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‘Limited’ breakup seen for euro zone Add to ...

These are stories Report on Business is following Monday, June 18, 2012.

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Limited breakup seen
When all is said and done in the euro zone, observers still see a "limited" breakup of the monetary union.

Greece came out of its weekend elections seemingly no further ahead, and many bet Athens will still have to restructure its debt again, and will still quit the 17-member currency group.

But it's not likely to end there, some observers believe as the financial crisis mounts. Having said that, that may not be a bad thing in the longer-term.

"Our working assumption is that there will only be a limited breakup, with Greece and one or two other smaller countries leaving this year or next, but policy makers managing the process sufficiently well to keep the rest of the union together," said Julian Jessop of Capital Economics in London.

"In this case, the global damage should be much less than that which followed the collapse of Lehmans and, over time, there may even be some positives," Mr. Jessop said in a report today.

"We do not think a break-up of the euro zone will trigger economic and financial Armageddon," he added. "For a start, not only would the departure of one or more small countries from the region no longer be a complete surprise, but it should also be part of the solution to Europe’s problems, rather than the disaster that many assume. There is also a better chance now that the economic fallout would be a localized shock. There are still the unquantifiable impacts, via business, consumer and investor sentiment, but these could be limited if policy makers are able to manage the process well."

Mr. Jessop's comments followed an initial market rally in Asia, and then a fizzle, on the results of the Greek election, which put the pro-austerity forces ahead and now in a position to form a coalition government, if they can. Remember, this is the second election, which followed no clear winner in a May vote and a failure to strike a coalition.

Combined, the New Democracy and Pasok parties hold 162 seats, enough to strike a majority well ahead of the rival Syriza, the anti-austerity group with 71 seats.

"It was certainly a relief that our worst fears were not realized as the pro-bailout parties managed to clinch the majority," said senior economist Jennifer Lee of BMO Nesbitt Burns.

"But it is certainly not a unified leadership as the Pasok has yet to figure out how they will throw their support behind a coalition government (no ministers, just a vote of confidence?)," she added. "And the Syriza may have lost the battle but the war will rage on ('we will continue the fight') as they still took a hefty share of the vote, putting them in second place."

While this time may be different than the failed attempts to form a coalition in May, market sentiment soon fell flat after the initial results. At best, it's buying time. Worse still, Spanish bond yields shot well above the key 7-per-cent level that forced other governments into bailouts. The reaction was similar to the swift rejection in the markets of the Spanish bank bailout a week ago.

"If last Monday's relief rally was brief then this morning's was even briefer as investors digested the fairly positive outcome of yesterday's Greek election, and quickly discounted it," said senior analyst Michael Hewson of CMC Markets. "The reality remains that Greece's fiscal position remains unsustainable and more than that the continued deterioration in the viability of Spanish banks continues to worry markets."

What's most likely is that today's results are a small mercy, and only for now. The market reaction would probably have been severe had the Syriza camp, which wants to tear up the harsh provisions attached to the Greek bailout, come out on top.

"Economic reality can't be ignored - years of pain lie ahead whatever happens," said Kit Juckes, the chief of foreign exchange at Société Générale.

"If your cup is half-empty by inclination, you will see this all as a fool's bounce. Investors had no choice but to position for the worst outcome, because that was the one which would cause the bigger move. Reducing tail-risk is what investment is about these days."

Greece desperately needs to get a coalition in place.

Until it does, noted senior economist Martin Schwerdtfeger of Toronto-Dominion Bank, the so-called troika of the European Union, the International Monetary Fund and the European Central Bank won't send its next mission to Athens.

"Getting the first review of the second bailout under way is critical for Greece as the country could run out of cash shortly," he said.

"If New Democracy manages to form a government this week, discussions with the troika could be resumed next week," Mr. Schwerdtfeger added in a research note.

"European officials have signalled some willingness to make some adjustments to the current program to give Greece more breathing room. These could include extending the periods of adjustment, relax some of the targets, reduce interest rates on the loans, and extend funding for infrastructure projects via the European Investment Bank. All these elements will be part of the negotiations in the coming weeks."

Where does it all end?

I lean toward Mr. Schwerdtfeger's view, that it will be difficult for a coalition to do what's necessary and that "in all, we believe Greece will have to restructure its debt once again and that the country will eventually leave the euro zone."

 

Mexico invited into talks
Mexico has become the latest country invited to join the Trans-Pacific Trade Partnership talks, which would mark a major blow to Canada’s bid for expanded ties with Asia should Ottawa be left out of the deal.

Prime Minister Stephen Harper has been lobbying hard to get Canada at the table, but at this point it hasn’t happened, The Globe and Mail's Barrie McKenna writes.

“Apparently Canada doesn’t make the grade, at least not for now,” remarked Lawrence Herman, a trade lawyer at Cassels Brock in Toronto.

“If this is true, it’s a slap in the face for the Harper government and a real setback for its trade policy agenda.”

 

Yamana to acquire Extorre
Yamana Gold Inc. is having a busy day, boosting its dividend and announcing the acquisition of a miner with interests in Argentina.

The Toronto-listed miner, with interests across Latin America, hiked its dividend by 4 cents to 26 cents, marking the fourth hike in its payout in the last year.

Yamana also struck a cash-and-stock deal for Extorre Gold Mines Ltd., worth about $400-million.

Extorre boasts the Cerro Moro gold and silver project in Argentina's Santa Cruz province.

“It is a relatively small transaction in that it represents only 3 per cent of Yamana’s market capitalization yet it could ultimately deliver more than 10 per cent of our total gold equivalent production,” said chief executive officer Peter Marrone.

“It is rare to find such a small transaction that could contribute meaningfully to increases in net asset value, production and cash flow In our view, it is one of the best undeveloped, high-grade opportunities in the Americas."

 

Celestica pulls back from RIM
Celestica Inc., one of Research In Motion Ltd.’s long-time original suppliers, is winding down production of RIM’s signature BlackBerry smartphones over the next three to six months, The Globe and Mail's Iain Marlow reports.

The Toronto-based global manufacturer, which operates several facilities in China, received nearly 20 per cent of all revenues from its services to RIM in the first quarter, down from about 21 per cent in the same quarter last year.

RIM, which has struggled with slowing sales over the past year, has been attempting to streamline aspects of its operations, reevaluating supplier relationships and large parts of its global workforce.

Celestica, which brought in first quarter revenues of $1.69-billion (U.S.), said restructuring charges related to the loss of RIM’s contracts will not exceed $35-million.

 

Income steady
The median income of Canadian families held steady in the 2008-to-2010 period, a contrast to the plunge in wealth south of the border, The Globe and Mail's Tavia Grant reports.

Median after-tax income for families of two or more people was $65,500 in 2010, unchanged from 2009 and the third straight year of little change in after-tax income, Statistics Canada said today.

It’s a far cry from what happened in the U.S., where median income tumbled 7.7 per cent between 2007 and 2010, and median net worth plunged 38.8 per cent to 1992 levels amid to falling real-estate values, the Federal Reserve said last week in an analysis that encompassed 2007.

 

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