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Commentary

Of Greek Austerity and an Interesting Trade Setup: MV Chronicle

On Jun 25, at the MarketVision Chronicle I write about Greek Austerity and more: (You need to register to access, registration is free)

Austerity and Greece

The Greeks vote on an austerity package next week, as they prepare to have:

  • Pay freezes for all public sector workers, and job losses for contract workers in the public sector
  • No annual bonuses for high earners, and lower bonuses for others
  • Pensions cut from a percentage of the last salary, to a portion of their average salary. Plus, people have to work for 40 years before retirement versus 37 earlier. Early retirement will be stopped (many public sector employees retire in their 50s)
  • VAT increased to 23% from 21%
  • Tax Evasion will be clamped down

This is part of a 28 billion euro reduction in government spending.

But get this: The Greek government spends 50% of their GDP, and would have spend 113 billion Euros. That means 20% of government spending will be cut (and 10% of GDP!).

Shorting the Bank Nifty

That’s my previously mentioned trade setup, but this has more of a top-down macro-ish feel to it. First, we have rising interest rates. That hurts banks by reducing their spreads – the difference between what they can charge and what they borrow at.

Rising rates will slow down demand, and in a demand driven leveraged banking system, the banks will hurt when demand slows. And at some point, when banks increase rates, there are lesser takers, and more importantly there are potential defaults from those that can’t afford the higher rates.

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Martin Feldstein: After the Greek debt default

The Greek government, the European Commission and the International Monetary Fund (IMF) are all denying what markets perceive clearly: Greece will eventually default on its debts to its private and public creditors. The politicians prefer to postpone the inevitable by putting public money where private money will no longer go, because doing so allows creditors to maintain the fiction that the accounting value of the Greek bonds that they hold need not be reduced.

The Mauritius code

Indian firms with foreign investors would be adversely affected if India moved away from the residence-based taxation implicit in the Mauritius treaty. It is not surprising that every time the government has proposed doing something new on the Mauritius tax treaty, there has been a backlash from the private sector. This could explain the change in government plans that the DTC should override the Mauritius treaty.

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(Read the whole Chronicle)