This guest post is from Peter Doyle, an economist and former IMF staffer
In an otherwise sound critique of Mr. Varoufakis’ list of proposals for Greek government policies last week, Mme. Lagarde’s letter to Mr. Dijsselbloem contains an additional, unremarked, but revealing element. After saying that, in the IMF’s view, the Greek list was sufficiently comprehensive to be a valid starting point for a successful conclusion of the review, she added:
… but a determination in this regard should of course rest primarily on an assessment by Member States themselves and by the relevant European institutions.
The US has falling prices again, but bulls need not fear: it is “good” deflation, as it is all about falling gas (petrol) prices making consumers better off.
Still, this chart should offer pause for thought: it shows US inflation on the same basis as the eurozone, which is worrying about “bad” deflation. The eurozone doesn’t include housing costs in its basket of consumer prices, so this compares the US excluding housing costs too. It doesn’t look pretty, with more deflation on this basis in the US than Europe. Read more
Peter Doyle, an economist and former IMF staffer, argues that for Greece continued emergency lending assistance is a necessity.
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You may have heard Yanis Varafoukis, Greek finance minister, is also a professor of game theory.
However you’ve also probably heard negotiations over Greek debt are like a game of chicken, where both players try to convince the other they really will go ahead and crash the car.
This is the wrong analogy. It looks more like a bargaining game where two players have to find agreement to avoid an unpleasant outcome where neither side gets what they want. In practical terms, an agreement over an extension loan for Greece can be reached, it just depends on whether it benefits the troika or the Greek government more, while no agreement is bad for all concerned.
Debate still rages about the merits of last week’s Swiss National Bank move. Peter Doyle, economist and former IMF staffer, argues that the SNB in fact kept its exchange-rate cap for too long — and was wrong to have targeted the euro alone.
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Despite many recent reforms, standstill in euro area output and prices–alongside renewed debates on Grexit–have put fundamental questions about the euro back on the map. Perhaps, argues Peter Doyle, economist and former IMF staffer, that is because the key question about the euro has yet to be posed.
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To be clear, I regret nothing. But here’s the real thing anyway, reasonably important stuff — what with prices in the eurozone falling for the first time in more than five years (do click to enlarge): Read more
Here is an unimpressed Jean-Claude Trichet.
And here is the ECB’s full response to the revelation of the Trichet letter…
Mario Draghi has been very clear about what would push him into the full-blown QE of buying government bonds. He faces some serious opposition from German monetary conservatives even to the less whizzy QE he’s unveiled so far, though — that of buying asset-backed securities.
Full-on QE faces legal difficulties from the ban on financing eurozone governments, as well as deep-seated opposition within Germany and major issues about which government bonds it should buy, and in what proportion. (Italy has the most in issue, so buy mostly Italian debt? Or buy in proportion to shares in the ECB? Or to economic size, meaning the biggest share would be German? Or in proportion to the size of the banking system?).
So it feels like time to explore some alternatives that have been, inexplicably in our view, ignored. Read more
Securitisation has gotten a bad rap thanks to its association with dodgy underwriting during the bubble. Yet bundling loans originated by banks and selling them to investors in the capital markets could be just what is needed to boost the flagging euro area economy.
This helps explains the European Central Bank’s recent announcement that it will be shopping for asset-backed securities (including mortgage bonds) and covered bonds starting in October. Read more
Cross-posted from Lex Live — which is Lex’s new, free (you don’t even have to register) blog giving an insight on what Lex writers are reading and thinking…
Not that negative zone – Europe: Read more
A week ago, Mario Draghi set euro policy-watchers all a-flutter, departing from his prepared remarks at Jackson Hole to issue a kind of blunt confession that he and his colleagues had run out of excuses for the ongoing depressed level of inflation across the eurozone, and that maybe some sort of reaction was required. Cue a quall of ECB QE speculation.
Then, on Wednesday this week, a story appeared on Reuters stating that, according to “ECB sources,” there was unlikely to be any new policy action from the ECB at its September meeting next week unless August inflation figures (published on Friday) showed the eurozone sinking significantly towards deflation.
The story remained exclusive to Reuters. But the message was clear: ECB officials are worried that market participants were reading too-much-too-soon into Draghi ad-libbing. Read more
A brief follow-up to this morning’s post in response to a question we received on Twitter…
Below is a chart showing the full history of French household indebtedness data. It only goes back to 1996 but provides some additional context about the changes that occurred after the introduction of the euro: Read more
With a hat-tip to our friends at CreditSights, check out the starkly different paths of household indebtedness in France and Germany since the introduction of the euro:
(Sources: Bundesbank 1 and 2, Banque de France) Read more
From JP Morgan Asset Management. Tantalisation comes from the end of the black line, which you will note has perked.
Following Izzy’s charts from Credit Suisse, here’s an update of my favourite measure of how Europe’s turning Japanese.
This chart shows eurozone inflation since the region’s crisis against Japanese inflation from the bursting of its bubble. The offset puts the peak of 1990 where the eurozone was in 2011, when the US near-default started a panic which threatened the survival of the euro. Read more
Ebbing, one month at a time. (Via Eurostat’s March flash estimate)
From the pixels of Christian Dargnat, chief exec of BNP Paribas Asset Management and president of EFAMA:
The European Reward System (ERS) is a process of annual certifications by the European Commission for sovereign bond issuances by Eurozone member states that adhere to a set of definitive budget criteria defined in advance. These Certifications allow a state to benefit from a budgetary transfer from other member states when higher interest rates are paid compared to the average European system of 100 basis points more or less.
The crisis of individual state debts in the Eurozone has lead to lower interest rates from debts issued by Germany and France, and elevate rates from Italy and Spain. Since 2010, Germany and France have benefitted from savings of approximately €30 billion and €10 respectively during their issuances. Inversely, one can observe an additional cost of around €53 billion for Italy and €30 billion additional for Spain.
Arguably, none of the below matters now.
That’s the prime effect of the German constitutional court turning to the European Court of Justice for a ruling on whether the ECB’s sovereign bond-buying programme is a “structurally significant transgression of powers” under European treaty law.
Big words. But the backing of the Bundesverfassungsgericht judges (pictured right) for that view gets rendered into just another opinion, pending the ECJ’s decision. And the arc of the ECJ’s justice is long, turgidly written, but ultimately quite friendly to pieces of bailout architecture that have an odd relationship to the treaties — as in past musings on the ESM.
But the really interesting thing is that regardless, the OMT’s purpose apparently remains almost completely lost on the court. Read more
A few years ago Capital Economics made a strong case that the UK output gap — or how much slack there is in the economy — was being grossly under estimated by one and all. Their note prompted a spirited debate about the importance of output gaps in ascertaining correct monetary and fiscal policy.
Well, a similar case is now being made for the Eurozone by David Mackie and team at JP Morgan.
It’s an absolutely fascinating note, which argues above all that the ECB and the European Commission are wrong to think that the Euro area output gap is modest or that the growing unemployment rate is structural, given there is so little wage pressure in the region. Read more
First, rewrite history (as Aufhebung). Read more
Just to put an already-huge year-end move in Portuguese bond yields into some wider context…
Here’s a chart (via Reuters) of the five-year yield since August 2010 — to which levels it’s now, roughly, returned. Click to enlarge.
Icap’s Chris Clark alerts us on Friday to the fact that European liquidity markets are already preparing themselves for a potential liquidity squeeze come the end of the year.
As he notes:
Month-ends have become increasingly significant events for the Eurozone repo markets over the second half of this year as levels of excess liquidity have diminished and market rates have slowly edged higher. This Thanksgivings Day/November month-end liquidity hump has proved a tricky one for the market to manoeuvre, but already attention is focusing on the impending year-end as evidence stacks up to suggest funding might be problematic for some.
Here’s an essay published by the Bruegel think tank, penned by Ashoka Mody, currently a visiting professor at Princeton. He argues that if Europe wants to move forward in terms of integration, it first needs to stop. Click to read.
Update – It’s not just the rate cut, as Mario Draghi opens the presser at pixel time:
Earlier – Bold move or way too late? You decide: Read more
According to Morgan Stanley’s banking research team, one of the focus areas of the upcoming AQR and banking stress tests is likely to be the definition of a non-performing loan (NPL).
These, as FT Alphaville has noted in the past, vary somewhat radically across Europe.
What’s more, even with recent reclassifications, they’re are still rising: Read more
Courtesy of Icap’s market analysis team, here’s the turnaround in the Eonia December 13-January 14 spread this month:
That’s because it’s ghostly and hard to spot. (And it is All Hallows’ Eve.)
First it was the buried announcement that Irish banks with government share ownership are about to get Spanish-style flexibility on deferred tax assets… (though not nearly as far as the Spanish proposal for tax-credit conversion) H/T Lorcan
Next it was Bank of Ireland’s stock rising by more than 4 per cent in Dublin late on Thursday. Read more
Months after the Finnish government was made to open up its Greek bailout ‘collateral’ deal to public scrutiny, one of the weirder episodes of official secrecy in the eurozone crisis …
Finland’s Chancellor of Justice, Jaakko Jonkka, has criticised the decision to keep the Greek transaction under wraps in the first place: Read more
Click for the ECB’s official introduction to its year-long “supervisory risk assessment… asset quality review and a stress test” for 124 European banks (who are all listed)…
The capital ratios to be used have already been leaked, but here it is in full from Wednesday’s note — it seems there’s a significant wriggle: Read more