7/5/15: Russian Services and Composite PMIs: April 2015

Russian Services and Composite PMIs are out today (Markit) and the results are quite positive.

Remember that Manufacturing PMI for April posted 48.9 compared to 48.1 in March, signalling less pronounced rate of contraction in the sector. Analysis of this is available here: http://trueeconomics.blogspot.ie/2015/05/5515-bric-manufacturing-pmi-further.html

Per Markit release: "The new orders component of the [Manufacturing] PMI was the primary drag on the headline index in April. Total new work fell at the sharpest pace for nearly six years, although the contraction was principally centred on capital goods producers… In contrast, consumer goods companies recorded solid growth… New export orders continued to fall markedly, extending the current period of contraction to twenty months. That said, some manufacturers found that clients were undertaking a degree of import substitution and choosing to purchase where possible from Russian producers rather than those based abroad. …However, there were signs from the latest survey that these …impacts were dissipating."

So key points for Manufacturing were:

• Production rises modestly, but new orders down at a sharper rate
• Price indices fall sharply to signal much slower inflation
• Focus on cost-rationalisation and higher productivity leads to modest job losses

Meanwhile, in Services sectors, per Markit, "seasonally adjusted HSBC Russia Services Business Activity Index… signalled a return to growth in April. The reading of 50.7 (up from 46.1) pointed to a marginal increase in activity at service providers, representing a marked turnaround from the substantial reductions seen in the early part of 2015. …Services companies mainly linked the improvement in activity to higher new orders. New business also returned to growth in April, ending a seven-month sequence of contraction. According to respondents, rising client demand had helped them to secure more new business during the month. …Meanwhile, services companies continued to lower their staffing levels in April, extending the current sequence of job shedding to 14 months. Although remaining solid, the rate of decline in employment eased for the second month in a row and was the slowest since October 2014."

Key points on Services PMI:

• Russian private sector output returns to growth
• Services new business increases
• Further reductions in staffing levels

Overall, m/m, seasonally-adjusted PMIs posted a first monthly rise in Manufacturing sector and second consecutive monthly rise in Services sector. Rate of growth in Services PMIs (m/m) has been extremely robust in March and April.

This resulted in the seasonally adjusted Composite Output Index posting 50.8 in April, up from 46.8 in the previous month and above the 50.0 no-change mark for the first time in seven months. This marks second consecutive month of m/m growth in Composite PMI.

More on near-term dynamics of the indices in the following post that will cover BRIC economies PMIs. But overall, we have some encouraging signs of stabilisation in the economy. The signs are still fragile and manifested through moderating rate of contraction signalled in Manufacturing and a marginal rate of growth in Services, with both manifesting over only one month to-date. In other words, we will need much more positive data to confirm any potentially developing upside trend.

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!'

6/5/15: Thus Spoke 'Not a Dwarf' of Politics...

Does it make you wonder what the U.S. might have looked like if Sarah Palin was elected in 2008? Well, here's a snapshot of a similar experiment currently ongoing in Europe: behold the European Titan of Thought, the (one of the numerous) President of Europe, Jean-Claude Juncker and his latest escapade http://www.telegraph.co.uk/finance/economics/11583755/Anglo-Saxon-world-would-rip-apart-Europe-after-a-Grexit-says-Juncker.html.

This is the best that Europe can do in making high level appointments. And it is out there, on par with Palin.

So here are some choice moments from Mr Juncker-Palin lengthy career as Europparatchik...

• On the 2005 French referendum on the Lisbon Treaty: "If it's a Yes, we will say 'on we go', and if it's a No we will say 'we continue'."
• On the Lisbon Treaty, 23 June 2007: "The constitutional treaty was an easily understandable treaty. This is a simplified treaty which is very complicated."
• On the Lisbon Treaty, 2 July 2007: "Britain is different. Of course there will be transfers of sovereignty. But would I be intelligent to draw the attention of public opinion to this fact?"
• On 20 April 2011: "Monetary policy is a serious issue. We should discuss this in secret, in the Eurogroup [...] I'm ready to be insulted as being insufficiently democratic, but I want to be serious [...] I am for secret, dark debates."
• Referring to his work in the European Council in 2012: "We decide on something, leave it lying around and wait and see what happens. If no one kicks up a fuss, because most people don't understand what has been decided, we continue step by step until there is no turning back."
• On Greek crisis, 2011: "When it becomes serious, you have to lie."
• To George W. Bush, June 20 2005: "I was going to say he's a piece of work, but that might not translate too well. Is that all right, if I call you a 'piece of work'?"
• As PM of Luxleaks: "We do not attract Russian money to Luxembourg with high interest rates."
• Ibid: "The Luxembourg financial centre is based on several pillars, we are characterised by the breadth of our product range, we are an active participant in the international credit business."
• "I am not a dwarf."
• "God understands more about the financial markets than many who write about them."
• "...we must be careful that we do not blow up the global financial system by insisting on regulatory principles."
• Answering the question: :what happens if we're sitting here again next year and conclude that Greece is still not on a stabilization course?", Juncker produced the following: "If the donkey were a cat it could climb a tree. But it is not a cat. Nevertheless, this is a question that worries many people. My answer to it is almost a little theological: I do not believe that this question will ever be asked."
• "We must go back to teach Europeans to love Europe."
• "I believe neither the French nor the Dutch really rejected the constitutional treaty."
• "Now is the time to give a message of hope to the Greek people, not only implement, implement, implement and obligations, obligations, obligations, the message that the European institutions will give help and solidarity with particular rates, in order to over come this very bad situation at the social level."
• "One should stop - especially Britain, which was always for expansion of the European Union - discriminating against countries only because it comes across well in the current context if you beat up on others, i am strictly against that one should - and this is the key point - act as if all Poles, all Romanians, all Bulgarians who are on the European labor market are doing this out of a basically criminal disposition. These are people who are working to get paid." [It is worth remembering that the UK was one of just 3 countries in the EU that opened its labour market to the Accession States]
• On Greek bailout negotiations currently underway: "I am working together with Eurogroup President Jeroen Dijsselbloem to achieve an extension of the existing program, in order to bridge the time until summer."
• "Britain is different. Of course there will be transfers of sovereignty. But would I be intelligent to draw the attention of public opinion to this fact?"

All of which provides a decent comic relief across the Atlantic, and a dose of tears here, in Europe, where taxpayers are paying for this 'leadership' through the nose.

6/5/15: Irish Services & Manufacturing PMI: April 2015

Irish Services PMI (Markit & Investec) for April posted slightly lower rate of growth in the sector compared to March, declining marginally to 60.9 from 60.6 a month ago. Current reading marks the 14th consecutive month of Services PMI above 60.0 and 33rd consecutive above 50.0 reading, so not surprisingly, the sector is running hot.

Irish Manufacturing PMI is covered in more details here: http://trueeconomics.blogspot.ie/2015/05/1515-irish-manufacturing-pmi-april-2015.html


Stripping out some volatility:

• Services sector PMI 3mo average is currently at 62.2, running above 3mo average through January 2015 (61.0) and 3mo average through April 2014 (60.0). 6mo average through April 2015 is just 0.4 points below 6mo average through October 2014.  Historically, current Services PMI 12 mo average of 61.8 compares favourably to the post-crisis period average of 56.0 and pre-crisis average of 57.6. Crisis period average was 50.7.
• Manufacturing sector PMI 3mo average through April 2015 is at 56.1 which is somewhat lower than the 3mo average through January 2015 (56.7) but well ahead of the 3mo average through April 2014 (54.8). 6mo average for the period through April 2015 is 0.5 points above the 6mo average through October 2014. Historically, current Manufacturing PMI 12 mo average of 56.1 compares favourably to the post-crisis period average of 52.7 and pre-crisis average of 51.8. Crisis period average was 51.2.

In April, both Services and Manufacturing PMIs posted some marginal slowdown in activity compared to April 2014. Services PMI slipped from 61.9 to 60.6 and Manufacturing PMI declined from 56.1 to 55.8. Nonetheless, both series have now been jointly trending above 50.0 for 23 months, which is a solid performance.

6/5/15: IMF to European Life Insurers: Japanification Cometh

Life Insurance business is the out-of-sight type of the sector that few notice... until it is too late. So here is an early warning from the IMF (not known for early warnings).

Core point is: we are in a world of Japan - persistently low, extremely low interest rates. Which means that insurance companies with long-dated contracts face the challenge of liabilities exceeding assets at some point in time. The longer the duration of low rates, the greater is the risk of a system-wide insolvency.

So insurance industry took some stress tests recently. And passed. except the stress tested was not enough to match the current reality:

Oops...

5/5/15: Good Bonds, Bad Rules & Russian Deficits

Neat chart via @sobberLook showing Russian 2-year bonds yields out through today:

The blowout is over, but at 10.9% still ahead of anything 'normal' and remains pressured. To me, real test will be around 9.7% levels and then again around 9%.

Meanwhile, on a supportive side of things, Russia is about to decouple its budgetary balance estimates from the 3-year (back) average oil price rule, by switching to RUB denominated oil price benchmark. Which will improve the deficit calculations by bringing some reality to assumptions underlying the budget.

As the result of the switch, Budget for 2015 will see a correction in built-in oil price of RUB2,915, Budget 2106 - of RUB1,938 and Budget 2017 of RUB 760. Thereafter, the effect should be weaker, with Budget 2018 estimated impact is for price decline of RUB60. Current rule implies that Budget 2016 was to be estimated using oil price of USD89 per barrel, against the Economy Ministry forecast of USD60.  In 2015, Budget is computed using base line price of USD94 against the economic forecast (for the Budget) of USD55. Higher budgeted oil price implies higher spending, while revising the benchmark price down as per new proposed rule implies lower spending and, thus, lower deficits. So, in return, budget cuts and balancing of the budget, will be spread over longer horizon and will allow to more conservatively use Russian foreign exchange reserves.

More on this here: http://www.vedomosti.ru/newspaper/articles/2015/05/05/minfin-pridumal-kak-viiti-iz-lovushki-byudzhetnogo-pravila.

5/5/15: US Mint Gold Coins Sales: April 2015

April sales of U.S. Mint gold coins came in at 39,500 oz, down 29.5% y/y. Over the first 4 months of 2015, total sales of U.S. Mint gold coins (by volume) is down 8.9% y/y. In terms of number of coins sold, April sales stood at 71,500 units, down 39.7% y/y and the first four months of 2015 cumulative sales are down 9.1% y/y. Meanwhile, average volume of coin sold in April stood at 0.552 oz per coin against 0.473 oz/coin a year ago. Still, average weight of coin sold in the first 4 months of 2015 is down 1.4% y/y.

As the chart above shows, current reading is well below the post-crisis period average of 58,542 oz and only marginally above the pre-crisis average of 38,016 oz. Historical average is 79,825 oz, and current reading is statistically below the historical average.

12 months dynamic correlation between prices and volume of U.S. Mint gold coins sales has remained negative in April, albeit at -0.08 not statistically significant. This means that over the last 12 months - from April 2014 through April 2015, investors and savers tended to purchase more U.S. Mint coins gold against falling prices, and less against rising prices. Historically, average 12mo correlation between gold prices and coins demand is -0.03.

Overall, the trend toward lower post-crisis sales for the U.S. Mint gold coins compared to the crisis period sales has been in place now since start of H2 2013 and remains in place. However, the trend is still to the upside compared to the pre-crisis period. Data from Q3 2014 on suggests some renewed weakening in demand trend, but confirming this will require more months coming in at below the post-crisis average reading. 

The reason for being cautious about calling the short-term trend change in Q4 2014 is that data for Gold Eagles sales (we have many more years worth of these sales) suggests a different signal to total U.S. Mint gold coins sales. Specifically, as can be seen in the chart below, there is actually some potential positive growth trend emerging in the Eagles sales data for Q2 2014-present.

5/5/15: IMF, Greece & Europe: More Bickering, Less Tinkering?

An interesting article on Greece in FT: http://www.ft.com/intl/cms/s/0/72b8d2ae-f275-11e4-b914-00144feab7de.html#ixzz3ZFOAlR4B suggesting that the IMF is now actively drifting into fall-out management mode for Greek crisis.

According to the FT: "Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors." And this means that Greece is at a risk of failing to secure release of EUR3.6 billion worth of bailout funds - the IMF share of the EUR7.2 billion of Troika funds - that still remain to be disbursed to Athens.

Absent these funds, Greece is insolvent, full stop.

Basically, per IMF projections, debt sustainability in Greece requires 3% primary net lending / borrowing balance in 2015 (up on estimated surplus of 1.5% in 2014) and this is required to rise to 4.5% in 2016-2017 and 4.24% in 2018-2020. In Euro terms, 2015 primary surplus required is EUR5.49 billion. Instead, the IMF now estimates that the country will be running a primary budget deficit (not surplus) of 1.5%.

Primary balance is Government balance excluding interest on debt.

If true, the deterioration in Greek finances so far this year is massive. And there is no way of correcting for it, unless either Greece imposes much more severe austerity or there is a formal and significant debt restructuring for debts held by the 'official sector' - aka Troika.

Per FT report, sources close to the Eurogroup claimed that “The IMF thinks the gap between the two realities is very large right now,” said one senior official involved in the talks. A stand-off between the IMF and eurozone creditors over Greece is not unprecedented. Three years ago, the IMF refused to disburse its portion of the aid tranche because of similar fears Greek debt was not falling fast enough. The IMF only signed off after eurozone ministers agreed to consider, but never implemented, writing down their bailout loans to reduce Greece’s debt to “substantially lower” than 110 per cent of GDP by 2022. It currently stands at 176 per cent." So in other words, the IMF appears to be pushing for a debt restructuring for Greece.

In a separate report: http://www.ifre.com/imf-not-insisting-on-further-debt-relief-for-greece-schaeuble/21197177.fullarticle Germany Finance Minister Wolfgang Schaeuble denied the IMF is pressuring the Eurogroup to restructure Greek debts.

As I noted in January (http://trueeconomics.blogspot.ie/2015/01/512015-imf-on-debt-relief-for-greece.html), this is by far the most often repeated disagreement between Greece, Europe and the IMF. And it comes as the Eurogroup attempts to structure another bailout package for Greece. So far, rumours have it, the Eurogroup outlook for Bailout 3.0 needs are pitched at EUR30-50 billion. But, as FT notes, "rising deficits could change that calculation."

Meanwhile, Greece continues to stumble from one payout to next - on a weekly basis - http://trueeconomics.blogspot.ie/2015/05/1515-good-news-may-hide-bad-news-when.html

And now we have a smell of napalm in the morning - some signs of bond markets repricing peripheral risks for the euro area:

5/5/15: BRIC Manufacturing PMI: Further Growth Slowdown in April

BRIC manufacturing PMIs (Markit) are out for April, and the signs are poor in terms of economic growth prospects for the block of the four largest emerging economies.

• Brazil manufacturing PMI came in at 46.0 in April, down from already abysmal 46.2 in March, singling deepening and accelerating contraction. This the the third consecutive month of Manufacturing PMI below 50.0. 3mo average is at 47.3 and previous 3mo average (through January 2015) is at 49.9. The weakness in Brazil manufacturing sector performance is not new: in 3mo through April 2014 the index reading was just 50.1. Weak growth or contraction (below 51.0) has been recorded every month since March 2013. As of April, Brazil has posted the lowest monthly and 3mo average readings for Manufacturing PMIs for all BRIC countries.
• Russian Manufacturing PMI posted a slight improvement in April, rising to 48.9 from 48.1. Nonetheless, April was the fifth consecutive month of sub-50 readings and the 'improvement' is reflective of a slowdown in the rate of contraction, not a reversal of contraction. 3mo average through April is at 48.9 which is still worse than the 3mo average through January 2015 (49.4) and only marginally better than 3mo average through April 2014 (48.4). Last time Russian manufacturing PMI reading was in healthy territory was November 2014 when it posted a surprising reading of 51.7, but overall, weak performance can be traced back to July 2013.
• Chinese Manufacturing PMI continued to post contraction in the sector coming in at 48.9 in April, marking worsening in the growth conditions compared to 49.6 reading in March and the second consecutive month of sub-50 readings. 3mo average is now at 49.7, marginally weaker than 49.8 3mo average through January 2015. Current 3mo average is, however, stronger than 48.2 average for the 3 months through April 2014.
• India was the only BRIC economy that managed to sustain above-50 reading for the Manufacturing PMI. However, at 51.3 in April, the PMI is still down on 52.1 in March. This marks 18th consecutive monthly above-50 reading for the series.

Overall, April data indicates significantly adverse conditions in BRIC manufacturing, with Brazil being by far the worst performer in the group both in terms of monthly reading and 3mo average. As the chart above shows, excluding India, BRIC Manufacturing PMIs trend to the downside from mid-2014 levels with Brazil readings at the worst levels since September 2011, Russia continuing to perform at the levels consistent with the worst economic slowdown since October 2008-July 2009, China showing renewed weaknesses consistent with overall zero growth trend present since around Q2 2013. India bucked the BRIC pattern by posting a positive growth trend since Q4 2013.

2/5/15: China's “Great Leap Forward” in Science and Engineering

Richard B. Freeman and Wei Huang NBER Working Paper No. w21081, April 2015 titled "China's “Great Leap Forward” in Science and Engineering" looks at how over "…past two decades China leaped from bit player in global science and engineering (S&E) to become the world's largest source of S&E graduates and the second largest spender on R&D and second largest producer of scientific papers. As a latecomer to modern science and engineering, China trailed the US and other advanced countries in the quality of its universities and research but was improving both through the mid-2010s."

The paper "...presents evidence that China's leap benefited greatly from the country's positive response to global opportunities to educate many of its best and brightest overseas and from the deep educational and research links it developed with the US. The findings suggest that global mobility of people and ideas allowed China to reach the scientific and technological frontier much faster and more efficiently."

Overall, a nice addition to the body of literature exploring internationalisation of human capital and shedding some light onto a less reported area of this development: the reverse flows of human capital from the advanced economies to emerging markets.


Full link: Freeman, Richard B. and Huang, Wei, China's “Great Leap Forward” in Science and Engineering (April 2015). NBER Working Paper No. w21081: http://ssrn.com/abstract=2593660

2/5/15: IMF to Ukraine: Pain, and More Pain, and Maybe Some Gain

A very interesting IMF working paper on sustainability and effectiveness of fiscal policy in Ukraine that cuts rather dramatically across the official IMF policy blather.

Fiscal Multipliers in Ukraine, by Pritha Mitra and Tigran Poghosyan, IMF Working Paper, March 2015, WP/15/71 looks at the role of fiscal policy (spending and investment) in the Ukrainian economy.

As authors assert, "since the 2008-09 global crisis, which hit Ukraine particularly hard, the government relied on fiscal stimulus to support recovery. In reality, it was the main lever for macroeconomic management… Today, even after the recent float of the Ukrainian hryvnia, fiscal policy remains key to economic stabilization." In particular, "Over the past five years, the government relied on real public wage and pension hikes to stimulate economic activity, sometimes at the expense of public infrastructure spending. Many argue that this choice of fiscal instruments undermined private sector growth and contributed to the economy falling back into recession in mid-2012."

Since the IMF bailout, however, fiscal adjustment is now aiming for a reversal of long term imbalances on spending and revenue sides. In simple terms, fiscal adjustment now became a critical basis for addressing the economic and financial crisis. As the result, the IMF study looked at the effectiveness of various fiscal policy instruments.

The reason for the need for rebalancing fiscal policy in Ukraine is that current environment is characterised by "…the severe crisis, its toll on tax revenues, and financing constraints, necessitate fiscal consolidation. But the challenge is to minimize its negative impact on growth."

In other words, the key questions are: "Will tax hikes or spending cuts harm growth more? Does capital or current spending have a stronger impact on economic activity?"

Quantitatively, the paper attempts to estimate "…the fiscal multiplier – the change in output, relative to baseline, following an exogenous change in the fiscal deficit that stems from a change in revenue or spending policies."

The findings are: "Applying a structural vector auto regression, the empirical results show that Ukraine’s near term fiscal multipliers are well below one. Specifically, the impact revenue and spending multipliers are -0.3 and 0.4, respectively. This suggests that if a combination of revenue and spending consolidation measures were pursued, the near-term marginal impact on growth would be modest", albeit negative for raising revenue and cutting spending.

"Over the medium-term, the revenue multiplier becomes insignificant, rendering it impossible to draw any conclusions on its strength. The spending multiplier strengthens to 1.4, with about the same impact from capital and current spending. However, the impact of the capital multiplier lasts longer. Against this backdrop, the adverse impact of fiscal consolidation on medium-term growth could be minimized by cutting current spending while raising that on capital."

The risks are unbalanced to the downside, however, so the IMF study concludes that "Given the severe challenges facing the Ukrainian economy, it is important that policymakers apply these results in conjunction with broader considerations – including public debt sustainability, investor confidence, credibility of government policies, public spending efficiency. These considerations combined with the large size of current spending in the budget, may necessitate larger near- and long-term current spending cuts than what multiplier estimates suggest."

In simple terms, this means that, per IMF research (note, this is not a policy directive), Ukrainian economy will need to sustain a heavy duty adjustment on the side of cutting public spending on current expenditure programmes (wages, pensions, purchasing of services, provision of services, social welfare, health, etc) and, possibly, provide small, only partially offsetting, increase in capital spending. This would have to run alongside other measures that will raise costs of basic services and utilities for all involved.

The problem, therefore, is a striking one: to deliver debt sustainability, current expenditure and price supports will have to be cut, causing massive amounts of pain for ordinary citizens. Meanwhile, infrastructure spending will have to rise (but much less than the cuts in current expenditure), which will, given Ukrainian corruption, line the pockets of the oligarchs, while providing income and jobs to a smaller subset of working population. Otherwise, the economy will tank sharply. Take your pick, the IMF research suggests: public unrest because of cut-backs to basic expenditures, or an even deeper contraction in the economy. A hard choice to make.

In the end, "More broadly, fiscal multipliers are one of many tools policymakers should use to guide their decisions. Given the severe challenges facing the Ukrainian economy – including public debt sustainability, low investor confidence, and subsequent limited availability of financing – it may be necessary for policymakers to undertake stark consolidation efforts across both revenues and expenditures, despite the adverse consequences for growth."

1/5/15: Good News May Hide Bad News When it Comes to Greece

Greek 5 year CDS (Credit Default Swaps) continued to tighten dramatically today:

Source: CMA
Note: CPD refers to Cumulative Probability of Default (5 years)

Per Bloomberg, this is down to Greek Prime Minister Alexis Tsipras stepping up "efforts to clinch a deal that would unlock financial aid… The ASE Index of stocks jumped the most since September 2012 from a two-year low on April 21. It ended up 6.1 percent in April, the biggest rally in western Europe. Bonds returned 13 percent, while securities in the rest of the region fell. Investors put money into Greek assets in April, betting the rally may have more to go if a default is averted. The nation and its creditors hope to reach a preliminary agreement by Sunday, ahead of a scheduled meeting of euro-area finance ministers on May 11, according to three people familiar with the matter." More on this here: http://www.eubusiness.com/news-eu/greece-debt-imf.10za.

One factor unmentioned is sidelining of Greek Finance Minister in leading the negotiations with the Troika. Another factor is growing discontent within the Greek ruling coalition - a move that increases pressure on Tsipras to get a new deal. My sources in Greece claim there are big disagreements within the Government and main parties. Much of this is focused on hard left's view that Syriza is abandoning its Programme promises. But, as common, much of it also about individual personalities.


Greece is a recurring nightmare - for Europe and for Greece itself.

The country had to be bailed out twice already, borrowing EUR240 billion from the European partners and the IMF. Its Government debt stands at 177% of GDP. The economy is down 25% since 2010 and unemployment rate is at 26%.

It is crunch time for the country:

• European position is that there is no question that Greece is responsible for the mess the economy is in. The problems - with external and fiscal imbalances - started with misguided policies, dishonest accounting and reporting of the fiscal environment, and this continued over many years. The problems were exacerbated by structural weaknesses in the Greek economy. So from the European perspective, a member state, like Greece, simply cannot continue endlessly violating rules. Which means that Greek debt write down via official channels is impossible. And since the banks and private investors have already taken a 50%+ write down on their claims, further debt relief is not on the cards.
• The Greek view is the exact opposite. And it has some reasonable ground under it too. Greeks see their situation as being forced onto them by Europe and, rightly, recognise that the country simply cannot repay the debts accumulated. Worse, the economy, in its current state, can't even fund these debts. We are now witnessing weekly liquidity squeezes, the latest being over the tiny EUR200 million interest payment this week.

Greece is being squeezed on liquidity front much more seriously than the immediate pressure points suggest.

Banks are losing deposits - probably over EUR5bn in April, on top of some EUR27 billion in 1Q 2015 which marked a 16% decline. These are being replaced by weekly increases in ELA by the ECB. In April alone, ECB hiked ELA by EUR5.6 billion.

Government is also running out of money. In first two weeks of May, Greece will need to refinance EUR2.8 billion of Treasury T-bills, repay EUR800 million on IMF loans. In June - EUR1.5 billion of IMF debt, EUR3.2 billion in T-bills. So there are big bills coming due.

Meanwhile, the Government is having difficulty paying pensions and public sector wages. The Government have already drained the local authorities funds, requiring their transfers to the Central Bank. Which provided somewhere between EUR1.6 and EUR1.9 billion in deposits. Not enough to cover May liabilities.

Beyond that: big redemptions are due in 2016: total of just over EUR5 billion, 2017 - over EUR6 billion, and 2019 - just under EUR11 billion. These are completely unfunded at this stage, as Greece needs to negotiate a new support package with the EU, IMF, and ECB - the so-called Institutions.

And things are still very trigger happy.

• "Panic descended in Athens on Thursday as Greece’s 2 million pensioners were hit with delays to their monthly state stipend. Pensioners raided their accounts and broke into a board meeting, according to reports."
• And quoting from the EUBusiness news linked above: "...the Greek government, ...insists it will not back down from 'red lines' on labour protection and wage cuts. A Greek government source on Thursday said Athens wanted a deal without austerity "crimes" against the Greek people. ...would not back down on labour issues, income cuts, the sale of state assets at whatever cost and a hike in VAT.""
• And the external environment remains also volatile. As Reuters described this scenario: "“We’re going bust.” “No, you’re not.” “You’re strangling us.” “No we’re not.” “You owe us for World War Two.” “We gave already.” The game of chicken between Greece and its international creditors is turning into a vicious blame game…" The problem, as anyone familiar with the game theory knows, that in the game of chicken, switching into unstable strategies may lead to a worse outcome if expected payoffs from non-cooperation (head-on-collusion) are raised. When you start publicly accusing the other side of being intentionally damaging and/or dishonest, you are getting the cost of stepping down from brinkmanship only much higher.

Three options are open:

• Structured write down of official sector debts : EFSF, ESM, and ECB. But not the IMF, leading to no Grexit and a path toward repaired economy;
• Hard default with resulting Grexit and massive mess across both the EU and Greece; and
• Kicking the can down the road once again by securing another bailout agreement to take Greece through 2015-2016. The problem here is that unless Greek economy starts a dramatic recovery, 2017-2020 will see renewed pressures of default and Grexit.

All in, the third option is currently the most likely one. Welcome to Europe's Groundhog Day, Season 8.