Pick Your Poison
Financial Review by Sinclair Noe
DOW – 350 = 17,596
SPX – 43 = 2057
NAS – 122 = 4958
10 YR YLD – .15 = 2.33%
OIL – 1.30 = 58.33
GOLD + 5.90 = 1181.10
SILV + .01 = 15.86
Late Friday, Greek Prime Minister Alexis Tsipras called for a July 5 referendum on whether to accept the latest offer from Greece’s creditors. That meant that Greece would not pay $1.8 billion to the Troika due tomorrow. The European Central Bank responded by halting emergency lending to Greek banks. With emergency aid to the country frozen, Athens has imposed capital controls to halt bank runs and confirmed that the country’s banks would remain shut for six working days; Greek banks are closed and the Greek stock market is closed, possibly until the July 5 referendum. ATM withdrawals are being capped at €60-euro-per-day.
We’ve been watching the problems in Greece for a long time. A few years ago, we knew Greece had a debt problem; that was back when they were lumped together with Portugal, Italy, Ireland, and Spain. They were called the PIIGS. The Troika of the European Central Bank, the International Monetary Fund, and the European Monetary Union, decided to crack down on the PIIGS; prescribing a big dose of austerity; the cure has been debilitating. Spain is dealing with 22% unemployment, Italy with 12.4% joblessness, Portugal at 13% (with youth unemployment at 32%), and Greece has an unemployment rate of 25.6%. Those are numbers comparable to the Great Depression. And now they have a bank holiday to match.
The ECB couldn’t wait until July 5 for voters to decide on a referendum; they shut off funding and effectively closed the country’s banks. And they are now moving to the punishment phase off the negotiations. The message is clear; accept austerity or the ECB will crush the Greek economy. The Troika made Tsipras an offer that was unacceptable. The only option for Tsipras was to reject the offer or put it to a referendum of the voters. By shutting down the banks the Troika has spit on the democratic process.
Earlier in the year, I thought the Troika and Greece would come to an agreement because the cost of default and possible Greek exit from the EU would be much more expensive than a settlement. Greece may be a small country with a small economy but it is geopolitically and geographically important. The Troika feared that leniency would encourage Spain, Portugal and Italy to seek leniency; what they forget is that Greek default may also encourage the peripheral countries, or scare other countries. And even though there is a form of depositor insurance, it is woefully underfunded. If the bank runs in Greece spark bank runs in Italy and/or Spain, the Eurozone could be facing huge problems. We’re not there yet, but it has been a wild day.
There was quite a bit of market turbulence. The Euro Stoxx 50 Index fell more than 3 percent. Greek 10-year notes plunged by the most since at least 1998, driving the yield to 14.6 percent, the highest since December 2012. German bunds rose the most since 2011, sending the 10-year yield to 0.74 percent, as money flowed out of Spain, Italy, and Portugal. The euro fell 0.6 percent to $1.1093. The currency pared its loss following purchases by the Swiss National Bank to curb gains in the Swiss franc.
Few think a Greek default will lead to a scenario similar to one that played out in 2008, when Lehman Brothers collapsed. For one, international banks have far less exposure to Greece than in the past; they have also had more time to prepare. We have seen this slow motion train wreck coming. It is not a black swan event that surprises everyone. There has been plenty of time to “ring-fence” assets; plenty of time to prepare. Still, the cost of insuring corporate debt against default surged by the most since the day Lehman collapsed. The Markit iTraxx Europe index of credit-default swaps on 125 investment-grade companies jumped 20 percent this morning to the highest level since March 2014.
And then to pour gasoline on the fire, the Bank for International Settlements warned in its annual report that the world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises. The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies. Rather than simply reflecting widespread economic weaknesses, ultra-low rates have contributed to the slow recovery in the global economy by entrenching the excessive reliance on debt and causing large-scale misallocation of capital. Now imagine the Greek problem causes a downturn in the Eurozone; in normal times, the ECB could cut interest rates, and Greece would be nothing more than a minor downturn. The ECB can’t cut rates much lower than the zero bound.
The July 5 Greek referendum will ask Greek voters: “Should the agreement plan submitted by the European Commission, European Central Bank and the International Monetary Fund to the June 25 eurogroup and consisting of two parts, which form their single proposal, be accepted?” Greek PM Tsipras says a “no” vote will give him more leverage in negotiations. Euro Commission President Jean-Claude Juncker says “no” vote would lead to a Greek exit from the Eurozone; he described it as committing suicide. Not exactly. The Maastricht Treaty of 1992 which formed the Eurozone does not include a provision for expulsion of a country. There does not appear to be a legal basis to kick Greece out. The only thing they could do is squash the Greek economy, which might come off as a bit sadistic.
Greece is not the only one in hot water. Puerto Rico’s long-simmering debt crisis is about to come to a boil. The commonwealth’s governor, Alejandro García Padilla, says “The debt is not payable,” and investors should be prepared to sacrifice if they want the cash-strapped island’s economy to grow. Puerto Rico is in the midst of a decades-long economic struggle fueled by years of recession and slow economic growth. As a result, its government has taken out massive loans from creditors to cover its costs. Many also anticipate Puerto Rico’s electricity provider, which has borrowed $9 billion, to miss a payment to creditors this week, in what would be one of the largest municipal defaults ever. Padilla called the situation a “death spiral.” And he wasn’t exaggerating: Puerto Rico’s debt is four times that of Detroit’s, and the island has more debt per capita than any American state. Analysts believe the central government will run out of cash as soon as July, which could lead to a government shutdown, emergency measures and an unpredictable crisis. Greece can’t file for Chapter 9 reorganization. The White House today said there would be no bailout for Puerto Rico but did say there should be a change in the bankruptcy law.
And while Greece and Puerto Rico struggle with debt, China’s equity markets have slipped into a bear market. The Shanghai Composite slid 3.3% today to levels more than 20% below its June 12 close of 5,180, meeting some investors’ definition of having entered a bear market. The smaller Shenzen Index is already in a correction and it closed down 6.1% for the day; and the ChiNext board, which consists of small-cap companies, ended the day down 7.9%. The plunge comes despite a rate cut by the PBOC over the weekend. Chinese regulators are now considering suspending initial public offerings to stabilize the country’s tumbling equity markets.
Contracts to purchase previously owned U.S. homes rose in May for a fifth month. The National Association of Realtors said the pending home sales index increased 0.9 percent after a revised 2.7 percent advance in the previous month. Purchase contracts rose 8.3 percent in the 12 months ended in May.
The Supreme Court ruled today that Oklahoma’s lethal-injection procedure does not violate the Eighth Amendment ban on cruel and unusual punishment. The decision was 5–4, and Justice Samuel Alito wrote the majority opinion. He argued that the inmates on death row in Oklahoma who had brought forward the case did not prove that a less painful alternative existed, so I guess now it is up to the inmates to pick their poison.
Hours after the Supreme Court finished its term on Monday, the justices put on hold the Fifth Circuit’s ruling allowing Texas’ draconian anti-abortion law to go into effect. The decision grants a last-minute reprieve to over half of Texas’ remaining eighteen abortion clinics. Under the new law, which forces clinics to meet incredibly stringent standards unrelated to women’s health, all but seven of these clinics would have been forced to close. The court stayed the ruling by a 5-4 vote.
The Supreme Court ruled 5-4 that the Environmental Protection Agency needs to consider costs when regulating pollution caused by coal-fired plants.
The U.S. Supreme Court today rejected appeals from BP and Anadarko Petroleum over fines related to the 2010 oil spill in the Gulf of Mexico. The companies had argued that oil had not leaked from a well they co-owned, but from a broken underwater pipe owned by Transocean Ltd. The justices let a lower court’s ruling about fines stand.
The Supreme Court ruled that Arizona’s voters were entitled to try to make the process of drawing congressional district lines less partisan, upholding an independent commission set up by Arizona voters to draw congressional districts. The 5-4 ruling rejected contentions that the Arizona law, approved in a 2000 ballot initiative, strips state lawmakers of power reserved to them by the US Constitution. The decision opens a new path for efforts to limit gerrymandering, the practice of drawing irregular district lines to gain a political advantage. The Supreme Court has previously refused to put constitutional limits on partisan districts. The ruling applies only to congressional redistricting and doesn’t affect the Arizona commission’s role in drawing state legislative maps.