a temporary bridge as IOUs come with their own problems e.g. not being legal tender outside of Greece and may lead to capital outflows.
Such a move also runs the risk of further weakening support for the govt at home; around 1 million Greek workers already face delays of up to 5 months in their salaries. Purchasing value of IOUs would probably be lower than that of euro, meaning they would be effectively devalued, UBS analysts, including Knight, write.
Introduction of IOUs, as they grow in number, would make an exit a fait accompli in a practical sense at some point.
NEW ELECTIONS, A REFERENDUM
Over time this limping along approach would likely significantly increase pressure on Greek government, making fresh elections, or at least a referendum on EU membership, increasingly likely. Citigroup says a vote could come sooner if the govt were to choose to push ahead. Tsipras says Greek voters could be asked to decide on whether to approve an agreement that violates his campaign pledge to end austerity, though he’s confident it won’t come to that. Becoming “increasingly convinced” that Tsipras’s solution if there is no deal to release aid funds in next few days would be to call elections, RBS strategist Michael Michaelides wrote in a note Friday; given strong Greek public support for euro, a probable Syriza victory with a new mandate to strike a deal will ultimately prove positive to finding a final agreement.
Death ships on the Mediterranean. Cyberattacks in America. Syria in turmoil. War in Yemen and Ukraine. Islamic State, Boko Haram, al Shabaab — all on the move.
If the world seems more volatile, it is. If it seems more dangerous, not so much.
Welcome to the war of perceptions, in which an ever-improving planet seems ever more at risk largely because of the noise.
Many more people are hearing from many more people as they compete for the same, or fewer, resources. The result: a louder world, and more anxiety about the noise, but not necessarily deeper crises underneath.
“It’s almost the principle of network mathematics that when you build a system of globalization like the one we’re building with computers and speed, you’re going to get volatility, and we see it in the financial markets, and we see it in the rise of groups like ISIS overnight and their ability to empower themselves through their own engagement with global technologies and communications,” said Steve Coll, author of several books on terrorism and dean of the Columbia School of Journalism. “You’re looking at a world that is more subject to sudden shocks.”
Coll was among five previous winners of the Lionel Gelber Prize interviewed for a video project to mark the 25th anniversary of the award, which is named for the late Canadian diplomat who helped create the state of Israel. The award — granted, through the Munk School of Global Affairs at the University of Toronto to the best English-language book on international affairs – was given this week to Serhii Plokhy, author of The Last Empire: The Final Days of the Soviet Union.
The others interviewed were Paul Collier of Oxford University; China scholar Jonathan Spence of Yale University; the American political scientist Walter Russell Mead; and human rights expert Adam Hochschild of the University of California at Berkley.
Each author was asked about the world today, and whether it is in better shape than in 1990, when the award was created, communism was on its deathbed and the Internet in its cradle.
They noted the world has seen extraordinary declines in poverty and child mortality, epic rises in global trade and investment, and the spread, albeit fitfully, of democracy and human rights. The threats of loose nuclear weapons from collapsing nations, debt crises in Latin America, Southeast Asia or Russia, a war between India and Pakistan, the collapse of Africa and a litany of global pandemics have all been avoided.
The Gelber winners each said they maintained optimism about the next 25 years, for different reasons. But equally, they remain concerned about the world’s ability to cope with emerging small forces, including terrorists and cyberattackers, and the potential that their asymmetrical pressures bring to bear.
Despite the noise, five of the dominant themes of the past quarter century — terror, rising China, the struggle for human rights, poverty and American hegemony — have been reasonably well managed. Even terrorism, Coll contended, could have been a lot worse, as fears of massive, random civilian attacks in the West subside.
How those forces play out in the next quarter century may be more challenging:
Spence, one of the world’s pre-eminent sinologists, who has been visiting the country for 60 years, said he is still shocked by China’s ability to manage rapid change. “I certainly didn’t expect the kind of speed with which China would be integrated in a kind of global community. That startled me, and still startles me.”
He said the regime — more so recently under President Xi Jinping — has been able to manage disruptive forces across the country through a sophisticated system of rewards and punishments, even within the Communist Party.
China will be challenged to maintain that system as it reaches into other countries, and continents, to protect and expand its interests — both through the hard power of its military and the soft power of its diplomatic and economic interests. Mining in Africa. Oil exploration in the Arctic. The promotion of Chinese language and media. Spence said one of the great challenges of the coming decade is the rest of the world learning how to live with an expansionist China, and China learning to adjust to global responsibilities.
The most positive story of the past quarter century, especially in Africa, is the reduction in poverty. Now the challenge is to translate economic growth into social progress and a stronger middle class.
The collapse of commodities prices has thrown some of Africa’s recent hopes into question, but for those who assume oil and mineral prices will regain some of their strength, Africa is still the new frontier — and a very young one. The continent’s urban population is projected to triple by 2050.
“We are at the point of a big struggle over whether natural resources will become an opportunity that is harnessed or a mistake that is repeated,” Collier said. Will Africa’s new mineral and oil wealth finance despots and their cronies, as was the case in the commodities booms of the 20th century? Or will they produce competitive private-sector players, create high-value jobs and sustain well-functioning governments and public institutions?
Democracy and human rights
The collapse of communism opened the floodgates to the spread of democratic principles and human rights. Those are under assault once again in Ukraine, Russia, across the Middle East and North Africa, as well as in China.
Still, Hochschild, who has written extensively about the long march of human rights, particularly in Africa, does not see a reversal. Peaceful, democratic transitions of government in Nigeria, Sri Lanka and Indonesia are positive examples.
Digital and satellite technologies secure an inevitable, if halting, progress by giving citizens the tools to probe, understand, criticize and even select (through mobile voting) their governments. The Internet may yet prove to be more valuable than the U.S. Bill of Rights as an envoy for democracy.
Militant groups don’t need to seize power anymore; they can carry out their objectives by infiltrating societies everywhere through mass technology.
As Coll noted, extremists such as Islamic State “manage their own media operations, their own branding strategies and recruitment strategies without really much need for the formal mechanisms of the state because of the way technology makes it possible to self-empower.”
A greater concern, he said, is the use of cyberwarfare by states and their proxies. A major disruption, such as a utilities network, could lead to reprisals and bring down far larger networks.
“Cyber is the most important new field of defense competition and probably the most important new field of warfare looking out over 20 or 40 years,” Coll said.
He is most concerned about China and Russia, China because of its desire to use technology to match U.S. military supremacy and Russia because of its need to offset its declining traditional power.
For those who, in 1990, had doubts about the future of the last remaining superpower, the United States is as great a force as ever — in military affairs, diplomacy, education, media, energy and, most profoundly, digital technology.
Although the outcomes of the Iraq and Afghan wars remain uncertain, the United States remains the global cop. It also endures as the preferred quarterback for humanitarian operations, from Haiti to the Ebola zone. And its corporations continue to expand despite attempts by the European Union and China, among others, to curtail them.
Don’t assume these forces are benign, especially to governments and economies that follow a different model. “American power is inherently not a calming force in the world,” Mead noted.
But if the world feels like it’s about to explode, the perceived victims are likely to continue to turn to the United States.