The long and great depression affecting Greece

Later today we get the policy announcement from the ECB or European Central Bank but I am not expecting much if anything. Perhaps some fiddling with the monthly purchases of the emergency component ( called PEPP) of its QE bond buying scheme. They have been buying around 80 billion Euros a month. But no big deal. So let us look at a strategic issue for the ECB and one which has its fingerprints all over it. We get a perspective from this.

If anyone had doubts about why I keep calling it a great depression the graph explains it. In the west we had got used to economic growth but Greece has replaced that not only with a lost decade but a substantial decline over 14 years. Back in 2007 people might reasonably have expected growth and indeed we have kept receiving official Euro area projections of annual growth of 2% per annum. Including one which (in)gloriously metamorphosed into a 10% decline. Along the way we get a reminder that economic output in Greece is far from even throughout the year.

It is intriguing that Yanis has chosen nominal rather than real GDP for his graph of events. Perhaps it flatters his period in office. If he replies to me asking about that I will post it. But it does open a door because it does provide a comparison with the debt load as most of it ( Greece does have some inflation -linked bonds) is a nominal amount. Of course Greece does not have control over its own currency as it lost that by joining the Euro. Along the way it has seen its debt soar as its ability to repay it has reduced.

National Debt

According to the Greek Debt Office this was 374 billion Euros for central government at the end of 2020 or up some 18 billion. It was more like 150 billion when this century began and really lifted off as a combination of the credit crunch and then the Euro area crisis hit. In 2012 some 107 billion Euros or so was lopped off by the Private Sector Involvement. or haircut although in a familiar pattern debt according to the official body only fell by around 50 billion. The ECB was involved here as it essentially was willing for anyone except itself to see a haircut ( regular readers will recall it insisted all bonds were 100% repaid).

This has meant that the debt to GDP ratio has soared, Initially a target of 120% was set mostly to protect Italy and Portugal  but that backfired hence the PSI. Then there was a supposed topping out around 170% but now we are told it ended 2020 at 205.6%.

There is a structural difference in the debt because so much is in what is called the official sector as highlighted below.

The majority (51%) of Greek debt is held by the European Stability Mechanism and this ensures low interest rates and a long repayment period.

Whilst it has exited in terms of flow the IMF is still there and with the various other bodies means the official sector now holds 80% of the stock.

That 80% is both decreasing and increasing. What do I mean? Well Greece is now issuing bonds again and here is this morning’s example.

The reopening of a 10-year bond issue by Greek authorities on Wednesday attracted 26 billion euros in bids and the interest rate of the issue was set 0.92 percent (Mid Swap + 82 basis points), down from an initial 1.0%. (keeptalkinggreece )

The actual issue is some 2.5 billion Euros and for perspective is much cheaper than the US ( ~1.5%) and a bit more expensive than the UK ( ~0.75%). A vein which the Greek Prime Minister is keen to mine.

Another sign of confidence in the Greek recovery and our long-term prospects. Today we issued a 10-year bond with a yield of approximately 0.9%. The country is borrowing at record low interest rates.

If only record low interest-rates were a sign of confidence! In such a world Greece would soon be surging past the US. Meanwhile we can return to the factor I opened with which is the ECB.

When it comes to ECB QE, Greece is different. The ECB has bought €25.7bn in GGBs under the PEPP so far, which is about €24bn in nominal terms, or 32% of eligible debt securities (GGB universe rose by €3bn in May, and by €11bn ytd). So, what happens next? ( @fwred )

As you can see Greece has been issuing new debt but overall the ECB has bought more than it has issued. There are two ironies here as its purchases back in the day were supposed to be a special case and here it is back in the game. Also Greece is not eligible under its ordinary QE programme. Probably for best in technical terms because if it was it would be breaking its issuer limits.


This is a really thorny issue because this remains the plan for Greece.

Achieve a primary surplus of 3.5% of GDP over the

That is from the Enhanced Surveillance Report of this month. That is the opposite of the new fiscal policy zeitgeist. Not only is it the opposite of how we started this week ( looking at the US) but even the Euro area has joined the game with its recovery plan and funds. The catch here is that everything is worse than when the policy target above was established.

The Greek economy contracted by 8.2% in 2020,
somewhat less than expected, but still considerably more than the EU as a whole, mainly on
account of the weight of the tourism sector in the economy……Greece’s primary deficit monitored under enhanced surveillance reached 7.5% of GDP
in 2020.

In terms of the deficit more of the same is expected this year and then an improvement.

The authorities’ 2021 Stability Programme
projects the primary deficit to reach 7.2% of GDP in 2021 and 0.3% of GDP in 2022.


There is a clear contradiction in the economic situation for Greece. The austerity programme which began according to US Treasury Secretary Geithner as a punishment collapsed the economy, By the time the policy changed to “solidarity” all the metrics had declined and the Covid-19 pandemic has seen growth hit again and debt rise.  The debt rise does not matter much these days in terms of debt costs because bond yields are so low and because so much debt is officially owned. The problem comes with any prospect of repayment as the 2030s so not look so far away in such terms now. That brings us back to the theme I established for the debt some years ago, To Infinity! And Beyond!. But for now the Euro area faces a conundrum as the new fiscal opportunism is the opposite of the plan for Greece.

We can find some cheer in the more recent data such as this an hour or so ago.

The seasonally adjusted Overall Industrial Production Index in April 2021 recorded an increase of 4.4% compared with the corresponding index of March 2021……..The Overall Industrial Production Index in April 2021 recorded an increase of 22.5% compared with April 2020.

Although context is provided by this.

The Overall IPI in April 2020 decreased by 10.8% compared with the corresponding index in April 2019

Plenty more quarters like this would be welcome.

The available seasonally adjusted data
indicate that in the 1st quarter of 2021 the Gross Domestic Product (GDP) in volume terms increased by 4.4% in comparison with the 4th quarter of 2020, while in comparison with the 1st quarter of 2020, it decreased by 2.3%.

For a real push tourism would need to return and as we are already in June the season is passing. But let us end on some good cheer and wish both their players good luck in the semi-finals of the French Open tennis.



Greece now defines a great economic depression

One of the issues in economics is that transferring the theoretical concepts to real life often has problems. Before we even get to the conceptual issues there is the simple concept of time which means that by the time we have the full data on something it can already be too late. However today’s releases from Greece will update us on what Elton John described well.

It’s sad, so sad
It’s a sad, sad situation
And it’s getting more and more absurd
It’s sad, so sad
Why can’t we talk it over?
Oh, it seems to me
That sorry seems to be the hardest word

Looking at the last decade or so is grim reading and it starts symbolically because the Greek statistics office sends you to a page which does not exist. But once you bypass that if we look back to the pre crisis era and I mean just before the first bailout then Greek GDP at current prices was 54.1 billion Euros ( first quarter 2010) and in the last quarter of 2020 it was 42.5 billion at current prices.

As that sinks in and there is an element of shock in that size decline you may think that the Covid pandemic is just bad luck. But as I have regularly pointed out if you mess around for years and years another recession or problem was bound to come along. So the scale of this downturn is unlucky but not one occurring. We can refine our numbers in terms of scale by switching to a chain-linked index which tells us that the 104.6 of the opening of 2010 has been replaced by 77.6 at the end of last year.

An economic depression has two features of which the first is the economic decline and the second is how long it lasts. For example the Covid-19 depression has been deep but we hope it will be short. Care is needed as like wars these sort of things are always supposed to be over by Christmas and I note many who suggested it would end in 2020 have simply recycled that for 2021. Greece has been a case of it being both deep and long lasting. Looking back remember when Christine Lagarde was telling us the bailout was a case of “shock and awe” and economic growth of 2.1% for 2012 was forecast followed by 2% per annum ad infinitum?

There is another way of looking at such a thing and it is to compare yourself with your peers. Sadly things just get worse as whilst the composition of the Euro area has changed it grew by 8% over the same period.

What about now?


Regular readers will know that in general I am a fan of lower prices but there can be special cases and Greece is certainly one of those.

The CPI in February 2021 compared with February 2020, decreased by 1.3%. In February 2020, the annual rate of change of the CPI was 0.2% ……The average CPI for the twelve – month period from March 2020 to February 2021, compared with the corresponding index for the period
March 2019 to February 2020 decreased by 1.6%.

As you can see there are actual deflation dangers here as opposed to the usual media panic which is anything but. What I mean by that is that we have falling prices with pretty much everything else falling.

Overall the issue is different as since 2009 Greece has had inflation of around 5% in total so it has not been something which has made things worse. Also looking at the detail health (~2%) and education (~12%) have got cheaper which is very rare so the numbers need an investigation I think.


These are important figures on several levels. In ordinary times they have importance. But in the context of Greece the austerity programme had something of a kicker because of the International Monetary Fund involvement as in the past its programmes were set to improve trade figures. In that context the numbers below are really poor.

The deficit of the trade balance, in January 2021 amounted to 1,442.9 million euros (1,733.7 million dollars) in comparison with 1,893.0 million euros (2,075.9 million dollars) in January 2020, recording a drop, in euros, of 23.8%..

There are several levels to this so let us start from the fact that Greece had a deficit in spite of all the austerity pre pandemic. If we now go to the Bank of Greece and add in services mostly because of the importance of services we see that there was an issue allowing for that.

In 2020, the current account showed a deficit of €11.2 billion, up by €8.4 billion year-on-year. This development is almost exclusively due to a decline in the services surplus, which was partly offset mainly by a €4.3 billion drop in the balance of goods deficit

The point here is that Greece still had a deficit pre pandemic. As to the pandemic it wreaked havoc on the tourism numbers.

A significant decrease in the services surplus is attributable to a deterioration in, primarily, the travel services balance and, secondarily, the transport balance, while the other services balance improved. Both travel receipts and non-residents’ arrivals fell by 76.5% year-on-year. Sea transport receipts dropped by 15.3%.

If we now switch back to January of this year it is worrying that imports fell faster than exports as we have seen this be a signal for an economic decline before.

The total value of imports-arrivals, in January 2021 amounted to 3,953.2 million euros (4,799.9 million dollars) in comparison with 4,747.7 million euros (5,254.2 million dollars) in January 2020, recording a drop, in euros, of 16.7%………The total value of exports-dispatches, in January 2021 amounted to 2,510.3 million euros (3,066.2 million dollars) in
comparison with 2,854.7 million euros (3,178.3 million dollars) in January 2020, recording a drop, in euros, of 12.1%

The decline in trade has mostly been outside the EU. Also as people often ask what does Greece export? Well in January it was manufactured goods across a range of categories. Followed by mineral fuels and lubricants and the vast majority goes outside the EU. Then chemicals and food exports are similar.


We find a little more cheer here as we see Greece is seeing the bounce we have seen elsewhere.

he Overall Industrial Production Index in January 2021 recorded an increase of 3.4% compared with January 2020. The Overall IPI in January 2020 decreased by 0.6% compared with the corresponding index in January 2019.

However the 2019 decline is troubling as after all Greece was supposed to be surging forwards then. Also if we look back and use 2015 as our base then manufacturing output was at 101.3.


At the moment Greece is mired in two particular problems.

The third wave of the coronavirus pandemic ramped the number of daily cases up to 3,215 on Tuesday, in what was a record figure for this year, approaching those seen at the peak of the previous wave.

Also we are back to riots there with both sides accusing the others of brutality. In terms of hopes well world trade coming back would be a boost.

Greece remains the world’s largest shipowning nation. Though the country accounts for only 0.16% of the world’s population, Greek shipowners own 20.67% of global tonnage and 54.28% of the European Union (EU)-controlled tonnage (Figure 1)9. Between 2007 and 2019, Greek shipowners have more than doubled the carrying capacity of their fleet ( Greek shipping and the economy)

Although we have noted in the past the problems with taxing this area.

As to the central bankers priority the housing market it seems to have missed the reforms that have so regularly been trumpeted.

The result is that the property market is in zombie mode, in that the number of transactions completed is minimal, also damaging the state that is deprived of significant tax takings. ( Kathimerini)

There is some hope that the Brits might make some sort of rescue effort although in truth it feels like a PR release dressed up as news

The islands of the Cyclades, Lefkada and Cephalonia in the Ionian Sea, as well as the capital Athens and the nearby islands (e.g. Spetses, Hydra etc) are today the most expensive areas for investing in the property market across Greece. Nevertheless investment interest in them from abroad remains particularly strong and looks set to surge as soon as the health crisis is over. ( Kathimerini )


What can the ECB and Christine Lagarde do next?

Today is a policy meeting day for the European Central Bank and it has a lot to think about. One way of reflecting on this is just to simply note where it presently stands in terms of policy.

First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively.

The operative rate for the banks was in fact not mentioned last time around,perhaps it is considered too embarrassing at -1%. But it looks increasingly permanent.

Third, the Governing Council decided to further recalibrate the conditions of the third series of targeted longer-term refinancing operations (TLTRO III). Specifically, it decided to extend the period over which considerably more favourable terms will apply by twelve months, to June 2022. Three additional operations will also be conducted between June and December 2021.

So rather than further interest-rate cuts the mood music has shifted towards keeping them where they are for longer. It is a relief that they do not seem to be looking at the “Micro-Cuts” hinted at yesterday by the Bank of Canada. After all the interest-rate cuts we have seen does anyone sensible actually believe another 0.1% would make any difference?

Next comes the issue of bond buying or the manipulation of longer-term interest-rates or bond yields. Here we have a rather extraordinary situation where the ECB is running two programmes at the same time! The main one was extended in both size and time at the last meeting.

Second, the Governing Council decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

There was a time when 500 billion Euros seemed a lot but no longer in this context. Also the previous programme appears as something of an after thought these days which is revealing.

Sixth, net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion

The other part that is revealing is the way it now fits with our “Too Infinity! And Beyond!” theme.

The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Euro

There has been a little relief here for the ECB as the Euro has weakened a little recently. It is a bit over 1.21 versus the US Dollar and the UK Pound £ has rallied above 1.13 this morning. However the ECB started its open mouth operations versus the Euro some months ago at 1.18 versus the US Dollar so it has lost ground.

The real issue here is a more conceptual one as the ability of a central bank to influence its currency has changed in the credit crunch era. It is hard for an interest-rate cut to have much of an impact when interest-rates are so low in so many places. The issue of QE is the same except it is hard for more of it to have an impact. There was a time when the extra 500 billion Euros announced last time would depress the currency but in fact it was expected and over that period the Euro rose. That leaves intervention against a strong currency but as the Swiss have discovered although in theory it should work, in practice even promising unlimited intervention has achieved nothing much. At best it has stopped the Swiss Franc going even higher, but that is almost impossible to quantify.

The other tactic is open mouth operations and there the ECB does have a strength in Christine Lagarde as she can be relied upon to say something stupid. Who can forget the claim that the ECB was not their to “close bond spreads” last year which torpedoed the Italian bond market? Also there was her claim that the Greek bailout was “shock and awe” although to be fair that was partly true as the economy collapsed and went into a depression from which it has never recovered. Maybe they could add something to the script she reads from at the press conference.

The Economy

The problem here is that we were supposed to be in the recovery now whereas economies will contract again this quarter. The central banking response is simply to push the recovery back in time.

Nevertheless, real GDP will recover only gradually, reaching the 2019 pre-crisis level by mid-2022 and exceeding it by 2½% in 2023.

Essentially they took 1% off growth this year as reality forced them too but rather than learn from that they simply added it to 2022! But there is a catch because we will be weaker for longer with the implication for debt and people’s incomes as well as business survival.

I would say the forecasts are a random number generator but I think that is unfair on random number generators. Once the restrictions ease we know the economy will bounce back and in the third quarter of last year it did so more strongly than people thought. But we do not yet know when they will be over and we do not know how the economy will then grow? We came into the pandemic with a Euro area that already was struggling for economic growth. This has been a credit crunch era issue.


We can take that forwards and give ourselves some perspective by simply asking when the ECB will raise interest-rates. On growth grounds that looks awkward to say the least as the economy is still shrinking and the ground that will hopefully eventually be regained merely takes the ECB back to a place where it felt things were bad enough to ease policy. Inflation could rise towards and indeed above target as we note the way the oil price has risen with Brent Crude Oil around US $56 per barrel and other factors such as shipping costs rising.

But there is a rub as Shakespeare would put it. That is that all the extra debt taken on by the weaker countries has been oiled by the low bond yields we see. Indeed as a result of the ECB’s policy many are negative even in places you might not expect. As countries borrow ever more due to the longer lasting nature of the pandemic the amount of debt taken on will make it ever harder to raise interest-rates and bond yields. We got some news on this front from Eurostat earlier.

Compared with the third quarter of 2019, the government debt to GDP ratio rose in both the euro area
(from 85.8% to 97.3%) and the EU (from 79.2% to 89.8%): the increases are due to two factors – government debt
increasing considerably, and GDP decreasing.

If we look ahead to the bounceback then we can (hopefully) omit the “GDP decreasing” impact but the Euro area had in the year to then added approximately I trillion Euros of extra debt. That will be continuing last quarter and this. As an aside Greece was just on the edge of 200% relative to GDP (199.9%).

Another way of looking at this is that once you deploy monetary policy on this scale you become a subsidiary of fiscal policy and QE becomes something sung about by Queen.

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me

It is also going to get ever harder to explain another consequence of all this to first-time buyers.

In the third quarter of 2020, house prices, as measured by the House Price Index, rose by 4.9% in the euro area
and by 5.2% in the EU compared with the same quarter of the previous year


The rise and rise of negative interest-rates

This week is ending with a topic that has become something of a hardy perennial in these times. By these times I mean the way that the Covid-19 pandemic has added to the credit crunch. An example has been provided this morning by Bank of England Governor Andrew Bailey.

BoE’s Bailey: As You Go Towards Zero And Into Negative Territory, Academic Research Says Impact Of Structure Of Banking System On Transmission Tends To Increase Most Countries That Have Used Negative Rates Have Not Used Them For Retail Deposits ( @LiveSquawk)

This has reminded markets again about the Bank of England looking at negative interest-rates which as an aside is none too bright at a time when the UK Pound is seeing pressure. Perhaps he has gone native early and started the old tactic of talking it lower. But on the subject of negative interest-rates he is both reinforcing a point made by some of his colleagues and disagreeing with them. The agreement is with this bit from Michael Saunders on the

In my view, there may be some modest scope to cut Bank Rate further but, if we do, it may be preferable to move in relatively small steps.

The disagreement has been over the impact on banks with both Michael Saunders and Silvana Tenreyro claiming they can help them a view which I consider to be evidence free. It is also contradicted by this from the Saunders speech.

For example, if the TFS (or TFSME) interest rate is
below Bank Rate, then banks could borrow funds at the (lower) TFS rate and earn the (higher) interest rate
on reserves. This subsidy for banks would come at the BoE’s expense.

Firstly nice of him to confirm my point that such policies are indeed a bank subsidy. But why so banks need a different interest-rate to everyone else especially if they are unaffected.

But the clear message here has been the development of the effective lower bound or ELB. I still recall Governor Carney telling us this.

The Bank of England’s website says that the “effective lower bound” for the interest rate it sets, Bank Rate, is the current rate of 0.5%.

This is the level, according to the Bank, “below which it cannot be set” – the lowest practicable official interest rate. ( BBC March 2015)

Of course that became 0.1% when we cut to 0.1% and Governor Carney had previously contradicted his own rhetoric by cutting to 0.25% after the EU Leave vote. Well now according to Michael Saunders it has got lower again.

As discussed above, I suspect the ELB is probably somewhat below zero, but there is uncertainty around this. With this uncertainty, it may be preferable to make any further rate cuts in relatively small steps, less than the normal 25bp increments.

So 0.5% became 0.1% ( after they cut to 0.25%) and now it is somewhere below 0%. Were it not so serious this would be a comedy version of central banking 101. The other ridiculous part was claiming it was 0.5% when only across The Channel the ECB had cut below 0%.

The road below zero has been littered with official denials, although the record remains with Governor Kuroda of the Bank of Japan who imposed negative interest-rates only 8 days or a Beatles week after denying any such intention in the Japanese parliament.


We did not get an ECB interest-rate cut partly because they had reined back on that and partly because it looks as though there was some dissension in the camp.

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde brokered a difficult compromise this week to secure backing for a new pandemic-fighting package of measures, but her battle to convince sceptics among her colleagues and investors has only just begun.

Her claim that she had ended dissension has gone the way of well many of her other claims. But there was a nuance to the interest-rate debate as she simultaneously said down and then up.

She starts by saying “we are enlarging the volume of lending that can be obtained at those rates” And then says “we are slightly changing the reference period…. to make it a little more challenging” Seems at cross purposes… ( @LorcanRK)

It has turned out that there has been some potential tightening here, but I would not worry about it too much as once they realise it will hurt The Precious! The Precious! it will be changed. The interest-rate of -1% remains but how much of that banks can access has potentially been reduced.

I would not worry about this too much as once somebody points out to Christine Lagarde that she has made another mistake this will be reversed.

Bond Yields

We can continue the theme of mistakes by President Lagarde as someone was keen in the ECB messaging to make sure there would not be another “we are not here to close bond spreads” debacle.

We will conduct our purchases under the PEPP to preserve favourable financing conditions over this extended period. We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy.

This was a subplot to the main event in this area.

Second, we decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. We also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

We can now move to what The Frenchman in the Matrix series of films would call cause and effect.


The 10-year Spanish bond yield turned negative for the first time ever. Still somewhat of a national embarrassment that Portugal went there first, I suppose. ( @fwred)

Fred has rather stolen my thunder about what had happened in anticipation of the move.

Yesterday Portugal joined the euro zone’s growing pool of negative yields as 10-year YTM dropped to -0.1% for the first time in history.



As I have been typing this there has been a reminder of old times for me and well you can see for yourselves.

Money Markets Assign 65% Probability Of 10 Bps Bank Of England Interest Rate Cut By March 2021 Vs 16% At Start Of Month ( @LiveSquawk)

It is hard not to laugh as a cut of 0.1% after cuts approaching 5% would do what exactly? But it would appear that for rate cuts central bankers keep singing along with the Average White Band.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

In terms of the UK we do already have negative interest-rates as both the two-year ( -0.14%) and the five-year yields ( -0.11%) are already there and as a real world issue they feed into mortgage rates because so many are at a fixed rate these days.

In terms of the world well it is arriving right now in a land down under.

An auction of three-month Australian notes on Thursday saw an average yield of 0.01%, with buyers who bid most aggressively at the sale receiving a yield of minus 0.01%. ( Bloomberg)

Adding in time to this.


Greece rearms but what about the economy?

These times does have historical echoes but in the main we can at least reassure ourselves that one at least is not in play. However Greece is finding itself in a situation where in an echo of the past it is now boosting its military. From Neoskosmos last month.

Greece’s new arms procurement program features:

  • A squadron 18 Rafale fighter jets to replace the older Mirage 2000 warplanes
  • Four Multi-Role frigates, along with the refurbishment of four existing ones
  • Four Romeo navy helicopters
  • New anti-tank weapons for the Army
  • New torpedoes for the Navy
  • New guided missiles for its Air Force

The Greek PM also announced the recruitment of a total of 15,000 soldier personnel over the next five years, while the Defence industry and the country’s Armed Forces are set for an overhaul, with modernisation initiatives and strengthening of cyberattack protection systems respectively.

Some of this will provide a domestic economic boost with the extra 15,000 soldiers and some of the frigate work. Much will go abroad with President Macron no doubt pleased with the orders for French aircraft as he was calling for more of this not so long ago. As a major defence producer France often benefits from higher defence spending. That scenario has echoes in the beginnings of the Greek crisis as the economy collapsed and people noted the relatively strong Greek military which had bought French equipment. Actually a different purchase became quite a scandal as bribery and corruption allegations came to light. The German Type 214 submarines had a host of problems too as the contract became a disaster in pretty much every respect.

The driving force behind this is highlighted by Kathimerini below.

Turkey’s seismic survey vessel, Oruc Reis, was sailing 18 nautical miles off the Greek island of Kastellorizo on Tuesday morning. The vessel, which had its transmitter off, was heading northeast and, assuming it continues its course at its current speed, it was expected to reach a point 12 nautical miles off Kastellorizo by around noon.

The catch is that many of the defence plans above take many years to come to fruition and Greece is under pressure from Turkey in the present.

The Economy

At the end of June the Bank of Greece told us this.

According to the Bank of Greece baseline scenario, economic activity in 2020 is expected to contract substantially, by 5.8%, and to recover in 2021, posting a growth rate of 5.6%, while in 2022 growth will be 3.7%. According to the mild scenario, which assumes a shorter period of transition to normality, GDP is projected to decline by 4.4% in 2020 and to increase by 5.8% and 3.8%, respectively, in 2021 and 2022. The adverse scenario, associated with a possible second wave of COVID-19, assumes a more severe and protracted impact of the pandemic and a slower recovery, with GDP falling by 9.4% in 2020, before rebounding to 5.7% in 2021 and 4.5% in 2022.

As it turns out it is the latter more pessimistic scenario which is in people’s minds this week. As I regularly point out the forecasts of rebounds in 2021 and 22 are pretty much for PR purposes as we do not even know how 2020 will end. This is even more exacerbated in Greece which has been forecast to grow by around 2% a year for the last decade whereas the reality has been of a severe economic depression.

The projection of a 9.4% decline would mean that we would then be looking at a decline of around 30% from the peak back in 2009. I am keeping this as a broad brush as so much is uncertain right now. But one thing we can be sure of is that historians will report this episode as a Great Depression.

What about the public finances?

There is a multitude of issues here so let us start with the latest numbers.

In January-September 2020, the central government cash balance recorded a deficit of €12,860 million, compared to a deficit of €1,243 million in the same period of 2019. During this period, ordinary budget revenue amounted to €30,312 million, compared to €35,279 million in the corresponding period of last year. Ordinary budget expenditure amounted to €41,332 million, from €37,879 million in January-September 2019.

Looking at the detail for September there was quite a plunge in revenue from 5.2 billion Euros last year to 3.8 billion this. Monthly figures can be erratic and there have been tax deferrals but that poses a question about further economic weakness?

If we try to look at how 2020 will pan out then last week the International Monetary Fund suggested this.

The Fund further anticipates the budget deficit this year to come to 9% of GDP, matching the global average rate, while the draft budget provides for 8.6% of GDP. In 2021 the deficit is expected to return to 3% of GDP rate, as allowed for by the general Stability Pact rules of the European Union, the IMF says, bettering the government’s forecast for 3.7% of GDP. ( Kathimerini)

As an aside I do like the idea that the Growth and Stability Pact still exists! That is a bit like the line from Hotel California.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

Actually it has only ever applied when it suited and I doubt it is going to suit for years. Anyway we can now shift our perspective to the national debt.

However, on the matter of the national debt, the government appears far more optimistic than the IMF. The Fund sees Greek debt soaring to 205.2% of GDP this year, from 180.9% in 2019, just as the Finance Ministry sees it contained at 197.4%. ( Kathimerini)

I do like the idea of it being “contained” at 197.4% don’t you? George Orwell would be very proud. So we can expect of the order of 200%. Looking ahead we see a familiar refrain.

For 2021 the government anticipates a reduction of the debt to 184.7% of GDP, compared to 200.5% that the IMF projects before easing to 187.3% in 2022 and to 177% in 2023. ( Kathimerini)

This is a by now familiar feature of official forecasts in this area which have sung along with the Beatles.

It’s getting better all the time

Meanwhile each time we look again the numbers are larger.

Debt Costs

This has been a rocky road from the initial days of punishing Greece to the ESM ( European Stability Mechanism) telling us how much it has saved Greece via Euro area “solidarity”

Conditions on the loans from the EFSF and ESM are much more favourable than those in the market. This saves Greeces around €12 billion every year, or 6.7 percent of its economy: a substantial form of solidarity.

These days the European Central Bank is also in the game with Greece now part of its QE bond buying programme. So its ten-year yield is a mere 0.83% and costs of new debt are low.


I have several issues with all of this. Let me start with the basic one which is that the shambles of a “rescue” that collapsed the economy was always vulnerable to the next downturn.I do not just mean the size of the economic depression which is frankly bad enough but how long it is lasted. I still recall the official claims that alternative views such as mine ( default and devalue) would collapse the economy. The reality is that the “rescue” has collapsed it and people may live their lives without Greece getting back to where it was.

Next comes the associated swerve in fiscal policy where Greece was supposed to be running a primary surplus for years. This ran the same risk of being vulnerable to the economic cycle who has now hit. We are now told to “Spend! Spend! Spend!” in a breathtaking U-Turn. Looking back some of this was real fantasy stuff.

 In 2032, they will review whether additional debt measures are needed to keep Greece’s gross financing needs below the agreed thresholds ( ESM)

Mind you the ESM still has this on its webpage.

Now, these programmes have started to bear fruit. The economy is growing again, and unemployment is falling. After many years of painful reforms, Greece’s citizens are seeing more jobs opening up, and standards of living are expected to rise.

Shifting back to defence we see that another burden is being placed on the Greek people in what seems a Merry Go Round. Reality seldom seems to intervene much here but let me leave you with a last thought. What sort of state must the Greek banks be in?



The economic problems of Greece are multiplying

Today is a case of hello darkness my old friend, I have come to talk to you again, as we look at Greece. Yet again we find a case of promised economic recovery turning into another decline although on this occasion it is at least nit the fault of the “rescue” party. The promised recovery was described by the Governor of the Bank of Greece back in February.

According to the Bank of Greece estimates, the Greek economy grew at a rate of 2.2% in 2019 while projections point to growth accelerating to 2.5% in 2020 and 2021, as the catching-up effect, after a long period of recession, through rises in investment and disposable income is projected to counterbalance the effect of the global and euro area slowdown.

Apart from the differences in the years used that could have been written back in 2010 and pretty much was. Maybe no-one should ever forecast 2% or so economic growth for Greece as each time the economy then collapses!

Also Governor Stournaras told us this.

The main causes of the crisis, namely the very large “twin” deficits (i.e. the general government and current account deficits) have been eliminated,

So let us take a look.

Balance of Payments

This morning’s release tells us this.

In June 2020, the current account balance showed a deficit of €1.4 billion, against a surplus of €805 million in June 2019.

So the Governor as grand statements like that tend to do found a turning point except the wrong way. Anyone with any knowledge of 2020 will not be surprised at the cause of this.

This development is mainly attributable to a deterioration in the travel balance and, therefore, the services balance, which was partly offset by an improvement in the balance of goods, as imports of goods decreased more than the respective exports. The primary and the secondary income accounts did not show any significant change.

Let us get straight to the tourism numbers.

The travel surplus narrowed, as non-residents’ arrivals and the corresponding receipts decreased by 93.8% and 97.5%, respectively. Moreover, travel payments dropped by 81.3%. The transport balance also declined, by 39.7%, due to a deterioration in the sea and air transport balances.

Nobody will be especially surprised about this falling off a cliff although maybe with restrictions being eased from mid June the numbers may not have been quite so bad. Also there is the kicker of the impact on Greece’s shipping companies.

Switching to the half-year we see this.

In the first half of 2020, the current account deficit came to €7.0 billion, up by €2.9 billion year-on-year, as the deteriorating services balance and secondary income account more than offset an improvement in the balance of goods and the primary income account.

That is awkward for out good Governor as we note a deficit last year but for our purposes there is something ominous in the goods balance improvement.

The deficit of the balance of goods fell, as imports decreased at a faster pace than exports.

Whilst some of that was the oil trade which was affected by the price fall there was also this.

Non-oil exports of goods declined by 3.9% at current prices (-3.4% at constant prices), while the corresponding imports fell by 10.1% (‑9.5% at constant prices).

Which suggests via the relative import slow down that we have a possible echo of what happened in 2010.

Government Deficit

This was the benchmark set by the Euro area authorities and the IMF. Back in the day they were called the Troika and then the Institutions which provides its own script for events. After all successes do not change their names do they? As for now we see this.

In January-July 2020, the central government cash balance recorded a deficit of €12,767 million, compared to a deficit of €2,432 million in the same period of 2019.

Unsurprisingly revenues are down and expenditure up.

During this period, ordinary budget revenue amounted to €22,283 million, compared to €25,871 million in the corresponding period of last year. Ordinary budget expenditure amounted to €32,423 million, from €29,870 million in January-July 2019.

That does not add up as we note the weasel word “ordinary” which apparently excludes public investment which is over 2.5 billion higher so far this year. Also debt costs are about 700 million higher mostly to “The Institutions”. That looks a little awkward but it seems they have decided to give it back.

(Luxembourg) – The Board of Directors of the European Financial Stability Facility (EFSF) decided today to reduce to zero the step-up margin accrued by Greece for the period between 1 January 2020 and 17 June 2020, as part of the medium-term debt relief measures agreed for the country in 2018. The value of the reduction amounts to €103.64 million.

Additionally, as part of the debt relief measures, the European Stability Mechanism (ESM), acting as an agent for the euro area member states and after their approval, will make a transfer to Greece amounting to €644.42 million, equivalent to the income earned on SMP/ANFA holdings.

The air of unreality about this was added to by ESM and EFSF head Klaus Regling who seems to think the Greek economy is recovering.

This is necessary to further support the economic recovery, improve the resilience of the economy and improve the country’s long-term economic potential.

What is he smoking?


It has stepped in to help with the Greek finances as these days Greece is issuing its own debt again. The ECB is running two QE programmes and the “emergency” PEPP one ( as opposed to the now apparently ordinary PSPP) had at the end of July bought some 10 billion Euros of Greek government bonds,

There was always an implicit gain from ECB QE for Greece in that its bonds would be made to look relatively attractive now it is explicit with the ECB purchases. Indeed it has so far bought more than Greece issued last year.

During 2019, the Hellenic Republic has successfully tapped the international debt capital markets through 4 market
transactions: 3 new bond series (5Y, 7Y, 10Y new issue + tap) for a total amount of € 9bn have been issued, ( Greece PDMA)

Greece was also grateful for the lower borrowing costs.

The average cost of funding for 10-year bonds has decreased from c. 4.4% to c.1.5%, while yields on 3m and 6m T-bills
have recently reached negative values

But I have never heard the ECB being called an insurance and pension fiund before, although it is in line with my “To Infinity! And Beyond! ” theme maybe the longest of long-term investors..

The investor base for Greece Government Bonds (GGBs) has significantly strengthened and broadened with an
increased share of long-term investors, notably insurance and pensions funds.

Just for clarity the PEPP purchases had not begun but the PSPP had.


The numbers here apparently have changed little but that is because Greece borrowed extra to give itself a cash buffer. So if we allow for that another 7.4 billion Euros were added to the debt pile in the second quarter of this year.


The saddest part of this is that the present pandemic has added to what was already a Great Depression in Greece. At current prices a GDP of 242 billion Euros in 2008 was replaced by one of 187.5 billion last year. At this point the casual observer might be wondering how a central bank Governor could be talking about a recovery?

But there is more as Greece arrived at the pandemic under another depressionary influence as it planned to run a fiscal surplus and I recall 3.5% of GDP being a target. Now you may notice that the same group of Euro area authorities seem rather keen on fiscal deficits as they have been taking advice from Kylie it would appear.

I’m spinning around
Move outta my way

To my mind the issue revolves around out other main indicator which is the balance of payments. This used to be the role of the IMF before it had French leaders. At the moment the Greek numbers have been hit hard by something it can do nothing about via the impact of lockdown on tourism. Sadly with the rise in cases of Covid-19 elements of that may return, although one of my friends is out there right now doing her best to keep the economy going. We will never know how much better that trajectory of the Greek economy would have been if the focus had been on reform and trade rather than debt and punishment, but we do know it would have been better and maybe a lot better.


How much do the rising national debts matter?


A symptom of the economic response to the Covid-19 virus pandemic is more government borrowing. This flows naturally into higher government debt levels and as we are also seeing shrinking economies that means the ratio between the two will be moved significantly. I see that yesterday this triggered the IMF (International Monetary Fund) Klaxon.

This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies.

Firstly we need to take this as a broad-brush situation as we note yet another IMF forecast that was wrong, confirming another of our themes.

Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below our April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

It is hard not to laugh. At the moment things are so uncertain that we should expect errors but the issue here is that the media treat IMF forecasts as something of note when they are regularly wrong. Be that as it may they do give us two interesting comparisons.

These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis………Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

Being the IMF we do not get any analysis on why we always seem to need economic support.

What do they suggest?

Here come’s the IMF playbook.

Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time.

Readers will have differing views on the green washing but that is simply an attempt at populism which once can understand. After all if you has made such a hash of the situation in Argentina and Greece you would want some PR too. That leads me to the last sentence, were the poor protected in Greece and Argentina under the IMF? No.

The IMF has another go.

Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

Would the “wasteful spending” include the part of this below that props up Zombie companies?

and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants.

Now I know it is an extreme case but this piece of news makes me think.

BERLIN (Reuters) – German payments company Wirecard said on Thursday it was filing to open insolvency proceedings after disclosing a $2.1 billion financial hole in its accounts.

You see the regulator was on the case but….

German financial watchdog #Bafin last year banned short selling in its shares, and filed a criminal complaint against FT journalists who had written critical pieces. .. ( @BoersenDE)

Whereas now it says this.

The head of Germany’s financial watchdog says the Wirecard situations is “a disaster” and “a shame”. He accepts there have been failings at his own institution. “I salute” those journalists and short-sellers who were digging out inconsistencies on it , he says. ( MAmdorsky )

As you can see the establishment has a shocking record in this area and I have personal experience of it blaming those reporting financial crime rather than the criminals. I raise the issue on two counts. Firstly I am expecting a raft of fraud in the aid schemes and secondly I would point out that short-selling has a role in revealing financial crime. Whereas the media often lazily depict it as being a plaything of rich financiers and hedge funds. Returning directly to today’s theme the fraud will be a wastage in terms of debt being acquired but with no positive economic impulse afterwards.

Still I am sure the Bank of England is not trying to have its cake and eat it.

Join us on 30 June for an interactive webinar with restaurateur, chef and The Great British Bake Off judge, @PrueLeith . Find out more and register for your place here:

Debt is cheap

The IMF does touch on this although not directly.

monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

It does not have time for the next step, although it does have time for some rhetoric.

In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.

Then it tip-toes around the subject in a “look at the wealth effects” sort of way.

This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened.

Let me now give you some actual figures and I am deliberately choosing longer-dated bonds as the extra debt will need to be dealt with over quite a period of time. In the US the long bond ( 30 years) yields 1.42%, in the UK the fifty-year Gilt yields 0.43%, in Japan the thirty-year yield is 0.56% and in Germany it is -0.01%. Even Italy which is doing its best to look rather insolvent only has a fifty-year yield of 2.45%

I know that it is an extreme case due to its negative bond yields but Germany is paying less and less in debt interest per year. According to Eurostat it was 23.1 billion in 2017 but was only 18.5 billion in May of this year. Care is needed because most countries pay a yield on their debt but presently the central banks have made sure that the cost is very low. Something that the IMF analysis ( deliberately ) omits.


So we are going to see lots more national debt. However the old style analysis presented by the IMF has a few holes in it. For a start they are comparing a stock (debt) with an annual flow (GDP). For the next few years the real issue is whether it can be afforded and it seems that central banks are determined to make it so. Here is yet another example.

Brazil may experiment with negative interest rates to combat a historic recession, says a former central bank chief who presided over some of the highest borrowing costs in the country’s recent history ( @economics)

That is really rather mindboggling! Brazil with negative interest-rates? Anyway even the present 2.25% is I think a record low.

If we go back to debt costs then we can look at the Euro area where they were 2.1% of GDP in 2017 but are expected to be 1.7% over the next year. Now that does not allow for the raft of debt that will be issued but of course a few countries will be paid to issue ( thank you ECB!). The outlier will be Italy.

Looking further ahead there is the capital issue as this builds up. I do not mean in terms of repayment as not even the Germans are thinking of that presently. I mean that as it builds up it does have a psychological effect which is depressing on economic activity as we learnt from Greece. Which leads onto the final point which is that in the end we need economic growth, yes the same economic growth which even before the pandemic crisis was in short supply.


Where next for UK house prices?

Today we are going to start by imagining we are central bankers so we will look at the main priority of the Bank of England  which is UK house prices. Therefore if you are going to have a musical accompaniment may I suggest this.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me…  ( Yazz0(

In fact it fits the central banking mindset as you can see below. Even in economic hard times the only way is up.

Now we may not know, huh,
Where our next meal is coming from,
But with you by my side
I’ll face what is to come.

From the point of view of Threadneedle Street the suspension of the official UK house price index is useful too as it will allow the various ostriches to keep their head deep in the sand. This was illustrated in the Financial Stability Report issued on the 7th of May.

As a result, the fall in UK property prices incorporated in
the desktop stress test is less severe than that in the 2019 stress test.

Yes you do read that right, just as the UK economy looked on the edge of of substantial house price falls the Bank of England was modelling weaker ones!

Taking these two effects together, the FPC judges that a fall of 16% in UK residential property prices could be
consistent with the MPR scenario. After falling, prices are then assumed to rise gradually as economic activity in the
UK recovers and unemployment falls in the scenario.

Whether you are reassured that a group of people you have mostly never heard of forecast this I do not know, but in reality there are two main drivers. The desire for higher house prices which I will explain in the next section and protection of “My Precious! My Precious!” which underpins all this.

Given the loan to value distribution on banks’ mortgage books at the end of 2019, a 16% house price fall would not be likely to lead to very material losses in the event of default.

So the 16% was chosen to make the banks look safe or in central banking terms “resilient”


I did say earlier that I would explain why central bankers are so keen on higher house prices, so here is the latest Bank Underground post from yesterday.

Our results also suggest that the behaviour of house prices affects how monetary policy feeds through. When house prices rise, homeowners feel wealthier and are more able to refinance their mortgages and release housing equity in order to spend money on other things. This can offset some of the dampening effects of an increase in interest rates. In contrast, when house prices fall, this channel means an increase in interest rates has a bigger contractionary effect on the economy, making monetary policy more potent.

Just in case you missed it.

Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.

So even the supposedly independent Bank Underground blog shows that “you can take the boy out of the city but not the city out of the boy” aphorism works as we see it cannot avoid the obsession with house prices. The air of unreality is added to by this.

 we look at the response of non-durable, durable and total consumption in response to a 100bp increase in interest rates.

The last time we had that was in 2006/07 so I am a little unclear which evidence they have to model this and of course many will have been in their working lives without experiencing such a thing. Actually it gives us a reason why it is ever less likely to happen with the present crew in charge.

When the share of constrained households is large, interest rate rises have a larger absolute impact than interest rate cuts.

Oh and is that a confession that the interest-rate cuts have been ineffective. A bit late now with Bank Rate at 0.1%! I would also point out that I have been suggesting this for some years now and to be specific once interest-rates go below around 1.5%.

Reasons To Be Cheerful ( for a central banker )

Having used that title we need a part one,two and three.

1.The UK five-year Gilt yield has gone negative in the last week or so and yesterday the Bank of England set a new record when it paid -0.068% for a 2025 Gilt. As it has yet to ever sell a QE bond that means it locked in a loss. But more importantly for today’s analysis this is my proxy for UK fixed-rate mortgages. So we seem set to see more of this.

the average rate on two and five year fixed deals have fallen to lows not seen since Moneyfacts’ electronic records began in July 2007. The current average two year fixed mortgage rate stands at just 2.09% while the average rate for a five year fixed mortgage is 2.35%. ( Moneyfacts 11th May)

2. The institutional background for mortgage lending is strong. The new Term Funding Scheme which allows banks to access funding at a 0.1% Bank Rate has risen to £11.9 billion as of last week’s update. Also there is the £107.1 billion remaining in the previous Term Funding Scheme meaning the two add to a tidy sum even for these times. Plus in a sign that bank subsidies never quite disappear there is still £3 billion of the Funding for Lending Scheme kicking around. These schemes are proclaimed as being for small business lending but so far have always “leaked” into the mortgage market.

3. The market is now open. You might reasonably think that a time of fears over a virus spreading is not the one to invite people into your home but that is apparently less important than the housing market.  Curious that you can invite strangers in but not more than one family member or friend.


Zoopla pointed out this earlier.

Buyer demand across England spiked up by 88% after the market reopened, exceeding pre-lockdown levels in the week to 19th May; this jump in demand in England is temporary and expected to moderate in the coming weeks

Of course an 88% rise on not very much may not be many and the enthusiasm seemed to fade pretty quickly.

Some 60% of would-be home movers across Britain said they plan to go ahead with their property plans, according to a new survey by Zoopla, but 40% have put their plans on hold because of COVID-19 and the uncertain outlook.

Actually the last figure I would see as optimistic right now.

Harder measures of market activity are more subdued – new sales agreed in England have increased by 12% since the market reopened, rising from levels that are just a tenth of typical sales volumes at this time of year.

Finally I would suggest taking this with no just a pinch of salt but the full contents of your salt cellar.

The latest index results show annual price growth of +1.9%. This is a small reduction in the annual growth rate, from +2% in March.


So far we have been the very model of a modern central banker. Now let us leave the rarified air of its Ivory Tower and breathe some oxygen. Many of the components for a house price boom are in place but there are a multitude of catches. Firstly it is quite plain that many people have seen a fall in incomes and wages and this looks set to continue. I know the travel industry has been hit hard but British Airways is imposing a set of wage reductions.

Next we do not know how fully things will play out but a trend towards more home working and less commuting seems likely. So in some places there may be more demand ( adding an office) whereas in others it may fade away. On a personal level I pass the 600 flats being built at Battersea Roof Garden on one of my running routes and sometimes shop next to the circa 500 being built next to The Oval cricket ground. Plenty of supply but they will require overseas or foreign demand.

So the chain as Fleetwood Mac would put it may not be right.

You would never break the chain (Never break the chain)

We should finally see lower prices but as to the pattern things are still unclear. So let me leave you with something to send a chill down the spine of any central banker.

Chunky price cut for Kent estate reports
@PrimeResi as agent clips asking price from £8m to £5.95m (26%). (£) ( @HenryPryor)

Me on The Investing Channel

Is it the ECB which is the Euro area bad bank?

A feature of the credit crunch era is that some subjects have never gone away in spite of all the official denials. Another is that establishment’s use crises to try to introduce policies which they would not be able to get away with in ordinary times. As today we are looking at a central bank this is of course about the subject closest to their hearts which is “The Precious! The Precious!” which for newer readers is the banking sector. So let us get straight to the issue in the Financial Times which has taken a brief holiday from its role as the house journal of the Bank of England to bid for the same role for the ECB or European Central Bank.

European Central Bank officials have held high-level talks with counterparts in Brussels about creating a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets.

After my reply I somehow doubt I will be getting the role.

But they already have Deutsche Bank?

Indeed this is quite a different message from the one given to the European Parliament by Mario Draghi in February 2016.

However, we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole. Banks have built higher and better quality capital
buffers, have reduced leverage and improved their funding profiles.

I have emphasised the use of central banking language as I have picked out that word for some time. He emphasised the point later.

In the euro area, the situation in the banking sector now is very different from what it was in 2012……….making them more resilient to adverse shocks.

Indeed the non performing loans we are now supposed to be worried about were apparently fixed.

There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a
good position to bring down NPLs in an orderly manner over the next few years.

Er, well we have had a few years since so…..


The article gives us a good idea of one of the countries pressing for this.

“The lesson from the crisis is that only with a bad bank can you quickly get rid of the NPLs,” Yannis Stournaras, governor of the Bank of Greece and member of the ECB governing council, told the Financial Times. “It could be a European one or a national one. But it needs to happen quickly.”

I have no idea how you could form a Greek bad bank but anyway that would have even less of a life than a May Fly so let’s not worry too much. If we switch to the state of play it does not seem to have progressed as Mario Draghi told us four years ago.

Greek banks have by far the highest level of soured loans on their balance sheets of any eurozone country, making up 35 per cent of their total loan books — a legacy of the 2010-15 debt crisis that pushed the country to the brink of exiting the eurozone.

Yes the numbers are down but the crisis started in 2010 so we are a decade on now. When will it ever go away?

But plans by Greece’s big four lenders to sell more than €32bn of NPLs — almost half the total in the country — are likely to be disrupted by the coronavirus crisis,

We could have a quiz as we wonder how much would be paid for that and whether it would help much? Regular readers will recall that we were told it was a triumph when some of the NPLs of the Italian banks were sold. Would you want them now? I rather suspect the problem has been kicked like a can elsewhere. I note the Bank of Italy reporting this in its latest Economic Bulletin.

approving a debt moratorium on outstanding bank loans, and increasing public guarantees on new loans to firms.

The latest Financial Stability Report was somewhat upbeat on the subject.

At the end of June, the stock of NPLs net of
provisions fell to €84 billion (€177 billion gross
of provisions), 7 per cent less than at the end
of 2018.

Although even by then ( November) the Bank of Italy was troubled by the slow down in the Italian economy and of course now we know that essentially 2019 saw no economic growth at all.

In the fourth quarter of 2019 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.3 per cent over the previous quarter and increased by 0.1 per cent in comparison with the fourth quarter of 2018. ( Istat)

So we can see why Italy would be keen especially as we note this development.

In June, Italian banks’ exposure to emerging economies was €165 billion (about 5 per cent of assets),
6.4 per cent higher than at the end of 2018.

They got into trouble with this last time around.

Returning to the FT there is also a mention of a couple of places which the official and FT lines had been ones of recovery.

Total NPLs in the biggest 121 eurozone banks almost halved in four years to €506bn, or 3.2 per cent of their loan books, by the end of last year. But Greek, Cypriot, Portuguese and Italian banks still have NPL ratios above 6 per cent.

Portugal had been in a better economic run but those who followed the debacle at Novo Banco will be aware of the banking system problems.


There are quite a few issues for us to pick our way through. For example with the expansion of its role is the ECB already a bad bank itself? Let me hand you over the the present ECB President Christine Lagarde.

Second, we are buying public and private sector bonds in large volume to ensure that all sectors of the economy can benefit from easy financing conditions…….We have also extended our asset purchases to commercial paper, which is an important source of liquidity for firms.

It is also lending but with wider ( aka weaker) collateral requirements. I raise this issue because back at the height of the credit crunch issue the Bank of England ended one of its schemes early because of “Phantom Securities”. I am sure you get the drift.

A reply to the FT from Italicus raises another issue.

So the idea is to remove NPL from the balance sheets of banks so that they can keep on lending to people and businesses who can keep on not repaying their debts?

As Pink Floyd so aptly put it.

Tired of lying in the sunshine staying home to watch the rain.
You are young and life is long and there is time to kill today.
And then one day you find ten years have got behind you.
No one told you when to run, you missed the starting gun.

Next comes the issue that rules for banks are only applied when the seas are calm which is the reverse of what should happen.

The European Central Bank (ECB) today announced a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements.

Next comes the issue of what are Special Purpose Vehicles. The Italian versions for bad loans called variously Atlas and Atlante have rather faded from view. Not before some rather spectacular write downs though which weakened the banking sector they were supposed to support.

Also there is Deutsche Bank with its share price of 5.88 Euros.



The ECB now considers fiscal policy via QE to be its most effective economic weapon

Yesterday saw ECB President Christine Lagarde give a speech to the European Parliament and it was in some ways quite an extraordinary affair. Let me highlight with her opening salvo on the Euro area economy.

Euro area growth momentum has been slowing down since the start of 2018, largely on account of global uncertainties and weaker international trade. Moderating growth has also weakened pressure on prices, and inflation remains some distance below our medium-term aim.

In the circumstances that is quite an admittal of failure. After all the ECB has deployed negative interest-rates with the Deposit Rate most recently reduced to -0.5% and large quantities of QE bond buying. No amount of blaming Johnny Foreigner as Christine tries to do can cover up the fact that the switch to a more aggressive monetary policy stance around 2015 created what now seems a brief “Euro boom” but now back to slow and perhaps no growth.

But according to Christine the ECB has played a stormer.

 The ECB’s monetary policy since 2014 relies on four elements: a negative policy rate, asset purchases, forward guidance, and targeted lending operations. These measures have helped to preserve favourable lending conditions, support the resilience of the domestic economy and – most importantly in the recent period – shield the euro area economy from global headwinds.

It is hard not to laugh at the inclusion of forward guidance as a factor as let’s face it most will be unaware of it. Indeed some of those who do follow it ( mainstream economists) started last year suggesting there would be interest-rate increases in the Euro area before diving below the parapet. There seems to be something about them and the New Year because we saw optimistic forecasts this year too which have already crumbled in the face of an inconvenient reality. Moving on you may note the language of of “support” and “helped” has taken a bit of a step backwards.

Also as Christine has guided us to 2018 we get a slightly different message now to what her predecessor told us as this example from the June press conference highlights.

This moderation reflects a pull-back from the very high levels of growth in 2017, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level, as well as weaker impetus from external trade.

As you can see he was worried about the domestic economy too and mentioned it first before global and trade influences. This distinction matters because as we will come too Christine is suggesting that monetary policy is not far off “maxxed out” as Mark Carney once put it.

For balance whilst there is some cherry picking going on below I welcome the improved labour market situation.

Our policy stimulus has supported economic growth, resulting in more jobs and higher wages for euro area citizens. Euro area unemployment, at 7.4%, is at its lowest level since May 2008. Wages increased at an average rate of 2.5% in the first three quarters of 2019, significantly above their long-term average.

Although it is hard not to note that the level of wages growth is worse than in the US and UK for example and the unemployment rate is much worse. You may note that the rate of wages growth being above average means it is for best that the ECB is not hitting its inflation target. Also we get “supported economic growth” rather than any numbers, can you guess why?

Debt Monetisation

You may recall that one of the original QE fears was that central banks would monetise government debt with the text book example being it buying government bonds when they were/are issued. This expands the money supply ( cash is paid for the bonds) leading to inflation and perhaps hyper-inflation and a lower exchange-rate.

What we have seen has turned out to be rather different as for example QE has led to much more asset price inflation ( bond, equity and house prices) than consumer price inflation. But a sentence in the Christine Lagarde speech hints at a powerful influence from what we have seen.

 Indeed, when interest rates are low, fiscal policy can be highly effective:

Actually she means bond yields and there are various examples of which in the circumstances this is pretty extraordinary.

Another record for Greece: 10 yr government bonds fall below 1% for the first time in history (from almost 4% a year ago)  ( @gusbaratta )

This is in response to this quoted by Amna last week.

 “If the situation continues to improve and based on the criteria we implement for all these purchases, I am relatively convinced that Greek bonds will be eligible as well.” Greek bonds are currently not eligible for purchase by the ECB since they are not yet rated as investment grade, one of the basic criteria of the ECB.

Can anybody think why Greek bonds are not investment grade? There is another contradiction here if we return to yesterday’s speech.

Other policy areas – notably fiscal and structural polices – also have to play their part. These policies can boost productivity growth and lift growth potential, thereby underpinning the effectiveness of our measures.

Because poor old Greece is supposed to be running a fiscal surplus due to its debt burden, so how can it take advantage of this? A similar if milder problem is faced by Italy which you may recall was told last year it could not indulge in fiscal policy.

The main target in President Lagarde’s sights is of course Germany. It has plenty of scope to expand fiscal policy as it has a surplus. It would in fact in many instances actually be paid to do so as it has a ten-year yield of -0.37% as I type this meaning real or inflation adjusted yields are heavily negative. In terms of economics 101 it should be rushing to take advantage of this except we see another example of economic incentives not achieving much at all as Germany seems mostly oblivious to this. There is an undercut as the German economy needs a boost right now. Although there is another issue as it got a lower exchange rate and lower interest-rates via Euro membership now if it uses fiscal policy and that struggles too, what’s left?

Mission Creep

If things are not going well then you need a distraction, preferably a grand one

We also have to gear up on climate change – and not only because we care as citizens of this world. Like digitalisation, climate change affects the context in which central banks operate. So we increasingly need to take these effects into account in central banks’ policies and operations.

Readers will disagree about climate change but one thing everyone should be able to agree on is that central bankers are completely ill equipped to deal with the issue.


This morning’s release from Eurostat was simultaneously eloquent and disappointing.

In December 2019 compared with November 2019, seasonally adjusted industrial production fell by 2.1% in the
euro area (EA19)……In December 2019 compared with December 2018, industrial production decreased by 4.1% in the euro area……The average industrial production for the year 2019, compared with 2018, fell by 1.7% in the euro area

The index is at 100.6 so we are nearly back to 2015 levels as it was set at 100 and we have the impact of the Corona Virus yet to come. Actually we can go further back is this is where we were in 2011. Another context is that the Euro area GDP growth reading of 0.1% will be put under pressure by this.

In a nutshell this is why the ECB President wants to discuss things other than monetary policy as even central bankers are being forced to discuss this.

 We are fully aware that the low interest rate environment has a bearing on savings income, asset valuation, risk-taking and house prices. And we are closely monitoring possible negative side effects to ensure they do not outweigh the positive impact of our measures on credit conditions, job creation and wage income.

But central bankers are creatures of habit so soon some will be calling for yet another interest-rate cut.

Let me finish with some humour.

Governors had to stop trashing policy decisions once taken and keep internal disputes out of the media, presenting a common external front, 11 sources — both critics and supporters of the ECB’s last, controversial stimulus package — told Reuters.

Yep, the ECB has leaked that there are no leaks….