Tuesday, June 30, 2015

Greece Defaults, Indonesian's Youth, China's Stock Traders and G.E.'s Selloff

IMF Confirmes Greece Defaults on Scheduled Repayment
The IMF has confirmed that Greece did not make its scheduled 1.6 billion euro loan repayment, leading the fund's Managing Director Christine Lagarde to report that the country is "in arrears." The default has sparked fears that Greece may exit its euro membership; however, this is still dependent on the Greek referendum on July 5th. In addition, the IMF has confirmed that Greece has asked for a last-minute repayment extension, which the fund will consider appropriately. Currently, there is no indication that any of Greece's 3 lenders - the European Commission, the ECB and the IMF - will release frozen aid to avert a default. For now, the country will lose access to a 1.8 billion euro loan tranche and 10.9 billion euros for recapitalizing banks. Since 2010, Greece has received nearly 240 billion euros in 2 bailouts from the EU and the IMF. These loans have come at a high cost to Greek citizens, as cuts were made to pensions, wages and public services. With the missed IMF repayment, Fitch ratings agency has cut its long-term rating for the country from CC to CCC. It marks the first case in IMF history that a developed nation has defaulted on a loan.

 Indonesia In the Midst of a Population-Ageing Golden Age
While Indonesia' GDP is still relatively small (about a quarter of the size of Germany's economy), it is the world's fourth most populous country. This offers a positive outlook for the archipelago country, as the World Banks notes the nation has an abundance of youth. Currently, 50% of Indonesians are under 30 years of age, and the proportion of elderly people is lower than other large Southeast Asian economies. In the realm of economic cycles, this stage of growing supply of workers and relatively few retirees implies a strong recipe for growth. However, to help ensure economic gain, the Indonesian government must address 3 critical areas: (1) Improved efficiency of labor, such as investment in transportation; (2) Transition to higher-productivity jobs such as in the service industry; (3) Loosening of laws which has made the labor market uncompetitive, such as removing the requirement to pay nearly 2 years' worth of severance wages when firing employees. Of course, leveraging demographics will also play a role; currently, only 51% of women participate in the workforce, compared to 84% for men.

 Stock Traders Outnumber Party Members in Communist China for First Time
According to the China Securities Depository and Clearing Co., over 90 million Chinese are trading stocks today, surpassing the 87.8 million Communist Party members. While this has drawn political inferences from the Western press, it also demonstrates the transformation of the Chinese markets over the past decade. Just in the past year, new investors numbered more than the population of Germany, as the Shanghai Composite Index doubled. However, this also leaves a wider Chinese population to market volatility; the Shanghai Composite advanced 5.5% on Tuesday after falling as much as 5.1%. Nevertheless, equity ownership remains a growing space for the private sector. A Charles Schwab survey estimates that stocks account for 20% of financial assets in Chinese homes, compared with 45% in cash and bank deposits.

 General Electric to Sell European Financing Division to Sumitomo
G.E. confirmed today that it has agreed to sell a division which finances leveraged buyouts in Europe to Sumitomo Mitsui Banking Corporate for $2.2 billion. The sale of the private equity lending unit continues G.E.'s focus to re-establish its roots as an industrial business, all the while removing itself from the banking sector. This also marks the third major move by General Electric this month; earlier in June, the firm also agreed to sell its U.S. private equity finance unit to the Canada Pension Plan Investment Board for $12 billion. Just yesterday, it reached a deal to sell its fleet-financing businesses (in the U.S., Mexico and Australia/New Zealand) to Element Financial Corp. of Canada for $6.9 billion. If G.E. continues to execute its current strategy, it is expected that most of its GE Capital finance arm will be sold by the end of 2016.

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