24/2/19: Europe of Divergence: Euro and the Crisis Aftermath

A promise of economic convergence was one of the core reasons behind the creation of the Euro. At no time in the Euro area history has this promise been more important than in the years following the series of the 2008-2013 crises, primarily because the crisis has significantly adversely impacted not only the 'new member states' (who may or may not have been on the 'convergence path' prior to the crisis onset), but also the 'old member states' (who were supposed to have been on the convergence path prior to the crisis). The latter group of states is the so-called Euro periphery: Greece, Italy, Spain and Portugal.

So have the Euro delivered convergence for these states since the end of the Euro area crises, starting with 2014? The answer is firmly 'No'.

 The chart above clearly shows that since the onset of the 'recovery', Euro area 8 states (EA12 ex-periphery) averaged a growth rate of just under 2.075 percent per annum. The 'peripheral' states growth rate averaged just 1.623 percent per annum. In simple terms, recovery in the Euro area between 2014 and 2018 has been associated with continued divergence in the EA4 states.

This is hardly surprising, as shown in the chart above. Even during the so-called 'boom' period, peripheral states average growth rates were statistically indistinguishable from those of the EA8. Which implies no meaningful evidence of convergence during the 'good times'. The picture dramatically changed starting with 2009, starting the period of severe divergence between the EA8 and EA4.

In simple terms, the idea that the common currency has been delivering on its core promise of facilitating economic convergence between the rich Euro area states and the less prosperous ones holds no water.

9/1/19: Banca Carige & the Promise of Euro Banks Insolvency Resolution Regime

Italy has been the testing ground for the European regulatory framework for resolution of insolvent banks for several years, running. In all past sagas, the framework has been shown to fall short of protecting the taxpayers from the risk contagion loops that dominated the banking sector insolvency resolution regimes during the Global Financial Crisis. And the latest problem bank, Carige, is no exception.

Per latest reports (https://www.ft.com/content/b9fe3384-1427-11e9-a581-4ff78404524e) the Italian Government is pushing toward nationalization of the troubled lender in need of at least EUR400 million in fresh capital - capital it can't raise in the markets. The Government is also set to guarantee new bonds sold by Carige.

Carige assets of ca EUR25 billion are set against current capitalization of just EUR84 million. Per V-Lab data, Banca Carige is suffering from a massive spike in liquidity risk, with illiquidity index (a measure of liquidity risk) spiking to its highest levels in more than 21 years:

In late December, the ECB has taken the unprecedented step of placing Banca Carige in temporary administration, with administrators given three-month mandate to reduce balance sheet risks and arrange sale/merger/takeover of the bank. As a part of this work, the administrators are trying to review the Italian Government guarantee (issued in December) that led to the Italian deposits guarantee fund (FITD) purchasing EUR320 million of Carige's bonds.  In a notable development, the purchased bonds are potentially convertible into equity in an event of Carige's capital levels falling below regulatory threshold. In other words, these are CoCo-type bonds, implying the state fund is carrying the entire risk of Carige's future capital breaches. Beyond this, there are on-going talks with the Government on the possible SGA SpA (state-owned bad assets fund) purchase of some of the Banca Carige's non-performing assets. As an important aside, the existent bondholders in Carige are not subject to the bail-in rules the EU has put forward as the core measure for reforming banking sector insolvency regime.

These guarantees, buy-ins into Carige's bonds, lack of bondholders bail-in, and potential purchases of the bank's troubled loans constitute a de facto bailout of the bank using sovereign (taxpayers) funds. In other words, the European banking insolvency regime core promise - of shielding taxpayers from the costs of banks bailouts - is simply an empty one.

17/6/18: ECB's Shift of Gears Presents Another Set of Risks

My article for Business Post from Friday covering ECB's latest announcements on QE and interest rates: https://www.businesspost.ie/opinion/ecbs-shift-gears-presents-another-set-risks-418797.

28/9/17: Schauble: A Requiem For Austerity Finance

My comment for yesterday’s NY Times on Wolfgang Schäuble’s departure from the Finance Ministry post: https://nyti.ms/2k5N2Er 

22/5/17: Eurogroup and Greece: Wrestling Defeat from the Claws of Victory

Today's Eurogroup meeting on Greece ended in no agreement and extends the current tranche negotiations into June 15, the date of the next Eurogroup meeting.

For the background:

• Greece is an economy brought to its knees by the Eurogroup and the ESM, as detailed in a range of facts well-summed up here: http://blogs.lse.ac.uk/eurocrisispress/2017/05/01/greece-any-better-times-or-more-pitfalls-ahead/; and
• Greece is now back in a recession, with dire consequences for both, the economy and the Greek society, and for fiscal targets and programs previously agreed by the Eurogroup: http://trueeconomics.blogspot.com/2017/05/18717-greece-in-recession-again.html.

The key sticking point so far is the scheduling of future primary surpluses (budgetary surplus before the debt servicing costs are factored in). The Eurogroup insists on these surpluses running at 3.5% of Greek GDP for the first 5 years following 2018, declining to 2% or 2.2% (depending on the version of the draft agreement) for 2023-2060. 

In very simple terms, such commitments are absolutely bogus (and dangerous). They are bogus because there is absolutely no way anyone can project growth rates out to 2060 from today that can be in any way reasonably accurate to predict primary surpluses. They are dangerous, because they will shackle Greek governments to running buffer funds to compensate for possible recessionary and non-cyclical shocks to the primary surpluses. These buffers will imply underinvestment within the Greek economy (public investment) over the long term. Which, of course, will damage the Greek economy and increase the risk of non-compliance with the deficit rules.

Here is how unrealistic the current proposed targets are. Consider, first, IMF projections (April 2017 data) for primary surpluses over the next 5 years (2018-2022). Remember, Greek target (grey line) is 3.5% for that period:

With exception of Italy, no other advanced euro area economy comes even close to the proposed target. And no one is making a case that Italy running these surpluses is somehow consistent with structurally strong growth expectations over the period.

Now, consider past and present performance, based on 10 years windows. For 10 years window, Greek target surplus is 2.85% per annum:

The view is a bit brighter. 

In the 1990s, two countries managed to run surpluses at or above the target set for Greece forward: Belgium and Ireland. Both countries were recovering from substantial fiscal crises of the late 1980s-early 1990s.  But, unlike Greece today, both countries benefited from exogenous shocks that boosted significantly their surpluses and growth: Belgium gained substantial income transfers from growth of the EU institutions, and Ireland gained from a large scale FDI boom. Neither country needed to run large scale public investment programmes financed from own (internally-generated) funds. 

In the 2000s, Belgium continued to run large surpluses and it was joined in this by Finland. Belgium surpluses drivers remained the same, while Finland carried out substantial fiscal consolidation in the wake of the early 1990s crisis timed perfectly to coincide with rapid economic growth in the economy. 

In simple terms, no advanced euro area economy has managed to run surpluses expected of Greece at the times of adverse economic growth conditions or immediately after a major recession.

As I noted in the earlier post on the Greek economy (see http://trueeconomics.blogspot.com/2017/05/18717-greece-in-recession-again.html), the state of Greek economy has been so highly uncertain over the last few years, that any projections 3-4 years out from today are simply an example of a delirious wish-for-thinking. In this environment, setting targets out to 2060 is absurd, and dangerous, for it commits Greece to targets that may or may not be to the benefit of the Greek economy and sets up the euro area fiscal policy architecture for a failure at the altar of extreme conviction in technocratic targeting. 

3/1/17: Euro growth greets 2017 with a bit of a bang

December marked another month of rising economic activity indicator for the euro area. Eurocoin, a leading growth indicator published by Banca d’Italia and CEPR notched up to 0.59 from 0.45 in November, implying annualised growth rate of 2.38 percent - the strongest growth signal in 67 months. It is worth remembering that in 2Q and 3Q 2016, real GDP growth slumped from 0.5% q/q recorded in 4Q 2015 - 1Q 2016 to 0.3% in Q2-Q3 2016. Latest 4Q 2016 reading for Eurocoin implies growth rate of around 0.47 percent, slightly below 1Q 2016 levels, but above the 0.31% average for the current expansionary cycle (from 2Q 2013 on).

Charts below illustrate these dynamics

Cyclical trends in growth rates currently imply ECB policy rate mispricing of around 2.0-2.5 percentage points (see chart below).

Meanwhile, inflationary dynamics, based on 12mo MA, suggest current monetary policy environment providing only a weak support to the upside.

The growth dynamics over the last 12 months are not exactly convincing. Even at currently above 2Q and 3Q forecast for 4Q 2016, FY 2016 growth is coming in at 1.58% annualised, against FY2015-2016 growth of 1.65%. Overall, this environment is unlikely to drive significant changes in ECB policy forward, as Frankfurt will continue to attempt supporting growth even if inflation ticks up to 0.4-0.5% q/q range for 12 months moving average basis.

15/5/16: Don't Rush the Cheers for Eurozone Growth, Yet

Remember record-busting 0.6% preliminary flash estimate of the first estimate GDP growth figure for Euro area released back in April? Well, it sort of was true, sort of...

Eurostat now puts 1Q 2016 growth at 0.5% q/q in its updated estimate released today - 0.1% lower than the April estimate. This figure is tied jointly for highest q/q growth figure since 1Q 2011 when it hit 0.8%.

Sounds good? Brilliant - the euro area outperformed both the U.S. and the UK. But when one looks at annual rates of growth... things are not as shiny.

In annual terms, growth rate actually fell in 1Q 2016, from 1.6% in 2Q 215 through 4Q 2015 to 1.5% in 1Q 2016. You won't be jumping with joy on that. And as the euro area lead growth indicator, Eurocoin suggests, rates of growth have been declining over the last three months through April 2016, dropping from cyclical high of 0.48 in January 2016 to a 13-months low of 0.28 in April 2016:

There is a strong smell of smoke from the Eurostat figures. Demand side of the economy is apparently booming. Despite the fact that retail sales are tanking:

Meanwhile, external trade is also underperforming (on foot of euro appreciation from November 2015 lows against both the US dollar and British pound):

Euro bottomed out at around 1.057 to the dollar at the end of November, and steadily gained against the USD every month since, with current valuation around 1.13-1.14 range. This hardly supports European exports to the U.S. Controlling for volatility, similar trend is against British Pound. About the only thing going the euro way today is yen and it is immaterial to the Euro area’s economy.

So euro zone economic growth appears to be loosing momentum since the start of 2Q 2016. And there are both short term drivers for this and long term ones.

Short term drivers, as outlined above suggest that current risks environment appears to be titled to the downside:

• Eurozone Composite Output Index by Markit posted 53.0 in April against March 53.1. Statistically-speaking, the rate of growth effectively remained static. 
• German Composite PMI was at 53.6, which is an 11-months low, French Composite index reading was 50.2 (barely above the 50.0 line, but still at 3mo high), while Italian Composite PMI in April came in at 53.1, also 2 months high. 
• Importantly, the euro zone PMI indices have been moving out of step with the Global PMI readings. In April, while eurozone PMI declined marginally compered to the end of 1Q 2016, Global PMI reading marginally picked up, rising from 51.5 in March to 51.6 in April. 
• The ongoing stagnation in France continued, while solid expansions were noted in Germany, Italy, Spain and Ireland.
• Developed markets saw all-industry output rise at the fastest pace in three months during April. However, the rate of increase still one of the weakest registered during the past three years. Growth remained only modest in both the US and the UK (UK growth slowed to its weakest pace since March 2013). This puts pressure on demand for eurozone exports and, in turn, pressures profit margins and investment.
• Given 1Q growth estimate at 0.5% (q/q growth) from the Eurostat, current level of Eurocoin suggest quarterly growth slowdown to around 0.4%. 
• Ifo’s Economic climate indicator for the Euro area has now been on a clear declining trend since mid-2015 and is now at its lowest levels since 1Q 2015 and second lowest reading in two-and-a-half years.
• In Germany, consensus estimates put gross domestic product growth at 0.3 percent in the current quarter and 0.4 percent in 3Q and 4Q, with full year growth of around 1.5 percent.

My view: we might see 2Q growth coming in at 0.3-0.4 percent, if April trends continue into the rest of 2Q. Overall, I expect 2016 growth to be around 1.4-1.5 percent which is just about to the downside on current consensus estimate of 1.5 percent.


Long term drivers for structural euro zone growth weakness: Even with positive 1Q 2016 print on growth side, it is fairly clear that euro zone lacks serious growth catalysts.

Everyone is talking about Brexit referendum and the renewal of the Greek crisis as key threats. Put frankly - this is a smokescreen. When it comes to longer term euro zone growth prospects both are irrelevant. Growth within the euro area has nothing to do with the UK. And Greece has been effectively removed from the markets and economic agents' considerations - the country is no longer commanding any serious media attention (with markets fatigued by the never-ending 'crises'). With ESM / EFSF /ECB now seemingly the sole bearers of Greek debt (with IMF likely to take back seat in the Bailout 3.0 as per http://trueeconomics.blogspot.com/2016/05/11516-71-steps-guide-to-greek-crisis.html) Greek funding issues and any risk of a default are unlikely to trigger Grexit. Put more directly, even if Greece were to exit the Euro, no one will bat an eyelid over such an event.

Meanwhile, the real long term problems for the euro area are:

• Capex remains subdued across the entire euro area, including Germany, Italy, France. 
• Fiscal policy is currently largely neutral and it is hard to see how the euro area can find any significant capacity to increase fiscal spending. 
• ECB stimulus is working in the financial markets, but not on the ground - there is still too much debt and too little prospect for a return on capital. Quality borrowers are not rushing to take on loans for capex. And the banks are not too eager to lend to borrowers with legacy leverage problems. 
• Eurozone banking is still a mess: capital and loans restructuring is sporadic, rather than systematic, negative rates taking a bite out of margins, but even if this headwind is taken out, markets volatility is not helping. 

And there are even bigger structural headwinds:

1. Lack of agility in the structurally over-regulated and sclerotic economy: technological innovation is weak, adoption of technological innovation is weak, labour force quality is deteriorating, so productivity growth has collapsed. Entrepreneurship is weak. Employment is sluggish and of deteriorating quality. That’s supply side.
2. Demand side is improving due to a short term boost from the post-Great Recession cyclical recovery. But, legacy issues of debt across corporate and household sectors and public finances are still present.
3. On financial side: banks-intermediated funding model for capex is a drag on growth and there is zero momentum on equity and direct debt issuance sides. Even with ECB going into another round of TLTROs, issuance of new bonds has spiked primarily because of larger corporates issuance, not because of market deepening.
4. On policies front, there is total and comprehensive paralysis. EU is malfunctioning, torn apart by crises of European making. National governments have lost capacity to legislate because of delegation of so much decision making to Brussels in the past. Political discontent is rising everywhere. We now have growing proportions of core European countries’ populations - the Big 4s - wanting to reexamine the entire EU.

Europe has been Japanified. And there is little that it can do to avoid this stagnation trap. There is no hope that  fiscal policy can do what monetary policy has failed to deliver - the great hope of Keynesianistas. And with that, both the monetary and the fiscal sides of European growth equation are out. What's left? Endless low interest rates (with a risk of policy error, should Germans rebel against Draghi's uncountable puts) and endless painful quasi-deflating (through low demand) of debt. Aka, pain.

4/2/16: Tear Gas v Lagarde’s Tears: Greece

Here’s Greece on pensions reforms:

Source: https://www.rt.com/news/331265-greece-tear-gas-protet/#.VrN56JItCdA.twitter

Here’s IMF on same:

Note: to watch the video comment by Mme Lagarde on Greek situation, please click on this link: http://www.imf.org/external/mmedia/view.aspx?vid=4739363229001 (answer on Greece starts at 22’:22”). Otherwise, here’s official IMF transcript of it:

“I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side. Equally, no [amount of debt relief] will make the pension system sustainable. For the financing of the pension system, the budget has to pay 10 percent of GDP. This is not sustainable. The average in Europe is 2.5 percent. It all needs to add up, but at the same time the pension system needs to be sustainable in the medium and long term. This requires taking short-term measures that will make it sustainable in the long term.

“I really don't like it when we are portrayed as the “draconian, rigorous terrible IMF.” We do not want draconian fiscal measures to apply to Greece, which have already made a lot of sacrifices. We have said that fiscal consolidation should not be excessive, so that the economy could work and eventually expand. But it needs to add up. And the pension system needs to be reformed, the tax collection needs to be improved so that revenue comes in and evasion is stopped. And the debt relief by the other Europeans must accompany that process.  We will be very attentive to  the sustainability of the reforms, to the fact that it needs to add up, and to walk on two legs. That will be our compass for Greece. But we want that country to succeed at the end of the day, but it has to succeed in real life, not on paper.”

Yep. Lots of good words and then there are those ungrateful Greeks who are just refusing to understand:

1. How can Mme Lagarde insist that there’s a second leg (debt relief) where the EU already said, repeatedly, there is none? and
2. How there can be sustainability to the Greek pensions reforms if there are actually people living on them day-to-day who may be unable to take a cut to their pay? Who's going to feed them? Care for them? On what money? Where has IMF published tests of proposed reforms with respect to their impact on pensioners?

Strangely, Mme Lagarde seems to be not that interested in answering either one of these concerns.

14/7/15: Arrears on IMF & No Samurai Bonds Trigger: Greek Bridge Financing Update

Yesterday, I covered the possible routes to structuring bridge financing for Greece (see this post with today's earlier update). Via WSJ, here is the list of debts coming due over July-August, inclusive of two payments to IMF that are now in arrears (see IMF statement below):

Source: http://graphics.wsj.com/greece-debt-timeline/

And the IMF statement from last night:

A point to note: Greece redeemed the Samurai bonds (Yen 20bn) yesterday. Which, effectively, means it avoided private sector bonds default trigger.

8/7/15: Latest Round of Greece Talks: Smoke, Fire, Grexit

Summit / Eurogroup takeaways:

1. No progress of any variety beyond the usual agreement to have more talks
2. Short term deal 'weighing in' for Sunday is rumoured - effectively a bridge loan based on Greek acceptance of pre-referendum proposals. One of proposals involved a 3-4 months long bridge financing deal (Bailout 2.1) followed by 3-4 year deal (Bailout 3.0). This was rejected by Finland.
3. Any 'possible' new deal being discussed is 2-3 years in duration - a can kicking of weak variety, in other words.
4. No haircuts on debt will be allowed.
5. Sunday - full EU heads summit (not euro alone), which indicates something serious brewing - at least in terms of applying pressure on Tsipras. Also, possible Grexit push. Summit can be 'avoided' if Greece presents an acceptable plan on Thursday. Decision to be finalised on Saturday.
6. Overall, Bailout 3.0 package of measures is now being pushed out to tougher conditionality for Greece than in previous talks.
7. Juncker stated that the EU Commission has prepared a detailed Grexit plan, inclusive of humanitarian aid. Juncker plan also includes balance of payments support scheme for non-euro states with big exposures to Greek banks: Bulgaria, Romania. Big questions are also about Macedonia and Serbia.
8. At least in theory (detailed theory per Juncker) we have the end of 'irreversibility' of the euro (for now - at single state level).
9. IMF is back in the Troika 'Institutions' pairing.
10. No parallel currency discussions - left to Finance Ministers discussions.

My take: Overall, Greek position is now nearly toast. Contrary to many expectations, a No vote did not produce a stronger playing hand for Greece. Possibly because Tsipras failed to deliver any new proposals. Sunday EU Council would be required for a treaty change. This implies two possibilities: haircuts (ruled out) or Grexit. We are leaning toward Grexit, heavily.

The acceleration in Eurogroup and council demands on Greece suggests that prior to the Referendum there was already a strong consensus that Grexit is the preferred direction for further talks.


Serious sidelines:

Italy position is optimistic on the deal, but no debt relief in sight. Still remains hard-line on Greece.

Merkel takes harder stance than anyone else: strikes down bridge agreement: "Bridge financing didn't play any role in our talks tonight." Stance on conditions: "The proposals we are expecting now encompass what we put forward for second programme plus more for third programme." Haircuts: "A haircut is not up for debate. That is a bailout under the treaties and that will not happen." Merkel isn't even keen on discussing ESM programme resumption. Tougher thing still: "The situation has become much worse. I have to take 3rd programme proposals to Bundestag - hence need detail." Which means serious hurdles to cover here.

France is the lead in Greek side support and Hollande is not impressed: "It is true that if there were no agreement, the situation would be serious. Other options would have to be sought."

Spain's Rajoy "New Greek programme will have conditions attached. Will have to be approved by institutions, then Eurogroup, then leaders". Meaningless, surprisingly.

Donald Tusk: "Our inability to find an agreement may lead to the insolvency of Greece and the bankruptcy of its banking system". Says the Greek government is to present its proposals by Thursday, July 9. Juncker put deadline at 8:30 am Friday, July 10. So lots of confusion.

Finland: ruled out Bailout 3.0 for Greece on any terms.

Belgium: Finance Minister Van Overtveldt: "very disappointed" by today's Eurogroup meeting. New Greek Finance Minister made "very good explanation" of situation, but "had no new proposals to show us". "I had the strong impression that everybody really feels the sense of urgency, except the Greek government." His boss: Belgian PM Michel: has “more and more difficulty to understand the logic of Tsipras. On the one hand he says 'we want to stay in the eurozone'. On the other hand, he's not taking any initiative, zero, nothing, to stay in the eurozone.”

Lastly - a link worth reading: http://www.capx.co/the-eurocrats-are-punishing-greece-to-scare-other-countries/

28/6/15: Grexit with Help: Hans Werner Sinn

My favourite Bad Dude of German Economics, Hans Werner Sinn on Greek crisis:

Orderly Grexit is, in my view, still more disruptive and costly to all sides than a facilitated debt writedown and restructuring, while allowing Greece more time and fiscal room for implementing real reforms (as opposed to the currently proposed reforms, which are aimed solely on addressing short term fiscal imbalances).

Truth is - Europe has the means to meaningfully help Greece, as well as other 'peripheral' states, to get back onto growth path consistent with long term sustainability (in Greek case, we are talking about 3.5-4 percent annual growth averaging over a good decade). What Europe lacks is the will.

19/6/2015: Greek ELA and ECB... What's the Rationale?

The price of getting Greece ejected or pushed out of the euro has now risen once again as ECB added to the ELA provided to Greek banks amidst a bank run that is sapping as much as EUR800mln per day.

In basic terms, ECB is allowing lending via Eurosystem to Greek banks to fund withdrawals of deposits. Once deposits are monetised and shifted out of Greek banks, Eurosystem holds a liability, Greek depositors hold an asset and the latter cannot be seized to cover the former. ECB was very unhappy with doing the same for Ireland at the height of the crisis, resulting in a huge shift of ELA debt onto taxpayers' shoulders via Anglo ELA conversion into Government bonds.

But ECB continues to increase Greek ELA. Why? We do not know, but we can speculate. Specifically there can be only three reasons the ECB is doing this:

Reason 1: increase the cost of letting Greece go. If Greece crashes out of the euro zone, the ELA liabilities will have to be covered out of Eurosystem funds, implying - in theory - a hit on member-states central banks. In theory, I stress this bit, this means higher ELA, greater incentives to keep member states negotiating with intransigent Greece. Why am I stressing the 'in theory' bet? Because in the end, even if Greece does crash out of the euro area, ELA liabilities can be easily written off by the ECB or monetized (electronically) without any cost to the member states.

Reason 2: keep Greece within the euro area as long as possible, thus allowing the member states to hammer out some sort of an agreement. In theory, this implies that the ECB is buying time by giving cash to Greek depositors so they can run, in hope that they continue to run at a 'reasonable' rate (at, say, less than EUR2 billion per day or so). In practice, however, this is a very short-term position.

Reason 3: ECB is monetizing Greek run on the banks in hope that Greece does crash out of the euro. Here's how the scheme might work: increasing ELA for Greece weakens Greek banks and, simultaneously, strengthens the incentives for Greece to exit the euro once deposits left in the system become negligible and the economy is fully cashed-in. On such an exit, Greek residents will be holding physical euros that cannot be expropriated by the Eurosystem, and thus Greece can launch drachma at highly devalued exchange rate, while relying on a buffer of cash in euros held within the economy.

I am not going to speculate which reason holds, but I will note that all three are pretty dire.

Take your bets, ladies and gentlemen.

11/6/15: What Markets Are Pricing in Greece-Troika ex-IMF Standoff

Head on collision warning 1: IMF has now left the 'political dialogue' room where Greece and Troika (pardon, Institutions) have been pretending to negotiate a pretence at a solution: http://uk.reuters.com/article/2015/06/11/uk-eurozone-greece-chance-idUKKBN0OR13020150611

Which brings us to the markets.

CDS-implied probability of default for Greece is now at 82.04%, ahead of Ukraine:

But bond markets seem relatively cool:

Which suggests two things:

1. Markets still anticipate a deal; but
2. Markets also push down expected duration / longevity of the deal and, in case of the deal unraveling, they expect lower recovery rates.

This, amidst continued 'warnings' and 'dire warnings' and 'ultimatums' and 'take-it-or-leave' offers and the rest of warring rhetoric is not a good omen for the crisis resolution.

Even Jean-Claude 'The Rubber Chicken of European Politics' Junker seemed to have given his last push to this: http://uk.reuters.com/article/2015/06/11/uk-eurozone-greece-juncker-attempt-idUKKBN0OR23V20150611?mod=related&channelName=businessNews and failed...

15/5/15: Greece on a Wild Rollercoaster Ride

Greece has become a BitCoin of Europe in terms of volatility, and, man, things are soaring and crashing on a daily basis now. Here are three snapshots of Greek Credit Default Swaps:

End of last week:

Mid-week this week:

Closing yesterday:

Meanwhile, the entire financial system of Greece is now on a weekly timeline courtesy of the ECB approvals of ELA:

One move by ECB down on ELA or laterally on collateral requirements, and the house of cards can come crashing.

Note: Sources: CMA and @Schuldensuehner.

9/5/15: Politico and 'Spice Me Up, Scotty' Headlines for Grexit

Europe's latest media arrival, Politco.eu is an outfit made to thrill... or to add thrill to the banal, boring, grey, stodgy (you name it) world of Brussels. And it is off with a flying start: http://www.politico.eu/article/a-crazy-european-storm/ The headline reads "A Carzy European Storm" and promises the risks of Grexit, Greefault, with some pepper garnish of Brexit too. It is as if someone at a gas station in Washington DC picked an old newspaper and gave it a 'Look wha's up in old crazy Europe!' yelp.

The premise is that Greece is about to face EUR774 mln payment to the IMF. No, we did not know this until the Politico.eu told us.

The thesis is that Greece might not repay it. No, we did not know that this was a possibility and we had no idea that the Greek Government officially said they will repay it.

The theorem is that if it is not repaid, there can be forced (by other member states) exit of Greece from the Euro.

Quote: "On May 12, after several weeks of barrel-scraping, Greece will pay back a €774 million loan to the IMF. Or maybe not. Which would then trigger the dreaded debt-default spiral that could push Greece out of the monetary union."

Proof [Politico.eu styled]: "“In 30 years here I’ve never seen such a crazy climate,” says a former merger-and-acquisition banker and hedge fund manager now running a corporate-finance advisory boutique." Which begs a question, was this lad asleep in 2008, 2009, 2010, 2011, 2012, 2013, 2014... to have missed an even 'crazier' 'climate'. Or were his measures of 'crazy' somewhat at odds with normal financial markets and public opinion polling indicators?

Never mind that Politico's only data-focused source, the Grant Thornton survey says that... err... no, there is not quite panic yet about Grexit, though concerns are rather high.

Of course, no one would dispute the risk of Grexit is serious. But Politico.eu might want to actually consult direct sources on whether it is feasible and whether it can be linked (over 'next 2 months' as one source alleges) to a reasonable likelihood of Greece leaving the Euro. And, finally, they might want to rethink as to whether it is possible at all to 'push Greece out of the monetary union'.

Here are two links worth considering:

• ECB position on potential mechanics for member state exit from the Euro: see second link in this post: http://trueeconomics.blogspot.ie/2015/01/412015-greek-crisis-40-politics-1.html. For the impatient media spicers: summary is that per ECB view, "a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible."
• And here is the IMF official procedures for dealing with arrears: http://trueeconomics.blogspot.ie/2015/04/1415-greek-crisis-gaining-rhetorical.html. Again, for trigger happy journos a summary: first 3 months after arrears arising will be taken up by 'strongly worded' letters. It takes up to 15 months before a declaration on non-cooperation can be issued. Which is (1) hell of a lot longer than 2 months and (2) gives plenty of time to 'sort something out'.

Yep. An already crazy European storm that has been blowing over Greece and the euro area since mid-2008, uninterrupted, is pretty... well... crazy. But do we need another 'Spice Me Up, Scotty' media headline about it out on the web? Neah... not really...

6/5/15: Crunch Time in Greece: Day -t or -t-1

Just as Greece barely made today's payment of EUR200 million to the IMF (there's much more coming up - http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) even if only by not paying its own internal bills (http://businessetc.thejournal.ie/greek-debt-crisis-update-2087392-May2015/), the ECB continued to pretend that all is fine in the solvent world of Greek banks. As there exult, the ECB hiked Greek ELA by another EUR2 billion to EUR78.9 billion, which means that some 60% of Greek deposits are now covered out of ELA.

Per FT report (http://www.ft.com/intl/fastft/319051/ecb-mulls-tougher-greek-lending-rules), the ECB's governing council discussed whether "to impose tougher haircuts on the collateral Greek lenders are using to secure emergency loans from Greece's central bank. The council …voted against raising the haircuts, but is likely to revisit the issue should Monday's Eurogroup meeting of eurozone finance ministers disappoint." Which means that should the Greeks continue to play hard ball with the Eurogroup, the ECB can raise collateral requirements on ELA and force Greek banks into panic search for new collateral eligible to be pawned into the ELA.

And while the Greek savers continue to hold deposits in Greek banks - yes, clear evidence of infinite irrationality of retail investors - currency dealers are cutting credit lines extended to Greek banks for trading in forex markets (http://www.bloomberg.com/news/articles/2015-05-06/greece-s-banks-said-to-face-curbs-to-foreign-exchange-trading-i9d1an9v). That's because the Eurosystem et al can fool some of the people some of the time (depositors for now) but can't fool all of the people all of the time.

The whole shift in markets sentiment is not missing on the Credit Default Swaps traders either:

Meanwhile, do recall that Greece is at a risk of running primary deficit in place of primary surplus for 2015: http://trueeconomics.blogspot.ie/2015/05/5515-imf-greece-europe-more-bickering.html (although this FT piece seems to suggest they are not, yet… http://blogs.ft.com/brusselsblog/2015/05/06/is-this-how-greece-is-avoiding-bankruptcy/) and you have a potent cocktail of explosives wired together and the clock's ticking... EUR200 million 'Tick'… EUR800 million 'Tock'… before June EUR1.5 billion 'Kaboom!'

22/4/15: Some morning links on Greek crisis

Greek crisis is accelerating once again, predictably, given the deadlines and debt redemptions looming. So what's worth reading on the subject this am?

Start with @FT's Martin Wolf and his "Mythology that blocks progress in Greece". It is good… as a summary of key myths surrounding Grexit. But...

Myth 1: "A Greek exit would help the eurozone" and Wolf view is that it is not so because with Grexit "euro membership would cease to be irrevocable. Each crisis could trigger destabilising speculation." Now, sort of yes, Martin. But by the same token, is irrevocable - no matter what - euro a good thing? Is it stabilising to know that euro is purely political currency with membership irrespective of economic and financial realities? Is it better for a city to keep town walls shut for doctors in a plague?

Myth 2: "A Greek exit would help Greece". Here Wolf is on the money… again, sort of. "Stable money counts for something, particularly in a mismanaged country." Really? Stable money in a mismanaged economy? Is that possible? Ever heard of real effective exchange rates and internal devaluations? So much for 'stable', then. Would it not be more helpful to devalue both across real and nominal margins, rather than force all pain into internal devaluation channel?

Myth 3: "It is Greece’s fault. Nobody was forced to lend to Greece." Yeah, true… sort-ish… No one was forced, but many were incentivised to lend to Greece, including by idiotic EU (and international) risk-weighting rules on sovereign debt. Wolf is right that in 2010, "Rather than agree to the write-off that was needed, governments (and the International Monetary Fund) decided to bail out the private creditors by refinancing Greece. Thus, began the game of “extend and pretend”. Stupid lenders lose money. That has always been the case. It is still the case today." Which is an argument in favour of a default. Perhaps managed default or as I call it - assisted. But default alone won't do much to correct for internal mispricing of risk and real mispricing in the economy. That requires devaluation, so back to Myth 2 above.

Myth 4: "Greece has done nothing." Agree with Wolf here. Greece has done quite a bit. But I am a bit puzzled: "Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources." Really? Oh, ok, then - if Greece does not need additional resources, soldier on, what's the fuss?

Myth 5: "The Greeks will repay" - Agree with Wolf - this is a sunk cost fallacy. "What is open is whether the Greeks will devote the next few decades to repaying a mountain of loans that should never have been made." This is on the money.

Myth 6: "Default entails a Greek exit." Ok, agree again. But I must add here that if we do have default and no exit, then by Myth 1 analysis by Wolf, the euro will be a currency where "Each crisis could trigger destabilising speculation". You can't have a cake and eat it, Martin.


Now, EUObserver on the European salad dressing - sorry, the meetings schedule for resolving Greek crisis. First there was Friday 24th of April as the deadline, now its May 11th summit that is going to be decisive…  Read and laugh - THIS is Europe. ""What are the 70 percent [of the programme] Greece said were acceptable and the 30 percent acceptable? When we have a firm picture of that, we’ll discuss that. But preconditions for having discussions are not there”." All sounding like a dysfunctional family attempting to deal with an unpayable credit card bill amassed by the live-at-home 'prodigal' son… One note, though - this is about meetings to shore up Greece until June. This is NOT about meetings to shore up Greece for 2016-on. In other words, the entire circus is for bridging things through 2015. Thereafter... ah, well, pass the Kool-aid jug, Roger...


Talking of dysfunctional families, one can't avoid the topic of dead-beat parents… And here rolls in the ECB. "ECB to fund Greek banks as long as they stay solvent - Coeure". Coeure is priceless. Apprently, "The European Central Bank will continue to provide liquidity to Greece's banks as long as they remain solvent and have sufficient collateral, ECB Executive Board Member Benoit Coeure" said. Wait, you mean as long as Greek banks continue to have that which they don't have enough of?

"imposing capital controls was "not a working assumption" for the ECB, while speculation about Greece leaving the euro was "out of the question."" But capital controls already ARE a "working" solution, not just an assumption and the ECB is already looking at cutting back Greek banks access to liquidity supports and Constancio did already say that capital controls can be introduced, which is sort of saying that look, Cyprus does exist.

The best bit of Coeure's statement is this: ""In recent days, there has been tangible progress in the quality of the discussions with the three institutions - the ECB, the European Commission and the IMF - which can be built upon," Coeure said." Tangible metrics of quality… only at ECB.

Meanwhile, more news about ECB considering doing what Coeure says they won't do.

May Greek Gods be with Greece today, for the whole Euro area beehive is buzzing with funny stuff… qualitatively and quantitatively "tangibly"...


Meanwhile, some factuals: Greek debt exposures by countries: http://trueeconomics.blogspot.ie/2015/04/19415-greece-in-or-out-ifo-aint-caring.html and across the official sector: http://trueeconomics.blogspot.ie/2015/04/15415-official-sector-exposures-to.html.

19/4/15: Greece In or Out: Ifo ain't caring much

Ifo Institute calculated euro system-wide losses from Greek default under two scenarios: Greece remains in the Euro and Greece exits the Euro.

In basic terms, there is no difference between the two.

And alongside that, called for the annual settlement of euro system liabilities and higher cost of funding within the central banks system. Which would trigger Greek default literally overnight and probably make Grexit total inevitability. In effect, thus, Ifo - a very influential German think tank - is calling for shutting the lid on Greece, comprehensively, and crystalising losses across the Eurozone and Eurosystem.

1/4/15: H-W Sinn "Europe’s Easy-Money Endgame"

A very interesting op-ed by Professor Hans-Werner Sinn of German Ifo Institute for Project Syndicate: http://www.project-syndicate.org/commentary/euro-demise-quantitative-easing-by-hans-werner-sinn-2015-03

The problem outlined by Professor Sinn is non-trivial.

"...for countries like Greece, Portugal, or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30%, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10-15%. But Portugal and Italy have so far failed to deliver any such “real depreciation,” while relative prices in Greece and Spain have fallen by only 8% and 6%, respectively".

As Professor Sinn notes, there are four possible solutions:

1. "Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it." 
2. "The south can deflate." 
3. "The north can inflate." 
4. "Countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency."

So here's the problem, correctly identified by Professor Sinn: "Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls".

Now, note: Ireland has opted for the second path. Any surprise we are driving people into bankruptcy in tens of thousands (once current legal queue is taken into account), along with multiple businesses?

But back to Prof Sinn's analysis. Remember the ECB QE? Ok, says Prof Sinn, suppose it delivers on target inflation of just under 2%. What does it mean for internal devaluations in the 'peripheral' Europe?

"If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today."

The problem, thus, is an unresolvable dilemma, since with that sort of arithmetic, we are in a tough bind:

• Either Germany runs mild inflation, while the 'periphery' runs outright deflation, allowing - over a painfully long period of time (decade or more) to devalue the imbalances, or
• Eurozone pursues Mr Draghi's objective of 'just under' 2% inflation across the entire Euro area at the expense of Germany (and the rest of the already shrunken 'core').

Do note, I have argued before that deflation in the 'periphery' is not a bad thing, as it allows for the interest rates to remain low (servicing cost of household and corporate debts is lower) and deleveraging of the households and companies to be less painful, while sustaining some domestic demand through increased purchasing power of incomes. So I agree with Professor Sinn's criticism of the ECB QE programme. 

The problem is that this means, as Professor Sinn rightly suggests, continued suppression of demand (the 'austerity' bit).

The choice faced by Europe are ugly. All of them. And there are no guarantees for any of them to actually work. And the cause of this problem is singular: creation of a political currency union. For anyone who says that Greece, Italy, Portugal, Cyprus, Ireland and Spain have caused their own problems, the replies are both simple and complex: 

• The simple one: absent the euro, their problems would have been by now solved by a combination of the old-fashioned defaults and devaluations. 
• The complex one: absent monetary transfers (lower interest rates and ample bank liquidity flowing cross-borders) with the EMU from the late 1990s through 2007, the imbalances generated in the 'peripheral' economies would never have been this large. Which means that the simple reply above would have been even more easy to apply.

7/3/15:Euro Area GDP per capita: the legacy of the crisis

I have posted previously on the decline in GDP per capita during the current crises across the euro area states, the US and UK. Here is another look:

Let's take GDP per capita at the peak before the crisis.

For some countries this would be year 2007, for others 2008. Keep in mind, many comparatives in the media and by analysts treat the peak as 2008. This is simply not true. Only 89countries of the sample of 20 countries comprising EA18, plus US and UK have peaked their GDP per capita in real terms in 2008, the rest peaked in 2007. Hence, for the former countries, the GDP per capita decline started in 2009 and the for the latter in 2008. Now, take GDP per capita declines cumulated over the years when the GDP per capita was running, in real terms, below the peak. Again, the sample of the countries is not homogeneous here: for some countries, GDP per capita regained pre-crisis peak by 2011 (Germany, Malta and Slovak Republic), by 2013 (Austria and U.S.) and by 2014 (Latvia). For all the rest of the countries, the GDP per capita peak was not regained through 2014.

Now, let's plot the overall cumulated losses over the years of the crisis (over the years from the crisis start through either the year prior to regaining pre-crisis GDP per capita levels for the countries where this was attained, or through 2014 for the countries that did not yet recover pre-crisis levels.

Chart below plots these in euro terms (remember, this is loss through end of crisis or 2014 per capita) (note figures for UK and US are in their respective currencies, not Euro):

Thus, per above, in Greece, cumulative GDP per capita losses during the crisis (through 2014) amount to around EUR42,200, while in Malta cumulative losses from the start of the crisis through the end of the crisis in 2011 amounted to around EUR500 per capita.

Since the crisis was over, before 2014, across 6 countries (in other words the regained their pre-crisis peak GDP per capita levels in inflation-adjusted terms), it is worth to note that through 2014, in these countries, losses have been reduced.  In Austria, through 2014, cumulative losses on pre-crisis GDP per capita levels stood at EUR 2,107 per capita, in Germany there was a cumulative gain of EUR4,078 per capita, in Latvia a cumulative loss of EUR5,696 per capita, in Malta a cumulative gain of EUR1,029 per capita, in Slovak Republic a cumulative gain of EUR1,352 per capita and in the U.S. a cumulative loss of USD258 per capita

Taking the above figures covering either gains  or losses from the start of the crisis in each country through 2014 as a percentage of the pre-crisis peak GDP per capita, the losses/gain due to the crisis through 2014 amount to:

And that chart really tells it all.