Chinese economic growth rises whilst a debt restructuring in Greece and the Spanish cajas looks ever more likely

This morning has seen more signs of inflationary pressure in China. For those interested in my previous thoughts on this subject I wrote recent articles on this subject on the 11th and 17th of this month. If we move back to today’s news we see that according to the Chinese statistics bureau in the last quarter of 2010 reported Chinese economic growth rose to 9.8% from the 9.6% of the third quarter. This meant that growth for 2010 overall was revised higher from 10.2% to 10.3%. Whilst consumer inflation did fall back in December to 4.6% from November’s 5.1% it is still much higher than the official target for 2010 of 3%. Indeed the rise in inflation at the end of 2010 meant that inflation for the year as a whole was 3.3% which is also above target.

So we can see that such figures are likely to lead to more fears of overheating in the Chinese economy. Rather interestingly a member of the Chinese Monetary Policy Committee Mr.Li has spoken this week and suggested that interest-rate rises may be needed as China was likely to grow faster than its proper growth rate of 8.5 to 9%. I have been arguing for a while that it is a better strategy to get on with the interest-rate rises and was intrigued to see that Mr.Li thinks that 8.5 to 9% is sustainable as an economic growth rate! I rather suspect it is not.

Either way markets are concerned and the Shanghai composite equity index has fallen by 2.92% to 2678. Contrary to the pattern in many other equity markets it is now down just under 5% in 2011 and what it indicates is concern over overheating in the Chinese economy. As growth in it is important to the world economy it affects us all in one way or another and we are left with the hope that China can ease the overheating problems although I have to confess that in my opinion they are in danger of making the mistake of the imperialist capitalist lackeys they like to criticise of doing too little too late.

More problems in the Euro zone: Greece

I wrote yesterday about the recent rise in German government bond yields and wondered how much of this was due to the prospective cost of the bailouts for the weaker economies in the Euro zone. There was indirect news yesterday that some in Germany have begun to wonder the same thing and come up with something of an alternative strategy. According to the Greek newspaper Kathimerini.

They have started to consider the unthinkable,” said the source. “They (German Ministry of Finance officials)  are looking at a contingency plan preparing for Greek restructuring. It is not something they want, but something they recognize,” he said………….Meanwhile, in an interview published in German newspaper Handelsblatt yesterday, Lars Feld, a designated economic adviser to the German government, said that Germany should set funds aside to prepare for a Greek default.

The German newspaper Die Zelt also published a story saying that Germany may allow Greece to buyback some of its debt using Euro zone crisis fund such as the European Financial Stability Fund or EFSF. Indeed there has been discussion of the EFSF helping Greece in this way in various parts of the Euro zone recently and it was combined with plans to increase the EFSF which ended up being rather stamped on by Germany’s Finance Minister.

Government debt buybacks

I thought that I would explain how this might work and that in itself it is not so unusual for example Italy as a nation uses them. from time to time as part of its debt management strategy it chooses to buyback a particular bond and issue a new one. You may already be seeing a potential problem here for Greece in the issuing a new one part!

Anyway if we look at a bond Greece issued back in April the 6.25% coupon June 2020 bond we can see the issue. Whilst this was issued at just under 99 the price is now 70.96. It has been lower so there might be one or two holders who have a profit but in general holders will be at a loss and anybody still holding from the original issue will have what is in bond terms a rather large loss particularly considering the time period. So when the EFSF turns up and says can we buy them please? What if they say no? They may not want to take a loss and keep their fingers crossed for getting 100 in June 2020.

Indeed the Euro zone clashes with one of its previous failings the banking stress tests of July 2010 which Commissioner Rehn somewhat breathtakingly described as “very rigorous” only on Monday night allowed banks to ignore sovereign bond holding as long as they planned to hold them to maturity. In effect banks were offered a type of get out of jail free card which this new policy would take away as it would force them to take the losses now. So unless you force banks to do this many are likely to say no.

Let us say you made institutions/banks sell to you then in the hope of benefitting Greece you are making banks including hers (who own a lot of Greek government debt) take losses. Indeed some might collapse under the strain. Also they would be capable of spotting the likelihood of such a policy spreading to say Portugal and Ireland which is unlikely to encourage them to hold debt there so you could cause further problems there.

Just to complete the cycle for this plan to work and get through the flaws already described Greece would have to be able to issue new debt and currently that looks impossible for the forseeable future. By debt I mean bonds of at least a few years duration rather than the bills of up to a year she currently can.


I am afraid that there is no magic cure here. Such a policy can make gains for Greece but someone will have to take losses to pay for it. After spending so much time criticising the “wolf pack” of speculators it would be as a minimum an own goal for Greece to punish loyal investors. The first consequence would be that they would be less likely to invest again which would therefore give a possible tactical success but a strategic failure. I think that Greece has had too many tactical success of this sort! The only other alternative is for the losses to be moved from the Greek taxpayer to the European one and I suspect it is this possibility that has got the Germans on the case.

In the end there will have to be a form of debt restructuring for Greece but someone somewhere has to be worse off as a result….

Spain and her cajas

For those unaware of what cajas are they have similarities to what are called building societies in the UK,although many may think that perhaps a better comparison in all respects is with the savings and loans institutions of the United States. There are a few scare stories circulating so I thought I would update. We are in a situation where over the next twelve months there will be more news on this subject but we are left in a news interregnum for now.

The reason for this is that pretty much everyone, including me, suspects that the Spanish housing market has further to fall and that combining this with the fact that Spanish banking rules allowed the cajas to in effect kick the housing can down the road for a couple of years leaves us with prospective problems as the two years is coming to an end. Just to add to the problems even the bigger banks in Spain such as Santander and BBVA have struggled with their margins and found they have to pay more for funding and they are at the top of the Spanish banking tree so the caja situation is likely to be worse maybe much worse. Just to give an example of this a year ago Santander could finance itself at 0.5% over swap rates and recently it has paid 2.25% over them. In an eerie similarity to the early stages of the Irish banking crisis I remember Bank of Ireland also issuing debt at an interest-rate which guaranteed a loss when it lent the money out.

So as higher funding costs are clashing with cheap mortgage rates there are rumours that Spain is preparing a bailout of the cajas and the estimated size is 80 billion Euros. Of course then the problem moves to the Spanish deficit figures just like it did in Ireland. Plus ca change c’est le meme chose you might say. But in the Euro zone things tend to move slowly.

UK Unemployment

There were several matters of significance in yesterday’s unemployment figures for the UK and sadly they were mostly negative.

Firstly unemployment as measured by the Labour Force Survey rose by 49,000 to 2,498,000 although the unemployment rate remained the same at 7.9% as employment rose too.

Secondly the claimant count fell by 4,100 to 1.460,000. On the face of it this seems good but the problem with it is the number above somewhere around a million people are missed by this measure reducing its credibility.

Thirdly in a familiar pattern part-time work increased as according to the Office for National Statistics. “The number of employees and self-employed people who were working part-time because they could not find a full-time job increased by 26,000 on the quarter to reach 1.16 million, the highest figure since comparable records began in 1992.”

Fourthly,the unemployment rate for those aged from 16 to 24 increased by 1.0% on the quarter to reach 20.3 per cent, the highest figure since comparable records began in 1992. This is a concern and has an echo of the situation in Spain where youth unemployment has soared.

Fifthly, the number of people who were economically inactive because they had taken retirement before reaching the age of sixty-five increased by 39,000 on the quarter to reach 1.56 million, the highest figure since comparable records began in 1993.


So whilst the unemployment rate remained the same there were unfavourable developments in the breakdown of the figures. Rises in economic inactivity translate into people giving up looking for work, part-time work is often on worse terms than full-time, and rising youth unemployment is hardly a good sign.

In my opinion the wide divergence between the unemployment and the registered unemployment figures makes the claimant count virtually meaning less these days. I know many places in the media emphasise it but to them I ask the question, what about the missing million?


11 thoughts on “Chinese economic growth rises whilst a debt restructuring in Greece and the Spanish cajas looks ever more likely

  1. Hi Shaun,
    Great blog as usual. I know that you don’t do politics, but the time seems to have come when politics is overriding every sort of rational outcome. In the UK, the pendulum seems to be swinging against cuts before any cuts have actually taken place. The real world of numbers, which you describe so well, appears to have disappeared from the debate.
    it does seem to me, from your blogs, that:
    1. The politicians are wilfully kicking the can down the road;
    2. In the meantime, their pronouncements are designed to mislead the market into supporting the bond issue of the day;
    3. When this fails, they get the ECB to buy bonds to keep the yield down;
    4. If any private issuer behaved like this, they would be in court for market manipulation;
    5. The politicians are deliberately using the public ignorance of financial terminology to confuse the issues. I keep hearing people talk about the Tories reducing the debt, but I do no believe that this is even a possibility. They are, despite the rhetoric about cuts, merely slowing down the rate at which the debt grows.
    It seems to me that the only choice is whether the defaults take place with commercial banks still on the hook for some of it, in which case, we will have to bail out the banks or whether the losses are all transferred to governments before the defaults take place.

    • ‘Reducing the debt…’ is current UK-speak for ‘reducing the rate of increase of the debt’. This confusion has existed for decades and is deliberately fostered by both sides of arguments to disguise their weak points and especially the BBC, who, it must be said, probably don’t always know the difference. In some ways it is similar to the deliberate misuse of the word ‘investment’ which of course refers to spending on something of long term, lasting value, not (as in UK-speak) the current year chunk of recurring annual expenditure.
      These are but two entries in my forthcoming dictionary of UK-speak, or how our politicians misuse the language to deceive us and just possibly, others. I would not bet on the latter, though, most foreigners are rather well educated.

    • Hi James
      I avoid joining in the political debate but am happy to comment on the political class as a total. In the UK they have managed to expand their position as roles have become available in Europe and the devolved administrations in Wales and Scotland in addition to the number of ministers rising….. Sadly our management has not improved as a result indeed these days any problem involves some official being blamed rather than the politician. Just to add to it reform of the House of Lords seems to mean that if you cannot get elected or get voted out you can go there!

      As to the crisis itself I am not sure which politicians do not understand what is going on and which ones are being deliberately misleading but many including those who claim financial awareness have been shown up by this phase.

  2. Things could be worse in Spain, Shaun, until very recently banks had up to 6 years to report non-performing loans. Oh, dear…
    People say that the current stock of new houses (variously reported as 3 years of sales to 10 years) is no problem. Of course that’s wishful thinking, there are no sales at the moment and the main buyers in the areas where there is most stock are British (pound devaluation problem) and German (Eastern Europe now much more attractive for them).
    Spain’s cajas de ahorro and, let’s not forget, the main banks are in a serious mess and I would not like to be in Elena Salgado’s shoes right now. This will come to a head in the next few months as foreign buyers of Spanish bonds wise up to the very large dodgy real estate debts out there.

    • Hi Carys
      I think that matters are slowly coming to a head as it would appear that even the bigger and better capitalised banks are currently doing much business at a loss. But these things take time and the Spanish government has followed the ostrich strategy and stuck its head in the sand. But if I may mix my metaphors the sand in the eggtimer is running out….

      Would 6 years have been enough for a proper can kicking programme? I am not so sure as I think the after effects of the credit crunch may continue through this decade. The shame is that we are repeating so many of the errors Japan made when she entered into her lost decade and number one on my list is zombie banks…..

  3. A bit like:

    compensation noun
    money that is paid to someone in exchange for something that has been lost or damaged or for some problem

    has become:

    Bankers’ pay.

    How did that happen?

  4. The most pernicious change to newspeak was when “debt” was reclassified as “credit”. Overnight, people who would never have gone into debt were living on credit!

  5. A note regarding politics (and a bit more of general observation), at the outstart of this i declare myself as ‘a floater voter’ voting in a way i think suits the time, for me it’s all about balance and if we are honest my needs at the time of voting; though my last vote was for the Countries long term best & i’m prepared for pain..
    So thing is i lived in Altrincham, Trafford for 16yrs and during that time we mostly had the Torries, they are tight with the taxpayers money, had essential services libraries, leisure centre, decent hospitals, nice parks all the things u need but we got greedy so voted them out in the late 90’s., in hindsight it was about a lack of extra spending and jobs. Well with the Torries we had a healthy surplus of money 4 emergencies but within a short time of the Labour control that surplus became a deficit, we got shot of Labour as we realised they were damaging our ward..
    I think that we in the West want and expect too much and should take a look to the East for ways to get out of this mess, u only have to go back to the 30’s to see the answer boarding houses, big houses shared by many, but the one big thing we need to do is allow this bubble to pop, take the consequences and build again.
    Two things i’d like ppl to stop saying in 2011: we’re a rich country we can afford it, we are not. The other one is: This Country is crap or some such, how dare u speak of ur country like that u wouldn’t say it bout ur beloved football team when they are down and out u would instead find a solution and dig ur way out.
    We are all in this together and as thus i think we owe it to this great country to stop bickering & figure this out. Torries won’t be any fun but they’ll figure this out. In the meantime i solomly hope we on this small but perfectly formed island start to appreciate what we have; it could be an awful lot worse (ie we could have infertile land and unable to feed ourselves). The word NEED is important here.
    Lastly the difference between a winner and a loser is a winner gets up and trys again, how we handle this will go down in the history books, lets hope it’s a winning entry.

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