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Europe scrambles As The Globe and Mail's Eric Reguly reports today, Europe is in full-scale crisis mode.
After his unexpected call for a referendum on the euro crisis accord, Greek Prime Minister George Papandreou was headed for an emergency meeting with German Chancellor Angela Merkel and French President Nicolas Sarkozy, the two main players in the saga.
They were scheduled to meet this evening in advance of the G20 summit in Cannes.
Mr. Papandreou has been under extreme pressure since he shocked the markets two days ago by announcing plans for a confidence vote in parliament this week and a referendum, likely in December or January. Make no mistake, this vote among Greece's angry populace will come down to a referendum on the fate of the euro zone.
“The referendum will be a clear mandate and strong message within and outside Greece on our European course and participation in the euro,” Mr. Papandreou told his cabinet ministers, who backed his plan for a national referendum.
"If events move towards a referendum, Papandreou has essentially linked that which Greeks want, the [euro]and membership in the EU and that which they revile – EU fiscal dictates and loss of sovereignty with the increased scrutiny," said Stewart Hall, senior fixed income and currency strategist at RBC Dominion Securities in Toronto.
Recent polls suggest that the Greek people would choose to remain in the union. What they don't want are the harsh austerity measures tied to that, and which have sparked widespread protests and strikes.
"Which is the dominant desire?" Mr. Hall said in a research note today.
"The results of a recent Kapa Research poll suggested that 44 per cent of those surveyed viewed EU decisions in a 'negative light' but 72.4 per cent favored Greece staying in the [euro zone] As for Papandreou, having played the nuclear card, he is likely to face retribution in Cannes and retribution at the polls. Merkel, Sarkozy and Draghi are having a staring contest with Papandreou, whether or not anyone blinks is yet to be seen. EU policy makers have made it clear that the current package is the only package."
Up to this point - and we're now two years into this crisis - observers have speculated on whether Greece could leave the 17-member monetary union, but few actually thought that would happen. Now, that's not a sure thing.
As The New York Times reports today, some economists believe that a default by Greece and return to the drachma might be the best course of action, though the results would be devastating.
Such a move, said chief currency strategist Camilla Sutton of Scotia Capital, would mean a sharp currency devaluation that would spark high inflation, a run on the banks and rising unemployment, which is already running at about 17 per cent.
"It would be excrutiatingly painful for those left behind," Ms. Sutton said. "... It would be horrific, and it would take years and years and years to rebuild."
Technically, Greece can't be forced out of the 17-member monetary union, but it can choose to leave on its own. Thus, Ms. Sutton said, Mr. Papandreou has a massive political job ahead of him to convince people of the merits of staying within the euro zone.
For the euro zone, however, the exit of Greece could be a good thing, seen to strengthen the union.
"The cost of a Greek exit from the EMU would be high, particularly for Greece, however for the [euro] once near-term uncertainty subsides it would likely be positive," Ms. Sutton said.
(But, hey, you could really see the sights of Athens on the cheap as a tourist.)
That's certainly not Mr. Papandreou's preferred route, though it is his gamble.
- Leaders scramble to save euro zone plan
- Papandreou's bailout strategy unnerves European leaders
- Euro zone factory data suggest recession
- Europe's banking plan destabilized
- Greek Prime Minister Papandreou takes a high-stakes gamble
Timelines and uncertainty The confidence vote and referendum, of course, threaten to prolong the agony not only of Greece, but of the markets in general.
While the entire crisis accord is at stake, first up is the question of the next tranche in Greece's bailout money. And that's heading down to the wire.
"If it takes Greece four weeks to hold either elections or a referendum - or five or six weeks to do both - the country all but surely will run out of money unless the donors are prepared to disburse tranche six without assurance of conditionality accepted by the borrower," said Carl Weinberg, chief economist at High Frequency Economics.
"This is what is inside Pandora's box, and Mr. Papandreou has opened it."
Mr. Weinberg expects the IMF to tell the Greek leader that it won't approve that tranche if plans for a referendum proceed. But having unveiled it, and won the backing of his cabinet, Mr. Papandreou is not likely to cancel that vote. Already there are riots in the streets of Athens. Think of what could happen if he were to decide suddenly to take away the voice of the people?
So what's in store for the next several weeks?
"While recent polls suggest the majority of Greeks view the government’s austerity plans negatively, an even stronger majority wish to remain in the eurozone - limiting the odds that the referendum will fail," said Emanuella Enenajor of CIBC World Markets.
"Nonetheless, uncertainty in the interim will likely add to volatility of the euro, and keep funding costs of Greece and peripheral European nations elevated."
Haircut not 'stylish' National Bank Financial has done some math around the euro crisis deal, and has found that the proposed haircut for holders of Greek debt isn't "very stylish."
The plan struck in Brussels, of course, is now under threat since Mr. Papandreou decided to hold a referendum on the accord.
It envisions a "voluntary" 50-per-cent hit, or haircut among bondholders, largely banks, an enhanced rescue fund and pumped-up capital levels among euro zone banks. The whole thing aims to bring down Greece's debt-to-GDP level to 120 per cent by 2020 from its current level of more than 160 per cent.
Several observers have questioned whether the plan is enough to get Greece out of its hole, which has plagued the monetary union for two years now.
Economists Krishen Rangasamy and Matthieu Arseneau of National Bank base their findings on a "conservative assumption" of an average interest rate of 5 per cent. That, they said in a report today, would mean debt servicing costs of 6 per cent of GDP.
The Greek debt burden, they found, would remain high in comparison to those of other countries that have defaulted.
"A more realistic target for Greece would be for a debt service of 4 per cent of GDP or less, which translates to an 80-per-cent debt to GDP ratio. And to achieve that target in 2016, a haircut of around 65 per cent to 70 per cent would be needed, based on the IMF’s September projections for Greek debt and deficits."
Stopping the contagion Key to much of what's going on in Europe is over the threat of contagion. While many observers expect Greece to inevitably default, the question becomes one of protecting bigger economies such as Italy and Spain, which are feeling the wrath of the bond markets with expensive yields.
"While the impact from a disorderly Greek default would clearly be negative, the greater concern is contagion," said Benjamin Reitzes of BMO Nesbitt Burns.
"If Italian yields rise sufficiently to cut the country off from capital markets, the rest of Europe would face either a very costly bailout or potentially a break up of the euro," he said in a research note.
"If this uncertainty persists for much longer, another European summit will likely be necessary which will hopefully be focused on properly ring-fencing Italy. Such an outcome would probably need a reluctant [European Central Bank]to participate."
Like Mr. Papandreou, Italy's Silvio Berlusconi is under pressure, and has pledged to bring in reform measures as quickly as possible.
Building up to G20 All of this, of course, forms the backdrop to a summit of G20 leaders in Cannes tomorrow and Friday. Increasingly, The Globe and Mail's Kevin Carmichael writes in today's Report on Business, they're finding their hands tied.
The economic outlook stinks - witness fresh data from Europe today and an expected grim outlook from the Federal Reserve this afternoon - while the euro zone plunges back into crisis. Not that it was ever out.
"The G20 leaders’ summit this week will be an exercise in damage limitation," said Andrew Kenningham, senior economist at Capital Economics in London.
"The agenda has been completely overtaken by the euro crisis, where there is no agreement on the role non-euro zone countries should play," Mr. Kenningham said in a report.
"Nor is there likely to be progress on the perennial issue of global imbalances ... No doubt the leaders will repeat the message of their finance ministers who said on Oct. 15 that the euro zone has the primary responsibility for solving its own problems. In addition, they may agree to look at the case for additional IMF resources, and perhaps creation of a new IMF 'facility' which could support countries such as Italy and Spain if needed. But none of this would provide the markets with any comfort that the world’s most powerful governments are any nearer to containing the euro debt crisis."
Brought to you by ... Just an aside, note how the official agenda for the G20 summit carries the logos of its "partners" and "sponsors," sort of like sponsorship of the save-the-world Olympics. Among them are well-known names like Dior, Bic, Michelin and Air France.
Fed stands pat The Federal Reserve held its benchmark lending rate steady near zero today as it pointed to "significant" risks to the economic outlook, though noted that growth strengthened in the third quarter.
It was still a grim statementement from the U.S. central bank, though, warning that "recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated."
Still, it may have been more optimistic than many observers expected, saying consumer and business spending has picked up and inflation seems to have "moderated." Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee said they would maintain their existing policies, so little change there.
But remember what Mr. Bernanke has already termed the "national crisis" of unemployment. The Fed sees little change there, expecting a "moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually."
Jobless numbers, the Fed said in a new forecast, are going to be even worse than it projected in June. The unemployment rate now is seen at 9 per cent to 9.1 per cent this year, 8.5 per cent to 8.7 pr cent next year, and 7.8 per cent to 8.2 per cent in 2013.
The central bank also slashed its outlook for economic growth, now projecting 1.6 per cent to 1.7 per cent this year, 2.5 per cent to 2.9 per cent in 2012, and 3 per cent to 3.5 per cent in 2013.
- Fed cuts economic outlook, raises unemployment estimates
- Kevin Carmichael's Global Exchange: Fed inflation hawks return to the fold
'Fracking' likely behind tremors An independent study has found that the controversial natural gas drilling practice known as "fracking" likely triggered two minor quakes in Britain in April and May.
But, said Cuadrilla Resources, the company involved in the shale gas drilling, the temblors were small, and it probably won't happen again.
"The seismic events were due to an unusual combination of geology at the well site coupled with the pressure exerted by water injection as part of operations," Cuadrilla said in a statement today.
"This combination of geological factors was extremely rare and would be unlikely to occur together again at future well sites. If these factors were to combine again in the future local geology limits seismic events to around magnitude 3 on the Richter scale as a 'worst-case scenario.'"
To its credit, Cuadrilla published the report, which cited a pre-existing, brittle fault.
"The repeated seismicity was most likely induced by repeated direct injection of fluid into the same fault zone," the report says, adding that "the probability of a repeat occurrence of a fracture-induced seismic event with similar magnitude in the Bowland basin is very low."
It recommends the company monitor just such an event of between 0 and 1.7 per cent, after injection, until levels subside, and stop injecting water if it tops that higher level.
Feel better? Just a little jostling and nothing to worry about? Or, as the company put it in its statement, "minor seismic events."
The company had suspended operations as the British Geological survey investigated the quakes, the first in April measuring 2.3, about 2 kilometres from the project near Blackpool, and the second, in May, measuring 1.5 within about 500 metres of the site.
Fracking, which is also known in the industry as fracing, is actually hydraulic fracturing, which uses water, sand and chemicals or gases to bust underground rock formations and push natural gas to the surface. It has helped change the face of the natural gas sector, though remains mired in controversy.
Cuadrilla's chief executive officer, Mark Miller, said the company is pleases that the report found "no threat to people or property" in the area, adding "we are ready to put in place the early detection system that has been proposed in the report so that we can provide additional confidence and security to the local community.
Talisman boosts profit Talisman Energy Inc. today posted a gain in third-quarter profit of almost 50 per cent, in line with what the Calgary-based energy company had forecast.
Talisman earned $521-million or 51 cents a share in the quarter, compared to $352-million or 35 cents a year earlier.
“With growing shale production, the Kitan field startup and a number of platform turnarounds completed in Southeast Asia and the North Sea, production is now expected to increase into the fourth quarter, averaging 425,000 barrels of oil equivalent a day for 2011," chief executive officer John Manzoni said in a statement.
"This will equate to growth from ongoing operations of 9 per cent year over year. Apart from some short-term operational issues during the quarter, there were a number of notable successes."
Sony sees big loss Kids, long before the iPod the Sony Walkman ruled the world. Ask your parents about it. (There was no iTunes, but instead something known as a tape cassette, though there's now a digital version.)
The Walkman doesn't rock any longer, and as for Sony, it posted a second-quarter loss of almost ¥27-billion, or about $345-million U.S. Revenue fell more than 9 per cent.
More importantly, the once mighty consumer electronics giant forecast a loss of the year of ¥90-billion, or about $1-billion.
The company is also overhauling its TV unit.
- Molson Coors profit falls as economy hits beer spending
- Mega Brands profit dips on higher costs
- Nissan hikes forecast despite profit dip
In Economy Lab The best reason for sticking with the Bank of Canada's inflation target is that after several decades of flailing about, the central bank has a policy framework that works well, Stephen Gordon writes.
In International Business China may well still be headed for a soft landing but a "structural slowdown" in GDP growth has even previously optimistic economists uneasy, Carolynne Wheeler reports from Beijing.
In Globe Careers If you’ve dug yourself into a hole, in terms of a suffering project that has already sucked up large amounts of time and effort, don’t just keep digging, according to Harvard Business Review.
From today's Report on Business
- Jeff Gray's Law Page: Law profession grapples with 'articling crisis'
- Alberta pension fund takes aim at Viterra board
- RIM stock falls below $20 a share
- Fabrice Taylor: What does hedge fund know about CP? Less than you think