23/7/2012: Eurozone, Greece and the IMF - Part 2

On foot of my previous post on Greece and the IMF, the Fund has issued the following statement, quoted in full:

"We have received a number of inquiries related to the Der Spiegel report on Greece. You can attribute the following to an IMF spokesperson:

“The IMF is supporting Greece in overcoming its economic difficulties. An IMF mission will start discussions with the country’s authorities on July 24 on how to bring Greece’s economic program, which is supported by IMF financial assistance, back on track.”"

Key words here are "...to bring Greece's economic programme... back on track" which is a de facto admission by the Fund that the programme is 'off track' now. Another key issue with the statement is that it does not directly reject the claims made in Der Spiegel that the IMF is considering exiting the programme funding Greece.

Now, here's a problem the Fund is facing: it has two options now:

1. Admit that the programme is off track and hope that meetings with Greek authorities will put it back on track via some new additional measures to deliver more savings. In which case Greece buys few months more until that new sub-programme gets off track again, or
2. Admit that the programme is off track and cannot be restored to any reasonable level of performance. In which case the Fund must exit the programme.

Economically, (2) is the only rational choice. Politically (1) is the only feasible option. 

So long and thanks for all the fish, as they say...

23/7/2012: Eurozone, IMF and Greece

One must treat seriously the possibility that Greece will see its funding from the IMF cut-off or suspended. For a number of reasons, extending well beyond the simple financial arithmetics of aid.

Here are the details of the report.

Assuming the report is true, the questions it raises are:

• Validity of the Troika assessment during the structuring of the 'aid' packages: Greece received two 'bailouts' including a partial debt restructuring. Both packages were heavily criticised during their structuring as being insufficient in scope and excessively restrictive / ambitious in terms of fiscal adjustments required. In all cases, Troika rejected any criticism and pursued adjustments as planned.
• Validity of the Troika monitoring: since May 2010, there were ample signs that Greece will not be able to deliver on the 'bailouts' targets due to: (1) political constraints, (2) lack of real policy enforcement by Troika, (3) structural economic failures in the economy incapable of generating growth, (4) nature of the 'bailouts' that did not correct for debt overhang, and (5) social breakdown within the Greek society. Yet, the Troika continued to insist on compliance with the programmes that were clearly misfiring.
• Validity of the Troika assessments: since May 2010 numerous Troika reports were issued, all in effect (albeit with caveats) confirming that the programme in Greece was 'on track'. There was not a single report that sounded an outright alarm. Prior to each report publication, Greece was pressured to deliver on targets, with some marginal noises from the Troika that the programme is at risk. However, every tranche of loans was delivered in the end. With every bogus report being published, Greek authorities and international markets received a wrong and purposefully deceitful signal that no matter what, Greece will be provided loans to cover its ongoing obligations.
• Validity of the Troika capacity to design functional economic programmes: since May 2010, Greek economy continued to accelerate in the rates of decline - as measured by growth, unemployment, and growth components metrics. Objective assessment of the Greek situation can only conclude that an outright and full default on the country debts back in 2010 would have by now corrected the major debt imbalances and most likely restored economy to some positive expansion path. Objective assessment of the Greek situation also clearly shows that the Troika measures have not only failed to do this, but actually made the situation far worse.

Now, given that the Troika programmes for Greece were effectively driven by European, not the IMF, structuring, the questions above clearly reinforce the view of the EU authorities as being (a) incapable of economic policy formation, (b) unwilling to be honest and transparent in the assessment of the economic, political and social conditions in the member states, and (c) completely out of touch with reality of what is happening within a member state.

And at this stage, the IMF is left with few options but to present this exact assessment of the situation to the EU counterparts in a hope that they wake up and smell the roses. Unfortunately, to do so would require the IMF to exit the programme of assistance to Greece. Doing so might rescue the IMF reputation. Or it might not. But doing so will also clearly expose the EU's failure, with implications not only for Greece, but also for the rest of the euro area 'periphery'. Contagion will, therefore, be carried over straight to Spain and Italy - the heart of the EU core.

20/02/2012: Greece, Europe, Ireland and the crisis: Max Keiser interview

My conversation with Max Keiser last week on Euro, Greece, Ireland etc.
Link here.

22/1/2012: 'Markets are crazy', says market economy Ireland

So we used to have an 'Innovation Island' here that was run by the Deputy PM who confused Einstein with Darwin. She was directly in charge of Innovation policies.

Now we have a 'Competitive Market Economy' that 'Is Open for Business', as we constantly remind our potential foreign investors (domestic investors we have simply taxed into oblivion already and are even expropriating their wealth through Minister Noonan's 'levy' on pensions), run by the Minister responsible for the following statements (source here HT to @brianmlucey for flashing this one out):

"Michael Noonan, Ireland's finance minister, criticised the involvement of private creditors in the [Greek PSI] talks, arguing that it had made the crisis worse. Mr Noonan told the German newspaper Sueddeutsche Zeitung it had been a "fatal" mistake to involve the private creditors and this had "driven the markets crazy". He said that markets would only calm when they were convinced that eurozone countries were making serious efforts to solve their debt problems."

So, 'markets are crazy' and proper risk sharing with private investors in the case of insolvency is a 'fatal mistake'.

Does Minister Noonan believe in slavery? Because if he doesn't then there is no alternative in the case of Greek crisis resolution options to PSI. Of course, Minister Noonan believes in slavery - the modern variety of it - slavery that subjugates those who do not emigrate from Ireland to decades of involuntary repayment of privately accumulated debts they did not contract to accumulate. Minister Noonan has no problem with the Government of Ireland simply undertaking all private debts of a private insolvent banks and forcing ordinary people - not shareholders or lenders to these banks who were paid to take the risks in the first place - to repay them. Just like that. Without any consent: "Give us your money, granny, or else!"

But there's more to the statement above, which shows Minister Noonan in an equally unpleasant light. You see, Minister Noonan swears by the wisdom of the IMF and the ECB and the European 'partners' when it comes to his domestic policies. He did so officially earlier this week when he used Troika endorsement of Ireland's 'progress' in the programme as the reflection of their support for his policies. Yet, it is the very same Troika he so blindly follows into Ireland's economic oblivion which deemed Greek debt levels unsustainable - aka non repayable even were the modern day debt slavery terms (as imposed in Ireland) deployed in Greece as well.

So, for all our Irish concerns about the sanity of the Troika 'solutions' for Ireland, there's an even greater concern that should be preoccupying our minds - concerns for the positions taken by our own national leaders. And for all those would-be foreign investors into Ireland - please remember, you are about to invest in the economy run by those who think that 'markets are crazy' and contracts for risk pricing are 'fatal mistakes'.


PS: Never mind, Minister Noonan's only plan for Ireland is to attempt, asap, borrowing in the 'crazy' markets to finance his 'sane' fiscal management strategies.

26/09/2011: Greek crisis and exit strategy

At last - an excellent summary of the Greek crisis possible outcomes and exit strategies, courtesy of BBC (link here).

The bottom line is that no matter what Greece and Troika do or fail to do, the crisis will either move onto a full-blow economic implosion of Greece or global meltdown. This puts Greek dilemma, from euro area's perspective, squarely into the category of the choices faced by a patient with gangrened leg: to cut or to die. In other words, unless someone can find a node to hang a decent outcome on in the above - and I can't find one - the optimal policy mix from the point of view of both Greece and the euro area would be:

• Swap tranche release in October for commitment from Greece to exit the euro area under oversight from the IMF (staged exit with monetary support provided by the IMF and ECB). Future tranches should be tied to Greek Government progress on the bullet points below.
  
• Greece should default on sovereign and banks debts (60-70% writedown on sovereign and 50% writedown on banks), in part financed out of the current bailout package, in part netted through ECB (with ECB providing support for non-Greek banks and financial institutions writing down Greek assets on their balance sheets).
  
• Post-default, Greece should remain within the EU but outside the euro to avail of the benefits of free trade, labour and capital mobility.
  
• EU assistance to support growth via infrastructure investment should be extended to Greece in 2012-2017, in part to provide stronger foundations for growth and in part to provide an incentive to see through structural reforms in public sector and overall economy.

In effect, Greece will be incentivised via emergency supports and future investment assistance to exit the euro area voluntarily. There are no guarantees that post such exit Greek new currency and indeed its economy can gain a footing in the markets. However, retaining Greece within the euro zone does not appear to be a feasible option at this stage.


Note: The argument that Greece should default and exit euro is hardly a novel one. Nouriel Roubini recently made a very strong case for this here. Roubini also, in my view correctly, recognizes that transition from euro to domestic currency will require some financial supports from the EU.

Economics 09/05/2010: What sort of EU leadership?.. Part 2

Underlying the unworkable logistics of the Euro-bond that Brussels is planning to deploy to contain the spillover of the fiscal crises in PIIGS, there is a pesky issue of the past record of the currency block management of its finances.

Here are some historic comparisons from the IMF latest GFS report worth highlighting.
Now, spot the odd ones in the above chart? That's right - the non-Euro zone countries are the ones with the lowest indebtedness of households in their economy. In other words, no matter how much the Euro area leadership talks about the US being the cause of the current crisis, data simply shows that the US - despite all its problems - has had far less of a bubble in overall debt terms than Euro area. The only reasons Germany does not figure amongst the countries with the weakest households are:

1. Germany's exports oriented economy which in effect is a 'beggar thy neighbor' economy reliant on someone else assuming credit to buy German goods; and
2. Germany's costly reunification coupled with poor demographics, which assured that over the last 20 years German consumers had virtually no improvements in their standards of living.

But in assuming all this debt, were Euro area households buying productive assets (as opposed to the Americans, who, per our Europhiles' assertions were all playing a property Ponzi game)?
Oops. Not exactly. While Americans were buying homes (fueling their own bubble), Europeans were buying... homes and public sector spending goodies. But may be, just may be, Euro area members were more prudent in buying homes than the Americans, who stand accused of causing the financial crisis of 2007-2009?
It turns out that this was simply not true. Chart above shows just how far more leveraged were the Euro area states compared to the US in terms of two main parameters of house prices sustainability.

And the same is true for overall asset valuations.
Oh, and those prudent lenders - the Germans and the rest of the Euro pack banks?
It turns out the US banks were actually much better off throughout the bubble formation period in terms of their lending and profitability than... hmmm... Germany and Belgium. Who could have known, judging by Mrs Merkel's hawkish statements as of late?

Now, take a look at the total external indebtedness of the Euro area... Recall, the US and Euroarea both have relatively similar GDP...
So suppose the EU Commission issues common bonds (and assume it places them in the market) to underpin PIIGS plus Belgium, the Netherlands and Austria - the sickest puppies of the Euro area. That would require bonds issuance to the tune of 20-30% of these countries outstanding public debt. Which means that the unified bond issuance volumes will be in the region of USD1 trillion, pushing Eurozone's combined indebtedness to over USD25 trillion. Does anyone really think this is a 'solution' to contagion or a surrender?

Economics 09/05/2010: What sort of EU leadership?.. Part 1

Prepare to be afraid, ye the financial markets – those always-on-time and forever-effective super leaders of the Eurozone have concocted a Plan. A Plan to deal once and for all with the frightening levels of their own governments’ insolvency. A Plan code-named Bondzkrieg!

The troops of illiquid and insolvent PIIGS will be backed by the armies of the liquid, but pretty much nearly as insolvent the rest of EU. The attack, commencing possibly as early as on Monday next will be a two-pronged strategy: a pincers manoeuvre.

Part 1 will, per latest reports from the EU16 summit, require an issuance of Euro Commission Bonds. These will be backed by the EU16 states’ guarantees and something that is called ‘an implicit ECB guarantee’. Sounds terrifying, folks:

1. What is exactly an ‘implicit ECB guarantee’? A sort of ‘we might print mucho Euro notes, should Brussels default’ stuff? What kind of nonsense is this? The best the ECB can do is promise to monetize the EU Common bond in the same way it monetizes Greek junk bonds. Yet, the latter has not stopped contagion, only accelerated it by undermining the ECB credibility.
2. What will back these Common bonds? The solvency of the EU nations guaranteeing them? But wait – isn’t the problem the EU is facing is precisely the very lack of solvency? How is it going to work then? A severely indebted and deficit ridden pack of nations issues new debt to cover up the old debt problems? Well, that did work for the Russian Government a miracle back in 1998. Without actually resolving the problem of excessive and long-running deficits, and without either restructuring (default) or deflating (devaluation which is a de facto default) the existent pile of debt, the new EU-wide bond issue will simply transfer Greek-style problems of the PIIGS to the rest of EU. Given that we are talking about roughly a €1 trillion worth of junk, the entire pyramid scheme concocted by the EU is going to collapse unless Germany is good for underwriting the entire EU16 with its economic might. Trouble is – Germany can’t. It has little prospect of growth and its’ current economy simply cannot carry the burden of the rest of EU16 obligations.
3. What will be the seniority of these bonds? If the new bond is subordinated to the existent state bonds (as implied by a ‘guarantee’ proviso), these bonds will have no meaning. If it will be senior to existent member states’ debt, then issuing them to pay down sovereign debt will be equal to deflating seniority of sovereign issues already outstanding. Which, in common English, is called defaulting on existent debt.
4. How can these bonds be priced? Normally a bond is priced by a combination of factors. Some are exogenous – such as global liquidity and portfolio driven demand. Some are endogenous – such as analysis of what the sovereign deficit is for the issuer, what debt burden the issuer is paying and what prospects for economic growth (and other components of future default probability) does a sovereign face. Finally, expected Forex positions for sovereign currency in which the bond is denominated are taken into account. Care to guess what any of these endogenous variables might be for the EU16? Right – they are totally meaningless. Will EU bond be written against EU own debt (which is nil) or against guarantors’ debt (sovereigns already overloaded with debt)? Will the Forex rates relate to the ECB rate which the ‘sovereign’ issuing the bonds (the EU Commission) cannot control (due to ECB independence)? Will EU ability to repay these bonds rest on Euroarea economic growth? If so, what does this mean, since the EU Commission collects revenue from EU27, of which 11 member states are not a party to issuance of the bond! Will, for example, UK government assume liability to the Eurozone-issued bonds by committing its own economy to the risk of a call on the bond should, say, Belgium decide to default?

The second prong of the EU attack on the markets is the incessant blabber about the need to set up an EU-own rating agency. Here, the promised might is clearly unmatched by any sort of internal capability:

1. The EU itself cannot certify own annual accounts, despite having only in-house own auditors. Even these are refusing to sign off on EU accounts for over a decade now. How can the same institution produce a credible rating agency that will be entrusted with providing assessment of the EU credit worthiness?
2. Can the EU-imposed metrics be seriously treated as fundamental benchmarks for solvency? Give it a thought – the EU oversees a union of member states bound by own sovereign treaty to uphold the Maastricht Criteria targets. The EU has failed to enforce these in the case of Greeks, Portuguese, Spaniards, French, Italians, Belgians and so on. In other words, the EU cannot enforce its own rules, let alone police economic and fiscal performance parameters required to issue any sort of risk assessments. In fact, this year Euroarea deficit is expected to reach 6.6% of GDP and in 2011 -6.1% - way above the 3% the block set as its own rule. Debt to GDP is heading for double digits, before we add banks supports. Letting the EU run a rating agency is equivalent to letting an alcoholic run a bar!
3. The entire idea of an EU rating agency traces back to Merkel’s and Sarkozy’s desire to shift blame for the Greek (and indeed PIIGS) debacle off the shoulders of the European governments and Brussels and onto the shoulders of ‘speculators’ and the Big-3 rating agencies. Of course, the logical inconsistency of the EU attacks on the Big-3 is painfully obvious. The Big 3 are accused for failing to properly recognize and publicize risks to the systemic solvency of financial institutions in the case of ABS/MBS and so on. Yet, the minute the rating agencies actually do their jobs – as in the case of PIIGS in recent months – they are standing accused of… well… doing the jobs only to well? Can anyone have any trust in a ‘rating agency’ set up by the very people who are simply and evidently incapable of a simple logical argument?

Mrs Merkel have stated this Friday: "Those who created the excesses on the markets will be asked to pay up -- those are in part the banks, those are the hedge funds that must be regulated ... those are the short-sellers and we agreed yesterday to implement this more quickly in Europe." Obviously, over a decade of fiscal recklessness across the PIIGS was never a problem for Mrs Merkel. And she is supposed to be the reasonable one?

All I can say, folks, forget any hope for growth in Europe with this sort of leadership.

Economics 28/04/2010: More on Greece contagion

Contagion from Greece is clearly a problem for the EU at this stage. Looking back into some older data, February 2010 note from Credit Suisse (linked here)
Spot Ireland at position number 7? That was then. The figures refer to 2009, which means that since then, pressures on Iceland, Hungary and Latvia have receded. In addition:

• Our 2009 deficit has been revised to 14.3%
• Our CA deficit has worsened (as imports are falling at a lower rate and exports are now performing less robustly)

So re-weighting the score in the right hand column of the table, Ireland gets closer to 38.1-38.3, Portugal moves to 39.4-39.5, Greece to 45. We are number 3 on the list...


PS: If you want to see an example of absolutely and even alarmingly distorted logic - read this. One of the best examples of bizarre ramblings that pass for 'analysis' in Ireland. I mean what else can you call a note that:

• Admits that Ireland has record deficits of all EU countries;
• Admits that debt levels are very high;
• Admits that we are close to Greece;
• Admits that Greece is deep trouble, and then
• States that "The Greek recesion [sic] had been milder than the EU average, and recovering, before austerity measures were adopted" and thus
  
• Makes an implicit claim that the spectacular collapse of Greek economy witnessed by the entire world and threatening contagion to all of the EU has been caused by Greece not running enough deficits!
• And concludes that: "By contrast, other EU countries adopted fiscal stimulus measures [without identifying which states did so, what were the implications of these, etc]. Their debt has stabilised along with economic activity [a mad claim, given that stimulus measures were financed out of debt increases] and they have been rewarded with much lower bond yields than Ireland [absolute groundless claim, as none of the countries that adopted stimulus had the same fundamentals as Ireland going into the recession or during the recession and furthermore, none of the countries, other than PIIGS experienced similar bond yields dynamics to Ireland]"

I mean this stuff is actually factually incorrect and logically inconsistent!

Economics 28/04/2010: Our week so far

So will Germany open a 'needle exchange' for Europe's debt junkies (para-phrasing Laughinbear comment)? Check CNBC's rankings of debt by nation (here - all rankings slide show)... Greece is No 16, Ireland is No1! Link here.

Ireland 10-year yields are at 5.6% and moving in tandem with Portugal and Greece. Here is a revealing weekly step-function for our 10-year notes (hat tip to Brian Lucey):