Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 6/6/11

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A few things have caught my eye since my last blog post. Firstly, the Lex column in the weekend edition of the Financial Times had a good piece on Greece’s creditors, a theme that Bloomberg picked up on this morning. According to an analysis by BarCap, a mere 30 institutions hold two-thirds of Greek government debt. The main creditors are: Domestic €90bn, ECB €40bn, Other Central Banks €35bn and German & French banks €34bn. BarCap estimates that the recovery rate for Greek bonds will be 25-28% of nominal value, which is no great surprise given where Greek bonds are trading.

I’ve seen some recent debates about Argentina’s default, with several people giving the impression that we’ve nothing really to worry about should Ireland walk away from its debts. That’s not quite the case. On my recent travels in Argentina many of the people I met spoke of how their savings were mostly wiped out after the default happened. This Irish Times piece gives a good picture of the impact that this had. Staying on this theme, another thing I noticed when I was in Buenos Aires and Mendoza was that even modest homes were “fortified” (bars/shutters on all the windows etc.). I asked the locals why this was the case, and they explained that after seeing how their savings were mostly wiped out many people simply convert their wages from pesos into US$ and keep it in cash at home. Of course, the consequence of people not putting their money into the banks is that  it is harder for firms to borrow which means less investment in the economy. So, alas, default is no panacea. As an aside, not all of the cash is kept in shoeboxes in peoples’ homes – when I was in Uruguay I noted that every second building seemed to be a bank, and this local press story explains how many Argentinians keep their savings in financial institutions located in their smaller neighbour, rather than invest in their own economy.

Elsewhere, the International Air Transport Association cut its 2011 global airline-industry profit forecast by 54% because of higher oil prices, political protests in the Middle East and North Africa, and Japan’s earthquake. No great surprise there I would have thought.

I was really surprised that the Slovenian electorate rejected plans to raise the minimum retirement age to 65 from the current levels of 58 for men and 57 for women. Considering that life expectancy in that country is now 79 (having increased 10.5 years since 1960), it is inevitable that the country will reach a stage where the demographics cannot sustain such a set-up. Better for countries to reform systems to take into account longer life expectancies now before the demographic time bomb detonates.

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Written by Philip O'Sullivan

June 6, 2011 at 4:49 pm

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