Half a League Onward Rode the Six Hundred

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Well you may doubt their wisdom, and you may doubt their rigour, but there’s no doubting their tenacity. This looks like being Marathon all over again.

New EUR 5 Year Mandate for Greece

The Hellenic Republic, rated A2/BBB+/BBB+, has mandated Credit Suisse, Deutsche Bank, Eurobank EFG, Goldman Sachs International, Morgan Stanley and National Bank of Greece for its forthcoming Greek Government 5-year Euro benchmark. Due 20 August 2015, the transaction will be launched and priced in the near future subject to market conditions.

And here’s how the ten year bond spread with the comparable German bund performed today.

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Does Anyone Really Know The Size Of The Greek 2009 Deficit?

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While investors are generally aware of the dire state of the western economies’ accounts, quite a few of them are optimistic that these large budget deficits can be closed through a combination of fiscal discipline and expenses reduction. Such optimism, based on other countries’ past experience, is likely to be disappointed for mainly two reasons. Firstly, the closing of the gap relies on consensus growth estimates that appear overly optimistic, leaving room for tax revenues disappointment. Secondly, the budget deficit problem concerns countries accounting for more than 50% of global GDP, meaning that single countries’ past experience does not necessarily provide a reliable guide here.
Andrea Cicione, PNB Paribas

The risks to the EUR from the events in Greece arise from a number of different factors. In summary, however, it boils down to credibility: The credibility of the Greek government in meeting their targets, the credibility of the EU institutions to deal with non-compliant states and the credibility of the EUR itself. In periods of fiscal deterioration, the EUR has typically benefitted from the understanding that all countries would adhere to the conditions of the Growth and Stability Pact (GSP) envisioned by the European Treaty. The GSP requires that they would need to employ deficit reduction programs. The fact that Greece had yet to implement reduction programs, and now evidence that historical financial statistics were not accurate, calls this market assumption into doubt.
Emma Lawson, Morgan Stanley

This is a problem I have touched on before. What exactly is the true size of the Greek 2009 fiscal deficit? Well, according to a report signed by the Greek Finance Minister which has been sent to the EU Commission, and leaked to the Greek finance and business portal Kathimerini (Greek only I’m afraid), it is likely to come in at around 13.7% (and not 14.5%, as I forecast in this post) since the final decision on some hospital expenses which were dancing around in-no-mans land has been to attribute them to the 2008 deficit (and consequently increase the recorded size of that years debt). Continue reading →

Hungary Isn’t Another Greece……..Now Is It?

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I couldn’t help being struck earlier this week by the following statement in an interview the Financial Times had with Hungarian Finance Minister, Peter Oszkó:

“Structural reforms of the pension and social welfare systems, plus a rebalancing of the tax system, should allow the government to report a 3.9 per cent budget deficit in 2009, on a par with the preceding year and in line with IMF requirements”.

“Structural reforms”, I asked myself, “exactly which structural reforms are we talking about here?” Certainly the EU Commission and the OECD have been pounding away at the Hungarian authorities on the pressing need for major changes in the health and pension systems (these areas – and the way they are rising as the population ages – are, after all, the underlying cause of the structural deficit in the Hungarian budget). In fact it seems to me that the FT is merely re-iterating here Peter Oszko’s own claim that the government’s austerity measures are working (and no matter how many times you repeat something, it doesn’t make it true). Continue reading →

The EU Is Reportedly Exploring Making a Loan To Greece

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Pressure on Greek finances continues unabated. According to European Voice this morning the EU Commission and Finance Ministers remain most reluctant to call in the IMF (which I think would be the best solution) but they are themselves actively comtemplating providing some kind of IMF-type “straightjacket loan”. My only big fear here is that they take too long to put the necessary mechanisms in place while the situation in Spain continues to deteriorate, leaving wide open a serious contagion risk.

European Union officials are exploring the possibility of providing a heavily-conditioned personal loan to Greece instead of seeing it turn to the International Monetary Fund. Officials are worried about the possible impact on banks elsewhere in the eurozone of Greece defaulting on its sovereign debt. But they would prefer to avoid the ignominy of a eurozone country seeking IMF assistance.

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Spain Gets Frobbed-Off By The EU Commission

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FROB, for those of you who are wondering, stands for “Fund for Orderly Bank Restructuring” and is an entitly created by the Spanish government in June last year, in order to facilitate (in particular) the restructuring of Spain’s hard hit Savings Banks (Cajas). There is just one problem: as of the present time – and over seven months later – the FROB still is waiting to receive approval from the European Commission.

“The essence of the FROB in fostering the reorganisation of the sector in an orderly manner and in the most financially efficient way, as well as the key role of the Bank of Spain in most of the phases of the restructuring and integration processes, are positive.” says Carmen Munoz, Senior Director, Fitch’s Financial Institutions group. “Fitch will assess the rating impact, if any, on a case-by-case basis with respect to financial institutions.”

“While the number of financial institutions that could receive support from the plan remains uncertain, Fitch believes that the orderly consolidation process reduces the risk of multi-notch downgrades for financial institutions that act as counterparties in securitizations,” says Rui J. Pereira, Managing Director, Fitch’s Structured Finance group. “At present, FROB will have a neutral affect on outstanding Spanish structured finance ratings and any later developments will be analyzed on a case-by case basis.”

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The Italian Lion Sleeps Tonight, And Yet Awhile……….

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“If we look at public-sector debt and interest payments, Greece isn’t doing particularly worse than Italy,” Peter Westaway,Chief Economist Europe at Nomura International

To everyone’s relief, Italy’s economy returned to growth in the third quarter of 2009, following five consecutive quarters of contraction. But that doesn’t make the future look or feel any more secure than the recent past, and while an immediate return to a sharp recession isn’t likely, it still isn’t clear whether the Q3 performance was repeated over the last three months of last year, or whether output remained more or less flat. This does seem to be a more or less a touch and go call, and while the final result will hardly be a shocker one way or the other, my feeling is that we are looking at growth in the region of -0%. That is to say, slight contraction is marginally more likely than slight expansion. So Italy’s economy is more or less dormant, but it’s debt to GDP ratio is not, and is moving steadily upwards (see the last section of this post), so the lion sleeps tonight, and goes on sleeping, but what will happen tomorrow when she, or rather the financial markets, finally wake up, and discover seems evident, at least to me and Peter Westaway, that in the longer run Italy’s sovereign debt problem is every bit a large as the Greek one, although given that most of the debt is in fact held by Italians, the threat to the good functioning of the eurosystem may well be proportionately less.

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Government by Acronym

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Haiti is a country with at least 9 million people and GDP of $7 billion (pre-quake).  Think about that size of that latter number in relation to the usual magnitudes that we discuss on this blog.  But anyway, given its long-standing economic plight, Haiti also has extensive relations with international financial and development organizations and as part of that relationship, it has a poverty reduction strategy.  In February 2009, the government published a progress report on implementation of that strategy.  Here’s a paragraph on implementation (para. 37) —

Strategic-level entities: the Strategic Orientation Investment Council (COSI), the Donor Advisory Committee (DAC), and the Priority Arbitration Committee (CAP) are not yet officially up and running. At the operational level, the Interministerial Committee for Implementation Coordination and Monitoring (CICSMO) is up and running and is chaired by the Minister of Planning and External Cooperation. The Executive Secretariat of CICSMO, the key entity for the entire implementation mechanism, the Interministerial Subcommittee for Sectoral Coordination and Monitoring (SCTICSMO), and the Departmental Subcommittees for Implementation Coordination and Monitoring in the regions (SCDCSMOs) have been established. SCTICSMO is holding its ninth monthly coordination and monitoring meeting.

Does this sound like the kind of administrative weight that a country like Haiti could handle? And with the government now essentially destroyed by the earthquake, does it sound like the kind of thing they should rush to re-establish?  And yet as the demands come in for a “coordinated” approach to aid delivery, how does one avoid exactly this kind of structure emerging again?  There is going to be a clear tradeoff between getting aid delivered quickly and establishing any meaningful role for the government of Haiti in the crisis mitigation and recovery process.  Can you build a nation without a government?

 

 

VTV

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Reality TV is a television format in which ‘ordinary’ people willingly participate. They don’t act; they do, for real. A reality TV show is hence defined by the activity it features. For example, if the participants are going around in cars, arresting people; you have a ‘cops’ reality TV show.

The reality TV genre has an identifiable sub-genre. For example, Masterchef. In this sub-genre, the participants not only do things, they get lectured at by experts. Often, a participant does badly and gets shouted at. He or she may lose and get eliminated. Sometimes a participant does well, and wins. He or she then goes through. Usually, a participant has a chance to improve. This is always the case if the participant is featuring in just the one show: at the beginning of the show, he or she does badly, gets lectured at, is made to cry if at all susceptible, and then improves.

We need a name for this sub-genre. ‘Improvement TV’ is an convenient choice, but it suggests self-improvement, and that’s too woolly a concept. ‘Results TV’ might be better. After all, results are what matter. The fillet of tuna must be perfectly cooked, and the sauce must be delicately flavoured. The dress must be just right, and the make-up must be exquisitely coordinated. At the same time, a participant can’t spend all day about it, so perhaps ‘performance TV’ is what we want. The idea is that, with guidance, the participant will learn to consistently perform at an excellent level. Come to that, why not ‘excellence TV’?

Then again, failure means bad things; bad as in worse than a brow-beating. Putative dates will mock; wealthy and demanding customers will not pay; the participant’s business will fail. If the show is a contest, the participant may be eliminated, once the fruits of his or her poor efforts have been thoroughly reviewed. So perhaps another name candidate might be ‘consequences TV’. Fail, and there will be consequences.

We’re still missing something, though. We’ve been focussing on the participant and his or her efforts, and we’ve ignored the expert. But the expert is crucial to the success of, well, everything. There must be standards; the expert sets them. There must be motivation and encouragement; the expert provides it. There must be specialist knowledge; the expert has it. Crucially, there must be an ethos of success; the expert knows what this is, and will impart it, if the participant pays attention (the participant is very lucky to have the opportunity). In short, the expert is virtuous; the participant, less so. So there’s our coinage; ‘virtue TV’. It’s the stuff of our times. Draw near and be made virtuous.

The Debt Snowball Problem

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OK, just for a change let’s start with some math. The increase in a countrys sovereign debt stock to GDP ratio is given by the following formula:

where D is the total debt level, Y is nominal GDP, PD is the primary deficit, i is the average (nominal) interest paid on government debt, y is the nominal GDP growth rate and SF is the stock-flow adjustment.

Now, if like me, you don’t especially love maths, you may want to ask “what the hell does this rigmarole mean?”.

Well, in simple plain English the above equation – which in fact comes from the recent Danske Bank report on EU Sovereign Debt– means that movements in the critical debt to GDP level depend both on the level of the annual fiscal deficit (the primary deficit, on which so much attention is currently focused in the Greek case) and on changes in the ratio between the value of the stock of debt and the value GDP. The key term is the one in brackets, and it is often referred to as the snow-ball
effect on debt – the self-reinforcing effect of debt accumulation (or de-cumulation) arising from the difference between the interest rate paid on public debt and the nominal growth rate of the national economy. Continue reading →

Moodys on Japan and the Eurozone – Stating the Obvious

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I shall openly admit that I have always found the exact role of the rating agencies a bit odd in the global financial system. I mean, do we really need them to tell us which bonds are good and which are not? I am not sure and what is more; rating agencies sometimes, if not all the time depending on their ability to stay in front of the curve, seem to wield a tremendously amount of power relative to their role as private actors (after all) in financial markets. Continue reading →