‘We are not negotiating the bailout; it was cancelled by its own failure.’
‘I want to assure you that there is no going back. Greece cannot return to the era of bailouts.’
So said Greek Prime Minister Alex Tsipras to members of the Greek parliament overnight.
This is going to get interesting. The current Greek ‘bailout’ program expires at the end of February unless Athens requests an extension. Athens is not going to request an extension.
In response, German finance minister Wolfgang Schauble said that if Greece didn’t want a new rescue plan, ‘then that’s it’. Which presumably means when the money runs out at the end of the month, Greece will be on its own.
Schauble’s Greek counterpart, Yanis Vourafakis, is supposedly an expert in ‘game theory’, having written books on the subject and taught it at university. He’ll need that knowledge in spades as he enters into negotiations over the next week or so.
Even though the money runs out at the end of the month, apparently Greece has only until 16 February to request an extension. That’s next Monday.
The market couldn’t give a hoot right now. That means either it is woefully underestimating Greece’s resolve, or thinks the players will come to some sort of solution (regardless of the rhetoric), or that a possible Grexit doesn’t really matter.
Back in the day, before central banks tried their hand at playing market God, the market would price all this uncertainty in. Not these days though. In the markets’ eyes, there’s nothing that central banks can’t fix…including the breakup of the largest monetary union in history.
As I’ve written previously, this matters for Australia because we import a fair bit of capital from Europe. Well, the banks do at least, and they pass this credit on to property speculators so they can get rich by swapping houses with each other.
If Europe goes into another Greek induced euro spasm, the cost of that credit will rise like it did in 2012. If there’s one thing that speculators don’t like, it’s rising borrowing costs.
Banks don’t like it either. Easy money is why the Commonwealth Bank [ASX:CBA] keeps churning out record profits. The Reserve Bank of Australia only just reduced interest rates for the first time in over 18 months, but the banks’ funding costs have fallen this year. That’s as global risk tolerance increases and the helicopters and spotlights are out in force in the search for yield.
Yesterday, CBA announced a $4.5 billion profit for the six months to 31 December, an 8% increase on the same period last year. CBA achieved the result by growing its ‘average interest earning assets’ by nearly $50 billion dollars (which it earns a margin on) and lowering its cost-to-income ratio by 70 basis points.
Around half of the asset increase came in the form of home loans, meaning CBA contributed around $25 billion in new credit to the engine of Australia’s economy. Good on them!
Business loans grew by around $12 billion for the year, half the amount of home loans. That makes sense…why would you go through all the hard work of trying to run a business when you can just buy and sell properties?
The Australian Bureau of Statistics released data yesterday showing more and more people getting in on the act. ‘Investor finance commitments’ grew by 6% in December and are up nearly 20% year-on-year. Investors now account for a record 48.7% of total finance commitments, with a record total finance amount of nearly $140 billion…up from around $80 billion in 2011.
2011 was when the Reserve Bank started lowering interest rates. That rate cutting cycle kicked off a ‘search for yield’, but punters didn’t have to look very far. Property was the answer. It’s an untouchable asset. Politicians build their wealth around it and create tax incentives that aid speculation.
The yield on most residential properties is now so low that it doesn’t cover the interest expense on the debt financing. So calling people property investors is being a bit generous. But who needs yield when you’ve got capital growth and the ability to tax deduct the income losses against your other income.
It’s a sweet deal…so sweet, in fact, that it’s going to give Australia diabetes if we keep up with the ‘houses as wealth generators’ charade. Channelling an increasing amount of capital into Australian housing year after year is a recipe for poor productivity and declining economic wealth.
The historic commodity boom obscured this stark fact (and it is a fact, not my opinion) from view as we simply leveraged the boom with foreign capital to con ourselves into believing we are wealthy.
Australia is a wealthy country — don’t get me wrong. But it’s not because of rising house prices. Our wealth stems from what happened in the past, notably many of the hard structural reforms that were pursed in the 1980s.
Economics works in long waves. Structural reforms have long, not short term, pay-offs. That’s why politicians rarely pursue them anymore. That’s why the whole debate about tough budgets is off the agenda. Because as we get closer to an election, the Coalition will loosen the purse strings and try to spend their way into another three years of power.
But this tried and true political/economic model is running out of steam. We’ve effectively spent all our hard earned wealth…the result of sacrifices made by previous generations. We’ve replaced it with debt and pretended that nothing has changed.
Bill Bonner is fond of saying you get what you deserve. I have a go at politicians constantly here and will continue to do so. They all have my contempt. But we’re the clowns who vote them in, endorsing their behaviour. We kick up a stink when the government tries to ‘take our benefits away’.
Who are they taking from though? The government is merely a wealth distribution machine. They take from one part of society and give to another.
In my last income tax statement, which was horrendous, the government helpfully provided a graph of where my tax dollars are going. The largest chunk of it goes to the aged pension.
Of course I don’t mind making sure our older citizens are taken care of in retirement, but the needs of retirees are only going to grow…and it will grow much quicker than the workforce will, meaning budget deficits will become entrenched.
Ask any financial planner and they’ll tell you ‘retirement planning’ is their bread and butter. What they mean to say is they work on how can you shift assets around in order to access the pension. Houses of course are exempt from the assets test. Even $5 million homes in leafy suburbs.
The whole system needs reform. It will anger a lot of people. But the government won’t touch it. Instead they focus on things like dole payments even though the percentage of tax dollars spent on unemployment benefits is tiny compared to the aged pension.
The only thing that will bring about tough reforms is a crisis. And if we keep going in this direction, a crisis is what we’ll get.
for The Daily Reckoning