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.
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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.