Scandal at IMF

Dominique Strauss-Kahn
Source: nytimes.com

I was really astonished when I read about a scandal that emerged after the IMF chief Dominique Strauss-Kahn had been stopped last Saturday from boarding a flight to Paris. He had been detained right before the flight was supposed to take off from JFK. He was accused of sexually attacking a maid in a hotel suite where he stayed at in New York. He has pleaded not guilty to the charges according to his lawyer, but a court ruled on Monday that no bail would be set for him. Since he was detained he was not able to attend the EU summit on Portugal’s bailout and the discussion on Greece’s re-negation demands. He was replaced as acting chief of IMF by John Lipsky on Sunday.

The end of his reputation

I think this is a scandal that a person of his magnitude cannot shake off. Even though it might be true or not, the damage has already happened. This is a scandal that is just now unfolding and I cannot believe a person of his magnitude would do such a thing. This will possibly completely destroy his career and reputation, especially his chances of being chosen as the socialist president candidate in the upcoming French election, for which he expected to announce his candidacy this summer. One could say that this might be a smear campaign against him with the aim to destroy his reputation or maybe he is just guilty of the horrible crimes he is accused of.

Some of the headlines in the newspapers over the weekend have been:

"I.M.F. Chief, Apprehended at Airport, Is Accused of Sexual Attack" 

                                                                          – The New York Times, 14 May 2011

"IMF Amid Scandal Turns to Lipsky as Greece Talks Persist" 

                                                                                     – Bloomberg Businessweek, 16 May 2011

All I know is that this is a scandal that most people in the political and financial world are appalled at and we just have to wait to see the outcome of it.

Creating a European Giant

During the last four years there has been speculation, talk, and even hostile takeover attempts by both MAN and Scania in a bid to acquire each other. Now it seems that much of this talk and hostility is coming to an end thanks to VW and its Chairman Ferdinand Piech.
a

Source: Di.se

Takeover bid for MAN

On Monday of this week VW increased its share in MAN from 29.9 percent to 30.47 percent, thus forcing the company, in accordance with German law, to make a mandatory bid for the entire company. VW is offering 95 euros for common shares and 60 euros for preferred shares, which was under the price the stock was trading for the previous week at 96.52 euros. Experts do not expect that investors will actually accept the bid, which is in line with what VW intended, since many believe that the small increase over 30 percent was just a probe to see if regulatory authorities would approve a deal. What many expect is that VW is going to increase their stake to 35-40 percent, thus creating a stable majority for the stakeholder meetings. It is expected that they would need to spend 1.5 billion to acquire the necessary shares.


Failed merger

In February the last merger talks failed mainly due to VW (major stakeholder in both firms) stating that MAN had to sort out its legal issues before talks could continue. What VW was referring to was the corruption accusation against MAN’s previously-owned subsidiary Ferrostaal. Ferrostaal was sold to International Petroleum Investment Company (IPIC) in 2008, but MAN decided to keep a minority stake of 30 percent that could be sold off at a later stage. They are now in a dispute with IPIC owners over potential legal charges and the sale of their minority post.


Creation of a market leader

VW CEO Ferdinand Piech 
Source: abendblatt.de

Piech wants to create the largest European heavy truck manufacturer (Scania and MANs combined market share: 30 percent), and stated that the firms could potentially save one billion euros annually in this fusion. Scania’s CEO, Leif Östling, who has lead the Swedish company for the last 21 years, has previously been hesitant to agree to any kind of merger with MAN, reasoning that merging two companies together often means a loss in overall market share as the organizations focus on blending their cultures instead of beating competitors.  In my opinion, what has changed Östlings view is that instead of threatening him with a hostile takeover, Piech instead is offering to sit down and talk. With the increased position in MAN that VW is expected to take, they are now in the position to dictate the conditions between the companies better than before. Thus, a merger looks more close at hand than ever before.

Was it a Justified Price

CEO Steve Ballmer and Marc Andreessen
Source: cnn.com

This week it was confirmed that Microsoft is purchasing Skype for 8.5 billion US dollars. The hefty price tag makes it Microsoft's most expensive acquisition to date. The final price has been viewed as extremely steep for a software company such as Skype, which has never reported a profit, and the purchase is being put into question by investors. Many do not know what Microsoft will use the acquisition for and what their final goal is with this takeover. Interestingly, it has emerged that it was Bill Gates pushing the board of Microsoft to acquire Skype and he has said that it is important to incorporate video services in the future as it will become increasingly vital.

For an interesting article on this topic, I recommend you can go to the Bloomberg homepage.

My view on the final purchasing price is that it seems inflated for something that Microsoft itself could most likely have programmed.  It would be fair to say that what Microsoft is in actuality paying for is Skype’s massive user-base and reputation. It remains to be seen if this price will prove to be justified, or if it is actually an overinflated price that they are paying.

The Plot Deepens

This is a follow-up on the post i made last week about 

Greece’s problems with their debt payments.

Today it was reported that after the meeting on Friday between ECB chairman Jean-Claude Juncker and Greece finance minister Giorgos Papakonstantinou that the 110 billion Euro loan scheme will likely have to be extended and possibly expanded with new loans. The finance minister also concluded that Athens has abandoned its plan to reenter the marketplace to refinance its loans at the end of the year.

Source: editorialcartoonists.com

Less strict conditions on the agenda

The outcome of the meeting was quite clear; Greece wanted less strict conditions and two more years to reach the max 3% GDP deficit limit that was set for 2014. They also wanted lower interest rate levels from the loans provided by ECB and IMF. Greece rationalizes these demands by asserting that the stringent conditions currently imposed are hampering economic recovery and only with more relaxed conditions can the growth pattern be set back on a strong path. What many now fear is that if these relaxation demands are met, other countries that are facing default would follow suit.

Market reaction

The way the market reacted to this news was that the cost to protect oneself against Greece defaulting increased in the CDS market to 13.60%. That is double the cost in comparison with Portugal (6.43%) and Ireland (6.70%) which have also received loans. The rate on a ten year Greece bond increased to 15.89% which is five times what Germany have on theirs, 3.17%.

Taking into account this and the content of my previous post, I think it is just a matter of time before Greece have to restructure their loans, most likely sooner than many expected would be necessary. All we can hope is that the Euro group decides on a plan that would help Greece in the long run and not just look at their own short term interests. If this is not possible, I cannot see the Euro group surviving in the future; this could squander years of European diplomacy and cooperation.

Deja Vu - All Over Again

Source: toonpool.com

The words one hears time and time again from European politicians when they talk about the European Union are: “unity,” “cooperation,” and “partnership.” It is always reiterated that by working together we can avert the power shift towards the East, lead the globalisation of the world, and protect the way of life that so many have grown accustomed to here in the West. It is true that being part of the EU brings many benefits for its citizens; it is now easier than ever for citizens to work freely and move wherever they desire.  The single currency has fomented an increase in trade among one another and made it simpler for its citizens to compare prices of products and services. But as many know, in the last year the EU’s foundation has been crumbling and the partnership has turned in many ways ugly, with the “stronger” countries dictating the terms, leaving the “weaker” ones to agree, or be threatened with expulsion from the EU if they do not comply.

Let's take it from the beginning
In the beginning of the financial crisis everyone thought that the Euro was a safe haven in a sea of financial disarray. But that changed quickly when the new socialist government in Greece entered office in late 2009. What they discovered was that the previous government had not only hidden facts about the state’s finances and the current debt, but done so for years, stretching as far back as before the introduction of the Euro in Greece in 2002.

In the Euro group there is a common agreement that the deficit should not exceed 3% of the GDP. They had to revise the expected deficit in 2009 from 6-8% to roughly 15.4%. Greece had to choose between going belly-up (since the open market would only give loans with very high interest rates, over 15%), or to get rescued by fellow EU members. France was eagerly advocating that the EU should do this alone as they saw it as a European affair. Germany on the other hand wanted the IMF to participate since it was against their constitution to provide funds to countries going bankrupt (this is also written into the EU constitution). Despite Germany’s reluctance to participate, all the countries joined in and lent Greece 110 billion euro’s over a 3-year period in 2010. The requirements to gain this loan were connected with a lot of austerity measures which were dictated by IMF and EU member states, and a failure to comply meant a halt in the loan payments.

Germany's hesitation and contribution

An interesting fact here is that the 22.4 billion euro loan Germany had to provide was passed with an overwhelming majority in the Bundestag. This, despite Angela Merkel advocating against any kind of loan or payment; she wanted to protect German taxpayers from Greece’s wasteful spending habits. But what was not discussed in any great detail was what the actual cost would be for Germany if Greece had to default. According to recent calculations done by IMK and Deutsche Bank, Germany and its tax payers would have to swallow a 40.6 billion euro loss if Greece were to need to restructure its loans and write off half its debt now. 

By looking at the picture above we can see how the 40.6 billion euros is divided into three areas that would be affected. 25 billion would be incurred by German banks, 11.4 billion from the ECB loan they gave to Greece, and 4.2 billion for the German state itself.

One might ask the question: If Merkel would have decided not to help Greece back in 2010 would the other countries in the EU have done the same and withdrawn their support? I think most likely yes, and this would have forced Greece’s hand and given them no other option than to default, start negotiations and write off their debt. Debt that was held by financial institutions who were already in a dire state after the financial crisis and were being kept alive by the taxpayers’ money that was being pumped into them. One could say that out of two bad choices, Germany and the rest of the EU took the cheaper way out, and at the same time sacrificing Greece and its citizens to years of possible stagnant growth and a decrease in quality of life.

Deja vu all over again

Source: seekingalpha.com

The problem now for the leaders in the EU is that more and more people from the market are demanding that Greece should restructure its debt since the likelihood that Greece would be able to continue borrowing money is not sustainable. This does not look like an option however, since the ECB chairman Jean-Claude said as recently as this week that these demands are ridiculous. There have also been whispers that Greece is considering leaving the euro collaboration, but this was strongly contended by the EU who said that the topic is “not up for discussion.” This raises some questions: if they are “not talking about it” then why is there an internal memo circulating the German finance department stating that if Greece leaves the euro, their debt level would increase by 50%?

Only path forward
In my view the path for Greece is already set out and it is leading the country towards bankruptcy and default. What most western countries did to lower their debt previously was not to pay it off, and instead have a growth rate that is higher than what they pay for rates on their debt. The problem for Greece here is that the level of interest they pay for the ECB loan is 6.5%. Greece will not surpass that level of growth in the near future and most forecasts suspect it will never even be close. It is unimaginable to think that Greece will ever be able to pay off its debt and despite the harsh austerity measures they have implemented the debt is ballooning out of control.

Possibly the only way forward is what should have been done from the beginning of the crisis. Allow Greece to restructure part of its debt, refinance the rest and keep putting pressure on the politicians in Athens on reforming their economy. The leaders of Europe have to make some tough decisions, even if it is against public opinion in their own countries. 

Flicking the Switch…

Federal Government Spending last thirty years

The recent talks about a possible shutdown of the Federal Government in America is quite disconcerting and emphasises the general public's opinion that politicians will always put their personal agenda before the greater good of the country. Despite the wrangling between the Republicans and the Democrats in the last few months, an agreement has still not been made and it looks as if sealing a deal before the government runs out of funds is looking bleak. The Republicans, and especially the new “Tea Party” movement, are flexing their muscles and showing the Democrats that their spending-spree days are over. They are using the current dire situation to their advantage to force through spending cuts that they say are justified despite the sluggish recovery the US is experiencing. What they aim to accomplish with this move is to show Obama that they take the current $1.65 billion deficit seriously and he needs to do more to balance his books.

Wrangling in the Congress

Obama and Boehner
Source: Politico

In spite of this, negotiations are still underway between Senate Majority Leader Harry Reid and House Speaker John Boehner. Not even Obama’s continuous meetings with congressional leaders have helped to break a deal. There is now less than a day left before the federal government runs out of funds and the current continuing resolution that is funding the government expires at midnight Friday, 8 April. The likelihood of this “shutdown” happening is much larger now than it was in previous weeks and thus Obama has instructed his government to start the process of designating which employees will be furloughed (meaning that they are placed temporarily on non-duty, non-pay status), and which employees would be required to continue working.

Government activities related to financial markets are not expected to be affected in any significant way by a “shutdown,” should it occur.  The FED, FDIC and OCC are not expected to be affected and to continue with business as usual. The Treasury might furlough some staff, but the main departments of debt issuance and tax collection would not be affected. One department that would be affected quite severely and is causing some concern is the Federal Housing Admin (FHA).  In America FHA issues mortgages to property acquisitions (15% of all home purchases in 2010) and their importance in the housing market is even more important when considering their refinancing activities. If disruptions do occur then the FHA would not be able to issue any more loans and many experts raised their concerns on this point since the housing market in America is still in shambles after the financial crisis and still slowly pulling itself out from the crash. By withdrawing FHAs loan issuing abilities, more pressure could be created in the housing market and house prices might drop even further. This could lead to a vicious cycle that would stop consumers from spending due to fears of rising loan costs.

Other affected government areas

By viewing the picture above one can see which areas will be affected, partially affected, and which will not be affected at all. The two largest groups, postal workers and active duty military, are expected to continue working as normal, but they can expect a delay in receiving their pay checks until the shutdown is over. Other departments that are critical to the US security are expected to be maintained on status quo, but a few civilian workers might be furloughed from Defense and Homeland Security. Regarding social security payments, the payments will not be affected, but people who are applying for benefits will experience delays. The department with the most furloughed staff will be the Interior Department. Their main responsibilities are the national parks in the US and one expects that around three-quarters of their staff have to go on non-duty service.

History repeating itself

I find it interesting that despite all the concerns and media coverage this possible “shutdown” is experiencing, this has happened before, as recently as Bill Clinton’s presidency in 95/96. The reason behind that “shutdown” was then president Bill Clinton refused to accept the spending bill with the cuts that was passed by the Republican controlled congress and thus vetoed against it. The house speaker Newt Gingrich then threatened to refuse to increase the debt limit, thus forcing the Treasury to suspend funding to avoid the US going default. This struggle between the leaders lead to the suspension of all non-essential government services between November 14 to November 19, and again from December 16 to January 6, 1996. In the end the general public blamed the Republicans for the shutdown and many say that this was the reason behind Bill Clinton’s successful reelection later that year.

In the end, I do believe that the parties must agree and both Obama and John Boehner may have to give a bit more than they would like to avoid the closure. In comparison to the last closure, the state of the economy today is much more dire and sensitive to political instability. That the Republicans and Democrats would threaten the recovery of the US economy is quite astonishing and something that I do not believe they would do in the end. I guess we just have to wait and see if Obama has to “flick the switch” and turn off his government on Friday.

Rejection & Resignation for Portugal

Interesting story that just happened yesterday. Portugal's prime minister resigned after his proposed austerity measures were voted down by the parliament. Now it looks even more bleak for Portugal and more likely that they will be forced to ask the EU and IMF for help.

Portugals Prime Minister Socrates
Source: bbc.co.uk

More about this story can be read on BBC News homepage.

I will be for sure very interested to see the outcome and if Spain is next in line begging for a bailout.

We won’t manipulate it

On Thursday night, the Yen hit the strongest position against the dollar since the Second World War. After a surge of around 4% in one hour, it was trading at dollar/yen 76.25. Many state that the strengthening of the Yen was caused by market perception of repatriation of investments going back to the Japanese financial market which many experts do perceive as a short term occurrence and speculation. The reaction from the financial minister Igarashi was swift and with the support of the G7 group an intervention in the market was done this Friday morning. The selling of Yen started with Bank of Japan and was followed up by Europe’s central banks, the Bank of Canada, and the Federal Reserve Bank of New York with an estimated 2 trillion yen ($25 billion) used. The rate of the currency fell to 81.36 at noon today. 

First intervention by the G7 since 2000

This was the first intervention in the market by Japanese authorities since November of last year. At that time the Yen had reached an all-time high of 82.88 the highest since 1995 however, the BOJ acted alone and sold off 2 trillion yen. For the G7 this was the first intervention in the Forex market in 10 years. The last time was in 2000 when G7 stepped in to intervene in the market for the Euro; this caused the Yen to weaken against all of its 16 most-traded peers.

What the G7 is hoping to do with this intervention and the strong message it sends to the market is to force investors out of long positions that have been taken against the Yen; a stable Yen will help boost the economy and exports now that domestic demand has collapsed due to the devastating earthquake that occurred last week.

BOJ and its stance with manipulation

Source: Top News

The finance minister was quoted this morning as saying: “We won’t manipulate it, but I hope that the yen goes back to where it was before the earthquake.” It seems odd to me that an intervention is just an adjustment back to a level that the government deems appropriate for the Yen to be valued at, and not the market. The BOJ also said that they will continue with powerful monetary easing to avert the economy slipping into a recession.

There are four different explanations that experts have developed to explain the increase in value of the Yen:

• Japanese insurance and finance institutions have started to bring capital back from abroad to fund the crisis situation
• Japanese households have started to bring home investments abroad to get a higher interest rate on their investment
• Outward flow of capital has diminished compared to previous levels
• Speculators have been forced to buy more Yen to fund their deals

Weakening the Yen

One may ask if this intervention is enough to weaken the Yen. Deutsche Bank has stated that Japan may need almost $500 billion to weaken the Yen and fight the forces that where driving it up. This estimation comes from looking at previous interventions as well as the size of the Forex market. If this is the amount that will be needed to stabilize the Yen, it will increase the debt burden by 10% and Japan already has the highest debt ratio in the developed world with over 220%.

The question that remains is: can Japan realistically stop the Yen from appreciating?

Make or Break for Japan

“The most expensive natural disaster”  - Reuters

Hefty cost on insurers

Source: The National

That is what experts say that the disaster in Japan is going to be. Insurance companies are expected to have to payout anywhere from 15 to 35 billion dollars as compensation, but this will not be nearly enough to cover everything. An early estimate of 100 billion is being thrown around, but many think even this is not enough to replace and rebuild everything the earthquake and tsunami destroyed. Replacing the infrastructure alone will be around $40 billion. Additionally, the escalating problems at the Fukushima Daiichi nuclear power plant where explosions have been rocking the nuclear reactors since the earthquake, has led to fears of radiation leaks and this has put the Nikkei index into a freefall. 

The first I heard about this catastrophe came on Friday morning when a guy asked me if I’d heard about the tsunami.  He then proceeded to tell me:

“If you have anything invested there you should sell it now.
The market will go into a free fall.”

Market reaction

A massive drop occurred on Tuesday after the already significant drop on Monday of 6.2% (the first trading day after the disaster). The index dropped by 10.55% or 1,015.34 points and ended up at 8,605.15. The Nikkei index was also down Tuesday hovering on the 8,227 mark.  To help stabilize the market, the Bank of Japan pledged on Sunday that they would pump 15 trillion yen ($183 billion) into the economy to reassure global investors about the stability of Japanese financial markets and their banks. This is almost five times what was put into the market after the Lehman collapse in 2008 and they are offering to buy an additional 3 trillion yen of government bonds.

Forecast is bleak

Biggest investment bank in Japan, “Nomura”, has forecasted that the recovery of the economy is now going to be delayed by at least six months and that the GDP growth figures will most likely flat-line for the rest of the year. Previous expectations were that the economy would expand by 1.4% in the second quarter this year. Also, the world economy is probably going to be affected with increased inflationary pressure and short-term stimulus for the recovery.

Source: CIA World Fact Book

Unsustainable

Japan already has one of the highest debt ratios in the world and will surpass 233% of the GDP in 2012. This is an unprecedented rate and Japan is the only country gaining such a high level of debt during peace time. Japan already got a downgrade on its rating in January, how will they fair now with the rating agencies? Japan’s financial minister has stated that the agencies should give leeway to the Japanese finances due to the crisis.


For years experts have said that the economy in Japan needs a more significant boost to push it out of the deflationary cycle that it has experienced since the financial collapse in the ‘80s.  It is a hard point to make, especially in light of the recentness of the catastrophe, but maybe this could give Japan’s fragile economy the chance to push itself out of its decade-long economic stall and regain its position as a strong financial player. A darker path could be that this catastrophe will break the Japanese finances and push it further down the spiral of economic contraction and stagnation; a spiral it would then never be able to lift itself out of without default.

The Return of the Vikings

Could the Swedes have found the light in the dark abyss that the western countries plummeted into after the financial crisis in 2008?

Graph shows the changes in GDP since 2007

Source: Government Offices of Sweden

Explosive growth
Last week Sweden’s Statistical Bureau posted last year’s quarterly GDP growth figures and to everyone’s surprise it was much stronger than what experts had predicted. A record growth of 7.3 % was achieved and it has never been that high since recording began in the ‘70s. The huge rise is partially explained as a recoil from the severe dip the Swedish economy took in 2009. But I think those are still some amazing growth figures from a developed western economy and that makes me proud to be Swedish (despite not living there for 3 years now).

Recovery already reached

Anders Borg
Source: sverigesradio.se

In a year, Sweden has already recovered the GDP drop and is now heading with full force into 2011. By looking at the graph above one can see this very clearly: Sweden is the blue line, the Euro area is red, and the US is demarcated in green. Experts predict the growth of the year to be over 4% with the finance minister Borg optimistically predicting 4.8% growth.  It is expected that the unemployment rate will drop to around 5% in the next 3 years.  Having an export-oriented and open market to the world is can be seen as a drawback and it makes us much more vulnerable to the changes in the world economy; sharper drops, but steeper climbs which we can clearly see now. Despite the view by many of Sweden as the totem of socialism, our country has a liberal-oriented market. We have a more liberal market than Germany and Belgium and we’re one of the few that actually became even more liberal during the financial crisis, when so many others turned to protection. The truth is that Sweden was, and almost always had, a liberal market.

How many other countries in Europe can report their budget’s heading into a surplus? Even the state review agency had concerns about the forthcoming predicted surpluses in the coming years. They wanted to know what the government had planned to do with it! How many other countries have this problem? Possibly China, but not many others I would say.

Has the country up in the cold north found the way out of slumped growth and persistent unemployment? Maybe the world could learn a thing or two from this remote part of the world where the Viking once came from.

First draft

Just want to welcome you to my new blog that I’m doing in part with a class at university. I’ll write about topics that interest me and things that happen in the global economy and financial markets during the next few months. I have never done this before so let’s see together what this little project will produce at the end.

Source: Dilbert.com

So I have nothing more to say than… here we GO!