G20 Communiques differ and problems for the eurozone as peripheral government bond yields rise again

After writing on the subject of market volatility over the past few weeks we then had Friday which was one of the most extreme examples of this. After rallying in the morning European equity markets were affected by the tailwind of the non-farm jobs report from the United States as the Dow Jones Industrial Average quickly fell some 200 points and ended up 332 points down. After reaching an intra-day high of 5261 the FTSE 100 index closed at 5126, and following the later moves of the Dow Jones and overnight falls in Asian markets is down another 70 points as I type this article. Over the past 26 trading days the Dow Jones has moved up or down by more than 100 points 20 times. I believe that it is very difficult to be a private investor in these times with investment funds and pensions often taking 48 hours to invest money. No wonder structures such as Self Invested Personal Pensions which have the option of much more prompt investment have become increasingly popular.

US Non-farm payrolls explained

What these figures actually represent particularly once they are broken down into their constituent parts is an indicator as to the health of the US economy and in particular to its ability to create jobs. Coming out of a severe downturn as the United States is doing currently such a measure is watched closely  and pored over by analysts.

Why this figure was being focused on even more than usual was that there had been hints that the figures would be good. President Obama had opined that the US employment situation was improving and doing so quite close to the figures was taking as a hint that he knew the figures would be good. In addition Goldman Sachs has raised their figures for expected job creation and again conspiracy theorists wondered if they had an “early wire” on the figures. So estimates of job creation crept past 500,000 towards 600,000 and even 700, 000 in some cases.

Thus job creation of 431,000 was a disappointment against expectations and quite a large one too. When the figures were broken down some 411,000 of this were temporary jobs related to the 2010 Census. Markets in their disappointment ignored the fact that private sector job creation of 41,000 was not in itself a bad figure. However they did notice that the statistical adjustment for births and deaths was 215,000. This may well be significant as the model used for this had problems last year and created around 800,000 phantom jobs. So over-optimistic expectations lurched into a probably over-pessimistic view of reality and down equity markets went.

At first the fall in unemployment from 9.9% to 9.7% looked a reasonable figure but further examination showed a similar theme to the UK of unemployment numbers improving because of people giving up looking for work. The civilian labour participation rate fell by 0.2% which explains the fall in unemployment rather neatly.


Whilst disappointing in the structure of them these numbers were not of themselves bad enough to cause a 332 point drop in the Dow Jones. I think it would be best if President Obama avoided talking about employment and in particular talking in up as we approach non-farm payroll figures in future as the improved expectation became a bubble which burst spectacularly.

G20 Meeting

The G20 group of nations met at the weekend in South Korea. My first thought was this is probably not the best place to meet currently! However they published a communique on Saturday which I read and would like to compare with the one published in April 2009 following a previous meeting.

April 2009 Communique

We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth.

Our central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability

Taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times

So we got a relatively clear-cut message which goes as follows. Fiscal policy and fiscal stimulus programmes are a good thing at this time and we are slapping ourselves on the back for undertaking US $5 trillion of it and look how clever we are as it will raise world output by 4%. From a UK context there was the sub-text pushed by the Prime Minister of the time Gordon Brown that he had somehow “saved the world” by persuading other countries to follow his expansionary lead.

June 5th 2010 Communique

We get no particular change in the view on monetary policy

Monetary policy will continue to be appropriate to achieve price stability and thereby contribute to the recovery.

However take a look about the new view on fiscal policy. I have put the changes in emphasis in bold type.

The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.


There is quite a change of tone and emphasis between the two statements. I do not wish to waste too much time on the figures of 5 trillion and 4% growth as to be polite to them they were always hyperbole and grandstanding. The G20 has gone from supporting growth stimulus in a way that others support their favourite football team to a more considered approach with two new themes.

1. The fiscal stimulus has not suceeded in delivering enough economic growth around the world as evidenced by the non-farm payrolls figures for the US discussed above. In effect they are criticising their own “4% growth” claim but of course they do not actually say that…

2. Problems with the strategy are rising as we are seeing countries suffering from increasingly unsustainable deficits and debts. This is highlighted by the tensions in Europe being felt by an increasing number of the so-called peripheral countries. These countries who were told to expand their economies back in April 2009 are now being tied into financial austerity packages under plans conceived yes you have guessed it by the same group of people and institutions.

I read a speech a few months ago by the Polish Finance Minister who highlighted what he felt was the hypocrisy and inconsistency of the “leaders” of the world as represented by the G20 and the International Monetary Fund. He pointed out that Poland had been encouraged to fiscally expand during the credit crunch and the same group of people were now running round saying that fiscal deficits were a problem. Apparently irony, humility and learning from experience are not strengths of theirs. The truth is that there are limits to the ability of a stimulus fiscal policy even with international coordination to influence the growth rate of the world and if it does not reach an “escape velocity” then the associated problem of increased fiscal deficits and rising debts may pull the world economy back to earth.

Euro zone government bond spreads

I wrote on Friday that we were seeing divergence again in the government bond yields of the euro zone. This was in spite of the fact that the European Central Bank has announced it has spent 35 billion Euros trying to stop this and to instead get them to converge. We will get an update on its purchases tomorrow and more than a few eyes will be on the figures as this situation deteriorated on Friday. Now Friday was not helped by some loose talk from Hungary making investors think of the subject of default but the fact remains that government bond spreads are widening again.

Greek ten-year government bond yields rose to 8.3%, Portugal’s rose to 5.23%. Ireland’s to 5.19%, but more importantly Spain’s are now 4.59%. The move by Spain has been extraordinary in more than one respect. Until a month or so ago Spanish ten-year government bond yields were below those of the UK equivalent and had been below ours on a consistent basis. They are now more than 1% higher and this is quite a move.

In case anybody was unsure that fear uncertainty and in this instance counter-party risk were factors stalking markets deposits at the European Central Bank rose on Friday to 350,903 billion Euros. Commercial banks are accepting a yield of 0.25% rather than the market level of 0.33% to have the security of the ECB around them.

The ECB will in the short-term be making an “interest rate ” profit as it pays investors 0.25% and receives rates of up to 8.3% on what it invests it. However there is an old banking adage which points out that it is very risky to have very short-term assets against  long-term debts and that is without the current default risk which needs to be factored in.


3 thoughts on “G20 Communiques differ and problems for the eurozone as peripheral government bond yields rise again

  1. Thanks, Shaun, this is all getting slowly clearer. I particularly like your ‘escape velocity’ metaphor. I hope the capsule has a full sized parachute!
    I suppose that Brown’s supporters would say that the fiscal stimulus, while inadequate, at least prevented an immediate slump. Perhaps they would be right, but we should never have been in that position in the first place and if the erosion of confidence continues, it may happen anyway, time having been bought.

  2. The fiscal stimulus was inadequate because it probably could not have been big enough or because channelling a good proportion of it via the banks was not going to have a stimulative effect because of their liquidity preference.

    In the cold light of day would it have been better (more or less catastrophic) to have let the banks fail?

    • Hi Sean
      I was in favour of letting institutions like Northern Rock fail but wasn’t writing my blog at that time…. I would have protected retail depositors and the mortgage book would have been nationalised and gone into the care of the Bank of England/Treasury. It is not a perfect solution but I think it would have changed the gameplan going forward and would have sped up the changes necessary. This way round we have plenty of taxpayers funds deployed but no reform…
      The failure of the current system comes from the moral hazard of bailing out an institution which was reckless and in essence gambled its future away. It was not systemically significant and did not need to have been bailed out in the form that it was.
      If you want an irony out of the situation if Northern Rock had possessed a subsidiary in the euro zone it could have used the better parts of its mortgage book to get liquidity from the ECB and could have struggled on, for a while anyway. So the UK authorities were in a rather inconsistent position by the end of bailing out an institution they had refused credit too…

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