An institutional friend once defined a mine as a "hole in the ground with a liar at the top".  While clearly Australia's largest export earners revolve around mining, this remark struck caution into me.  There is more to be cautious about with the resources sector and iron ore in particular than a simple throw away line however.


With 60% of world iron ore shipped to China, investors need to consider that the Chinese economy is undergoing change, and its construction and use of steel is slowing.  The fundamentals of iron ore supply and demand have changed and has already caused a massive drop in the price of iron ore, which can be seen in the chart below.  Just a few years ago the iron ore price was almost $200 per tonne, and now hovers around $60 per tonne (US).



With Chinese demand for iron ore significantly different to that of a few years ago, we have also witnessed a significant uptick in production of iron ore.  Slowing demand and rising production has now resulted in an iron ore glut, which obviously has depressed the price.  Investors need to ask themselves whether this is likely to rebound quickly or whether lower prices are to remain part of the environment for some time.  The graph below forecasts iron ore demand (black line) and overlays iron ore supply from global players.  The grey shaded part above the solid line shows the level of oversupply in the iron ore market that is forecast until the end of this decade.  It is difficult to see iron ore prices rise given these fundamentals.  While BHP and RIO's cost of production remains below $60 per tonne (implying that their production remains profitable), the same can not be said of the small to medium sized players.



This not only impacts the mining companies themselves as they receive a lower price for their iron ore, but also has the flow on effect on companies that provide services to the mining companies.  We are currently witnessing most mining companies cutting costs as their margins are eroded by lower prices and some of the simpler costs to cut involve reducing the expenditure on mining services contractors and other capital expenditure.  Australia is also toward the end of completion of several large LNG projects that involve large amounts of capital expenditure, but are likely to complete in the next couple of years.  This means that the capital expenditure in the mining sector, which has already come off its all time high, is likely to have further to fall.  This is evidenced in the chart below.



So not only are we cautious about owning mining companies themselves, we are also very cautious about investing in companies that provide services to the mining sector.  While some of this bad news is clearly already priced in, we are of the view that a catalyst to increase resources prices and stimulate capital expenditure in the mining sector is not on the horizon.



This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306

Friday, 06 March 2015 06:04

The Future of the Oil Price

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With permission from Platinum Asset Management, we bring you their views on the future for the oil price.


Scott Gilchrist talks with Douglas Isles about the oil price and what is the likely outcome for it on a medium term view.


Tuesday, 03 March 2015 07:16

Bubbles and the corruption of risk

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I have previously warned that the combination of the demographic avalanche of retiring baby boomers, low interest rates and a disproportionately large amount of their wealth in cash would mean that stocks and property would continue to rise for a while. I call it ‘The Boom We Have to Have.’ But like all booms, this one will also bust.

These conditions, especially low rates forcing a big part of the population into riskier products, corrupt investors’ sense of risk. Rising prices amid a wave of buying reinforces the behaviour of investors and their brokers who believe their thesis is correct.

New listings and credit point to problems

I am not alone in the view that at some point in the next six to eighteen months, there is a real chance that baby boomer retirement plans may sink thanks to their inability to avoid repeating the investment mistakes of their past. Stanley Druckenmiller is an American hedge fund manager, famous for being the lead portfolio manager for George Soros’s Quantum Fund. In 2010, Druckenmiller handed back the billions he had been managing for 30 years through his firm Duquesne Capital. He remains a noted philanthropist, keen golfer and speaker on the global investment and macroeconomic circuit.

Druckenmiller should be heeded. He observed that low rates have skewed peoples’ sense of risk, particularly in two markets – new share listings (IPO’s) and credit. He pointed out that 80% of companies listed in 2014 have “never made a dime”. In 1999, just before the tech crash, that number was 83%.

(As an aside, over the Christmas break, I read You Only Have To Be Right Once: The Unprecedented Rise of the Instant Tech Billionaires. Including Twitter, Facebook, Instagram, the book was a who’s who of the world’s biggest tech companies and the backgrounds to their stunning rises. But I couldn’t help noticing that all the references to billions had little or nothing to do with profits or in some cases even revenues. Some of the businesses discussed, which were sold for billions, not only had no revenue but no revenue model either).

Druckenmiller had another warning on credit markets. Last year, speaking on CNBC, Druckenmiller said, “When I look at credit … corporate credit is growing at a record rate, far faster than it grew in 2007. And S&P pointed out that 70% of debt issued has a B-rating or worse. To put that in perspective, in the ’90s, that number was 31%. Do you remember the hullabaloo in 2007 about covenant-light loans? Companies issued $100 billion of them in 2007, and 38% was B-rated. This year we’re going to $300 billion, up from $260 billion last year and $90 billion a year earlier, and 58% of them were B-rated.”

At the more recent speech, Druckenmiller also observed, “There are some really weird things going on in the credit market … but there are already early signs starting to emerge. And if I had a message out here, I know you’re frustrated about zero rates, I know that it’s so tempting to go ahead and make investments and it looks good for today, but when this thing ends … I think it could end very badly.”

Why is Druckenmiller so worried? It’s simple. If interest rates rise, many investors in corporate debt will want to exit at the wrong time. Australian investors in bank hybrids and corporate bonds (G8 Education is a recent example of a popular corporate bond issuer) should consider the warning too. And if interest rates don’t rise, but the economy weakens significantly, then some industries will be unable to cover their debt costs. Either way, investors will face problems at some stage.

Low rates support asset prices

Low interest rates are here to stay for a while and that will support asset prices. Eventually however the price of those assets (stocks and property) will be pushed way too high (we think a strong bull market is likely for some part of this year) as people panic buy amid a fear of missing out when their income is eroded from low rates on cash. After that, a large number of investors will, sadly, suffer financially again – from buying too late and paying too much.

There is a way to avoid it. You must be invested in high quality businesses with bright prospects and buy them when they are cheap. We can think of only a handful of stocks that meet this criteria currently. When we cannot find such opportunities, the only safe alternative is cash (even though rates are low) and we are 20-30% invested in cash at the moment.

If you are invested in a high-performing fund that is fully invested in stocks like REA Group (P/E ratio 44 times), Dominos Pizza (68 times), or many of the expensive stocks below, consider switching at least some of your retirement nest egg to a larger cash weighting. The cash won’t make your investment 100% immune to a declining market but it will allow additional purchases at cheaper prices, which offers the opportunity to significantly reduce the time to recovery. In Table 1, PER is Price to Earnings ratio.

Table 1. Expensive stocks? You be the judge…

RM Picture1 270215Of course if interest rates stay at zero, the party could last a while yet, but as I have warned previously, be sure to be dancing close to the door in case you need to leave. Druckenmiller refers to a “phony asset bubble”, with a bunch of investors ploughing money into assets which will “pop”. Then we’ll see how many people are still enjoying the party.

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management

Monday, 23 February 2015 20:14

Greece stares at apocalypse, and retreats

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Greece stares financial apocalypse in the face, and retreats

By Remy Davison, Monash University

Crisis postponed. On Friday, Greece, the European Union (EU) and the International Monetary Fund (IMF) brokered a four-month extension of bailout loans to the newly-installed government of Alexis Tsipras.

Greece’s bureaucrats now have just 48 hours – until 23 February – to pull together a list of reform proposals. These must be approved by the Eurogroup, comprising all of the eurozone’s finance ministers.

Since the Syriza coalition’s election in January this year, Prime Minister Tsipras and his finance minister, ex-Sydney University economist Yanis Varoufakis, have engaged in a tough, no-compromises approach to their EU partners.

But the harsh reality of politics meant compromise was inevitable. Unsurprisingly, the weaker player – Athens – ultimately retreated, unwilling to pull the trigger that would usher in a financial apocalypse.

Thus, Tsipras and Varoufakis find themselves in a most unenviable position: on the one hand, they must deliver some kind of victory to placate their supporters at home. But, on the hand, both men must know the painful reality: resistance is futile.

Regardless of how Varoufakis paints this internecine European struggle – making economic policy as if people matter – the irresistible logic of the situation is that Greece has scarcely any room for manoeuvre, and the most Tsipras and Varoufakis can hope for are minor concessions and weekend extensions. Which is precisely what happened this week.

Zero option

The stand-off between Greece and Europe’s paymaster, Germany, which has insisted upon strict conditionality for the €240 billion bailouts obtained by Athens during the multiple 2009–12 eurozone crises, ultimately led to the rise of Syriza as a domestic political force.

In 2005, Syriza could barely attract 4% of the electoral vote. Seven years later, the Tsipras-led Syriza narrowly lost the 2012 election. Crumbling support for New Democracy, led by conservative Antonis Samaras, meant Tsipras was effectively prime minister-in-waiting, as voters turned decisively against Samaras’ harsh austerity regime. By May 2014, the European Parliamentary elections confirmed the groundswell of support for Tsipras and Syriza.

In December 2014, Syriza forced an early election by orchestrating a minor constitutional crisis. Tsipras swept to power in January this year, promising an end to austerity and renegotiation of the bailout condition, while pledging that Athens would remain in the eurozone.

This final point is critical: at no point have Tsipras or Varoufakis ever suggested Greece would exit the eurozone. Nor have they indicated any desire to withdraw from the EU. The reasons are obvious: since 1981, with one exception, Greece has been a net recipient of transfers from the EU budget. In 2013, Athens received over €7 billion euro, while paying in less than €2 billion. These fiscal transfers range from agricultural subsidies to regional development funding.

But perhaps more importantly, Germany is the largest net contributor to the EU budget, paying almost €30 billion in 2013. And it is Germany’s massive current account surplus that allows its banks to be the eurozone’s largest creditor institutions.

Thus, it is scarcely surprising that Berlin not only wants the biggest say over how the EU budget is disbursed, it also has by far the greatest influence over eurozone policy, which means Greek politicians will be forced to convince sceptical German policy makers that Syriza will honour the bailout conditions signed by previous governments.

The German conundrum

The most implacable obstacle in Tsipras’ and Varoufakis’ path is Wolfgang Schaeuble, former tax inspector, and Germany’s iron minister of finance. Varoufakis’ and Schaeuble’s relationship did not begin well. At their first summit, Schaeuble said the two had “agreed to disagree". Varoufakis swiftly countered that they did not even agree on that.

A note of caution: if you think Germany speaks with one voice on Greece and the eurozone crisis, think again. Since the 1990s, German institutions and political parties have been torn asunder by the divisions caused by what former EU monetary affairs official Bernard Connolly labelled “the dirty war for Europe’s money".

As Connolly notes, Europe can have a “transfer union” (in which Germany pays other states’ welfare bills via fiscal disbursements) or it can have a “fiscal union”, where EU member states follow a German system of fiscal confederalism characterised by disciplined monetary policy, mandatory low-inflation targets and strictly-policed public deficits and borrowing.

This is Germany’s Pareto-optimal model of how a European monetary and fiscal system should operate. It has been articulated ad nauseam by conservative economists for over two decades. Yet, it exists only in theory. But in 2012, Europe moved a cautious step closer to that model with the promulgation of the Fiscal Compact (in force 2014).

However, Germany is divided into at least three camps: anti-euro currency crusaders (mostly university professors and their comrades at the Bundesbank); reluctant participants in the eurozone (the now politically-irrelevant Free Democrats); and those that drove Germany away from the all-conquering deutschmark to embrace the euro currency union in the first place: German industry.

The latter group are the most important. German governments never do anything without consulting industry first, a situation that hasn’t really changed since Frederick the Great. In the global recession of the early 1990s, German industry nearly went broke as the deutschmark (DM) towered over its EU and North American counterparts.

The bill for German unification and the refurbishment of east Germany was DM3 trillion (six times the Bundesbank and the Finance ministry’s original estimate). Daimler-Benz, Germany’s largest industrial combine, gazed into the abyss in 1994; BMW sank billions into ill-considered British automotive ventures and faced huge losses by 1999, the euro currency’s first year of operation.

The chief problem was the exchange rate: the strong DM caused German wage bills to skyrocket, rendering exports uncompetitive. What was needed was an internal devaluation to decrease the cost of German wage labour and reduce the global price of German exports. The euro worked spectacularly well in this respect, losing 30% of its value during its first 18 months of operation (1999–2001). Furthermore, the extension of the EU Single Market to eastern Europe from 2004 saw Germany invest heavily in industrial plant in the EU’s eastern periphery, thus deriving innumerable benefits from low-wage, skilled-labour economies situated within easy reach of the German border.

But the euro had precisely the opposite effect upon Greece when it acceded to the eurozone in 2001. It caused an internal appreciation, meaning Greeks suddenly gained considerably greater purchasing power than they had enjoyed under the drachma. The euro also meant the public and private sectors could borrow in both Eurobond and third-country markets at much lower rates of interest. Markets also assumed there would be no sovereign defaults as the European Central Bank (ECB) could act as the lender of last resort, despite the fact that the ECB’s charter expressly forbids this role. Consequently, this provided an incentive to predominantly French and German banks to lend to Greece and the rest of the EU’s southern periphery: Spain, Portugal, Italy and Ireland.

This is why Germany will not and cannot afford to allow the eurozone to collapse. Quite simply, it is immersed in the politics of national interest. Instead of off-loading the PIIGS in 2012 and cutting its losses, Berlin responded, belatedly, with due diligence: strict austerity underpinning bailout conditions; a fiscal compact; a financial transaction tax; and, reluctantly, with misgivings, quantitative easing by the ECB.

No Grexit?

Despite the re-emergence of rumours of a “Grexit”, the news of Greece’s imminent departure from the eurozone has been greatly exaggerated. This is not to say that an orderly exit by Greece could never occur in the future, but it is unlikely precisely because it is in neither Germany nor Greece’s interest for a rupture in the eurozone to occur. This is why the Germans and the French, whose private bank leverage as a proportion of GDP dwarfed that of Lehman’s or Bear Stearns, could not countenance the implosion of the EU currency union in 2012.

First, Greece will not leave the eurozone voluntarily. No Syriza or New Democracy politician is advocating that. Bundesbank officials may cattily brief journalists that it is only a matter of time before Greece is unceremoniously ejected, but the Bundesbank detests the finance ministry, while institutional resentment of the disappearance of the DM in 1999, and its consequential impact upon the Bundesbank’s loss of prestige runs deep in Frankfurt.

Second, a key point worth repeating is that nothing has changed in the EU treaties since the international financial crisis struck the eurozone in 2009. There is no legal mechanism under Article 50 of the Lisbon Treaty that permits a member state to exit the eurozone, unless that state withdraws altogether from the EU. No state has ever withdrawn from the EU.

Third, there is another reason why Greece has no incentive to abandon the euro system and return to the drachma. Fear of a stalemate between Syriza and the Troika has seen Greek business and investors quietly transferring over €2 billion per day in deposits out of Greek financial institutions. The reason is that if a compromise is not reached over the coming months, Greek banks will run out of cash, leading to a shutdown of the financial system. Even more sobering would be the fact that 25% unemployment, a lost youth generation, slashed pensions, structural reform and five years of painful austerity would have all been for nought.

Tsipras and Varoufakis know this only too well. They were elected to save Greece. Not to bury it.

The Conversation

This article was originally published on The Conversation. Read the original article.

Wednesday, 18 February 2015 10:58

RBA February minutes - more rate cuts likely

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The minutes of the Monetary Policy meeting of the Reserve Bank Board for February provide further insight into the Board’s thinking behind the decision to cut rates. This complements the Statement on Monetary Policy (SoMP) and the Governor’s testimony to the House of Representatives Standing Committee on Economics.

This is a difficult document to write given that the case needs to be made for the rate cut but most readers will be much more interested in the forward guidance.

The most important forward guidance which the Bank has delivered so far has been to assume “market pricing” for the interest rate outlook in its forecasts for the SoMP. At that time the market had priced in a further 25bp cut by May – by adopting that pricing it was implied that the Bank fully expected to cut rates again and certainly by May.

With the announcement that Australia’s unemployment rate had jumped from 6.1% to 6.4% in January, markets moved to aggressively embrace prospects for a cut by March.

A key issue is whether the Bank sees that adverse development as reason to further downgrade its already pessimistic outlook for the labour market or is inclined to dismiss it as “one month” volatility. Certainly it was a shocking move and one that , at least, would confirm their concern with the labour market.

Last week in writing on the Westpac-Melbourne Institute Index of Consumer Sentiment in February we noted: “For now, we are comfortable to maintain our original call [made on December 4] that the Bank would cut in both February and March. However we recognise that a perfectly respectable case can be made for the Bank to pause for a month or two to assess developments in the housing market”.

This observation is further supported in the minutes with the use of the sentence ( which first appeared in the SoMP) : “Given the large increases in housing prices in some cities and ongoing strength in lending to investors in housing assets members also agreed that developments in the housing market would bear careful monitoring”.

On the other hand , the Governor gave a balanced view on the housing market in his recent parliamentary testimony,” Price rises in Sydney are very strong, and they are pretty solid in Melbourne. On the other hand they are much more mixed elsewhere. Excluding Sydney, the rise for Australia as a whole over the past year was about 5 per cent. That is a healthy pace but not alarming.”

The sense of the Bank waiting a month or two for the follow-up cut is further strengthened by the following sentence in the minutes: “In deciding the timing of such a change members assessed arguments for acting at this meeting or at the following meeting. On balance, they judged that moving at this meeting which offered the opportunity of early additional communication in the forthcoming Statement on Monetary Policy was the preferred course.” This could, but not necessarily should, be interpreted that, at the time of the meeting, the board wanted one or the other but not both months.

“Communication” was always our argument for beginning the easing cycle in February rather than waiting for March.

Given that we have held the” February to be followed by March” call since December 4, on balance, we still see that as the best policy and the most likely outcome.

However, as noted above, waiting for a month or two would not come as a significant surprise.

Other incentives to wait, if the Bank is uncertain, would be to assess momentum in the December quarter with the national accounts that will be released on the day after the March meeting.

A major cost in delaying the next move is that the Australian dollar might start responding to a benign rates outlook. Note that the AUD has already traded back up to near USD 0.78 , its level prior to the February rate cut.

Commentary in the minutes pointed out that markets had, at the time, priced the Fed’s first rate hike back to year’s end whereas the governor in his testimony predicted,” in a few months from now”. This updated view on the FED might encourage the Bank to wait on the assumption that further downward pressure will exerted on the AUD. However, that adjustment should already have happened given the strong conviction in markets now that the FED is readying to move in June.

The key point is that the reasons given by the Bank in its recent communications , including the minutes, justify more than one move in total .; “ restrained pace of wage increases;”; “ low rates of inflation likely to be sustained”;” a lower exchange rate was likely to be needed” ;”fewer indications of near term strengthening in growth than previous forecasts would have implied” ;”unemployment rate likely to peak a little ( and later) than in the previous forecast”.

Indeed the risks are much more skewed to more than two moves in total rather than no more moves at all.

Certainly international investors see Australia’s rate structure as being far too high even with a cash rate of 2.25%.


These minutes , on balance, cast more doubt on a follow up move in March. While a March move to follow up February has been our core call since December 4 we can see that “ a respectable case can be made for the Bank to pause for a month or two “ but a second cut still seems extremely likely.

For now, we maintain our original call , particularly watching the AUD over the course of the next few weeks. It is our view that the Bank has considerable scope to ease further and the best policy is to maintain downward pressure on the AUD. The somewhat uncertain outlook for rates which is implied in these minutes might prove to be counter-productive in delivering the Bank it’s likely USD 0.75 target.

That may become apparent over the course of the next few weeks


Bill Evans

Chief Economist Westpac

Tuesday, 17 February 2015 06:58

What is Estate Planning?

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Good question! We won't bore you with the 200 word definition. In simple terms - it's a way of ensuring that a person's assets are passed onto their beneficiaries in the most financially efficient and tax effective way possible in the event of their death.

Estate planning has two main aims:

  • to try and avoid the likelihood of any next of kin suffering financially; and
  • to minimise the risk of family squabbles about who gets what.  (otherwise the lawyers get rich)

Most people who work in this area include tax planning as a part of estate planing. They will also look at how you can get most use and enjoyment of your assets while you are alive, as well as providing for your beneficiaries.

Estate planning was initially used when there were death and estate duties. These don't exist anymore, but there are other taxes, such as capital gains tax, superannuation death benefits tax, that make estate planning just as worthwhile now.

An estate plan should:

  • be administratively simple to operate;
  • not be too expensive to maintain;
  • balance life-time enjoyment of assets/income with preserving assets for family after death; and
  • be regularly reviewed.

Steps in estate planning

There are five steps to develop a comprehensive estate plan:

  1. Organise your finances and assets during your lifetime.
  2. Do it at a time when you have the capacity to make strategic decisions for yourself.
  3. Ensure that your assets are distributed to those for whom you are you are responsible.
  4. Minimise the taxes payable on your estate.
  5. At the end of the day, ensure that your assets are distributed in the way that you – not the government or a court – want them to be.

Some threshold questions

Here are some threshold questions that assist in establishing a framework to manage the succession of your values and not just your estate capital:

  • To whom am I accountable?
  • Who do I trust to represent me, during my life (whether incapacitated or not) and upon my death?
  • How will my beneficiaries cope with their inheritance?
  • What people apart from myself have rights that attach to property that I possess?
  • What promises have I made that will survive my death or incapacity?
  • How do I expect my family to operate in the event of my incapacity, disability or death?
  • Are there disabled or disadvantaged people in the group of people to whom I consider myself accountable in the management of my estate? If so, do I know how best to deal with their interests?
  • How do I plan to extract the value of equity I have invested in my business interests?
  • What life and financial risks am I under and how do I intend to minimise those risks?
  • Am I concerned about my spouse and/or other inheritors taking risks with family assets, or being unable to deal with them?

Using a trust

Leaving assets directly to another person is only one way of distributing assets through a will. Another, increasingly popular strategy is using a trust. Trusts are prepared by lawyers and accountants for many reasons - probably the most common is a discretionary family trust which allows a person to transfer assets out of their name while still keeping control of the assets.

One of options often considered in estate planning is to include a trust as part of the will - this is called a testamentary trust. The advantages include:

  • maintaining social security entitlements;
  • ensuring that assets pass to children even if a surviving husband/wife remarries;
  • capital gains tax and income tax advantages;
  • providing for children with an intellectual disability or mental illness; and
  • protecting assets where a beneficiary becomes bankrupt or divorced.

There are few general rules about whether a testamentary trust will be best for you. It will depend on your individual circumstances and how you want to leave your assets. You will need expert advice about this.

Monday, 16 February 2015 05:52

What is Income Protection and who should have it?

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Income Protection is simply insurance so that in the event of not being able to work due to sickness or accident, you continue to receive up to 75% of your income.


The key aspects of Income Protection insurance are the benefit period, which is the maximum length of time that a claim can be paid.  Typically benefit periods range from 2 and 5 years or until age 65. 


The other important decision when arranging this insurance is selecting the waiting period.  This is the length of time that must pass before a claim is paid.  Common waiting periods are 14, 30 or 90 days, but it is also possible to select longer periods.  Obviously these selections effect the cost of the insurance.


Incidentally, many people choose to own their income protection through superannuation, so their superannuation pays for the premiums rather than normal household cash flow.



We act as brokers, to find the best income protection insurance available for you.  Part of our service also includes handling claims for you.


If you would like an instant quote, please visit the page Personal Insurance - Instant Quotes.  After completing the 3 entry screens you will receive an onscreen quote from Australia's leading insurers.

Tuesday, 03 February 2015 20:37

Greek Debt - Who is on the hook

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We have sourced this information from an excellent article from Bloomberg.  Understanding who owns the Greek debt is critical in determining whether the Greek elections are likely to cause contagion in the financial system.




(Bloomberg) -- Greece’s anti-bailout governing coalition wants to reduce the country’s debt burden. Who’s on the hook if they succeed?

Prime Minister Alexis Tsipras has pledged to repay in full obligations to the International Monetary Fund and the European Central Bank. Finance Minister Yanis Varoufakis outlined plans to swap some debt into new securities and link repayment with economic growth. Both have said private investors won’t be asked to shoulder additional losses after taking the hit in two restructurings since the start of the euro financial crisis.

Euro-region governments and the crisis-fighting fund they set up in 2010 are owed almost 195 billion euros ($221 billion) by Greece, mostly in emergency loans. That’s about 62 percent of the total debt and compares with 17 percent held by private investors.


Governments and national central banks are also contributors to the ECB and the IMF so taxpayers would be exposed should Greece go back on its pledge to make those creditors whole.

Here’s a list of frequently asked questions about Greece’s debt profile. The answers are based on the latest available data from the country’s Finance Ministry and Statistical Authority.

Q: How much does Greece owe? A: Greece’s total public debt amounted to 315.5 billion euros at the end of the third quarter.

Q: Who is Greece’s largest creditor? A: The European Financial Stability Facility, the euro area’s original crisis-fighting fund, which has lent the country 141.8 billion euros, and hence owns about 45 percent of its debt. The average maturity of EFSF loans to Greece is just over 32 years, with the last payment due in 2053, according to the EFSF’s website. Greece pays about 1.5 percent on those loans, comparable to what a AAA rated country would be charged. The rate fluctuates based on the EFSF’s own borrowing costs.

Q: When is Greece scheduled to start paying principal on the EFSF loans? A: Not until 2023. It also enjoys an interest deferral on most of the loan. The exception is a 35.5 billion-euro chunk that was paid to private investors in 2012 to persuade them to accept the restructuring. Because of the grace period already in place, any writedown on the debt held by the EFSF will have relatively little impact in easing the Greece’s debt-servicing costs over the next eight years.

Q: How much of Greece’s debt trades among investors? A: After the biggest debt-restructuring in history, in which securities totaling about 200 billion euros suffered losses, Greece’s tradeable debt is now just 67.5 billion euros, 82 billion euros if treasury bills are also included. The ECB and euro-area central banks currently own about 27 billion euros of Greek bonds, according to data compiled by Bloomberg, comprising 40 percent of the total outstanding market.

Q: How about the ECB? A: During 2015, Greece is set to repay 6.6 billion euros of bonds held by the ECB. By year-end the ECB would own 20.4 billion euros out of a total 60.5 billion euros of tradeable bonds, assuming no new issuances by Greece and other small bonds are repaid as they mature.

Q: Wasn’t the ECB debt already restructured once? A: Yes, albeit indirectly. The ECB and euro-area central banks bought Greek government bonds at the peak of the crisis at prices below their nominal value. While Greece is required to repay these bonds at their nominal value, the central banks would then return the profits they made on the transactions to their shareholders, which are euro-area member states.

The ECB has always resisted agreeing to a voluntary haircut on its debt because that would be considered monetary financing, which is banned under EU law.

Q: How does the payback work? A: These shareholders must give Greece back this profit, as long as the country complies with its bailout agreements, according to a euro area finance ministers decision taken in November 2012. In this way, Greece ends up repaying less than the full amount. In 2014, Greece was scheduled to receive about 2 billion euros in ECB-profit returns. It never did, as the bailout review was never completed.

Q: Treasury bills are tradeable, how many are there? A: Almost 15 billion euros of Greece’s debt consists of short-term T-bills, which the country continuously rolls over. This covers financing needs while its bailout review remains stalled, and no aid disbursements are being made from the euro area and the IMF.

Q: How much does Greece owe to the IMF? A: Almost 25 billion euros, according to the fund’s website. The IMF’s policy is to never restructure its loans, and Tsipras said he doesn’t intend to test the fund’s resolve. Greece is scheduled to repay about 19.4 billion euros to the IMF by 2019, and another 6.4 billion euros between 2020 and 2024.

Q: Does Greece pay interest? A: The interest paid on IMF loans is also not fixed, and depends on the amount outstanding and the length of time since the money was advanced. The average rate varies between 3 percent and 4 percent, according to a person familiar with the matter.

Q: What about bilateral loans? A: In May 2010, euro-area members agreed to provide bilateral loans pooled by the European Commission, after Greece was shut off from international bond markets. The so-called Greek Loan Facility included commitments of 80 billion euros to be disbursed between May 2010 and June 2013.

This was eventually reduced by 2.7 billion euros when Slovakia decided not to participate and Ireland and Portugal stepped down after they requested their own rescues, according to the Commission’s website. Only 52.9 billion euros were disbursed before the GLF facility was replaced by the EFSF bailout.

Tsipras’s commitment to repay Greek loans didn’t include EFSF or GLF loans.

Q: How much could each creditor nation lose? A: A precise calculation of the potential liabilities of each member-state would have to take into account the impact of contagion from a Greek default, the consequences for European banks and the precise amount for which Greece will forsake repayment.

Q: But haven´t some made estimates? A: Some countries have done their own math. French Finance Minister Michel Sapin says his country’s exposure is 42 billion euros.

Finland, which demanded collateral for its loans to Greece, has a total liability of 5.4 billion euros, according to Finance Ministry data and Bloomberg calculations, including the country’s contribution to the first and second bailouts and its share of the IMF loans.

The Netherlands contributed 3.2 billion euros in the first bailout loan and the Dutch guarantees on the EFSF loans and interest total 33.6 billion euros.

NOTE: These figures are approximate because a small part of Greece’s debt is denominated in currencies other than euros or in the IMF’s Special Drawing Rights. The breakdown doesn’t include some state guarantees for liabilities of government-owned entities, including public utilities, or European Investment Bank loans, which were channeled to infrastructure projects and financing of businesses.

Syriza sweeps to victory in Greek election, promising an end to 'humiliation'

By Spyros Economides, London School of Economics and Political Science

As had been widely predicted, the left-wing party Syriza has secured a victory in the Greek election. Having finished with just short of enough seats in parliament for a majority, leader Alexis Tsipras has agreed to form an anti-austerity coalition with the right-wing party Greek Independents.

Throughout the short campaign, it appeared the relative newcomer to Greek politics, led by the charismatic Tsipras, would win. Now it appears he has done so by a significant margin.

Speaking in the wake of the victory, Tsipras said the vote would end years of “destructive austerity, fear and authoritarianism” and that his country could now leave behind the “humiliation” it has suffered.

The last half of 2014, which became essentially a prolonged general election campaign, saw the Syriza leadership (especially Alexis Tsipras) toning down its extreme rhetoric. Instead of pushing for radical reform, it focused on promising simply to abandon austerity and challenge Greece’s external debt commitments.

Syriza has pledged to tackle what it calls Greece’s “humanitarian crisis”. It plans to feed and house the worst affected by the crisis, providing them with free electricity and medication, and reintroducing a higher minimum wage.

Internationally, it has promised to bring Greece’s creditors to the negotiating table, with the intention of thrashing out a deal more favourable to Greece. In essence, this will amount to requesting debt redemption, or a “haircut”.

This toned-down platform may have won Syriza the election by attracting enough of the political centre, but it may not be enough to sustain the support of the more radical elements in the party’s leadership and political base.

The worry is that the whiff of power may not be strong enough to placate radical elements, who really do want radical domestic policies. They would like to see austerity abandoned and replaced by increased government spending across the board, and the restitution of public salaries and pensions. The public sector workers made redundant over the past four years would be re-employed and state property nationalised.

Greek Prime Minister Antonis Samaras concedes defeat. EPA

They also want a more confrontational policy towards Greece’s creditors and the so-called troika (the EU, the European Central Bank and the International Monetary Fund). This could ultimately result in the dreaded Grexit.

If Syriza’s more radical elements feel betrayed by watered-down policies, the party faces the prospect of internal division, and Greece could soon see social unrest and demonstrations. That would weaken the new government dramatically, and could further destabilise the country at a very delicate moment.

Despite the scene of triumph, Greece is entering a period of deep uncertainty, and Syriza’s victory may indeed turn out to be pyrrhic. It is confronted by the immense task of governing at a time when Greece may be ungovernable, while also facing a potentially divisive internal struggle. International partners have also made it clear that the new Greek government, whatever its makeup, will have to honour the country’s existing agreements and commitments.

If Greece’s international creditors don’t come through with quick concessions, or if radical opposition rears its head against Syriza’s more moderate approach, this could trigger an uncontrollable reaction based on fear of uncertainty. That could lead to an accidental default, which would have disastrous consequences for Greece.

The Conversation

This article was originally published on The Conversation. Read the original article.

Monday, 26 January 2015 03:49

Australian Housing .... still expensive

Written by

In the long running obession that Australians have for the property market, we have sourced the latest affordability charts that outline housing affordability in Australia (a key measure of price), relative to other countries property markets.  The key measure used is the price of property relative to income.  The higher the multiple of income, the higher the price.

The first chart shows that Australia's property market is far more attractive than Hong Kong and even New Zealand.  Measured against Canada, a country that has many similarities to Australia, our market looks stretched.

To put this chart though into more perspective, let's consider what sort of levels are considered unaffordable.  Here is a table showing broadly accepted definitions.

Finally the table below shows the numbers on a "State by State" basis.


"Hong Kong's Median Multiple of 17.0 was the highest recorded (least affordable) in the 11 years of the Demographia International Housing Affordability Survey. Again, Vancouver was second only to Hong Kong, with a Median Multiple of 10.6. Housing affordability in Sydney deteriorated to a Median Multiple of 9.8, which was followed by San Francisco and San Jose (each 9.2). Melbourne had a Median Multiple of 8.7 and London (Greater London Authority) 8.5. Three other markets had Median Multiples of 8.0 or above, including San Diego (8.3), Auckland (8.2) and Los Angeles (8.0)."

Jeremy Grantham, a world recognised investor with GMO remains concerned at the levels of the Australian property market and we would encourgage investors to exercise caution in assuming the run up in property prices will be a permanent feature of the Australian economy.


Note:  Charts sourced from Mike Shedlock "Mish's Financial Trend Analysis"


This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306