One of the most distressing aspects of global travel is surely to get into
certain Asian cities and be accosted by a virtual cacophony of beggars at every
traffic light. Some of the worst such concentrations can be found in India and
especially in the commercial capital of Mumbai (Bombay). As one's senses -
sight, smell and hearing - are accosted by the armies of mangled human forms
each more dastardly than the other (see
Slumdog communists, Asia Times Online, February 14, 2009), the most
obvious question is how this happens in an otherwise modern and even
forward-looking civilization.
The answer comes at the next traffic light, literally when one spies a hand
darting out of the window of the car in front and handing
over a few coins to a handicapped child begging for alms. That act of kindness,
perhaps prompted by the continued onslaught of such sights each more grotesque
than the other, is the real root of the problem. For in talking to Indian
authorities, the existence of the "beggar mafia" run by ruthless criminal
kingpins is confirmed by more than one as being closer to reality than what
some journalists in India would have you believe is pure Hollywood myth.
That such a criminal enterprise flourishes under the nose of the government is
of course no major surprise in a country where other perditions appear to
gallantly march around (see
Crooked Indians, Asia Times Online, April 13, 2011) in an apparent sea
of corruption. What feeds the monster though isn't the government but the
actions of Indians - the ones who donate money to the beggars. The road to hell
is truly paved with good intentions.
Reading about the new deal reached for Greece on Thursday led me to think about
the beggars of Mumbai. Much like that great crime, what has gone down in Europe
over the past two weeks is another piece of evidence that Europeans simply do
not appreciate the concept of truth. The deal is analyzed below - but before
that, we should consider the likely behavioural chaos it would create in Europe
and elsewhere.
By bailing out a patently undeserving candidate, European officials have simply
done what the lady in the car at the Mumbai traffic signal did; perpetuating a
grotesque course of action. Other candidates (ie other countries) will be
encouraged to live beyond their means like the Greeks rather than within their
means.
When a bigger economy with greater structural and social problems, for example
Spain, comes to the fore, it will be the actual defining moment of the European
financial crisis. Going back to 2008, the first collapse of an investment bank
- Bear Stearns in March 2008 - was easily absorbed by the markets and there was
a strong rally since. It took until after summer of 2008 for the real big
impact - Lehman Brothers and AIG - to filter through.
At 2% of the European economy, Greece was never the story. The drama around its
rescue though is: and therein lies the tale for the markets, as the good bard
would say.
Dealing camels
The deal itself appears to have very little to commend for it: a 21% haircut
for private bond holders triggering a selective default by Greece, a load of
new money thrown by the International Monetary Fund and the European Union,
maintenance of an austerity program even as interest rates on new debt are
reduced further to 3.5% and maturities are extended from seven years to 15 and
even 30 years in some cases. Confusingly, the haircut for private bondholders
will be constructed using multiple options presumably designed to suit the
differing accounting regulations for investors holding the debt - the European
Central Bank (ECB), commercial banks and others.
Confusingly, the deal seems to have missed all targets for constituents:
1. The ECB steadfastly demanded that there would be no default of any kind by
Greece - this has been over-ruled by the deal;
2. Market investors were expecting a 50% haircut but will instead have a figure
of less than half that imposed on them. However, this isn't the same as a
settlement for credit default swap contracts, where prices could be decided
later based on auctions;
3. Banks that were declared to have passed the stress tests last week by
European authorities will, embarrassingly, have to fail them again, because the
21% haircut is higher than what was proposed by authorities at the time stress
tests were promulgated;
4. New money has been made available for other European countries like Portugal
as well as for any banks facing trouble through the offices of the European
Financial Stability Facility; however, there is apparently not enough money in
the kitty should any of the bigger countries, like Spain or Italy, face funding
problems in the distant future;
5. It is not clear how the official assistance of 109 billion euros (US$157
billion) for Greece will be funded by European member states, some of whom
(like Finland, the UK and Austria) have recently disavowed any further
assistance for Greece;
6. The most chilling part of the eurozone statement is the assertion that the
bailout for Greece is the "first and only" one of its kind. That is exactly the
kind of statement that will be tested by market participants in coming months
and years;
7. Lastly and most importantly, I see no evidence that the core issue of Greek
solvency has been addressed in the bailout. On the contrary, it appears that
more debt is being heaped on a country that is already unwilling to bear the
burden from its existing debt.
As the old joke goes, a camel is a horse that was designed by a committee. In
this particular case, the committee has given us a truly bewildering rescue
plan for Greece.
What is its likely near-term impact? There is a lot of cash lying around
uninvested by different investors from hedge funds to sovereign wealth funds.
It is possible that the rescue for Greece may prompt a strong summer rally - a
capitulation trade of sorts that sees equity and commodity prices rising 25% or
more in coming weeks on the notion that the Greek plan is Europe's version of
the QE2 (second quantitative easing) program that was pushed through in the
United States by the Federal Reserve.
That said, the second bailout for Greece comes at a time when economic data
from around the world isn't looking too peachy - whether you look at US
unemployment or housing, German manufacturing, or worst of all, Chinese loan
statistics.
In my article earlier in the week (see
Murdoch, Moody's and Mandelbrot, Asia Times Online, July 20, 2011) I
averred that crises grew and multiplied when people least expected them; and
usually they came from an unexpected but not unknown source.
In this particular case, we aren't even watching a new movie - just a dubbed
version of a previously released one: namely the 2008 crisis I alluded to
above; that time it was American and now it is being dubbed into Greek with
Latin subtitles.
A bailout of Greece falls into the category of an event that satisfies the
near-term requirements of bullish investors, but leaves a sufficiently large
number of questions unanswered for the more bearish folks not to completely
throw in their towels.
Ergo, my expectation is now for a market rally going into the period after the
US Labor Day (September 5), at which point a confluence of more sobering
economic data and better market liquidity conditions will likely augur a crash.
(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
