As is being widely reported (exclusive to all newspapers), Scotland is considering vetoing Brexit, if not launching a second referendum to express its pro-European Union feelings in an independent context.
Somewhat overlooked in that context, however, is the role played by the sterling zone in the original Scottish referendum.
An independent Scotland after all wanted it all: independence, European Union membership and continued use of sterling.
In the event Scotland did vote ‘leave the UK’ in a second referendum, this time round the chances of it being allowed to stay within the sterling zone would be decreased sizeably. Read more
A guest post by Peter Doyle, economist and former IMF staffer
An election with only one candidate? Doesn’t sound competitive. But with nominations just closed for Managing Director of the IMF, the one candidate, Madame Lagarde, will be reelected regardless. Read more
In this guest post, former IMF staffer Peter Doyle castigates the institution’s flip-flopping over Greece…
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For the latest on the ECB’s liquidity position on Greece, see our post here.
Meanwhile, here’s some instant analysis by way of the FT Alphaville collective inbox:
UPDATE: Capital controls and a bank holiday now confirmed; full research pack from Buiter, Barr and others available in the usual place. Read more
After that late-night announcement in Athens of a July 5th referendum, the response on Saturday…
In one sense, Greece’s full membership of the euro is, quite literally, already being consigned to the footnotes of history.
You may have thought this was just a car…
In this guest post, former IMF staffer Peter Doyle argues that in pushing for pensions, VAT and labour reforms, creditors are only stoking the latent explosiveness of Greece…
Troika-Greek negotiations are reportedly down to the wire over early-retirement pensions, VAT, and labor reforms: the IMF says all are non-negotiable; Tsipras, perhaps inadvertently echoing Mrs. Thatcher, has, so far, responded “No! No! No!”
These three issues converge on those at the upper end of their working lives, the 50-74 year old cohort, and are reflected in its participation and unemployment behavior. So it is worth considering data on those and the associated implications for the negotiations. Doing so suggests that these creditor red lines lack foundation. Read more
This guest contribution, from Giles Wilkes, sprung from a fierce internal debate amongst the FT’s leader writing team on Wednesday…
The standoff between the Greeks and their European creditors has often been compared to a Prisoner’s dilemma. This foundational scenario for game theory – famously, the expert discipline of Yanis Varoufakis, the Greek finance minister – concerns two prisoners accused of a crime who are handled separately by the police. Each are given the choice either of ratting on their accomplice, or staying silent. Should just one of the prisoners choose to rat on the other, he will walk free with a reward while his mate languishes in jail. If both hold firm, they each walk free unrewarded, while if they each betray their friend, then both are thrown into jail. Read more
Here’s former IMF staffer Peter Doyle , with some bold advice from the wings of the IMF Spring meetings…
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Bond Vigilantes reminds us of this:
Greece has raised €3bn in a five-year bond deal after attracting in excess of €20bn in orders for its eagerly anticipated return to the bond market. The yield on the deal was confirmed at 4.95 per cent – much lower than most analysts expected. Read more
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