Friday, April 17, 2015

Greece back to brink of default (again) as frustrated IMF signals end game


For weeks, months and years the economic crisis in Greece and the prospect of a Greek exit from the Eurozone has been simmering in the background.

But now it's looking serious and a showdown between Greece and the International Monetary Fund appears to be entering its final dangerous phase.

Financial markets, which until now have been numb given the duelling rhetoric, are now bracing for the fallout if Greece is pushed from the Eurozone or decides to walk away.


Just last week Greece made aUS$485 million repayment to the IMF on its massive debt of US$260 billion to ease concerns about debt default.

In return, Greece asked for more emergency cash to keep the government running so it can maintain social services could pay public sector workers.

But the IMF and Eurozone leaders, led by Germany said "no"  and demanded that the Greek government deliver on promised economic reforms within six days.

The deadline for the updated reform strategy us now up and rather than signal it would comply, Greek finance minister Yanis Varoufakis is giving every indication that the default prospect is real.

"We need to convince our partners, especially in northern Europe, that this government is not about going back to the profligacy of yesteryear," Dr Varoufakis said in Washington.

"They need to convince us that they are serious about rebooting a series of measures, programs, fiscal consolidation plan that has (to date) failed.

Setting the end of June as a deadline he said "this negotiation must succeed".

The hard talk is becoming ominous with Greece scheduled to deliver on a US$1 billion debt repayment in the coming weeks.

But the prospect of that repayment going down to the wire prompted the IMF's managing director Christine Lagarde to remind Greece that a replayment delay would not be tolerated.

"Payment delays have not been granted by the board of the IMF in the last 30 years so while all options are available to all countries, it's clearly not a course of action that would actually fit or be recommendable in the current situation. We have never had an advanced economy asking for payment delays," Ms Lagarde said in Washington.

European markets reacted cautiously and the standoff between Greece, the IMF and Eurozone leader was a factor that prompted investors to sell.

However, there appears to be greater confidence six years after the Greek crisis began that an ultimate exit would not result in a domino effect with other weak nations like Spain, Italy, Portugal or Cyrus deciding to go it alone.

But as a result, Greece is now paying more for its debt with its three year bonds now at around 30 per cent.


It's the best sign that in addition to the IMF, financial markets still see Greece as a very risky nation to lend to especially as its next debt deadline gets closer. 

Tuesday, April 14, 2015

Australia world's tenth most socially advanced nation - but scores badly on housing affordability


A survey out today shows Australia is the world's tenth most socially advanced nation.

But while Australia scores well on personal rights - such as freedom of speech, freedom of movement and political rights - it's falling well behind in housing affordability.

Listen to my report from this morning's edition of AM

The study comes as spiraling real estate prices in Sydney fuel fears about a potentially dangerous housing bubble especially if the Reserve Bank cuts interest rates in the coming months.

The report also underscores that the end of the resources boom, illustrated by the falling iron ore price, has the potential to damage living standards of Australians.

The Social Progress Index which is published by the US not-for-profit group, Social Progress Imperative, ranks Norway as the world's most socially advanced nation.



Norway is followed by Sweden, Switzerland, Iceland, New Zealand and Canada.

At number ten, Australia is in the middle of the rankings but ahead of the bigger economies such as Britain, Germany, Japan and US.

Australia ranks in the middle, but ahead of Britain, Germany, Japan, the United States in terms of social progress.

But Lynne Pezzullo, lead partner of health economics and social policy at the accounting firm Deloitte, says Australia only ranks 19th in the world when it comes to shelter and 51st in terms of housing affordability.

"Access to affordable housing is a key issue and Australia is not doing particularly well in that area, even though we have very low interest rates at the moment," Ms Pezzullo told AM.

"But importantly it's our housing pricing and our access into the housing market, both in terms of rent and also in terms of purchase, which are driving the poor performance we have in that area."

Ms Pezzullo says deepening worries about housing and basic shelter have potential psychological impacts that could ultimately lead to suicide.

"There's a link between housing affordability and homelessness and then through to domestic violence and suicide rates," Ms Pezzullo said.

"Australia performs particularly poorly relative to other countries in relation to our high suicide rates."

Ms Pezzullo also warns that the fallout from declining commodity prices could ultimately hurt living standards in Australia.

"Australia has had a really good free kick in the last three decades from particular factors, which have been very gracious to us," Ms Pezzullo said.

"But this coming decade we've got the baby boomers exiting the population and therefore reducing participation rates, we haven't had major investments in infrastructure or micro reforms to benefit from and of course we've got the iron ore price in particular falling and the coal price falling," Ms Pezzullo said.

"Other commodity prices are falling which means we have got particularly issues across the Australian economy - particularly in the Western Australian and Queensland economy."


The Social Progress Index is closely-watched because it does not use gross domestic product as the sole factor in measuring a nation's wealth.

Monday, April 13, 2015

Iron ore as low as US$35 a tonne? Welcome to the season of managing budget expectations

As the iron ore price continues to head lower, welcome to the pre-budget season of managing expectations.

Tony Abbott might be hoping for a dull or "steady as she goes" document to be revealed on May 12, but the declining state of government revenues will see Treasurer Joe Hockey and other ministers on the public relations treadmill in the month ahead.

The southward direction of the iron ore price - today at US$47.30 a tonne - represents a dangerous moving target given that Mr Hockey had factored in what he thought was a conservative US$60 in December's midyear budget update.

Now the Treasurer's expectations are being driven increasingly lower price and with the market far from bottoming out, he is now warning of $US35 a tonne before it hits a floor.

The treasury alarm bells are ring because this time last year, revenue from corporate tax and royalties was still in boom territory at around US$117 a tonne.

As the headwinds get stronger, Joe Hockey is under pressure to pull a fiscal rabbit out of the hat to replace disappearing revenue at a time when public acceptance and political will for tough budget measures appears to have evaporated.

The miscalculation of what looked like a steady correction a year ago is now damaging the government's election promise to be a conservative economic manager on a credible path to surplus.

Iron ore price heading twoards US$35?  Source: Thomson Reuters


While there appears to be an element of shock about the pace of the iron ore decline, the warnings from the Reserve Bank have been constant for at least the past two years.

Time after time, RBA documents and public statements have flagged that the investment phase of the resources boom was ending and that the transition back to traditional parts of the economy is slower than expected.

Just last week, as interest rates were kept on hold at 2.25 percent, governor Glenn Stevens was typically understated as he said "commodity prices have declined over the past year, in some cases sharply" and "Australa's terms of trade will continue to decline".

So with iron ore veering into crisis territory, with futures down 30 percent in the space of a month, how worse could it get?

The big players - BHP Billiton, Rio Tinto and Vale - can afford to dramatically ramp up volumes to keep the dollars rolling in even though flooding the market has done little to put a floor under the price.

But smaller exporters, unable to withstand the high cost business of extracting iron ore, are at risk of going to the wall.

Late last week, the junior miner Atlas Iron announced it would progressively suspend production at its Pilbara mine sites because of the plunging iron ore price.

The Atlas share price over the past year demonstrates the crisis for small miners - down from a year high of $1.08 on 10 April 2014 to a low of 12 cents before the company went into a trading halt.

Fortescue Metals recently pulled out of efforts to refinance US$2.5 billion of debt after rejecting an unattractive risk premium from US credit markets.

And last month Fortsecue's chairman Andrew Forrest highlighted the miner's desperation by suggesting that the world's big miners should act together to cap iron ore production to keep prices high.

Mr Forrest is now being investigated by the Australian Competition & Consumer Commission after chairman Rod Sims warned even the suggestion of cartel behaviour risks civil and criminal penalties.

The big factor out of everyone's control is China as the world's second biggest economy continues to slow towards a still strong annual growth target of around seven percent.

While a hard landing is looking less likely, Chinese steel producers are cutting back to deal with softening construction demand.

At the same time, stockpiles of iron ore are not being topped up as frequently given the likelihood that prices will be lower in the short term.

Analyst Li Wenjing told Reuters late last week: "the overall market in bearish and only buying on a hand to mouth basis."

The softer market for iron ore is also an opportunity for Chinese steel mills to meet tighter regulations on carbon emissions after a surprise declaration on "blue skies" at the APEC summit late last year.

So despite a stronger US economy, Australian remains hostage to an uncertain global outlook given the reality of a weaker appetite from China and Europe's flatling economy continuing to loom as a potential shock in the event of a Greek exit from the Eurozone.


Thursday, April 2, 2015

Iron ore falls to US$49 a tonne - more bad news for Joe Hockey's budget

It's now a daily occurrence and for the Federal Government it's constant bad news that's likely to get worse.

For sixth consecutive session, the spot price for iron ore has fallen  - this time to US$49 a tonne.

With every fall, it's another hit to Joe Hockey's shaky Budget which has been relying on tax revenue from iron ore exports.

Source: Thomson Reuters

This time last year, when the spot price was US$119 a tonne, the Treasurer was factoring in a fall to around US$100 on expectations that the big miners who had been feeding a massive appetite from China would continue to provide sustenance for Treasury coffers.

But today at US$49 a tonne,  the price has more than halved to the lowest level since the iron ore benchmark began in 2008,

Deloitte Access Economics now estimates that the plunge could strip $3 billion from the 2015/2016 budget, even after a revision in the midyear update just before Christmas.


So now with corporate tax receipts down as the price hits the bottom of a wild cycle, it's getting even tougher for Mr Hockey to get the budget back into balance.

Source: Thomson Reuters

What is now a resounding correction is all part of the big economic picture in China, where annualised economic growth is slowing to around seven percent.

The reality check for the world's second biggest economy means less manufacturing, less construction and therefore lower demand for steel.

As a result, the normally big stockpiles of iron ore aren't being topped up as frequently.

At the same time, savvy operators of Chinese steel mills are playing a waiting game on the expectation that the iron ore price is likely to fall even more - so why buy now?

Steel mills are also under pressure from Chinese regulators to tighten up environmental standards and are looking at ways to cut costs as they reduce emissions.

In addition to hurting the Federal Budget, the correction is also continuing bad news for Australia's iron ore exporters.

On top of yesterday's falls, there was more selling in early trade with BHP Billiton down 0.5 percent, Rio Tinto 1 percent and Fortescue Metals 2.7 percent weaker.

Last week, Fortescue's outspoken chairman Andrew Forrest suggested the big miners should cooperate to cap iron ore production to keep the price high.

That earned a warning from the chairman ofthe ACCC Rod Sims that even the suggestion of cartel activity might risk not only civil but criminal penalties.

In a report issued yesterday, Deutsche Bank is forecasting that prices may drop below US$40 as weaker currencies and lower energy prices eased producers' costs.

Bloomberg has quoted a Standard Chartered report which warns that tumbling prices risk mine closures and job losses at sites across the globe, including in China.

As prices tumble, some higher-cost mines are closing or suspending output. More than 210 million tons of capacity has been cut, with additional closures to come, according to Morgan Stanley, which reduced its price forecasts last month.


Wednesday, March 25, 2015

Reserve Bank warns on Sydney property - don't bet the house on it


The latest health check on Australia's financial system should provide the stark wake up call for investors betting that real estate prices will always keep rising.

The Reserve Bank has a blunt message - don't put the house on it.

In a ramped up warning about stellar markets in Sydney and a lesser extent Melbourne, the RBA's twice yearly Financial Stability Review is cautioning that investor exuberance and high expectations could see more than just a few fingers burned.

The RBA is warning that price falls in real estate could hurt even those who decided it's too risky to bet on real estate as an investment that always reaps big capital gains.

The key message about a broader economic fallout should be ringing alarm bells for investors on interest only loans and banks that risk exposure if prices fall or unemployment spikes.

In other words - what goes up can and does often go down.

"Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on," the Review says.

"The consequences of such a downturn is prices are more likely to be macroeconomic in nature because the effects on household wealth and spending would be spread more broadly than just on recent property purchasers."

And while household debt is currently at low levels, borrowers stress "could start to increase if labour market conditions weaken further than currently envisaged."

That's a real risk given that the official jobless rate is expected to peak around 6.75 percent later this year.

The RBA notes that the recent decline in the cash rate to 2.25 percent is likely to boost demand by borrowers and that given the low rates environment "it is important that lending standards do not decline."

In addition to residential real estate investment, the RBA has also flagged that risks appear to be building in the commercial property sector and that "particular caution around collateral valuations is warranted in the current environment of declining property yields."

Today's financial stability update ramps up a warning in the September review that property is becoming "unbalanced" and that speculation increases the potential for prices to fall.