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Stephen Tierney MBMG International Ltd.


Better late than never

Despite the most recent bailouts, the peripheral European economies should still leave the EuroZone as they should have done three years ago and why the ECB's LTRO funding mechanism, while reasonably successful the first time, is not a long-term solution, as Paul Gambles of MBMG recently told Money Channel:

“You can only stop downgrading Greek bonds when it gets to 100% haircut, and we've seen this gradual write off of Greek debt over time - 30% haircut, 50% haircut, 70%, and now the 30% that's left is getting stretched over 30 years and torn in such ways that it's not really worth 30%.

“I think that the real problem here is that the recent Fitch downgrade highlights the fact that we keep bailing out Greece time after time after time, and yet none of this is really making any difference to Greek fundamentals, and Greece is actually getting in a worse and worse situation all the time. If you ask the people on the streets in Greece, they don't seem to feel that their situation is improving.

“Greece has got one of the longest lasting and deepest recessions in history now. This has been going on for three years and we've got a really sharp rate of contraction every year, and yet all that's happening is that the ECB and EuroZone core are saying that we need more contraction and more austerity, but there comes a point where it's just impossible to keep reducing people's standard of living any further and to keep applying more austerity. As we've always said, that will end up being the breaking point.”

Greece should have left the Euro three years ago, so should Ireland, so should Spain, so should Italy, In fact, probably everybody except Germany should have left the Euro and then it would not be the Euro, it would be back to being the Deutsche Mark. The reason that they did not is because politicians generally will always make the easy choice, and usually that means they won't make the right choice. We have seen that, not just in Greece, but all over Europe and in America. In all these places, people have kicked the can further down the road and into the future. The problem is that every time they kick the Greek can now is not really travelling that much further down the road.

It only seems a couple of months ago we were talking about the last Greek bailout, and we will be here again in a couple of months talking about the next Greek bailout, and because the problems have got that much bigger and because the problems all the other EuroZone countries have got bigger and bigger as well, it has just increased the chance that once something goes wrong with Greece, it goes wrong with the entire EuroZone. People said that Greece was never going to default, but I think it is now widely accepted that Greece has defaulted in effect because it cannot afford to pay back the debts it has got.

Italy and Spain are not at the haircut stage yet. The haircut is the second stage of it. If you look at the EuroZone crisis, we think there are a number of stages. The first stage is when you cannot go and raise enough money. When you get shut out from the capital markets, you cannot raise the money you need to keep paying the bills. We first saw that happen with Greece and Ireland, then with Portugal - it could not go the capital markets and its debt was entirely being bought by the ECB, no one else.

Italy and Spain have also got into that same situation. What happened in December is very interesting because the first round of the LTRO, which is basically the ECB doing quantitative easing, what we saw there was that the ECB went and forced half a trillion Euros into the market. It basically went and put that cash into the market and it bought bad assets, bad bonds and bad sovereign bonds, and that had an interesting effect because at about the same time, there was roughly the same amount of money that was being parked with the ECB every single night on overnight deposits by banks who just did not trust any other banks in the Euro system.

Paul Gambles gave a great example, “If you are a French bank and you have got a surplus of cash at the end of every night, normally you would go and lend it to another French bank that has a deficit of cash over night, and they will pay you an overnight interest rate on that. We got to the stage in December where French banks did not trust any other French banks, so they were putting their surpluses on deposit with the ECB. When LTRO number one came out in December, this influx of half a trillion Euros of credit into the system from the ECB also encouraged the banks to actually go and put their own money back into the system. They realized that if the ECB was putting half a trillion Euros of cash in there, then the banks were all going to be able to survive a little longer, so half a trillion at that stage actually had the impact of about a trillion Euros, which is why some people were surprised at the extent of the impact that this had on the capital markets - we saw a really strong capital market rally.”

With diminishing returns, each time you do this, it becomes less and less affective each time - the periphery should now abandon the ill-fated Euro project. Better late than never!

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Stephen Tierney on [email protected]


Aussie expats in firing line over 2012 budget proposals

There wasn’t a great deal of joy for expatriate Australians in the 2012/2013 Australian Federal Budget handed down on May 8th.

This budget has variously been called the “Battler’s Budget” and the “Robin Hood Budget” with the obvious implications of pinching a bit from the rich and giving a bit to the poor.  It’s a little more complex than that as, drilling down into the details we find that the government has also taken a pot-shot at a very soft target - expatriates. Some of the measures leveled at non-resident Australians include the scrapping of the 50% capital gains tax discount, increasing the non-resident marginal tax rate and introducing measures that will potentially reduce the amount of Aged Pension received by expat retirees.  These and other measures proposed are all part of the “surplus we had to have” - Treasurer Wayne Swan’s promise to deliver a budget surplus seemingly at any cost.

Even as governments in other parts of the globe are beginning to doubt the benefits of austerity programs, Australia has decided to go down this route even when not economically necessary. Rather, once promised, it became politically inevitable. This was one promise that had to be kept by the Labour government in order to avoid political crucifixion in parliament.

The government has shrewdly targeted non-residents for some special treatment as we represent a politically soft target. The average Aussie on the street back in Sydney or Melbourne or Perth is unlikely to be too concerned that “non-residents” have had their tax burden increased or their pension entitlements reduced.

Some of the proposed measures include:

The tax rate for non-residents for income ranging from 0 - $80,000 will be increased to 32.5% from July 1st 2012 and to 33% from July 1st 2015.  This will affect those expats that derive part or all of their income from taxable sources in Australia. This includes such items as rent from investment properties, wages and salaries paid in Australia and the taxable portion of superannuation pensions. There are measures that may be taken in order to potentially offset Australian income tax for expats, including concessional (tax deductible) contributions to superannuation.

In what is likely to be a highly unpopular move amongst expats, the 50% capital gains tax (CGT) discount has been scrapped for non-residents from 8th May 2012. Gains made on certain assets, such as investment properties, from that date onwards will not be eligible for the discount. According to the proposal, non-residents will still be eligible for the discount on gains made prior to May 8 provided they have a valuation on their asset as at that date. This may dampen the enthusiasm for non-residents to invest in direct Australian property, although this mightn’t be such a bad thing considering we still feel Australian property to be overpriced and relatively unaffordable by most measures.

There was some bad news for Aussie expat retirees in receipt of the Aged Pension with a proposal to increase the Australian Working Life Residence (AWLR) test from 25 years to 35 years. Essentially, the AWLR is a measure of how many years a pension recipient resided in Australia between the age of 16 and Aged Pension age (65 for a male). Currently, if you had lived in Australia for 25 years between age 16 and 65 you would be eligible for the full pension (subject to means testing). The proposed increase to 35 years means that for those expats who left Australia permanently prior to age 51 (16 + 35), they will not be eligible for the full Aged Pension.

Some of the other items of interest in the Budget include the reduction in the concessional (tax deductible) superannuation contribution cap for those aged over 50. Previously it was $50,000 but will be reduced to $25,000 as from 1 July 2012. This may impact upon those contributing to superannuation to offset other Australian income tax or those that are currently using a “transition to retirement” superannuation pension strategy.

In one of the only bright spots in the budget, the tax-free threshold on resident personal income tax has been tripled to $18,200 - although obviously there is little cheer in this for expats who are not expecting to return to Australia any time soon.

In a nutshell, the Australian government has made things just that little bit more difficult for expats that hold certain investments in Australia or derive their income from back home. This is compounded somewhat by what we see as increasing downward pressure on the Aussie dollar. Always something of a “canary in the coalmine” for global economic conditions, we feel the Aussie is substantially overvalued and expect a reasonably sharp decline in value against the USD as global economic conditions worsen. Thailand-based expatriates here for the long haul would do well to consider holding at least part of their investment portfolios in baht in order to hedge against currency risk.

Lastly, for the cigarette smokers out there - the government hasn’t forgotten to pick on you either with a reduction in the inbound duty free allowance from 250 cigarettes to 50 cigarettes from 1 September 2012. That’s only two packets of Winfield Blue that you’re allowed to take into the country without penalty.  It would be nice to believe that this measure is being introduced to promote the benefits of a healthy lifestyle, but no, the government estimates that this measure will provide savings of $600 million over 4 years in additional duties!

Nick Morton is Senior Private Client Advisor at MBMG Group and a Certified Financial Planner member of the Financial Planning Association of Australia. Nick can be contacted at [email protected]

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Stephen Tierney on [email protected]


China in your hands, part 3

Economies like Japan and China have come to resemble huge currency hedge funds. This is a real worry!

Paul Gambles continues his views on China: There's a real worry because there are all these different symptoms of malinvestment and manipulation underneath the system. The biggest bank in the world is the Chinese bank, and that bank had to be rescued in 2008, when we had a situation where the Chinese sovereign wealth fund borrowed money to go and buy 70% of that bank, so unless that bank really is generating enough profits and really is behaving like a commercial entity, rather than just part of the Chinese government, then the Chinese wealth fund isn't going to be able to generate enough of a return to pay back its interest and to pay back its capital.

These kinds of manipulations underpin the system. The market didn't want to go and buy those shares when the banks collapsed in 2008, so the Chinese government did instead, and it bought them at artificially high prices; it didn't let the market do the adjustment and the correction, and that's pretty well true across a whole range of assets in China, and that's what really worries us right now. What are any of these assets worth? It seems to me that nobody really knows.

People talk about the elections in the States as though they're the biggest political event of the year, and maybe from a prime-time-TV point of view they are, but what's going to happen in China could be even more important. One reason Chinese politics maybe doesn't get the same amount of attention is that it's not really a democratic process in the same way; it's much more of an ordered process. In the same way that the economy is controlled, also the politics tends to be controlled.

There's always been this situation where effectively the Chinese President and the politburo in China have always chosen the President and the Prime Minister, but this year, there seems to be a little bit of concern about the fact that the person who everybody thought was the president-elect, a guy called Xi Jinping, who was going to automatically replace Hu, but there was a ratification that was supposed to happen by the Chinese military council, I think in January, and this didn't happen. They decided they wouldn't ratify him, and nobody quite knows what that means.

Some people are saying that they think there might actually be two different camps within the Chinese politburo. One which is aligned with President Hu, which is very much a believer in spreading the wealth more democratically and more evenly across the country, and the other is more of a business faction called the Shanghai clique, which is more attached to Prime Minister Wen. It seems like, in the past, these two factions managed to get on ok, but people are now wondering, because of the imbalances in the system and the jasmine riots and social unrest coming through, whether all the imbalances that have built up over the last twenty years are causing some kind of a disagreement and a conflict between the factions that supposedly represent the mass of the population and the factions that represent business.

In the past the two of them were able to get on. If they're not able to get on any more, to us, that's a really bad sign that all the imbalances in the system are starting to squeeze. If there isn't enough fat on the Chinese pig to be able to feed the people and to feed businesses, then if one of them is going to have to go without, if one of them has got to be a little bit leaner, that's going to be an uncomfortable adjustment after China has had such a phenomenal growth rate. If that starts to ease off or if that doesn't translate into increasing wealth for the people or increasing volume, size and scale for Chinese businesses, then that's really a major conflict, and I think the politics is starting to potentially reflect that.

Again, nobody really knows what's going on outside of the politburo, but watch that space very very carefully. Maybe it will all be ok; maybe they're having negotiations and they will work it all out, but it could well be that there are much bigger problems under the surface.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Stephen Tierney on [email protected]