Greece claims that she will not default whilst Japan may be trying to inflate her economy

After a day which was dominated by the return of the Bank of Japan to currency intervention we can now look at the effects a day later. The exchange rate versus the US dollar has been fairly stable since the initial surge and is now at 85.39 but the rate has improved again versus the Euro to 111.06. The Bank of Japan has intervened more than once and we wait to see what response the currency markets have as these are early days in the engagement. One fascinating rumour did go round the markets at lunchtime yesterday that the Chinese central bank had intervened the other way, this really would put the cat among the pigeons but remains a rumour.  

This intervention does have possibly unintended side effects. For example Japan will be buying US dollars and will presumably want to get some interest on them and the largest US dollar market for this would be US Treasury Bonds and Bills (government debt) and such purchases would presumably be at the shorter maturities. Also if we look at Japan and make the assumption that the intervention will succeed it suddenly makes investing in Japanese Government Bonds look less attractive because foreign investors in a countries bonds are usually looking for currency appreciation as well as coupons or interest. At the moment the BoJ is explicitly trying to create a loss for them. Now overseas purchases of Japanese Government Bonds are only 5% of the market which is comparatively much lower than in the UK or US for example, and I have assumed the intervention succeeds which is not my personal view, but it may have an effect in a country which is refinancing an enormous percentage of its national debt this year.  

So far Japan has bought around ten billion dollars in its currency intervention. In my view this will only be the start as currency markets know that Japan is intervening on her own and is not getting any help from other world central banks. In fact she is getting criticism with the Chairman of the US House of Representatives Ways and Means Committee calling it a “predatory exchange rate policy”. Ouch. But Naoto Kan the Prime Minister seems determined and talked of more “resolute action”. So this saga has a way to go I feel.  

The Swiss Franc  

Talking of currency intervention reminds me of the Yen’s “currency twin” the Swiss Franc. This is suffering from the aftereffects of the failed intervention efforts of the Swiss National Bank(SNB)  from earlier this year. At the moment there is no great activity with the exchange rate at around 1.30 to the Euro although one has to remember that this level has two consequences. The announced losses of 7.5 billion Euros for the SNB’s currency intervention will be much higher at this level and Swiss exporters are suffering.  

Just to prove that there is no shortage of silly ideas the Swiss trade unions have suggested that either the SNB intervenes again or that it creates a two tier Swiss Franc. So the choice is a policy which has failed so far or the creation of a fantasy currency which will create even more losses for the SNB. Suddenly the foreign exchange job being advertised on the SNB website seems to be possibly a poisoned chalice!  At least you get paid in Swiss Francs……..Also on this subject Union Bank of Switzerland are predicting that Switzerland will raise interest rates today and they are well-connected so this may have some credence. For a country with a strong currency whose rally must have had an anti-inflationary effect,the effects of which are mostly yet to come, this would be very unwise in my view.  


We are seeing the credit crunch response move into a new phase as we are seeing the creditor nations make their responses. One view on this is that they are simply trying to stop the appreciation of their currencies. However even this has the possible side effect of attempting to create something similar to what was called “competitive currency devaluations” in the 1930. Also there may be something deeper in the Japanese intervention as if it should turn out to be unsterilised it will boost the money supply and will therefore be inflationary. Now in her current disinflationary environment that may not be all bad as she has struggled for some time with this problem. I will be watching this development which may turn out to be as significant as the intervention itself. For now in Japan   a monetary boost may help but even here as I have argued before care is needed as such efforts can rapidly go wrong. One example of this is that I already see suggestions that such a policy would be good for other countries too which is much more dangerous, and ignores the premise that we need to make sure that Japan is actually following such a policy which only time will tell us.  

Greece and the prospect of default  

I mentioned earlier this week that the Greek Finance Minister George Papaconstantinou is on a roadshow in Europe to persuade investors to buy Greek government bonds, or in some cases more of them. To aid his case he has suggested.  

“Restructuring is not going to happen. There are much broader implications for the euro zone should Greece have to restructure its debt,”  

Actually I agree with his second sentence but cannot agree with the first. He then goes on to say.  

If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the euro zone.”  

Again I agree with his second sentence and this makes me wonder if this is the real reason for his speech and tour, a type of veiled threat to the politicians of the euro zone and hence have a large vested interest in Greece not defaulting. This would perhaps be more logical than the stated reason for the tour. Even though the tour has been accompanied by a lot of hot air and rhetoric if we look at the evidence we get a different view.  

Yesterday Greek government bond yields rose. Her ten-year yield is now 11.7% and her three-year is now 11.72%. In some ways the three-year yield is the most damning for Mr.Papaconstantinou as this is the around the timescale at which Greece will have to return to financial markets and the price and yield still mean that she would immediately be on a path to insolvency. The recent treasury bill issue did not go that well either. On Monday I suggested that there would be some arm-twisting to get a good result. However there was some evidence of arm-twisting as local banks were the main buyers but the yield on the 6 month bills was 4.82% which is higher than that at the last issue on July 13th when the yield was 4.65%.Back in January she could issue such bills for an interest rate of 1.38%.  

In a way the last figure is very revealing as since January the stronger euro zone countries have been able to raise short-term money at ever cheaper rate whereas Greece is on a very different path. And this path involves the euro zone and IMF effectively taking get of her bond issuance needs for a while if not her bill needs, as well as the “shock and awe” package of May. It remains my view that it would be better if Greece restructured her debt now to try and get her financial position on a more sustainable path.  

The position of Ireland and Portugal in terms of government bond yields took a knock yesterday too with ten-year yields rising to 5.98% and 5.84% respectively. They will not welcome Mr.Papaconstantinou’s comments if they contribute to further falls in their bonds. They are in danger of funding themselves at a more expensive rate than the one they are charging Greece for the help they are providing her.  

The European Central Bank has produced a working paper which looks at Greece’s situation with regards to her balance of payments which have been a problem for some time and indeed from well before she joined the Euro. After my usual cautionary note about the accuracy of balance of payments figures which questions to my mind the reliance on mathematical modelling of this type we get.  

In sum, despite the fact that the ongoing financial and economic crisis seems to have speeded up adjustment of current account imbalances in Greece, as it has forced the correction of some underlying domestic imbalances, bold and co-ordinated policy measures are needed to restore the economy’s external equilibrium.






Now re-read the last bit again and remind yourself that it is the ECB who has published this paper. Not quite the view of the euro zones politicians is it?  

Mervyn King and his speech to the Trades Union Congress  

This speech got quite a bit of airtime in the UK media and some of it was due to this in Mervyn’s speech.  

Before the crisis, steady growth with low inflation and high employment was in our grasp. We let it slip – we, that is, in the financial sector and as policy-makers – not your members nor the many businesses and organisations around the country which employ them.

So some humility for once and a speech tailored to the audience. In some ways this is refreshing  but then he moved onto more debatable and contentious ground and if you notice an implicit slap on the back for himself which is not quite so humble.  

Thankfully, the costs of the crisis have been smaller than those of the Great Depression. But only because we learnt from that experience

Such talk is dangerous to my mind as we are a long way from knowing what the costs of this crisis will be and accordingly we do not yet know if we have followed the right path. Then we get an even more disturbing statement and the emphasis is mine.  

So the Bank of England has taken extraordinary measures – described as “quantitative easing” – to boost the supply of money in order to support a recovery in the economy and keep inflation on track to meet our target

I was not aware that it was on track and am even more unclear as to how being more than 1% over target in each month this year leaves us on track. He appears to have temporarily forgotten the letters he has had to write to the Chancellor of the Exchequer to explain the divergence. Perhaps of course he has a different target to the one that is published and if so he should tell us what it is.


10 thoughts on “Greece claims that she will not default whilst Japan may be trying to inflate her economy

  1. Hi Shaun,

    Long time no speak (sort of).

    I’d like to point to your attention the fact that IMF and ECB officials seem to gain a permanent foothold in Athens:

    Also, something not stated in the article, but stated in the Greek edition of Kathimerini as well as other media, is that IMF correspondents did state yesterday that, should Greece continue materializing the MoU with the IMF/EU/ECB, if it is unable to access the markets in late 2012/start of 2013, its support could keep going after that.

    In another note, a recent poll showed support for ‘sacrificed to be made to save the economy’ dropping to about 35% from 55%, and I suspect this number will drop even further as time passes.

    The government has admitted that there is a sharp drop in revenues, compared to the official targets, and there had been a debate here on what will be done in Autumn 2010.

    Option a) would be to scrap the 11% VAT payable on food, certain services, et al, and unify both 11+23% VATs to a unified 18% VAT.

    Option b) would be to migrate 30% of the 11%-VAT products to the 23% category, and then in 2012 migrate 100% of them to the 23% category.

    Option c) would raise the 11% VAT only, to 13% or so, with the products belonging to it remaining unaffected.

    Option d) would do nothing with VAT, but would raise the tax on the petrol used for heat in equivalent levels with the diesel petrol used in (certain) motors, thus doubling the cost for heat generation nationwide (Greece does have quite limited gas installations compared to petrol. Generally, the majority of the country used petrol for heating, rural areas or villages may use fireplaces/woods, a minority and newer houses use gas, and almost nobody uses electricity alone).

    It was debated that option d) would go on, but then the government said that this is ‘postponed’ (perhaps because we have regional elections in 1.5 month and they were afraid of losing everywhere? I don’t know), and option c) is now preferred.

    Last but not least, the Labour Institute of the General Confederation of Workers in Greece did predict a rise of ‘real unemployment’ to over 20% levels by 2011, as well as a reduction in income and consumption to before 2004 levels (and mind you, 2004-2009 were always rising years).

    Official unemployment, reported today, for Q2 2010, rose to 11.8%, although as I have stated many times, the real percentage should be much higher, seeing that several categories of unemployed (such as youth unemployed people who have never worked anywhere) find no benefit from registering in the unemployment office -the monthly stipend for this category is 70 EUR per months for 12 months-.

    I would like your opinion on the path the Greek economy is taking. I fear things are not as ‘rosy’ as they are portrayed by the IMF/EU officials and the mass media, and the country is indeed in a ‘death spiral’ from which it can never come out.

    Myself, and friends of me, have plans to leave the country in 2011, permanently, unless something changes to the better (which seems rather impossible) in the coming months. Your opinion would be valuable on the topic of Greece’s way forward.


    Ioannis M.

    • Hi Ioannis
      I am sorry that you and your friends feel that you have no choice but to leave Greece in 2011.Unfortunately my views have remained pretty similar to what I have stated in the past. If the bail-out plans were to be to Greece’s benefit they needed to be combined with a restructuring of her debt. So that going forward everyone was taking their share of the pain. In addition I feel that some of the mistakes that I felt the IMF had made in Latvia were in danger of being repeated in Greece. What Greece needed was doses of austerity in bursts not the equivalent of jamming the brakes full on.

      Since then Greece has made some progress but as you highlight with the unemployment figures at a heavy cost. I still fear that the falls in economic growth will be higher than forecast and so far the data has supported my view. As to death spirals I am not so sure about that as before then I feel that there would be change, and actually I fear the change more and what it might bring,although say a real change in Greece’s politics could be healthy as time goes by. It might break the corruption spiral for example.

      For an example of things going badly I can only refer you back to the article I wrote on Latvia and her experience on the 12th March. Greece desperately needs some economic growth as Andy has already pointed out but she is far from alone in that and the world outlook has slowed up which we all need to hope is only temporary.

    • Ioannis M wrote:
      “Myself, and friends of me, have plans to leave the country in 2011, permanently”

      I agree that the grass is almost non-existent in Greece these days (I am currently visiting in Athens, and it’s even more shocking than I expected). But it’s not that green in other places either. In the USofA, the college graduates of the last two years have been moving back with their parents (this should be a familiar economic sign to a Greek).

      I hear that Greeks are leaving for Canada and Australia. Perhaps these are better places nowadays.


      • I respect your views, john, but we haven’t set our potential destination(s) in stone just yet.

        The thing is that, in several other countries, even with the mininum wage, one can live – not enjoy things, but live.

        In Athens, where the average rent alone is 300-400 EUR (for a 1-bedroom house, usually), even if someone does not earn the minimum of 700-750 EUR, but the ‘luxurious’ amount of 1000-1200, it’s still non-sustainable.

        300-400 + phone bill + electricity + petrol or gas for heating + food = quite over 700-750, and quite over 1,000 in most cases.

        Even in London (I’ve studied in UK and know 1-2 things myself), with a ‘lowly’ salary one can’t enjoy life exactly, but the situation is VASTLY superior compared to Athens.

        After all, in all the relevant ratings, Athens is more expensive than many other cities worldwide, London included, with the key difference being that the Greek wages usually are 1/2 or less compared to pretty much the entire western world.

        And I do not count the former USSR regimes in this classification…

  2. It seems the IMF and EU have decided to take a united front on the Greek situation,which is understandable as they have skin the game. As you say Ioannis the media has largely gone along with this ,probably because media will usually print material from whomever provides the most canapes and drinks at presentations in the Hiltons and Sheraton’s of the world.

    However as Shaun points out the market yield speaks volumes for the almost almost mathematical certainty of some type of default. All the indebted nations are factoring in growth assumptions to underpin creditworthiness but offer no practical notion where the growth will come from. International investors rationalise that Greece is the most exposed to the risk of contraction.Perhaps Ioannis you are aware of how the Greek people expect their Government to find ways to kick start the economy?

    I suppose its more kicking the can down the road.

    • Hey,

      I’ll welcome more opinions about what I wrote. And I also found out I made some typos on the earlier text, apologies about that.

      Now – The government position is that we have lagged terribly behind in the ‘stimulate growth / investments’ sector, and this is why after the cabinet reshuffle earlier this month, certain ‘task forces’ were created that, among others, have to provide a way to ‘unblock’ major investments for the country.

      As ‘major investment’ they classified anything over € 200 m., or anything above € 80 m. I believe, but with 200-300 or so guaranteed job positions.

      Regardless, the situation is weird, seeing that:

      *The opposition still remains vastly unpopular, because apparently they have hot on their heels the notion of ‘the government who led to bankruptcy, and then quit / called early elections, to hand off the hot potato to others’. Right now, the combined polls of the 2 largest parties resemble nothing of the 80%+ they usually got, and the electorate appears to vote ‘undecided’ or ‘none of them’ in polls.

      *The opposition, and anyone else really, trade unions and all, do not provide a clear ALTERNATIVE to the current situation, they just mumble that if they had their way, we would ‘face better terms’ or ‘stimulate growth’, however they are vague in ‘how to do this’.

      *The people generally seem to embrace the ‘SNAFU’ view on things, and considering the woes the bank are into, the cash flow in the market is generally non-existent. As usual, most inter-company payments are currently made with back-dated cheques, and its “equal to cash” if they indicate a payment date 6 months from today.

      *What is plainly visible but apparently a matter of non-discussion with the Troika of ECB/EU/IMF is the fact that the Greek bonds do not seem to budge from the 10.5-11.5% regardless what is said or done.

      Those in the know seem to believe that Greece is effectively bankrupt, and all that remains is for the exposure of EU banks / institutions to Greek debt to be gradually reduced, where perhaps the “controlled default / restructuring” that Ms. Merkel advocates will come into play. I tend to agree with that sentiment, a sentiment which seems to increase the tide of refugees abroad from Greece.

      The key difference is that, while in the 50’s or 60’s Greece had a sizeable tide of emigration to Australia, USA, etc, most of the people leaving then were mainly uneducated workers, who today may be rich and all, but started off washing dishes in Astoria and other places.

      Today, the people electing to ‘leave this cesspit behind’, are like me and my friends: In their mid-late 20’s or early 30’s, educated, with work experience, opting to find a reasonable standard of living outside Greece – because in Greece, be is as it may, even if the IMF ran the country for 10+ years, the professional development options will remain limited:

      *Either forever, or
      *Find out a friend / brother-in-law/whatever who can accommodate you somewhere, and you’ll get well paid.

      The third, normal, way of “advance your skills and find something better” is an extremely rare case, and will continue to be so.

      No growth = no money.



      • It seems a small part of my last reply was deleted while typing:

        “*Either forever, or”—> “Either get paid peanuts, forever,”



  3. “From the age of uniformity, from the age of solitude, from the age of Big Brother, from the age of doublethink – greetings!”

    When Merv keeps saying inflation is on target, when it persistently isn’t, he wants us to say that two plus two make five. Both his analysis of the crisis and his “solutions” are from a Keynesian perspective and can therefore only ever be wrongheaded nonsense. He and his ilk will ruin is all.

  4. I think the Greek situation is desperate and the longer they stick to this road they have been put on by outside forces the more ruinous it becomes. They are being used as no more than pawns in the Euro protection racket and I think Ioannis’s posts perfectly illustrate the ground level effects. As long as their politicians agree to be bound by financial instruments which favour other countries more than their own they are failing their own first duty towards their populous and at some point that will tell in an election, and lets not even consider accusations of corruption etc. If the Euro was supposed to converge not only economic but also social outputs then we can clearly see the abject failure it has been for the likes of Greece. If Euro membership is deemed so important to the wellbeing of the country then a restructuring is a necessity but not over the 3, 5 or 10 years of its bond issues more like a generational sort of time frame would be needed. For a country which seeded the world with philosophy maybe they should be looking to their ancient past for some answers!

  5. “Greece claims that she will not default ”

    Well, they are Greeks after all. They tried to scam pension funds one more time but now the truth had to come out:

    Pangalos [Deputy PM] said: “Before we reach the stage of a debt restructuring we have to finish with the deficit. But demonizing debt restructuring is wrong. Debt exists to be restructured. We may pursue it ourselves or it may be proposed to us and it may too advantageous to turn it down.”

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