James Montier of GMO is the subject of the latest Welling on Wall Street newsletter, a weekly long-form interview conducted by Kate Welling.
Montier, ever the bear, doesn’t like the negative expected return environment we’re in. He thinks we’ve learnt little from the crisis and that one the biggest risks is that the market isn’t being adequately compensated for the risk it’s being forced to take.
We can’t duplicate too much of the interview here, but consider the following something of a teaser. The questions (in bold) are being posed by Welling: Read more
To the untrained eye, this might look like the usual buzzword-soup from the European Commission (home of “growth-friendly fiscal consolidation”): Read more
Carmen Reinhart and Ken Rogoff wrote a letter to Paul Krugman.
He responded, and so did some others. (DeLong for Krugman; Hamilton for R&R.)
On it goes.
And why not? Austerity is an important subject, the empirical data or lack of it deserves a great deal of attention. Economists calling each other names, probably less so. But it’s so entertaining… Read more
The chart above shows the decline in Spanish bond yields “occurring at a time that Spain has announced that it had not hit its deficit targets and would not hit next year’s,” as David Watts of CreditSights points out. Read more
By Theo Casey, marketcolor
Half nine (GMT) is seldom a cheery time of day for the Chancellor.
Mid morning, several times a week, the Office for National Statistics releases worse-than-expected parcels of economic gloom, which serve to undermine HM Treasury and George Osborne’s Plan A.
At least that’s what it normally does. Read more
…the UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower. Read more
(This is getting to be a genre.)
Robert Chote, head of the Office for Budget Responsibility – the UK’s independent fiscal watchdog – writes to David Cameron about this speech… Read more
Pushing a fresh austerity package (the price of financing the next stage of the country’s bailout) through parliament on Wednesday night cost the Greek government and Antonis Samaras, the centre-right prime minister, dearly. And while there is no guarantee a repeat performance can be staged, there is every probability the boulder will slip and one will be demanded. Read more
Forecasts for the European Union covering 2012-2014 were out on Wednesday. FT Alphaville thinks the EC may be onto an important trend:
The distress in more vulnerable Member States has progressively started to affect the remainder of the Union.
Christine Lagarde has urged countries to put a brake on austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday.
The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. Read more
The IMF (among others) seriously misjudged the effect of austerity measures on growth. The fund says that the “fiscal multiplier” used by many countries has been a mere 0.5, when in reality the effect over the past few years has been 0.9 to 1.7. So, why did everyone get it so wrong? Read more
France thinks Greece should get the two extra years that it’s been seeking to achieve the cuts outlined in its 2013-14 austerity programme.
The French PM: Read more
Unable to benefit from currency depreciation, the peripherals have been urged to seek other ways to improve their balance sheets by means such as ‘internal devaluation’ — regaining competitiveness by lowering costs, particularly wages.
One of the criticisms of “internal devaluation” is that it’s a slower method of improving competitiveness than an old fashioned currency devaluation. There are also questions about whether it even works. Read more
Greek cabinet ministers are meeting later today to finalise how they’re going to come up with €11.5bn in savings over the next two years as demanded by the Troika. Unsurprisingly, the most contentious and sensitive part is the €1.5bn in pension and wage cuts that are needed.
From the FT: Read more
From HSBC’s Global Macro Economics team on Thursday:
Matters are being made worse because the world’s savers would rather buy Treasuries than global goods. Read more
On Friday, FT Alphaville discussed the process of de-euroisation that is currently underway as foreign investors continue to withdraw from the sovereign bond markets of peripheral countries. For Spain and Italy, the issue is of particular concern, as the ability and willingness of remaining investors to fund them will, in large part, determine whether the or not countries will need to be bailed out.
According to research analysts at Credit Suisse though, the recent focus on Spain, rather than Italy, is misplaced: Read more
Deutsche Bank’s Jim Reid, Colin Tan, and Nick Burns have been musing over what we’ve learnt since the start of the crisis in a note released on Friday.
They review the anaemic growth that the crisis has wrought. And while they are a bit gloomy about austerity’s bite, and hence the limited scope for additional fiscal policy, they do single out one country’s response for praise. (Place your bets on which country that is, now!) Read more
Greek lawmakers on Sunday approved a tough austerity package aimed at averting a default, but the vote was overshadowed by violent street protests in central Athens and dozens of arson attacks against shops and banks, reports the FT. The legislation passed by 199 votes in favour to 74 against, a convincing majority for Lucas Papademos, the caretaker prime minister who has been given the job of pushing through painful reforms demanded by the EU and the International Monetary Fund in return for a second €130bn bail-out. The WSJ says that 43 deputies from the socialist party Pasok and conservative party New Democracy were expelled for not voting in favour and Antonis Samaras, leader of New Democracy and likely the next prime minister, said the measures should be renegotiated after national elections expected in April.
Eurozone finance ministers dismissed as incomplete a reputed €3.3bn package of Greek budget cuts presented to them in the hope of securing a new €130bn bail-out and sent the country’s finance minister back to Athens with a fresh set of demands and an urgent deadline, says the FT. In exchange for signing off on the loan, which Greece is depending on to avoid a potentially chaotic default next month, its lenders are demanding €325m in further cuts to this year’s budget, parliamentary approval of a sweeping reform package and a pledge from the country’s political leaders to ensure that they will maintain their commitment after April elections. Reuters reports Jean-Claude Juncker, who chairs the Eurogroup, said the Greek parliament must ratify the package when it meets on Sunday and the further spending reductions needed to be identified by next Wednesday, after which eurozone finance ministers would meet again. Bloomberg reports that Greek finance minister Evangelos Venizelos said the parliamentary vote set to begin this weekend amounted to a ballot on euro membership. “If we see the salvation and future of the country in the euro area, in Europe, we have to do whatever we have to do to get the program approved.”
Some detail on the draft agreement Greece’s political leaders want to submit to their international saviours (assuming they can agree to pension cuts).
Via Bloomberg (emphasis ours): Read more
A meeting among Greek Prime Minister Lucas Papademos, the parties supporting his coalition, and New Democracy, the opposition conservative party, broke up early Thursday morning without an agreement on economic overhauls sought by the EU and the IMF in exchange for lending an additional €130bn to the Greek government, says the WSJ. The key sticking point was cuts to the Greek pension system. “There is only one issue, that of pensions, to be resolved,” Antonis Samaras of the New Democracy party, the country’s second-biggest party, told reporters in Athens in comments televised live on state-run TV, reports Bloomberg. “The talks will continue.” Bloomberg reported earlier that a draft financing agreement said Greece would pledge permanent spending cuts, including lower pension payments and a 20 per cent reduction in the minimum wage.
The European Central Bank has made key concessions over its holdings of Greek government bonds, says the WSJ, citing people briefed on the country’s debt restructuring talks. The ECB has agreed to exchange the government bonds it purchased in the secondary market last year at a price below face value, provided the debt-restructuring talks have a successful outcome. The central bank won’t take a loss on the transaction, but it isn’t clear whether it will exchange the bonds at the below-par price at which it purchased them or whether it will make a profit, the newspaper says. The concession could reduce Greece’s debt by up to €11bn — difference between the price at which the ECB bought the bonds in the secondary market and their face value. The sources said that another option was discussed for eurozone national central banks to also take part in the debt reduction exercise had been rejected. Greece missed another deadline to approve conditions for a second €130bn bail-out on Tuesday night, the FT reports, after a meeting between the country’s political leaders was postponed until Wednesday because of last-minute haggling with international lenders over emergency spending cuts. In Brussels, José Manuel Barroso, president of the European Commission, insisted that eurozone leaders would continue to strive to keep Greece in the euro, an apparent rebuke to Neelie Kroes, the Dutch member of his commission who was quoted in her country’s press as saying a Greek exit would not cause significant shockwaves.
Lucas Papademos, the Greek premier, failed to make party leaders accept harsh terms in return for a second €130bn bail-out, pushing Athens closer to a disorderly default as early as next month, reports the FT. Greek television reported that Mr Papademos has set a deadline of midday on Monday for the three leaders to let him know whether they agree in principle with the proposed austerity measures, before he meets them again later in the day. After five hours of discussions, the three leaders of Greece’s national unity government had not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package. Eurozone officials are deliberately refusing to allow Greece to sign off on a €200bn bond restructuring plan because the threat of default is the leverage they have to convince recalcitrant Greek ministers to implement necessary cuts. While some recognise that Greek politicians must be seen by voters to be putting up a fight, there are fears that the show of brinkmanship could easily go too far and backfire, with disastrous consequences. By late on Sunday, no meeting of the Euro Working Group had been formally scheduled for Monday, says Reuters, but it could confer either by conference call or schedule a face-to-face meeting at short notice, depending on the outcome of talks in Athens.
Britain faces spending cuts “almost without historical or international precedent” over the next few years and, painful as the squeeze has been so far, it amounts to less than a 10th of what is planned by the 2016/17 fiscal year, according to the Institute for Fiscal Studies. The FT says in its annual “Green Budget”, the independent think-tank noted that the case for a short term fiscal stimulus to boost the economy is stronger than it was a year ago because growth over the past year has been so much weaker than had been expected. Moreover, the IFS calculates, it is likely that the combination of cuts and comparatively buoyant tax receipts mean that by the end of the 2016/17 year, government borrowing will be about £9bn lower than the current official forecast. The Telegraph says a separate report yesterday from the National Audit Office found 2.3 per cent of departmental spending cuts have been completed so far, against a target of 19pc by April 2015, and too many of those were achieved by non-permanent measures such as delaying IT programmes.
Twenty-five of the EU’s 27 countries have signed up to a German-inspired treaty enshrining tougher fiscal rules to help underpin the euro, with the Czech Republic announcing it would join the UK by not agreeing to the pact. Reuters says Ms Merkel “cemented her political ascendency” with the treaty. But the FT reports Berlin was warned that there were limits to how much sovereignty governments could be expected to surrender for the sake of fiscal discipline. Nicolas Sarkozy, the French president, said the German proposal for the EU to control Greece’s budget decision-making “would not be reasonable, not be democratic nor would it be effective”. He said that he had confronted Angela Merkel, his German counterpart, with his views and insisted she had agreed. “The recovery process in Greece can only be enacted by the Greeks themselves, democratically,” Mr Sarkozy said. “There can be no question of putting any country under tutelage. Having spoken to the chancellor, I can tell you this is exactly her position.” However, Ms Merkel said she still believed that Greece required stricter monitoring to stick to its bail-out targets, saying Athens’ repeated failure to implement agreed reforms warranted more intensive intervention.
Governments across Europe can breathe a deep sigh of relief. Even the unlucky few who can’t convince Ms. Merkel to carry their standard on the campaign trail may not be brutalised at the polls by vengeful electorates beaten down by austerity.
Why? Read more
Italian Prime Minister Mario Monti has called for a doubling of the eurozone bail-out fund to 1tn, according to a report in Der Spiegel citing unnamed sources. The story says Mario Draghi supports a similar increase. However German finance minister Wolfgang Schauble on Sunday rejected the calls to boost the European Stability Mechanism in a television interview, says the WSJ, saying Europe must first implement the decisions made at the December summit of leaders before coming up with fresh demands for more cash. Mr Monti on Sunday also sought to reassure his government was taking austerity plans forward, the WSJ reports separately, saying on state television that plans to spin off Eni’s regulated natural gas business were going ahead. He said the government will introduce a decree within six months to detail the ownership split between energy companies Eni and Snam. There is no “delaying” on the government’s part the decision to force Eni to sell its stake in Snam after Friday’s measures to compel it to do so, Mr Monti said. The lapse of time reflects the fact that the companies are listed and have to meet market obligations, he said. Mr Monti also said he had “very high” expectations that eurozone countries would eventually agree to jointly issued bonds, although not before 2013.
The coming year will rival 2009 for economic weakness in the UK, as output is hit by the continuing debt crisis in the eurozone, according to a large majority of economists polled by the FT. In a survey of 83 economists, including 11 former members of the Bank of England’s monetary policy committee, three times more respondents thought the economic outlook would deteriorate than thought it would improve in 2012. Even if there is a double-dip recession in 2012, however, only a small minority are urging George Osborne to abandon his seven-year austerity plan in favour of stimulating the economy with tax cuts or more public spending. Of the 83 respondents, 45 predicted the outlook would deteriorate again this year. Four economists said the London Olympics would boost growth in the third quarter.
In his first interview since becoming ECB president, Mario Draghi warned of the costs of a eurozone break-up even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis, says the FT. Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis. Mr Draghi said struggling eurozone countries that quit the currency bloc would face still greater economic pain. For remaining members, EU law would have been broken and “you never know how it ends really,” he said. To fight the crisis, Mr Draghi stressed the importance of unprecedented measures taken by the ECB to shore-up eurozone banks – which include its first ever offer of unlimited three-year loans last week. He emphasised, however, that the region’s politicians had to take the lead in rebuilding investor confidence in eurozone public finances – by ensuring fiscal discipline and making fully operational the EFSF. He expressed hope that the fund’s resources would be enlarged after a review in March. Meanwhile the FT reports separately that Jurgen Stark, the ECB’s top German executive, told the German magazine WirtschaftsWoche he was standing down because of his objection to the ECB’s bond-buying programme, rather than the personal reasons he cited in September.
From the new-fangled EU fiscal compact declaration:
5. The rules governing the Excessive Deficit Procedure (Article 126 of the TFEU) will be reinforced for euro area Member States. As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed. Steps and sanctions proposed or recommended by the Commission will be adopted unless a qualified majority of the euro area Member States is opposed. The specification of the debt criterion in terms of a numerical benchmark for debt reduction (1/20 rule) for Member States with a government debt in excess of 60% needs to be enshrined in the new provisions. Read more