China’s Evergrande Debt Crisis

The debt crisis now threatening to overwhelm property developer Evergrande arrives at a decidedly inauspicious time for China. With the national economy continuing to slow, the prospect of an economic crisis centered on a Chinese entity is quite real. Global markets sense it and investors are preparing for the ripple effects. Last week, Fitch Ratings agency downgraded its forecast for China’s economic growth, citing the slowdown in the property sector as the prime contributing factor. Evergrande has been in trouble for some time now and its current problems did not arrive out of nowhere. In fact, alarm bells have been sounding for years over the state of the Chinese property market.

All eyes are focusing on Xi Jinping now as it becomes clear the Chinese government will likely have to intervene. To put it simply, Beijing cannot stand on the sidelines and permit a chaotic default where citizens lose large sums of money. Allowing that could cause a ripple effect in other sectors of the national economy, another prospect Beijing cannot allow. As a hedge against a worst-case scenario coming about, the Chinese government has ordered local officials to prepare for a potential Evergrande collapse. Local governments and Chinese-owned enterprises are being directed to intercede only if Evergrande is unable to meet its obligations. Some Chinese officials have described the measures as storm preparation.

How Beijing handles the crisis in coming days will set the tone for market behavior. If investors are encouraged by the way the Chinese government handles the Evergrande situation it will minimize the damage and perhaps instill a burst of positivity to China’s national image, which has absorbed considerable damage over the past 18 months.

Sunday 12 November, 2017 Update: Venezuela On the Brink of Default

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Tomorrow, Venezuela’s newly created debt restructuring committee is scheduled to meet with creditors in hopes of renegotiating, or restructuring $69 Billion of Venezuela’s outstanding debt. It is not presently clear just how many creditors will actually be attending the meeting. It is also unknown if the meeting will include frank discussions about restructuring Venezuela’s current debt, or if Venezuelan officials will use the opportunity to simply blame the current economic situation on US sanctions. Quite honestly, it is unclear at this time whether or not a meeting will even take place tomorrow.

As meeting preparations continue this evening rumors of default continue to swirl from Caracas to Wall Street. Venezuelan President Nicolas Maduro has adamantly insisted that his country will never default on its debt. Despite his assurances, speculation is growing that the true purpose of tomorrow’s meeting is to lay the foundation for  default. Venezuela’s economic situation is beyond dire. It’s cash reserves are nearly dried up, and US sanctions are making it impossible for Venezuela to refinance its debt. Securing a debt restructure in the current climate is virtually impossible. Therefore, Maduro’s only other option would be to declare insolvency and default on the country’s $150 Billion in debt.

The uncertainty surrounding Venezuela’s economic future is causing anxiety internationally. A default could possibly spark a global financial crisis, although the prospects of this happening are low. There is still a possibility of Russia extending a lifeline and saving the day. Or, at least postponing the inevitable for some time. The two nations are expected to sign a debt restructuring deal later this week that will provide some relief for Maduro’s socialist paradise.

Realistically, however, even Russian assistance might not be enough. After years of political catastrophe, social unrest, and economic disasters, time is truly running out for Venezuela. What happens this week will likely determine its fate whether Maduro is prepared to face the truth or not.

 

 

Friday, 21 August 2015 Update: Political Drama In Greece, Tension In Korea, Global Markets Plunge

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August had been a relatively quiet month up until a couple of days ago. As we move towards the end of the month, things are happening across the globe. In the space of the last thirty six hours or so, North Korea and the ROK have traded artillery fire and tensions are on the rise, Greek Prime Minister Alexis Tsipras has resigned and called for new elections, and China’s economic slowdown is beginning to have a negative effect on world markets. Judging by what we have seen this week, we could be in for a dangerous September.

Tsipras Resigns

For the third time since January, Greek voters are returning to the ballot box. Do not be fooled, Alexis Tsipras’s resignation and call for new elections were not made out of a sense of obligation or an admittance of defeat. They are components of a very shrewd political maneuver. When the third bailout was passed by the Greek parliament in mid-July, one-third the Syriza party’s representatives voted against the bill or abstained. Now, the Syriza party is in the midst of a rebellion and Tsipras needs to gain a new mandate. He is turning to the people to extract him from a very tenuous position and provide him with political cover. Tsipras is banking on the new elections neutralizing the radical left wing of his party. That wing has made his life complicated since July, opposing him almost constantly. Tsipras appears determined to move himself from the radical left to the center and he is using popular will as a political tool to help him get there.

Tension & Threats In Korea

The world has become desensitized to North Korean threats and claims. The regular stream of bold talk coming out of Pyongyang is bolder today, however. Following an exchange of artillery fire with South Korea and the resumption of US/South Korean military exercises, Pyongyang has announced that its forces along the DMZ are in a “quasi-state of war” and will prepare for battle. The North has, in fact, started preparations to test fire short and mid-range ballistic missiles but there have been no concrete signs of preparation for military action against the South.

The situation appears to be following the same line that others before it have. The North Koreans ramp up their rhetoric in an attempt to stoke military tensions on the Korean peninsula in a bid to show its populace that it is confronting the enemy to the south. Kim Jong Un has done this before and predictably will do it again in the future. The real danger here is the possibility that an accident or incident might lead to a military confrontation that neither side wants.

China’s Economic Woes Go Global

It was bound to happen sooner or later. Economists, market analysts, and financial experts around the world have been talking about the economic problems facing China. Last month’s successive devaluations of the yuan signaled that the problems were going to worsen before long. Data was released confirming that China’s manufacturing activity has slowed to its lowest levels since 2009. Global markets were thrown into panic mode almost immediately. Stock markets in Asia were the first to feel the hurt, followed by Europe and then Wall Street. The Dow plunged 531 points today, falling into correction territory. The two day sell off in New York has erased practically all of the 2015 gains for all three US indexes.

The ramifications of a weakened Chinese economy are continuing to play out. Investors are spooked for the moment, though, and it is fair to say that further bad economic news from China will continue to have negative consequences on Wall Street, in London, Tokyo and elsewhere. How these economic problems will translate into the geo-political arena also remains to be seen.

*Note- The third part of the Desert Shield series has been lost. I deleted it from my hard drive my mistake. I will rewrite and post it sometime before Labor Day. In the meantime, Sunday night I’ll post a look at the coming arms race in the Persian Gulf.*

Monday June 13, 2015 Update: Rescue Plan For Greece Agreed Upon

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Following a marathon 17 hour session that dragged on into the early morning hours, Eurozone leaders finally agreed on the terms for a third bailout for Greece. With the prospect of a ‘Grexit’ looming over their heads, European leaders negotiated the terms of the third bailout deal and they were accepted by Greek Prime Minister Alexis Tsipras. He will now have to get key measures of the deal passed through parliament. That process will not easy. The terms of the third deal are not as generous as the ones included in the deal that Greek voters turned down in last week’s referendum. In fact, the reaction of many in Greece to the harsh terms has been one of anger and humiliation. Tsipras was elected in January on a platform of rolling back austerity measures. His dangerous game of brinkmanship took Greece to the edge of the abyss and some European leaders, especially Angela Merkel, called his bluff. Tsipras was forced to go to Brussels this weekend with hat in hand and beg for a third bailout without any room to maneuver.

The full text of the agreement can be found here: http://news.bbc.co.uk/2/shared/bsp/hi/pdfs/13_07_15eurosummit.pdf

Despite Monday morning’s sense of relief, the deal is not complete just yet. The prospect of a ‘Grexit’ has not disappeared entirely. As I stated above, Tsipras still has to get approval from parliament. By all appearances, Tsipras is going to be faced with at least some political opposition. It remains unclear if this will force him to call for new elections in the coming months, however, the possibility is real. In the meantime, he has to convince the voters that this is a negotiated settlement and not a surrender of Greek sovereignty.

The crisis is not yet over, however, if parliament agrees to the terms of the deal, the light at the end of the tunnel will be much closer than it has been at any point in the last thirty days.

Sunday, 5 July, 2015 Update: Greek Voters Say No

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Greece has spoken on the topic of whether or not to accept an international bailout and the answer has been a resounding “No!” 61.3% of the people who cast a ballot in Sunday’s referendum rejected the terms of the bailout.  So, what will happen now?

The truth is that nobody is sure. Prime Minister Alexis Tsipras now has a popular mandate and believes the referendum results will give him a stronger hand at the bargaining table. It is unclear just how much, if any weight the referendum results will carry with Greece’s creditors, Eurozone finance ministers and national leaders. Tsipras has been playing a perilous game of political brinkmanship with the creditors and EU. Although he is declaring victory, the end results are not yet certain. After the drama and histrionics of the last few weeks, the IMF and other creditors might not be in a generous mood when it comes to negotiations. In fact, the deal that Greek voters just said no to is no longer on the table. Tsipras may have overplayed his hand in counting on the results of a domestic referendum to be enough to force the creditors to renegotiate.

The majority of Greek voters, regardless of how they voted today, want Greece to remain in the Eurozone. The question is whether or not that will even be possible now. Greek banks are still closed, although the government has stated they will be opened on Tuesday. Money is running short at a dangerously fast clip. If a compromise between the creditors and government is not reached quickly, the situation could worsen even faster.

Today was an important day for Greece. The people sent a message to the European Union and the nation’s creditors. After five years of austerity, the people have had enough. Tomorrow, however, is a new day. The good feelings and confidence generated by today’s vote will start to dissipate and reality will set in.

Greece’s problems have not been solved.