Greek Default - who will be caught in its wake?

It should be a very intersting week in the financial markets. The big story of course is that Greece is on the precipice and staring into the abyss. Already we have seen riots and protests across Greece even as the government promises to hold the line and stay the course.

I think expectations that Greece would default over the weekend were unfounded - mainly because there are some crucial meetings that need to happen this coming week. The troika (ECB , EU and IMF) meet on wednesday so nothing will be clear before than in any case. Also the troika will more than likely cobble together some measures that allow them to kick the can further down the road. They have been doing this for a while now but every time they are forced to revisit the problem and confidence just seeps out of the system. I would not be surprised if talks now move towards how to have the most orderly default possible and reduce the effects of contagion from a Greek default as much as possible.

If you look at some of the market indicators - CDS spreads for Greece have reached an incredible 50,000 - at those kind of prices I am not sure anyone even bothers buying CDS protection any more. However the main point is that the market is pretty much putting a very high probability of default on Greece (around 95%). The next indicator that is cause for worry is the rate at which GDP is shrinking - its down 7.3% in the last quarter (annualised). With GDP growth probably due to get worse as the cuts get more and more savage with austerity measures I dont see how Greece will actually be able to meet the ambitious debt cutting plans they have agreed to. The spectre of total social breakdown and anarchy also looms large. Its a very difficult balancing act - clearly Greece needs some structural reforms, but they can't have society just breakdown in order to achieve it.

Leaving aside the question of when (it is no longer a question of if) Greece defaults - lets ask another question - who else will be affected by Greece defaulting? Clearly a major casualty will be the EU as a whole - a Greek default will affect the credibility and standing of the EU and their economic policies. More worryingly we will most likely see the credit markets start to seize up with regards to some of the EU nations. The ones most at risk inferring from the CDS market are Portugal, Ireland , Italy and Spain (in that order). Think the immediate effects of a Greek default will be that there will be a liquidity crunch across sovereigns as well as the interbank market. We will probably return to the dark days of the credit crunch where banks fell overnight due to not having the ability to raise short term liquidity to fund their ongoing activities as fear pretty much stops the interbank market and LIBOR / EURIBOR spreads start to shoot up again.

So who is really exposed to the Greek debt (of course I mean foreign investors as there is significant domestic exposure within Greece)? The Chart below shows the countries in the EU that are exposed to Greek debt. (I have used data from the Guardian newspaper to put together these charts).

Looks like Germany and France pretty much account for half the exposure, which is pretty common knowledge. To me Holland and Belgium seem like the two segments that seem pretty large and may cause some trouble. There is already talk of some of the French banks getting downgraded owing to their exposure to Greece so expect the interbank markets to be choppy for a while.

Below is a list of the top 12 banks with large exposures to Greece (as a percentage of their equity):

Bank of Cyprus is clearly in trouble, and Dexia looks like it has far too much exposure as well. The market seems pretty jittery about Dexia's prospects as it was down 7% on friday. I think a Greek default is going to be pretty damaging to the European banking system as a whole and over the weekend EU leaders would have been talking about how to shore up the capital base of some of the banks worst affected by this.

The EU has to make the right moves now so that all confidence is not lost in the system. However already its starting to look like this situation might be beyond anybody's control and whatever is done will be too little too late. I get the strong feeling that we are merely prolonging the inevitable.

Is poverty really at the heart of the London Riots?

A society can only work if every member of the said society feels that they have something to gain from being a valuable and law-abiding member of that society. The counterpoint to having something to gain is of course when people have nothing to lose. When we reach a stage where people feel they have nothing to lose, their lives and prospects so bleak that they would rather spit in the face of the society that they are supposedly a part of – we end up in a scenario like we have in London right now.

The question I am interested in understanding is how people reach a stage in a country like Britain where they feel that they have nothing to lose. The point I am trying to raise here is that the rioting has been blamed on the poverty, deprivation and injustices that these youths feel. However I am at a loss to understand this point – Britain is country with an extremely generaous social security system which cares for anyone who is unable (or not wanting) to work. There are also ample opportunities for people to skill themselves as the education system is free and despite its various flaws is able to provide a decent education to anyone that is motivated enough.

Now compare this to the truly extereme poverty that you see in many countries across the world (more than half the worlds population live in genuine poverty) and you certainly would not see these people rioting – even though some of the citizens of these countries probably should be demonstrating more due to the extreme corruption that keeps them poor in their countries. No doubt the poor in these countries would consider the so called poor that are rioting very privileged given all the opportunities that they have had. And also probably foolish given how little they have made of those opportunities.

The point here is these riots have nothing to do with poverty. The real problem is the culture of instant gratification that permeates through our society now. It is no longer deemed necessary to work for anything, these youths feel that they are owed everything as their “human right”. What does it matter if they are not able to find gainful employment ? They can just break into shops and loot what they like in any case – after all they feel that they are justified in taking whatever they feel they deserve.

I saw the following quote in an article in the Guardian:

That Cameron doesn't know what he's talking about. He's lucky he can get a holiday. These kids don't get a holiday.

The above pretty much sums it up really. David Cameron may be wrong on a lot of things but at the end of the day he is the prime minister of the country and he works pretty hard – so he does deserve a holiday. These kids would also be able to get a holiday if they worked hard and made an honest living. It is this culture of entitlement that seems to be poisoning the very fabric of the society that we live in. The feeling now is that the socity owes them something for doing nothing and if it is not given it should just be taken. There is no understanding that in order to receive you need to initially put something into your community and society.

So lets stop blaming social exclusion and poverty for the London Riots. There are plenty of poor people in the world who behave with far greater dignity in much more trying circumstances than these youths that have brought havoc to London.

Germany will not suport Italy with any form of bailout.

The Spiegel reports that Germany cannot support any bailout of Italy as the numbers are simply too large. Expect carnage on monday, or a retraction on sunday...

Link to the google translate of the original German Article.

US Downgraded, China starts to gloat

Following the downgrading of US debt from AAA by S&P, China has started gloating and even giving free advice to the US to curb its addiction to debt.
In the piece linked above on Xinhua above the Chinese seem to be viewing this as an opportunity to demand some changes of the US. The spirit of the advice is not wrong - the US does need to control its spending and certainly the debt is at an unsustainable level. However for China to be doling out advice is a bit rich.

China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.

I find the bit above amusing - if China does not like the way US debt is going surely they can just sell it rather than whinge about it publicly? As a bond holder they should be aware that there is an inherent risk of holding any financial asset. Also they are the single largest foreign creditor to the US, but they are nowhere near being the largest creditor to the US - US Pension funds, the Fed and other organizations hold by far the largest amount of US Treasuries (on an aside it will be very interesting to see how pension funds react as they may have to sell due to loss in rating).

To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

Absolutely agreed with the above sentiment. However lets also add that it is common sense to let your currency be valued realistically and not let it remain artificially weak and as a result imbalance world trade and build up reserves by "beggaring your neighbour".

China needs to seriously look at their own house before they start commenting on others. While there is some sense to what is being said, the tone of the comments seem a bit odd.

Putting the You back into YouTube

One of the killer features of Google+ has to be Hangouts. Hangouts allows you to initiate a video chat with upto 10 people - this is the functionality that could really put Google+ ahead of Facebook in the Social Media war. Facebook of course have also rolled out functionality that allows you to talk to your friends using Skype within Facebook, but in my view the Hangouts functionality is by far superior.

Early indications are pretty encouraging for Google, with Michael Dell being a big fan and he is even talking about using Hangouts for customer service for Dell. This is merely one example of how this could be used by various people. I have envisaged one potential use for myself being the ability to start a work circle related hangout and then I can essentially have a conference with people in different geographic locations. This could really add a big boost to the off-shoring model - hangouts gives companies a cheap and easy way to communicate with their off-shored staff and make everyone feel like they are part of one global team and get a lot of "face time" with different employees.

Another use for hangouts could be to do live press conferences. Of course there is the problem of the 10 users per hangout , but there is already sites where a hangout can be streamed to reach a wider audience e.g. Googlecircus.com . Of course the ideal solution would be for Google to allow a feed of a Hangout to be broadcast live to YouTube so that non participants can just view the live Hangout event. Add some record functionality to the YouTube feed and you really have a very compelling product. Imagine how aspiring musicians could use this to reach a wider audience. I can also see this being used for delivering training courses, teaching etc.

Ultimately I am sure Google will create this link to YouTube, it is such a obvious move for the company. And once they do it it really could put the You back in YouTube.

Airbnb Raises $113 million USD - Technology Bubble?

Airbnb just just finished raising funding to the tune of $113 million from Andressen Horowitz and DST Capital. The website aims to hook up people with a spare bedroom or even a second home with people looking for cheap accommodation in that city. In theory a great idea and one that I am sure many will find very valuable.

However this is nothing new as I have previously myself used websites which specialise in renting out holiday villas and cottages in Spain and Britain. The good thing about these sites was that the operators of the site would personally look at every let that was on their books and as a client you could be sure that you knew exactly what you would get. I am not sure what Airbnb's model for home verification will be, but this is bound to be very important. Maybe the social media aspect of the site will somehow aim to fill the gap here. However given their stated aim of wanting to be all over the world I think it will be very difficult to provide quality control.

There are also some concerns about issues such as local taxes and regulations that this site may not be complying with - apparently there may be issues in New York with bed tax not being paid. I am sure these will be worked out over time however. Also if the main selling point is the cheapness of the site - then of course it is worth pointing out that couchsurfing is completely free. I think Airbnb will also face a lot of copycats and me too websites which will start eating into their market and may well force their commission rates down. Add to this the company seems have some past history with some dubious shenanigans.

The main question is however the valuation that has been put on this site. The recent funding round puts the market value of this company at $1.3 billion. Let us say that the company has been valued at 10x revenue - this would mean that the company needs to be turning over $130 million a year. As we know that they take 10% charge from the rentals of properties this would imply that the $1.3 billion worth of property must be rented out every year. If we now assume that the average rental may be in the region of $50 per night then we are looking at somewhere in the region of 26 million nights being sold per year through this site. Thats a lot of nights. From what I have read they are selling somewhere between 1 million and 2 million. So the growth will have to be absolutely stratospheric before this valuation can be justified. To me this looks like irrational exuberance on the part of VC's and the bubble seems to be forming - yet again.

Moody's cuts Greek rating

Moody's has cut the rating of Greek debt to Ca from Caa1 - pretty much on the edge of default.
The EU debt swap deal essentially means that private sector creditors would lose somewhere in the region of 20% of their current value.

I am sure many would find fault with the ratings agencies for their actions now and refer to their triple A ratings of CDO toxic garbage that precipitated the initial credit crunch. However I think this is the correct course of action - we can't blame the ratings agencies for being too lax on the one hand with ratings and then also find fault when they are too harsh.

There should be reform to the whole ratings model but that is more to do with how the agencies make money and who pays the - essentially thats a discussion about the incentives that drive them and what the best model might be. I will dedicate a whole post to that topic soon.