The soaring price of shares in the Swiss National Bank poses many questions

We find ourselves today looking at a country which exhibits many of the economic themes of these times and one of them is brought to mind by this from the fastFT twitter feed.

US 10-year bond yields creep further towards 3% milestone

The fact that the 10-year Treasury Note yield is 2.99% is part of what is called “normalisation” of interest-rates and bond yields, although care is needed as we have been here before. But my subject of today can say the equivalent of “bah humbug” to this as it has a 10-year yield of a mere 0.13%. If we look back and take a broad sweep it has had this yield averaging around 0% for the past five years with a low of -0.6%. In fact Switzerland can still borrow out to the 8 year maturity and be paid for doing so as its yields are negative out to their. So the old normal remains a distant dream ( or nightmare depending on your perspective) and let me throw in a thought. There are arguments you should use such times to borrow and invest but the Swiss have pretty much set their face against this.

The Confederation wants to ensure room for manoeuvre for future generations by means of a sustainable fiscal policy. It has been pursuing a strategy of a balanced budget in the medium-term and a low level of debt since the start of 2000…………Thanks to the debt brake, it has been possible to considerably reduce federal debt ( Department of Finance February 2nd 2018).

According to the OECD it has a national debt of just under 43% of annual GDP. Of course there is a virtuous circle between bond yields and fiscal surpluses but for these times Switzerland is rather abnormal to say the least.

Negative Interest-Rates

The Swiss National Bank has contributed to the above via this.

Interest on sight deposits at the SNB is to remain at –0.75% and the target range for the three-month Libor is
unchanged at between –1.25% and –0.25%.

Money rates are at -0.73% if you want precision and as Swiss Banks have some 573 billion Swiss France deposited at the SNB there will be an icy chill felt although of course the SNB did take measures to protect the “precious”. Nonetheless there is a cost. From Reuters.

Swiss banks paid 970 million Swiss francs ($1 billion) in negative interest rate charges in the first six months of 2017, according to central bank data, up 40 percent year-on-year as clients continue to hoard cash.

Interesting isn’t it that so far ( and we have over 3 years now) there has been little impact on cash holdings? We learn a little more about negative interest-rates from this as there does not seem to be much of an adjustment so far.


Last week saw what was quite an event. From Reuters.

The Swiss franc fell to a three-year low of 1.20 against the euro on Thursday as a revival in risk appetite encouraged investors to use it to buy higher yielding assets elsewhere, betting on loose monetary policy keeping the currency weak.

This took us back to January 15th 2015 when this happened.

The Swiss National Bank (SNB) has decided to discontinue the minimum exchange rate of CHF 1.20 per euro with immediate effect and to cease foreign currency purchases associated with enforcing it.

This was how interest-rates were reduced to -0.75% as the previous policy of “unlimited intervention” fell to earth. It was not that the SNB was running out of reserves as when you intervene against a strong currency you are selling something you do have an unlimited supply of at least in theoretical terms. But it was a combination of the scale of interventions  required and the side-effects and consequences which in this instance broke the bank policy.

As ever a move in interest-rates of 0.5% was in currency terms like putting a Band-Aid on a broken leg and the Swiss Franc surged.

; in midMarch 2015 it was at CHF 1.06 per euro, constituting a 12% appreciation against the minimum exchange rate of CHF 1.20 per euro in place until mid-January. ( SNB)

For newer readers wondering why the Swiss Franc was so strong it had been kicked-off by the reversal of the Carry Trade. If you look back in time on here you will see analysis of what I called the Currency Twins of the Swissy and the Japanese Yen who were affected by enormous levels of foreign borrowing pre credit crunch. This strengthened those two currencies after the credit crunch as some rushed to get out and of course the currency markets noted that at least some were desperate to get out.

This had a substantial human cost as many mortgage and business borrowers in Eastern Europe had taken advantage of low interest-rates in the Swiss Franc. They then faced surging monthly repayments when they were converted into the currency in which they had an income and quite a crisis was started. Of course doing such a thing was stupid but care is needed as whilst you should be responsible for your own actions it is also true that the banking sector did its best to miss lead on this issue and hide the risks faced.

Hedge Fund

On the road to the 15th of January 2015 the Swiss National Bank built up an extraordinary amount of foreign exchange reserves. In fact since there it has also intervened from time to time but on a much more minor scale.

The SNB will remain active in the foreign
exchange market as necessary, while taking the overall currency situation into consideration.

Which according to the 2017 annual report has led to this.

The level of currency reserves has risen by more than
CHF 700 billion to almost CHF 800 billion since the onset of the financial and debt crisis in 2008. The increase is largely due to foreign currency purchases aimed at curbing the appreciation of the Swiss franc.

Which has led to this as I pointed out on the 15th of March.

The majority of the SNB’s foreign currency investments are in government bonds, bonds issued by foreign local authorities (e.g. provinces and municipalities) and supranational organisations, as well as corporate bonds, or are placed at other central banks. The proportion of equities is one-fifth. Two-fifths of the foreign currency investments are denominated in euros, and more than one-third in US dollars. Other important investment currencies are the pound sterling, yen and Canadian dollar.

It has become rather a large hedge fund as we note the diversification into equities. Also we get a hint of why Euro area bonds have done so well as not only has the ECB been buying via its QE program so has the Swiss National Bank. A rally driven by competing central banks?


There is a lot to consider here as for example if we start with an international perspective what will happen to equities if the Swiss National Bank should stop buying and start selling? The bellweather of this is Apple where according to NASDAQ it owned some 19.1 million shares at the end of 2017. Care is needed as we are just below the 1.20 level and the SNB intervened at considerably worse levels but it could decide to reverse course soon at least in part unless of course it is singing along to the ladies of En Vogue.

Hold me tight and don’t let go
Don’t let go
You have the right to lose control
Don’t let go

Don’t let go
Don’t let go

Meanwhile staying with the theme of equities there is the ongoing issue of shares in the Swiss National Bank itself.

This has led to quite a lot of speculation that one day the private shareholders might get a share so to speak. This is how it looked back in October.

Less than a month after its stock smashed through the 3,000-franc-a-share barrier, SNB shares hit an intraday high of 4,324 on Wednesday and were trading as high as 4,600 on Thursday. The stock has tripled in value from a year ago, repeatedly confounding market watchers by regularly hitting records.

It is now 8380 Swiss Francs according to Bloomberg. Should shares in a central bank be doing this? The answer is clearly no as we mull a central bank which is partly privately owned.

Moving back to Switzerland I note many are calling this a success for the SNB. Odd isn’t it that this way round the counterfactuals that many are so keen on when things go wrong for central banks seem to get lost in a fog of amnesia? The truth is we do not know as currency trends ebb and flow but there is of course another factor. Any economic slow down would start currently with interest-rates at -0.75% posing the question of what would happen next? Perhaps they will run into Korean Won. From February.

The swap agreement enables Korean won and Swiss francs to be purchased and repurchased between the two central banks, up to a limit of KRW 11.2 trillion, or CHF 10 billion.



The IMF debt arrow warning misses the real target

Yesterday brought the latest forecasts from the IMF ( International Monetary Fund). Don’t worry I am not concerned with them as after all Greece would be now have recovered if they were right. But there is a link to the Greece issue and the way that it has found itself trying to push an enormous deadweight of debt which meant that Euro area policy had to change to make the interest-rates on it much cheaper. Here is the ESM or European Stability Mechanism on that subject.

1% Average interest rate on ESM loans to Greece (as of 28/04/2017)

That is a far cry from the “punishment” 4.5% that regular readers will recall that Germany was calling for in the early days and the implementation of which added to the trouble. Also if we continue with the debt theme there is another familiar consequence.

That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

So in the words of the payday lenders Greece now has one affordable monthly payment or something like that. As we note the IMF research below I think it is important to keep the consequences in mind.

The IMF Fiscal Monitor

Here is the opening salvo.

Global debt hit a new record high of $164 trillion in 2016, the equivalent of 225 percent of global GDP. Both private and public debt have surged over the past decade.

Later we get a breakdown of this.

Of the $164 trillion, 63 percent is non financial private sector debt, and 37 percent is public sector debt.

That is a fascinating breakdown so the banks have eliminated all their own debt have they? Perhaps it is the new hybrid debt being counted as equity. Also the IMF quickly drops its interest in the 63% which is a shame as there are all sorts of begged questions here. For example who is it borrowed from and is there any asset backing? In the UK for example it would include the fast rising unsecured or consumer credit sector as well as the mortgaged sector but of course even that relies on the house price boom for an asset value. Then we could get onto student debt which whilst I have my doubts about some of the degrees offered in return I have much more confidence in young people as an asset if I may put it like that. So sadly the IMF has missed the really interesting questions and of course is stepping on something of a land mine in discussing government debt after its debacle in Greece.

Government Debt

Here is the IMF hammering out its beat.

Debt in advanced economies is at 105 percent of
GDP on average—levels not seen since World War II.
In emerging market and middle-income economies,
debt is close to 50 percent of GDP on average—levels
last seen during the 1980s debt crisis. For low-income
developing countries, average debt-to-GDP ratios have
been climbing at a rapid pace and exceed 40 percent
as of 2017.

If we invert the order I notice that there are issues with the poorer countries again.

Moreover, nearly half of this debt is on
nonconcessional terms, which has resulted in a doubling
of the interest burden as a share of tax revenues
in the past 10 year.

This gives us food for though as you see one of the charts shows that such countries have received two phases of what is called relief, once in the 90s and once on the noughties. Is it relief or as Elvis Presley put it?

We’re caught in a trap
I can’t walk out
Because I love you too much baby

Next time I see Ann Pettifor who was involved in the Jubilee debt effort I will ask about this. Does such debt relief in a way validate policies which lead such countries straight back into debt trouble?

Advanced Countries

Here the choice of 2016 by the IMF is revealing. I have a little sympathy in that the data is often much slower to arrive than you might think but the government debt world has changed since them. Any example of this came from the UK only this week.

General government deficit (or net borrowing) was £39.4 billion in 2017, a decrease of £19.0 billion compared with 2016; this is equivalent to 1.9% of GDP, 1.1 percentage points below the reference value of 3.0% set out in the Protocol on the Excessive Deficit Procedure.

It is hard not to have a wry smile at the UK passing one of the Maastricht criteria! But the point is that the deficit situation is much better albeit far slower than promised meaning that whilst the debt soared back then now prospects are different.

In truth I fear that the IMF has taken a trip to what we might call Trumpton.

In the United States—where
a fiscal stimulus is happening when the economy is
close to full employment, keeping overall deficits above
$1 trillion (5 percent of GDP) over the next three
years—fiscal policy should be recalibrated to ensure
that the government debt-to-GDP ratio declines over
the medium term.

I have quite a bit of sympathy with questioning why the US has added a fiscal stimulus to all the monetary stimulus? I know it has been raising interest-rates but the truth is that it has less monetary stimulus now rather than a contraction. Those of us who fear that modern economies can only claim growth if they continue to be stimulated or a type of economic junkie culture will think along these lines. But also they lose ground with waffle like “full employment” in a world where the Japanese unemployment rate is 2.5% as to the 4.1% in the US. Oh and whilst we are at it there is of course the fact that Japan has been running such fiscal deficits for years now.

What about interest-rates and yields?

There was this from Lisa Abramowicz of Bloomberg yesterday.

While U.S. yields may still be rising, the world is still awash in central-bank stimulus. The amount of negative-yielding debt has actually grown by nearly $1.4 trillion since February, to about $8.3 trillion: Bloomberg Barclays Global Aggregate Negative Yielding Debt index

My point is that for all the talk and analysis of higher interest-rates and yields we get this.


There is a fair bit to consider here and let me open with a bit of tidying up. Comparing a debt stock to an income/output flow ( GDP) requires also some idea of the cost of the debt. Moving on an opportunity has been missed to look at private-debt as we note that US consumer credit has passed the pre credit crunch peak. Of course the economy is larger but there are areas of troubled water such as car loans. This matters because the last surge in government debt was driven by the socialisation of private debt previously owned by the banks.

If we note the debt we have generically then there are real questions now as to high interest-rates can go? Some of you have suggested around 3% but in the end that also depends on economic growth which is apposite because the slowing of some monetary indicators suggests we may be about to get less of it. Should that turn further south then more than a few places will see an economic slow down that starts with both negative interest-rates and yields. These are the real issues as opposed to old era thinking.

• First, high government debt can make countries
vulnerable to rollover risk because of large gross
financing needs, particularly when maturities are

In reality that will be QE’d away if I may put it like that and the real question is where will the side-effects and consequences of the QE response appear? For example the distributional effects in favour of those with assets. Perhaps the real issue is the continuing prevalence of negative yields in a (claimed) recovery………From the Fab Four.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Me on Core Finance TV

How quickly is the economy of Germany slowing?

Until last week the consensus about the German economy was that is was the main engine of what had become called the Euro boom. Some were thinking that it might even pick up the pace on this.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

This was driven by the PMI or Purchasing Managers Index business surveys from Markit which as I pointed out on the 3rd of January were extremely upbeat.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

This was followed by the overall or Composite PMI rising to 59 in January which suggested this.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

Actually that was for the overall Euro area which had a reading of 58,8. The catch has been that even this series has been dipping since as we now see this being reported.

The pace of growth in Germany’s private sector cooled at the end of the first quarter, with the services PMI retreating further from January’s recent peak to signal a loss of momentum in line with that seen in manufacturing.

This led to this being suggested.

it still promises to be a strong 2018 for the German economy – with IHS Markit forecasting GDP growth to pick up to 2.8%

Still upbeat but considerably more sanguine than the heady days of January. Then there was this to add into the mix.

However, unusually cold weather in March combined with continuing payback from January’s jump in activity has led to the construction PMI falling into contraction territory for the first time in over three years

Official Data on Production and Trade

The official data posted something of a warning last week.

In February 2018, production in industry was down by 1.6% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)…….In February 2018, production in industry excluding energy and construction was down by 2.0%. Within industry, the production of capital goods decreased by 3.1% and the production of consumer goods by 1.5%. The production of intermediate goods showed a decrease by 0.7%. Energy production was up by 4.0% in February 2018 and the production in construction decreased by 2.2%.

As you can see the monthly fall was pretty widespread and only offset by a colder winter. Whilst this did show an annual increase of 2.6% that was a long way below the 6.3% that had been reported for January and December. So on this occasion the PMI surveys decline seems to have been backed by the official numbers as we await for the March numbers which if the relationship holds will show a further slowing on an annual basis.

Thrown into this mix is concern that the decline is related to fear over the rise in protectionism and possible trade wars.

If we move to this morning’s trade data it starts well but then hits trouble.

Germany exported goods to the value of 104.7 billion euros and imported goods to the value of 86.3 billion euros in February 2018. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 2.4% and imports by 4.7% in February 2018 year on year. After calendar and seasonal adjustment, exports fell by 3.2% and imports by 1.3% compared with January 2018.

This may well be an issue going forwards if it is repeated as last year net exports boosted the German economy and added 0.8% to GDP ( Gross Domestic Product) growth.

On a monthly basis we saw this.

Exports-3.2% on the previous month (calendar and seasonally adjusted). Imports –1.3% on the previous month (calendar and seasonally adjusted).

Of course monthly trade figures are unreliable but this time around they do fit with the production data. The export figures look like they peaked at the end of 2017 from an adjusted ( seasonally and calendar) 111.5 billion Euros to 107.5 billion on that basis in February.

What are the monetary trends?

If we look at the Euro area in general then there are signs of a reduced rate of growth.

The annual growth rate of the narrower aggregate M1, which includes currency in circulation
and overnight deposits, decreased to 8.4% in February, from 8.8% in January.

The accompanying chart shows that this series peaked at just under 10% per annum last autumn. So that surge may have brought the recorded peaks in economic activity around the turn of the year but is not heading south. If we move to the broader measure we see this.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.2% in February 2018, from
4.5% in January, averaging 4.4% in the three months up to February.

This had been over 5% last autumn and like its narrower counterpart has drifted lower. If you apply a broad money rule then one would expect a combination of lower inflation and growth which is awkward for a central bank trying to push inflation higher.  If we move to credit then the impulse is fading for households and businesses.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation
and notional cash pooling) decreased to 3.0% in February, compared with 3.3% in January.

This is more of a lagging than leading indicator of circumstances.

These are of course Euro area statistics rather than Germany but they do give us an idea of the overall state of play. A possible signal of issues closer to home are the ongoing travails of Deutsche Bank. There has been a bounce in the share price today in response to the new Chief Executive Officer or CEO as Sewing replaces Cryan but 11.8 Euros compares to over 17 Euros last May. Yet in the meantime the economy has been seeing a boom and added to that as I looked at late last month house price growth will have been boosting the asset book of the bank yet the underlying theme seems to come from Coldplay.

Oh no, what’s this?
A spider web and I’m caught in the middle
So I turned to run
And thought of all the stupid things I’d done


The heady days of the opening of 2018 have gone and in truth the business surveys did seem rather over excited as I pointed out on January 3rd.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth.

We can bring that more up to date.

 In February 2018, roughly 44.3 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with February 2017, the number of persons in employment increased by 1.4% (+621,000 people).

Thus we see that it continues to suggest steady if not spectacular growth and bypasses the excitement at the turn of the year. Looking forwards we see that the monetary impulse is slowing which is consistent with the reduction in monthly QE to 30 billion Euros a month from the ECB. We then face the issue of how Germany will follow a good first quarter? At the moment a growth slow down seems likely just in time for the ECB to end QE! So it may well be a case of watch this space…..





What does the 10 year yield of Greece tell us?

Today’s headline or title introduces a subject which I find both frustrating and annoying.This is not only because it regularly misunderstood but also because it represents something of a financialisation of the human experience. What I mean by that is that some have used it as a way of suggesting an improvement in Greek economic performance that does not exist. Personally I sometimes wonder if it is used because it is the one signal that does show a clear improving trend. Let me illustrate with this from the LSE European Politics blog this morning.

A fall like that looks good on the face of it. Few point out the irony which is that falls in bond yields like that used to mean that a country was heading into at best a recession and probably a depression. Actually a drop from around 10% to around 4% indicates that something may be wrong so let us investigate.

The Greek bond market

A troubling sign arrives when we look for the benchmark 10 year bond of Greece and see that the benchmark page at the Hellenic Republic debt agency or PDMA is “under construction”. If we look at the data at the end of 2017 we see that of total debt of 328.7 billion the total of bonds is around 50.4 billion and if we add in treasury bills and the like we get to 65.4 billion.

By comparison the European Stability Mechanism or ESM tells us this.

The loan packages from the ESM and EFSF are by far the largest the world has ever seen. The two institutions own half of Greece’s debt.

Actually the support for Greece totals some 233 billion Euros which means we need to add the IMF and the original Greece “rescue” package to the numbers above.

Oh and as to the bond total well there is still the SMP which sounds like something used in the Matrix series of films but is in fact the Securities Markets Program which has mostly been forgotten but still amounts to 85 billion Euros. These days that is I guess a balancing item in the ECB accounts but it does appear here and there.

The ECB’s interest income from its SMP holdings of Greek government bonds amounted to €154 million (2016: €185 million).

There was a time that the SMP was a big deal and regular readers will recall so was its “sterilisation” but the ECB got bored with that in 2014 and gave up. Oh well!

But if we move on we see that there are relatively few Greek bonds around and of those that do exist the ECB holds a fair bit.

Why has the bond yield fallen then?

You could argue that the bond yield should have fallen before. A possible reason for it not doing so is that it is now too small a market for big hedge funds to bother with, especially if we note that a busy month now for the market (December) had a volume of 120 million Euros. But if we look from now there have been changes in the bond metrics. For example the average maturity of Greek bonds has risen mostly by the fact that ESM loans have an average maturity of 32 years. Also bond investors may have noticed a certain “To Infinity! And Beyond” willingness from the ESM and added that to the overall bond maturity of 18.32 years.

Fiscal Matters

The LSE blog summarises matters like this.

Greece has outperformed Programme budget targets . According to the Hellenic Fiscal Council, Greece may have reached a 3.5% primary surplus in 2017 already, versus a target of 1.75%. There are reasons to be optimistic about Greece meeting the fiscal targets in 2018 as well. Maintaining a 3.5% primary surplus also in the years to come appears feasible. On balance, the overall improvement of the fiscal situation is impressive.

From a bond investor’s point of view this if combined with the extended average maturity looks more than impressive as it means on their metrics the thorny issue of repayment has been kicked into the future. They will also like this statement from the ESM on the 27th of March.

 Today the Board of Directors of the European Stability Mechanism (ESM) approved the fourth tranche of €6.7 billion of ESM financial assistance for Greece. …….The tranche will be used for debt service, domestic arrears clearance and for establishing a cash buffer.

Problems in the real economy

There is a very descriptive chart in the LSE blog.

This shows us that the initial credit crunch impact on Greece was what we might call Euro area standard. But those of a nervous disposition might want to take the advice of BBC children’s programming from back in the day and look away now from the real crisis. Here we saw “shock and awe” but not of the form promised by Christine Lagarde which back then was France’s Finance Minister. An attempt to achieve the fiscal probity so approved of by bond markets saw the economy plunge into quite a recession and made an already bad situation worse. But the rub is that the recovery such as it is was not the “V-shaped” bounce back you might expect but rather this.

However, not only is there no indication of any catching up following the crisis, but also the pace of growth remains below the Eurozone’s.

So whilst we now have some growth there has been no relative recovery and in fact on that metric things have got worse. This comes in spite of the “Grecovery” theme of around 2013 which was an example of what we now call Fake News and of course was loved by the Euro area establishment. The reality is not only did thy make the recession worse they seem to have managed to prevent a bounce back as well. We can bring this up to date with the latest business survey for Greek manufacturing.

At 55.0, the index reading signalled a
marked rate of growth, albeit one that was weaker
than the multi-year high seen in February (56.1).

I am pleased to see that but you see that is slightly worse than what the UK did in March. I will not tire you with the different themes and descriptions in the media but simply say I am sad for Greece and  its people and use the famous words of Muhammad Ali.

Is that all you’ve got George?


If we step back we can see the impact of what is called “internal competitiveness” or if you prefer squeezing real wages. Let us look at that a different way as the UK had some of this albeit not as much. But the measure here we gives us a scale of the disaster is unemployment which has got better in Greece but comparing an unemployment rate of 20.8% with one of 4.3% is eloquent enough I think.

It also gives us an easy cause of this issue raised by the LSE.

Direct tax revenues are not performing very well. The high rate of social contributions has probably increased the area of tax evasion.

Also I am reminded that the IMF has failed in an area it mostly used to be successful in.

The external position has improved sharply, although more because of weakness in domestic demand than strength in export activity. Export performance remains underwhelming.

You see on that performance any improvement will simply put Greece back into balance of payments problems which is sort of where we came in. Also there is this from the Bank of Greece.

On 8 March 2018 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €16.6 billion, up to and including Wednesday, 11 April 2018, following a request by the Bank of Greece.

The reduction of €3.2 billion in the ceiling reflects an improvement of the liquidity situation of Greek banks, taking into account flows stemming from private sector deposits and from the banks’ access to wholesale financial markets. 

So it has got better but it has yet to go away.

Thus in summary we see that we have seen something of a divorce between the Greek financial and real economies. Prospects for the bond market look good but the real economy has not done much more than stop falling with a lot of ground still to be reclaimed. Those who look at credit conditions will not be reassured by this from the LSE blog.

 According to the Bank of Greece, the annual growth rate of credit to the private sector stood at -1.0% in February, and that of credit to corporations at 0.2%.

There was a time when the supporters and acolytes of the Euro area “shock and awe” package accused me and others who were in the default and devaluation camp of being willing to collapse the economy so let me finish with some Michael Jackson.

Remember the time
Remember the time
Do you remember, girl
Remember the time



Number Crunching and Seigniorage at the ECB

This week has seen a flurry of activity at the ECB or European Central Bank and I do not mean the usual “sauces” which have been raising some doubt about a further reduction in the monthly flow ( currently 30 billion Euros) of QE bond purchases. Let us open with some Brexit bingo from the Financial Times.

Brussels is considering a €56bn raid on European Central Bank profits to plug a hole in the EU’s long-term budget after Brexit.  The European Commission will discuss the plan at its weekly meeting on Wednesday, where it is due to consider a range of new revenue sources as it tries to maintain its financial firepower once the EU’s second-biggest net budget contributor leaves the bloc in 2019.

There is some debate over whether the UK will be the second or third largest net contributor but you get the message. We also get a clear sign of the bureaucratic mind which of course wants more revenue rather than cutting spending in true Sir Humphrey Appleby style. But why not simply get the money from the usual sources ( minus one)?

The commission is considering an ECB cash raid as a quick way to generate money for the common EU pot as several wealthier members, including the Netherlands and Austria, refuse to raise their contributions to the €1tn EU budget after the UK’s departure.

Okay so as they do not want to pay how would it raid the ECB?

The ECB proposal would divert profits made by the eurozone’s 19 national central banks from printing banknotes straight into EU coffers. The commission estimates the revenue stream could generate €56bn during the seven-year span of the next EU budget.

No doubt more than a few of you have spotted what Shakespeare would call the rub here but let me explain.


This is the profit from issuing money which comes from the fact that if we take the example of the picture of the 50 Euro note it costs a lot less than that to make one. So as it comes off the printing presses hey presto there is a large profit, or rather when someone wants it there is. From the ECB.

They make their way to you via your bank, which pays the face value of the notes to the central bank. To do this your bank usually needs to borrow money from the central bank or it pays by handing over some of its assets. The central bank earns interest on the money it lends, or receives a return on the assets it acquires – and this is called seigniorage income.

To give you an idea the US Federal Reserve calculates it costs some 12.9 cents to make each US $50 note so the note is almost “all gravy” to coin a phrase. A little care is needed as smaller denomination coins actually make a loss – hence the campaigns from time to time to get rid of them – but overall the operation is extremely profitable. However you may note that it is not the capital profits under discussion here ( that presumable can wait for a more desperate time) it is the income from them.

Is anybody else thinking that the campaign to get rid of the 500 Euro note might now have a rethink? Kenneth Rogoff might go from hero ( of the establishment) to zero overnight.

But then we hit a rather large stumbling block.

Although the ECB does not physically issue banknotes, it has been agreed that of all the banknotes in circulation in the euro area, 8% – in terms of value – are considered to be issued by the European Central Bank. The national central banks put the notes into circulation on the ECB’s behalf, and the ECB earns seigniorage income on the 8% through the claim it holds on the national central banks.

Okay before we break that down let us have a break for some humour. From kim in a comment to the FT article.

The ECB takes a cut of the transferred seignorage, to pay for its Christmas Party.

But the 8% is a gift as you see the income goes to the central bank which is each national one.  Oops!

Danger! Will Robinson Danger!

There are consequences here and let me take you back in time to explain them. Let me illustrate from the Maverecon Blog of my tutor from back in the day Willem Buiter from 2009.

The NCBs that own the ECB themselves have a range of formal ownership arrangements, but
are ultimately under the financial control of their national fiscal authorities, because the
national fiscal authority can always tax the NCB.

So we are back in a way to how this story started because the money belongs to the national governments via their treasuries or if you consider belongs to be over playing it they can at least take it via taxation. It is not usually expressed as taxation but we regularly discuss payments from central banks to national treasuries as part of QE declared profits. Most of us would love to be able to declare something “independent” then sing along with the Steve Miller Band.

Go on take the money and run
Go on take the money and run
Go on take the money and run
Go on take the money and run

We of course would sooner or later end up in jail unless we had the wisdom to set up a bank ourselves. But then looking back to 2009 there is this that strikes to the core of the ECB itself.

What makes the ECB more independent than any other central bank is the fact that it has 16 national Treasuries as its counterparties rather than a single national Treasury. Should a European fiscal federal authority ever emerge, the anomaly of the ECB as a de facto as well as a de jure financially independent central bank would probably come to an end.

There are of course some extra treasuries now so it should be even more independent and yet seems set to lose it. My argument with my old tutor would be that politicians are pretty much the same the world over so the situation has always been more like the episode of Star Trek where the USS Enterprise is swallowed by a giant amoeba in my opinion. Of which this is simply the latest step. It should not be true under the rules of mathematics but we know that in human behaviour more can sometimes be less.

The Income

Actually there is a problem here too as the ECB notes.

Seigniorage income has been falling since 2008, in line with a decline in euro area interest rates.

Let me make that clearer because you see at the moment their isn’t any because the current account rate is a grand 0%. Actually contrary to the forecasts above the ECB under Mario Draghi seems in no hurry to raise interest-rates so they could be there for a while and may well survive his term as ECB President. If a recession hits they could cut interest-rates again in which case the European Commission will have shot itself in the foot.


There are several issues here which go to the heart of an “independent” central bank. Up until now it has operated in concert with the establishment where lower interest-rates and QE have generated gains for the establishment. But the irony of the European Commission proposal would be that it would lose if the ECB cut interest-rates again as seigniorage income would be negative. So suddenly we might find that they are keen on higher interest-rates which is quite a tangled web! It might have been far better if the subject had remained in the text books.

Also there are national issues as some national central banks issue more cash that others under the ECB system. We find ourselves quickly returning to yesterday.

The value of accumulated net issuance of euro banknotes by the Bundesbank rose between the end of 2009 and the end of 2017 from € 348 billion to € 635 billion. Since 2010
On average, the Bundesbank gave an average of € 35.8 billion in euro banknotes a year.
This corresponds to an average annual growth rate of 7.8%.

Or we can put that another way as Lorcan R Kelly does here.

The Bundesbank has, since the introduction of the euro in 2002, put a net 327 billion euros into circulation above its on-paper allocation………In total, 592 billion of the 1.1 trillion euros worth of banknotes in circulation at the end of 2016 started life at the Bundesbank.

The ECB explains this by giving an example of German tourists spending money abroad whereas I am sure I am not the only person who remembers the phase where people were worried about the Euro and therefore keen on “German” Euros as opposed to in the worst case “Greek” ones. Also should interest-rates rise there is a cost as you have to pay if over your allocation.

Should the ECB, over time, raise benchmark interest rates to 2 percent, for example, that would impose an annual cost of 6.5 billion euros on the Bundesbank.

So a transfer to the European Commission what could go wrong. Also if we note that this seems to be something under the aegis of Mr.Juncker he might be able to help out with this.

One more thing worth noting from the data is the position of Luxembourg’s central bank. It has an allocation of less than 3 billion euros and yet has put over 96 billion euros into circulation, and in this case it doesn’t seem like holiday makers are to blame.

So as a final thought is the US Federal Reserve planning a Seigniorage party with its interest-rate rises?


Germany also faces ever more unaffordable housing

The economy of Germany has been seeing good times as Chic would put it and this morning has seen an indicator of this. From Destatis.

 The debt owed by the overall public budget (Federation, Länder, municipalities/associations of municipalities and social security funds, including all extra budgets) to the non-public sector amounted to 1,965.5 billion euros at the end of the fourth quarter of 2017. ……..Based on provisional results, the Federal Statistical Office (Destatis) also reports that this was a decrease in debt of 2.1%, or 41.3 billion euros, compared with the end of the fourth quarter of 2016.

We talk of Germany being a surplus economy and here is another sign of it as it applies to itself the medicine it has prescribed for others.

 Net lending of general government amounted to 36.6 billion euros in 2017…….. When measured as a percentage of gross domestic product at current prices (3,263.4 billion euros), the surplus ratio of general government was +1.1%.

Of course all of this is much easier in a growing economy.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

Thus the national debt to GDP ratio will have declined and I am sure more than a few of you will have noted that the total debt is a fair bit smaller than Italy’s for a larger economy. This parsimony has of course been helped by European Central Bank purchases of German Bunds which means that even five-year bonds have a negative yield ( -0.07%). Of course there is a chicken and egg situation here but 469 billion Euros of bond purchases in a growing economy lead to yields which would lead past computer models to blow up like HAL-9000 in the Film 2001 A Space Odyssey.


Whilst we are looking at surpluses there is this ongoing saga which continued last year.

Arithmetically, the balance of exports and imports had an effect of +0.8 percentage points on GDP growth compared with the previous year.

Ironically Germany did actually boost its imports ( 4.8%) but its export performance ( 5.6%) was even better. This meant that the same old song was being played.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 257.1 billion euros in 2017.

If we allow for the inaccuracies in the data and the latest “trade wars” debate mostly raised by President Trump has highlighted the issues here with some countries thinking they are both in surplus/deficit with each other the German surplus is a constant. This poses quite a few questions as of course on one line of thinking it was a cause of the credit crunch.

The International Monetary Fund (IMF) and the European Commission have for years urged Germany to lift domestic demand and imports in order to reduce global economic imbalances and fuel global growth, including within the euro zone.

As time has passed it is hard not to wonder about how much Germany could have helped its Euro area partners via this route. Of course a catch is that it would have to want what they produce which gets forgotten. Also I find a wry humour in organisations like the IMF and EC telling Germans to “spend,spend,spend” to coin a phrase and consume more and yet also warn regularly about climate change.

Labour Market

There is another sign of success if we note this.

The adjusted unemployment rate was 3.6% again in January 2018……….Compared with January 2017, the number of persons in employment increased by 1.4% (+631,000 people). Roughly 1.6 million people were unemployed in January 2018, 160,000 fewer than a year earlier.

So we see that the quantity numbers for the labour market are very good as the unemployment rate chases that of Japan. However if we move to the quality arena things look a little different. From Bloomberg.

The scramble for qualified workers has become an existential issue for companies across Germany, which are offering enticements ranging from overseas sojourns and ski outings to subsidized housing and sausage platters.

Let us park the issue of whether the sausages are delicious and consider the cause of this.

After years of robust growth, unemployment has dropped to a record low of 5.4 percent, and the country has 1.2 million unfilled jobs—nearly equivalent to the population of Munich. Manufacturing, construction, and health care are particularly stretched, and 1 in 4 businesses may have to hold back production as a result of the labor crunch, the European Union reports.

So our HAL-9000 would predict wage growth and of course if it was in a central bank it would be flashing “output gap negative” and predicting stellar wage growth. Meanwhile back in the real world.

The corporate largesse hasn’t dramatically boosted salaries, at least so far. Compensation in Germany rose 13 percent in the last five years as unions moderated wage demands to help their companies maintain an edge in the face of growing global competition.

There is another similarity here with Japan in that the financial media have been telling us that wages are about to soar or sometimes that agreements have been signed. So they must spend their lives being disappointed as whilst the German figures are better than Japan’s they are not what has been promised.

If we look into the detail of the report we see that in spite of strong circumstances companies these days seem to prefer one-off payments rather than wage rises. Have we changed that much in response to the credit crunch as in being less certain about the future or not believing what we are told in this case about economic strength? There is some logic behind that in an era of Fake News stretching to diesel engines and indeed hybrid performance if we consider areas especially relevant to Germany, Maybe wages measures should switch to earnings per hour.

the country’s biggest union this year accepted a lower increase in salaries in exchange for the right to work fewer hours.

But America already does that and it has not changed the picture but maybe still worth a go.

House Prices

I note that in February the Bundesbank picked out house prices and told us this.

According to current estimates, price
exaggerations in urban areas overall in 2017
amounted to between 15% and 30%. In
the big cities, where considerable overvaluations
had already been measured earlier,
the price deviations are likely to have increased
further to 35%.

Price “exaggerations” is a new one but presumably is being driven by this.

According to figures based on bulwiengesa AG
data residential property prices in urban
areas in Germany continued to increase
sharply by around 9%, and hence at a
somewhat faster pace than in the three
preceding years, when the increase averaged

Indeed there may well be issues similar to the British buy to let problem.

As in 2016, the rate of inflation for rental
apartment buildings in the towns and cities
as well as in Germany as a whole was markedly
higher than for owner- occupied housing.


So we have good times in many respects as after all many would see rising house prices as that too. Of course I do not and let me now throw in the impact of easy monetary policy at a time of economic growth.

The average mortgage rate, which had already hit
an all- time low in the preceding year, settled
at 1.7%, which was slightly above its
2016 level.

Interestingly the cost of housing is soaring relative to wages however you try to play it.

The continuing sharp price rises for housing
in urban centres were accompanied by a
significant increase of 7¼% in rents in new
contracts, which are chiefl y the outcome of
rent adjustments in the case of repeat occupancies.

This poses a question for what would happen if later in 2018 we see an economic slowing as suggested by weaker monetary data and some lower commodity prices? We will have to see about that but much further ahead is the issue of Germany’s demographics which combine a low birth rate, rising life expectancy ( economics is clearly the dismal science here) and an aging population. This leaves the intriguing thought that travelling towards it just like in Japan leads to negative interest-rates, low wage growth and a trade surplus…….Yet the public finances are very different.

Cash is King

Something else that Germany shares with the UK. From the Bundesbank March report via Google Translate.

The value of accumulated net issuance of euro banknotes by the Bundesbank rose between the end of 2009 and the end of 2017 from € 348 billion to € 635 billion. Since 2010
On average, the Bundesbank gave an average of € 35.8 billion in euro banknotes a year.
This corresponds to an average annual growth rate of 7.8%.

Yet we keep being told that cash is so yesterday whereas we may still be in the adventures of Stevie V

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, oho
Money talks, money talks
Dirty cash I want you, dirty cash I need you, oho


The Swiss mixture of negative interest-rates, currency intervention and equity investing

Today brings an opportunity to look at a consequence of several economic themes. The opening one is related to the way that in both economic and currency terms the Euro is something of a super massive black hole. This accompanies and has exacerbated issues caused by what was called the carry trade in the years that preceded the credit crunch. Back then borrowers both individual and corporate decided to take advantage of cheaper interest-rates abroad and in particular used the Swiss Franc and the Japanese Yen. This meant that both currencies soared and in the early days on here I christened them the currency twins for that reason. Both currencies were bounced around by this as at first as the trade was put on they were depressed but later as the credit crunch hit and nerves replaced greed both currencies soared. This showed how even national economies were to this extent the playthings of international currency flows and meant that Switzerland had elements of the Japanese experience.

Thus it should be no great surprise to see a country with elements of the Euro and the Yen experience finding itself in the cold icy world of negative interest-rates, From the Swiss National Bank earlier.

The Swiss National Bank (SNB) is maintaining its expansionary monetary policy, with the
aim of stabilising price developments and supporting economic activity. Interest on sight deposits at the SNB is to remain at –0.75% and the target range for the three-month Libor is unchanged at between –1.25% and –0.25%.

This goes through to some extent on the nod these days but if we look at the economic situation we see something that is increasingly familiar.

In Switzerland, GDP grew in the fourth quarter at an annualised 2.4%. This growth was again primarily driven by manufacturing, but most other industries also made a positive contribution. In the wake of this development, capacity utilisation in the economy as a whole
improved further. The unemployment rate declined again slightly through to February. The SNB continues to expect GDP growth of around 2% for 2018 and a further gradual decrease in unemployment.

We set yet again that expansionary monetary policy coincides with economic expansion and there is a contradiction. We are told by the SNB that manufacturing is leading the charge whilst it also tells us that the Swiss Franc is at too high an exchange-rate.

The Swiss franc remains highly valued. The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential. This keeps the attractiveness of Swiss franc investments low and eases pressure on the currency.

In other words perhaps the currency is not as big a deal for an area you might think would be price competitive and no doubt the situation below is a factor in this.

The international economic environment is currently favourable. In the fourth quarter of 2017,
the global economy continued to exhibit solid, broad-based growth. International trade
remained dynamic. Employment registered a further increase in the advanced economies,
which is also bolstering domestic demand.
The SNB expects global economic growth to remain above potential in the coming quarters.

So is the Swiss Franc too high as the SNB keeps telling us? If you think of foreign exchange markets as being “fragile” in one of the better periods for the world economy when can you ever leave the party?As you can see below the rhetoric is still the same.

The SNB will remain active in the foreign
exchange market as necessary, while taking the overall currency situation into consideration.

The Swiss Franc

Actually the indices of the SNB also pose a question about its policy as it has various real exchange rate indices and they are between 104 and 110 now if we set 2000 as 100. This is different to the nominal measure which is at 153. So the situation is complex as the carry trade pushed it down and then sucked it back up. Of course the SNB would say its policies have helped ameliorate the situation.

Hedge Fund alert

The enthusiasm of the SNB for currency intervention especially in the period running up to the 20th of January 2015 has led to it becoming one of the world’s largest investors. This is because in an unusual situation – from the Uk’s perspective anyway – it has intervened to keep its currency down rather than up so it has bought foreign currencies. this meant that it needed some sort of investment strategy.

The majority of the SNB’s foreign currency investments are in government bonds, bonds issued by foreign local authorities (e.g. provinces and municipalities) and supranational organisations, as well as corporate bonds, or are placed at other central banks. The proportion of equities is one-fifth. Two-fifths of the foreign currency investments are denominated in euros, and more than one-third in US dollars. Other important investment currencies are the pound sterling, yen and Canadian dollar.

As there were some 790 billion Swiss Francs of reserves as of the end of last year this is a big operation. With equity markets rising it has been profitable and of course over time so has the bond investing even allowing for recent tougher times. This has led to this.

Another important project was the renewal of the profit distribution agreement  between the Federal Department of Finance (FDF) and the SNB, which defines the amount of the annual profit distribution to the Confederation and
the cantons.

Yet as I pointed out on the 3rd of October last year there are also private shareholders.

Cantons own 45% of stock, cantonal banks 15% and private investors (individuals or institutions) the remaining 40%.

This has led to quite a lot of speculation that one day the private shareholders might get a share so to speak. This is how it looked back in October.

Less than a month after its stock smashed through the 3,000-franc-a-share barrier, SNB shares hit an intraday high of 4,324 on Wednesday and were trading as high as 4,600 on Thursday. The stock has tripled in value from a year ago, repeatedly confounding market watchers by regularly hitting records.

The price is now as of the last trade 5640 Swiss Francs so the rumours continue. We get many stories about central banks being privately owned which are usually not true whereas here there is some truth  to it.


There is a lot to consider about the present Swiss situation where we again see negative interest-rates and a different type of balance sheet expansion combined with recorded economic growth that is solid. We also see some familiar risks.

Imbalances on the mortgage and real estate markets persist. While growth in mortgage lending remained relatively low in 2017, prices for single-family houses and owner-occupied apartments began to rise more rapidly again. Residential investment property prices also rose,
albeit at a somewhat slower pace. Owing to the strong growth in recent years, this segment in particular is subject to the risk of a price correction over the medium term.

Things take a further step forwards when we note their line of thinking.

The SNB will
continue to monitor developments on the mortgage and real estate markets closely, and will
regularly reassess the need for an adjustment of the countercyclical capital buffer.

It seems as though rather than stepping back they might intervene even more reminding me of the words of Joe Walsh.

I go to parties sometimes until 4
It’s hard to leave when you can’t find the door

Me on Core Finance TV