There is a beguiling argument that life for outside the eurozone wouldn’t be so bad. Sure, the immediate economic pain would be severe, but a new drachma, coupled with debt default, might deliver a whoosh of relief in time. Isn’t history full of countries that have devalued their way out of crisis by generating an export boom? Didn’t Argentina recover that way when it abandoned its currency peg to the US dollar in 2002?
Taken to its logical extreme, this argument says the real threat to the survival of the eurozone is that Greece leaves and prospers. Come the next crisis, other strugglers might opt to quit, dumping their debts as they go.
If this idea sounds far-fetched, Jim Leaviss on M&G’s bond team would agree. He makes an excellent case that Greece isn’t Argentina, not by any stretch.
Sure, there are parallels between the causes and symptoms of distress – an overvalued currency, unsustainable debts, shoddy tax collection, dodgy official statistics and high unemployment. But an Argentinian-style cure – massive devaluation and conversion of bank accounts – is unlikely to produce the same recovery in Greece, thinks Leaviss.
Argentina was lucky with its timing of its devaluation, he argues. Global trade boomed after 2002 as the US Federal Reserve cut interest rates after the 9/11 terrorism attacks and China was welcomed into the world economy. A newly-competitive Argentina increased exports by 120% between 2002 and 2006.
It’s hard to imagine Greece copying that performance. Tourism is already 18% of the economy, so probably can’t double as it almost did in Argentina. The poorer quality of the land makes an agricultural boom harder. Greece’s biggest export (surprisingly) is refined petroleum, which is priced in dollars. And its biggest export market is Germany – “possibly problematic post a debt default”, notes Leaviss dryly.
His common-sense conclusion is that countries that thrived after devaluation (Canada and Sweden are other examples) had trading partners that were growing strongly. “Greece does not have that luxury, nor an economy that can respond quickly to increased export competitiveness,” concludes Leaviss. Note, too, that the Argentinian revival looks less impressive these days with real growth at just 0.5%. They’re all good points, even if life inside the eurozone for Greece is also hellish.
A fair wind for Infinis
Here’s an investment oddity: a company with a mammoth dividend yield of 9.5% and an intention, which most of its City followers think credible, to keep annual payments to shareholders rising in line with inflation, at a minimum.
What’s the catch with Infinis Energy? There are two. First, half its business is onshore wind farms and new energy secretary Amber Rudd supposedly hates the things; yesterday she said she would honour the Conservatives’ pledge to kill current subsidies for onshore wind a year early. Second, the dominant shareholder is Guy Hands’ Terra Firma, which has been saying for six months it might sell its 68.6% stake.
These are serious worries – thus the one-quarter decline in Infinis’s share price since flotation in 2013.
But perhaps Rudd’s war on onshore subsidies is not as damaging for Infinis as it seems. She plans to grant a “grace period” to allow projects with planning permission to proceed. This is not a token concession either. She’s talking “up to 5.2GW” of new on-shore wind capacity, which could mean another 3,000 turbines in the UK, on top of the 5,000 already turning (usually). Infinis’s two big new projects in Scotland, adding 109MW to the company’s current 274MW, should still be OK.
Admittedly, there’s a question mark over what Infinis does thereafter. A new contracts for difference subsidy regime arrives in 2017. Will onshore wind get a fair crack? In theory it should: onshore wind is cheaper than offshore variety, letalone grand projects like the Swansea Bay tidal lagoon. Plus, the UK’s renewable energy targets will almost certainly rise after the Paris climate summit in September. On the other hand, it’s hard to know what the government’s plan to give local communities “the final say” on windfarm applications will mean in practice.
The other half of Infinis is unaffected – it extracts gas from landfill sites to generate electricity. There is little growth in that business since nobody is building new landfill sites, but the cashflows look extremely solid. They are the main source of comfort on the dividend.
Cautious investors, understandably, would steer clear of a stock where the main shareholder is eyeing an exit. But, if you think Rudd has thrown only a medium-sized spanner in the turbines, Infinis is an intriguing stock at that dividend yield.
Fitbit for the future?
Fitbit makes profits – net income was $132m last year – so it came to market in better shape than some Wall Street technology flotations. Even so, a 50% surge in the share price on day one, carrying the company’s market value to $6bn, is hard to fathom.
The company leads the market for fitness trackers, which probably aren’t a fad. Fitbit is even able to shift its top-of-the-range versions at $250 a pop. But competitors are arriving in droves to this “wearables” market, from Apple to Google to Chinese tech firms. It’s hard to believe profit margins will continue to be so good forever. Fitbit is now worth about six times this year’s expected revenues. Too much, too soon.