Nightmare scenario of a return to the drachma
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Ms. Katerina Kapernarakou is a journalist for the Greek newspaper “Kathimerini”, and a contributor to the BusinessThinker.com covering the international business, economic, and financial issues.
In a hypothetical exit from the euro and a return to the drachma, the new Greek currency would have to be devalued by a gigantic 120 percent against the euro in order to play any part in reducing the country’s deficit, according to a study by New York-based financial analysis firm Roubini Global Economics.
The firm estimates that Greece would lag in terms of its labor cost per unit by 38 percent compared to the eurozone average and by 62 percent compared to Germany.
The analysis suggests that Greece could eliminate its current account deficit with an approximate devaluation of 50 percent, all else being equal, according to Roubini Global Economics strategist Michael Hart, who added that “markets have become less forgiving during this crisis.”
With the real exchange rate between the drachma and the euro weaker by 120 percent, the euro would become 2.2 times stronger in comparison to the original drachma-euro exchange rate (around 750 drachmas to the euro), a percentage that the analysts find neither unreasonable nor excessive, if it helps deal with the country’s deficit immediately. According to the analysts, it can also be seen as a simple starting point as an acceleration of inflation brings the original debt down to zero.
Which Europe?
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Mr. Nikos Konstandaras is managing editor and a columnist of Kathimerini, the leading Greek morning daily. He is also a contributor to The BusinessThinker.com
This editorial is also published in Kathimerini.
Many years ago, as Europe was taking its first steps toward greater unification, the French historian Fernand Braudel posed the question whether this would lead to an “inventive Europe, making for peace, or a routine Europe, still creating the kind of tensions that we know only too well?” In the years since the publication of “A History of Civilizations” (1963 and, posthumously, in 1987), Braudel would have seen reason to hope but also to fear: the European Union does express the humanistic spirit that can conquer problems at home and abroad, and is trying to show solidarity among its peoples at a time of crisis, but, at the same time, its member states remain set on serving first their own interests and satisfying their own obsessions, before considering what is good for Europe. Europe is at the crossroads that will determine the answer to Braudel’s question.
European history is an endless effort by the continent’s nations to maintain a balance between them. Whenever one entity assumed a disproportionate amount of power, it provoked the others’ reaction, leading to the formation of opposing alliances and, of course, war. Even though the EU has developed beyond the wildest dreams of the visionaries who saw unification as the only way to put an end to endless conflict, in the last two years we have seen a resurgence of the fear of imbalance. This time, though, the majority of countries are afraid not of the most powerful among them but of the weaker ones, whose failure could threaten their own well-being. Because Europe’s mission of “pacification” has succeeded so well, power and threats are today measured by each country’s economic standing, not by military might.
Are Treasuries Overpriced?
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Dr. H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally recognized authority on financial issues and Derivatives.
All I read these days is how much Treasuries are overpriced. At the beginning of 2011, Bill Gross, the famous bond fund manager at Pimco, predicted serious losses for Treasury investors and he publicly announced that Pimco had sold its massive Treasury positions. In addition to fund managers and newspaper columnists, recently some well-known economists have also joined this chorus. Their argument is simple and appealing: At an annual yield of 1.9%, with actual inflation running over 2%, these experts are telling everyone that expected real Treasury returns are negative and that anyone who buys Treasuries is likely to be disappointed over the next ten years or longer.
Inflation worries are certainly real. Some suggest and worry that faced with a massive and ever-increasing debt, the U.S. Government is likely to inflate even further in the future to reduce the real debt burden similarly to what it did in the 1950s by pegging the interest rates below the inflation rate. In fact, Charlie Plosser, president of the Philadelphia Fed, has also publicly expressed his inflation worry. If the Fed were to carry out such monetary policy, this would further erode the real returns to long-dated Treasuries.
VALUING AND PRICING THE COMPANY (This is the 10th article in the series on M&A)
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Dr. John Psarouthakis, Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. Publisher of www.BusinessThinker.com
Before you can begin final negotiations on price, you need to determine the value of the company. You can use several techniques to value a company. We recommend the discounted cash flow value approach as the most accurate method although other approaches are useful in preliminary stages of your search to give you a sense of the range of the estimated price.
Timing and Scope of the Valuation Process
An initial calculation of valuation can be done on a fairly mechanical basis, based on information provided to you by the seller using established formulae and guidelines. However, determining the accuracy of the financial data that the seller provides you is an on-going part of the evaluation process that should take place throughout preliminary and formal due diligence up to the closing. Thus valuation takes place along with negotiations throughout the deal-making process. One of the key objectives of due diligence is to surface any information that might affect the accurate valuation of the company. If your team does not have a financial auditor you should hire one to verify the accuracy of the historical data.
Once you verify the completeness and accuracy of existing documents, historical valuation of a company is often relatively easy from a technical standpoint. But it may be a fairly inaccurate reflection of what you can expect from the firm’s financial performance in the future. Thus, although a preliminary valuation of the company might be done initially when you first receive financial data from the company, refining the financial assumptions about the company’s future performance must take into consideration a wide array of non-financial considerations. Accurate forecasting requires a thorough understanding of general trends as well, trends specific to your industry, the economy, and of course a thorough understanding of the strengths and weaknesses of the particular company you plan to purchase. Read More »
A Free Lunch in a Perfect Storm
ShareDr. H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally recognized authority on financial issues and Derivatives.
As we welcome 2012, it is a good idea to take stock of the lessons of the roller-coaster stock market of 2011. The year ended on a mixed note. The Dow Jones Industrial Index was up about 6%, S&P 500 index pretty much flat and Russell 2000 down about 4% for the year. Overseas, European and Asian stocks fared worse. MSCI Europe ETF and iShares S&P Asia 50 Index ETF were both down about 15%.
Investors’ concerns in 2011 were about existential issues. They worried about a possible collapse of euro, wide-spread European sovereign and bank defaults, and possible global depression. Investors also worried about disorderly Greek, Irish, Portuguese, Italian and Spanish defaults. A new term was coined, Private Sector Involvement (PSI), to euphemistically refer to private investor’s losses on their European sovereign debt holdings, a concept that would have been unthinkable a year earlier. Consequently, the prices of European periphery sovereign debt plummeted and their yields skyrocketed.
Against this dooms day scenario, a surprising bright spot was the U.S. economy. The U.S. economic picture steadily improved during the year. The U.S. GDP growth rate rose from 0.4% in the first quarter to 1.8% in the third. Retail sales increased about 8% year-on-year and unemployment declined from 9% to 8.6%. Forecasts of S&P 500 stock earnings in 2012 surpassed $100.
Corporate Insiders are Turning Neutral on the U.S. Stock Market
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Dr. H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally recognized authority on financial issues and Derivatives.
As we enter a New Year, it is a good idea to review our stock selections and risk exposures. It is well known that legal insider trading by top level corporate executives in their own firms can help provide useful investment signals (Seyhun 2000, Investment Intelligence from Insider Trading, MIT Press.) Sustained insider buying in their own firms indicates a bullish signal while sustained insider selling indicates a bearish signal. Insider trading patterns provide useful signals not only for individual stocks, but also for industry sectors as well as the aggregate stock market.
The historical average value of the insider buying index is around 34. Above this level, I consider insider activity to be bullish. Below this level, I consider insider activity to be bearish. Insider trading patterns over the past six months indicate that insiders have regarded the European sovereign debt crisis and its potential impact on the U.S. market to be temporary. As the stock prices took a dive during July and August of 2011, insiders have regarded the depressed levels of stock prices as a good buying opportunity. Consequently, at a reading of 56 in August 2011, insider sentiment reached its highest level in over two years. To find the previous high, one has to go back to March of 2009 when stock prices had reached a trough and insider buying rocketed to twice the usual levels. Index levels of 60 and above on insider sentiment around March of 2009 appeared to be extremely timely as Dow Jones Industrial Index has increased more than 80% since then.
Building a Fortune 500 Manufacturing Corporation from Scratch (Synergy and Homogeneity for Growth in Manufacturing)
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Dr. John Psarouthakis, Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. Publisher of www.BusinessThinker.com
J.P. Industries. Inc. (JPI) made its first acquisition – a metal stamping firm with annual sales of $3 million. Within the next ten years JPI joined the Fortune 500 Industrial Corporations. It was merged into T & N, plc of the UK in its 11th year.
Writing about JPI, I would like to start with the two factors I consider central to the success of JPI: synergy and homogeneity.
You are probably saying to yourselves that synergy was a concept of the 1960′s which was not notably successfully employed by the conglomerates which coined it, and that homogeneity reminds you more of processing milk than of conducting business. However, I believe that understood and applied correctly, the concepts expressed by these words have clear practical meanings and direct application to business growth.
Globalisation and higher education: Different degrees of success. (Offshoring, inequality, and the value of college degrees)
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This article ir republished from and in accordance with the policy of “VoxEU.org”
Dr. David Hummels
Professor of Economics at Purdue University
Dr.Rasmus Jørgensen
Postdoctoral Research Fellow at Yale University’s Department of Economics
Dr.Jakob R. Munch
Asian Dynamics Initiative Professor of International Economics in the Department of Economics, University of Copenhagen
Dr.Chong Xiang
Associate Professor of Economics, and Director of Graduate Studies, at Economics Department, Purdue University
With stagnating wages and lingering unemployment, income inequality is back in the headlines. Is globalisation to blame for this inequality? Is more education a solution? This column argues that focusing on university education misses important effects. It presents evidence that wage effects vary markedly among those with degrees depending on their specific skill sets, and that globalisation can often benefit workers
without degrees.
Fuelled by concerns over rising income inequality, Occupy Wall Street has grown into a global movement in slightly over 2 months, with protests i over 900 cities worldwide. Protestors have been criticised for lacking a specific set of policy demands, but in this the protestors are hardly alone.
AMERICAN DIPLOMACY: Some thoughts
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Mr. Joseph P Garske is a retired private investor. He is an invited contributing writer to the www.BusinessThinker.com
He holds a bachelor degree in history from Harvard.
A famous saying is attributed to the French diplomat, Talleyrand: “Words are used to conceal thoughts.” There is, of course, more than a touch of cynicism in this quotation. Yet, it may also betray merely a deeper level of knowledge born of experience.
Talleyrand was the wily and irrepressible Foreign Minister to Napoleon Bonaparte. In fact, as a public figure he outlasted the decade of the French Revolution beginning in 1789, he survived the fall of the Bourbon Monarchy in 1793, he ascended with the rise the Napoleonic Empire, and in 1814 took a leading part in the Bourbon Restoration. Finally, at the end of his career he was able to salvage the dignity of a defeated France at the Congress of Vienna in 1815.
As one of the most adept practitioners of the art of diplomatic interaction his statement quoted above must be credited with a level of insight that is deeper and more knowing than mere cynicism. He was a consummate realist, a shrewd evaluator of human nature and of national interests. Most of all, he was able to align those disparate interests to the advantage of France.
ECB: The Quest for Purity May Lead to Obscurity
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Dr. Periklis Gogas is an invited contributor to The Business Thinker magazine. He is Assistant Professor at Democritus University of Thrace, Greece, teaching Macroeconomics, Banking and Finance. Recently, Dr. Gogas was a Visiting Scholar at the Ross School of Business, Uinversity of Michigan.
The European Central Bank, under the influence of Germany was designed with a single mandate: price stability. The function of the Fed in the U.S. is quite different as it is designed to play a significant role in preventing and fighting both recessions and inflation to avoid economic crises. It seems that the U.S. has a long memory regarding crises. The Great Depression and several other less significant in terms of impact crises since then are gone but not forgotten. This is evident in the dual mandate of the Fed that apart from the pursuit of price stability it can also intervene whenever seems necessary with an expansionary monetary policy to provide the liquidity to stir the economy away from danger.
In the European Union things are different. The design of the euro, the monetary union and the EU seems to ignore the history of crises and even recessions. The European Monetary Union’s “Stability and Growth Pact” is a great example. According to this, no member country can run a deficit and debt more than 3% and 60% of its GDP. On top of the fact that this requirement was proven to be hard to enforce, it also makes no distinction between normal economic activity and periods of recessions and even crises. This leaves European governments with no tools for implementing economic policy to avoid or dampen economic downturns as fiscal policy is limited according to the above requirements and monetary policy is in the hands of the European Central Bank where there is no mandate to fight recessions and crises.