An analysis of Greece’s (further) downgrade and measuring the impact on the oil price rise on different countries and currencies

The past weekend has seen the rebellion in Libya continue and it is now showing signs of durability on both sides. The autocrat Colonel Gaddafi refuses to step down and the rebels resist his forces making many wonder how long this situation may persist. Indeed as there are signs of unrest in Arabia too, the oil price has resumed its upward climb and is now just under US $117 for a barrel of Brent crude and the price of a barrel of West Texas Intermediate is catching up as it now stands at US $ 106 per barrel. This got me thinking as to how far oil has risen and what the impact will be in different countries/currencies.

The rise in the oil price since the beginning of 2009 in different currencies

The reason why I have looked at this is the fact that the price of oil is in US dollars so those who do not have it as their currency have to use their own currency to purchase it.

Back at the opening of 2009 the price of a barrel of Brent crude was approximately US $50 per barrel (the price was volatile then too but at a much lower level!). So if we look at this mornings price we see that it has risen since then by 134%.

So the rise for those who use US dollars is simple 134%

If we look at those who use the Euro the exchange rate back at the opening of 2009 was 1.37 and is now 1.40. So there has been a small impact here as the Euro has risen by just over 2%. Accordingly the currency adjusted price of oil is US $114.4

If we now use the UK pound we can see that it has risen from £1.49 at the beginning of 2009 to £1.63 now. So it has risen over the period by just over 9%. Accordingly the currency adjusted price of oil is US $106.

If we use the Yen we need to convert the exchange rate from and use the inverse of our usual measure which rose from 92 Yen per dollar to 82. If we do this we see that the Yen has risen by just over 12%. Accordingly the currency adjusted price of oil is US $102.7

Comment

It is interesting I felt to see that the consumers most exposed to the rise in the oil price are those who consume in US dollars. The reason for this is that against the worlds major currencies the dollar has fallen since 2009. The Euro has risen only marginally and this makes me wonder if the relative inflationary pressure on the Euro zone is a factor in their threat to raise interest-rates in April. For the Uk we see that over this period the pound has risen against the US dollar and has been an anti-inflationary influence of around 9%. It is strange that the Bank of England has missed this and perhaps someone might wish to make it aware of such a fact! The performance of the Yen has been documented on here many times and whilst in itself it is painful for Japanese exporters it does have the side-effect of reducing import price pressure.

There are two main ironies here. Many will wonder as to whether a little import price pressure might help Japan to overcome her problem of disinflation (negative inflation) that has lasted for over 20 months now. Also the so-called panacea of the fall in the UK pound in 2007/08 which amounted to 25% is certainly not a panacea. For example imagine if such a fall combined with rising oil and commodity prices. The existing rise would be compounded and care is always needed in my view when lauding exchange rate falls as outright solutions to economic problems. You also have to allow for the inflation they can either cause or contribute too.

Commodity Prices: Food prices surge again

These also closed at new highs for this phase of time at the end of last week. The Commodity Research Bureau spot index rose on Friday by 4.46 to 572.98. Contributing to this was what to my mind has been one of the main causes of the unrest in North Africa and Arabia which is higher food prices as the foodstuffs component of the index rose by 6.32 to 504.77. It is of course a feature of us counting in base ten but somehow “big figure” chnages like going through 500 always seem more symbolic.

Greece receives (yet another) downgrade

This morning the ratings agency Moodys has downgraded Greece ‘s government bond rating from Ba1 to B1.In the arcane world of ratings agencies this is a 3 notch move and she also has a negative outlook. If we suspend the usual issues of what exactly changed this morning? (The timing of such moves often feels arbitrary) And if we ignore the fact that Moodys is again behind the curve we do find some interesting analysis. According to Moodys.

Moody’s decision to downgrade Greece’s rating is driven by three reasons:

1.) The fiscal consolidation measures and structural reforms that are needed to stabilise the country’s debt metrics remain very ambitious and are subject to significant implementation risks, despite the progress that has been made to date.

2.) The country continues to face considerable difficulties with revenue collection.

3. ) There is a risk that conditions attached to continuing support from official sources after 2013 will reflect solvency criteria that the country may not satisfy, and result in a restructuring of existing debt.

Comment

As ever there is sense in the underlying report. If one had a theme for ratings reviews it would be that they are usually tardy but also usually describe the scene well. I have a category on this blog for Greece and have been describing that dangers of the approach taken by the Euro zone for around a year now. As to revenue collection I still remember the “tax amnesty” of autumn 2010 which frankly set a dreadful example. For the plans to post-2013 then the European Stability Mechanism remains ill-defined and frankly ill-thought out. We are back to “kicking the can down the road”.

Greece would have been set on a much more positive path if the restructuring/haircut to her debt that Moodys is afraid of post 2013 had taken place in early 2010.

The Response from Greece

From time to time I like to point out the fact that official responses are full of hyperbole and according to Reuters here is this mornings reply.

RTRS-GREECE SAYS MOODY’S  DOWNGRADE COMPLETELY UNJUSTIFIED 

RTRS-GREECE SAYS MOODY’S DOWNGRADE SHOWS NEED FOR TIGHTER REGULATION OF RATING AGENCIES

So no substantive reply and a rather nasty threat in the latter part.

The US economy: The employment/unemployment situation

On Friday we received the latest update on the US economy from the Bureau of Labor Statistics

Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate was little changed at 8.9 percent……….Job gains occurred in manufacturing, construction, professional and business services, health care, and transportation and warehousing.

So after the weather related problems for the January figures we got a decent rise in non-farm payrolls and a further drop in unemployment. In addtion some of the back data was revised favourably.According to the New York Times unemployment has not dropped like this since 1983 and the 1983 move preceded a good period of expansion for the US economy. However we have seen a period where the jobs figures have improved which is good but there are issues with the figures and the improvement is still not fast enough. Let us look at some of the detail.

If we take the average of the last 3 months to try to see through the weather problems in January we see that  non-farm payrolls have improved by 136,000 per month. So good in itself but it is probably only just enough to keep up with the growth in the US labour force. Here we do get a problem with the numbers as the BLS is becoming a little inconsistent about population growth.

The headline fall in unemployment is welcome as is the fall in the U-6 measure to 15.9%. For those unfamiliar with U-6 it is a broader measure of unemployment which seeks also to capture short and part-time working and those the  BLS calls “discouraged”. So we see an improvement but still large numbers.

If we look into deeper issues there is a debate developing over the “participation rate” which measure how much of the population actually works. This has fallen from an long-term average of between 66 to 67% to 64.2%. This may seem not that significant but when you remember that this accounts for 4 million people it feels much more significant.There are a lot of arguments about this but I spotted this in the Wall Street Journal.

A growing number of workers with health problems are applying for Social Security Disability Insurance benefits. The disability rolls, where many beneficiaries remain for life, have surged more than 14% since the recession began, to nearly 10.2 million in December 2010.

So workers when unemployed seem to be taking the route of going long-term sick which is an issue the UK has also faced. To the extent that such a trend exists the fall in the unemployment rate is in fact a mirage and those who try to allow for this and other such influences argue that the true US unemployment rate is more like 12%.

Comment

The starting point is that these numbers do show that there is job creation going on in the United States. However it is barely fast enough to account for expected population growth and indeed on some forecasts for it then it is not enough for that either. So in spite of the recent falls in the unemployment rate there is little sign of a sustained fall in unemployment and there are dangers of a rise back again. I am reminded of the testimony from Ben Bernanke which I quoted from on March 3rd which revealed that the US economy had lost approximately 7.7 million jobs since the credit crunch began. So at this level of job creation we would take a very long time to get there…

Also it is easy to forget (and some have in their analysis) the extraordinary level of stimulus presently existing in the United States. Not only do we have interest-rates at near-zero but we also have a central bank currently spending some US $75 billion a month on asset purchases of US Treasury Bonds. In addition the fiscal stimulus announced in late 2010 of around US $900 billion means that the pedal is not far off the metal for official stimulus measures.

Looked at like that then the US Federal Reserve and government must have their fingers crossed for even higher job growth in the spring and summer of 2010 or they will be faced with the problem of what to do next having already deployed much of the available resources. This would not be a good place to be.

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21 thoughts on “An analysis of Greece’s (further) downgrade and measuring the impact on the oil price rise on different countries and currencies

  1. The Greek government is truly between a rock and a hard place. It only has three options:

    Option 1 is to default (“re-structure”) while keeping Greece in the Eurozone. It can only do this if the other Member States agree, which they will not and probably cannot (German public opinion will not tolerate it). So this is not really an option

    Option 2 is to default (“re-structure”) and quit the Eurozone. Whatever the legal niceties, it could factually do this, but the result would be a fall in living standards that could produce a revolution.

    Option 3 is to play for time and wait for something to turn up.

    Faced with a choice between options 2 and 3, it is not very surprising they choose 3.

    • “Faced with a choice between options 2 and 3, it is not very surprising they choose 3.”

      Having spent time living in Thessaloniki, I’d say option 3 fits the Greek psyche extremely well too. (Path of least resistance). And who can really blame them?

  2. Exactly, Ian, do you think anyone has explained this to the Greek people? Somehow I doubt it and of course option 2 is the one that will impose itself eventually. Playing for time is fine, but only for a while, and things get worse meanwhile…
    There are several other countries in a similar position, also receiving fine words from their politicians.

    • Carys…may I question your note that option 2 will be the “end-game”? Can you (or anyone) see the EU bigwigs allowing such a thing to happen? Surely this is tantamount to admitting defeat – their beloved experiment has not produced the right result? Looking to Ireland, I have (along with Shaun) proposed the IMF as the end lender, and would suggest the same for Greece. OK it’s playing the long game and waiting but Ian (above) notes it’s probably the only game in town….

  3. Well put, Ian. Looking at the reason that the Greek government is so angry at the downgrade, we can assume one of the following:
    1. They had no idea how bad things are and are therefore surprised that Greece should be downgraded; or
    2. They know exactly how bad things are , but are hoping to play for time, as you say, and the ratings downgrade makes it that bit harder.

    I do wonder about the ratings agencies myself. They have all these models and fancy ratings grades, but why can’t they just say what we all know, i.e. that Greece has no chance of paying back the debt. No chance, not a fair chance or B1.1 or whatever. Just no chance. Same for Ireland.

  4. On the oil price, you mention the currency adjusted price at $106 for the UK. The OBR’s fiscal forecast determinant as at Nov 2010 is $85 per barrel for 2011 – 12, stabilising at $87 per barrel up to 2015. For every £10 per barrel in price hike, they say revenues are boosted by £2.4 billions. There would be, they say, a net loss to the public finances if the rises become permanent.

  5. In my opinion, the downgrade is a divine gift for Greece and puts more pressure to EU and Germans to make up their mind sooner than later. It accelerates decisions (one way or the other) and this is good for Greece.

  6. Regarding Greece, i talked to a Greek chap in our shop @ mcr airport in depth Sunday am, i’d say he was in his early 30’s said nothing had changed since the initial riots but they have riots daily, certain areas are no go & he fears for his life. There is no trust for the government & for him no work. He wants to leave Greece & was looking @ maybe coming to the UK. I discouraged him from that move saying i believe we soon will have more riots & unrest when the cuts kick in & that if it were me i’d learn Indian or Chinese & move there (he is enterprising & wants to trade with mates in Greece) so basicaly the Greeks continue to work outside the system. The conversation made me wonder why the press have stopped covering this ‘daily riots in Greece’ situation; i bet Moodys & other rating companies know though. As to my guess on riots, read that police are planning to riot about the cuts so there we go. It is being compared to the 70’s.

  7. Carys i think uv nailed it, to my mind i think they should leave the EU now & when i mentioned that to the Greek gentleman in my shop he went silent & looked uneasy. Even after i told him that all the Irish i spoke to lately had had enough of the EU & when i mention leaving it they look at peace, happy & hopeful. It reminds me of an illness lingering & the patient hesitant for the op; no recovery without it is all i see.

  8. Jiminey Cricket re rating agencies, long ago at the beginning of this crisis over in America the rating companies were all implicated in overrating many banks and companies that led them to do well on the stock market & thus bubble. No reform was ever implemented but suddenly the ratings companies started to downgrade everyone. Yes sadly the contagin has gone deep into the system. I was shocked when i found out back in ’07.

    • Hi Basil
      What is the current situation? Has it calmed down a lot? The news media over here has moved in its usual pack to North Africa so the newsflow from Greece has dropped away.

      On another tack do you think these disapora bonds for ex-pats have much of a chance? I think that there are lots of issues with them but will Greek nationalism and love of the motherland get them away?

  9. Hi Sean

    I agree with Basil – there are not “daily riots” in Greece – far from it. There is ongoing travel disruption in Athens and the usual ( if more frequent) short strikes in various sectors.

    I will be very surprised if the disapora bonds succeed – the love of the motherland will not extend that far!!

    The fundamental problem that I see is that the government has done what Greek governments have always been good at – passing lots of legislation (in this case, as required by the “Troika”). Very little has been implemented, however, and one suspects that this is why protests come and go – the protestors/strikers are reassured that life will continue, whatever is on the statute books. The exception to this is the indirect taxes – e.g. VAT hikes, salary reductions – which of course are being felt keenly. I get no sense, however, that there is any head of steam building for major unrest anytime soon.

    • Good points. I agree completely. Apart from the cuts in salaries/pensions, the higher taxes etc., the bad psychology of the general public, the usual short strikes (same more or less situation prior to crisis) and associated travel disruptions mainly in Athens, I do not see no major changes and certainly not riots. The government legislates and the laws are generally not implemented. Life more or less goes on as usual as I have said many a time here. I have not seen anything substantially changed (apart from the mood which is of course worse). There is no appetite for major unrest but I believe that much worse are to come. I do not see any success with the diaspora bonds. There are many problems with illegal immigrants worsened by the crisis and center of Athens has become more dangerous.

  10. And on the issue of Greece and EU. As I have said before, the reasons of Greece joining the EU are not financial but geopolitical (the neighbourhood involves Albania, FYROM, Turkey, middle east and north Africa are close, it is hardly central Europe). And that’s why leaving the EU is not an option at all for Greece. If Greece is made to leave EU then it will go straight to Russia. It is a rough neighborhood, NATO sides always with Turkey, you cannot be alone.

    • Greeks exaggerate easily. During the ‘boom’ years everybody complained for their salaries and for the prices when they were not bad at all. Believe you me, very little has actually changed and there are no riots. Of course in the future I expect much to change one way or the other and I cannot exclude riots or even storming of the parliament but currently there is calm.

  11. I can confirm – There are no riots over here.

    The most “oomph” is usually on general strike days, but these at best happen once a month or every two months, there is no sustained “uprising” movement like one can find in France, when something major happens.

    The remainder of the strikes / “riots” / etc are small scale and not worthy of excess exposure.

    As for the public’s mood – Naturally it’s at a nadir. The average story on the street will either include mass redundancies, or massive pay cuts (in most cases, forcibly and discreetly applied), or some combination of both.

    In the company where I work in, for instance, although for entirely different reasons (long overdue restructuring after a merger having taken place in the past), the overall workforce will be reduced from ~115 to ~75. I know I’m not in them, but it’s still not an easy thing to bear, especially if some of these were doing things now YOU have to do…

    (To put this into perspective: I left a company department to join another.
    I do have to assist once in a while in matters of the old department, because the company didn’t hire a replacement for me per se, but rather told me to unload chunks of my work to several different people.

    I have, by default, to do the work my new position includes, and shortly before I join the new department, a colleague resigned, whose work I inherited 100% – And while I am among the least well paid in the company, and effectively have 3 “job roles” on me in varying degrees, the climate nowadays is “be happy to work anywhere”, which tends to stall things regarding, well, anything really, be it a raise or something else!)

    Not pleasant, the situation as a whole, not pleasant.

  12. it is a shame what is happening with our country, the uk, im not a fan of david cameron and i am certainly not a fan of the tories, to be honest i thought that gordon brown was an okay prime minister but he was not the greatest either, still i do not remain that convinced about ed miliband, sure he looks nice enough but he is not exactly the tony blair backbone which we had 4 years ago.

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