John Mauldin: Greeks Bearing Gifts!
Sovereign Debt Defaults. How is the world going to avoid this crisis?
- Sovereign debt defaults on the horizon. How is the EU going to survive this? Will the EU/EMU boot Greece out or will Germany leave voluntarily (It is better for Germany to stop financing the other bankrupt countries)? John Mauldin writes:
On Monday, the government of Greece offered a “gift” to the markets of 8 billion euros worth of bonds at a rather high 6.25%. The demand was for 25 billion euros, so this offering was rather robust. Today, those same Greek bonds closed on 6.5%, more than offsetting the first year’s coupon. Greek bond yields are up more than 150 basis points in the last month!
Why such a one-week turnaround? Ambrose Evans Pritchard offers up this thought: “Marc Ostwald, from Monument Securities, said the botched bond issue of €8bn (£6.9bn) of Greek debt earlier this week has made matters worse. Many of the investors were ‘hot money’ funds that bought on rumors that China was emerging as a buyer, offering them a chance for quick profit. When the China story was denied by Beijing and Athens, these funds rushed for the exit.”
Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph (top of post) on the debt of various countries.
When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That’s a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.
Greece benefitted from being in the Eurozone by getting very low interest rates, up until recently. Being in the Eurozone made investors confident. Now that confidence is eroding daily. And this week’s market action says rates will go higher, without some fiscal discipline. To help my US readers put this in perspective, let’s assume that Greece was the size of the US. To get back to Maastricht Treaty levels, they would need to cut the deficit by 4% of GDP for the next few years. If the US did that, it would mean an equivalent budget cut of $500 billion dollars. Per year. For three years running.
That would guarantee a very deep recession. Just a 10% suggested pay cut has Greek government unions already planning strikes. Nevertheless, the government of Greece recognizes that it simply cannot continue to run such huge deficits. They have developed a plan that aims to narrow the shortfall from 12.7% of output, more than four times the EU limit, to 8.7% this year. That reduction will be achieved even though the economy will contract 0.3%, the plan says. The deficit will shrink to 5.6% next year and 2.8% in 2012.
The market is saying they don’t believe that will happen. For one thing, if the Greek economy goes into recession, the amount collected in taxes will fall, meaning the shortfall will increase. Second, it is not clear that Greek voters will approve such a plan at their next elections. Riots and demonstrations are a popular pastime.
Both French and German ministers made it clear that there would be no bailout of Greece. But here’s the problem. If they ignore the noncompliance, there is no meaning to the treaty. The euro will be called into question. And the other countries with serious fiscal problems will ask why they should cut back if Greece does not. If Greece does not choose deep cutbacks and recession, the markets will keep demanding hikes in interest rates, and eventually Greece will have problems meeting just its interest payments.
Can this go on for some time? The analysis of debt crises in history says yes, but there comes a time when confidence breaks. My friends from GaveKal had this thought:
“What is the next step? Having lived through the Mexican, Thai, Korean and Argentine crises, it is hard not to distinguish a common pattern. In our view, this means that investors need to confront the fact that we are at an important crossroads for Greece, best symbolized by a simple question: ‘If you were a Greek saver with all of your income in a Greek bank, given what is happening to the debt of your sovereign, would you feel comfortable keeping all of your life savings in your savings institution? Or would you start thinking about opening an account in a foreign bank and/or redeeming your currency in cash?’ The answer to this question will likely direct the next phase of the crisis. If we start to see bank runs in Greece, then investors will have to accept that the crisis has run out of control and that we are facing a far more bearish investment environment. However, if the Greek population does not panic and does not liquefy/transfer its savings, then European policy-makers may still have a chance to find a political solution to this growing problem.
“What could a political solution be? The answer here is simple: there is none. So if Europe wants to save Greece from hitting the wall towards which it is now heading, the European commission, the ECB and/or other institutions (IMF?) will have to bend the rules massively. In turn, this will likely lead to a further collapse in the euro. But for us, an important question is whether it could also lead to a serious political backlash. Indeed, at this stage, elected politicians are likely pondering how much appetite there is amongst their electorate for yet another bailout, and for further expansions in government debt levels. The fact that the intervention would occur on behalf of a foreign country probably makes it all the more unpalatable (it’s one thing to save your domestic banking system … but why save Greece?).”
If Greece is bailed out, Portugal and Ireland will ask “Why not us?” And Spain? Italy? If Greece is allowed to flaunt the rules, what does that say about the future of the euro? Will Germany and France insist on compliance or be willing to kick Greece out? A few months ago, the markets assumed that not only Greece but Portugal, Italy, Spain, and Ireland would have a few years to get their houses in order. This week, the markets shortened their time horizon for Greece.
Even so, we get this quote, which may end up ranking alongside Fisher’s quote in 1929, that the stock market was at a permanently high plateau, or Bernanke’s quote that “The subprime debt problem will be contained.”
“There is no bailout problem,” Monetary Affairs Commissioner Joaquin Almunia said today at the World Economic Forum’s annual meeting in Davos, Switzerland. “Greece will not default. In the euro area, default does not exist.” The evidence in This Time is Different is that default risk does in fact exist. You cannot keep borrowing past your income, whether as a family or a government, and not eventually go bankrupt.
Are we at an inflection point? Too early to say. It all depends on the willingness of the Greek people to endure what will not be a fun next few years, for the privilege of staying in the Eurozone. And on whether the bond market believes that this time is different and the Greeks will actually get their fiscal house in order.
Oh by the way, did I mention that the history of Greece is not exactly pristine in terms of default? In fact, they have been in default in one way or another for 105 out of the past 200 years. Aristotle, can you spare a dime?
And one last thought. The US is running massive deficits. If we do not get them under control, we will one day, and perhaps quite soon, face our own “Greek moment.” Look at the graph below, and weep.
And we think Greece is a big problem? America's debt default is the real monster!
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The Fateful Geological Prize Called Haiti !
- What is the military invasion of Haiti about? It is a war for resources and a strategic move in the coming war to capture Latin America. William Engdahl opines:
Behind the smoke, rubble and unending drama of human tragedy in the hapless Caribbean country, a drama is in full play for control of what geophysicists believe may be one of the world’s richest zones for hydrocarbons-oil and gas outside the Middle East, possibly orders of magnitude greater than that of nearby Venezuela.
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A relevant Texas geological project
Leaving aside the relevant question of how well in advance the Pentagon and US scientists knew the quake was about to occur, and what Pentagon plans were being laid before January 12, ….. Haiti also happens to lie in a zone that, due to the unusual geographical intersection of its three tectonic plates, might well be straddling one of the world’s largest unexplored zones of oil and gas, as well as of valuable rare strategic minerals.
The vast oil reserves of the Persian Gulf and of the region from the Red Sea into the Gulf of Aden are at a similar convergence zone of large tectonic plates, as are such oil-rich zones as Indonesia and the waters off the coast of California. In short, in terms of the physics of the earth, precisely such intersections of tectonic masses as run directly beneath Haiti have a remarkable tendency to be the sites of vast treasures of minerals, as well as oil and gas, throughout the world.
Notably, in 2005, a year after the Bush-Cheney Administration de facto deposed the democratically elected President of Haiti, Jean-Baptiste Aristide, a team of geologists from the Institute for Geophysics at the University of Texas began an ambitious and thorough two-phase mapping of all geological data of the Caribbean Basins. The project is due to be completed in 2011. Directed by Dr. Paul Mann, it is called “Caribbean Basins, Tectonics and Hydrocarbons.” It is all about determining as precisely as possible the relation between tectonic plates in the Caribbean and the potential for hydrocarbons—oil and gas.
Notably, the sponsors of the multi-million dollar research project under Mann are the world’s largest oil companies, including Chevron, ExxonMobil, the Anglo-Dutch Shell and BHP Billiton. Curiously enough, the project is the first comprehensive geological mapping of a region that, one would have thought, would have been a priority decades ago for the US oil majors. Given the immense, existing oil production off Mexico, Louisiana, and the entire Caribbean, as well as its proximity to the United States – not to mention the US focus on its own energy security – it is surprising that the region had not been mapped earlier. Now it emerges that major oil companies were at least generally aware of the huge oil potential of the region long ago, but apparently decided to keep it quiet.
Cuba’s Super-giant find
Evidence that the US Administration may well have more in mind for Haiti than the improvement of the lot of the devastated Haitian people can be found in nearby waters off Cuba, directly across from Port-au-Prince. In October 2008 a consortium of oil companies led by Spain’s Repsol, together with Cuba’s state oil company, Cubapetroleo, announced discovery of one of the world’s largest oilfields in the deep water off Cuba. It is what oil geologists call a ‘Super-giant’ field. Estimates are that the Cuban field contains as much as 20 billion barrels of oil, making it the twelfth Super-giant oilfield discovered since 1996. The discovery also likely makes Cuba a new high-priority target for Pentagon destabilization and other nasty operations.
No doubt to the dismay of Washington, Russian President Dmitry Medvedev flew to Havana one month after the Cuban giant oil find to sign an agreement with acting-President Raul Castro for Russian oil companies to explore and develop Cuban oil. Medvedev’s Russia-Cuba oil agreements came only a week after the visit of Chinese President Hu Jintao to meet the recuperating Fidel Castro and his brother Raul. The Chinese President signed an agreement to modernize Cuban ports and discussed Chinese purchase of Cuban raw materials. No doubt the mammoth new Cuban oil discovery was high on the Chinese agenda with Cuba. On November 5, 2008, just prior to the Chinese President’s trip to Cuba and other Latin American countries, the Chinese government issued their first ever policy paper on the future of China’s relations with Latin America and Caribbean nations, elevating these bilateral relations to a new level of strategic importance.
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Haiti, a new Saudi Arabia?
The remarkable geography of Haiti and Cuba and the discovery of world-class oil reserves in the waters off Cuba lend credence to anecdotal accounts of major oil discoveries in several parts of Haitian territory. It also could explain why two Bush Presidents and now special UN Haiti Envoy Bill Clinton have made Haiti such a priority. As well, it could explain why Washington and its NGO’s moved so quickly to remove– twice– the democratically elected President Aristide, whose economic program for Haiti included, among other items, proposals for developing Haitian natural resources for the benefit of the Haitian people.
In March 2004, some months before the University of Texas and American Big Oil launched their ambitious mapping of the hydrocarbon potentials of the Caribbean, a Haitian writer, Dr. Georges Michel, published online an article titled ‘Oil in Haiti.’ In it, Michel wrote,
… .[I]t has been no secret that deep in the earthy bowels of the two states that share the island of Haiti and the surrounding waters that there are significant, still untapped deposits of oil. One knows not why they are still untapped. Since the early twentieth century, the physical and political map of the island of Haiti, erected in 1908 by Messrs. Alexander Poujol and Henry Thomasset, reported a major oil reservoir in Haiti near the source of the Rio Todo El Mondo, Tributary Right Artibonite River, better known today as the River Thomonde.
According to a June 2008 article by Roberson Alphonse in the Haitian paper, Le Nouvelliste en Haiti, “The signs, (indicators), justifying the explorations of oil (black gold) in Haiti are encouraging. In the middle of the oil shock, some 4 companies want official licenses from the Haitian State to drill for oil.”
At the time, oil prices were climbing above $140 a barrel — on manipulations by various Wall Street banks. Alphonse’s article quoted Dieusuel Anglade, the Haitian State Director of the Office of Mining and Energy, telling the Haitian press: “We’ve received four requests for oil exploration permits…We have had encouraging indicators to justify the pursuit of the exploration of black gold (oil), which had stopped in 1979.”
Alphonse reported the findings from a 1979 geological study in Haiti of 11 exploratory oil wells drilled at the Plaine du Cul-de-sac on the Plateau Central and at L’ile de La Gonaive: “Surface (tentative) indicators for oil were found at the Southern peninsula and on the North coast, explained the engineer Anglade, who strongly believes in the immediate commercial viability of these explorations.”
Journalist Alphonse cites an August 16, 1979 memo by Haitian attorney Francois Lamothe, in which he noted that “five big wells were drilled” down to depths of 9000 feet and that a sample that “underwent a physical-chemical analysis in Munich, Germany” had “revealed tracks of oil.”
Despite the promising 1979 results in Haiti, Dr. Georges Michel reported that, “the big multinational oil companies operating in Haiti pushed for the discovered deposits not to be exploited.” Oil exploration in and offshore Haiti ground to a sudden halt as a result.
Similar if less precise reports claiming that Haitian oil reserves could be vastly larger than those of Venezuela have appeared in Haitian websites. Then in 2010 the financial news site Bloomberg News carried the following:
The Jan. 12 earthquake was on a fault line that passes near potential gas reserves, said Stephen Pierce, a geologist who worked in the region for 30 years for companies that included the former Mobil Corp. The quake may have cracked rock formations along the fault, allowing gas or oil to temporarily seep toward the surface, he said Monday in a telephone interview. ‘A geologist, callous as it may seem, tracing that fault zone from Port-au-Prince to the border looking for gas and oil seeps, may find a structure that hasn’t been drilled,’ said Pierce, exploration manager at Zion Oil & Gas Inc., a Dallas-based company that’s drilling in Israel.
In an interview with a Santo Domingo online paper, Leopoldo Espaillat Nanita, former head of the Dominican Petroleum Refinery (REFIDOMSA) stated, “there is a multinational conspiracy to illegally take the mineral resources of the Haitian people.” Haiti’s minerals include gold, the valuable strategic metal iridium and oil, apparently lots of it.
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Societal and economics observer and commentator with an endtimes, future history perspective. Follow me at Twitter: socioecohistory
