Gold News

Greece in the South Pacific

Default and devaluation looks so far away from Australia right now...
What was that? The sound of the iron ore price falling to the floor, writes Greg Canavan in The Daily Reckoning Australia.
The benchmark Qingdao spot price sank 6% Thursday to US$55.63 a tonne. It was the largest one-day fall in over a year.
The fall came on the back of record iron ore exports out of Port Hedland, signifying that a torrent of supply of the red dirt doesn't look like slowing on the back of weaker prices.
The iron ore story isn't really front and centre right now, but it will be soon enough. Given the unfavourable demand and supply situation, there's a strong probability that iron ore will fall to new lows in the next couple of months.
That will put pressure back on the Aussie economy (it will lose billions in income for every US$1 per tonne price fall) the federal budget, and the government.
Given the economic headlines are elsewhere right now, the government must be enjoying the reprieve. And they'll continue to operate in the shadows for at least a few more weeks, given a resolution to the Greek crisis is nowhere in sight.
The Financial Times explains:
"Greece needs more than €60bn in new financial help over the next three years and faces decades under a daunting mountain of debt that will make it vulnerable to future crises, the International Monetary Fund has warned.
"In a new analysis that lays out Greece's economic dilemma in stark terms, the IMF on Thursday called for Europe to grant the country "comprehensive" debt relief, arguing for the doubling of the maturities on its debts from 20 to 40 years."
The IMF report also stated that before the ruling Syriza party came to power in January, the Greek economy had returned to growth, but had since stalled after the reform process halted.
That sounds like convenient analysis. The bottom line is that Greece's creditors, made up of Europe's 'elite', don't want to deal with Syriza. They are the first government in Greece since this whole crisis began to stand up for the Greek people rather than be the creditors' puppets.
And don't you like the IMF's idea of 'comprehensive' debt relief? No, it doesn't involve writing any of it off. It simply wants to extend it for another 20 years! Gee, thanks!
But at least the IMF recognises Greece's debt is way too high and completely unsustainable. Any arrangement that doesn't look to reducing the debt burden will ultimately fail, and the crisis will drag on.
The focus on Greece means the rest of the world is not really aware of another looming debt sustainability problem. The US island territory of Puerto Rico, with a population of just 3.5 million, is labouring under the weight of US$72 billion in debt.
Earlier last week, the island's governor said the debt was 'not payable'. And owning to the complex nature of it, restructuring the debt could prove difficult too.
Puerto Rico certainly isn't Greece, but the point to note is that all this debt is held by the private banking system. That's why the situation in Greece isn't causing too much panic. The debt is out of the banking system. But Puerto Rico, nearing default, is different. It's something to keep an eye on.
And it's worth keeping in mind too that the island territory's overseer, the US, isn't as healthy as you might imagine.
Thursday also saw the release of the widely watched 'non-farm payrolls' report. It came in slightly weaker than expected, along with downward revisions to previous months. But the highlight, or lowlight, was the participation rate, which is at the lowest point since October 1977.
In other words, American's are slowly giving up on looking for work. In a strong job market, the participation rate should climb as the unemployed gain confidence about their employment prospects. That's just not happening in the US, which gives you an idea about the quality of the economic recovery.
In Australia, poor local economic data doesn't seem to faze investors too much these days. Last week saw the release of yet another disappointing trade report. After April's record deficit of A$4.14 billion, the deficit for May was still worse than expected, coming in at A$2.75 billion.
Clearly, the massive iron ore shipments from Port Headland aren't helping to keep our trade balance in check. For the past three months alone, our trade deficit was nearly A$8.5 billion. The June quarter current account numbers will be ugly, that's for sure.
That's because the current account includes the trade deficit PLUS the income we have to pay to service our borrowings. And to finance our trade deficits, we have to borrow!
In the financial markets, none of this matters, until it does. That is, while no one seems to care about it, no one really cares about it. But there will come a tipping point, and then it will become a very big deal.
At that point our Dollar will fall A LOT to keep foreign capital coming in. That's because a falling Dollar gives foreigners more bang for their buck. Our companies will look cheaper and so will our prime residential properties. We'll continue to sell off assets to keep up with the Jones'...until we become a type of Greece in the South Pacific.

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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