26 June 2011

Why Greece Will Likely Default

Few people wish to see Greece defaulting on its debt obligations.

Greece will probably avoid a default now, but it will likely default eventually.  It is only a matter of time.

When a country has difficulties in meeting its debt obligations, it will typically try to negotiate with its creditors to accept a reduction in the principal amount or in the interest payable and/or a postponement of repayment of principal or payment of interest.

Restructuring the existing debt is not enough to nurse a country back to health because restructuring alone does not generate cash flows needed to service the restructured debt.  So the country devalues its currency in order to stimulate exports and encourage inward tourism and inward capital inflows.

Let's take a look at Greece.

Greece is a member of the European monetary union.  The other members of the European monetary union do not want Greece to default because they are afraid of the consequences to the euro, their banks and their economies.

Together with the IMF, they will try to rescue Greece.  They have to be very careful because restructuring Greece's existing debt may trigger a default.

They will provide financial assistance to allow Greece to meet its immediate debt obligations.

How will Greece meet its debt obligations in the future?

As a member of the European monetary union, Greece does not have its own currency that it can unilaterally devalue.

Worse is that one of the conditions of the financial assistance is that Greece must introduce fiscal austerity measures (increasing taxes and reducing spending) and privatise government-owned enterprises.

Fiscal austerity will bring about hardship to the middle and lower income groups.

Fiscal austerity programmes will likely bring about economic slowdown, further reducing tax collection and Greece's ability to meet its debt obligations.

Privatising government-owned enterprises may result in upfront cash flow to the government, but it will be at the expense of future cash flow.  It may prove to be difficult to find buyers for assets that are located in Greece and are dependent on the Greek economy to generate and maintain a reasonable level of revenue.

Who will suffer?

The Greek people, certainly.  The common people.

The (mainly German and French) banks and (mainly European) private investors which hold Greek government bonds.  If the capital base of these banks is severely diminished, their ability to continue their ordinary business of lending may be impaired.  The economies of the European Union will be affected.

Other banks may stop transacting with the banks that hold, or are believed to hold, significant levels of Greek government bonds, because no one really knows how badly affected the counterparties are.  The domino effect takes over.

If not handled properly, the contagion may spread to the rest of the world.

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Updates

12 July 2011

Dutch finance minister Jan Kees de Jager said that Eurozone finance ministers were open to the possibility of allowing a selective debt default by Greece.

Any proposal that penalises existing investors which do not participate — for example by threatening a hard default or by changing the tax or legal status of the residual bonds — may result in a selective or restricted default.  This in turn may trigger insurance claims on Greek government debt.


21 July 2011

Dutch finance minister Jan Kees de Jager said that neither France nor Germany would prevent Greece from partly defaulting on its debt.

European Central Bank, which had strongly opposed a Greek default, may accept a default.

Member countries of the Euro area announced a rescue package for Greece, comprising €109 billion in official financing and €37 billion from the private sector to roll over maturing debt.


22 July 2011

Fitch Ratings Inc. said that the rescue package package for Greece would put the country in restricted default.


25 July 2011

Moody's Investors Service cut Greece's foreign and local currency bond ratings from Caa1 to Ca, just one notch above what is considered default.

It warned that the rescue package implied a temporary sovereign default.  The likelihood of a distressed debt exchange and a default on Greek government bonds was virtually 100 per cent.

It warned that Greece still faced medium-term solvency challenges and there were significant risks in implementing the required reforms.  From its experience, countries that defaulted often defaulted again.

25 June 2011

Rest Days for Domestic Workers

Singapore should consider legislation that makes employers give their domestic helpers a rest day every week, according to Minister of State for Community Development, Youth and Sports Halimah Yacob.

She was commenting on the new International Labour Organisation convention that was approved last week in Geneva to grant domestic workers greater protection from exploitation.

Singapore was among 63 countries which abstained from voting on the convention.  Ministry of Manpower has said it would sign the treaty only when it was sure it could implement it here, and that it would continue to review the rights and responsibilities of employers and workers.  Under the convention, domestic workers should not be treated differently from other workers.

Let's examine the arguments.

Domestic workers should not be treated differently from other workers.

The very nature of the work of a domestic worker is different from that of other workers.

Domestic workers need to rest and should not be made to work excessive hours that could affect their health and well-being.  Having weekly rest days may help to minimise some issues such as stress and overwork.

In many if not most households, domestic workers are not required to work 24/7 and have several opportunities to rest during the day.  There are of course some errant employers who believe in getting their money's worth, and they want their domestic workers to be continuously working 16 hours or more per day.

If it is not possible to give a domestic worker one rest day per week, she should be compensated in cash.

Most domestic workers are currently employed on the basis of one rest day per month.  If it becomes mandatory to grant them one rest day per week, does this mean that their remuneration will be reduced accordingly?  If their remuneration remains the same, it means that those domestic workers who do not get weekly rest days will get a salary increase of almost $100 per month.

If one rest day per week becomes mandatory, it becomes the norm.  Then, it will be difficult for employers to find any domestic worker who will be prepared to forgo the weekly rest day even though she will be compensated for it.  Even if a domestic worker agrees contractually to forgo the weekly rest day and be compensated for it, there is a strong likelihood that she may change her mind during the term of her two-year contract, leading to friction between the employer and the domestic worker.

The rest day need not be on a Sunday; employers can choose a day that suits their routine.  Household work is not so complex that it cannot be organised to enable domestic workers to take a day off every week.

This statement is incomprehensible.

For almost all employers, the issue is not whether the rest day falls on Sunday.  If an employer of a domestic worker works five days or five and a half days a week, he/she will have to take over the domestic worker's work on her rest day.  This is not an issue if the main duty of the domestic worker is to look after his/her young children because the employers (the children's parents) can and should spend time with their children.  Neither is it an issue if the main duty of the domestic worker is to attend to housework inasmuch as most types of housework may be put on hold for one day in a week.  But what if the domestic worker is employed primarily to care for the elderly, especially if they are bedridden?

It is only logical that most domestic workers want to have their rest days on Sundays.  It is rather pointless for a domestic worker to have a rest day if her domestic worker friends do not also have rest days on the same day of the week.

Employers can consider hiring part-time help on their maids' rest days.

There are about 200,000 domestic workers in Singapore.  According to a recent survey, 25 per cent of them care for the elderly.  If these domestic workers are given weekly rest days, about 50,000 individuals are required to provide part-time help on the rest days of these domestic workers, especially if most if not almost all domestic workers want to rest on the same day of the week i.e., Sundays.  To what extent is such part-time help available?  What will these part-timers be doing during the rest of the week?

If weekly rest days become mandatory, many families may find it impossible or impractical to have their bedridden elderly parents or grandparents live with them.  Does the Government plan to set up more nursing homes?

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Notes

1. Consider Law to Give Maids a Day Off Every Week: Halimah The Straits Times (20 Jun 2011).

08 June 2011

Flood Alert System and Lessons for Nuclear Power Preparedness

Tanglin Mall and St Regis Residences, both located along Orchard Road, were flooded following a short period of intense rain on 5 June 2011.

As part of its flood warning system, Public Utilities Board has sensors installed in drains and canals.  The sensors monitor the water level every two minutes when it rains, and every ten minutes during dry conditions.  When the water level reaches the 75 per cent mark (which indicates moderate flood risk) or 90 per cent mark (which indicates a high flood risk), the sensors send SMS alerts to the owners of the buildings in areas prone to flooding.

It appears that intense rain on 5 June caused the water level to rise so fast that it bypassed the trigger points of 75 per cent and 90 per cent, according to PUB.  As a result, the SMS alerts were not sent.

It is not clear why the system was not designed to trigger an SMS alert when the water level exceeds the 75 per cent mark or the 90 per cent mark at the time of measurement or monitoring.  For example, what triggers the alert at the 75 per cent mark should be the water level being at 75 per cent or higher (or water level not less than 75 per cent, which is the same thing) at the time of measurement or monitoring.

PUB has now modified the system so that it will send SMS alerts if the water level rises beyond the 100 per cent mark.

It is not clear why the system was not originally designed to trigger another SMS alert when the water level reaches or exceeds the 100 per cent mark, which is when water overflows from the drain or the canal.

PUB will also look into reducing the two-minute interval for monitoring the water level when it rains.  The two-minute interval was based on past records (presumably of the rate at which the water level rose).  What happened on 5 June was that the water level was rising about three to four times as fast as that in its worst-case scenario, according to PUB.  Ideally, the interval for monitoring the water level should be dynamic, shortening as the water level rises.

PUB should also ensure that the sensors are able to trigger SMS alerts not only when the water level has reached any predetermined mark but also (more importantly) when the water level has risen past any predetermined mark since the last time the water level was measured or monitored.  Otherwise, whether the marks are set at 75 per cent, 90 per cent or 100 per cent may not make much difference to the efficacy of the SMS alert system.

The flood was distressing and painful for everyone affected — the occupants of the shop space, the building owners and the insurers.

Now, suppose it was not a flood, but a nuclear accident such as that at Fukushima Daiichi.

I am convinced that Singapore should never have a nuclear power plant.

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Notes

1. Public Utilities Board ("PUB") is Singapore's national water agency under Ministry of the Environment and Water Resources.

2. PUB Tweaks Flood Alert System TODAY (8 Jun 2011).

07 June 2011

Singapore as a Global Gaming Superpower

With the opening of two casinos in Singapore last year, the country has emerged as Asia's hottest new gaming destination and Asia has cemented its place as a major betting market.

In barely one year, the two casinos collected gaming revenue of US$5.1 billion in 2010, and are forecast to collect US$6.4 billion this year.  This may result in Singapore surpassing Las Vegas, for which the gaming revenue has been projected at US$6.2 billion this year.

Singapore has become Asia's second global gaming superpower after Macau.

It is understandable if Singaporeans are pleased or proud of their nation's status as a global financial centre, or a leading manufacturer of hard disk drives (some years ago), or a reputable manufacturer of deep sea semi-submersible drilling platforms etc.

But, a global gaming superpower?

Is it an achievement?

Gaming revenues, after all, are the net amounts of money that casino patrons lose to the casino operators.

Apart from generating some tax revenue, creating jobs as croupiers (which may or may not be filled by citizens) and giving some business to taxi drivers and food and beverage outlets, it's not clear how casinos help the country to progress and upgrade.