The Riksbank of Sweden completes the journey from sado-monetarists to Krugmanlike fanatics

A central theme of this blog since been the early days has been first to warn that negative interest-rates were coming and to warn about the implications and then to analyse the reality of them. This morning has seen another venture in this direction and these days it is not a surprise to find a Scandanavian country leading the way so let me hand you over to the Riksbank of Sweden.

The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points to -0.35 per cent.

2015 has been an extraordinary journey for the Riksbank which entered it following a literal Zero Interest-Rate Policy (ZIRP) of 0% but then cut to -0.1% in February and -0.25% in March and now -0.35%.

Why has it done this?

In the opening salvo of its rationale the Riksbank joins the list of central banks (the Bank of England did so yesterday) warning about Greece. I guess it is an easy target.

But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece.

This is entwined with fears about the strength of the Swedish Krona.

the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation.

In response to these two factors it feels that it needs to do this.

In this uncertain environment, monetary policy needs to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent.

More Quantitative Easing Too

These days central bankers may make grand statements about the effects of cutting interest-rates into negative territory but if they really believed them they would not indulge in QE as well would they? The Riksbank is no exception.

purchases of government bonds extended by SEK 45 billion

It was only last night I was discussing the possibility of QE4 in the United States and this morning I find that the Swedes have beaten them to it as in spite of only starting QE in February they have found themselves having to keep upping the size. If the Riksbank needs a song for its website then this by Britney Spears seems appropriate.

I just can’t control myself, more
They want more?
Well I’ll give them more (ow!)

If we move to a measure of scale then one way of looking at this is that the Riksbank has not completed the last announced increase yet before announcing even more. So much for leads and lags in monetary policy as the full implications cannot possibly be evident yet. Or if you prefer at the end of 2015 it will own 20% of the Swedish government bond market whereas the ECB will own 8% of its.

Why have they needed more,more,more?

Bloomberg pointed out the problem the Riksbank has been facing just over a week ago.

Sweden’s 10-year government-bond yield, which traded as low as 0.2 percent in April, was at 1.1 percent on Tuesday. Its five-year yield was 0.4 percent, after trading below zero just two months ago.

There are technical monetary arguments saying that QE has in fact caused this by reducing liquidity. If so the Riksbank is on its way to making the situation even worse so watch this space!

Back in February the story we were told was very different.

monetary policy can be made more expansionary by purchasing government bonds.

Of course the official central banking view these days as recently expressed by Ewald Nowotny of the ECB is that bond yield rises are good (as they indicate better economic expectations). This has replaced the previous view that bond yield falls created by QE policies are good. So everything is good and a success with the only exception being bond yields being unchanged. No doubt someone will be along soon to declare that a success too! All very 1984 isn’t it?

Other measures are also being considered

The Riksbank has previously suggested it may intervene directly in the foreign exchange market but today has seen a new suggestion as it looks for alternatives.

Purchases of other types of security are also a possibility, as is launching a programme for lending to companies via the banks.

It used to be a joke that central banks would end up buying every asset but the joke has morphed into near reality. Sweden may soon be chasing Japan and Sweden on that particular road to nowhere.

Also as to foreign exchange intervention, well good luck with that! Perhaps they might like to look at Switzerland although of course its central bank seems to have learnt very little if anything.

A complete change in monetary theory

Back on the 29th of May I pointed out that Sweden was undertaking an extraordinary economic experiment.

With a narrow money annual growth rate of 13.5% it is certainly doing the central banking equivalent of splashing the cash.  The economic experiment is to do this in an economy that is growing solidly. Even the argument of low and negative inflation will fade away if the price of crude oil remains where it is now.

Okay so what does the Riksbank think now?

GDP will grow faster than the historical average in the coming years . Indicators also point to increasingly bright prospects for the labour market. Employment is continuing to rise and unemployment is gradually falling.

So to coin a phrase the future is bright,so they are cutting interest-rates and adding to QE. This certainly provides food for thought about what they would do if Sweden expected economic weakness? Interest-Rates of -1%,-2% or -3%? QE to infinity?

Oh and you may have a wry smile at this after the section above discussing bond market developments.

An analysis of data from the financial markets shows that the Riksbank’s asset purchases have also had the intended effect.

Never believe anything until it is officially denied…..

What about house prices?

A feature of these times is that asset prices surge. One example of this is booming equity markets but another is the creation of house price rises and in some cases bubbles.

The Riksbank has pumped up the mortgage market.

Financial market statistics show that the average mortgage rate fell further up until the end of May and is now at all-time low levels. Since the turn of the year, it has fallen by 0.3 percentage points to 1.7 per cent.

Presumably today’s move will add to the downward pressure on mortgage-rates, so what about house prices?

According to statistics from Valueguard, prices of tenant-owned housing increased by 18.3 per cent and house prices by 13.1 per cent in May, expressed as an annual percentage change.

I would just like to point out that this is the most extraordinary part of the experiment as the Riksbank cuts interest-rates and adds to QE in such a situation.

According to SEB’s housing price indicator, households expect prices to keep on rising.

There are other consequences of this.

The development means that the debt-to-income ratio, i.e. debt as a percentage of households’ disposable income, will increase to about 188 per cent in 2018,

Such developments will make future interest-rate increases more difficult as the Riksbank ties itself ever more into a situation described by Coldplay.

Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,

Also I think that first-time buyers in Sweden will already be singing along to its most famous pop music export.

S. O. S.

A message for the Bank of England

The UK often follows Swedish developments. Also there are a lot of similarities like a booming house market for example, economic growth and a strong currency. Now if Sweden cuts interest-rate because its currency is too strong the UK will raise them because its currency is even stronger? As Snoopy would say whilst lying on top of his kennel. Ahem!

When the UK began its strong currency status in March 2013 one UK Pound £ bought 9.6 Krona and now it buys 13.1.


Today’s article points out that the Riksbank is now indulging in monetary policy of which even Paul Krugman of the New York Times would approve. Ignore any housing bubbles or economic growth and push the pedal to the metal anyway is that drumbeat. Perhaps he rattled them with the description below back in April 2014.

Whatever their motives, sadomonetarists have already done a lot of damage. In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.

The “stagnation” line was somewhat bizarre if you look at Swedish economic growth but it turned the Riksbank into disciples as they travelled their own economic road to Damascus.

QE Wars

The ECB has expanded its QE program further into private-sector assets (Corporate Bonds) this morning. Did the Riksbank either know or suspect this? I will let readers decide for themselves if this is a new battlefront in the ongoing Currency Wars or a distinct war of its own.

Too Infinity! And Beyond!

Whatever happens next the Greek people look set to suffer even more

Last night at 11 pm British Summer Time saw an event which the last five years have been building up to. From the International Monetary Fund or IMF.

I confirm that the SDR 1.2 billion repayment (about EUR 1.5 billion) due by Greece to the IMF today has not been received. We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared.

Thus Greece finds itself in arrears to the IMF but I can confirm that the world has not ended!

However there are a lot of implications which in the IMF has implicitly admitted by the use of the word “arrears” as it avoid the word default. Some have argued that this is like missing a credit card payment but there are quite a few differences to that. For example penal interest-rates on the whole sum and missed payment fees and so on. Also credit card companies like you to run into arrears because as long as you actually repay they can rub their hands in anticipation of making a substantial profit out of you. The longer you take to repay the more money they actually make.That is not the business model of the IMF which lest we forget is supposed to put a country back on its feet so that both it and the individual country concerned can live happily ever after.


The IMF’s leadership now finds itself facing a problem I have warned about since June 2010.

Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong.

There is of course a supreme irony that the current head of the IMF Christine Lagarde is an ex-politician.

Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.

She now heads an organisation facing the largest non-payment in its history as a direct consequence of the way that she and her predecessor Dominique Strauss-Khan twisted the organisation into helping with Euro area fiscal problems.

We also face the consequence of some recent can-kicking as several IMF payments due earlier this month were bundled up in the hope that “something wonderful” might happen by the end of the month. Right now the IMF is left wondering about the 32 billion or so Euros it has lent in total. Due to the economic recession which of course was turned into a recession by a plan supported by the IMF it is unlikely to be able to repay those funds either.

So let is leave the IMF mulling how it is going to explain is largest ever arrears to its shareholders. In case you are wondering the UK is a little over a 4% shareholder.

Preferred Creditors

The IMF is a “preferred creditor” in that it is supposed to be repaid first. As it has not been in this instance that poses questions for the vehicle the Euro area uses to loan to Greece called the European Stability Mechanism or ESM. Not so stable looking today is it? Theoretically it is also a “preferred creditor” which seems now a bit like tilting at windmills.

European Central Bank

It now has an extra problem as it mulls the amount of Emergency Liquidity Assistance or ELA it has given to Greek banks. It imposes a haircut on the collateral it receives from the Greek banks in return for this and the obvious consequence of last nights default is that it should increase the haircut. Here we see an example of a rock meeting a hard place as there is not only doubt about whether Greece has enough collateral for current ELA levels its banks would like more of it.


There were all sorts of strange stories yesterday. Perhaps the most bizarre was a claimed offer of help from Turkey! The Greek government also got in on the act as Prime Minster Tsipras made a new proposal to the Euro area. According to the Financial Times he has taken this a step further today.

Mr Tsipras’ letter says Athens will accept all the reforms of his country’s value-added tax system with one change: a special 30 per cent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained.

On the contentious issue of pension reform, Mr Tsipras requests that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He also requests that a special “solidarity grant” awarded to poorer pensioners, which he agrees to phase out by December 2019, be phased out more slowly than creditors request.

So it appears that he has blinked first but as I pointed out only last Thursday there is a problem with such a move.

However its analysis of the impact of a fiscal consolidation has a chilling implication for the austerity package which the Greek government has just proposed. The impact will be to reduce GDP by 1.5% to 2% this year and to reduce it by 3-4% next year!

So we return to a problem which so far in the Greek crisis has failed to find a solution. In return for the loans and credit Greece needs the creditors always want more austerity which shrinks its economy and makes it ever less likely the loans will be repaid. It also leads to more demands for austerity in a cycle which so far has been endless.

The Eurogroup

If the media wires are any guide this body seems to be singing along to Tom Petty and the Heartbreakers.

Well, I won’t back down
No, I won’t back down
You can stand me up at the gates of hell
But I won’t back down

No, I’ll stand my ground, won’t be turned around

They are formally meeting at 5:30 pm Brussels time but it is hard not to wonder why? After all they show no sign of changing their position. It does not seem to bother them that its very nature is not only destructive it is self-destructive.


This saga continually plumbs new depths. On the one side we have the institutions or creditors insisting on programs which will further shrink the Greek economy. They of course do their best to deny this and are willing to rewrite history to do so. From the head of the ESM Karl Regling.

Due to the economic policies adopted under the EFSF programme, the country was on a good path towards strong growth until the second half of 2014. The many sacrifices which the Greek people had to make were paying off…… According to the OECD and World Bank, Greece was a reform champion until 2014, with encouraging growth prospects.

“Reform champion”? “Encouraging growth prospects”? That is before we consider his omission of what the “economic policies” have done to Greece’s economy. They will do it again.

As to the Greek government it now faces the problem of people wondering exactly what its modus operandi is? It badged itself as anti-austerity but now is willing to give a lot of ground on that front.

The losers yet again are the Greek people who I feel dreadfully sorry for as this shambles will affect them materially and they have already suffered on a grand scale. Let us hope that Tom Petty was right below.

Baby, even the losers get lucky sometimes
Even the losers keep a little bit of pride
They get lucky sometimes

Just in time for summer UK consumer confidence booms as GDP is revised higher

Today sees the UK economy at least make an effort to nudge past one or two of the headlines about Greece! One thing London at least has is temperatures which are expected today to be Athens like, or in tabloid terms to be hot,hot,hot with the temperature at the tennis at Wimbledon expected to make 30 degrees Celsius. We do not cope with it particularly well and I think I will give the tube a miss as I am not a great fan of saunas. However already we have received an update on consumer confidence which ties in with the weather. From the Gfk Consumer Confidence Report.

We’re seeing a dramatic uptick in confidence this month, a real post-election bounce that’s put a spring in the step of consumers across the UK. June’s six-point jump takes the Overall Index Score back to levels not seen since the late Nineties or early days of the Noughties.

If you look for some perspective you will see that like so many measures this index picked up after the Bank of England Funding for (Mortgage) Lending Scheme began in the summer of 2012. The chart provided shows that it hit a low of around -30 as summer turned to autumn in 2012 compared to +7 now. So the UK consumer has followed mortgage and housing changes just like one of Pavlov’s Dogs and “same as it ever was” to quote Talking Heads. The catch which will wipe the smile of the face of the more thoughtful Bank of England policy-makers is that back when consumer confidence was last at this level UK Base Rates were more like 5% than 0.5%.

Or as the Chief Economist of the Bank of England Andy Haldane put it in a speech yesterday.

Interest rates appear to be lower than at any time in the past 5000 years.

I will leave the Bank of England to explain how record  low interest-rates go with a consumer boom that may well be as hot as the weather if Gfk are correct.

Perhaps Andy and his colleagues are troubled by this issue.

Over the course of a decade, the risk of experiencing at least one recession rises steadily, reaching between 85-90% after ten years.  Using post-war data, this cumulative probability is just less than 80%.

One is starting to become due is it not? If we look for possible causes there is Greece in all the headlines or deeper in the newspapers but overall more significant the way that China seems to be bubbling over.

Of savings and generational inequality

One (Space) Oddity of the Gfk report is that the savings index has improved too and it is apparently now a good time to save! Rather awkward that as that does not go well either with it being a good time to consume nor following the FLS inspired reductions in savings deposit rates. But this does link in with an interesting set of data on my theme of generational inequality from the Office for National Statistics.

The median disposable income of retired households was 7.3% (£1,400) higher in 2013/14 than in 2007/08, after accounting for inflation and household composition, compared with 5.5% (£1,600) lower for non-retired households.

So retired households who one might think are dependent on savings income and deposit rates both of which have fallen have in fact done relatively well in the credit crunch era. We have considered this many times before but if we add in higher house prices and indeed rents it is not the best of times to be young is it? Or to be more specific for the first time for a while subsequent generations face the probability of being worse-off than their antecedents.

Whilst I expected the changes to the state pension to be an influence here I have to confess some surprise at the other impact below.

In 2013/14, retired households received an average of £9,500 from private pensions/annuities, a real terms increase of 9% from 2012/13 when the average was £8,800 and an increase of 26% since 2007/08 (£7,500).

Going forwards with the legal changes that is going to be difficult to measure to say the least.

What about booming consumption?

Also whilst the data only takes us up to April 2014 there is plenty of food for thought in the numbers below.

In 2013/14, median disposable income was £500 (or 2.0%) lower than in 2007/08, while GDP per person in 2013/14 was 3.1% below its 2007/08 level.

Indeed the OECD (Organisation for Economic Co-operation and Development) weighed in on this subject yesterday evening. It compared hourly wage growth pre credit crunch (2000-07) to after it (2007-14) and had the UK as 5th worst at just under -4%. Until their full report is published the methodology used is unclear but we are not that different to Greece on this measure.

Those numbers do not fit that well with booming consumption but of course we have just had a good year in economic growth terms to add into the pot.

Between Quarter 1 2014 and Quarter 1 2015, GDP in volume terms increased by 2.9%, revised up 0.5 percentage points from the previously published estimate.

GDP was estimated to have increased by 3.0% in 2014, compared with 2013, revised up 0.2 percentage points from the previously published estimate.

But even allowing for that we again find ourselves in the position of looking at things which do not seem to be consistent. Perhaps the unsecured lending boom squares much of this circle.

Consumer credit increased by £1.0 billion in May, in line with the average monthly increase over the previous six months. The three-month annualised and twelve-month growth rates were 8.5% and 7.2% respectively.

There was a time when this would be considered a risk of “over-heating” and interest-rates would rise in response as opposed to being unchanged for over 6 years at a 5000 year low.

Also we may be feeling better-off due to this.

Real household  disposable income per head increased 3.9% in Q1 2015 compared to the same quarter a year ago

Oh and on the subject of interest-rates Andy Haldane might like to review and perhaps redact this bit.

in my time at the Bank of England I can recall UK interest rates rising by 5 percentage points in a day.

Actually in 1992 the latter 2% never actually happened as it was announced for the next day and was cancelled.

The unreliability of GDP statistics

I often detail the problems of using Gross Domestic Product as a measuring-stick for an economy. Today’s data release highlights that in one simple section and it refers to the construction sector update that I discussed on the 12th of this month.

Construction output rose by 4.5% between Quarter 1 2014 and Quarter 1 2015, revised up 4.8 percentage points from the previously published estimate.

The construction series was a shambles and hopefully has now been improved. If we recall the shambles over recording rents and then the establishment effort to force us to use them as an (owner-occupied) inflation measure you can see that the housing sector is measured dreadfully. It is a good job it is not a significant part of the UK economy…..Oh hang on.


There is much to consider in the latest data. We should be grateful that the UK continues to grow and that the performance over the past year of circa 3% is good in historical terms. However even if we ignore the conceptual issues with GDP we have the problem that if we move from the aggregate to the individual level things are not as good. For example I have already highlighted the lagging of per capita GDP well even now it continues to lag the aggregate number.

GDP per head was estimated to have increased by 0.2% between Quarter 4 2014 and Quarter 1 2015, revised up 0.1 percentage points from the previously published estimate. Between 2013 and 2014, GDP per head increased by 2.3%.

As for generational issues they continue to build as the young face student debt,maybe mortgage debt on large scales whilst wages and incomes stagnate. Perhaps this is why Andy Haldane is so gloomy.

The psychological scars of the Great Recession, as after the Great Depression, have proved lasting and durable.  They help explain the sluggishness of the recovery, and the adhesiveness of interest rates, since the crisis.  And, if the past is any guide, these scars may heal only slowly.

His policy prescription? Well we do get a broad steer.

As then, they suggest the optimal path for interest rates involves an immediate cut in rates for about a year, which pushes inflation back to target and closes the output gap.

Meanwhile enjoy your extra second tonight!

Greece faces yet another credit crunch as capital controls begin

This morning we find ourselves considering a situation which the Euro area has told us is not possible. The recent accession of Lithuania to the Euro area led the European Central Bank to proclaim this.

The irrevocably fixed exchange rate is €1= LTL 3.45280.

It is the word “irrevocable” which poses more than a little food for thought right now as it reminds us of the new word of the credit crunch era called “unpossible” which is for something apparently even less likely than impossible. Of course in the twisted language of these times -especially from officials- the higher the rhetoric rating the more likely moves are in the opposite direction! The connection between Greece and the Euro does not look irrevocable after the events of the past weekend does it?

Even UK Prime Minister David Cameron seems to be on the case. From BBC Radio 4 Today.

If they vote no, I find it hard to see how that is consistent with staying in the euro, because there would be, I think, a very significant default and a very significant problem.

Also in an intriguing move the central bankers body the BIS (Bank for International Settlements) left Greece off its map of the Euro area in its latest Annual Report! What is the opposite of a redaction as they rushed to put it back in later editions? Some may be wondering if it was not necessary…

Even the Eurogroup of Euro area finance ministers joined the game in a way as they issued a statement from 18 nations not including one of its members (guess which one…?).

What about Greece?

The calling of a referendum on the latest Euro area austerity proposals by the Greek Prime Minister and then Parliament threw something of a spanner into the works. As we were left waiting until next Sunday for the vote and then result there were two issues which quickly came to mind. The first was the fact that Greece has to repay some 1.5 billion Euros to the IMF (International Monetary Fund) by 6pm Washington time tomorrow. The second as how the ECB -which has been propping up the liquidity of the Greek banks- would respond. We found that out yesterday afternoon.

Given the current circumstances, the Governing Council decided to maintain the ceiling to the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on Friday (26 June 2015).

The message was along the lines of the boxer Roberto Duran “No Mas” statement when he ended the fight against Sugar Ray Leonard. Accordingly Greek banks would have to deal with future withdrawals and indeed ones which happened this weekend on their own. So we have another form of credit crunch which led to this announcement. From Kathimerini

ATM withdrawals would be limited to 60 euros per day per account and that banks would remain closed for at least the next six working days, including the day after the referendum on the institutions’ proposals to Greece. Visitors to Greece will be able to withdraw cash up to the limit set by their bank.

This was especially awkward for the Greek Finance Minister Yanis Varoufakis who around 5 hours before had tweeted this.

Capital controls within a monetary union are a contradiction in terms. The Greek government opposes the very concept.

Apparently that did not stop the Greek systemic council from imposing them. Although if we return to the basic monetary policy that I discussed last week he does have a point with his first sentence. How can you have capital controls in a common currency? There is a clear failure here.

The ECB has found itself offering some odd rhetoric too. From RANSquawk

ECB Nowotny says Greece may not be able to pay IMF on June 30 but that doesn’t mean that it will default

Apparently even a default does not mean a default any more! It might be a good idea if somebody told Christine Lagarde of the IMF as she has been issuing various threats on that basis. Perhaps she does not want to be left holding the parcel of the largest default the IMF has ever had on her watch should the music stop.  Mind you after issuing a statement like the one below it makes you wonder how much reality reaches the upper echelons of the IMF these days.

I continue to believe that a balanced approach is required to help restore economic stability and growth in Greece……. The IMF is prepared to continue to pursue that approach with the Greek authorities and our European partners.

That “balanced approach” and “help” has collapsed the economy and created an economic depression in Greece.

The problem for the creditors and institutions

This is simply the amount of money that has been lent to Greece. Countries such as China and India which have increased their backing for the IMF in recent times are unlikely to be too pleased should it see its largest ever default which the Greek lending scheme would be. In effect Europe managed something of a takeover of the IMF by appointing (French) politicians to lead it and by the way that they have turned it from a balance of payments organisation to one dealing with fiscal issues particularly European ones. No wonder Christine Lagarde often seems rattled these days.

Mario Draghi and the ECB  face their own problems based on the scale of funds provided to Greece. I bet right now officials at the ECB are scanning the Greek collateral provided in return for much of the payments. Meanwhile Mario will be mulling the fact that a central bank needs to be linked to a Treasury at times like this. LorcanRK of Bloomberg put it more humourously as queues began at Greek ATMs on Saturday.

Anyone see Mario Draghi in any of the Greek ATM queues? I hear he wants to make a large withdrawal..

We are back to the old truism that if you owe a bank £1 it owns you but if you owe it £1 million then you own it. Of course the more modern version involves billions in these increasingly inflated times.

Remember around 3 years ago when I pointed out the problems created by the accounting assumption made by the ECB that all Euro area sovereign bonds would be repaid at par of 100?

Market Response

There is very little from Greece itself. Markets there are shut this week but some derivatives traded elsewhere are indicating falls of between 15% and 30% for Greek bank shares. The Euro dropped below 1.10 versus the US Dollar last night but has rallied since, perhaps in the style of Who wants to be a millionaire it was able to phone a friend. From Reuters.

The euro came off its lows on Monday as the Swiss National Bank said it intervened in the market to weaken the franc,

After initially falling heavily Spanish and Italian bonds have rallied back. Is it rude to wonder if the Swiss National Bank has parked its new Euros there? After all it can’t keep buying shares in Apple can it?

The German stock market is currently down about 3.5% today as we await the next developments.

Spare a thought for China

Having gone to all the trouble of cutting interest-rates yet again on Saturday the People’s Bank of China must have been disappointed to see its stock market fall again. Those pesky European Federalist Capitalist Imperialists…..


We are seeing another phase in the credit crunch that is ongoing in Greece as banks shut and withdrawals are limited. Although in a sign of the shambles that times like this create some banks seem likely to open today to allow pensioners to collect their pensions. This in itself reminds us of another way which is how long the Greek government can pay its bills and obligations for outside of the bailout structure. As we stand that ends formally tomorrow. Right now it would appear that filling your car with petrol or diesel has replaced withdrawing cash from banks as the thing to do as many Greek petrol stations have run dry.

Still Greece will receive an economic boost from all the journalists who have flown in and are presently on their way. So the hotel and restaurant industry can expect a boost from their expense accounts.

As to what happens next there is a lot of uncertainty at which times it is often best to see what the betting markets are doing. William Hill has stopped taking bets on Grexit as they became all one-way and Paddy Power is now pricing an 11/19 chance of a Grexit.

Oh and what is it about Robert Peston of the BBC and bank runs? From yesterday morning.

The European Central Bank’s governing council is expected to turn off Emergency Liquidity Assistance (ELA) for Greek banks at its meeting later today, according to well-placed sources.

He appears to be the ultimate insider aware of events that for example the French Prime Minister was denying. He is like a vampire waiting to sink his teeth into any banking collapse.

European Central Bank monetary policy and Greece

The Greek saga has now continued for over five years and it has managed to produce an economic depression to rank with the falls of the Great Depression of the 1920s and 30s. At the beginning the European Central Bank was relegated to the back as Euro area politicians proclaimed their “shock and awe” program which produced the disaster that has unfolded since but very quickly it was required to take action. In the melee which has followed it is easy to forget that a type of Quantitative Easing began in Greece back in May 2010 as the ECB purchased its government bonds. The official view was that it was not QE because there was a weekly sterlisation auction to withdraw the liquidity created but this ignored various effects. Firstly the Greek bond market was supported, secondly holders of Greek bonds (banks for example…) were given a taxpayer-funded exit,and thirdly whilst some funds were withdrawn they were across the Euro area rather than specific to Greece. Also the liquidity withdrawal was of weekly funds as opposed to the 3/4 year maturity of the bonds purchased and that matters. You do not have to take my word for it as the Federal Reserve and Bank of England think so otherwise they would never have instituted Operation Twist style strategies which depend on precisely that.

So there was a time when the ECB was a friend to Greece if I may put it like that. There were also other programs such as the trillion Euro LTROs (Long-Term Repurchase Operations) which indirectly benefited Greece as well as the cut in the main interest-rate to -0.2%. However times have changed and it is now operating expansionary monetary policy elsewhere but has been keeping the monetary sector in Greece on a much shorter leash.

Euro area monetary policy

This is very accommodative right now. In addition to the measures described above the ECB commenced a formal program of QE in January. Up until this date it had a couple of relatively minor programs but the effort since has been expanded to 60 billion Euros a month and now includes sovereign bonds.As of the 19th of June some 182.2 billion Euros had been spent on operations in this area.

Today’s update on monetary data does show how these sums are in some instances flooding into the Euro area monetary system.

the annual growth rate of M1 increased to 11.2% in May 2015, from 10.5% in April.

However as I have discussed before as we move to wider monetary aggregates the impact fades considerably.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in May 2015, from 5.3% in April 2015.

If we move to the area of credit the numbers are much lower.

Among the components of credit to the private sector, the annual growth rate of loans increased to 0.5% in May, from 0.0% in the previous month (adjusted for loan sales and securitisation , the rate increased to 1.0%, from 0.8% in the previous month).

Indeed for businesses the situation has in fact deteriorated.

The annual growth rate of loans to non-financial corporations stood at -0.3% in May, compared with -0.4% in the previous month.

As you can see the ECB is making an extraordinary effort which as we go into the wider measures of the monetary system fades away quite fast. It has produced a more clear cut rise in another area but I will let readers decide if this is a success or not.

The annual growth rate of lending for house purchase, the most important component of household loans, increased to 1.4% in May, from 0.1% in the previous month.

Perhaps it is copying the policy of the Bank of England which enjoys pumping up the housing market. As an aside this is an area which is also awkward for the ECB as of course if we look at Spain which has seen official estimates of annual economic growth vary between 3.1% and 4% this week what is does not need is a new housing related boom.

Accordingly we see that even with what would only a few short years ago have seemed an extraordinary effort the ECB is seeing patchy results especially if we recall that it had expansionary policies in place before its new QE effort. However the tap is definitely tuned on.

What about Greece?

Here we have a complete contrast in terms of monetary action especially as this is the Euro area country you might think would most benefit from a monetary boost. This point was made in the Economist magazine by its Finance Minister Yanis Varoufakis back in late January.

Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall.

By all three measures Greece would be at number one in the charts rather than being excluded. There are a couple of awkward issues here because Greece has already benefitted from the  QE style purchases by the ECB discussed above which is one of the reasons it is not active there now. Put simply it cannot buy the same bonds twice! Rolling the bonds over on maturity would not only look like debt monetisation it would be.

In spite of the other expansionary monetary efforts we see that the Greek money supply continues to shrink. Todays’s official data brings us up to the beginning of this month and it does not make good reading.

Total deposits at Greek banks which were some 159.6 billion Euros at the end of November had fallen to 125.2 billion at the end of May. If we move to the household sector alone deposits fell from 136.5 billion Euros to 111.8 billion over the same period. If we look at May on its own then the Greek household sector withdrew some 3 billion Euros from Greek banks. Putting it another way this is what economic and finance text books mean when the use the phrases capital flight and deposit flight. Actually we are in fact simply in a faster phase of it because is we look back to the end of 2009 total deposits at Greek banks were 234.5 billion Euros.

Thus if we look at a type of pure monetarism we are left with a very troubling though because the original crisis with its deposit falls was followed by an economic depression. So further falls which we believe have accelerated even more in June point to a grim economic future for Greece.

The ECB has a specific policy to combat this which is called ELA (Emergency Liquidity Assistance). But the way that it grudgingly gave weekly increases to the amount of ELA only made things worse in my opinion because it gave the impression that it could stop doing so. Frankly the ECB undermined its own actions by doing this and something which was supposed to calm the crisis in fact exacerbated it. Indeed in something of an irony it was forced into a volte face with a change to daily announcements and actions. Today was better in the sense that no increase was required but of course the money that can leave probably already has.


The founders of the Euro area left its central bank with quite a list of problems. For example the UK has regions with economic problems but by contrast it is a nation-state with fiscal and political union.Now here is a really dark thought for you which is that some Euro area supporters may not be that upset over the Greek crisis as it provides an opportunity to press for exactly that where fiscal union creates a federal state. As Frances Coppola points out below something along those lines appeared on Monday.

Today, the five Presidents – European Commission PresidentJean-Claude Juncker, together with the President of the Euro Summit, Donald Tusk, the President of the Eurogroup,Jeroen Dijsselbloem, the President of the European Central Bank, Mario Draghi, and the President of the European Parliament, Martin Schulz – have revealed ambitious plans on how to deepen the Economic and Monetary Union (EMU) as of 1 July 2015 and how to complete it by latest 2025

This has been added to by Euro area politicians who put a fiscal squeeze on Greece when it was already in crisis. As I discussed only on Wednesday that seems to be the plan going forwards too.

However if we return to pure monetary policy we find that the ECB is pursuing what it considers to be an extremely expansionary policy except that it is not reaching Greece. Putting it the words of Governor Carney monetary policy there looks “maxxed-out”. It is to use a past analogy “pushing on a string” as fear offsets its efforts. As the chance of capital controls being introduced rises ECB policy gets undermined as what Keynes called “animal spirits” take charge. What a mess!

A Video Version

I was interviewed by Kumutha Ramanathan of World Finance magazine on Tuesday on the subject of Greece and for those who prefer a video analysis it is shown below.

What are the economic consequences of the UK leaving the European Union?

A feature of these times is that the news flow is dominated by discussions about the Greek crisis. In spite of a deal being “close” and then “closer than close” we find a situation where there is still dissent and plenty of name calling. However there is another issue on the horizon for Europe which is the planned referendum in the UK on the subject of continued (or not) membership of the European Union. Accordingly some 40 years or so after they voted to join what was then a free trade area called the European Economic Community or Common Market UK electors seem set to get the opportunity to vote on what has now become a federal project called the European Union unrecognisable from those days. The vote has acquired its own acronym of Brexit which seems a little unfair on Northern Ireland which is in the UK but not Great Britain. Let us take a look at the economics.

The UK establishment

This has continued to run various unsubstantiated lines of which the most prominent has been “3 million jobs depend on Europe”. As Europe is our largest trading partner of course plenty of jobs depend on business there just like they did before we joined the EEC back in 1973. As we traded with Europe before 1973 presumably we could post 2017 and any Brexit. It is of course possible that some jobs will be lost but let me give you an area where it is certain.That is of UK politicians and officials who work in the European parliament and institutions who will lose well paid jobs sometimes which are tax-free and which frequently come with substantial expense accounts. This ,makes me wonder if the UK establishment has confused its well-being and circumstances with ours.

The other side of the argument is that the UK would have changed European policy if it had “engaged” more with the project. This has been expressed by Martin Sandbu in the Financial Times and this is the argument.

The important question, therefore, is how the UK would have changed the eurozone’s policies from the inside.

You may note that the sands have shifted here as the FT’s economics leader writer looks to justify its long-standing support for the Euro project. Apparently everything would have been better.

The BoE understood the need for extraordinarily aggressive policy much better than its counterpart in Frankfurt.

So in the fiscal sphere, too, British euro membership would have tilted policy in the direction of growth. And the influence could have been substantial.

There you have it as we are so clever in the UK we could have fixed both monetary and fiscal policy! Rather against the reality of the policy errors of the Bank of England which gets a lot of rose-tinting here.

There are quite a lot of issues with this. Firstly had we been in the Euro and the lower interest-rates there had been applied to our housing market then it would have had a boom and bust which would have made the ones in Ireland and Spain look like an afternoon tea party. As an example post 9/11 UK Base Rates fell to a low of 3.5% whereas the ECB cut to 2%. Never mind Greece how about paying for a UK bailout? That may well have broken the Euro. Also as an implicit part of our policy response under Bank of England Governor Mervyn King was for the UK Pound £ to fall and this fall was if we use our rule of thumb a larger monetary stimulus than the Base Rate cuts we have a problem if we are in the Euro do we not?

Life is rather different if you look at the facts rather than cherry-picking from a wish list. But of course the Financial Times is writing to itself with this bit.

If you were so misguided as to have supported the euro then, they argue, surely we cannot take seriously your argument for continued EU membership today.

The economics leader writer of the FT seems to be a little short of knowledge of economics and economic history. Perhaps he might take a look at 1992 when we left the forerunner of the Euro called the ERM in a rather undignified fashion.

What about trade?

The simple fact is that the UK trades on a large-scale with Europe and both not just one side benefits from that. This is reinforced by the fact that we have a balance of payments deficit with Europe and in particular a large goods or balance of trade deficit. Here is the data from UK Customs and remember this is just one month.

EU Exports for April 2015 are £11.0 billion….. EU Imports for April 2015 are £17.6 billion……..EU trade is a net importer this month, with imports exceeding exports by £6.6 billion.

I do like the way they put “this month” as I cannot remember when we last had a trade surplus with the European Union. But if we look at individual countries we bought some £2.6 billion more goods from Germany than we exported in April alone. Thus any closure of trade with Germany would have Audi.BMW,Bosch,Porsche and Volkswagen knocking on Chancellor Merkel’s door in very short order. Or let me be more realistic ringing her mobile phone as I am sure they will have the number.

In the unlikely event that such numbers do not influence Germany there is always the £1 billion goods deficit with the Netherlands, the £600 million deficit with Belgium and Luxembourg, the £570 million deficit with Italy or the £400 million goods deficit with France in April to consider.

If you want a longer-term perspective here is the latest quarterly data is below.

By area, the UK’s deficit with the EU widened by £0.2 billion to £21.3 billion in the three months to April 2015,

They are not going to end that are they? At a time of economic difficulty the UK has been a substantial buyer of European and Euro area goods something which we seem to get very little credit for.

Just to be clear these are numbers for goods. We do have a services surplus but we are very vague about from where (although we have monthly numbers the actual data is quarterly and annual). I regularly discuss the fact that this is an embarrassment in an era of information technology but overall we remain solidly in deficit.

Also to sweep up the whole subject if trade is a benefit for all as argued why would anybody want to stop it?

Looking further afield

On the upside there would be clear gains from the UK moving its emphasis to the rest of the world. If we just look at the subcontinent there is the fast growing India with which we have traditional and indeed cultural links (tea,cricket and increasingly I gather football). Or if we consider China I note that it is playing a long-term game based on resources whereas we have de-emphasised links with Canada and Australia which of course are stacked with them. In a world where Australia sees threats merging we could do a lot worse than actually putting some planes on one of our upcoming aircraft carriers and sending it on a tour to Australia. After all the US defence umbrella is not what it was.

Some numbers from Open Europe

They did an analysis of the situation and it is the scale of the numbers I think which are important here.

In a worst case scenario, where the UK fails to strike a trade deal with the rest of the EU and does not pursue a free trade agenda, Gross Domestic Product (GDP) would be 2.2% lower than if the UK had remained inside the EU.+

In a best case scenario, where the UK strikes a Free Trade Agreement (FTA) with the EU, pursues very ambitious deregulation of its economy and opens up almost fully to trade with the rest of the world, UK GDP would be 1.6% higher than if it had stayed within the EU.

Some care is needed as these numbers represent the impact a fair way down the road as they are for 2030 but they are quite low considering all the hue and cry and they center on zero pretty much! So it does not matter? I think that overstates things but we are obsessing one more time about a narrow geographical issue.


One thing I would like to make clear is that many of the countries in Europe have long been our friends. Portugal is the oldest ally of England and Wales and I am putting it like that because the alliance even predates the union with Scotland. Also I recall messages to this blog from Greeks back in the early days of their crisis pointing out that British troops had fought for them back in World War Two. Thus I am bemused by the idea that somehow the day after Brexit we would have moved our island into the middle of the Atlantic rather than being next to Europe. Why could we not be friends and do a deal? After all we are always likely to be a disruptive influence to a federal Europe with our economy tilted towards housing and banking.

The other side of the argument that we can start to “really engage” with Europe and help to reform it has as a problem the evidence of the last 40 years. It is silly to argue that everything that has come from there has been bad but exactly where have we made our voice heard? Indeed when this came up some 30 years ago on Yes Minister the apocryphal civil servant Sir Humphrey Appleby put it very differently.

Sir Humphrey: Minister, Britain has had the same foreign policy objective for at least the last five hundred years: to create a disunited Europe. In that cause we have fought with the Dutch against the Spanish,with the Germans against the French,with the French and Italians against the Germans, and with the French against the Germans and Italians. Divide and rule, you see. Why should we change now, when it’s worked so well?

Later he went on..

Hacker: But surely we’re all committed to the European ideal?

Sir Humphrey: [chuckles] Really, Minister.

Hacker: If not, why are we pushing for an increase in the membership?

Sir Humphrey: Well, for the same reason. It’s just like the  United Nations, in fact; the more members it has, the more arguments it can stir up, the more futile and impotent it becomes.

Hacker: What appalling cynicism.

Sir Humphrey: Yes… We call it diplomacy, Minister.

Was he right?

UK rents are surging to all-time highs making them much higher than in Europe

Yesterday I analysed the way that yet more austerity is likely to squeeze the life out of the Greek economy one more time. Today I return to a very British problem and crisis which is the cost of housing which for many people squeezes the life out of the family budget. Of course the conventional and mainstream view is that the price of housing boosts wealth and hooray we are all richer. But of course much of the increase is in fact inflationary and it reduces the wealth and indeed financial position of those looking to buy a house. As I regularly point out “Help To Buy” for first time buyers is an opportunity to buy an overpriced house with real wages which have been falling. What could go wrong? Back on the 16th of March I pointed out (via BBC Womans Hour) that women do fear what might happen next.

I look around at the children who are 19 and 20 and I don’t know how they will ever be able to afford a mortgage?


I would prefer the housing market to halve in all honesty and let people get in on the market even though I would lose money. But I don’t see it as losing money…..


Young people won’t get a chance with landlords snapping up every available property….


However there is another factor in the situation which is to look at the implications of the current situation for those who rent rather than buy. If we look at the last quote above we are reminded of the Buy to Let boom and the fact that more people are either choosing or being forced to rent. They also are having a hard time of it as I pointed out on the 27th of March. From Your Move

Rents across England and Wales are now 15.2% higher than at the time of the last General Election in May 2010……This is faster than inflation. Over the same period since
May 2010, consumer price inflation (CPI) has amounted to
11.6%. This leaves a 3.6% increase in rents after the
effects of inflation – or the equivalent of a 0.7% real terms
increase each year over the last Parliament.

I compared that increase to an 8% increase in average wages over the same period or a 7.2% decline. So yet another form of real wage squeeze has been in process for those who rent. Or as Gwen Guthrie so aptly put it.

Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
Ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Friday saw more bad news for both actual and prospective renters from Your Move research.

Rents driven to new all-time record by

divergent south-eastern regions….. Residential rents up 4.5% year-on-year across England and Wales, powered by three southeast regions.

In case you are wondering how much..

As of May 2015, the average residential rent across England and Wales now stands at £778 per month.

As ever London leads with £1207 per month. But it does not lead the annual increases as the leader is the East of England at 13%. Does anybody have any detail or insight to this?

exceptional economic expansion in the Cambridge area,

A rentier society?

The Your Move report goes on to measure returns for landlords.

Total annual returns, on the other hand, have continued to cool. Across England and Wales, returns came to 9.5% in May 2015 – down from 9.8% in April and 11.8% in January.

If you compare that to a Bank Rate of 0.5% or a ten-year Gilt yield of 2% that looks hot hot hot to me rather than cool. There are of course costs (maintenance etc.) but in these times 9% + looks like nectar does it not?

An international perspective

Renters who note that rents are rising at a solid lick when you consider that we are supposed not to have any inflation will not be cheered up by the fact that they are still rising faster than wage growth. Even its recent spurt falls short. But adding to their pain is the fact that the UK is very expensive when compared to its peers as the UK Housing Federation points out.

In fact, private renters in the UK pay the highest price for housing in the entire European Union. With an average monthly rent of 902 Euros per month (the equivalent of around £730), private renters in the UK pay almost double the amount of the European average, which is 481 Euros.

If we look to compare with our peers then we are in fact still considerably more expensive.

Even when compared to other Western European countries with similar income levels, the PRS in the UK remains expensive. For example, private rents in the UK are around 50% higher than in Germany (600 Euros) or the Netherlands (625 Euros), both countries with a large share of privately rented households.

There will have been an effect here from the rise in the UK Pound £ against the Euro especially at the 1.41 it has reached this morning. However that still leaves a fair-sized gap to explain as we mull concepts such as “rip-off Britain” and the fact that our whole economy has been tilted towards the housing sector.

Existing mortgage holders have their problems too

I have written in the past about how big a deal credit rating is on an individual basis and we got a hint of this yesterday from the RBS announcements. From its chairman (h/t Investis)

Around half of all mortgage customers in the UK are still on Standard Variable Rates.

You see that is at 4% which is rather different to the headline rates for new customers.

Martin Weale

Dr.Weale has been quoted in the Financial Times today.

The FT reported that Weale, a member of the BoE’s  Monetary Policy Committee who voted for rate rises last year, believed the central bank should be ready to raise rates as soon as August.

Perhaps rather than speaking to newspapers he should actually vote for such a thing. We know he did not in June as the vote was 9-0 against. Of course Dr.Weale was voting for a Bank Rate increase up until January. Actually he now has two sequences of voting for a rise then changing his mind.


It is increasingly pointed out that the UK has strong elements of a rentier society. Today we see that rents are not only on the rise to record levels but are very high in international terms. We also know that as fewer people can afford to buy and the stock of housing for public-sector renting falls – especially under the new Right To Buy plans – then more will find themselves privately renting. They find themselves doing so just as the terms and costs move against them. How very credit crunch! We live in a world where official claims that there is no inflation clash with the fact that quite a few things are more expensive.

So renters are likely to be mulling the thoughts of Dido.

If my life is for rent and I don’t learn to buy
Well I deserve nothing more than I get
Cos nothing I have is truly mine