Ten Year Bond Spread Between Between Greek and German Benchmarks Post 1999

The Greek government announced this week that it is introducing a public sector wage freeze together with and a one-off tax for high-income earners in an attempt to prevent the budget deficit from spiralling yet further out of control. The measures, which were announced on Wednesday, constitute a significant change of discourse from a government which until now has claimed Greece’s service-based economy could avoid falling into recession. Speads on European government bonds widened again this morning The difference in yield between German and Irish 10-year government bonds, increasing five basis points (to 281 basis points), the most since February 1993. Portuguese, Spanish and Greek (see chart above) spreads also widened versus the German benchmark.

Basically what follows is a brief examination of the evidence we now have to hand for a sudden and sharp slowdown in Greek GDP, and of how this may influence future expectations on the spreads. This follows in the path of my two previous Greece related studies:

Why We All Need To Keep A Watchful Eye On What Is Happening In Greece

and

The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation Continue reading →

From Wikipedia:

Enric Duran, also known as “Robin Bank” or “Robin Hood of the Banks” is a Catalan anticapitalist activist and member of the “Temps de Re-volts collective”. On September 17, 2008, he publicly announced that he had ‘robbed’ dozens of Spanish banks of nearly a half-million euros as part of a campaign of political action to denounce what he termed the “predatory capitalist system” and finance various anti-capitalist movements. From 2006 to 2008, Duran took out 68 commercial and personal loans from 39 banks with no guarantees or properties as collateral. Duran published an article entitled “I have ‘robbed’ 492,000 euros from those who most rob us in order to denounce them and build some alternatives for society” explaining via the internet that he had taken out a series of loans from numerous Spanish banks as well as publishing his “confession” in the Catalan magazine Crisis. Duran called his action an act of ‘financial civil disobedience.’

Of course, while Timothy Geithner recieves a supportive understanding pardon for his “sin of omission” (he forget to present adequate tax returns), and AIG directors continue to haggle about their bonus payments, Duran is whiling away his time in prison awaiting trial on charges of fraud. There is a fairly credible rumour going the rounds that he will be receiving no support from the official government “bail”-out fund.

Meantime we are constantly reassured that Spain’s banks are completely sound, that every loan was judiciously and meticulously checked, and that there really is nothing at all to worry about.

My point here is not to defend Duran’s actions, but to highlight the double standards embodied in the way we go about things. I think his case can also give us some inkling of an insight into why it is that some of our young people are now becoming so disaffected. Apart from being left with the lions share of the debt to pay off over the years to come, they will also be called upon to sustain our ever more fragile pension systems.

We are told that recovery is just round the corner, maybe as soon as the end of this year. Personally I fail to see how this can be the case, not only because none of the macro economic data I am looking at are consistent with such a view, but also because it isn’t at all evident how things can ever “correct” themselves while we still have such a massive “values overhang”. Part of the problem we just got into was about greed (it always is), not just the greed of those who wanted an ever bigger cash bonus, but the petty greed of all those millions who got themselves ever deeper into debt on the basis of the flawed idea that the price of their home (or second home) would simply go up and up forever. We still have a lot of “cleaning out” to do in this department, all of us, before what is steadily getting worse can start getting better.

The much maligned Keynes went to work as a volunteer at the Bank of England during World War II, the man who was arguably the twentieth century’s greatest philosopher (Ludwig Wittgenstein) spent the war as a porter in Charing Cross hospital (he was already old, and a pacifist), while one of Russia’s greatest painters, Pavel Filonov, starved to death in 1943 since stayed behind in a beseiged Leningrad simply to take care of a sickly old woman. When we start to see people of this calibre up there and running things, then we will know we are starting to emerge from the crisis. Meantime, its “war” as usual, although hopefully not the type of “class war” that Duran and his associates would have us get ourselves into.

Of course, these scenes shot outside Barcelona’s central university yesterday afternoon are one good example of how NOT to handle the crisis.

I suppose industrial output numbers for Poland are not exactly the sort of thing that set most Afoe readers alight with blazing interest. They are, however, not without some significance, since one of the issues every right thinking European needs to be trying to assess right now is just how valid the “each Eastern Economy is different” actually is in reality.

Well, it is, and it isn’t is my view, since evidently there are differences, and some of them are important, but equally evidently there is one common underlying reality: an ongoing and extensive regional economic crisis. In this context the fact that Polish industrial production fell for the fifth straight month in February is not simply an incidental piece of news. It offers us and easy to understand indicator of the problem which exists, as well as providing the latest signal that the Europe’s economic crisis really is having an impact on domestic economic growth in Poland and other parts of central Europe. In fact annual output dropped by 14.3 percent in February, following a revised decline of 15.3 percent in January. Output was however up 2.7 percent month on month.

Continue reading →

I have been warning on the parlous position of Italy’s Unicredit for some time now (see this initial EU Bonds post, or the earlier history of the Unicredit problem, here, here, here, here, here). Well, today the story took another turn for the worse.

It all started yesterday, when Bloomberg came in with a report about Unicredit’s eastern exposure, outlining how a decade long expanison, which saw more than $65 billion of acquisitions in operations stretching from Poland to Kazakhstan is now alarming analysts who forecast that loan defaults in eastern Europe, where the bank focused its growth, are set to balloon. Unicredit’s stock is down 76 percent in the past 12 months, the second-biggest decline among Italian banks.

“Eastern Europe is the new bogeyman,” said Massimiliano Romano, an analyst at Concentric Italy in Milan. “UniCredit has subsidiaries in 17 different countries there. We used to see that as diversification, now we see it as a risk.”

Then came the news, again yesterday, that the bank had suffered a 57 percent decline in fourth-quarter profit. Finally, this morning, the bank informed us that they are planning to ask for as much as 4 billion euros in government aid. In fact the profit results were not as bad as some analysts had been forecasting, but then these results are for 2008, which, as the company said in its statement, was still a “very good year” in eastern Europe. 2009 looks set to be quite a lot worse, and 2010? As Unicredit CEO Alessandro Profumo said, the bank is “monitoring countries including Ukraine very closely”.

In fact the bank is going to apply for aid in both Austria and Italy, and this is not surprising since according to a statement from the Bank of Italy earlier this week, Italy’s national debt climbed to 105.8 percent of gross domestic product at the end of last year, up from 103.5 in December 2007. So the credit rating agencies’ patience is already being badly strained, even if the quality of their mercy might not be.

Oh, and just to cap it all, and a very bad day for Unicredit, HVB Group, their German banking unit, announced this morning that they had a loss of 671 million euros last year because of writedowns on investments and higher provisions for risky loans. HVB’s trading results were “severely affected by the extreme market turmoil which intensified in the fourth quarter of 2008,” according to the company statement.

Basically, this is that well known proverbial situation, where Europe’s leaders twiddle their thumbs, while Rome, almost literally, burns.

Joke – How do you know when a country is in crisis? Well, on the buses on the way to work, and in the bars and cafes during the mid morning break, everyone is reading the economy rather than the sports section in the local newspaper.

Several pieces of news out over the last week are relevant to the whole debate we are having about how to drag the Estonian economy (kicking and screaming it would seem) out of its current slump. In the first place the Estonian parliament passed a supplementary 2009 budget at the start of the week, in an attempt to address the ongoing crisis in the economy and the dramatic decline in revenues. The cuts were approved by 61 votes to 35 against in what was also an effective vote of confidence in the present government. So at least it is clear that the majority of Estonia’s politicians back the present course, and the degree of public support for the current path is greater than it would seem to be in, say, Latvia. That is, naturally a very positive point.

The supplementary budget lowers the amount of revenues in the annual budget by EUR 615.5 mln and of expenditure by EUR 419.9 mln. According to the revised budget, state revenue this year is now anticipated to be EUR 5,635 mln and expenditures EUR 5,871 mln. Both these numbers are of course conditional on the economic contraction for 2009 only being the forecast one (on which the budget is based) of 9.5%.

The second piece of news is that the Estonian Finance Mininistry have sent an official loan application today to the European Investment Bank, with a request to borrow Eur 550 million for 5 years. And this point is important, since obviously, as I will argue below, Estonia’s private sector (households and companies) is now basically very overleveraged (in too much debt) and the government is being forced to step in and assume greater responsibility for the collective debt as the correction continues.

The third relevant piece of news is that the number of unemployed registered with the Estonian Labour Board was up again last week, and reached 50,527, which means 2418 more people signed on with the board during the week, following the 3,019 who joined the list in the previous week. Meanwhile the Estonian Parliament has been having a debate about what kind of labour market reforms the country needs to handle the present crisis. Since one witty soul appropriately baptised me in my most recent post the “excel economist” I would just like to add-in my own chart-based contribution. People are leaving Estonia. How do I know that, well just take a look at the spike at the end of the time series shown in the grphic below, the volume of income transfers to Estonia (largely worker remittances) has been on the increase ever since the crisis started in 2007, and during the last quarter of 2008 they really spiked up, just (coincidentally?) as the economy spiked sharply downwards.

We don’t know too much about the murky topic of out-migration in the Baltics, since no one seems to consider it a particularly pressing issue. In fact, migrant labour flows could be considered to be a leading indicator for a modern (open) economy (in both directions), but surprisingly little attention is paid to the matter. We do have an old “estimate” that around one third of those working abroad are working in Finland, and now somewhat dated reports of young people working in Finland repairing motorway crash barriers for 150 kroon an hour, but that’s all we seem to have, anecdotal evidence. Maybe one of the reforms all those very busy parliamentarians could think about agreeing to would be the introduction of a question in the labour force survey about whether or not the interviewee currently has (or has had in the recent past) a family member working abroad. Continue reading →

Paul Krugman has a reasonably to the point Op-ed in the New York Times today. It starts off like this:

I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.

and ends up like this:

For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction. In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.

Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.

But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?

Amen to that!

Meanwhile, Spain’s Economy Minister Pedro Solbes has been talking about EU Bonds:

The euro zone is not yet ready for a joint bond but states in the 16-member currency area could coordinate their debt issuance more closely, a German newspaper on Wednesday reported Spain’s economy minister as saying. ‘I think the currency union is not yet ready for something like that,’ Economy Minister Pedro Solbes, referring to the idea of a joint bond, told Germany’s Handelsblatt in extracts of an interview to run in the business daily’s Thursday edition.

So the argument isn’t that they are not a good idea, it is that – with Spain’s unemployment now at 3.5 million, and money starting to run out on the public works “stimulus programme” – we aren’t yet ready for them. When will we be ready, when Spanish unemployment here hits 5 million, or six, or seven, or when we have 5 million people who have run out of unemployment benefit payments, when things eventually start to fall apart at the eurozone level, or after the German elections, perhaps? Come on. Enough of all this passivity. Let’s have some action up there. The issue is we set up a currency union without the necessary political architecture to make it work, so now we need to go to work on the architecture. Do our leaders have the mettle to finish the job, or, as Krugman fears, are they simply intent on proving all the skeptics right!

You can find some explanation of what EU Bonds are, and how they might work, in this post here.