Economic Overview of Toronto Commercial Real Estate

Thank you to everyone who continued to check my blog while I was on hiatus - I took a break intending to return after my busy summer, but it wound up being an even busier fall! One of the time pressures has been that overseas interest in Toronto commercial properties is growing swiftly, and I've been trying to fill the demand for foreign-investment oriented information. I prepared the following economic overview for a European investment bank who visited recently, and invite you to have a look. It focusses on both the micro and macro details of Toronto's downtown core, and you may find some of it very surprising!




Economic Overview for Investors

Commercial real estate in Toronto’s Downtown Core is ideally positioned to offer investors an increasingly rare commodity; secure and robust yields, in the safety of the G7’s strongest economy. After the global financial crisis of 2008, Canada’s position as a safe harbour from widespread economic downturns was undeniable, and the country has since been reaping the benefits of conservative banking policies, a powerful currency, and, buoyed by demand from emerging markets, a surge in production of its commodities such as oil, grain, precious metals and lumber.

At the epicentre of Canada’s thriving economic system is a small piece of land, measuring just 24 square blocks in size. Within this limited space, large multinational corporations vie to stake their positions in trophy buildings, and emerging companies hope to succeed with the help of their prestigious class-A locations. Canada’s economy will surely expand, but Toronto’s Downtown Core cannot grow with it. The following document outlines the myriad of ways in which this finite area is poised for rapid rises in both commercial real estate values and leasing rates.

1. Canada’s Strong Economy and Currency

Canada is the best-positioned country in the G7 on a multitude of levels. It has the healthiest banking sector, which resulted in a limited impact on Canada’s economy from the recent credit crisis. Found within it is the largest cache of raw materials of any country, including the second largest oil reserves in the world, and it enjoys proximity to the world’s largest market as well as exposure to growing emerging markets such as the BRICs. Of the G7, Canada also has the most advantageous debt/deficit to GDP ratio, allowing room for further economic stimulus if required, although the government has declared that no further stimulus is warranted. A recent round of interest rate increases has been executed, leaving its financial system in a favorable position to handle any further global turmoil, should it arise.

The robust Canadian Dollar has increasingly become a commodity currency. In fact, in June of 2010 Russia announced that it would begin holding CAD as a reserve currency. Over the course of the last year, it has also been widely reported that China has dramatically increased its purchase of the CAD. Both countries sparked international debate in 2009 with calls for a new world reserve currency to replace the volatile USD. With its inherent stability, and strong position in the G7, the Canadian dollar will continue to be a safe haven and climb against most currencies, and in particular those currencies that will have to enact further stimulus and/or maintain low interest rates for longer periods (namely the USD and EURO).



2. Canadian Banking Conservatism

Canada’s banking system maintained its status as a safe harbour throughout the tumultuous global environment over the past two years. Unlike foreign banks, Canadian banks maintained Tier One capital reserves in line with the original Basel Accords (7%) and were not permitted to hold off-balance sheet assets such as SIV’s. As global banks struggled to recapitalize to levels even sub-Basel Accord levels, Canadian banks were positioned to raise capital up to 14% (Royal Bank). Markets are now in a far safer position, and OSFI (the bank superintendant) has made foreign takeovers extremely difficult. Compounded by the targets Basel III has established for Tier One capital requirements at only half of current reserves by 2015, the bank’s excess capital is now set to be deployed domestically.

Canada’s commercial banks have not held significant levels of commercial real estate for the past 20 years, instead acting as an intermediary between the consumer and the ABCP (asset-backed commercial paper) market. However, evidence that this will change is mounting. Banks have historically held a weighted average of 20% of their assets in mortgages (residential and commercial). During the crisis, Canadian government purchased nearly $70 billion in mortgages from the banks through CMHC (Canada’s lesser-known equivalent to TARP). When it became clear that Canada would not be suffering the same fate as its G7 counterparts, the banks were unable to originate enough residential mortgages to return to their traditional weighting. Furthermore, new lending restrictions imposed by the government have further reduced the pool of available residential mortgages. This leaves only commercial real estate for the banks to recalibrate their asset mix.


3. The Scarcity of Yield

Since 2008, there has been a paucity of vehicles for investors to achieve safe, stable yields in excess of the nominal returns offered by financial institutions to depositors. Money has poured into bonds, resulting in low yields that do not justify their risks. For example, Mexico, which received a credit downgrade last year, has recently issued a hundred-year bond with just a 6% yield. This offering was quickly oversubscribed. Gold has also benefited greatly from the new high-risk, lower-return environment, and driving its emergence as an investment class is the hedge it offers against the threat of inflation, the outside risk of deflation, and as a sideline position in case of a further global economic crisis. Commercial real estate in stable venues is an ideal alternative, and will offer the same benefits and more.

This growing desperation for yield will only be compounded by slow growth (or further decline) in the economy of the United States, and additionally, the urgent need for yielding retirement investment vehicles for the more than 85 million “Baby Boomers” in North America. Canada’s REITs have seen this urgency. As of 2010, these trusts have taken on a record amount of capital and, in return, promised returns far in excess of bonds. These funds have remained largely un-deployed. Due to the predicted inflow of capital from both the REITs and major banks, there are calls for a significant cap rate compression.

4. The Microeconomics of the Downtown Core

Toronto’s Downtown Core is the sought-after financial centre of the Canadian economy. This market has undergone substantial changes during the last decade or so that have compounded the rise in property values. In the late 1990’s, there were approximately 130 owners of properties in the core. As of 2010, there are less than 20, of whom virtually all are major institutions such as Brookfield Properties, Cadillac Fairview, Slate Properties, and Oxford Properties. This dramatic consolidation has provided stability, but has led to far higher prices due to decreased competition from sellers, and a shortage of availability as these institutions tend towards long-term holdings. The high capital requirements and quiet nature of property sales have also posed an impenetrable barrier to entry for most non-institutional investors.

Current demand for commercial real estate heavily outstrips available supply, with a very small number of properties coming to market annually. Since 2007, just one or two Class A buildings have been on offer each year. Bidding wars have become common. This year, one building in the core (100 University Street) reportedly received more than ten bids, and is now said to be under contract at a cap rate of 5.75%, despite that half of the building will become vacant in 2011. Further limiting the supply of available properties, Canada’s current tax regime makes the holding of real estate assets more advantageous than selling.

This scarcity notwithstanding, Toronto is still the least expensive market for the purchase of commercial real estate when compared internationally to other major urban centres with a key stock exchange. By way of examples, 510 Madison Ave. (NY) sold for USD $1,000/psf (after cap-ex requirements); Mitsubishi Estates sold their 165,000/sf facility in London (wholly leased to the Bank of Ireland) for USD $212 Million ($1,284/psf) and the Aoyama Rise Square building in Tokyo sold for over USD $1700/psf.

The aforementioned consolidation of office buildings in the hands of major institutions has also limited the incentive for discounted rents, providing a steady upward pressure. However, Toronto’s commercial real estate market remains undervalued compared to other world-class cities. Occupancy costs in Toronto are less than one-fifth of those in London (West End), and this disparity is swiftly decreasing. Toronto is gaining prominence as one of the premier world financial centres, and already hosts the global mining exchange of choice. The growing requirements of international and multinational corporations for a substantial presence in Toronto will provide a strong upside on leases relative to other global centres.

The Greek Spirit Isn't Dead Yet

Late last night, Greece pushed through a bill cutting pensions, increasing retirement ages, and unilaterally stripping workers of rights and benefits. Today, Athens is under another general strike, with most services shut down and 12,000 workers taking to the streets in protest. I'm not saying that these measures aren't overall a good thing for Greece, and under ordinary circumstances, I'd no doubt be cheering them - but as I've said before in previous posts, the main beneficiaries of Greece's debt are getting off scot free while while the little guy pays. Europe is undergoing, on a mass scale, the dismantling of its unions, social systems and quality of life, and we are currently watching one of the largest wealth tranfers in history.

Given that the bogeyman of waves of poor, newly-ascended Eastern European immigrants pillaging the social welfare systems of their rich cousins has been around for years, is it any wonder that the wealthy countries have chosen to just destroy these systems? Granted, the wealthy never wanted these systems in the first place, but previous generations post-WW II recognized that they were necessary for stable societies. Will class warfare rear its head in Europe again? Rich 1-0 Poor.

Greece Pushes Through Pension Bill

Why Doesn't Canada Look Like Abu Dhabi?

I recognize that over the past few months, Greece has been my primary focus on this blog. Now, as the deals have been signed on the dotted line and unrest no longer runs through the streets of Athens, I feel regret that this country - homeland of my father and mother, and many beloved friends and extended family - is on the path to giving away its future at fire sale prices in what is sure do be a prolonged tax fuelled depression. Set to raise a mere billion dollars over the next three years, Greece is selling large pieces of everything from the railway and postal system to water treatment plants and the state-owned natural gas company. Seeing Greece give so much away for so little in return and for no apparent reason (what will $1 billion accomplish in the face of a $400 billion debt?), it reminded me that here in Canada, we’ve been doing just that for years - from Petro Canada to the 407 highway.

By any measure, Canada is a supremely wealthy country, filled with the world’s most in-demand resources; oil, lumber, grain, natural gas, coal, gold...the list goes on. Just over 33 million people are scattered over this vast, rich space. You’d think that given Canada’s geographical luck (and plenty of talent to take advantage of it), this country would be heaven on earth for its citizens. Not so. Canada has a poor social safety net compared to most European nations, few incentives for small business owners, and has always limited its access to credit for companies below the top tier.

Much like in the USA, our employment growth is primarily in the service sector, and as mentioned in the last post, education costs are cripplingly high. Our natural wealth is drained away into the hands of multi-national corporations, exported cheaply as raw materials rather than turned into good manufacturing jobs here. In Alberta, for example, a ‘revolutionary’ attempt by the Provincial government to raise royalty rates on oil and gas concerns starting in 2010 (called, of course, a “cash grab” by the corporations and right-wing rags) resulted in the usual corporate outcry. The government stuck to their guns initially. But just before these changes were to take effect, they were repealed in favour of multi-national profits. In my first post, ‘Suffering Canadian Patriot’ I touched on these issues, and invite you to look back.

Does it have to be this way?

A few years ago, I was in Abu Dhabi on business – a place that has its own problems, but a lot of lessons for Canada. I did not know what to expect and I tried to go without any preconceived notions. All I knew of the place was what I had heard from a dear friend who was a notorious exaggerator. We had met while he was studying here in Canada from wherest he left promptly after graduating to go get a ‘real’ job. From the minute I arrived, I was floored by the profligate luxury everywhere. Landing in Dubai, I took a car from the airport to Abu Dhabi, a two hour drive similar to that from Toronto to London; a drive I had done on many an occasion, winding through corn fields, much of it in darkness. As we left, I was struck by the endless rows of luxury waterfront condos that seemed to go on forever...the products of a bubble, to be sure, one I tried to warn them about, but spectacular nonetheless.

The road was brightly illuminated, making night feel like day, and was straight as an arrow and smooth as marble. A median separated eastbound from westbound for the entire drive. I thought that I must be in the richest place on the planet. I was wrong! As we entered Abu Dhabi the median was now filled with palm trees and lush greenery - remembering that we were in the middle of the desert - I noted that it wasn’t an oasis, but spurned by a 50km long irrigation system, running straight into a desalination plant needed to supply these people with drinking water of which they had none! Surely a planned luxury to impress guests? But upon arriving at the foot of Abu Dhabi, the oasis grew into a 10 km waterfront park, dominated by plush green grass sitting atop what was essentially a barren sand dune.

Our visit to the Emirates Palace, a declared seven star hotel, yielded more wonders where it seemed like all the walls were made of gold and the crystal chandeliers hung majestically from the cathedral ceiling. An auction was taking place where locals were bidding on license plates....While the number ‘5’ license plate fetched a cool US $8 million, it was the ‘911’ plate that provided me with the biggest catalyst for this post. It was bolted on a brand new Porche that was sitting on stage, worth a mere US $80,000 dollars (as there are no taxes on such goods there). The license plate went for $400,000 dollars at auction. Someone had just paid 5 times what one of the finest pieces of automotive engineering on the planet was worth, for the piece of tin that you bolt on the front of it! Were they mad? I scoffed at people at home for wasting 300 dollars on a vanity plate...this was insanity!! But not really; the citizenry had been allowed to keep all of their wealth.

I did not tell this story to make people jealous, to create filler or to digress; I told it because of the parallels between Canada and this oasis in the desert. Abu Dhabi is a place with a very small population and a single large resource. Canada is a place blessed with MANY resources in abundance and also a relatively small population – We ‘even’ have drinking water and plenty of it! Why are we not doing better than they are? This tiny Emirate has a massive sovereign wealth fund of 1 trillion dollars, which amounts to $17 million dollars for every citizen in the emirate - and not only that, it was a completely tax free haven! Even with our excessive and ever-growing taxes, and our far fewer luxuries, we could only muster a 1 trillion dollar debt (app. Federal, Provincial and Municipal). Not to mention the skyrocketing personal debts we have – 1.3 trillion dollars in 2009 – of which Abu Dhabi had none, as debt was illegal when I visited. (It was since legalized as Sharia compliant, in a form, and of course they had their first real estate crash 2 years later!)

No matter what their level of ambition and skill, citizens are also virtually guaranteed lucrative careers. A “poor” citizen of Abu Dhabi is a contradiction in terms. And this is the profound difference between this Emirate and Canada – our resources go straight into private hands, and we are given a minority of the profits in royalties. On the other hand, their wells and infrastructure had been built by foreign companies, who had been paid handsomely to do so – but they kept their oil!

When it comes to keeping a country’s wealth in the hands of its people, there is another motivator – safety. The BP oil spill in the Gulf of Mexico is a prime example. The so-called Big 5 oil companies in the world spent US $33.8 billion dollars on exploration over the last three years and their profits were upwards of $160 billion– their combined yearly spending on disaster prevention was $20 million, as such an event was deemed ‘a zero probability event’. Is it any wonder that safety violations are rampant? Numbers on how much damage the oil spill will cause are unknown right now, but can hardly be overstated. When you lose control of your resources, you put your safety in the hands of corporations to whom it's a cold cost-benefit equation – and almost always, the massive profits to be had more than outweigh potential risks. There is simply no moral hazard.

These views may sound like left-wing ranting to many, although I would hardly call Abu Dhabi an anti-capitalist commie paradise, but rather the complete antithesis. They just keep their wealth and generously take care of their citizens, unlike us. Tack on a quarter of a billion dollars for bank profits and a similar amount for insurers over the past decade, not to mention big oil, and you start to see where all of Canada's sovereign wealth goes. So what do we do? It’s not as though Canada could get away with telling the multinationals we’re keeping a bigger piece of what belongs to us and they can just deal with it, right? They need to make a return on investment or won’t they simply take their money and expertise and flee the country?

Well, a country did just that with success. Under Chavez, Venezuela tossed out old unfair agreements with international oil companies in favour of forceful renegotiation to increase royalties, give the government a minimum 51% stake in projects, and, as 90% of the multinationals engaged in tax and royalty evasion, ensure that the country was no longer cheated out of the money they were owed. Sure, there was a massive outcry and probably a few assasination attempts on Chavez, but even then, it was still worth it for the companies to do business there and only Exxon threatened to leave, but stayed in the end. I am not advocating a military seizure of all our resources and that our leaders wear fatigues - nor do I agree with all of the man’s politics - but I admire his balls. We need to grow a pair here.

Greece and Canada: Parallel Universes?

Now that it has become abundantly clear that the “Greek issue” had little to do with Greece, and everything to do with the Western world’s perilous dance with sovereign bankruptcy, let’s look at some parallels to Canada’s own, “safe” economic reality.

LIFESTYLE

As I previously discussed, Greece’s transition from a relatively simple, cash-based economy to a modern credit culture took very little time – half a generation or so. In Canada and many other countries, the changes happened gradually over the span of two or more generations. Things had already begun to change in my parent’s day, but I can recall my grandparents being able to afford a good lifestyle on one modest salary, while avoiding credit cards like the plague. In truth, aside from a brief peak in the heady days of the 1990’s boom, real wages in Canada have declined steadily since the 1970’s, to the point where it now takes many families two incomes and tens, if not hundreds of thousands of dollars in debt, just to cling to the designation of “middle class”. Maybe we should stop feeling sorry for the “1000 Euro Generation” and look at the precipitous drop in our own living standards?

TAX INEQUITY

The veneer of respectability provided by civil law has not been as well established in a newer debt society such as Greece, but the obvious corruption there has less blatant comparables here. As was widely reported a few weeks ago, wealthy Greeks are buying up shocking amounts of property in London, and it was found that only a few hundred of the more than 13,000 owners of swimming pools in Athens reported them when filing taxes, leaving union workers to shoulder the tax burden. Here, the “haves” pay accountants and consultants to avoid taxes legally, while the average worker must pay their share to the nickel. Is it really that different?

GOVERNMENT CORRUPTION

In Greece, it’s a given that corporate cronies of the current ruling party will reap the benefits, and bribery will get you anywhere. But Canada is a clear and transparent society, free of such unenlightened corruption, right? It may not be readily accepted by the average person, but the reality is that yes, it happens here. Those in the business community are more aware of how politicians are awarded lifetime board appointments for “favours” done while in office, lobbyist court our leaders with trips and gifts, and even plain old cash changes hands too. Both Mulroney and Chretien were exposed in bribe scandals (the Airbus Affair and Shawinigate), as have countless lower-level politicians. There is also the simple fact that for most, success is all but impossible without already having money and connections. Is it any wonder that a widening gap in income between the “haves” and “have nots” – thus shrinking the middle class – is a dangerous problem in Canada, as well as Greece?

DEBT TO INCOME

Did you know that most Canadians are technically bankrupt? Personal debt in Greece has risen dramatically over the past 10 years, but it is still nowhere near the 145% measured in 2009 for each Canadian household. The report further stated that “under this scenario, about 1.3 million households could have a vulnerable or dangerously high debt service load by 2011.” Here as in Greece, global banks preyed on uninformed people with irresponsible loans. Our industry has been steadily replaced with a consumer economy for years (while Greece has always been heavily consumer-driven), so it is especially perilous for us. The rise in our debt-to-income is also directly related to my first point about the decline in lifestyle available from our real income, and ties in with my last point to follow…

THE FUTURE?

One of the primary factors that define a “have” country is a high level of education among its citizens. When I was attending business school here in Ontario, my cost to attend was around $3000 a year, paid for by my summer work and subsidized with grants. Midway through school, the grants disappeared, replaced with unanticipated debt through student loans. Tuition has since skyrocketed and the grants have all but vanished. Faced with today’s situation for students, I may not have attended business school at all. Tertiary education in Greece is more selective than here, and tuition is free – but similarly, just as our graduates are welcomed into years of crippling debt, Greek grads face years of an average salary of only 1100 Euros. The future prospects for both countries are further hampered by low birth rates – high debt, low wages, and a smaller workforce to put back what the Baby Boomers will soon be taking out, sounds like a recipe for disaster to me.

When I encountered people here in Toronto who had been following the Greek “crisis”, their overall view, regardless of their opinion on where the blame lay, was that Greece’s was an isolated situation that only Greece and maybe the European Union would be impacted by. Many also thought – and who could blame them, given the mainstream news reports – that the problems were solely due to Greek laziness, tax evasion and spending profligacy.

But while they feature more obviously in Greece, the problems leading to the crisis are, in effect, symptoms of a general decline in the Western world. Massive personal and private debt, high income disparity, declining real income, corruption driving public wealth into elite hands, and the burden for both public and private debt landing on the shoulders of those who can least afford it. Welcome to Canada, the “True North Strong and Free”!

A Final Reckoning on Greece...Maybe.

This may be my last post on the 'Greek' matter. I have had a lot of feedback, most of which was positive – however, although the implications of what I’ve been discussing impact us all, it was generally viewed as a purely Greek theme, and even offended some.

It was always the purpose of my blog to highlight and comment on economic and political themes relevant to everyone. And there is no arguing that we live in an intricately-connected global economy - perhaps market events of recent days have vindicated me by demonstrating that the Greek crisis is entirely relevant to anyone with a bank account or tax roll number!

With any financial transaction there must be a debit, and an equal credit. The Greek debit – total debt – is currently in excess of 400 billion dollars. So where did the money go? With my limited time and research capabilities, it is impossible for me to do a comprehensive accounting, but a reasonable appraisal can most certainly be done with a look at the various involved governments and large stakeholders.

The main component is interest, bank fees and multi-national profits from when Greece was deregulated – Greece was prey to predatory lenders and other interests the moment it entered the Eurozone. While sources are scarce, one estimate had interest payments on public debt making up over 40% of the country’s budget deficit, a number which is projected to rise throughout 2010. Factor in the 5% interest the IMF loans will add and the number will be closer to 100% this year. All of the struggling PIIGS share a commonality in that they have massive external debt benefiting non-national players, with correspondingly large interest payments.

A smaller, yet still staggering component are the funds Greece’s government borrowed that were variously distributed to the country’s elite through; bribery, the privatization of state-owned companies and services (which were then issued bloated government contracts), funding of Greece’s notoriously high trade imbalance (nearly 40 billion Euros this year, mainly to the more prosperous Eurozone nations) general high-end corruption and theft, public works like airports and the Olympics (much of these bloated costs finding their way into the elite’s pockets), and finally, some excess spending on public wages used to placate the worker’s unions.

A list of the beneficiaries (from largest to smallest) of the +400 billion Euros would go something like this:

1. Banks (fees, commissions and interest)
2. Corporate interests (mostly non-Greek)
3. Corrupt wealthy Greeks and Greek government officials
4. German labour via massive trade imbalances
5. Greek labour and general population (actual cost of infrastructure)

It should be borne in mind that 1 and 2 are by far the largest numbers - the austerity measures, on the other hand, are focussed mainly on public-sector cuts and seemed designed to eradicate Greece’s strong unions. The smallest beneficiaries of Greece’s huge debt are expected to “take responsibility” for paying the piper, while the country’s wealthy elite (or at least their bank accounts) are quickly decamping to friendlier shores. They’re already fuelling a buying frenzy in London, where Greeks have doubled their ownership of real estate to 6% in the last year, with many properties in the £2 million range. Over 10 billion Euros has left the country since January alone.

If there is any doubt that the top bracket will weasel out of paying their share, consider that in the wealthy northern suburbs of Athens, 324 people admitted to having a swimming pool on their tax returns. The actual number, as revealed by satellite photos? A staggering 16,974 pools. The workers and those without the means to avoid the punitive austerity measures will see only one option for avoiding further poverty – an explosion of participation in black market economy, already estimated at 25% of Greece’s GDP.

Let me make this abundantly clear – only the most delusional of economists could actually believe that the austerity measures will “fix” Greece. Most mainstream articles and analysis I’ve read lately include small, off-hand caveats that restructuring will likely be necessary at a later date, despite the aggressive denials from Germany et al that Greece will be offered any “help” aside from high-interest loans.

In essence, the burden of the Greek debt crisis rests on the people who arguably benefited the least – the average, low-income citizen, and the country’s union labour. Is there still any confusion as to why the protests are so impassioned, so desperate? It would be like my taking out massive loans in your name, throwing you a few dollars and a new television, and then running for cover when the creditors came calling.

Papandreou knows this – hence his impotent bluster about cracking down on corruption and tax evasion among the elite. He’ll shortly be offering up a few Enron-style scapegoats in the courts, but we all know how much that did to “fix” America’s problems.

“Acutely aware that the vast majority of Greeks are baying for the blood of those perceived to be responsible for the dire straits of the country's public finances – crooked politicians and businessmen – Papandreou appears determined to push ahead with "catharsis".

The government has announced it will revise the constitution to lift parliamentary immunity for politicians by June. The lifting of the ban is expected to apply to politicians in power in the early 1980s when Papandreou's father, Andreas, was at the helm of government. Prominent cases involving corruption will also be brought before the courts in the coming weeks in an effort to appease an increasingly angry population.”

The courts, as is the case everywhere, are hugely inefficient and embarrassingly slow. It will make for good TV drama, but if stolen funds from Greece’s debt are not repatriated it will only embolden the crooks.

What he should be doing is a full crack-down on tax evasion by those in the top tier who benefited far more than the average worker from Greece’s debt – the same corrupt politicos and business leaders buying up multi-million dollar London homes as “safe harbors”. Get that stolen money back into Greece or start pressing criminal charges for all offenders, with a public “deadbeat” registry. Offer a 1-year amnesty for those who willingly repatriate their assets and come clean with resignations, disclosures and/or restitution in the form of a tax set at a rate where it hurts just enough, but still beats the real prospect of jail or having to flee one’s homeland.

Reward whistle-blowers and others who rat out large evaders and corrupt individuals after the year’s amnesty is up (and not before, as just about everybody was in on the take, and it is time that Greece begins to heal its resentments. Halt payments to the bankers and multi-nationals who profited from the debt until they too pitch in their fair share...which was the lion’s share.

The Greek people are far from stupid, and a few token, high-profile sacrificial lambs will not be enough to a population barely scraping by already, and rightly fearing additional austerity measures not yet made public. Papandreou needs to take major steps to even out the distribution of responsibility for Greece’s crisis or chaos will continue…and justifiably so. The speech I wrote may need some tweaking, but can still be made if someone with courage would step up!

What is Papandreou So Afraid Of?

I recently posted this on the Linkedin discussion forum 'Friends of Greece', a very active board that I recommend all Hellenes on Linkedin join.

'What happens if Greece just refuses to pay anything... No principle or interest? All I have heard is a presumptive "we MUST take this deal" by Papandreaou and other government officials...even as a child I was taught to ask the question...if we don't what will happen?'

Below is the closest there has been to any kind of response...and if that is the case then all Greeks would be infinitely better off defaulting or restructuring except for a few of the really rich:

"This is a time of responsibility for all, for social cohesion, for safety, and for democracy," he said.

Despite the violence and mass protest, Papandreou defended Greece's decision to seek aid and move ahead with the austerity and reform measures, saying the country had no other choice.

"The government understand the feelings of the pensioners who have had their pensions cut, of the workers who have had their incomes cut," he said. "But we did it to secure a future, which we would not have had without it."

"The other option was that the country would have become bankrupt, and in turn all of the Greek population would have become bankrupt," he added.'

Papandreou claims there is no other choice

So bankruptcy is just 'bad', without a coherent explanation as to why a debt-ridden country with a debt-ridden population should accept a punitive 'bailout' package without even minimal restructuring, which will only put off the inevitable for a few years of interest payments. On the other hand, here is an excerpt from an article outlining various sovereign defaults throughout recent history:

'For Greece, the prospect of default is naturally tied to other countries in the Eurozone. They are rightly worried that a default by Greece would destabilize the euro and countries like Portugal, Italy, Spain and Ireland.

While strong support was confirmed by the €110-billion emergency loan, Mr. Peijan thinks a debt restructuring could still be necessary at a later date. This is because austerity measures increase the population’s resistance over time. The willingness of the IMF and European Union to provide potentially necessary follow-up financing may also decline.

“In this case, the contagion argument would speak for a relatively high recovery value and for political pressure on Greece to offer rather favourable terms,” the strategist said. “Then, investors might be more willing to assume that this example is followed by other European sovereigns, which would reduce the pressure on these markets.”

If Greece is willing to offer relatively high recovery values to rebuild some of the political capital lost due to its incorrect debt statistics for years, Mr. Peijan expects recovery levels could be above historical averages of 50%.

However, it is important to note that Greece’s debt-to-GDP ratio of approximately 115% is well above the average for defaulters. An average recovery value of 50% left countries with a debt level of 35%. Applying that target to Greece would leave recovery at 30%.

“While this would bring Greece in more favourable starting position, it would put even more pressure on Portugal, Spain and Italy as their relative position would become worse and put their stained economies under additional pressure,” the strategist said. “Therefore, such a low recovery value might not be politically opportune.”'

Soveriegn Defaults 101

In short, based on an analysis of the recovery prospects of defaulted countries, Greece would be in a far better position should a default occur, but the country is expected to 'take its medicine' so that the rest of the PIIGs don't lose investor confidence and follow suit. How generous of Papandreou to value the rest of the EU so highly...more highly even than he apparently does his own people.

And my follow-up question to Papandreou, as Greece votes on the bailout and further unrest looms, is this: is it not the job of a democratic leader to do the will of his people?

The Speech Papandreou Should Be Giving

Mr. Papandreou,

I have taken the liberty of writing 'your' speech. It is, however, one that only a true leader can make. Given the urgency of the situation Greece now finds itself in, it is a choice you can ponder only briefly. But I tell you this – make this speech and history will remember you. Choose not to, and you will be just another goat along with those who have had their fingerprints all over this disaster. And if you do not have the courage to make it now, someone else might have to do it later– and your cowardice will only mean Greece will have to suffer and struggle longer for its freedom.

Jason Evdoxiadis


My People,

As I look around, I see that the ancestors of Alexander haven risen up, as they have on so many occasions in our history, and are resolutely telling the global bankers and their interests OXI! Demonstrators fill the city streets, demanding that their voices be heard. The proudest nation on the planet has been awakened!

In our crisis, as always, it is the people who are expected to pay. Pay for the failures of the ill-advised Eurozone, the greed of international banks, and of course, the stupidity and short-sightedness of Greece’s own corrupt oligarchy.

I think my people will happily pay. But only if in return, Greece is compensated fairly for all we have given to the world. Our royalties for creating the greatest political system that has ever existed, and is now considered a barometer of civilization and human rights. How about our mathematics, architecture, civil engineering, and philosophy? The foundations for modern medicine?

Let us also speak of more modern history. Give back our Parthenon marbles – and all other precious, stolen pieces of our culture! And where else is our gold, stolen by the Nazis, but sitting in German depositories?

With the throngs before me now, and having the voice of a nation telling me ENOUGH... I now have the strength to say OXI OXI OXI.

Our offer is nothing...not a drachma! We will pay when they pay us back 100-fold!

I would like to thank the German people for making it that much easier for us. It is not the German people, however, that we are saying no to. They were sold the same propaganda that we ourselves, not long ago, were ready to accept. It is the "farmer's fault" – the same farmer who wakes up at 5am to make sure we have food on our tables. "It is the government bureaucrats fault" – the same worker who was given a job to do and does it. "It is the tax evader's fault" – the same tax evader who saw his government wasting his money needlessly and willing to take, but give little back in return.

The greedy and corrupt bankers sat back, and through their media pawns, tried to make it all the working man's fault...the man who goes to work and tries desperately to make ends meet so he can feed his family while the banker, who adds nothing to society, decides which luxury car to drive to work – the same car that the common German man toiled to build, who to struggles with the same challenges of putting food on his table.

We are at a crossroads in this great country’s history and I know we will do the right thing...united we will flourish!

We have told the rest of the world no. We must now say yes to Greece!

We were nearly divided by the media rhetoric and by the pressure we were put under, but we did not break! We boldly rose up...we have won the battle...but a war, however still rages. We have a great opportunity...an opportunity to lead...an opportunity to create a glorious future for our children and their children and all the children to be born in Greece for a thousand years to come!

When I sat and listened to all that was wrong in Greece from various leaders and intellectuals, I could only think to myself that they were correct in their assertions. Greece has long been broken by meson, fakela, scandal, corruption, inefficiency and a willingness to blame our neighbour.

The scourge has not been fully vanquished. We will now enter a painful period and will be measured by history on how we react. Of course, we could all step back and go off to our fishing villages or our old way and the world will say "look at those Greeks...still as backward as ever...we were right…they were deadbeats". The scourge is now from within. We must purge ourselves of it, alone...united!

We must no longer fall back on old excuses, for change we must. Many of the austerity measures that were to be imposed on us were prudent – only now if we impose them on ourselves WE will reap the benefits, and all future generations will reap the benefits. Our toil, hard work and innovation will line our streets with gold and not the pockets of those who sought to bleed Greece.

It was with German discipline that we recently experienced the pride of glorious victory in the sporting arena. Think back to what it felt like...to the pride we shared as a nation. It is with that same discipline that we must approach this far greater challenge in this far vaster arena, in this far more critical pursuit.

We are only now discovering how our ancestors were able to build the Parthenon with such grace and precision. Never doubt that each one of us has those traits in our blood, coursing through our veins! I know that we can do great things and once again regain our seat as the forerunners in the world, a model of excellence for all men to behold. When we leave here we must leave with the knowledge that it is ON all of our backs and IN all of us to strive for the perfection that has lain dormant for so many centuries.

When you go back to your jobs tomorrow...your shops, factories or desks…you must go with the fortitude of a Greek and with the altered perception that all you do and all the sacrifices you make are for the restoration of Greece – and for your neighbours, your community, and your children! We must never again ask what is being done for ME – for if we all act together, all the ME's will be taken care of.

We will require bold leadership and resolute convictions. If you applaud me I will work tirelessly to foster a society where hard work, higher morality, ethics, prudence and innovation are rewarded and where sloth, corruption, theft and selfishness are punished! From now, on the fruits of what we accomplish will be ours and no one will take them away. Not the snakes from outside...or within!

Turn to your neighbour and pledge an oath "for the glory of Greece."

Zito Ellas! Zito Ellas!


Don't miss my previous two posts on Greece's turmoil:

The Time for Greek Unity is Now!

Greeks Beware of High-Pressure Sales Tactics

Greeks Beware of High-Pressure Sales Tactics

In my last post, I wrote about the ‘common enemy’ in Greece and elsewhere; it appears that the markets are unexpectedly taking the first step to defeating it, with the aid of the Germans. It looks as though the EU will not have time to orchestrate a bailout sufficient to keep Greece solvent and the Germans have been busy unwittingly insuring that a bailout does not happen with inflammatory posts and with their typical overanalysis.

I want to take a step back for a second. This all started as a real ‘issue’ just a few months ago, and in such a short time has escalated into a crisis of near-epic proportions. As a veteran in sales, I’ve witnessed many shady negotiating tactics - the most disgusting of which is a salesman putting a pen in someone’s hand, and creating panic with phrases like: “If you don’t do this immediately it will be gone and will cost you a pile of money,” or “This is the best deal you will ever get, and if you don’t sign now you’ll end up much worse off.” Buyers should always be wary of being pressured into the first deal on the table or to yielding to these tactics.

I asked for unity and solidarity last week, and today I ask this: people of Greece, please do not listen to the rhetoric and make the naïve mistake of taking the first deal offered under manufactured duress. These are national books and not, for example, someone’s personal finances who did not have the time to anticipate the effects of a global credit crunch. Greece’s debt to GDP ratio has been in the realm of dangerous (over 70%) for years. Why were the European powers not at least negotiating in earnest all that is on the table now, to have a stage set to take care of what we now know was known to be a virtual certainty? Are they that stupid?

Of course not. And if they are, they certainly have people around them who aren’t – so they are trying to take YOU for the fools. “We finally got this deal which is so much better than the bond markets, and more money than they originally offered! We are on the brink of collapse, we have no choice but to sign now!” is what you will hear. Don’t get sucked in. How can only 2% of Europe’s GDP cause such ripples through the market? I will explain that in a future post when I have a bit more time, but here’s a hint: ‘the Domino Effect.’ And it’s bigger than you think or that the paper’s are just coming out with now. What was Papandreou doing in the United States with Obama? If he was looking for money wouldn’t that have been arranged prior to a visit? He didn’t even get a crumb but they sure spent a lot of time talking and smiling…

I had many responses to my last post in various conversations, chat forums, and emails. I saw that there was still a desire to argue about the woeful state of the long-standing Greek economic system and play ‘the blame game’. Clearly, a number of people had missed the point of ‘unity’, so I translated it into an analogy that seemed to resonate with everyone.

Consider the following scenario:

Seeing an opportunity, I approached a rather intelligent, but naïve, panhandler on my street corner and offered him an unconditional $100,000 in exchange for a portion of his daily take. Until then, he had little in the way of possessions save one solid gold ring (a family heirloom), but what he had was all his. He would sit on his corner for a few hours a day, and otherwise have a good time drinking and partying without a care in the world.

He was a little wary of my offer, so to clinch the deal, I hired another, more senior panhandler he respected to convince him of how much better his life would be. He was sold when I added that: “That ring of yours is also worth a fortune, so you can always borrow more against that if you need to.”

Unsurprisingly, he spent his wealth like water, being inexperienced with finances and having no understanding of how much (or little) money $100K was. He intended to get some new suits, a stable address and get back into the workforce, but the right time always seemed like tomorrow, and he eroded his money within a few years with fine meals and buying rounds at the bar. But by then, he didn’t have much time for merriment anyway - to make the payments on the loan, he found himself having to panhandle almost constantly. Occasionally he borrowed a little from me against his gold ring to stay afloat, but these new payments compounded his problem.

One day, he came to me and told me that no matter how hard he panhandled there was no way he could continue to make his payments. I knew that the money had been pissed away and not spent on trying to better his life, but it was loaned unconditionally, so he had been free to use it as he pleased. Do I consider whether I may have made an error in judgement by lending the money to him in the first place?

No – instead, I start a neighbourhood campaign against him, telling everyone I see that he is a deadbeat who does nothing but party, and not to give him a cent. Now left with nothing, he is panicking. After I week of this torment, I offer him a new deal. I tell him that I’ve reconsidered and am willing to bail him out again after all – but this time, with conditions - I will give him $10K that must be put towards new suits and finding a job, and he must immediately cease drinking and partying. I will take full ownership of his gold ring, receive his entire salary once he is gainfully employed, his children’s salaries, should he have any, and he must agree to be on-call 24 hours a day as my personal assistant.

He turns to the so-called 'older and wiser' panhandler who first advised him, who tells him he has no choice to take this new deal. Left without his old way of life, he is now surrounded by people calling him a deadbeat, and fearing that even the small improvements he has made in his life will be stripped away, leaving him far worse off than before he accepted this “deal of a lifetime”. What should he do?

a) Take the deal – what choice does he have
b) Find a new corner in a new city, and try to return to his old way of living
c) Tell me to shove it, clean up his act on his own, keep all he earns at his new job…and get to party in moderation

I hope the Greeks remember the old wisdom of our forefathers – ‘Pan Metron Ariston’ –
and choose c). I know that they have the strength to pick c), and have the wisdom to see that a) can not even be considered an option.

And for a little added kick, in case the panhandler reference is not enough - Dropis. After the dust settles - and not before - please get your house in order…all of you. The whole world now knows what you have all known for years. The house is a mess and ‘that’s just the way it is in Greece’ will no longer cut it. I would like to go back to holding my head high wherever I go in the world, as a descendant of Aristotle, Socrates, Plato, Homer and Alexander, and not have to answer questions about the backwardness of my ancestral home coming from people whose ancestors were swinging from trees when we were building the Parthenon.

Read part 1 here:

The Time for Greek Unity is Now!

And my latest follow-up:

The Speech Papandreou Should Be Giving

The Time for Greek Unity is NOW!

I was sitting at the table this Easter over some ouzo and retsina, listening intently to what the old guard had to say about Greece's economic crisis. "The farmers took EU money to change their crops, and nothing changed other than the new house and car...kala na pathoun (they deserve what they are getting)." After a bite of lamb, one of the other elders piped up and said that "the government bureaucrats are useless and corrupt. It takes five of them to do the job of one, and even then it doesn't get done without a fakelo (bribe)...kala na pathoun!"

The most effective way to defeat an opponent is to divide and conquer, and the powers that be have been doing a phenomenal job. As Greece reaches out to the IMF and EU for a ‘rescue package’ organized labour is taking to the streets for a 24-hour strike. However, polling shows strong public support for the impending austerity measures, most of which focus on the public sector. Labour is still the strongest force in Greece, but if the broader public doesn’t stand in solidarity, the IMF will see even freer reign to impose its policies. And Greeks are delusional if they think that only unions will feel the impact.

Policies like IMF-mandated wage concessions, service cuts and higher personal taxes will not improve Greece's financial outlook, even with lower loan interest and 'bailout' funds in exchange. These restrictions have been shown time and again to hamper economic growth and cause social instability (eg. Argentina). With assistance from the IMF in Greece’s moment of desperation, the bleed will be slowed (and mildly less painful), but will make the reckoning much worse in the future.

The same conversation that went on at my family's Easter dinner table is going on all over Greece. I recently wrote about the trading of my homeland's formerly enviable lifestyle for the trappings of a consumer-driven society- new cars, televisions and the devastating credit card and mortgage debt that goes with it. Greece, long viewed as the ‘irresponsible stepchild’ of Europe, is having the blame for its crisis placed exclusively on its reckless personal and public spending. They even believe it themselves.

However, this story sounds awfully familiar.

Here's an excerpt from an article published in the Washington Post back in 2001:

"But it is neither necessary nor desirable for a government to balance its budget during a recession, when tax revenues typically fall and social spending rises. The "zero-deficit" target may make little economic sense, but it has great public relations value. By focusing on government spending, the IMF has managed to convince most of the press that Argentina's "profligate" spending habits are the source of its troubles."

Stellar public relations indeed- the world's financial institutions have already succeeded in making Greece a global laughing stock, a caricature of irresponsibility and lack of self-control. Not only that, but they've convinced most Greeks of it, too. It keeps them too busy pointing fingers at each other to acknowledge and take action against the true architects of their disaster. But wasn’t there the same culture of ‘fakela’, ‘meson’ (cronyism) and tax evasion long before Greece’s economy went into a tailspin – why do these failings account for the whole problem now?

As soon as Greece joined the Eurozone, deregulation and corporate tax cuts were the order of the day - all imposed by the EU in accordance with policies that were completely disconnected from the reality of each individual member state. Greece has never had a strong economy, and there is plenty of evidence to support that joining the EU – in doing so, losing control of its currency, being forced to aggressively deregulate, throw open the door to foreign investment, and cut corporate taxes – turned Greece’s stable-but-weak economy into the abject failure it is today.

“Greece shouldn’t have joined the Eurozone in the first place,” said M. Nicolas Firzli, Director of the CEE Council – a Paris-based economic strategy think-tank – and member of the International Committee of the French Society of Financial Analysts (SFAF), in a telephone interview. “Greece was de facto blackmailed by Brussels, Berlin, and Washington into severing its ties to Serbia in the mid-nineties, in exchange for the promise of further financial integration within the EU at a time when Greece clearly wasn’t ready to join the euro.”

PIIGs Strike Back

Through EU liberalization, the global banks forced open Greece’s market for debt, and are the primary benificiaries of its current state. Did the Greeks have to take advantage of readily-available debt? Of course not. But the Americans didn’t have guns held to their heads when they took out high-risk mortgages, either. If a financial product is being aggressively sold to people without the background or experience to understand its implications – being sold, no less, by people who should know better – it doesn’t take a genius to see the consequences. I won’t bother to mention the USA’s astronomical deficit.

Argentina’s crisis of the early 2000’s, while not exactly comparable to Greece’s in many respects, offers some important clues for how the Greek people should proceed. IMF-mandated policies like tax cuts, deregulation and the cessation of government spending drove the country deeper into crisis – and recovery only started after declaring bankruptcy. Now, Argentina is viewed as a moderate success story. Even Iceland, where the public is demanding a default on foreign debt and refuse most austerity measures, just received an upgrade from Moody’s. Upon the news that Greece wanted a rescue package, their rating went down.

The problem isn't the 50 extra Euros in the pocket of a government bureaucrat. If the people of Greece don't realize who the real enemies are and band together, the bondage of the Ottoman Empire will have been fully replaced with shackles of a different variety. Despite what many in Greece think, the restructuring will impact everyone from government workers to the unemployed to the private sector. And future generations will also pay. The only solution is to not pay now.

Declare bankruptcy. Default on loans. Find an exit from the Eurozone and fully restructure their debt. Just like with Iceland, another and better solution will be offered when it becomes clear that Greece won’t play ball. And before any of this can happen, all of the people of Greece need to rise up, take to the streets en mass, and make it abundantly clear that they won’t sell out the future of the country – and any prospects for a good life for their children – to ‘take responsibility’ for a crisis that was NOT their fault.

Throughout history, all of the disparate Greek states have been able to stand together against a common external enemy – no matter how much they ordinarily fought each other. Make no mistake, the Greeks will have to get their house in order, but if they are not united in their opposition, it will be shoved down their throats.

P.S. All Greeks should be yelling a hell of a lot louder, because they are hardly getting any international press - aside from being made the scapegoat for every market and currency fluctuation across the globe.

Read Parts 2 and 3 here:

Greeks Beware of Pressure Sales Tactics
The Speech Papandreou Should Be Giving

With Interest Rate Hike Looming, Canadian Dollar Hits Parity

The Canadian dollar has been edging up the charts for much of the last month, reaching parity with the USD this morning after closing at just $98.4 last night. The cause for the jump? Commodities prices rose, linked to the strength of our dollar...but the big news is that the Bank of Canada has dropped its conditional commitment to keep interest rates steady until the end of June.

"The central bank became the first Group of Seven country to
signal it will raise interest rates, possibly as early as June
1, as the economy recovers faster than expected. The bank kept
its key rate at its current ultra-low 0.25 percent level."

Canadian Dollar Rises

With the conditional guarantee removed, it's obvious that interest rates will start climbing in short order. What does this mean for the Canadian economy? More on this soon.

'Cassandras' Finally Get Vindicated

There's no question that 2010 is the year of Cassandra, Greece's own ignored prophet of doom. As were 2009 and 2008, arguably, but the last few months have seen more and more critiques of excuses and proclamations of ignorance. For the financial crisis in particular, the question of "why didn't anyone see this coming?" is finally being replaced with: "why didn't anyone listen?"

The NYT reported today on some frustrating examples of disregarded warnings, including a shamefully under-reported story of a financial analyst who spent 8 years jumping up and down in front of the SEC, trying to open their eyes to Madoff's Ponzi scheme:

"Harry Markopolos, a Boston financial analyst, has been out promoting his new book, “No One Would Listen.” It is an account of the eight years he spent trying to persuade the Securities and Exchange Commission that Bernard Madoff was running a multibillion-dollar Ponzi scheme. Mr. Markopolos recounts his tireless efforts to wave red flags in front of government watchdogs. In the spring of 2000, Mr. Markopolos says he tried to explain to a senior S.E.C. official why Mr. Madoff’s numbers did not add up, but “it very quickly became clear he didn’t understand a single word I said after hello.” In the end, perhaps $65 billion disappeared, much of it belonging to charities and retirees."

Speaking of Ponzi schemes, here's something I caught last night on CBS - financial expert Janet Tavakoli, who forewarned about the Ponzi-like credit crisis and is now taking on Goldman Sachs. Check out the video linked below, it's well worth it.

Tavakoli on Goldman Sachs Fraud

Is Greece Europe's California?

Or as a rash of recent articles have put it, is struggling California the USA's answer to Greece? Of course, there are many comparisons that extend beyond beautiful weather, rocky terrain and perfect beaches, as I mentioned in a previous post.

It's a race to see who will default first, according to this article in the Wall Street Journal. It's one of many pieces in the last few days to make the point that equating the two economies is comparing apples and oranges - or olives and oranges, I guess.

According to the WSJ, US states play too important a role to let flounder:

"...one third of the $3 trillion of total municipal debt in the U.S. is held by individuals and mutual funds. Thus, the Feds would likely act to prevent widespread defaults from wiping out a significant amount of household wealth in the U.S. and causing other investors to flee the market in fear, according to Roubini.

By contrast, Greece and the other struggling nations that use the euro can’t take such a euro-zone backstop for granted, something seen today in Fitch’s downgrading of Portugal by one notch and its issuance of a negative outlook for the euro-zone country."

The Eurozone has no obligation to bail out member states, unlike the backup the US government will no doubt provide. In the context of the US, California is certainly "too big to fail"...it has the distinction of being the largest economy in the country, and the 8th largest in the world.

The New Yorker also had an excellent analysis:

"The European model would do more harm than good, as American history shows: in the early eighteen-forties, after the bursting of a credit bubble, many states found themselves in a debt crisis. The federal government refused to bail them out, and eight states defaulted—a move that cut off their access to credit and helped sink the economy deeper into depression.

The U.S. did then what Europe is doing now, putting the interests of fiscally stronger states above the interests of the community as a whole. We seem to have learned our lesson. If Europe wants to be more than just Germany and a bunch of other countries, it should do the same."

The US depression the author referred to was in the 1840's - what major event occurred soon thereafter? Knowing the current (and historical) volatility of many fiscally-troubled European nations, it's not a stretch to envision arms being taken against the Union. I wonder what colours they will choose for their uniforms. The Greeks have dibs on blue.

Update on the Strength of Canadian Currency

You may have recently read Canada: A Safe Haven for Foreign Investment posted on March 24th. I will continue to post relevant articles as I come across them that may provide some insight into the matter. This is a must-read: Canadian Dollar at Parity

As you can see, the Canadian dollar has flirted with parity even in the face of a relatively strong USD vis-à-vis the Euro and other currencies.

Canada: A Safe Haven for Foreign Investment

If Davinci had kept making copies of the Mona Lisa, would they have increased in value or decreased? My preteen kids can answer this one, yet highly sophisticated currency traders seem to have trouble with the concept. Somehow, the USD has enjoyed the privilege of making my kids – and common sense – wrong, at least since it became the world's reserve currency. But all good things must come to an end...and our perceptions of “safe” investments are certain to change when it does.

The US has benefited greatly from its unprecedented run as the primary global reserve currency, but with the amount of printing their massive deficit now requires, alternatives are inevitable. The Chinese have slowed their printing and continue to refuse to float their currency. Europe is in the same boat as the US and will continue to print the EURO to bail out the floundering PIIGS (Portugal, Ireland, Italy, Greece and Spain). The Japanese are worried about deflation and so they are in the same predicament.

Canada has also been printing frantically in an effort to keep pace, but it will come woefully short of maintaining parity with our neighbors. Although the policy here has been to print in hopes of maintaining some order in the currency markets, it is impossible to avoid the long-term, upward pressure of our dollar. We may have mostly avoided the carnage our “big brother” to the south has been enduring, but with inflation looming the printing is set to slow.

That being said, Canada has the strongest banking system in the world, among many other advantages. Canada avoided all of the follies of over-lending, is strongly resource-backed and based, and is politically secure with a convenient proximity to the largest market in the world. Russia, for one, has recently realized the long-term stability inherent in a developed Western country boasting the lowest debt to GDP ratio in the G7. In an unprecedented move, the Russians recently declared that they would be holding some of their national reserves in Canadian Dollars. Movements such as these are significant when taken in the context of Canada’s relative economic size.

As this article from the CBC illustrates, many other nationalities have begun pouring money into Canada:

Foreign investors flock to Canada

With inflation fears looming – particularly in the United States – investors are once again seeking the insulation offered by hard assets. Gold tends to be the default commodity for circumstances such as these, but its commonly-held derivatives are still denominated in USD, thus retaining the risks posed by currency fluctuations. Owning US real estate, another hard asset alternative, leaves the investor open to both risks of the devaluation of the dollar and the still-uncertain American real estate market. The dollar correction alone will significantly outpace any interest income on savings or reserve cash with the inherent protection of a hard asset, if you realize that Canadian commercial real estate may well be the safest long term investment going for US investors familiar with the field.

Commercial Real Estate in Canada has weathered the global financial storm more than admirably with only scant evidence of any Power of Sales (foreclosures) and is now set to begin rising. The sector did not experience the boom in anything other than slow moderate growth from the mid nineties through the early part of the 2000’s and is now set to get its’ moment in the sun. Banks in Canada, which avoided the sector with anything other than lower leverage, are now dipping their toes into the market and with coffers brimming (RBC, Canada’s largest Bank, has a tier 1 capital reserve of app. 14%) the market is set to take off.

If you are in the sector or have clients sitting on cash making peanuts, I can think of no better way to unlock that cash into a higher and safer return with excellent up side!

Greece's Debt - But Europe's Problem

My beloved Greece is burning.

Well, not quite yet - but watch out. This is a proud nation of intelligent philosophers and closet politicians who are acutely aware of the political winds and what it could mean for them.

In North America, changes in our lifestyle have come far more gradually than they did in Greece. Real wages have remained flat since 1980 (in truth they are down, had CPI had been accurately reported). Furthermore, we all know that our grandfather - who had a then-good job in middle management or on the shop floor - was able to have a house, a car, family vacations and perhaps a cottage while our grandmother stayed home taking care of the household.

Today, with both spouses working, they can only hope to have a fraction of what Grandma and Grandpa had. But for us, that lifestyle is a relic of a bygone era and rarely front and centre in the national psyche. In Greece, however, those changes didn't take 50 or more years - they swept the country in the span of half a generation.

When I first went to Greece 17 years ago, I recall asking my aunt how big a mortgage she had. She asked me what that was. Thinking I had made an error in Greek, I translated it to the more descriptive "a loan on your house". She responded in shock and horror, "Christos kai panagia, pios kani tetio pragma!" The loose translation is "Jesus, Mary and Joseph, who would do such an awful thing!".

Also noteworthy was that while most of my relatives worked, they still were able to take time off work to entertain us at the local bars and restaurants every night. Well, 6 years later I went back and things had begun to change. People had begun sinking into credit card debt and mortgages were becoming more of a household word, although we could still go out. In fact, I recall going to dinner at a restaurant by the seaside on one of the islands. Six adults stuffed themselves and drank copiously. I decided to play some shooter and picked up the tab...all $65 CND of it (tip included).

Fast forward 5 years later: we went back to the same restaurant with essentially the same crew and the tab came to 300 dollars! I split that one. With all the scheduling and work commitments it was hard to get that one night out and "I would love to see you this week but work is hectic and finances are tight" was the answer from cousins and friends to requests to get together. From almost the day the EURO was introduced, they experienced 200 to 300 percent inflation on everything but wages, which had been locked in at par. They were beginning to really feel the debt squeeze.

My aunt, who had been mortgage-free, was forced to take one so that she could afford to buy groceries and help her kids a little bit. Her savings, which had been ample prior to the "merger", were now woefully inadequate under the new regime. Unless you scratched the surface, the changes looked for the better. They drove newer cars, had better TVs, and less young adults lived at home. But it was all financed by debt. In the end, they had given up their enviable lifestyle and their inheritance for a newer car, a new tv and a few less years under Mom and Dad's roof...and a few pairs of designer jeans.

As a "poor" nation, pre-Eurozone, Greece had virtually no national debt. Since then, the debt has swelled to 300 billion dollars - 50 billion of which is rolling this year - and is now critical. They have been overwhelmed by immigration, and many Germans, French and Brits have bought up prime real estate at cents on the dollar, not to mention the binging on the likes of Olympic Airways. The investment capital came, but the jobs never showed up. In fact the youth of Greece is now known as the generation of 600 - named for the prevalent monthly salary. Mere peanuts that they see no hope of exceeding...ever.

The new austerity measures, that I had the privilege of previewing, are a model that any progressed Western economy would be happy with. In a Greek context, they are laughable. Unfortunately, the Germans couldn't see that. Their attempts to impose such measures on people who know better - and are well aware of their crumbling lifestyle - will end with Greece telling them ENOUGH. There will be some changes to the public sector and a few new rules, but the rest of Europe will soon see that Greece's inevitable unrest will threaten to spill over to their neighbourhoods - and that they'd be better off dropping the strict loan conditions.

I see this as a growing pain for Europe, but they will have to understand that there is no middle ground. They will have to come to grips with the fact that Greece is akin to California - an essentially bankrupt state that is fine as long as the Fed will take care of it - or as Canada sees has-nots like Newfoundland. If the understanding that unity requires balance doesn't come shortly then not only will my beloved Greece burn, but the nascent Eurozone is doomed too.

A German politician recently said that the debt-ridden Greeks should sell their islands and the Acropolis to raise funds. He will soon have the collective finger raised by the Greek people facing squarely at Berlin...and Merkel will just cut the cheque.

OXI

A Lifeless Remission?

The latest US jobs report is out, and again, the phrase "jobless recovery" is being thrown around by politicians and journalists alike. This time, however, the talking heads are in rush to claim that the latest stats show that the recovery won't be jobless for long...or so they hope.

The American economy lost 36,000 jobs in February, but this is significantly less than had been predicted. Expectations were low in part due to the recent US snowstorms, although negative effects from the harsh weather didn't materialize. In a country whose health depends heavily consumer spending, more employment means more growth...so is it time to get optimistic?

Good News That Employment is Down

"It's good news. Everybody was doubting the sustainability of the U.S. recovery without more jobs. That's why this report is so important," said Stéfane Marion, chief economist at the National Bank.

Once we see the numbers for March, said Gault, the job gain could be over 100,000. Private payrolls should be growing in a sustained way from now on, he predicted."

Predicting more job growth in March? Sounds great...however, where will these jobs come from, is the question. There is speculation that when the all of the snow melts from the recent blizzards, there will be a surge in employment. A little odd considering that the report refuted that the snow had any impact on job loss, so why would its absence cause a boost? If anything, there are going to be a lot of unemployed maintenance and snow-removal specialists out there. So here's the real answer:

Snow Didn't Skew the Unemployment Rate, But the Census Will

Around half a million temporary census workers will begin being added to the American payroll. Similar to that mysterious service-sector employment boost that happens each year around November and December, these jobs are part-time, transient, and pay low wages (for the Census worker, a base hourly is around $11). As the above article discusses, these jobs will do virtually nothing to aid the economic recovery or add to the average income of the American worker. Nothing, that is, aside from masking true unemployment figures.

The recession has been declared over. The fact that 70 percent of the American GDP is based on consumer spending - and the fact that 16 percent of Americans are unemployed or underemployed - seems to be inconvenient to the desired message that we are out of the woods. And so the the term "jobless recovery" was coined. I wish I was as talented as the US spindocters. It's like using "lifeless remission" to describe a cancer patient wasting away on life support.

Just Good Sportsmanship

Like many Canadians, my Olympic "hangover" is finally starting to fade. I've stopped aimlessly flicking around TV channels wondering what to watch now that the Games are done, and I no longer feel the urge to wear a toga made out of the Canadian flag...for the most part.

We couldn't have asked for a more thrilling, heart-stopping finale as we battled the American hockey team into overtime, ending with one brilliant goal that not only won us the game, but the record for Winter Olympic medals. However, it made me wonder...what would that game have looked like without a rule book?

Throw out all of the regulations, and I expect there would have been few players left standing by the final minutes. In a free-for-all, no doubt Sidney Crosby would have been crushed into the ice long before the first period was up. In fact, without any rules at all, maybe he'd have been mortally wounded by American gunfire in a mid-ice shootout.

Of course, no one suggests that hockey would be improved by anarchy. It's entertaining enough with penalties and referees, and sans gunfire and baseball bats to the head. But many who support rulebooks in sports want them burned in business. We've all seen how well that worked out. So is Obama going to bring back the penalty box?

Obama Proposes New Bank Regulations

I've long been critical of Obama for humiliating himself and the American public by giving away trillions to the financial sector under TARP without conditions, only to have to beg the banks the people saved to pretty please start doing their part to aid the recovery. Namely, quit hoarding capital and start lending it out to the very Americans who saved your asses. TARP was missing a rulebook.

Now, it appears he's starting to see the need to push harder for reform and regulation...

"Under the Obama proposal, banks that take federally insured deposits or have the right to borrow from the Fed would be prohibited from owning, investing in or sponsoring hedge funds or private-equity firms. "You can choose to engage in proprietary trading, or you can own a bank, but you can't do both," an administration official said.

The president also called for expanding the reach of a 1994 law that forbids banks from acquiring another bank if the deal would give it more than 10% of the nation's insured deposits. He would expand that limit to cover other types of funding—such as banks' short-term borrowing from financial markets—and perhaps put a cap on the share of assets any one firm could hold."

Will it be enough to prevent another crisis?

I'm not an uncritical supporter of regulations. As a Canadian, I've suffered through their inefficiencies: the Kafka-esque bureacracy, the wasted time, the sometimes unthinking and unfair application of the rules. However, they also proved to be the savior of the Canadian economy.

Our Chartered Banks fought for years to merge, saying "bigger is better". They also fought to be able to “compete” by eroding away their Tier 1 Capital requirements as their European and American counterparts had. It was those rules that they fought tooth and nail, that not only saved them and the general economy, but that allowed them to achieve the title of the world’s best banking system according to the World Bank.

Even considering the Obama proposals, American financial leaders are still bringing pistols onto the ice and using a two-foot wide net, and another crisis will happen. We've shown how to prevent catastrophe through judicious regulations, but unfortunately, Canada does not dictate what happens on the world stage. The U.S. does.

For now.

Is Inflation Looming for Canada?

All signs point to yes.

"The Bank of Canada is on heightened alert for inflation and a stronger recovery than it had bargained for.

The central bank continues to hold interest rates at historic lows but is signalling to markets that inflation is running slightly higher and the economy, driven by "vigorous domestic spending" and a gradual recovery in exports, is expanding somewhat faster than it had projected, a juggling act for Governor Mark Carney.

Mr. Carney and his fellow policy makers at the Bank of Canada are now under more pressure in terms of how they time the first interest-rate hike after a lengthy run at near zero, economists say, and the next reading of inflation, due March 19, could be crucial to their thinking."

Inflation Set to Rise Faster than Expected

There are many other contributing factors to this impending problem. The virtual moratorium on personal lending over the last year allowed the banks to build up vast capital reserves and report record profits...until the government stepped in (late is better than never) to push for increased lending under the stimulus plan. Now Canada's financial sector has too much money without enough places to put it - and that spells inflation.