Christine Lagarde has left another economic disaster behind her in Argentina

One of the rules of modern life is that the higher up the chain you are or as Yes Prime Minster put it “the greasy pole” the less responsible you are for anything. A clear example of that is currently Christine Lagarde who is on here way to becoming the next President of the European Central Bank and found her competence being praised to the heavens in some quarters. Yet the largest ever IMF programme she left behind continues to fold like a deckchair. From the Argentina central bank or BCRA this morning via Google Translate.

Measures to protect exchange-rate stability and the saver

There are two immediate perspectives. The first is that we need to translate the announcement which suggests as a minimum a modicum of embarrassment. Next when central banks tell you that you are being protected it is time to think of the strap line of the film The Fly.

Be Afraid, Be Very Afraid

Let us look at the detail.

The measure establishes that exporters of goods and services must liquidate their foreign exchange earnings in the local market……Resident legal entities may purchase foreign currency without restrictions for the importation or payment of debts upon expiration, but they will need compliance from the Central Bank of the Argentine Republic to purchase foreign exchange for the formation of external assets, for the precancelation of debts, to turn abroad profits and dividends and make transfers abroad.

So some restrictions on businesses and here are the ones on the public.

Humans will not have any limitations to buy up to USD 10,000 per month and will need authorization to buy amounts greater than that amount. Transactions that exceed USD 1,000 must be made with a debit to an account in pesos, since they cannot be carried out in cash. Nor will it be allowed to transfer funds from accounts abroad of more than USD 10,000 per person per month. Except between accounts of the same owner: in this case there will be no limitations.

If you are not Argentinian then the noose is a fair bit tighter.

Non-resident human and legal persons may purchase up to USD 1,000 per month and may not transfer funds from dollar accounts abroad.

What about the debt?

We need a bit of reprogramming here after all it has been party-time for bondholders in most of the world. However as Reuters points out not in Argentina.

Standard & Poors announced on Thursday that it was slashing Argentina’s long-term credit rating another three notches into the deepest area of junk debt, saying the government’s plan to “unilaterally” extend maturities had triggered a brief default. The ratings agency said it would consider Argentina’s long-term foreign and local currency issue ratings as CCC- “vulnerable to nonpayment” – starting on Friday following the government’s Wednesday announcement that it wants to “re-profile” some $100 billion in debt.

That’s more than a bit awkward for those who bought the 100 year bond which was issued in 2017. It was also rather difficult for the IMF which seems to have found itself in quicksand.

By the time Treasury Minister Hernan Lacunza said on Wednesday that the government wanted to extend maturities of short-term debt, and would negotiate new time periods for loans to be paid back to the International Monetary Fund, a debt revamp was already widely expected.

We will have to see how the century ( now 98 year ) bond does but after being issued at 85 it traded at 38 last week. In a sign of the times even the benchmark bond which in theory pays back 100 in 2028 did this.

The January 2028 benchmark briefly dropped under 40 cents for the first time ever before edging up to trade at 40.3.

For perspective Austria also issued a century bond at a similar time and traded at 202 last week.

The Peso

Back on August 12th I pointed out that it took 48.5 Pesos to buy a single US Dollar ahead of the official opening. Things went from bad to worse after the official opening with the currency falling into the mid-50s in a volatile market. On Friday it closed at 59.5 and that was after this.

The central bank has burnt through nearly $1 billion in reserves since Wednesday in an effort to prop up the peso. But the intervention did not have the desired impact and risk spreads blew out to levels not seen since 2005, while the local peso currency extended its year-to-date swoon to 36%. ( Reuters ).

If we stay with the issue of reserves I note that the BCRA itself tells us that as of last Wednesday it had US $57 billion left as opposed to this from my post on August 12th.

But staying with the central bank maybe it will be needing the US $66.4 billion of foreign exchange reserves.

I was right and the nuance here is shown by how little of the reserves were actually deployable in a crisis. We know 14% were used and at most 20% have now been used yet policy has been forced to change. That is a common theme of a foreign exchange crisis you only end up being able to use if I an generous half of your reserves before either you press the panic button or someone does it for you.


Here we see another departure from the world-wide trend as rather than falls we are seeing some eye-watering levels. Back on August 12th I noted an interest-rate of 63.71% whereas now it is 83.26%. This provides another perspective on the currency fall because you get quite decent return for these times if you can merely stay in the Peso for a week or two.

As for the domestic economy such an interest-rate must be doing a lot of damage because of the length of time this has lasted for as well as the number now.


As recently as June 7th last year the IMF announced this.

The Argentine authorities and IMF staff have reached an agreement on a 36-month Stand-By Arrangement (SBA) amounting to US$50 billion (equivalent to about SDR 35.379 billion or about 1,110 percent of Argentina’s quota in the IMF).

The amount has been raised since presumably because of the rate of access of funds. If you look at the IMF website it has already loaned just short of 33 billion SDRs. Meanwhile here is some gallows humour from back then.

The authorities have indicated that they intend to draw on the first tranche of the arrangement but subsequently treat the loan as precautionary.

As Christine Lagarde was cheerleading for this she did get one thing right.

I congratulate the Argentine authorities on reaching this agreement

They kept themselves in power with the help of IMF funds. That has not gone so well for the Argentine people not the shareholders of the IMF. There are similarities here with the debacle in Greece where of course Christine Lagarde was heavily involved in the “shock and awe” bailout that contributed to an economic depression. For example as 2018 opened the IMF forecast 2.5% economic growth for it and 2.8% this year as opposed to the reality of the numbers for the first quarter being 5.8% lower than a year before.

Yet as recently as April she was telling us this.

When the IMF completed its third review of Argentina’s economy in early April, managing director Christine Lagarde boasted that the government policies linked to the country’s record $56bn bailout from the fund were “bearing fruit”.

It is not an entirely isolated event as we look at other IMF programmes.

Pakistan Rupee -4.83% seems IMF’s (Lagarde’s) lesser-known second success story. Eurozone you are next up ( @Sunchartist )

But the official view has been given by Justin Trudeau of Canada who has described Christine Lagarde as a “great global leader.”


Signs of trouble in China are to be seen in the Yuan ( Renminbi ) rally

As 2017 opens we find ourselves regularly looking east and today it is the turn of China to attract our attention. There is much going on both above and below the surface but let us begin with the good news part. So far the Chinese economy continues to grow if the Markit business surveys are any guide and it looks as though there has been a pick-up. On Tuesday we were told that the manufacturing sector was doing well.

Manufacturing companies in China reported the strongest upturn in operating conditions since January 2013 at the end of 2016. Production expanded at the fastest pace in nearly six years, supported by a solid increase in total new work.

If we focus in on reported output then the figures were even better.

Notably, the rate of output growth accelerated to a 71-month high, with a number of panellists commenting on stronger underlying demand and new client wins. This was highlighted by a sustained increase in new business during December

There is always an oddity in the Chinese numbers and what I mean by that is small PMI reading changes – the latest number was up to 51.9 – seem to have a much larger effect than elsewhere. For example the official manufacturing statistics show growth of around 6% in 2016 from PMI numbers that in the western world might indicate 0.6% growth.

The two worries in the report were a fall in employment which is odd with such output growth and a familiar rise in input costs of which the symbol is the higher price for crude oil.


This morning there was good news to be found here as well.

The headline Caixin China General Services PMI was up 0.3 points from a month ago to 53.4 in December. The sub-indices of new orders, input costs and prices charged all went up.

This meant that the overall picture was positive as well.

Moreover, the Composite Output Index posted up from 52.9 in November to a 45-month high of 53.5 at the end of 2016. China ended 2016 on a positive note, with both manufacturers and service providers seeing stronger increases in business activity compared to November.

Thus we see some good news and the likelihood that the official economic target of 6.5% economic growth will be declared seems high.


Here is one clear problem if you will forgive the malapropric effect of the word clear in these circumstances. Over the holiday break I noted pictures sent from China that were reminiscent of the film Blade Runner in the way that the air was polluted. Added to it was this from mrtoga yesterday in a reply to the Financial Times.

I am sitting in Beijing today and the PM count outside is at 529.  Might be the most hazardous day of this winter.

He seems to think that Shanghai is better although some have replied from there that they are not so sure! We need to find a way of putting such a level of pollution into the GDP (Gross Domestic Product) numbers as a subtraction and not as an addition ( via any clean- up costs). What is the price of having to do this?

How realistic is this?

Whilst we should have a slice of humble pie due to problems with western data there has to be an issue with declaring 6.5% GDP growth with this. From the Financial Times.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

So as the demographic decline begins to build-up we are simultaneously seeing high rates of growth? Productivity must be surging as opposed to the malaise seen by the capitalist imperialists.


The numbers from the FT tell their own story as ever more seems to be required to keep the game alive.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

The Monetary System

We are seeing issues arise this year or more accurately a continuation of past ones. Let us start with the value of the Yuan/Renminbi today. From Bloomberg.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

The yuan gained 1 percent at 2:53 p.m. in Hong Kong, taking its two-day move to 2.3 percent, the most in data going back to 2010.

There are two Chinese currencies the onshore and offshore and this squeeze has widened the gap between them. What we are seeing is an attempt by the Chinese authorities to “burn” those who are in their opinion trying to push the Yuan lower too quickly. There have been various official moves of which the first warning sign was the change in the trade-weighted basket from 11 to 24 currencies then others appeared.

Bloomberg News earlier reported Chinese policy makers were encouraging state-owned enterprises to sell foreign currency………Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.

Higher Interest-Rates

Some chilling numbers are being reported by Bloomberg.

Overnight yuan deposit rate jumps to 80% in Hong Kong

Actually Reuters have it at 96% but a lot of care is needed with annualised overnight numbers. But as we return to earth we do note a difference to the falls we saw at the end of the year in much of the western world due to in essence a lack of demand for money.

In other signs of yuan scarcity, HSBC Holdings Plc raised its three-month yuan deposit rate to 2.85 percent from 1.8 percent, according to the Oriental Daily……

In a world where it is news that US Libor has reached 1% that is relatively high.


Some of what we are observing is normal for China in that in the gap between our New Year and their they squeeze the exchange-rate. However whilst some of the economic signals are good there are clear dangers in doing this sort of thing. Whilst China may be happy to punish foreign currency speculators there are problems with affecting borrowers with higher interest-rates. The lesson of the credit crunch era is that such things can have big impacts.

Meanwhile it would appear that I am not the only person wondering ( see my post on the 29th of December) about the involvement of Chinese capital in the recent rise and rise of Bitcoin.

Capital flight anyone? That only means that the current Yuan rally looks set to be a type of Pyrrhic victory.

TipTV Finance

Here are my views on the Bank of England from yesterday.





How long before Greece can rely on some more help from the ECB ?

Today has already seen a flurry of news from Greece and  in addition to the re-opening of the banks there has been quite a bit of borrowing and repayment activity. It would appear that the Greek government was either under instruction to settle its debts promptly or decided to do so of its own accord. Thus some 6.8 billion Euros of debt has been repaid according to Bloomberg. If we look at the list we see what might be called a likely crew. The main payment was just over 4 billion Euros to the European Central Bank (ECB) followed by the settling of 2 billion Euros to the International Monetary Fund (IMF) and the rest to the Bank of Greece.

The reasons for this were that as part of its Securities Markets Programme the ECB had been buying Greek debt to support the price and reduce the yield. Some of that can was kicked forwards to today as the bond has matured and the capital needed to be repaid as well a coupon or interest payment. This will be a reasonably frequent event as the ECB initially chose to buy short-dated bonds because the “shock and awe” bailout operations were predicted to work quickly. It is hard to know whether to laugh or cry at that. Also various IMF repayments which have been missed have been settled as well as the account at the Bank of Greece which was raided to make an IMF repayment.

Bridge Finance

The obvious problem with the paragraphs above is that Greece lacked the money to make such payments as in the case of the IMF it would have already done so. Step forwards the EFSM or European Financial Stability Mechanism! It has loaned some 7 billion Euros to Greece and of that there is now only a relative pittance left.

You may wonder why the grandly named European Stability Mechanism was not used for this purpose? After all it is the “the permanent crisis resolution mechanism for the countries of the euro area.” However as you can see from the quote below it has what is financial terms might be compared to the turning-circle of a super-tanker.

The institutions will start negotiating the Memorandum of Understanding (MoU) with the Greek authorities.

Once done it can lend but not before which as I have pointed out before is a clear flaw for an organisation to provide stability. Thus the nine nations of the European Union (including the UK) found themselves providing bridge financing to a Euro area problem. Still at least the EFSM has a quality song written by Paul Simon.

When times get rough
And friends just can’t be found,
Like a bridge over troubled water
I will lay me down.
Like a bridge over troubled water
I will lay me down.

What about QE for Greece?

We open with one rule of ECB club, which is that the ECB must always be repaid in full and on time! That has been fulfilled this morning although quite how it can walk away with a profit from this is beyond me in terms of moral behaviour. Because of the distressed state of the Greek bond market back then it would have paid much less than 100. Also Euro area taxpayers and for a time European Union taxpayers are financing its profits in an example of round-tripping.

However if we go back to last Thursday ECB President Mario Draghi dropped various hints that Greece may not be the one Euro area country where his Quantitative Easing bond buying programme is not taking place for too long.

So there is an issue of going back to a rating which would make Greek bonds, eligible for monetary policy.

Constâncio: Or there should be a waiver.

So Vice President Constancio’s slumber was disturbed to remind us that the claim that the ECB is a “rules-based organisation” is one only for when it feels like that.. It can ignore them if it likes. This then went on.

Second point is the limit on how much of each country’s bonds can be bought by the ECB. As some SMP holdings will be repaid on 20 July and afterwards Greece would comply with this limit and there would be some room for doing QE.

You can see that some 3.5 billion Euros of this was cleared only this morning and there is more to come on August 20th when another bond owned by the ECB (3.2 billion Euros) reaches its maturity date.

Indeed Vitor Constancio went further and the emphasis is mine.

So the Governing Council will have to assess, after there is a programme, at a certain moment, that there is a credible compliance with the programme. That may come at the end of the first review, because that would be clear. The Governing Council could nevertheless decide even before that if there was credible implementation. So it’s at the discretion of the Governing Council either to wait for the review or to do it slightly before, if indeed, there is good implementation of the programme.

As the institutions who used to be called the troika before that name became poisonous have if you will excuse me a track record of telling us that Greece is “on track” what do you think is likely to happen next?

If Greece plays ball and the ESM gets on with its review and program then not only will its funding become available but Greece will then probably see itself in the ECB QE programme. Just to give an idea of scale this would have meant that some 1.36 billion Euros worth of Greek government bonds would have been bought in June alone.

What about Greece?

In a financing sense this is a story of two halves. In a capital sense the issue will build as Greece will have to keep borrowing more. Today is a small example of this as interest payments are capitalised and rolled on. However there will be gains in terms of interest to be paid as for example the maturing bond will be financed at a much lower interest-rate should the ESM finally get around to completing its review.

Of course this is yet another version of can-kicking.

What about the Greek banks?

They are open today unlike the Athens stock exchange which remains closed. There has been a slight relaxation of the deposit withdrawal controls as now 420 Euros can be withdrawn a week as opposed to having to make 7 daily withdrawals of 60 Euros. If we do the maths we see that the extra ECB ELA financing of 900 million Euros will finance some 2,142,857 such withdrawals this week.

If we look beneath this though the banking system in terms of lending to businesses must be in a dreadful state. What price credit finance? Or is there any credit finance at all?

The VAT rise

This is another kick in the teeth for businesses. The fall in the value of the Euro was something which hopefully would give a boost to the Greek tourism business. However as we arrive at peak season prices have been pushed higher via the VAT (sales tax) increases. The rate for restaurants and taxis has risen sharply from 13% to 23%.

If we move to the domestic market there are a range of increases including a similar jump as stated above on some foods. This has been estimated by Macropolis as having an average effect of some 650 Euros per household. As net household income is of the order of 13,800 Euros (OECD 2014) we see that this will take quite a bite out of it.

Frankly this seems set to prove that the Laffer Curve can apply to indirect as well as direct taxes.

Today’s data

This rather speaks for itself as an indicator of what has been happening in the Greek economy.

The Turnover Index in Industry (both domestic and non-domestic market) in May 2015 compared with May 2014 recorded a decline of 4.2%……Manufacturing turnover decreased by 4.2%.

Not what you want when you have a large debt burden.


We are back to a story of two halves here and it is a regular theme of the gap between the financial and real economy. There is a nuance however as this time it is a central bank rather than a private-sector one disappearing over the horizon with a swag bag of cash. There is a dizzying round-tripping of funds but the debt is being shifted onto Euro area taxpayers and for a hopefully brief period European Union ones as well as the Greeks themselves.

As the debt burden rises the average cost per unit will fall. This will help the Greek government finances at the margin but by the time we reach the Greek economy we see two major forces in the opposite direction. The first is the ongoing credit crunch where there is no finance available. The second is the latest round of austerity and in particular the VAT rises which will crunch the economy one more time. Does anybody believe that QE will be a cure for this?

Greece faces yet another credit crunch as capital controls begin

This morning we find ourselves considering a situation which the Euro area has told us is not possible. The recent accession of Lithuania to the Euro area led the European Central Bank to proclaim this.

The irrevocably fixed exchange rate is €1= LTL 3.45280.

It is the word “irrevocable” which poses more than a little food for thought right now as it reminds us of the new word of the credit crunch era called “unpossible” which is for something apparently even less likely than impossible. Of course in the twisted language of these times -especially from officials- the higher the rhetoric rating the more likely moves are in the opposite direction! The connection between Greece and the Euro does not look irrevocable after the events of the past weekend does it?

Even UK Prime Minister David Cameron seems to be on the case. From BBC Radio 4 Today.

If they vote no, I find it hard to see how that is consistent with staying in the euro, because there would be, I think, a very significant default and a very significant problem.

Also in an intriguing move the central bankers body the BIS (Bank for International Settlements) left Greece off its map of the Euro area in its latest Annual Report! What is the opposite of a redaction as they rushed to put it back in later editions? Some may be wondering if it was not necessary…

Even the Eurogroup of Euro area finance ministers joined the game in a way as they issued a statement from 18 nations not including one of its members (guess which one…?).

What about Greece?

The calling of a referendum on the latest Euro area austerity proposals by the Greek Prime Minister and then Parliament threw something of a spanner into the works. As we were left waiting until next Sunday for the vote and then result there were two issues which quickly came to mind. The first was the fact that Greece has to repay some 1.5 billion Euros to the IMF (International Monetary Fund) by 6pm Washington time tomorrow. The second as how the ECB -which has been propping up the liquidity of the Greek banks- would respond. We found that out yesterday afternoon.

Given the current circumstances, the Governing Council decided to maintain the ceiling to the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on Friday (26 June 2015).

The message was along the lines of the boxer Roberto Duran “No Mas” statement when he ended the fight against Sugar Ray Leonard. Accordingly Greek banks would have to deal with future withdrawals and indeed ones which happened this weekend on their own. So we have another form of credit crunch which led to this announcement. From Kathimerini

ATM withdrawals would be limited to 60 euros per day per account and that banks would remain closed for at least the next six working days, including the day after the referendum on the institutions’ proposals to Greece. Visitors to Greece will be able to withdraw cash up to the limit set by their bank.

This was especially awkward for the Greek Finance Minister Yanis Varoufakis who around 5 hours before had tweeted this.

Capital controls within a monetary union are a contradiction in terms. The Greek government opposes the very concept.

Apparently that did not stop the Greek systemic council from imposing them. Although if we return to the basic monetary policy that I discussed last week he does have a point with his first sentence. How can you have capital controls in a common currency? There is a clear failure here.

The ECB has found itself offering some odd rhetoric too. From RANSquawk

ECB Nowotny says Greece may not be able to pay IMF on June 30 but that doesn’t mean that it will default

Apparently even a default does not mean a default any more! It might be a good idea if somebody told Christine Lagarde of the IMF as she has been issuing various threats on that basis. Perhaps she does not want to be left holding the parcel of the largest default the IMF has ever had on her watch should the music stop.  Mind you after issuing a statement like the one below it makes you wonder how much reality reaches the upper echelons of the IMF these days.

I continue to believe that a balanced approach is required to help restore economic stability and growth in Greece……. The IMF is prepared to continue to pursue that approach with the Greek authorities and our European partners.

That “balanced approach” and “help” has collapsed the economy and created an economic depression in Greece.

The problem for the creditors and institutions

This is simply the amount of money that has been lent to Greece. Countries such as China and India which have increased their backing for the IMF in recent times are unlikely to be too pleased should it see its largest ever default which the Greek lending scheme would be. In effect Europe managed something of a takeover of the IMF by appointing (French) politicians to lead it and by the way that they have turned it from a balance of payments organisation to one dealing with fiscal issues particularly European ones. No wonder Christine Lagarde often seems rattled these days.

Mario Draghi and the ECB  face their own problems based on the scale of funds provided to Greece. I bet right now officials at the ECB are scanning the Greek collateral provided in return for much of the payments. Meanwhile Mario will be mulling the fact that a central bank needs to be linked to a Treasury at times like this. LorcanRK of Bloomberg put it more humourously as queues began at Greek ATMs on Saturday.

Anyone see Mario Draghi in any of the Greek ATM queues? I hear he wants to make a large withdrawal..

We are back to the old truism that if you owe a bank £1 it owns you but if you owe it £1 million then you own it. Of course the more modern version involves billions in these increasingly inflated times.

Remember around 3 years ago when I pointed out the problems created by the accounting assumption made by the ECB that all Euro area sovereign bonds would be repaid at par of 100?

Market Response

There is very little from Greece itself. Markets there are shut this week but some derivatives traded elsewhere are indicating falls of between 15% and 30% for Greek bank shares. The Euro dropped below 1.10 versus the US Dollar last night but has rallied since, perhaps in the style of Who wants to be a millionaire it was able to phone a friend. From Reuters.

The euro came off its lows on Monday as the Swiss National Bank said it intervened in the market to weaken the franc,

After initially falling heavily Spanish and Italian bonds have rallied back. Is it rude to wonder if the Swiss National Bank has parked its new Euros there? After all it can’t keep buying shares in Apple can it?

The German stock market is currently down about 3.5% today as we await the next developments.

Spare a thought for China

Having gone to all the trouble of cutting interest-rates yet again on Saturday the People’s Bank of China must have been disappointed to see its stock market fall again. Those pesky European Federalist Capitalist Imperialists…..


We are seeing another phase in the credit crunch that is ongoing in Greece as banks shut and withdrawals are limited. Although in a sign of the shambles that times like this create some banks seem likely to open today to allow pensioners to collect their pensions. This in itself reminds us of another way which is how long the Greek government can pay its bills and obligations for outside of the bailout structure. As we stand that ends formally tomorrow. Right now it would appear that filling your car with petrol or diesel has replaced withdrawing cash from banks as the thing to do as many Greek petrol stations have run dry.

Still Greece will receive an economic boost from all the journalists who have flown in and are presently on their way. So the hotel and restaurant industry can expect a boost from their expense accounts.

As to what happens next there is a lot of uncertainty at which times it is often best to see what the betting markets are doing. William Hill has stopped taking bets on Grexit as they became all one-way and Paddy Power is now pricing an 11/19 chance of a Grexit.

Oh and what is it about Robert Peston of the BBC and bank runs? From yesterday morning.

The European Central Bank’s governing council is expected to turn off Emergency Liquidity Assistance (ELA) for Greek banks at its meeting later today, according to well-placed sources.

He appears to be the ultimate insider aware of events that for example the French Prime Minister was denying. He is like a vampire waiting to sink his teeth into any banking collapse.

European Central Bank monetary policy and Greece

The Greek saga has now continued for over five years and it has managed to produce an economic depression to rank with the falls of the Great Depression of the 1920s and 30s. At the beginning the European Central Bank was relegated to the back as Euro area politicians proclaimed their “shock and awe” program which produced the disaster that has unfolded since but very quickly it was required to take action. In the melee which has followed it is easy to forget that a type of Quantitative Easing began in Greece back in May 2010 as the ECB purchased its government bonds. The official view was that it was not QE because there was a weekly sterlisation auction to withdraw the liquidity created but this ignored various effects. Firstly the Greek bond market was supported, secondly holders of Greek bonds (banks for example…) were given a taxpayer-funded exit,and thirdly whilst some funds were withdrawn they were across the Euro area rather than specific to Greece. Also the liquidity withdrawal was of weekly funds as opposed to the 3/4 year maturity of the bonds purchased and that matters. You do not have to take my word for it as the Federal Reserve and Bank of England think so otherwise they would never have instituted Operation Twist style strategies which depend on precisely that.

So there was a time when the ECB was a friend to Greece if I may put it like that. There were also other programs such as the trillion Euro LTROs (Long-Term Repurchase Operations) which indirectly benefited Greece as well as the cut in the main interest-rate to -0.2%. However times have changed and it is now operating expansionary monetary policy elsewhere but has been keeping the monetary sector in Greece on a much shorter leash.

Euro area monetary policy

This is very accommodative right now. In addition to the measures described above the ECB commenced a formal program of QE in January. Up until this date it had a couple of relatively minor programs but the effort since has been expanded to 60 billion Euros a month and now includes sovereign bonds.As of the 19th of June some 182.2 billion Euros had been spent on operations in this area.

Today’s update on monetary data does show how these sums are in some instances flooding into the Euro area monetary system.

the annual growth rate of M1 increased to 11.2% in May 2015, from 10.5% in April.

However as I have discussed before as we move to wider monetary aggregates the impact fades considerably.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in May 2015, from 5.3% in April 2015.

If we move to the area of credit the numbers are much lower.

Among the components of credit to the private sector, the annual growth rate of loans increased to 0.5% in May, from 0.0% in the previous month (adjusted for loan sales and securitisation , the rate increased to 1.0%, from 0.8% in the previous month).

Indeed for businesses the situation has in fact deteriorated.

The annual growth rate of loans to non-financial corporations stood at -0.3% in May, compared with -0.4% in the previous month.

As you can see the ECB is making an extraordinary effort which as we go into the wider measures of the monetary system fades away quite fast. It has produced a more clear cut rise in another area but I will let readers decide if this is a success or not.

The annual growth rate of lending for house purchase, the most important component of household loans, increased to 1.4% in May, from 0.1% in the previous month.

Perhaps it is copying the policy of the Bank of England which enjoys pumping up the housing market. As an aside this is an area which is also awkward for the ECB as of course if we look at Spain which has seen official estimates of annual economic growth vary between 3.1% and 4% this week what is does not need is a new housing related boom.

Accordingly we see that even with what would only a few short years ago have seemed an extraordinary effort the ECB is seeing patchy results especially if we recall that it had expansionary policies in place before its new QE effort. However the tap is definitely tuned on.

What about Greece?

Here we have a complete contrast in terms of monetary action especially as this is the Euro area country you might think would most benefit from a monetary boost. This point was made in the Economist magazine by its Finance Minister Yanis Varoufakis back in late January.

Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall.

By all three measures Greece would be at number one in the charts rather than being excluded. There are a couple of awkward issues here because Greece has already benefitted from the  QE style purchases by the ECB discussed above which is one of the reasons it is not active there now. Put simply it cannot buy the same bonds twice! Rolling the bonds over on maturity would not only look like debt monetisation it would be.

In spite of the other expansionary monetary efforts we see that the Greek money supply continues to shrink. Todays’s official data brings us up to the beginning of this month and it does not make good reading.

Total deposits at Greek banks which were some 159.6 billion Euros at the end of November had fallen to 125.2 billion at the end of May. If we move to the household sector alone deposits fell from 136.5 billion Euros to 111.8 billion over the same period. If we look at May on its own then the Greek household sector withdrew some 3 billion Euros from Greek banks. Putting it another way this is what economic and finance text books mean when the use the phrases capital flight and deposit flight. Actually we are in fact simply in a faster phase of it because is we look back to the end of 2009 total deposits at Greek banks were 234.5 billion Euros.

Thus if we look at a type of pure monetarism we are left with a very troubling though because the original crisis with its deposit falls was followed by an economic depression. So further falls which we believe have accelerated even more in June point to a grim economic future for Greece.

The ECB has a specific policy to combat this which is called ELA (Emergency Liquidity Assistance). But the way that it grudgingly gave weekly increases to the amount of ELA only made things worse in my opinion because it gave the impression that it could stop doing so. Frankly the ECB undermined its own actions by doing this and something which was supposed to calm the crisis in fact exacerbated it. Indeed in something of an irony it was forced into a volte face with a change to daily announcements and actions. Today was better in the sense that no increase was required but of course the money that can leave probably already has.


The founders of the Euro area left its central bank with quite a list of problems. For example the UK has regions with economic problems but by contrast it is a nation-state with fiscal and political union.Now here is a really dark thought for you which is that some Euro area supporters may not be that upset over the Greek crisis as it provides an opportunity to press for exactly that where fiscal union creates a federal state. As Frances Coppola points out below something along those lines appeared on Monday.

Today, the five Presidents – European Commission PresidentJean-Claude Juncker, together with the President of the Euro Summit, Donald Tusk, the President of the Eurogroup,Jeroen Dijsselbloem, the President of the European Central Bank, Mario Draghi, and the President of the European Parliament, Martin Schulz – have revealed ambitious plans on how to deepen the Economic and Monetary Union (EMU) as of 1 July 2015 and how to complete it by latest 2025

This has been added to by Euro area politicians who put a fiscal squeeze on Greece when it was already in crisis. As I discussed only on Wednesday that seems to be the plan going forwards too.

However if we return to pure monetary policy we find that the ECB is pursuing what it considers to be an extremely expansionary policy except that it is not reaching Greece. Putting it the words of Governor Carney monetary policy there looks “maxxed-out”. It is to use a past analogy “pushing on a string” as fear offsets its efforts. As the chance of capital controls being introduced rises ECB policy gets undermined as what Keynes called “animal spirits” take charge. What a mess!

A Video Version

I was interviewed by Kumutha Ramanathan of World Finance magazine on Tuesday on the subject of Greece and for those who prefer a video analysis it is shown below.

Greece is the word one more time as the economics version of a car crash continues

Today sees a meeting between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras as the Greek Prime Minister visits Germany. As he does so we find ourselves singing along to the rock band Muse.

Our time is running out
Our time is running out
You can’t push it underground
You can’t stop it screaming out
How did it come to this?


There are genuine fears now that Greece will run out of money and these have been reinforced by the letter that Alexis Tsipras sent to Chancellor Merkel last week.

What did the letter say?

The crucial part involves a combination of putting pressure on the European Central Bank to provide more liquidity for Greece and in the part I emphasise a statement that Greece could run out of money. From the Financial Times.

Given that Greece has no access to money markets, and also in view of the ‘spikes’ in our debt repayment obligations during the Spring and Summer of 2015 (primarily to the IMF), it ought to be clear that the ECB’s special restrictions [see (a) above] when combined with the disbursement delays [see (b) above] would make it impossible for any government to service its debt obligations.



That is a threat of default in anybody’s language and is reinforced by the fact that Greece’s creditors are now in essence official ones so it is a threat to Euro area taxpayers and at the limit to world taxpayers via the International Monetary Fund. As Euro area minister set up their “rescue” vehicles on an off-balance sheet basis any sizeable losses would pose a problem as they bring them back into the national accounts. Ouch! For example earlier this month Handelsblatt raised the issue with the head of the main two rescue vehicles.

Handelsblatt: Mr. Regling, the euro rescue fund EFSF has lent around €142 billion to Greece and is thus by far Greece’s largest creditor. Are there realistic chances that this money will ever be repaid?
Regling: Greece has to repay that loan in full. That is our expectation, nothing has changed in that regard


As you can see he has a mantra to chant. What was the saying that if you owe one Euro to a bank it owns you but if you owe 142 billion you own it? Even back then Klaus Regling was irritated I wonder what he is now?

That is one of several recent statement that have irritated me.


The Klaus Regling View

The view of the Euro area establishment was given by Klaus Regling in that interview too.

Economists who claim this have not done their homework. It is true: the Greek debt level of around 175% of GDP is very high. But this does not burden economic development because the debt service is very low. The EFSF has suspended interest payments for Greece for 10 years and the average maturity of our loans is around 32 years.


So as long as the interest-payments are low you can borrow as much as you like! There is no allowance here for the size of the capital burden or feeling out of control of events.

A Confession

Klaus let the cat out of the bag when he stated where the bailout money had gone.

Handelsblatt: The Eurozone and the International Monetary Fund have already granted loans to Greece in the volume of around € 240 billion. Where did all this money go?
Regling: With financial volumes of this magnitude at stake this is a justified question and the answer is no secret: around three-quarters of all the loans for Greece have been used to serve the country’s debt to private and public creditors.


So much for helping the Greek people as claimed! The reality as I have often pointed out on here is that it was a rescue operation for Greek, German and French banks in the main. The ordinary Greek was sold very short and not told the truth.

What about the economy?

The other side of such arrangements is the economy. A large debt burden can indeed be affordable if an individual,company or nation manages a fast rate of income growth. Unfortunately the austerity medicine prescribed for Greece made the illness worse and not better. As the boom ended in the latter part of 2007 then Greek Gross Domestic Product rose to 65.2 billion Euros per quarter (2010 prices) and by the last quarter of 2014 it had fallen to 46.6 billion. Even worse the official chorus proclaiming that a “Grecovery” was in place had to face this reality.

Available seasonally adjusted data indicate that in the 4th quarter of 2014 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% compared with the 3rd quarter of 2014.


Also the rate of growth compared to a year before slowed as opposed to the surge you might expect after declines equivalent in economic terms to something of a nuclear winter.

This is the other side of the debt burden coin as Greece faced not only a lack of economic growth – remember the original bailout forecasts involved economic growth returning in 2012-  but a contraction which peaked at 10% per annum. Thus the national debt to GDP burden which was supposed to be reduced from 170% to 120% by the 2012 private-sector default or PSI is now at 175%.

The Greek Banks

These are part of the rescue mechanism proposed by Alexis Tsipras and the Greek government as it wants them to be allowed to buy Greek sovereign debt. Greece is still issuing short-dated debt called Treasury Bills. Frankly nobody else shows any particular inclination too! The catch is that permission is needed and this looks like debt monetisation mostly because it is on a road to it.

However the Greek banks in spite of all the money that has been poured into them are in a bad way as deposits flee. In December and January some 16 billion Euros or just under 10% left the Greek banking system taking it back to levels last seen in 2005. Bloomberg estimates that another 1.6 billion Euros left the system last week.

In response the European Central Bank has allowed the Greek central bank to stabilise the system via Emergency Liquidity Assistance or ELA. But it is doing so on a short leash as it only allowed an extra 400 million Euros last week and in itself it hardly inspires confidence that the Greek banking sector now requires some 69.8 billion Euros of ELA.

Credit Crunch Alert

Greece faces two types of potential credit crunch right now. The first is being faced by its banks as they see deposits flee the country. This in my view was exacerbated by an extraordinarily stupid statement by Dutch Finance Minister Jerome Dijsselbloem made six days ago.

capital flows within and out of the country were tied to all kinds of conditions, but you can think of all kinds of scenarios.


Bank depositors in Greece have clearly constructed one or two scenarios of their own and decided to flee! You would have thought a muzzle would have been put on “Dieselboom” after he regularly put his foot in his mouth over Cyprus, but apparently not.

The second capital crunch is for the Greek government which has to pay out around 2 billion Euros before the end of April and around 5.7 billion Euros according to Bloomberg by the end of the second quarter of 2015.


The irony of all this is that with monetary policy so loose and the impact of much lower oil and commodity prices feeding into the system Greece should be finally seeing springlike economic conditions. Yet in something of an anti-triumph the latest business survey reported this about Greek manufacturing.

February saw a further contraction in Greece’s manufacturing sector, with the rate of decline in production the fastest seen since October 2013.


Another very important metric is again showing signs of struggling and it gets even harder to express how grim this must be.

The unemployment rate was 26.1% compared
with 25.5% in the previous quarter, and 27.8% in the corresponding quarter of 2013


Employment fell compared to the previous quarter as well. Added to this has been yet more grim data from Greece today.

The Turnover Index in Industry (both domestic and non-domestic market) in January 2015 compared with January 2014 recorded a decline of 16.0%.

Thus we see a situation where the economy is struggling in spite of favourable developments and both the banking and government sectors face a credit crunch. To the Greeks it must seem that.

You will suck the life out of me


Of course I suggest that they take a route which involves default and devaluation which the actual position sadly looks more like this.

I wanted freedom
Bound and restricted
I tried to give you up
But I’m addicted


Want to help?

The Bank of Greece does have an account for this.

Pursuant to Bank of Greece Governor’s Act 271/4.3.2010, an account entitled “SOLIDARITY ACCOUNT FOR REPAYMENT OF PUBLIC DEBT” (No. 24/26132462) has been opened at the Bank’s Head Office, Public Entities Accounts Section, for voluntary deposits, to be used exclusively for the repayment of Greece’s public debt.


The details of the solidarity account are as follows:
IBAN: GR 04 010 0024 0000000026132462