Dear PGM Capital Blog readers,
In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of June 1, 2015:
- IMF urged the FED to wait until 2016 to raise rates
- Greece defers payment to IMF
IMF URGED THE FED TO WAIT UNTIL 2016 TO RAISE RATES:
In its annual review of the U.S. economy, the International Monetary Fund said on Thursday, June 4, a series of negative shocks, including a strong dollar and bad weather, had sapped momentum for job creation and expansion, prompting a downgrade to its growth expectations to 2.5% for the year. Its last estimate in April was for a 3.1% expansion.
In a statement the IMF managing director, Ms. Christine Laggard said:
“The strength of the dollar, caused partly because of weakness in the rest of the developed world, was dragging on on growth in the USA and that things could get worse.’
She also said:
“There is a risk that a further marked appreciation of the dollar — particularly one that takes place in an environment where policies to address growth deficiencies languish both in the U.S. and abroad — would be harmful”
Based on this the IMF is calling for the Federal Reserve to hold off its first rate increase in nearly a decade until 2016.
GREECE DEFERS PAYMENT TO THE IMF:
On Thursday, June 4, Greece told the IMF it would delay a debt payment of about €301million, due today, submitting a request to the fund to bundle payments totalling about €1.5billion due this month into one lump-sum payment.
The proposal to bundle the payments was confirmed just hours after IMF managing director Christine Lagarde said she expected Greece to meet the €300 million payment due tomorrow.
The deployment of a seldom-used but legal device may buy Greece time as it struggles to agree a new reform deal with lenders.
But it also indicates the country’s precarious financial position, more than four months after the Syriza-led government swept to power in January’s general election.
Greece was last month forced to tap its reserves at the IMF to meet a €750 million payment.
With this action, Greece became the first country to defer a payment to the International Monetary Fund since Zambia in the 1980s.
PGM CAPITAL COMMENTS:
IMF message to the FED:
Fed officials, too, have expressed concern about the global economy. Ms. Lael Brainard, a Fed governor, said in a speech on June 2nd, that “foreign headwinds” were causing problems that could lead the Fed to delay interest rate increases.
Ms. Leal Brainard, isn’t the only FED governor who is raising the red flag regarding the intentions of the FED to start raising rates in the fall of this year. Her colleague Mr. Charles Evans, president of the Federal Reserve Bank of Chicago, reiterated on Wednesday June 5th, in Chicago that the Fed should wait to raise rates until inflation strengthens.
We of PGM Capital agrees with the IMF and believe that the recovery the in the country isn’t strong enough to handle a rate hike. A rate hike, will have a very negative effect on the overvalued US Capital Markets. On top of this, it will give an even more upwards pressure to US-Dollar which will effect have a negative effect on USA export sector, tourism and subsequent jobs in these sectors.
Greece defers payment to IMF:
Greece’s public debt is 180 per cent of GDP. The loans are in a currency that the country does not control. It is therefore foreign currency debt. The IMF knows that Greece cannot possibly pay this down by draconian austerity and the longer it pretends otherwise, the more its authority drains away.
Based on this, the Greek government faces another set of crucial deadlines in its interminable bail-out drama this month, as fears mount that the country could become the first developed nation to ever default on its international obligations.
But with public sector wages and pensions to pay out, a cacophony of voices on Syriza’s Left have vowed to prioritise domestic obligations unless creditors finally unlock the remainder of its €240billion bail-out programme.
In April of this year a senior Greek official told the following to the international press:
“We are a Left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer,”
The current phase of Greece’s crisis is nearing its conclusion as the country runs out of money after four months of deadlock.
The Greeks are not withholding a euros 300 million payment to the IMF because they have run out of money, though they soon will do. Five key players in the radical-Left Syriza movement took an ice-cold, calculated decision not to pay. They knew exactly what they were doing.
On one level, the “bundling” of euros 1.6 billion of payments due to the IMF in June is just a technical shuffle, albeit invoking a procedure last used by Zambia in the 1980s. In reality it is a warning shot, and a dangerous escalation for all parties.
Syriza’s leaders are letting it be known they are so angry, and so driven by a sense of injustice, that they may indeed default to the IMF on June 30. In doing so they will place the institution in the invidious position of explaining to its 188 member countries why it has lost their money so carelessly, and why it has made such a colossal hash of its affairs.
The delay in the payment to the IMF is an escalation of the confrontation, It increases the risk of bankruptcy and Grexit.
In Greece’s current predicament we know what Keynes would advocate – Default, reschedule, reorder, postpone, invite debt forgiveness, or whatever, as much as you like. But Greece desperately needs increased demand. And the only way of securing this is via a much lower exchange rate. That means Grexit and return to the Drachma.
The Drachma after being reintroduced, will devaluate immediately against all mayor currencies, a lower exchange rate will increase net export which will increase the net income of the country.
Look at it this way: if Greece manages to produce extra GDP as a result of a devaluation, it will be able to export more without importing more.
Moreover, instead of devaluation being anticipated and feared, once the deed is done, confidence would return. Spending, output and incomes would all increase, drawing in imports to match the increased exports and providing the wherewithal for increased living standards.
There are “none so deaf as those that will not hear”.
Until next week.
Yours sincerely,
Eric Panneflek