The official view is that Greece’s fiscal situation is improving whilst I feel she is getting ever more insolvent

Yesterday saw a solid rally in US equity markets with the Dow Jones Industrial Average rising 80 points to 11,143. So we are starting to approach the high over the past year of 11,205. One possible factor in the recent rally has been the liquidity pumped into the US economy by the Federal Reserve’s policy of QE-lite where maturing Mortgage Backed Securities are replaced by purchases of US government debt. This was brought to my mind by the fact that yesterday’s purchases were not only higher than expected but the highest so far at US $6.26 billion. Let me be clear that I am not saying that there is a direct explicit link between QE-lite and higher equity prices merely that the improvement in liquidity appears to be beneficial for many asset prices including shares.

Another area that may be benefitting from this policy in some way is the crude oil price which also has been quite firm recently and yesterday it rallied if we use the front month futures price for West Texas Intermediate crude by US $1.37 to US $83.08 per barrel. Putting this into perspective the oil price rose by 11.29% in September and has so far risen by some 3.82% in October. So it has been strong and of course commodity prices have been strong too, albeit they have been taking a breather over the past couple of days, however they are if measured by the Commodity Research Bureau’s spot index up by 29.1% over the past year.

The Weakness of the US Dollar

I was reminded of the weakness of the US dollar and the way it has shielded some of the effects of rising commodity and oil prices for much of the world. This is because oil and many other commodities are priced in US dollars and so a falling US dollar means that the price of the commodity falls in the home currency all other things being equal. Sadly there is no such help for countries which either use or peg themselves to the US dollar. What reminded me was these words by the US Treasury Secretary Timothy Geithner who according to Reuters said.

“It is not going to happen in this country. It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive,” Geithner told Silicon Valley business leaders. “It is not a viable, feasible strategy and we will not engage in it.”

When I heard this I got out the tables for the US dollar index which is the trade-weighted exchange rate measure for the US economy. This was at 88.71 at the recent peak on the 7th June and as I heard of this speech it was at 77.14 for a fall of 13% over the period. Perhaps someone should turn Mr. Geithner’s chart upside down for him as he is clearly reading it the wrong way around!

Another feature of the problems of the “currency wars” appears to be international disagreements. The Brazilian delegation to the upcoming G-20 meeting appears to be reducing  and I wonder if other nations might do the same. Also Brazil raised the inflow tax on foreigners’ investments in fixed-income securities to 6 percent from 4 percent. It also boosted the levy on money brought into the country to make margin deposits for transactions in the futures market to 6 percent from 0.38 percent. Another name for these two moves is capital controls and we are back to echoes of the 1930s and competitive devaluations. I have written on this subject several times but my main update was on the 23rd of September when I looked at the dangers of competitive devaluations.

More talk from the US Federal Reserve: Atlanta President Dennis Lockheart

In a talk in Savannah the President of the Atlanta Fed got his view in early.

Today I will walk you through the thicket of considerations that lead me, at this moment, to be sympathetic to more monetary stimulus in the near future. I take this view with a measure of tentativeness.

And later in his speech he indicated a willingness to support an inflation-targeting policy in other words to try to raise US inflation.

I am also open to a move that I believe would strengthen the effect and compensate for potential risks of the policy action—that move is the adoption of a more explicit inflation objective by the committee. I believe doing so might serve as a further step to ensure the anchoring of public expectations about long-term inflation and the response of the FOMC to adverse price developments. I consider a more explicit inflation target as something the public could easily understand, and I believe it would reduce uncertainty at a time when it is badly needed.

I have added the latter two sentences to the quote to illustrate a point and that is how far out of touch the Fed is. Do they really believe that ordinary people going about their work discuss Fed. policy and if they do are likely to believe it has much credibility? I suggest he stops talking to economists and gets out a little more!

Mr.Lockheart does not have a vote at the upcoming FOMC meeting but the non-voting Fed Presidents appear to be queueing up to put their point forward.

Greek government bonds rally whilst her fiscal performance is not as good as claimed

There has been an interesting development over the past few weeks where Greek government bond yields have fallen and prices accordingly risen. For example the Greek ten-year government bond yield closed last night at 9.09% which is some 2.5% better than the recent peaks. Just to add to this the Greek bank EFG Eurobank was able to raise some 300 million Euros in interbank markets yesterday. However before we get carried away let me quote from an article I wrote back in late April when Greece first called for euro zone aid.

On Friday Greece’s ten-year bond yield closed at 8.73% and remember this was after an announcement of officially calling for aid.

So the good news needs to be tempered by the fact that in spite of the 110 billion Euro aid package followed by the shock and awe package of the 10th of May yields still exceed what was considered to be too high for Greece to stand alone. But i have a further thought for you and this is something which has troubled me all along. Yields in the 2/3 year area are some 9% in Greece government bonds approximately, but let me refer you to my article of the fourth of May 2010.

This means that as long as you believe that the aid package will take place and that there will be no Greek default in say the next two years then you should buy every short dated Greek government bond you can lay your hands on if you are a bank in the euro zone. Once you have this high yielding instrument you then lodge it at the ECB as collateral in return for a loan which it will make at an interest rate of 1%.

Since then the ECB has reduced the scale of its efforts as it now will only lend for 3  months rather than a year but for an inventive mind I am sure there are ways around this. Yet still it remains true. Even with talk of buying from Norway and China and talk of an extension of the aid package which must have holders of mid-range Greek government bonds doing a jig it remains true. On the subject of extending the aid package the President of the ECB Mr. Trichet advanced this view yesterday according to Bloomberg news.

Extending the aid mechanism “could be imagined in the future,” he said at a press conference yesterday in Rimini, Italy. “We would then have to respect a number of criteria.” Any aid program should not encourage “moral hazard and it should be based on a very, very strong conditionality”

I remember writing when the aid package for Greece was approved that the countries lending the money might do well to borrow the money with bonds that last longer than the initial three-year term for the aid package and I am being proved to be correct. This of course poses a question, what will the term be?

Greece’s current fiscal situation

Whilst the Greek government continually trumpets improved figures and targets met I am afraid the situation in reality is a lot less rosy. In fact her position is if anything worse than that conceived back in May and this is the real reason why the term of the aid package is looking like it will be extended. Indeed let me be clear I feel that there is no choice for the EU, as they have endgamed themselves, or more specifically Europe’s politicians and officials have endgamed her taxpayers.

If we look at what has been happening recently I wrote on the 1st October about Greece passing new tax amnesty legislation which is a way of robbing the future to pay the present and a return to her bad old ways on which the EU has been strangely silent. On the 7th October I wrote about the upcoming report on Greece’s finances from Eurostat which is expected to raise her deficit and her national debt to GDP ratio. Well expectations are still deteriorating on this front. According to Kathimerini.

The general secretary at the Finance Ministry, Dimitris Georgakopoulos, suggested yesterday that the 2009 deficit may eventually close at 16 percent of GDP. In absolute numbers, the Eurostat revision adds 3.7 billion euros to the deficit and 28.8 billion euros to the debt………..and will reportedly reveal that the Greek state debt for last year actually came to 127 percent of GDP.

The official Greek figures were for 13.4% and 115% respectively. For those projecting this forward let me help this means that the ratio of national debt to GDP could rise as high as 160% in 2013. This compares with original estimates of 150% back in May. So she looks even more insolvent than before, no wonder the EU is thinking of extending its programme!

Also I have written in the past that Greece’s improvement in its public spending may be due to the fact that it is not paying its bills on time. Indeed on July 7th I wrote this.

However Greek contributors to my comments column have indicated to me on several occasions that this has been achieved in their opinion by the Greek government simply not paying its bills. One has translated an article from the Greek Kathimerini newspaper which suggests the following bills are currently unpaid. According to this the Greek state has unpaid bills of 10 billion Euros in 2010 which can be broken down into 6 billion to hospital suppliers, 1.6 billion to construction companies, 1 billion in unpaid VAT refunds, and rather curiously 0.1 billion to Media all around the world whatever that is, and the rest for bills such as the financing of investment programmes. Other sources at that period claimed the figure to be even higher, probably 11 or 12 Billion Euros.


So if you factor the problems with tax collection with the way it appears that Greece has improved expenditure by not paying the bills you get a completely different picture for Greece’s fiscal situation, from that given by her government. By the time that Eurostat issues its report on Friday it will be plain to everyone that at the end of the current aid package Greece will be even more insolvent than it appeared as recently as May 2010.

In my view the current aid package will not only have to be extended in terms of its length it is likely to have to be increased in size too. I would imagine that the euro zone will use its “shock and awe” vehicle the EFSF to do this as this will be the least embarrassing route for them. However it leaves taxpayers in the euro zone with an eminently predictable problem as I wrote on the 3rd of May.

Now if you put my more realistic forecasts for economic growth into the national and fiscal deficit forecasts above I think you can come to only one conclusion. At the end of this plan Greece is likely to be  insolvent.

So adding development since then I feel that the euro zone’s taxpayers would be best off considering their existing loans to be permanent and that they ready themselves for demands for more which will be along soon enough. As a suggestion when this happens then they should ask whoever gets the job of implementing this,exactly how things are ever going to improve under the current strategy?


9 thoughts on “The official view is that Greece’s fiscal situation is improving whilst I feel she is getting ever more insolvent

  1. “So adding development since then I feel that the euro zone’s taxpayers would be best off considering their existing loans to be permanent and that they ready themselves for demands for more which will be along soon enough.” It seems in fact that it is not only Greek politicians who have this orientation, but almost all Western politicians now, intent on getting to the bottom of the pile first!

    I wonder what Charles Dickens would have made of it all? He was one commenting on debt in his day. Although most of it was personal debt I feel his reaction to such large communal debt, without the agreement of taxpayers who have to bear it, would have been in a similar vein.

    • Hi Drf
      Indeed I sometimes wonder that as I am a big fan of his writings. I spent some time in my lunch-breaks when I worked at LIFFE taking a stroll and trying to identify landmarks in some of his books. In a sign of the times if I got my co-ordinates correct, one is now a Mercedes dealership! But it is not far over Southwark bridge to Marshalsea where the debtors prison his family spent some time in was situated…

      He also was scathing on the subject of financial bubbles.

  2. I used to live very near the Marshalsea. If you wander down Borough High Street, you can also see the Blue Eyed maid pub and St george the Martyr Church (where Little Dorrit was christened etc)

    • Hi James and welcome

      In some ways it was almost a going home as my grandparents on my mother’s side lived on the other side of Borough High Street towards Tower Bridge so if I had time I did extend my walks but often time was more limited.. The garage reference relates to one of the wharves in Little Dorrit but so much has changed in the meantime that I may have been in error.

  3. In this busy week, did you notice, Shaun, that the proud comments of Paul Fisher ( BoE Markets guru) to the good people of the South West went largely unreported. With a rather light touch speech on the success of QE, he dealt up a dose of reality by pointing out the likelihood that the QE Asset Purchase Facility Fund will end up in “cash deficit” – a point I have made for months. He explains that this deficit would have made gains to the public purse via cheaper government borrowing, boosting growth and avoiding deflation – impressive claims, if true. Problem is, as I see it, that he doesnt know if QE has boosted growth or avoided deflation, or indeed whether the costs of government borrowing will aggressively correct themselves later to clawback earlier QE effects….so more hot-air. Any calculation on the potential “cash deficit” which tax-payers will be indemnifying need to be built in to forward government accounting cash-flow ( contingent liabilities) and I would like to know if any figures have been canvassed for this deficit? I suppose no-one knows, with more QE in the offing…..

    • Just a footnote to the above. I see that for Y/E to February 2010 the BoE kindly charged the taxpayer a £5m QE management fee plus interest of £626m on its electronically created QE money loan of £200bn odd. Then, I note, BoE makes very clear that the BoE has no economic interest in Bank of England Asset Purchase Facility Fund Ltd which holds the gilts bought, being fully indemnified by HM Treasury,us.

      • Thanks Shire for the heads-up on the Paul Fisher speech. I notice that Mervyn King has been speaking too and there are developments in US mortgage foreclosures so tomorrow is going to be an active day I feel….

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