US stock futures up, euro sags as markets eye Greece

30 Jun 2015 | Author: | No comments yet »

Alexis Tsipras urges Greeks to defy creditors.

Defiant Greek prime minister Alexis Tsipras has urged his people to reject terms set by his country’s creditors, insisting a No vote in Sunday’s referendum would strengthen his negotiating hand. With the collapse of negotiations between Greece and international lenders, the Mediterranean country is in danger of a default that could plunge the 19-nation euro currency bloc and global markets into crisis.ON JUNE 26th Alexis Tsipras, Greece’s prime minister, announced a plan to put Europe’s latest bail-out offer to a public vote, in a referendum scheduled for July 5th.

The growing threat of Greece’s exit from the eurozone rattled financial markets Monday, as investors dumped stocks world-wide and moved to the safety of U.S. and German government bonds.Leaders around Europe appealed to Greece on Monday to return to the bargaining table over a bailout agreement as stock markets dipped and some Greeks began stocking up on supplies, hoarding cash and hunkering down for a week of political and financial uncertainty. With his country on the brink of a potentially catastrophic financial collapse, Mr Tsipras appeared on national television to insist that the international creditors must respect the democratically-expressed will of the Greek people. The plan quickly triggered a nasty chain of events: euro-zone leaders refused to extend Greece’s current bail-out programme beyond June 30th, when it is scheduled to expire, and the European Central Bank announced that it would cap its emergency lending to Greek banks.

The Dow Jones Industrial Average fell more than 350 points, or 2%, its biggest percentage decline since October, putting the blue-chip index into negative territory for the year. A parade of European officials also warned Greece that its referendum on bailout terms scheduled for this weekend was tantamount to a referendum on whether the country wanted to stay in the Eurozone. Without a last-minute deal to keep the country afloat, it will almost certainly fail to make a $1.8-billion payment to the International Monetary Fund that is due the same day. Facing the loss of ECB top-ups—and the prospect of empty vaults—the Greek government declared Monday, June 29th, a bank holiday and imposed capital controls. The Greek government remained adamant that blame for the failed bailout negotiations lay squarely with its partners in the 19-nation Eurozone, the euro currency club.

To prevent more cash from being drained from Greece’s floundering financial system, a weeklong bank closure began Monday, and residents were limited to $66 in cash withdrawals from ATMs a day. Even so, policy makers would have to consider the effect of any missed payment on the solvency of Greek banks when they discuss the level of assistance on Wednesday, with the outcome having implications for Greece’s membership in the euro. There was a time when capital controls were an instrumental part of macroeconomic management; in the early postwar decades, rich-world citizens taking holidays abroad faced strict limits on on the amount of foreign-exchange they could carry with them. The three major credit-rating companies say failure to pay the Washington-based IMF wouldn’t constitute a default because that term is reserved for private-sector creditors, and the IMF avoids the word. On another day of high-stakes brinksmanship, Mr Tsipras insisted that he would not bow to pressure from Greece’s creditors in the IMF and the eurozone.

European officials are now openly discussing the possibility that Greece could be forced out of the Eurozone, a prospect that until recently they were not willing to entertain. Yet since the great financial liberalisation of the 1970s and 1980s capital controls have been seen as an anachronism, generally imposed in the thick of crisis to prevent matters from spiralling out of control: as in Iceland and Cyprus.

But they said they were wary of holding too many risky assets ahead of what is likely to be a turbulent week leading up to a planned Greek referendum Sunday. The ECB’s decision on whether to provide ELA “will not be taken without political cover at the highest level,” Erik Nielsen, global chief economist at UniCredit in London, said in a note. British holidaymakers heading for Greece were warned by the Foreign Office to take enough euros in cash to cover their spending needs as well as any possible emergencies. Bank deposits are effectively loans to banks, who then lend out some of their depositors’ money (along with financing raised in markets) to finance economic activity. Although restrictions on bank withdrawals do not apply to accounts held outside Greece there are fears that cash machines will simply run out and that credit and debit cards may no longer be accepted.

In the Commons yesterday, Chancellor George Osborne said British pensioners living in Greece would continue to receive payments from the Department of Work and Pensions – although those with Greek bank accounts would be offered advice on how to switch. In exchange for loans exceeding $270 billion at today’s exchange rate, Greece was required to impose deep budget cuts and steep tax increases along with other reforms aimed at reducing the government’s bloated payroll, curbing tax evasion and making the country an easier place to do business.

Some news outlets also said that shoppers were making a run on staples in a few supermarkets and motorists were queuing at gas stations to fill up their tanks, fearful of a fuel shortage even though Greek officials have said that supplies are ample. Klaus Regling, head of the euro-area states’ crisis fund that supports Greece, said earlier in June that it has the option to accelerate Greece’s payment schedule on €130.9 billion if it falls into arrears with the IMF. However, Greek officials and many analysts contend that the painful austerity measures have also caused the economy to contract by 25% in the last five years. A rush to pull deposits can also bring on bank failure, since banks are often unable to call in their long-term loans in order to provide the necessary cash. Investors in past months have flocked to the dollar in anticipation of higher rates that would bolster returns, but the rally has lost steam amid patchy U.S. economic performance.

COMMENT RULES: Comments that are judged to be defamatory, abusive or in bad taste are not acceptable and contributors who consistently fall below certain criteria will be permanently blacklisted. Depositors’ expectations matter; fear of losses can spark a run, which then pushes the bank into failure. (Deposit guarantees can break the cycle but in the Greek case depended upon a flow of money—the ECB’s ELA—which is no longer available.) The greater the panic, the greater the potential losses to remaining depositors, creditors or taxpayers. Gyrations in currency markets prompted the Swiss National Bank to intervene to tamp down the value of the franc against the euro, the central bank’s chairman, Thomas Jordan, said Monday. “People are not panicking on this. It’s not a fire sale,” said Ryan Larson, head of U.S. equity trading for RBC Global Asset Management. “For the most part, the market is taking this fairly in stride.” Traders and analysts said stock markets are likely to hold up better than they did in 2011 and 2012, when anxiety ahead of Greece’s bailout snowballed into angst about the financial stability of bigger European economies, such as Spain and Italy.

With Greece already on the verge of bankruptcy, the government struck a deal with European officials in February to extend its repayment program for four months. Demonstrators hoisted signs bearing the word “oxi,” or “no,” siding with the ruling left-wing Syriza party’s decision to campaign against the bailout terms on offer.

While Lagarde used the word “default” earlier this month to refer to the situation of Greece missing a payment, fund spokesman Gerry Rice said last week that the lender wouldn’t use the term in official communication. But the two sides have failed to agree on what Greece must do to raise revenue and cut spending if it wants access to $8.1 billion in remaining rescue loans. The government contends that the proposals will hurt the poor and elderly disproportionately. “We are not here for ourselves but for” our children, said travel photographer Iraklis Milas, 40, whose 4-year-old son sat on his shoulders. “We may have been through hell these last years and during what should be the most productive years of our lives, and maybe we can still take more. The IMF would instead refer to Greece being in “arrears.” Food and liquor retailer Woolworths has started selling non-core assets, offering its Thomas Dux stores for sale less than a year after the 10-store gourmet food chain became profitable. If Greece left the euro area then deposits in its banks would be converted to a new currency, which would almost certainly be less valuable than the euro.

Bond yields on Greek debt surged Monday, but the rise was more modest for bonds from Italy, Spain and Portugal—highly indebted countries that in past years were seen as vulnerable to spillover from Greece. While Woolworths is keen to develop its small urban store format, industry sources said Woolworths had put Thomas Dux up for sale earlier this year, asking between $10 million and $20 million and seeking expressions of interest from trade buyers and private equity investors. Woolworths declined to confirm or deny whether Thomas Dux was on the market, and Woolworths’ head of mergers and acquisitions, Brent Merrin, who is said to have been handling the sale, was unable to comment. Tsipras’ government has pledged to protect pensions and public sector wages, proposing to raise more money through higher taxes on the wealthy and big corporations. Woolworths opened its first Thomas Dux store in Lane Cove in Sydney in 2008 and increased the number of stores from three to 12 in 2009 after buying Macro Wholefoods for around $20 million.

The stability of the world is in a better place than it was three or four years ago,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute. While Thomas Dux is popular with consumers in upper-income suburbs such as Crows Nest and Paddington in Sydney and Armadale in Melbourne, the chain has struggled until recently to contribute to profits because of high distribution and store costs. With the Greek leader accusing creditors of trying to humiliate his country, European officials took the unusual step Sunday of releasing their proposals to show that they had made some concessions and were prepared to address other Greek demands, such as debt relief. But Merkel said the other 18 Eurozone nations also had a right to respond to that act by deciding to not extend Greece’s current bailout past its Tuesday expiration. “An agreement remains possible,” he said, but added that if Greece turned its back on the Eurozone, France would carry on. “Today the French economy is stronger than four years ago and has nothing to fear.”

Woolworths used the small-format stores to test consumer demand for premium products, such as Woolworths’ Gold private label range, but saw little scope to roll out more stores. Instead, it has been trialling new urban store formats, possibly under the “Local” brand, ahead of a renewed push into the pre-prepared meals market. “There’s not enough people who like it [Thomas Dux] to make it a mainstream chain,” Woolworths’ former head of supermarkets, Tjeerd Jegen, told The Australian Financial Review 18 months ago. Credit cards can be used for online purchases, so long as the shop has an account in Greece; money can be transferred via wire, so long as the recipient account is in Greece.

As reported in Fairfax Media last week, Woolworths Holdings has appointed one of its senior food executives, Pieter de Wet, as general manager of food at David Jones and is considering establishing stand-alone food stores after revitalising David Jones’ existing food business. Emergency foreign payments can be made (to pay a foreign tuition bill, for example) but only after receiving authorisation from a newly created banking-transactions approval committee.

A number of investors saw the selloff as a good chance to buy European stocks, reasoning that the turmoil in Greece is unlikely to hold back a broader economic recovery in the region. “Over our six-month investment horizon, ECB action should mitigate contagion effects to other markets or economies in case of a Greek exit,” said Mark Haefele, chief investment officer at UBS Wealth Management. One source said Woolworths Holdings had appointed an intermediary to express an interest in buying Thomas Dux, but when Woolworths Ltd realised that Woolworths South Africa was behind the approach it pulled the plug. If Greek voters reject the creditors’ demands in Sunday’s referendum, investors’ faith that Greece won’t trigger a financial crisis will be tested anew. Such an event would throw the Greek economy into chaos, as the government rushed to reintroduce the drachma, imposed heavier capital controls and tried to placate angry citizens and businesses whose savings suddenly plummeted in value. A reaction Monday that some might see as mild means there is room for further declines, said Ewout van Schaick, who oversees more than €20 billion ($22.6 billion) at NN Investment Partners.

But Woolworths Holdings believes it can do a better job by leveraging its food expertise in South Africa, where it has 374 locations and food sales of 19.7 billion rand ($A2 billion). Domestic consumption will plunge as cash-constrained Greeks curtail spending; foreign investment will slow to a trickle while capital stowed in Greece looks vulnerable to freezing or devaluation. Other potential buyers of Thomas Dux include L Capital Asia, the private equity arm of luxury goods house LVMH, which owns Jones the Grocer, and Bright Foods’s Manassen Foods, which acquired Simon Johnson, Australia’s first gourmet grocer, in 2011. But finance officials are hopeful that they could contain the fallout and keep borrowing costs for other vulnerable Eurozone countries, such as Italy and Portugal, from rising to unsustainable levels. “For all the problems that still exist in the periphery of Europe, none of them are in nearly as bad a shape as Greece.

Sources suggested that Woolworths had been considering selling Thomas Dux well before the retailer released the outcome of a strategic review in May and downgraded its profits for the second time in four months in June, triggering the resignation of chief executive Grant O’Brien and a global search for his replacement. For the people of Greece, where real output remains more than 20% below the pre-crisis level, additional pain of that severity is almost certainly too great a burden to bear. But he cautioned there could still be a domino effect if investors become more risk-averse toward countries that are considered economically fragile for reasons that have nothing to do with Greece.

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