Monthly Archives: November 2011

Moody’s, Greece and Reading the Crisis

The New York Times spotlights Moody’s credit rating approach to Greece during the run up to the current crisis, echoing a number of events over the past few years that essentially amount to, positive outlooks followed by dramatically quick descents into very dark territories.

Moody’s held off dropping its strong A rating of Greece’s bonds despite growing political turmoil and economic woes through 2009. Investor fears over Greece’s short-term financing needs were “misplaced,” Moody’s said in a report in early December 2009. Twenty days later, after a review, the agency downgraded the nation’s debt, the last of the major ratings agencies to do so.

Moody’s response also seems familiar to anyone who paid attention to Enron or Lehman Brothers who both enjoyed favorable ratings until sometimes days before their complete collapse – essentially, that no one could have seen this coming.

”We never thought of such a catastrophic stress scenario in the euro zone,” said Sara Bertin, who was Moody’s lead analyst on Greece before leaving in spring 2008. “That’s the issue ratings agencies had with subprime. That’s the issue ratings agencies had in Asia, and that’s the issue the ratings agencies have in Europe.”

While I sympathize with Moody’s to some degree in their assumption that the EU would be unlikely to let one of their own sink beyond rescue, I am a little unclear about what information they were using to justify their rating, which stayed so strong for so long. They mention a checklist that their team uses but I am trying to figure out what checklist could not present at least a few causes of concern. This was, after all, following the revelation that the country has fudged their numbers used to be admitted into the currency in the first place. Furthermore, did the sovereign debt team not see the country’s spending and taxing behavior as some sort of red flag about potential problems in the near future? If not, what exactly were they looking at and what finally caused the to drop the rating so far, so fast. Was EU membership really the only thing keeping them afloat?

Again, I agree that the stability of the Euro members should have allowed some level of confidence going forward but weren’t other factors enough to invite some stronger scrutiny of the country’s ability to keep borrowing? This is especially important as this rating is what allowed Greece to continue borrowing far beyond what they should have. This also suggests that these ratings, as misplaced as they might have been, allowed other countries to dig deeper holes, exacerbating the already delicate situation. Finally, it lends a certain level of unease to the ratings still being applied to so many countries, causing market fluctuations that are increasing worrisome and suspicion. Do these ratings truly reflect the economic stability? Are they outdated? Are they running on trends or simple history?

The NYT article touches on possible conflicts of interest and issues with fees, but what concerns me most is the methods of measurement and how a group paid for the very task of determining the stability of investment opportunities could have been so late and/or so wrong on a case like Greece? Despite all the issues that could have raised concern, was EU membership really enough to justify propping up something so likely to stumble?

Image: BBC

 

Malta’s Offshore Solution – Energy Stability or Last Ditch Effort?

Driven by a precarious domestic energy environment and the opportunity to address claims disputes, Malta has renewed its focus on offshore efforts this year, but are finding that production success may be more difficult than first expected. Areas to the south and to the West have been the subject of disagreements over legitimate claims for several decades, pitting Maltese leaders against those from Tunisia and Libya, who went so far as to send a gunboat to stop exploration in the Medina Bank in 1981. The disagreement lingered in trials held by the International Court of Justice and attempted talks between the two countries but little progress was achieved in the years since.

Sensing an opening as both Libya and Italy faced political circumstances that removed any focus from offshore claims, Malta revitalized efforts to exploit offshore reserves, partnering with firms such as Mediterranean Oil and Gas to move efforts forward. In August of this year, Malta announced a licensing round to run through December for areas in the Ionian Sea previously claimed by Italy and previously protested by Libya. However, as Libya comes back online and a new obstacle in the form of revised European Union regulations on offshore drilling come about, success has become more elusive.

According to Platts, last week saw Malta’s EU minister join representatives from the Netherlands and the UK to voice their concerns about the impact of new regulations on offshore efforts on national sovereignty and the ability for the countries to pursue existing projects. Malta’s exploration push is anchored in the country’s efforts to reduce oil and gas exports and stabilize a domestic energy environment that has seen the price of products and environmental risks spike in recent years. These efforts have been rewarded in some ways, such as the EU approval of funds for a natural gas pipeline linking the island nation to the continent, but a lack of sufficient funding and available resources remain obstacles to energy sufficiency.

In what appears to be an effort to partner with a revitalized Libya instead of challenging them on offshore claims, Prime Minister Lawrence Gonzi visited Tripoli this week to reiterate support for the new government and economic partnerships. Malta was one of the earliest states to formally recognize the country’s transitional government as legitimate.

Photo: Marine World. Text: Originally Published in EurOil, All Rights Reserved.

Cost of Inaction – The ECB Edition

Taking aim at the inaction of the European Central Bank in this whole mess, The New Yorker’s James Surowiecki follows a similar line of reason to our earlier posts on the inaction of Merkel and the Southern economies, citing a clear and effective solution and an unwillingness to go there for fear of rewarding bad behavior:

The frustrating thing about all this is that there is a ready-made solution. If the European Central Bank were to commit publicly to backstopping Italian and Spanish debt, by buying as many of their bonds as needed, the worries about default would recede and interest rates would fall.

He continues with a swipe at the reasoning behind their choice of action – or inaction:
So the problem is not that the E.C.B. can’t act but that it won’t. The obstacles are ideological and, you might say, psychological…… Moral hazard is a reasonable concern, but the Germans have reaped enormous benefits from the euro—most notably, it made their exports cheaper for the rest of the continent—and they should be willing to bear some of the costs.
What I feel Surowiecki fails to mention is the pressure Merkel and Co. have put on the ECB to keep their coffers shut. Several times over the last few weeks, the ECB has broached the subject of extensive plans but have been curtailed by sharp responses out of Berlin and Paris. Their inaction seems less to do with their own ideological or psychological reasoning and more to do with falling in line with those at the helm. Still, the wave is coming whether they act or not; its up to them how prepared they will be.
Photo: AFP/Getty Images, via The Guardian
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The Cost of Inaction – Southern Edition

Returning to a theme of an earlier post, I remain at a loss as to why Euro leaders in France and especially Germany seem so timid about pursuing financial stability programs or what almost seem like inevitable steps towards greater economic integration among EU members states. Merkel has remained firm even though the costs of letting certain members of the community slide into default and/or leaving the Euro to collapse would leave Germany with far more of a burden than even a flat bailout of Greece, Ireland and Portugal – much, much more, it seems.

“One thing UBS notes is that it would be much, much cheaper for Germany to simply bail out Greece, Ireland, and Portugal outright (that would cost about 1,000 euros for every German man, woman and child in one swoop) than it would be for Germany to exit the euro zone (which would cost the average German 8,000 euros the first year and 4,500 euros thereafter).” -Washington Post

The actions called for seem like inevitable steps towards an EU economic integration so why beat around the bush as the markets continue to punish countries already struggling? Furthermore, as the punishing and insecurity spread to normally stable financial situations, what exactly is causing the delay?

Still, the inaction in this equation is hardly one-sided, though I am starting to see a strong narrative emerging to suggest otherwise in Spain, Italy and Greece. ‘Europe wants to shove reforms down our throats’, the story goes. ‘Look how they’ve installed new leadership in Athens and Rome’ or ‘Look how they’ve wiped the slate clear of left of center heads of state in favor of right wing politicians who are sure to be more obedient to the demands of an over-bearing Europe’. Leaving aside the political leanings of the outgoing Berlusconi and likelihood that France’s right of center Sarkozy faces a substantial challenge in next year’s election (my take is that anyone caught holding the bag come election time is sure to face as much), I am not sure I understand the argument here. Countries need funds to stay afloat due to a wider economic slowdown but more so because of irresponsible or outdated borrowing and spending practices. So, the idea that those entities asked to put forth said funds would ask for some behavioral change seems like a logical next step, both because they are the lenders and what responsible lenders in the world would distribute funds without some sense of where the money was going or how it was going to be spent and because its the next logical step in Europe’s planned economic integration. This was the plan, wasn’t it? Getting everyone on the same page economically? That sort of operation requires much from all those taking part, including the richer countries helping to stabilize those less fortunate and those with antiquated or unsustainable systems adjusting their practices to better reflect the system they had chosen to take part in. So if this was the plan and these were the changes needed, why are figures on all sides fighting so hard against it? Is it  theater, pride or are some deciding they’d no longer like to be on board this particular train?

To be clear,despite his obvious and public distaste for the EU,  Silvio Berlusconi was not tossed aside because he ran afoul of Merkel and Sarkozy as he led a noble campaign to rescue his country from an economic collapse. He was tossed out because he did little to spur actual growth or help ready his country for participation in the continental and global community he had chosen to be a part of, made all the worse by the fact that he kept being caught with his attention elsewhere as Rome burned. And to be clear, Merkel’s grandstanding is not for the benefit of the country as I believe deep down that she understands the real costs of letting this European experiment dissolve with her at the helm. Both sides need to put pride and worries about political futures aside and realize the wave is coming whether they act or not – its how they prepare for its arrival that will matter.

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A Mediterranean State of Change

Its a topic that’s been tossed around a lot these last two years but one worth repeating – the monumental wave of change that has rolled across the Mediterranean these last few years. At risk of overstating the point, I think it would be safe to say we are witnessing an evolution of the region that has seen roles reversed, goals aligned and countries previously thought to be on opposite end of the political and economic spectrum close together than they have been in centuries. Its a point I would like to come back to over these next few weeks as the reality of Europe’s economic challenge take hold and North Africa’s political evolution becomes clear but for now, here is a Guardian run-down of the events facing each and every one of the Mediterranean states. Plenty to absorb and plenty to discuss.

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Morocco’s New Government and Energy Future

Following the country’s first national elections under a new constitution meant to reduce monarchical authority, Morocco has shown signs of more decentralized state and new governing style. However, a lack of policy specifics, insecure funding methods and worries surrounding King Mohammad VI’s remaining authority have left the country’s energy sector without a clear path forward.

Called as a response to a growing movement in favor of government reforms, last week’s elections saw the moderate Islamic Justice and Development Party claim a majority victory with approximately 80 seats claimed out of the 288 seats announced. This showing does not grant the party a governing majority, as it allows them less than a quarter of the 395-seat body, but will guarantee that the country’s next prime minister, as selected by King Mohammad VI, will come from their party. Any ruling majority will have to come with the party’s efforts to create a parliamentary coalition, which can be pursued after the final votes are tallied and the final 90 seats are allocated proportionally.

However, despite the election and new constitution, it is unclear what this new government will mean for the country and its energy sector. While the Justice and Development Party have issued support of an Islamic financial system and a streamlining of regulations related to infrastructure development, issues of religion, security and most importantly the economy remain in the hands of the King, according to The Guardian. Faced with deep investment deficits, the country’s energy sector will need significant government support to sustain and continue to pursue new strategies, though the election has not offered much clarity about where that will come from.

A Desired Path Forward?

Currently reliant on imports for 97 percent of its energy needs, Morocco has long aimed to reduce its dependence on foreign sources through the development of domestic projects, including exploring newly-found traditional reserves, shale projects and more recently, alternative energy plans. So far, these efforts have fallen short due to slow government progress, insufficient investment and partnerships with foreign firms that are too small or unprepared to sufficiently address the needs of the local energy development needs.

These obstacles have been most pronounced recently with efforts to exploit the country’s shale potential at sites located near Tangiers, Tarfaya and Timahdit. While the sites have been estimated to hold significant reserves by the Moroccan government and the U.S. Energy Information Administration, progress on the sites has been slow as firms such as Ireland’s San Leon and Brazil’s Petrobras have yielded little in the way of significant results. Last year, the Moroccan government has reached out to government energy actors in the United States to lend technical support to shale efforts in the country, as well as signing a consulting agreement with Estonia’s state-backed Eesti Energia to further aid the effort. Just this month, the country’s Office National des Hydrocarbures et des Mines (ONHYM) agreed to an eight year exploratory deal with Canada’s East West Petroleum to further shale efforts, with the company taking on a 75 percent stake of the Doukkala Block, southwest of Casablanca.

Still, shale progress has been slow and has been made worse by a significant decrease in availability to investment brought on by the global economic slowdown and an increasing domestic budget deficit. The country’s spending drove the deficit to a ten year high as the government offered significant food and fuel subsidies to help calm a growing protest movement inspired by a broader regional reform campaign. While the spending and a new constitution passed by a public referendum in June, followed by answered calls for early parliamentary elections, helped the government escape the sort of movements that toppled leaders in Tunisia and Egypt, it has left the country low on funds when it needs it most.

The country’s economic challenges could worsen still in the coming months as potential investors and production partners to the north become more cautious ahead of an expected slowdown across Europe. While funding has continued for renewable energy efforts with fresh World Bank solar support and the country’s tourism industry, in the form of a $2.5 billion fund from three Gulf States announced last week, further support shale exploration efforts remains elusive and insufficient.

Traditional Alternatives

While government officials and regional analysts remain positive about the country’s long-term shale potential, the high initial costs of the method’s technology and infrastructure will continue to be a stumbling block to greater energy independence and energy development. In the meantime, traditional and renewable energy efforts remain an option for some industry actors. Earlier this month, representatives of the ONHYM began promoting the development of 22 blocks around the country at a hydrocarbons conference held in South Africa, boasting geological similarities between the region and Nova Scotia as selling points. Boasting sizable offshore reserves, Nova Scotia was once adjacent to the Moroccan coast, suggesting the potential for similar findings.

Inspired by such thinking, Australia’s Tap Oil and Karoon Gas have partnered to create Pure Vida Energy to advance oil exploration efforts off the country’s Atlantic coast, according to the Wall Street Journal. Currently seeking $3.9 million to move the effort forward, the partnership has cited geological similarities with the Jubilee field off the coast of Ghana as reason enough to pursue what they believe to be an estimated billion-barrel reserve.

 

Conspiracy Theories and Other Tales, Vol. 1 – Papandreou and the EU Duo

While the presence of conspiracy theories in the public sphere is hardly anything new, I have noticed a distinctive uptick in unusually fantastic re-tellings of events these past few months. Maybe its just the fact that I am living abroad or that the last eleven months of been so full of change at light speed, that people struggle to cope with the wealth of new realities that they are willing to consider just about anything. Usually, the theories have to do with some convoluted explanation about 9/11 being an inside job, but more and more I am witnessing a new wave of explanations for the region’s current events. Some are a stretch and others simply too out of orbit to believe that anyone could, well, believe. Still, they are nothing if not interesting, not least for the common threads that unite so many – the common villains, motivations and goals. I will reserve a section of this site for those stories, to be retold as I hear them. To be clear, I am not above admitting that the far-fetched does not mean impossible. Clearly, the last few months have shown some conclusions driven by suspicion to be true, but for now I will print the ones that stand out the most – the tales of the times.

The first of these was relayed to me at a dinner by an Italian business student in town for interviews, shortly after the appointment of a new government in Greece. The talk fell to figuring out what finally drove George Papandreou from office, with most agreeing that it was his last minute decision to submit the EU bailout plan to the country’s first public referendum in four decades. That, it seemed, was the last straw, angering heads of state across the community, sending borrowing rates soaring and generally adding a fresh sense of panic to the whole situation. The referendum idea last about 48 hours during which time the opposition in the Greek parliament balked at the idea and came around to accepting the EU-backed plan of funding and spending cuts and Papandreou yanked the idea before announcing his own exit from government, bringing an end to a lengthy political dynasty in Greece.

But, the Italian student volunteered, didn’t it make more sense that Papandreou’s referendum proposal was all part of a larger scheme to force the hand of his political opposition to get behind the unpopular EU plan? Wasn’t it more likely that he had plotted with France’s Sarkozy and Germany’s Merkel to sacrifice a political career that was already doomed by circumstances and pitched the referendum knowing that he would be out on his backside regardless of what happened soon enough?

No, I replied – I never thought of that. At all.

He continued, the referendum was never meant to see the light of day but Papandreou knew that if he wanted to get this passed by the deeply divided parliament and the increasingly angry crowds in the streets, he would have to force their hand – yanking their support for it by offering a lengthy and likely disastrous public forum that would prolong economic change and possibly even delay the outside funding needed to keep the country afloat into the next year. This, the student continued, was a plan hatched by Papandreou, Merkel and Sarkozy to get the opposition to pick the lesser of the two evils, adopting the plan and moving forward towards an appointed, technocrat government. After all, they all apparently reasoned, Papandreou was the owner of the country’s current predicament so he would be on his way out the door soon enough – why not put his likely exit to good use?  The referendum was a ruse and according to the visiting student, it worked.

I do not doubt for one second that there was pressure from forces beyond Athens to get the country to move in a particular government – the newly appointed government’s ties to the community and other global financial institutions certainly suggests as much. However, a trio of EU plotters seems a little difficult to swallow just now. I welcome anyone who can pick this particular theory apart or add some support for it.

Photo: The Guardian

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Euro Panic – They Didn’t See It Coming?

I used to find myself amused at the small stores around Barcelona and Malaga that used to list prices in Euros and then the now defunct peseta below, imagining the older residents of the neighborhood deciding that adopting a new currency after so many years of another was just too much effort. After all, this was years after the introduction of a European currency, meant to unite the 17 member states that had signed on to the experiment under a single economic policy. Were they really waiting for a return of the peseta or could they just not muster the enthusiasm for this great European project? Over the past few weeks, I’ve started to see some wisdom in the actions of these smaller shops as the reality of a broken or drastically altered Euro becomes more of a reality that anyone involved ever hoped it would be. Banks in the UK are running war games to see how hard they would be hit if the Euro collapsed – not if, but how much of a dent it would leave. Heads of state are having little luck calming voices of calamity from even within their own parties. Euro-skeptics are now being hailed as prophets who saw the ill of the continent’s ways as Euro Romantics, as Paul Krugman has coined them, rushed headlong into certain economic disaster.

Google ‘The end of the euro’ and you’ll be greeted by a lengthy list of the phrase as decisive statements and pondering aside. The coverage runs from the sadly hopeful to the methodically analytical. The news, they all agree, is not good. Meanwhile, even the best efforts of political leaders from Berlin to Madrid have done little to rebuild any sort of confidence in the currency and really the economic stability of the entire community. Despite new leadership, decisive shifts of power and pledges of pushing through difficult cuts have done little to bolster investor confidence, leaving countries struggling beneath spiking interest rates and a currency that seems to slip against the US dollar with each passing day. Yes, it remains steady considering the storm moving across the continent but losing ten cents against the dollar since January is nothing to dismiss. And finally, Chancellor Merkel crushed any remaining hopes of the ECB stepping in to offer what analysts warn was a last chance effort to stave off the currency’s collapse. To put it simply, this has been a tremendously bad couple of weeks for the dream of a European economic community. To be honest though, I am not sure I see the need for panic when it comes to the trials and travails of the Euro and the economies of member states.

Yes, I see plenty of reason to worry about the inaction on the part of particular heads of state – a week in, interest rates hitting record highs and 23% unemployment and Spain’s new prime minster can not muster the strength to name a finance minister? Sure, their inability or unwillingness to take difficult steps that might doom immediate election chances for the sake of the entire community but as far as the immediate issues facing them, wasn’t it supposed to be like this? This difficult? The idea was to bring together 17 very different economies under singular policies and a single currency and they could not see potential potholes along the road ahead? Its hardly a novel finding that Athens has different spending habits than Berlin, is it? There were always going to be obstacles to full integration and the thought that certain parties would bail out of the ship at the first sign of a wave seems a bit of an overreaction. To be clear – this is a hell of a challenge ahead but one I am naïve enough to think that the early proponents of a continental currency would have seen coming.

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Fracking Europe – Spanish Edition

Joining similar efforts to the south, Spain’s Basque Country region have announced an investment partnership with European and U.S. companies to help explore the area’s shale potential over the coming year.

Following the positive results of fourteen test wells drilled in the region, the Basque president announced a plan to initiate a series of exploratory wells in the region meant to help the region access an estimated 200 trillion cubic feet of free and absorbed gas; enough to supply the country with reserves for five years or the Basque region for 60 years. Funded by an initial $100 million investment, the project will be split between three significant actors, including Basque Energy with 42.8 percent, Texas’ Heyco with 21.8 percent and Cambria Europe with the remaining 35.4 percent.

Planned for 2012, the two appraisal wells will reach upwards of 15,000 ft into the dense Cretaceous Valmaseda formation, which presents a favorable consistency of shale and dense sand for the necessary hydraulic fracturing process.

Touted as a tool for greater energy independence and sustainability both locally and nationally, the Basque shale project is the second of its kind in Spain, joining California’s BNK who launched their respective effort in the Castille and Leon region earlier this year. BNK took on 234,000 acres in the central region, with the agreement that they will conduct a geological analysis during the first year and drill two wells in year two, three and four, with three wells promised for year five. The acquisition builds on earlier investments in the region including 61,470 acres in the Northern Spanish region of Cantabria.

Although shale projects and the necessary hydraulic fracturing have elicited government and public protests as the practice spreads across Europe, these worries have not manifested themselves in any significant way in Spain. Facing a precarious economic landscape and heavy dependence on foreign energy resources, novel and unconventional approaches to energy generation have been welcome in the Southern European country, especially as alternative resources have suffered as a result of cuts in research spending and subsidies.

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Eurobonds – An Inevitable Conclusion?

Aside from the dismal showing of German bonds this morning, the story of the day appears to be the unveiling of EU President José Manuel Barroso’s proposed economic policy suggestions for how to pull the community out of the current downturn. As outlined in the Guardian this afternoon, the proposals amount to:

1. All 17 euro area countries would send their draft budget plans to the Commission by 15 October each year.
2. The Commission be able to request a new draft budget if the original showed serious divergences with commitments made by member states.
3. The Commission carry out closer monitoring of Member States under its ‘Excessive Deficit Procedure.’
4. The Commission would have the right to decide on enhanced surveillance of member states when financial stability is threatened.
5. The European Council could recommend to a Member State that it requests financial assistance.
6. All euro area Member States would be required to set up independent fiscal councils, and prepare budgets based on independent forecasts.

While Barroso’s pitch was weighed down by early resistance out of Berlin, it really seems like all of the points he made were inevitable conclusions of Euro proponents’ plans for community economic integration. Sure, they are coming earlier than expected and forcing more than one head of state’s hand in the matter, but greater transparency and reporting seems like a natural progression of integration plans for the community and really, in line with what I understood leaders like Merkel to be demanding more of out of Athens and Rome. Critics have pointed to a loss of economic sovereignty in the face of greater oversight from fellow member countries, but unless I missed something along the way, doesn’t an EU community of shared policies requires at least a level of lost independence in favor of the health of the larger community?   I understood that to always be part of the plan.

Which leads me to the other big confrontation of recent days – the viability of a Eurobond for member states. Sure, it would mean more short-term benefits for those countries in the most need of assistance and require the most from the countries that have kept things in order. But like the Barroso’s proposals listed above, the bonds seem like a natural evolution or endpoint for the community’s economic integration.

Again – yes, they are coming earlier than expected but if a tool that will eventually be a part of the economic community could help strengthen fellow member states in a time of crisis, why not adopt them earlier than later. Resistance from Merkel and Sarkozy is certainly understandable as it allows a level of acceptance of economic misdeeds, but if eventually, why not now? And if they insist on holding out until a more ideal time, how good do things have to be before they can be considered? Or how bad?

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