Notes From Underground

The big story out of Europe this weekend is that the ECB and IMF cobbled together a package to keep Greece solvent. The German chancellor caved in to the chorus of European voices calling for the gelt of Germania to bring some semblance of order to the European financial system. Angela Merkel has taken on political risk with next Sunday’s vote in the state of North Rhine Westphalia (NRW). (The CDU presently controls that state but is in great danger of losing it as German voters are not supportive of the Greel bailout.) The total agreeed-upon package is for €110 billion and is payable over three years. The agreed-upon interest rate appears to be around 5%, which should tremendously lower Greece’s borrowing costs. The Eurocrats are hoping that this will be big enough to stem the contagion causing economic flu in the other PIIGS.

We caution the arrogant political elite of Brussels: The markets will look to the next weakest economy and attack those credit markets. How far are the Germans and IMF authorities willing to go to defend the next target? When are the good burghers of Bavaria going to cry enough and what will be the outcome then? A larger problem for the German leadership is the great possibility that the German Constitutional Court will declare the bailout null and void bringing the whole charade to an end. The group of German economists who filed a case at the GCC prior to the advent of the EURO is readying a case as we write. Frauline Merkel has put her political career on the line in the hope that the Greek package buys some time for economic Europe.

We will keep asking the question we asked on Friday: Where are the Russians and at what price willy they enter the attempted solution? Interestingly, the Chinese who started the Greek debt ball rolling by feigning interest in a €25 billion Greek bond offering have been missing in this entire discussion. When the Chinese had interest in the 10-year Greek debt, it was yielding just 250 basis points over similar German paper–at 900 bps you would presume that they might have some sugar plum fairies dancing in their heads. Diversification out of DOLLARS may be talked about but it doesn’t seem as if a high enough rate of return has been reached yet for the Chinese to hear the “SIREN” call of Greek bonds.

Asian news over the weekend revoled around two stories. The Chinese Central Bank raised reserve requiremnets another 50 bps in an effort to curb wanton lending by Chinese commercial banks. Also, the government is raising collateral standards to cool down real estate speculation. It is too early to know the impact but it is more than passing interest that as the Chinese jawbone, the domestic debt markets copper prices have been weakening. Chinese warehouses are stockpiled with copper and if lending restrictions in China begin to bite copper should be a good barometer.

Also, there’s news out of Asia that the Australian government is moving to tax mining profits under a “resources super profits tax” at a rate of 40%. The tax will be on net profits, after research and development, and other large expenditures. The Canberra government said this super tax would go toward establishing a mining infrastructure fund and would also help the Aussies shore up retirement accounts through national funding. Prime Minister Kevin Rudd also said the government would cut the present corporate tax rate to 28% from the present rate of 30%. Our first thought was that this would be bearish the AUSSIE DOLLAR, but the more we read the more uncertain we are as it is a mixed bag. We would advise watching the stock prices of RIO TINTO and BHP to get a better handle on the taxes’ real impact. These mining giants have carried the Aussie economy through the last 18  months, so a large negative impact on these two corporations may signal investors’ concerns about Australia. To make it a little more difficult, Monday 11:30 p.m. CST we get the announcement from the Reserve Bank of Australia and the markets are looking for an increase of 25 bps. If the bank raises rates and the Aussie falls, we may have a better inclination about the effects of the mining super tax and the impact of China’s recent tightening actions.

Tags: Aussie Dollar, Dollar, Euro, PIIGS

This entry was posted on May 2, 2010 at 9:49 pm and is filed under Currency, Sovereign Debt, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.