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.

Comment

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.

Comment

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?