Yesterday was a day where it felt like time has accelerated and Friday afternoon had already arrived as everybody sang along to Adele.
Rumour has it (rumour)
Rumour has it (rumour)
Rumour has it (rumour)
First the Euro area was going to indulge in some can-kicking by offering Greece a 6 month programme extension and then Greece was making either its own offer or a hard line stance depending on which news service was broadcasting! In response Greek financial markets mimicked the nursery rhyme about the Grand Old Duke of York and his ten thousand men and they marched up the hill and back down again.
Just a thought but has any regulatory investigation checked into who makes such likes and whether there has been any individual or collective benefit- like for a hedge fund- from such rumours? Of course some gains will be by chance but are all of them?
The Greek Economy
At the bottom of all of this is the distruction that has been visited upon the Greek economy by organisations such as the IMF which changed policy to one combining austerity and internal competitiveness under the leadership of French politicians. Of course the originator Dominique Strauss-Khan has hit what we may call other problems but for me he is guilty of economic mismanagement on a grand scale.
After all this time the state of production in Greece is shown below.
The Production Index in Industry (IPI) in December 2014 compared with December 2013 recorded a decline of 3.8%. In December 2013, the annual rate of change of the IPI was –1.4%.
In the 12-month period from January 2014 to December 2014, the average rate of change of the IPI was –2.7%. In December 2013, the corresponding average rate of change of the IPI was –3.2%.
Not much sign of an economic recovery or what has become called Grecovery there is there? If we look to the (working day adjusted) underlying index it is at 83 where 2010=100. You may want a deper perspective and if we try to look through the various rebasing of the numbers and I estimate that if we used 2005 instead as 100 then the index would be more like 69, and remember initially from 2005 the economy was growing.
According to provisional3 results, the Industrial Production Index (IPI) in December 2007, as compared to December 2006 rose by 0,8%. A year earlier, the annual rate of change of the IPI was 2,6%.
An interesting way of measuring matters was discussed earlier on Twitter by Macrocredit.
So half of London and a bit more than Madrid, Dusseldorf and Frankfurt.
What about the national debt?
This is a large issue as Greece owed some 321.7 billion Euros according to its Ministry of Finance in its bulletin up to the end of September 2014. Herein lies the rub as 220.1 billion is owed to external support mechanisms otherwise known as other Euro area nations and the IMF. Actually we could add another circa 12 billion of external and bilateral loans to this before we get to who really is backing the extra 16.7 billion of state guarantees. Accordingly any arrangement to reduce the debt in a meaningful way has to include official creditors which were excluded from the last haircut/default in 2012. I was very critical of that arrangement for precisely this reason, as it was and is my opinion that official creditors had to take a haircut too. This is a faultline as many of the debt involved here has been provided by off-balance-sheet units such as the EFSF and it replacement ESM. Such a “free lunch” has a price when you haircut it and Euro area politicians have to explain that they have made losses to their taxpayers.
The running costs are low
This may not be what you expect but the Euro area strategy changed from the initial Germanic tactic of making Greece pay a penal rate for its loans. So initial estimates of 6%+ became 4.5% and then went even lower as shown below.
The European Financial Stability Facility (EFSF) placed today a €1.5 billion 30-year bond maturing on 17 February 2045. The issuance spread was fixed at mid swap plus four basis points. This implies a reoffer yield for investors of 1.229%. The coupon rate is 1.2%.
According to the Greek Finance Ministry Greece does not pay much more than this which the EFSF confirms.
EFSF’s on-lending costs are funding costs plus operational costs.
A lot of the debt was shifted to the longer term in an example of can kicking of which even Jonny Wilkinson would be proud! Via this route Greece has low funding costs and it is a move which albeit belatedly has helped the Greek position. Indeed Greece has some of the lowest funding costs in the world albeit with a extremely odd yield curve.
Would you want to loan to Greece at an annualised rate of 2.5% for the next three months? If someone was invested my money I would regard that as outright incompetence. In case you are wondering about this there has been a type of convention that such bills are backed by the central bank and therefore safe via its ability to print. Are you thinking what I am thinking?
As you can see Greece has been given beneficial interest-rate or yield terms but in return has had to accept an ever rising yoke of debt accompanied by austerity based economic policies which have collapsed the economy. This has made the relative debt burden larger as the cycle which is like a dog chasing its own tail spins one more time. As I have pointed out before the dogs I have observed eventually tire and end the game whereas the Euro area ploughs on and on and on.
The other side of the coin is Greece choosing to abandon austerity and internal devaluation and leaving the Euro. It can default to reduce the capital burden and set new better economic policies but it would need to allow for higher interest-rates. In these times of forebearance for debtors and low yields they may however be much lower than everyone is assuming. A competent economic plan would help with perhaps some economic growth bonds (GDP) added to the mix to give investors some equity and a stake in the outcome.
These are significant but not the Sword of Damocles often implied by the media.
1. This puts ever more pressure on Denmark and Switzerland who both have official interest-rates of -0.75%. Will one or both go even lower? Swiss three-month money is at nearly -1%.
2. The UK has seen the Pound £ push to multi-year highs against the Euro and has pushed above 1.35 as I type this.
3. Germany is being paid ever more by investors keen to have the opportunity to owe it money. Investors have accepted a yield of -0.22% this morning to own 2 year Schatz debt.
As the Eurogroup finance ministers meet today they will find themselves in several between a rock and a hard place discussions. For example the new Greek government has a recent mandate which it has backed up this week with a parliamentary vote. This does not give it a complete mandate as it did not get more than 50% of the electoral vote. But it is light-years more than the unelected ECB which it has been jousting with so far. speaking of three letter acronyms one of the stars of this years Grammy awards was on the case back in the early 1970s.
Looks like we’re ridin’ on the same train
Looks as through there’ll be more pain
There’s gonna be a Showdown
There will be plenty of jostling and competing arguments and no doubt threats too as each side tries to apply their version of game theory. To my mind the Euro area establishment is both emotionally and intellectually bankrupt after what they have done but I doubt that will occur to them
Save me, oh, save me
It’s unreal, the suffering
There’s gonna be a Showdown
And it’s rainin’ all over the world
It’s raining all over the world
Tonight, the longest night