Greece is drowning under all the debt its “rescue” brought

After looking at the recent economic success of Spain on Friday, which was confirmed this morning by the official data showing 3.2% GDP growth in 2016 it is time to look at the other side of the Euro area coin. This is a situation that continues to be described by one of the songs of Elton John.

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

This is the situation facing Greece which is on its way back into the news headlines after of course another sequence of headlines proclaiming a combination of triumph and improvement. What is triggering this is some new analysis from the IMF or International Monetary fund and it is all about the debt burden. It is hard not to have a wry smile at this as the IMF has been telling us the burden is sustainable for quite some time in spite of it obviously not being so as I have regularly pointed out in here.

The IMF analysis

The Financial Times has summarised it like this.

Greece faces what is likely to be an “explosive” surge in its public debt levels that within decades will mean it will owe almost three times the country’s annual economic output unless given significant debt relief, the International Monetary Fund has warned in a confidential report.

Not that confidential then! Or perhaps conforming to the definition of it in Yes Prime Minister. Worrying after some better news in relative terms from the World Economic Forum suggesting that Greece was a lot further down the list of national debt per person (capita) than you might think. Japan of course was at the head at US $85.7k per person and intriguingly Ireland second at US $67.1k per person but Greece was a fair way down the list at US $32.1k each. Of course it’s problem is relative to the size of its economic output or GDP (Gross Domestic Product).

If we look at the detail of the IMF report it speaks for itself.

The fund calculated that Greece’s debt load would reach 170 per cent of gross domestic product by 2020 and 164 per cent by 2022, “but become explosive thereafter” and grow to 275 per cent of GDP by 2060.

If we switch to Kathimerini we find out the driving force of the deterioration in the debt sustainability analysis.

Greece’s gross financing needs are estimated at less than 20 percent of GDP until 2031 but after that they skyrocket to 33 percent in 2040 and then to 62 percent by 2060.

If we step back for some perspective here we see confirmation of one of my main themes on Greece. This has been that the debt relief measures have made the interest burden lighter but have done nothing about the capital debt burden which has in fact increased in spite of the PSI private-sector debt reprofiling. We can bring in that poor battered can now because the Euro area and the IMF thought they had kicked it far enough into the future not to matter whereas the IMF is now having second thoughts. In short it has looked at the future and decided that it looks none too bright.

The crux of the matter is the amount of the austerity burden that Greece can bear going forwards. Back in May 2016 the IMF expressed its concerns of future economic growth.

Against this background, staff has lowered its long-term growth assumption to 1¼ percent, even as over the medium-term growth is expected to rebound more strongly as the output gap closes.

That will do nothing for the debt burden and will have been entwined with the extraordinary amount of austerity required under the current plans.

This suggests that it is unrealistic to assume that Greece can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a primary surplus of 3½ percent of GDP.

As an alternative the IMF suggested something of a relaxation presumably in the hope that Greece could then sustain a higher economic growth rate.

The Euro area view

This was represented last week by Klaus Regling of the European Stability Mechanism or ESM.

I think it’s really important for Greece because it will reduce interest rate risk and improve Greek debt sustainability.

What was that Klaus?

we are dealing here with a bond exchange, where floating rate notes disbursed by the ESM and EFSF to Greece for bank recapitalisation will be exchanged for fixed coupon notes. There are measures related to swap arrangements that will reduce the risk that Greece will have to pay a higher interest rate on its loans when market rates go up………In addition, the EFSF waived the step-up interest rate margin for the year 2017 on a particular loan tranche. A margin of 2% had originally been foreseen, to be paid from 2017 on.

As you can see each time Greece is supposed to pay more they discover it cannot and we need more “short-term” measures which according to Klaus will achieve this.

All this will go a long way in easing the debt burden for Greece over time, according to our debt sustainability analysis. It could lead to a cumulative reduction of the Greek debt to GDP ratio of around 20 percentage points over the time horizon until 2060.

It does not seem a lot when you look at the IMF numbers does it. Also Euro area ministers repeated something which they have said pretty much every year of the crisis, from the FT.

Mr Dijsselbloem, who is also the Dutch finance minister, said that Greece was recovering faster than anyone expected.

Really? What was that about fake news again?

Retail Sales

We can learn a lot from these numbers and let us start with some badly needed good news.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in November 2016, recorded an increase of 3.6%.

Although sadly some of the gloss fades when we note this.

The seasonally adjusted overall volume index in November 2016 compared with the corresponding index  of October 2016 recorded a decrease of 0.2%.

So overall a welcome year on year rise and the strongest category was books and stationery. However perspective is provided if we look at the index which is at 69.7 where 2010 was 100. As that sinks in you get a true idea of the economic depression that has raged in Greece over the period of the “rescue” and the “bailout”. Most chilling of all is that the food beverages and tobacco index is at 55.6 on the same basis leaving us with the thin hope that the Greeks have given up smoking and fizzy drinks.

Also it is far from reassuring to see the European Commission release consumer confidence data for Greece indicating a fall of 3.4 to 67.8.


There is much to consider here but we find ourselves looking back to the Private-Sector Initiative or debt relief of 2012. I stated back then that the official bodies such as the ECB and IMF needed to be involved as well because they owned so much of the debt. It did not happen because the ECB said “over my dead body” and as shown below what were then called the Troika but are now called the Institutions pursued a course of fake news.

Thanks to Michael Kosmides of CNN Greece who sent me that chart. As we note the fake news let me give you another warning which is that Greece these days depends on its official creditors so news like this from Bloomberg last week is much less relevant than it once was.

The yield on Greece’s two-year bonds surged 58 basis points to 7.47 percent, while those on benchmark 10-year bonds rose 22 basis points to 7.13 percent as of 2:41 p.m in London.

The real issue is that Greece desperately needs economic growth and lots of it. As I pointed out on December 16th.

Compared to when she ( Christine Lagarde of the IMF) and her colleagues were already boasting about future success, the Greek economy has shrunk by 19%, which means that the total credit crunch contraction became 26%




What should we do about the International Monetary Fund?

Yesterday’s events give us an opportunity to look again at one of the longest-running themes of my writing on here. This is the role of the IMF and to do so I would like to take you back to the 8th of June 2010 when I pointed out this.

1. It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.

This was my response back then to the way that the Dominique Strauss-Khan who was Managing Director of the IMF at the time allowed it to get involved in the Euro area crisis. There was an obvious issue in a French politician doing this and of course the IMF has continued with French political heads. It worried me at the time on various grounds one of which was that poor third world countries were in essence financing a bailout of a much wealthier area overall which could afford to collectively pay for it. In my opinion the reason for this was that whilst Euro area political leaders ( including the French Finance Minister at the time one Christine Lagarde) were proclaiming “shock and awe” in fact the Euro area response was a mess. The so-called rescue vehicle the European Financial Stability Facility (EFSF) was anything but which my updates from back then show. Over time they have proved this as it was later replaced with the European Stability Mechanism or ESM.

But the fundamental point here was that a modus operandi which involved balance of payments problems was replaced by a fiscal one. This line could be covered up to some extent in Greece as it also had a balance of payments problem but not for example in Ireland which has surpluses pretty much as often as the UK has deficits!


This of course has been a debacle for the IMF where whatever reputation it had for economic competence has come a cropper as Greece was plunged even further into recession and in fact has yet to emerge from the economic depression created. This contrasts with the official view which I pointed out on March 30th of this year.

but from 2012 onward, improved market confidence, a return to credit markets, and comprehensive structural reforms, are expected to lead to a rebound in growth.

There was supposed to be economic growth starting in 2012 and then running at around 2.1% for two years and then pick-up to 2.7% in 2015.. Then once that obviously did not happen we got the “Grecovery” theme which did not happen either. Along the way we got a “mea culpa” from the IMF as well as something of a hand brake turn as the advocate of austerity became a fan of fiscal deficits.

However something was wrong and at least some in the IMF knew it’ Let me take you back again to the 8th of June 2010.

Mr.Boutros-Ghali (Egypt’s Finance Minister) went on to give us some idea of one of the areas he feels that trouble and hence further demands for funds might come from. He told the Reuters news agency that Greece’s problems were not over yet and there were doubts about its ability to implement the reforms demanded by the IMF and European Union in return for a 110 billion euro aid package.


“We are not out of the woods,” he said in the interview. “The measures they have been required to implement are fairly tough. And there are in some areas doubts whether they are able to continue implementing such tough measures.”

He was of course correct and it is a sad indictment of these times that official sources are still claiming progress on reforms when reality has been very different. After all Greece would not be in the state it is in if they had worked or even been applied. In my opinion there is something worse than the mistakes which is the way that there has been deliberate dissembling and misrepresentation of not only what is going to happen but what is happening at the time.

The implication that the IMF is free

Another feature of IMF aid is the way that it is presented as a type of SPV and sadly not the Spectrum Pursuit Vehicle driven mostly by Captain Blue in my and many other’s childhoods. These official SPVs ( such as the EFSF) are off-balance sheet vehicles which allow politicians to obfuscate about the state of play. Back to June 8th 2010 again.

Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong. Just to quote the IMF itself there are “doubts” over Greece. Any proper accounting system allows for the possibility of things going wrong. After the experience of the last two years we should know the implication of sticking your head in the sand like an ostrich and assuming there are no problems around…

In other words it is presented as “free” until it isn’t at which point phrases such as “this could not have been reasonably expected” and words such as “counterfactual” are deployed as weapons. Missing from the conversation is how people who were are regularly told are so intelligent and thus need to be paid highly have been wrong again! This of course brings us to the concept of responsibility.

Christine Lagarde

I have been critical of the IMF’s Managing Director quite a few times on the grounds that she has been intimately involved with the disastrous bailout of Greece via her roles as French Finance Minister and Managing Director of the IMF. Not everyone has spotted this as the Financial Time has proved this morning as it reviews her.

a blow to her previously unblemished reputation for managerial competence

But even the FT which appears ever keen to stand firmly behind any establishment vehicle has to admit this.

A conviction for negligence is somewhat at odds with a commitment to “the highest standards of efficiency and technical competence”.

Mind you perhaps something in the past has influenced this.

The Financial Times therefore argued earlier this year that she deserved reappointment for a second term on merit.

Is negligence the new definition of merit? I will have to update my financial lexicon for these times. This next bit is full on internal contradictions and effectively self-critiques.

It found her guilty of negligence because she did not appeal against the eventual decision — but it has not imposed any sentence, and the verdict will not result in a criminal record. Short of full exoneration, this is the mildest possible verdict.

This is an unusual verdict from an unusual court. Politicians who sit on the special tribunal may well have wished to avoid a tougher ruling that would have deterred ministers from making delicate decisions in future.


There are a litany of issues here. We see yet again that the more important you are the less you are apparently responsible for anything. Someone lower down the scale would have received punishment if they had been found guilty of negligence yet the leader of the world’s major financial organisation apparently can shrug it off. Punishment is for the little people only it would seem.

This leaves the IMF as a whole in an even bigger hole. As the economic world shifts east towards places like India and China it looks ever more like a western and to some extent French fiefdom. At the same time more of its bailouts have gone rogue of which Greece is the most extreme example. The worst part is the way that this is all covered-up and the truth is bent and miss shaped.

The only hope we have is that this statement from the IMF turns out to be like one about a manager from a football club’s board of directors.

In this context, the Executive Board reaffirms its full confidence in the Managing Director’s ability to continue to effectively carry out her duties.

Oh and “outstanding leadership” also needs to go into my financial lexicon for these times. Although we do need perhaps to go through the Looking Glass of Lewis Carroll.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”



6 years down the line and Greece is still arguing with its creditors

A clear candidate for the saddest story and indeed theme of my time on here has been the economic depression inflicted on Greece. If I had my way Christine Lagarde could finish at the current trial she is involved in and then could move onto one with her former Euro area colleagues about proclaiming “shock and awe” for Greece back in 2010. This involved promising an economic recovery in 2012 which in fact turned into an economy shrinking by 4% in that year alone. Compared to when she and her colleagues were already boasting about future success, the Greek economy has shrunk by 19%, which means that the total credit crunch contraction became 26%. I also recall the bailout supporters attacking those like me arguing for another way ( default and devalue) for saying we would create an economic depression which in the circumstances was and indeed is simply shameful. Instead they found an economy on its knees and chopped off its arms too.

A new hope?

We have seen some better economic news from Greece as 2016 has headed towards irs end. An example of this came yesterday.

The unemployment rate was 22.6% compared to 23.1% in the previous quarter, and 24%  in the corresponding quarter of 2015……The number of unemployed persons decreased by 1.8% compared with the previous quarter and by 5.9% compared with the 3rd quarter of 2015.

As an economic signal we need also to look at employment trends.

The number of employed persons increased by 0.9% compared with the previous quarter and by 1.8% compared with the 3rd quarter of 2015.

Thus we see an improvement which backs up the recent information on economic growth.

The available seasonally adjusted data indicate that in the 3 rd quarter of 2016 the Gross Domestic Product (GDP) in volume terms increased by 0.8% in comparison with the 2 nd quarter of 2016…… In comparison with the 3rd quarter of 2015, it increased by 1.8% against the increase of 1.5% that was announced for the flash estimate of the 3rd quarter.

So we have some growth although sadly more of the L shaped variety so far than the V shape one might expect after such a severe economic shock. Another anti-achievement for the program. But there are hopes for next year according to the Bank of Greece.

Specifically, the Bank of Greece expects GDP to grow by a marginal 0.1% in 2016, before picking up to 2.5% in 2017 and further to 3% in 2018 and 2019, supported by investment, consumption and exports.

Let us hope so although we have hear this sort of thing plenty of times before. Indeed those thinking that Fake News is something only from 2016 might like to look back at the officials and their media acolytes who pushed the Grecovery theme around 2013. Also this by the Bank of Greece as its highlight needs to be considered in the light of the economic depression I have described above.

An unprecedented fiscal consolidation was achieved, with an improvement in the “structural” primary budget balance by 17 percentage points of potential GDP over the period 2009-2015, twice as much as the adjustment in other Member States that were in EU-IMF programmes;

Not everything is sweetness and light

The obvious issue is the way that a lost decade ( so far..) has caused something of a lost generation.

the highest unemployment rate is recorded among young people in the age group of 15-24 years (44.2%). For young females the unemployment rate is 46.9%.

Also the Bank of Greece gives us its own fake news unless of course Mario Draghi is wrong at every ECB press conference.

Substantial structural reforms have been implemented in the labour and product markets, as well as in public administration.


One way of looking at this comes from the current trend to issue policy statements on Twitter as everyone apes President-Elect Trump. From the IMF on Monday.

debt highly unsustainable; no debt sustainability without both structural reforms and debt relief

Of course we have known that for years and perhaps it might like to talk to the Bank of Greece about structural reforms! The next day we got this.

Debt relief AND structural reforms essential to make ’s debt sustainable & bring back growth.

The IMF has in effect told us that it is no longer willing to join in with the Euro area austerity fanatics.

On the contrary, when the Greek Government agreed with its European partners in the context of the ESM program to push the Greek economy to a primary fiscal surplus of 3.5 percent by 2018, we warned that this would generate a degree of austerity that could prevent the nascent recovery from taking hold. We projected that the measures in the ESM program will deliver a surplus of only 1.5 percent of GDP, and said this would be enough for us to support a program.

There are two main issues here where we see the path of austerity but also debt relief. The latter is a big issue as you see private-sector creditors took their pain in 2012 but the ECB has been unwilling to allow the official creditors to take their share and at most has been willing only to contribute the profits it made on its Greek bond holdings. Profits out of such pain spoke for its past attitude eloquently I think. Going forwards though this is an official creditor issue as they own the vast majority of Greek debt now.

The European Union’s commissioner for economic affairs was quick to respond.

Writing in the Financial Times, Pierre Moscovici rebuffed claims made by senior IMF officials this week that Greece’s debt is “highly unsustainable” and that the country needs further comprehensive tax and pensions reform.

Monsieur Moscovici has made all sorts of ridiculous statements in my time of following this issue such that it makes me wonder if he has any grasp of the concept of truth, which is quite an irony when he goes on to say this.

In this era of ‘post-truth’ politics, it is more important than ever not to let certain claims go unchallenged,

It may not have been the best of times for the main lending vehicle the ESM (European Stability Mechanism) which of course has produced anything but in Greece, to call 2016 “exciting” and predict this ” 2017 will be another exciting year”. Still it does now have a Governor of the Day and a Wheel of Governors which it is rumoured sees the Italian and Greek ones spin into the distance if you get it right or should that be wrong?

Meanwhile there is something rather familiar about 2017.

Compared to previous announcements, this means an increase of, in total, €7 billion. The EFSF funding volumes are increased by €13 billion to execute the short-term measures for Greece.

To give you an idea of the scale here Greece owes the EFSF some 130.9 billion Euros and the ESM 31.7 billion which is part of an 86 billion Euro plan. This means that these days when you see headlines about yields on Greek bonds they are much less relevant as Greece borrows from official sources. Frankly it would immediately be insolvent if it did not.


There are lots of issues here but let me use the IMF statement to highlight the crux of the matter.

While Greece has undertaken a huge fiscal adjustment, it has increasingly done so without addressing two key problems—an income tax regime that exempts more than half of households from any obligation (the average for the rest of the Euro Zone is 8 percent) and an extremely generous pension system that costs the budget nearly 11 percent of GDP annually (versus the average for the rest of the Euro Zone of 2¼ percent of GDP).

You see this in essence is where the crisis began. An inability to tax, often meaning the better-off, which combined with a generous pension system was also looking like a car-crash relationship. Yet 6 years of reforms later we are at deja vu which the appropriate sorry seems to be the hardest word of Elton John tells us is.

It’s sad, so sad
It’s a sad, sad situation.
And it’s getting more and more absurd.

Meanwhile the current government has done this as Maria Kagelidou of ITV News tells us.

promises 1.6 million pensioners on less than €850/month will receive one off 13th pension. €300 min. Total €617mil

A nice Christmas gift? In isolation of course but how can Greece afford this? Maria sent me some details which I will omit because they are identifiable but I will simply say that tax payments have been accelerated and it looks like the money has been borrowed from the future one more time.





What is the economic impact of a higher crude oil price?

One piece of economic news dominated all other yesterday and it was at least a change for the Trump and Brexit circuses to take something of a break. Instead we had the OPEC circus which finally came up with something. Of course we know that announcements are one thing and implementation another but there was an immediate impact on the crude oil price. From Reuters.

The price for Brent crude futures (LCOc1), the international benchmark for oil prices, jumped as much as 13 percent from below $50 on Wednesday and was at $52.10 per barrel at 0806 GMT, although traders pointed out that part of the jump was down to contract roll-over from January to February for Brent’s front-month futures.

U.S. West Texas Intermediate (WTI) crude futures rose back above $50 briefly before easing to $49.63 a barrel at 0806 GMT, though still up 20 cents from its last settlement.

Volumes were very high too which makes a past futures traders heart lighter although of course we need to note that this is a result of yet more central planning.

The second front-month Brent crude futures contract, currently March 2017, traded a record 783,000 lots of 1,000 barrels each on Wednesday, worth around $39 billion and easily beating a previous record of just over 600,000 reached in September. That’s more than eight times actual daily global crude oil consumption.

Also as we note the influence at times of banks on commodity markets ( I believed their trading desks helped drive the last commodity price boom) maybe such high volumes are a warning signal too. But if this lasts we have the potential for a type of oil price shock as we have become used to relatively low oil prices. Also central banks may have to make yet another U-Turn as of course they may find that they push inflation above target as a higher oil price adds to all their interest-rate cuts and QE style bond buying.

Let us have a little light relief before we come to the analysis and look at this from February of this year. From Bloomberg.

Oil could drop below $20 a barrel as the search for a level that brings supply and demand back into balance makes prices even more volatile, Goldman Sachs Group Inc. predicted.

Oh well…

A higher oil price is good for us?

I made a note of this when I first saw it as it is the opposite of my view. I also note that it is Goldman Sachs again. From Bloomberg.

Higher oil prices would be a boon for the global economy, according to Goldman Sachs Group Inc.

Really! How so?

Pricey crude means economies such as Saudi Arabia take in more money than they can spend, which financial markets help distribute through the rest of the world, boosting asset values and consumer confidence, the bank’s analysts Jeff Currie and Mikhail Sprogis wrote in a Nov. 22 research note.

Apparently we can ignore the elephant in the room.

Forget the stagflation of the 1970s.

Here is the explanation.

“The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system,” Currie and Sprogis wrote. “More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe.”

Convinced? Me neither and it is hard to know where to start. One view is that the world economic expansion drove the oil price higher. Another is that greater global liquidity is an illusion as we see so many markets these days which seem to lack it. For example we are seeing more “flash crashes” like the one which happened to the UK Pound overnight a few weeks or so ago. This is of course in spite of the fact that central banks have been doing their best to create global liquidity and indeed cutting interest-rates.. Still if it created “increased asset values” the 0.01% who no doubt represent Goldman Sachs best clients will be pleased. As a final rebuttal this ignores the impact of lower oil prices on inflation and the key economic metric which is real wage growth.

Did the credit crunch never happen?

From 2001 to 2014, excess savings outside the U.S. grew to $7 trillion from $1 trillion as oil climbed, according to Currie and Sprogis. The savings helped drive up values of things like homes and financial assets and loosened credit markets for consumers.

I guess this is the economics version of all those strings of alternative universes in physics where Goldman Sachs is in another one to the rest of us, or simply taking us for well, Muppets.

They are not the only ones as the IMF got itself into quite a mess on this front back in February.

Persistently low oil prices complicate the conduct of monetary policy, risking further inroads by unanchored inflation expectations. What is more, the current episode of historically low oil prices could ignite a variety of dislocations including corporate and sovereign defaults, dislocations that can feed back into already jittery financial markets.

Are these “jittery financial markets” the same ones that Goldmans think are full of liquidity? Also you may note the obsession with central banks and monetary policy and yes asset values are in there as well.

Returning to Reality

There is an income and indeed wealth exchange between energy importers and exporters. For example Oxford Economics did some work which suggested that a US $30 fall in the oil price would boost GDP in Hong Kong by 1.5% but cut it in Norway by 1.3%. So we get an idea albeit with issues in the detail as I doubt the UK (0.8%) would get double the GDP benefit of Japan (0.4%) which of course is the largest energy importer in relative terms of the major economies. Oh and there are bigger negative effects with Russia at -5% of GDP and Saudi Arabia at -4%.

However the conclusion was this.

Lower oil prices should give a sizeable boost to world GDP in 2015 and 2016

There was a time (July 2015) when the IMF thought this as well.

Although oil price gains and losses across producers and consumers sum to zero, the net effect on global activity is positive. The reasons are twofold: simply put, the increase in spending by oil importers is likely to exceed the decline in spending by exporters, and lower production costs will stimulate supply in other sectors for which oil is an input…… the fall in oil prices should boost global growth by about ½ percentage point in 2015–16,

It would also produce a fall in inflation which will be welcome to those who are not central bankers.


Should the oil price remain higher it will reduce global economic growth and raise inflation. If we compare it with a year ago it is around 10 US Dollars higher but we also need to note that in December 2015 the oil price fell to the Mid US $30s so we need to do the same to prevent an inflationary effect. As I have been writing for some months now unless we see large oil price falls inflation is on it way back. We are of course nowhere near the US $108 that a Star Trek style tractor beam seemed to hold us at a while back. But as I note the rise in some metals prices ( Zinc and Lead in particular) commodity price rises are back in vogue. So there will be plenty of work for those economists who want higher inflation explaining how they are right be being wrong.

There will also be relative shifts as consumers will be poorer as real wages fall but say shops in Knightsbridge and the like seem set to see more Arab customers. Japan will be especially unhappy at a higher oil price. But US shale oil wildcatters might be the happiest of all right now and may even boost US manufacturing as well. In the UK there will be a likely boost for the Aberdeen area.

Me on TipTV Finance

“Outlook for RBS is dreadful”, says Shaun Richards – Not A Yes Man Economics







Currency movements are the major players in monetary policy now

One of the features of these economic times is the way that we get so many denials that monetary policy is pretty much impotent. We of course know what to do with official denials. But whether you choose interest-rates or longer-term yields via QE ( Quantitative Easing) there is now the obvious issue that 8 years or so of what have been extreme moves have not produced the “escape velocity” of Bank of England Governor Mark Carney. However movements in exchange-rates have retained quite a bit of power albeit that there is always an element of robbing Peter to pay Paul about them. What I mean by this is that a currency rises or falls against another one which means that overall it is a zero sum game with the losers matching the winners. Or at least at the first stage it is as in our increasingly centrally planned world all movements seem to cause trouble. But as ever we see much going on in the currency markets.


For those unaware something I have mentioned in the past took place at the beginning of this month which was this. From the International Monetary Fund.

The Board today decided that the RMB met all existing criteria and, effective October 1, 2016 the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound.

This does have real effects as for example some countries are likely to use it as a benchmark for foreign exchange reserve holdings. So we may see more demand for the Renminbi and we may have seen the biggest shift of all which is the SDR of the IMF increasing in importance. From Bloomberg at the beginning of September

The World Bank issued 500 million SDR units ($698 million) of three-year notes in China’s interbank market this week, the first sale of debt in the International Monetary Fund’s alternative reserve assets since the 1980s.

So we see that the US Dollar is facing potential challenges from both the Chinese Renminbi and the SDR of the IMF. Although care is needed with the latter as one bond issue will not cause sleepless nights!

However we did get a flicker of response as the other currencies in the SDR basket needed to be reduced to let the Renminbi in and they ( Euro, Yen and £) were except for the US Dollar which was nearly unchanged ( 41.9% to 41.73% compared to 37.4% to 30.73% for the Euro).


However rather than strength we saw this today according to Reuters.

The currency fell after the People’s Bank of China set the midpoint CNY=PBOCat 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 percent weaker than the setting on Sept. 30, before a one-week National Day holiday.

Just for comparison it has dropped from 6.33 to the US Dollar a year ago. Meanwhile it now buys 15.4 Yen rather than the 19 of a year ago which will focus attention in Tokyo.

The official view admits only a minor depreciation.

On August 31, 2016, the CFETS RMB exchange rate index closed at 94.33, losing 1.06 percent from the end of July;

It is now 94.07.

The Euro and the Yen

These are places where expansionary monetary policy was designed to reduce the value of the respective currencies albeit that one was explicit (Yen) and the other implicit (Euro). However more recently both have seen their currencies go through stronger phases in spite of both negative interest-rates and large-scale QE programs.

Overnight they have been echoing each other.

BOJ’s Kuroda: BOJ may delay hitting inflation target to 2018 ( @DailyFXTeamMember )

Draghi: Euro zone inflation could approach the ECB’s target by late 2018 or early 2019 ( Reuters)

Actually if you look at the surge in the value of the Japanese Yen in 2016 then it is it which is the furthest away from getting anywhere near its inflation target. But in the debates over possible reductions in unconventional monetary policy or “tapers” seem moot in comparison to this reality. Accordingly both will being trying to have lower currencies except after inflation success we saw one rebound strongly and the other stop falling a rebound a little.

Saudi Riyal

It gets only a small amount of attention but there are more than a few signs of stress in the financial system of Saudi Arabia right now. The issue of the lower oil price is clearly the main game in town but its effects have been added to by this. From the Saudi Arabian Monetary Authority on the 12th of August.

With regard to media news about the riyal exchange rate policy, SAMA Governor would like to reiterate SAMA’s commitment to maintain the current riyal exchange rate at SAR3.75 per USD, and that bets on the riyal on futures market are based on incorrect information.

So a fixed exchange-rate to the US Dollar with all the inflexibility that it provides which includes a currency which has appreciated at a time of economic difficulty. Not the type of “masterly inaction” so beloved of the apocryphal civil servant Sir Humphrey Appleby. We see an exchange-rate which is too high combined with speculation against the currency creating uncertainty.

Nigerian Naira

This years heavy faller in exchange-rate terms has been Nigeria where I note that in late July Bloomberg noted that it had passed 300 to the US Dollar for the first time in late July. Let is now skip to Bloomberg’s report from Friday.

with the central bank holding the naira in a tight range around 315 per dollar since the beginning of August.

So not much change? Er no.

Most local businesses and Nigerians going abroad can’t get foreign-exchange from their banks and have to turn to the BDCs, which have more leeway in setting prices, and black-market street-traders openly plying their services across the country. They sell each dollar for around 475 naira, compared with 425 in mid-September.

Oh so in reality quite a lot of change then. Two exchange-rates at the same time lead to an economy signing along with Earth Wind & Fire.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

On a wholesale level it is possible to get foreign exchange from the Central Bank of Nigeria except it then wants to know where you got the money from.

UK Pound

I have covered the details of this on more than a few ocassions but merely to say that the UK Pound £ has joined the ranks of the currency depreciators in 2016 with an obvious acceleration post the EU leave vote. Let me add that if you change your money up at an airport it will feel like the UK has two exchange-rates as well.


There is much to consider in what were some 6 years ago labelled “currency wars” by the then Finance Minster of Brazil. Of course its fortunes have turned downwards since then as we note how things can turn. There are big economic impacts from currency moves as we observe the later effects on both growth and inflation.

There is also the issue of yet another central planning failure as markets which increasingly only exist to front-run central banks get less liquid and this now seems to also apply to the previously relatively highly liquid currency markets. The Financial Times has these examples today.

The biggest flash crash of recent times was in January last year with “frankenshock” — when the Swiss franc jumped nearly 40 per cent against the euro and the dollar.

The New Zealand dollar lost more than 2 cents against the US dollar amid last August’s market turmoil over China growth fears. The South African rand fell 9 per cent against the US dollar in a mere 15 minutes in January this year.

To that we can add the UK Pound flashcrash of Friday morning. However the Financial Times sadly cannot resist its party line by publishing a quote that there were no buyers of Sterling at all. Yet it is now as I type this some 6 cents higher than the low. Did it just levitate?





It is all about the debt for the International Monetary Fund

The International Monetary Fund has had a troubled credit crunch. A major factor in this has been the way that its Managing Directors which as it happens have both been French politicians have moved it away from its original methodology. It used to help with balance of payments problems and whilst its austerity and devaluation/depreciation policies did not always work they did have plenty of successes. However it has increasingly become an organisation which helps with fiscal problems in the Euro area which have not always come with trade problems as for example Ireland had many years of surpluses. The move into the Euro area the major problem that devaluation was replaced with “internal competitiveness” which has pushed Greece into a depression and after a brief flurry Portugal is struggling again. It of course also had the issue that the Euro area is overall wealthy and could have financed it by itself.

Also there is the issue of a lamentable forecasting record as summarised below. From @ChristianFraser.

IMF on June 18th: “Brexit will trigger UK recession”

IMF on Sept 4th: “Britain will be fastest growing G7 economy this year”.

Is it all about the debt?

This is in some ways an economic virtue and in other ways a vice and perhaps even a four-letter word. The IMF has come up with some new analysis so let us steel ourselves for the inevitable barrage of very large numbers.

The global gross debt of the nonfinancial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion in 2015. About two-thirds of this debt consists of liabilities of the private sector.

In all the analysis of public-sector debt the issue of private-sector debt is often more of a backwater so it is good to see it being looked at. Also we get an estimate of how we can compare the debt level to economic output.

Although there is no consensus about how much is too much, current debt levels, at 225 percent of world GDP , are at an all-time high.

There is the issue that we are comparing a stock (national debt) with a flow (GDP or Gross Domestic Product) but it does at least give some sort of guide. We also are taken through the problem that has been created.

The negative implications of excessive private debt (or what is often termed a “debt overhang”) for growth and financial stability are well documented in the literature, underscoring the need for private sector deleveraging in some countries.

However the IMF fails to see that this may be a feature and indeed theme rather than coincidence.

The current low-nominal-growth environment, however, is making the adjustment very difficult, setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown.

There is a real swerve here which may be overlooked and this is that the “nominal growth” the IMF is apparently so keen on includes the good which is real growth but from the point of view of the ordinary worker or consumer the bad which is inflation. The more of the latter we see then an improvement in the spread sheets of the IMF will be accompanied by a deterioration in the economic experience of the ordinary person. Putting this another way we now see in my opinion the real reason why central banks want to target consumer inflation at 2% per annum and some want an even faster rate. For example my debating opponent on BBC Radio 4’s Money Box the ex Bank of England economist Tony Yates called for a 4% inflation target in March 2015. In my view that improves Ivory Tower style spreadsheets whilst harming the ordinary person.

How did we get here?

Twisting slightly the lyrics of Talking Heads we find out this.

The genesis of the global debt overhang problem resides squarely within advanced economies’ private sector. Enabled by the globalization of banking and a period of easy access to credit, nonfinancial private debt increased by 35 percent of GDP in advanced economies in the six years leading up to the global financial crisis.

So it was us although not quite everyone reading this as looking at the readership by country from yesterday Zambia was 7th and Thailand 8th. It was nice to see that I get around.

Meanwhile the situation with public-sector debt was much more restrained.

Interestingly, public debt declined across all country groups up to 2007, particularly among low-income countries—mainly as a result of debt relief under the Heav-ily Indebted Poor Countries and Multilateral Debt Relief Initiatives.

That makes the IMF switch to dealing with public-sector debt and in particular it in the Euro area even harder to explain. After all it is now in favour of fiscal stimuli which must make very hard reading in the countries in Southern Europe and particularly Greece which suffered under its fiscal yoke called austerity.

This may suggest that fiscal policy and, in particular, the early tightening in the latter (Euro area) may not have helped in facilitating the adjustment.

In essence the IMF is arguing that this was a good thing.

As private debt started to retrench, public debt picked up, increasing by 25 percent of GDP over 2008–15.

It is also true that some of this was the socialisation of what was private debt as bank debt found its way onto the ledgers of taxpayers in more than a few nations.

The good, the bad and the ugly

The IMF occupies all three positions on extra debt. First we get the implication that it would be good here.

In particular, there
is evidence that some European banks—burdened by
high levels of impaired assets and a low-growth environment—may
not be in a position to extend the necessary
credit flows to sustain normal economic activity, contributing
to a deeper economic slump

But later the implication is that it is bad in that we need to deleverage.

Private sector deleveraging in advanced economies
thus far has been much slower than previous successful
experiences, indicating that the adjustment will have to

which is repeated here.

Data for a sample of advanced economies suggest
that private debt is high in some cases, even after assets
are accounted for, a harbinger of possible deleveraging

Then we reference to Brazil and China in particular we get the view that it is getting ugly.

Meanwhile, easier financial conditions in the aftermath
of the global financial crisis have led to a private
debt boom in some emerging markets, particularly
in the nonfinancial corporate sector


The IMF here is following the FPC (Financial Policy Committee) of the Bank of England in simultaneously wanting more and less debt. I still remember Lord Turner apologising for telling banks on the one hand to deleverage and on the other to expand lending. That may work in an Ivory Tower but not in the real world.

Next we have the issue that the policies that are supposed to have helped in this such as lower interest-rates ( 102 official reductions so far this year according to @ReutersJamie) and lower bond yields via QE have not helped. The IMF points out that economic growth is still struggling relatively but fails to grasp the fact that I for example have argued from the beginning that such policies have side-effects ( as I analysed yesterday) and in some cases reduce economic growth.

Also it is hard to know whether to laugh or cry as the IMF of Euro area fiscal austerity which plunged Greece into an economic depression that is ongoing calling for this.

Premature tightening of fiscal policy in depressed economies with weakened financial systems should be avoided to the extent possible……..Targeted fiscal interventions could be used to facilitate balance sheet repair.


Me on TipTV Finance

6 years later the “shock and awe” is at the ongoing economic depression in Greece

The last 6 years in Greece have proven the wit and wisdom of the late Yogi Berra to be very prescient.

It’s like deja-vu, all over again.

One clear example of that is that there is an extraordinary Eurogroup meeting of ministers today to discuss yet more plans for Greek austerity. It will also discuss how they can provide Greece with even more debt relief. Oh and just to add to the repetition all of this has to be done before the next set of bonds owned by the European Central Bank mature in July as Greece is unable to repay them on its own. There has been an extraordinary inflation in the number of Eurogroup meetings on the subject of Greece which is odd don’t you think when we are so regularly told how well things are going?

The Official View

Only on Friday Klaus Regling who as the head of the European Stability Mechanism is the main lender to Greece told us this in an interview with Corriere della Sera.

. The situation has improved compared to some years ago:

Poor old Klaus hits trouble in the same interview later as he tells us that Italy is not Greece!

Also, the two countries are not really comparable, Greece is in a completely different situation: it lost market access five years ago and needed huge amounts of money to stay in the euro area.

That does not seem like much of an improvement to me I do not know about you. Indeed Klaus hits more trouble as he tries to blow the trumpet for the program for Greece.

Greece has now a primary surplus, so it doesn’t need money every month to finance its budget. At the end of July, there is a real need for liquidity due to a sizeable debt repayment.

So it can finance itself except it cannot. Actually the primary surplus point is particularly important as it was presented back in the days of “Shock and Awe” from Christine Lagarde amongst others as a sort of Holy Grail. Once it was achieved the economy would grow – believe it or not but these clowns forecast 2.1% economic growth in Greece in 2012- and the debt burden would fall.Instead of course an economic depression was worsened and the debt burden rose. This means that Klaus needs to try to rewrite history and hope that nobody notices that it is the opposite of the May 2010 and following PR spin and hype.

the starting position in terms of economic problems was far more serious than that of the other programme countries.

The Debt Burden

Let us take a look at how much Greece now owes. First let us remind ourselves as to what the IMF forecast back in May 2010.

In Greece, debt would peak at 149 percent of GDP only in 2013. A pending data revision was expected to raise this projection by 5–7 percentage points.

Remember that we had the debt default called PSI in 2012 as the numbers instead ballooned. So with the success trumpeted by Klaus Regling it is now in better shape? Er no.

Greece owes some 321 billion Euros according to the latest estimates. This represents some 184% of Greek GDP which means that in this respect the original program failed in two ways. Firstly this debt peak has been some 30% or so higher compared to GDP so far at least and secondly the time-span was three years longer and counting..

The various flaws outlined here means that the official creditors of Greece have it in hock to just under 126% of its GDP. Klaus himself is responsible for debt totalling 87% of GDP. This is why he feels it necessary to churn out phrases like this.

So we are not close to any default.

The IMF holds a relatively small 14.7 billion Euros of Greek debt or about 8.4% of GDP. So you see the Euro area could easily replace it. What it cannot replace is the credibility that an IMF stamp on proceedings provides. When you review how far IMF credibility has fallen in recent years that is another sign of how bad things are.

The ECB is also a player here with 20.5 billion Euros left of the Securities Markets Program. Back in the early days it skulked off into the background with the profits from this but even the Euro area bureaucracy spotted that it was round-tripping the Euro area taxpayer and it now puts such money back in the pot.

Along that road you may note that media references to Greek bond yields are much less important than they once were as the real game is elsewhere.

Economic Depression

Euro area ministers try to distract us from this in the manner of “look away now” or “move along, nothing to see here” but the reality has been a 6 year economic depression as opposed to the sunny uplands they promised. This has been the major player in everything else going wrong as the 2.1% economic growth promised in 2012 turned into a near 10% decline. That had a good go at wiping out all the gains from the 2012 PSI default.

In the first quarter of 2010 as in just before “shock and awe” Greek GDP was 59 billion Euros as opposed to the 46.1 billion of the last quarter in 2015. So we see a near 22% decline which is how you define an economic depression and perhaps the worst part is that according to the latest piece of data it is still getting worse.

The seasonally adjusted overall volume index in February 2016 compared with the corresponding index of January 2016 recorded a decrease of 3.0%.

Those retail sales numbers are an example of one of the deepest parts of the economic depression as the volume index were 2010=100 is 64.6. To put that another way they are buying less than two-thirds of what they did back then. Currently the most troubling aspect is the 5% fall in food purchases as the amount spent was already much lower. I guess the establishment can ignore that as they so often tell us such purchases are “non-core” . Even the sentiment indices are still struggling with the Markit manufacturing PMI at 49.7 still indicating stagnation.

This is happening when the rest of the Euro area has just had its best quarter for a while, due in my opinion to the beneficial impact of the lower oil price and the lagged impact of the past fall in the value of the Euro. Yet Greece seems unable to hitch much of a ride.


There is a rather wearying repetition as triumphant statement begets economic disarray and is followed by yet another triumphant statement. From the Guardian.

Greece has ‘basically achieved’ reform goals, says Jean-Claude Juncker.

Ah “basically achieved”, what again? Of course the man who told us he finds it necessary to lie has his own credibility problem! Meanwhile the Greek face yet another austerity program and yet more cuts to pensions. From Kathimerini

Sunday night of overhauls of the Greek tax and pension systems…..All 153 coalition lawmakers backed the legislation, which is worth 5.4 billion euros in budget savings.

Each time this medicine has been applied before the patient has become even more ill rather than improving as it turns out that the mathematics was supplied by Yogi Berra.

Baseball is 90 percent mental and the other half is physical.


It is now 6 years since the Euro area met to discuss and then approve the “shock and awe” program of May 2010. What they created was in fact a severe and long-lasting economic depression which is showing few if any signs of ending even now. This result is the opposite of the promises made back then. Greece was on a downwards trajectory but what it needed was a rope thrown to it to pull it up not a further shove in the back. Later we learned from US Treasury Secretary Geithner that more than a few at the meetings wanted to punish Greece and sadly that is the one part which did suceed.

Meanwhile the ordinary Greek has suffered from the economic depression which ensued. In essence the problem was this from the IMF.

Greece embarked on a far-reaching program of reforms in May 2010.

If it had then we would not be where we are and the first incarnation of the Syriza government looked hopeful but then engaged reverse gear. So the Greeks have been let down on so many levels. Even the latest austerity program will hit them again and miss the wealthy with of course the irony that if the truly wealthy had been taxed much of this would never have been necessary. Still there is Europe Day to celebrate.