Global Market Perspective | A Fisher Investments Blog

Previewing the Greek Election

France’s upcoming second-round vote has dominated headlines lately, but it’s not the only election happening Sunday. Greek voters also hit the polls to select the replacement for interim Prime Minister Lucas Papademos’s technocratic government.

The contest is wide open. There are 32 parties on the ballot, and the latest polls suggest 10 have enough support (3% or more of the popular vote) to win seats. The two main parties, center-left PASOK and center-right New Democracy, are polling at roughly 15% and 20%, making a hung parliament possible. Mirroring the trend seen in France’s first-round vote, far-left and far-right parties have gained considerable support, as Greek voters become increasingly austerity-fatigued. To meet the EU and IMF’s conditions for receiving bailout funds, Greece has passed wide-ranging public-sector job, wage and pension cuts. While these were necessary for Greece to start regaining its fiscal footing, they’ve severely impacted many Greek lives. And a growing number of Greek voters thus see the mainstream parties as simply following edicts from EU and IMF officials without a second thought for their people’s quality of life—and to them, the far right and far left are the political saviors who’ll look out for Greece’s best interests. Their pledges to resist Brussels’ mandates, rather than their misguided communist and neo-fascist policies, are what most new supporters find attractive.

Assuming various parties are able to form a coalition (it’s possible they go the way of Belgium and fail to reach a power sharing deal), the result may be a patchwork quilt of sorts. PASOK and New Democracy could form a combined majority on their own. Failing that, they could join with some of the smaller parties in a unity government. Or either party could find enough partners to form a government without the opposition’s help. It’s also possible one party could win the majority—polls suggest it’s unlikely, but the most recent was taken nearly two weeks ago. Opinions and preferences can change even in such a short period.

So what does this mean for Greece’s continuing quest to secure bailout funding?

In order to receive future aid installments, the Greek government needs to demonstrate ongoing deficit reduction progress and continue implementing the austerity measures outlined in the packages. This will likely involve passing some unpopular, politically unpalatable legislation—the first of which, €11.5 billion in fresh budget cuts and 150,000 additional public-sector job cuts, is due in June.

Antonis Samaris and Evangelos Venizelos, the leaders of New Democracy and PASOK, provided the European Commission and IMF with written, signed pledges to adhere to the bailout’s austerity terms. Their parties should stand behind them, considering the rebel MPs who voted against the most recent austerity package in February were promptly expelled from the parties—those who remain understand what’s needed.

If PASOK and New Democracy don’t have a combined majority, it’s entirely possible they could round up enough votes among the fringe parties (much like the UK’s last Labour government occasionally relied on the Democratic Unionist Party when bills lacked adequate back-bench support). As tough as some candidates’ anti-austerity rhetoric has been, if they’re faced with the choice of getting much-needed bailout money or not—and the risk of being labeled responsible for a potential Greek bankruptcy—it’s hard to imagine no one making the necessary concessions.

And if Greek MPs can’t form a government before it’s time to present the June spending cuts to the European Commission and IMF? President Karolos Papoulias can designate a caretaker government to pass budgetary measures until a new election is held—just as he appointed Lucas Papademos to head the current caretaker government after former Prime Minister George Papandreou stepped down last autumn.

In short, while the election could go any number of ways, it’s still possible even the most fractured of parliaments can pass the spending cuts Greece needs to secure more external funding and keep meeting its obligations. The debate surrounding these measures will no doubt be heated, and ideology could yet trump pragmatism, so nothing’s guaranteed—but there’s no reason the grimmest predicted outcomes must automatically come to pass.

 

 

Golf and Taxes

It looks like some Taiwanese lawmakers have learned an important lesson: The more you tax something, the less you get of it.

In this case, “something” would be golf: Under Taiwan’s Amusement Tax Act, anyone wishing to hit the links must pay a 20% surcharge on greens fees. Lin Chia-lung, a member of the ruling Democratic Progressive Party (DPP), thinks it’s time to end this, and he acknowledges the high tax has shut out many would-be golfers. He has support from others in his party and the opposition Kuomintang—but their purported reasoning for wanting to axe the tax seems somewhat odd to me. They want to shatter the perception that golf is, as the Taipei Times puts it, “a sport for the elite.” This suggests lawmakers think the tax would remain appropriate if golf were indeed a sport for a wealthy few—but because it has increasingly become a more common recreational sport for all income demographics, the taxes are now overly burdensome.

To me though, when you consider the tax’s effects don’t stop simply at the price of a round, it’s likely been overly burdensome for quite a while. Because of the tax, a round of golf is 20% more expensive than it otherwise would be, and as basic supply and demand dictates, the result is fewer golf games played. Fewer customers means course operators need fewer caddies, fewer groundskeepers, smaller wait-staff at onsite restaurants, smaller janitorial staff—in short, the tax likely dampens service employment. This means lifting the tax wouldn’t just benefit all of Taiwan’s would-be golfers. With more people playing more games, courses would likely hire more workers to keep up with increased demand—a positive for non-wealthy folks. Plus, these new workers would likely provide an additional demand source for the broader Taiwanese economy—which could lead to more state revenues over time than the golf tax would bring.

Unleashing the Chinese Dragon?

Chinese Premier Wen Jiabao made some rather interesting comments about China ’s state-owned banks last week. The Telegraph translates: “Frankly, our banks make profits far too easily. Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital. That’s why right now, as we’re dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly.”

Why, you might ask, does the number-two leader of a communist nation want to break up its nationalized financial system? Shouldn’t the government like owning hugely profitable banks?

Well, Wen’s concern isn’t really the state-owned banks’ outsized profits—perhaps he mentioned it to curry some populist favor, but it’s not the problem he’s seeking to rectify. Instead, the issue is small businesses’ difficulty accessing credit. State-owned banks tend to give other state-owned companies preferred credit access, due to the implicit guarantee in the government’s backing—there’s less risk of default than in lending to smaller private firms. When China ’s government tightened annual loan quotas last year, small businesses experienced a liquidity crunch, causing widespread bankruptcies in some southern manufacturing cities. Many were forced to secure financing in China ’s unregulated shadow banking system, where they often faced higher borrowing costs and unscrupulous lenders. This can make it difficult for small business owners to run successful, growing enterprises—and when you limit small businesses’ growth potential, you limit the broader economy’s potential.

Last October, Wen tried to combat this problem by directing state-owned banks to relax their small-business lending policies, scrap unreasonable charges and waive stamp duty on small-business loans. Last week Chinese officials went further, approving a pilot project to “regulate private funding” in the coastal city of Wenzhou . These reforms will allow citizens to set up banks, invest outside of the country, trade unlisted equities and develop different types of bonds—essentially liberalizing the financial industry and, potentially, legitimizing the shadow financial system.

The government said its goal is to adopt the Wenzhou reforms nationwide if the initial test is successful (though, what they’d consider “successful” is anyone’s guess). This is likely what Wen meant by “dealing with the issue of getting private capital into the finance sector.” If these reforms work as officials seem to hope, the influx of private capital into could improve entrepreneur and small business access to credit.

While we wait to see whether this works, there’s a near-term takeaway—party leaders still seem to be eyeing economic liberalization. There’s been some doubt about this recently within China , as some of the more traditionally communist elements of the ruling party have been jockeying for power, but recent policy moves have remained market-oriented. Officials have also relaxed rules on foreign investments within China (including purchases of China ’s historically closed-off “A-Shares” equity market), allowed up to 40% Guangdong pension funds to be invested in capital markets and given Chinese automobile insurers the authority to set their own prices and terms. It’s been and will be a very long process, but these are all positive and important steps forward.

Grassroots Greek Capitalism

While Greece ’s government muddles through austerity and slow-going market reforms, some Greek citizens have taken it upon themselves to revolutionize their economy from the ground up. They’re starting businesses, organizing new markets and local trading systems, and filling the void left by public services cuts. Jon Henley at The Guardian gives an in-depth look:

Greece’s Cut-Price Potato Movement Shows Greeks Chipping in

In short, it’s capitalism at its finest: Free of a heavy regulatory hand, these innovative folks have found ways to literally cut out middle men and other commercial burdens—and the result is lower prices, more efficient allocation of resources, and easier access to goods and services. Makes one wonder what Greece could be if its government put the same effort into liberalizing the economy from the top down. 

 

Interpreting the Andalusian Election

I’m somewhat puzzled by the popular interpretation of the weekend’s Andalusian election results. Because Spanish Prime Minister Mariano Rajoy’s Popular Party (PP) failed to secure a majority in the regional parliament, commentators say the election suggests he’s losing popular support for his austerity program. Here’s a sampling:

Spanish PM Mariano Rajoy’s Election Defeat Fuels Bailout Fears

Louise Armitstead, The Telegraph

Inconclusive Vote in Andalusia Far Worse News Than Full Monti

David Roman, The Wall Street Journal

Troubled Times – Rajoy’s Support Begins to Fade

Sinikka Tarvainen , Oman Daily Observer

Spain’s PM Denied Symbolic Austerity Boost in Local Vote

Staff, Buenos Aires Herald

Certainly that’s one way to look at it … but here’s another: The PP won the most votes, taking 50 seats to the Socialists’ 47 and United Left’s 12, and making this the party’s best ever showing in Andalusia . This is the first time the Socialist Party (PSOE) failed to win the most Andalusian seats since fascism’s fall (see historical results here). That the PSOE suffered an electoral setback at the PP’s hands amid Rajoy’s austerity drive suggests socialism, not Rajoy’s platform, is losing popular support.

The results do present a sticky wicket in one regard, though. Much of Spain’s debt troubles come from profligacies at the state level. Spain’s states—Andalusia included—are semiautonomous and have full budgetary powers. Andalusia is one of Spain’s most indebted states, and the PSOE isn’t keen on sweeping budget cuts and revenue raises (or, in the political vernacular, “fiscal consolidation). Thus, the incoming PSOE/United Left coalition may try to fight Rajoy’s crusade to rein in regional spending. However, a new law gives Madrid the power to approve/veto every state budget before implementation, so while we may see more politicking between Madrid and Seville, the election results may not hugely impact Spain’s overall debt reduction efforts.

 

100-Year Gilts: A Tough Sell?

Earlier this week, word leaked that the UK ’s Treasury is considering introducing 100-year gilts, which would theoretically allow the government to lock in today’s borrowing costs for a very long time.

It’s easy to see why the government would find this attractive. As we’ve written in the past, one of the keys to sustaining a large sovereign debt load over time is managing borrowing costs. At 2011’s close, the UK ’s total interest costs were roughly 9% of federal revenues^[1]—on par with the US , and historically a very manageable level. Current gilt yields are low by historical standards—30-year gilts yielded 3.4% as of market close on March 14^[2]—so issuing debt at today’s low levels helps keep total borrowing costs suppressed. And by issuing longer-matured debt today, the government can effectively finance the future now, at low cost, rather than having to issue more debt at higher yields in the future. From the government’s perspective, there’s a lot to like.

However, for the plan to succeed, investors would have to buy these gilts—and unless the new gilts are index-linked (interest and principal payments adjusted for inflation), they may not be as enamored. Many investors purchase gilts in hopes they’ll provide a stable store of value and reliable income source. Inflation, which has averaged roughly 4% annually in Britain since 1926, would likely hamper both aims.^[3] Imagine an investor purchases £10,000 in 100-year gilts today and passes the securities to their heirs, who hold them until maturity. When the gilts mature, the heirs receive the full face value, £10,000. But chances are that £10,000 buys far, far less in 100 years than it does today. Similarly, the interest received over those hundred years would likely buy less and less as time passes.

 In short, it’s tough to imagine many investors queuing up to purchase 100-year gilts that aren’t index-linked. Even if they are, investors may not see much point in buying 100-year debt when 30- and 50-year debt is readily available (and of long enough duration to satisfy most pension plans’ requirements). It’ll be interesting to see whether the Treasury reaches the same conclusion.

 

 [¹] Sources: Thomson Reuters, Organization for Economic Cooperation and Development, International Monetary Fund; as of December 31, 2011

[²] Source: Bloomberg

[3] Sources: Thomson Reuters, Global Financial Data; as of February 2, 2012

 

Putin’s Chinese Logic

Fisher Investments Market Minder has written a lot about the likelihood Chinese officials make economic growth-oriented policy changes this year. In 2012, the communist party announces new leadership and holds local “elections” in which the ruling party is the only option. Sham elections and planned transitions could easily be a backdrop for civil unrest, which is the Communists’ worst nightmare (see their crackdown in the wake of the Arab Spring)—they don’t want another Tiananmen. So they do what they can to speed the economy, with the assumption faster growth leads to richer, happier people—which means less chance of demonstrations and uprisings.

Well, it looks like Vladimir Putin’s applying the same “money makes people happy” logic in Russia. In recent months, anti-Putin demonstrators have flooded Red Square, with over a hundred thousand marching against his planned return to power (and what they allege were fraudulent parliamentary elections in late 2011). And considering Sunday’s presidential election was written off as a sham before it even happened (Putin won handily, of course), he no doubt anticipated more protests. That’s not the ideal backdrop for his plans to reconsolidate power.

But it seems he has a plan to tame the masses, so to speak: He’s proposed an estimated $30 billion public spending increase on healthcare, infrastructure, teachers’ pay and medical research. This would be paid for, in part, by a new luxury tax (on goods like yachts, fancy cars, second and third homes and the like). In other words, a bit of wealth redistribution to funnel money to all those who are increasingly frustrated with Putin’s authoritarian crony “capitalism” (which looks rather like feudalism in certain regards), in hopes they’ll be more accepting of his return to power. (Though, to be safe, the interior ministry sent 6,300 more police officers to Moscow last weekend.)

Who knows whether it’ll work—15,000 marched against the election results in Pushkin Square Monday evening, and another demonstration is slated for the weekend. But while the protesters’ momentum has slowed a bit, rampant electoral fraud allegations could easily fuel further unrest. Thus, it’s likely this isn’t Putin’s last populist move—especially given the parliamentary gains made by the socialists and communists last year. If there’s one thing we’ve learned about Putin over the past 12 years, it’s that he’ll do just about anything to keep his firm grip on Russia. But how much longer can the world’s authoritarian regimes use opportunistic economic changes to placate increasingly restive and freedom-craving citizens?

For anyone interested in reading up on Russian unrest, Der Spiegel ran an insightful, entertaining series this week:

Part I: A Divided Russia Goes to the Polls

Part II: Russians Fed Up With Putin’s Manipulations

By Walter Mayr, Christian Neef and Matthias Schepp

A Lesson in the Law of Unintended Consequences

Britons have likely noticed the higher price of eggs in recent weeks—prices are up across the EU, as recent regulatory changes surrounding poultry farming have led to egg shortages across Europe. Under the “Welfare of Laying Hens Directive,” farmers are required to house hens in more hospitable cages (allowing them more room to nest)—but the cost of all the necessary upgrades is estimated at around €700,000 per farm, and many producers are opting to exit the egg industry and cull their flocks rather than take on these high compliance costs. As a result, production is down between 10 and 25%, depending on the country, and average prices have risen around 75% since last October.

But it’s even worse in Bulgaria, where egg prices have roughly doubled over the past 10 days. A war of words has hatched between the government and domestic egg producers over who’s responsible. The producers blame the new law’s compliance costs and production shortages (314,000 Bulgarian hens have been removed from the supply chain). But the government thinks the producers themselves are to blame. Or as Farming Minister Miroslav Naydenov put it: “Producers and traders are obviously gouging the market.”

If it were true, it wouldn’t be the first time—Bulgarian egg producers were fined for price-fixing from 2002 to 2007. However, trade protectionism seems a likelier culprit for Bulgaria’s high egg prices. After the Bulgarian cartel was busted in 2008, producers complained that prices fell below their production costs, partly because cheap Polish eggs flooded the Bulgarian market. In response, the government enacted import restrictions, and prices went up. Now it seems Bulgarian hens aren’t laying enough to meet demand, and since Bulgaria can’t import enough Polish eggs to cover the shortfall, prices are skyrocketing. Not coincidentally, Naydenov is considering lifting the import restriction.

There may be other forces at work—the farming ministry is still investigating, and they plan to announce their findings later this week. But this saga is a good reminder of the unforeseen consequences of even well-intentioned regulations and trade restrictions: A law to improve hens’ lives has led to the loss of many; resulting shortages have fueled higher prices; and a trade policy to “help” Bulgarian farmers ended up hurting consumers.

Lesson: Beware of the problems new “solutions” often create.

On the Irish Referendum

When EU officials agreed on their new fiscal compact last month, they hoped for an uneventful ratification process. But Irish Prime Minister Enda Kenny scuppered their plans on Tuesday, announcing Ireland won’t ratify the agreement unless it passes a referendum.

Unlike the Nice and Lisbon Treaties, which were jeopardized by Irish “no” votes, the new agreement can take effect even if Irish voters reject it—it comes into force once 12 of 17 eurozone states ratify it. But a “no” vote could make things interesting. The new agreement is tethered to the European Stability Mechanism (ESM), which is the eurozone’s forthcoming permanent bailout fund (the successor to the European Financial Stability Facility, or EFSF, which granted Ireland’s 2010 bailout). Only countries that ratify the new agreement will be granted access to the ESM.

Ireland is still receiving loan installments under the 2010 bailout, and that won’t change even if voters reject the new agreement. However, if the referendum doesn’t pass, and Ireland still needs external assistance when EFSF funding runs out in 2013, what happens? Relaxing the terms would be a sign of political weakness in Germany and France (assuming, of course, Angela Merkel and Nicolas Sarkozy, the new agreement’s primary architects, are still in power when the time comes…and that’s far from certain). But not assisting a member state is likely equally unpalatable for eurozone officials. We might see a rather sticky political dilemma if this happens.

A few things to keep in mind, though: There’s no guarantee Ireland will still need external assistance come 2013. The country has made significant debt and deficit reduction progress, and its treasury yields have fallen on the secondary market since last summer, which suggests investors view Irish debt as less risky. The Irish economy is on firmer footing than other peripheral nations, and its situation could easily continue improving over the year ahead. And there’s always the chance voters pass the referendum.

In other words, the “what-if” scenario above is just that—there are other possible outcomes, and it’s too soon to tell how this plays out. For now, it’s just an intriguing story to watch.

Indian Insight

Tom Bawden at The Independent has a good piece on India ’s latest attempt to attract foreign investors.

Indian Tiger Fights to Regain its Bite

You may recall India ’s government ran into controversy when it tried to open its retail markets to foreign firms. We’ll see whether these new efforts are any more successful…