The questions on Greece: Will it survive, can it avoid default and what’s the point if debt in 2014 will be higher than it is now? Will the money, €110 billion, or $US133 billion, prove to be enough? Will the Greek voters and unions, not to mention business, agree to suffer €30 billion of cuts, work harder and longer and pay more tax, or will they reject a key measure, or simply go on doing what they have done before, thereby undermining the country? According to French Finance Minister Christine Lagarde, the rescue loans could run from €100 billion  ($A143 billion) to €120 billion over three years. But Greece will not get its budget deficit down to 3% of GDP until two years later; presumably the country will have shown itself capable of cutting and controlling spending and can borrow in world markets at an increasing rate.

About two-thirds of the funds will come from Greece’s 15 eurozone partners, which must still approve the disbursement by a unanimous decision. The IMF will provide the rest. The zone leaders meet on Friday; Germany has to get the required legislation through its parliament by then. With near €9 billion of debt due on May 19, the government had few choices but to turn to the EU and IMF for help to avoid certain default on part of its its huge debts which approach €300 billion. The deficit is 13.6% of GP this year (probably 14% when final figures are released in a month or two) and will only start falling from around 2012 onwards when the economy is expected to resume growing after a big drop in output in this year’s recession.

The debt will still be a crippling — 144.3% of GDP in that year after peaking at 149.1% of GDP the year before, according to figures released yesterday by the Greek government. At best there’s been a three-year postponement of the tough decision, which is how Europe is run, not how it is governed. The very high interest rate yields on Greek debt should fall — we will see how markets react from tonight. That should relieve the pressures for a while.

Oil crisis blows up: BP and the global oil industry are facing a disaster of their own making in the Gulf of Mexico, which is growing larger, more costly and more damaging by the day. Far from having systems in place to control leaks and close them quickly and efficiently, the US oil industry and BP has been exposed as having nothing except ad hoc, threadbare ideas. BP and the industry, which includes BHP Billiton, our biggest local oil company, have been shown to have been unprepared for this type of disaster, which in many ways is similar to the Lehman Brothers crash in the financial sector: a totally unexpected, worst ever event against which no one guards because it is unthinkable.

The US government has been seen to have no co-ordinated approach to major disasters such as this. In many respects it is a replay of the incompetent handling of the Exxon Valdez disaster in Alaska. Insurance costs are going to soar because of this, especially for so-called supercat risks (super catastrophes such as cyclones, earthquakes and hurricanes). This is going to involve huge claims against quite a few companies, insurers and their re-insurers.

The cost of drilling these deep offshore fields will rise dramatically (Brazil will feel it with its huge, super deep oil deposits offshore). But it’s BP that’s the focal point for the immediate impact of this disaster. BP shares have sank nearly 13% in the past five days — wiping out $US25 billion in shareholder value. Some brokers reckon this is an overreaction. That’s guesswork on their behalf. As the slick expands remorselessly and heads to the Texas coast, after fouling Florida, Mississippi, Alabama and Louisiana, watch the share prices of BP and other companies in the industry, drillers, service groups and the oil companies themselves, fall as nervy investors bail out.

The clean-up and the lawsuits together might run might run the company $US3 billion, according to a research note Friday from Bank of America/Merrill Lynch. London oil industry estimates were more than  $US4 billion or more overnight; while in the US other analysts claim it could be more, up to $US12 billion if the oil spews into the Gulf for as long as 90 days, which some oil industry experts say will be the length of time it will need to cap a blow-out 1.5 kilometres under the surface.

At least 31 proposed class-action suits have been filed in courthouses from Texas to Florida. Commercial fishermen, shrimpers, charter-boat operators and beachfront property owners asked to represent anyone whose livelihood depends on coastal waters imperiled by the drifting oil. At least 24 cases were filed on Friday, according to US media reports.

President Obama toured the Gulf coast on Sunday, while in London The Times reported that the oil giant had had problems with Transocean (the driller) and its technology 10 years ago. “BP faces fresh questions over the cause of the Gulf of Mexico oil spill after it emerged that problems with the type of equipment that led to the disaster were first reported a decade ago.

As high (BP can afford it, it earned $US6 billion in the March quarter) as the bill seems to be heading, the greater danger to the company and the US oil and gas industries is from the complete lack of any urgency at BP and the industry to halt the leak and start putting systems in place at the start to control any leak.

In a show of grandstanding, BP CEO Tony Hayward is expected to join the clean-up today (on the beaches). That is symbolic. He would have been better off ordering his company to attack the leak with considerable vigour and resources from the start.

House prices continue rising. In keeping with readings from private indexes, RP Data Rismark and Australian Property Monitors, the March quarter Australian Bureau of Statistics capital city house price index showed a small fall of 4.8%, down from a lowered average of 5.1% (5.2% originally reported). RP Data showed a rise of about 4.2% in February and March, APM showed a quarterly rise of 3.1%, down from 5.3% in the December quarter. RP Data said there was a 12.5% rise in the year to March in the capital cities, the ABS said 20%, up from 13.5% (down from 13.6%) in the December quarter. RP Data said prices outside the major capitals only rose 5.3%. APM said there was 16.1% jump in the year to March in house prices, 10.4% for units.

How did the cities go? The ABS said the main contributors to the national rise were Melbourne (+6.7%) and Sydney (+5.3%). The strongest growth in these two cities came from established houses with relatively high prices. There were also positive contributions from Perth (+3.5%), Brisbane (+2.0%), Adelaide (+2.7%), Canberra (+5.4%), Hobart (+4.2%) and Darwin (+3.6%).

And over the year. The ABS said the 20% rise in the year to March was the largest recorded since the series started eight years ago. Melbourne saw a rise of 27.7%, Sydney (+21.0%), Canberra (+20.6%), Darwin (17.5%), Perth (+15.0%), Hobart (+14.1%), Brisbane (+12.1%), and Adelaide (+10.8%). Now this doesn’t include house prices outside the major cities and it’s clear from the ABS, but it is a worry. Melbourne again is  leading the madness, as it did in the last boom. But this time it is coming from the higher end of the market, not the off-the-plan development sector.

China continues tightening the property screws: China’s central bank has increased its asset reserve ratio, the third such rise ordered this year as it tries to control the overheating property sector. The ratio goes up 0.50% next Monday, May 10, to 17% for the big banks and 13.5% to 14% for smaller ones. There was no move to lift interest rates. It is a move to try to put off a rate rise, but it represents another significant move to try to slow bank lending, especially to property. It is in effect is a tightening of monetary policy, just as Singapore, Vietnam, Malaysia, Australia, Brazil  and India have done recently.

The second move in a day: The move came a day after China’s banking regulator has made a new move to attempt to control the overheated property sector. According to media reports overnight the regulator has told property developers they have to provide existing projects as collateral for loans, instead of land. That’s to improve the position of lenders, such as banks, should there be a sharp fall in property prices. According to figures in the reports and from the central bank last month, just under half of all bank lending in China has been for real estate and related loans, backed by property as security.

Sense in the change: China’s biggest banks have already been told by regulators to re-examine their loan books and provide estimates of their exposure to un-collateralised loans, especially to provincial governments. This could lead to a jump in non-performing assets later in the year as they realise that the security is poor, wrong, not there or a shell company set up by a local government or central government group to speculate in property. The fear is that if there’s a bust and the borrowers have trouble, or there’s a drop in property values, the lenders would have been left with overpriced land as a security at a time when the market price was falling. The media reports said that under central bank stress tests, Chinese banks will be able to withstand a 30%-40% fall in property prices. They may get the chance to see if that’s correct.

China’s market’s bad April. So given the crackdown on real estate activity (Beijing tightened rules in its local government area, one of the hottest in the country, late last week) it’s no wonder the Chinese share market was the second worst performer in April, down more than 7%. Over the first four months of the year it was the second worst after (guess who? Greece, of course). The Shanghai Composite Index fell 7.7% on April, the biggest fall since January. Its down 12% in the first four months of 2010.

Kev’s unspoken fear: All this should give food for thought to Australians as we contemplate the new regime of a super resource rent tax, superannuation changes and tax changes for big and small business. Ask this question:  “what happens if the Chinese economy stumbles over the property bubble and has a rough year or two, driving prices for iron ore, coal, etc, lower as the Asian economy is in turn dragged down. Don’t say it can’t or won’t happen. More than half of Japan’s exports are going to China at the moment and it’s similar for South Korea. Taiwan ships well over half. A slump in China will produce a slump in Japan, Taiwan and South Korea,  all major markets for our raw materials.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey