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
The IMF’s latest global growth forecasts are, unsurprisingly, lower than their last set of forecasts. Which were in turn lower than their previous set of forecasts. And that’s as far as we want to go back, thankyouverymuch. And even with the reduced forecasts, there are caveats. Big, ugly caveats… Read more
There are two fairly important bits to this story in Der Spiegel.
One, that Merkel wants to avoid a Grexit for the time being and two, that the upcoming Troika report might be massaged to make that a reality. Read more
The U.K. economy has been flat for nearly two years. This stagnation has left output per capita a staggering 14 percent below its precrisis trend and 6 percent below its pre-crisis level. Weak growth has kept unemployment high at 8.1 percent, with youth unemployment an alarming 22 percent.
The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis. Read more
A one-liner, but from one preferred creditor to another…
Directors agreed that the ECB will have to continue to play a role in the crisis response, including through liquidity provision and securities purchases. A few Directors also noted that clarifying the seniority status of sovereign debt holdings by the ECB would help address market concerns. Read more
The IMF’s cut its growth forecast for the UK by 0.6 percentage points for both 2012 and 2013 compared to previous estimates… Click through the pic to get the full IMF World Economic Update doc:
If there was ever an expression of the fight facing the Bank of Japan in a risk-off world if it wishes to keep the yen down, then the IMF’s latest round of Currency Composition of Official Foreign Exchange Reserves (COFER) data out last week is it.
The COFER data remains the best snapshot of what is going on in one of the most important elements of the FX market. Admittedly China is annoyingly missing from the allocated reserve data, but with 55 per cent of reserves are reported, it remains an indicative dataset. Read more
Update (0445am UK time) — Well, well, well… eurozone leaders did indeed promise not to subordinate Spanish bondholders at the summit, as we assumed they would below. Seniority was “renounced” in the case of Spain.
That phrase suggests a reversion to the original status of official eurozone bilateral and EFSF loans – of being at least pari passu with bondholders. (Though at times the loans have even been subordinated on some points, such as restructuring interest rates. The status is a political football subject to constant change, you could say.) Read more
As we all wait for an actual Spanish bailout loan doc, and what it might say about that ESM seniority…
Here’s some seriously intriguing, counter-intuitive food for thought from Barclays’ Piero Ghezzi. From a Tuesday note: Read more
1) How do holders of Spanish bonds react to ESM subordination?
The cat’s out of the bag now, isn’t it. On the one hand Spain borrows up to €100bn for the bank recapitalisation which everyone knew was coming, but at a lower rate than everyone had priced into Spanish bond yields. Bond yield relief, maybe. Read more
What headline factoid to use?
Hands-Off policy fails UK Read more
Real games of chicken are about fundamentally misaligned incentives.
So, at the weekend’s G8, Europe’s voice was heard, and it muttered something under its breath about Greece ‘respecting the commitments that were made’ to its second bailout’s terms. No renegotiation. We also all know what Alexis Tsipras thinks of pretty much any terms applying to a bailout. Cue the Grexit fear cycle, terror of a retaliatory funding shock, etc. Read more
Something you will never ever read in an IMF report on Greece…
There seems to be something of a love-in going on between China and the IMF, though admittedly you have to wade through a weighty report to glimpse it.
Last weekend, finally, after years international pressure, China’s central bank said it was widening the renminbi’s daily trading band with the US dollar. Read more
As well as warning that eastern Europe has the most exposure to a eurozone credit freeze, the IMF has given us a handy, visual guide to eurozone contagion (click to enlarge):
The ECB has some room to further lower the policy rate, given that inflation is projected to fall appreciably below the ECB’s “close to but below” 2 percent inflation target over the medium term and that risks of second-round effects from high oil prices or tax and administrative price hikes appear small––WEO projections see headline consumer price index inflation falling to about 1½ percent by 2013, below the ECB’s target. Low levels of domestic inflation can hinder much-needed improvement in debtors’ balance sheets and stand in the way of much-needed adjustments in competitiveness. The ECB’s unconventional policies need to continue to ensure orderly conditions in funding markets and thereby facilitate the pass-through of monetary policy to the real economy.
Plus: “The Bank of England can further ease its monetary policy stance,” according to the Fund. Read more
The IMF’s latest quarterly update on the currency composition of official foreign exchange reserves (COOFER) is out. One person excited by the numbers is Simon Derrick at BNY Mellon.
But not with respect to what they say about the share of global US dollar reserves, but rather what they say about the world’s “other” non-dollar denominated reserves, as well as reserve growth in general. Read more
So, in case you missed it, the IMF released an excellent, pithy staff note on ‘Accounting Devices and Fiscal Illusions’ this week – all about book-cooking of sovereign debt stats.
It touches on almost any accounting trick you can think of, where the effect is that ‘this year’s reported deficit is reduced, but only at the expense of future deficits,’ as the IMF note says. ’The result is that the reported deficit loses some of its accuracy as a fiscal indicator,’ it drily adds. Read more
So it turns out that we won’t know, for a little while longer, who the holdouts are in Greece’s foreign law bonds – a remaining pimple on the bottom of its debt workout.
Greece has pushed back the deadline for foreign law bondholders to agree to a debt restructuring to April 4, as IFR reported on March 23. The deadline was meant to be March 23. Read more
Our Brussels Blog colleague Peter Spiegel has penned a great piece on the latest IMF report into Greece, covering the Hellenic Republic’s ‘Request’ for the second bailout.
Even at more than 200 pages, the report’s worth reading. Read more
Greece’s political leaders ended weeks of market-rattling brinkmanship on Thursday by agreeing to €3.3bn in budget cuts that they hoped would clear the way for a second multibillion euro bail-out to avert a sovereign default, reports the FT. No sooner was the deal sealed in Athens, however, than a potentially more fractious debate began in Brussels, where eurozone finance ministers were poised to work late into the night to structure a bail-out package with the target of cutting Greece’s debt to 120 per cent of economic output by 2020. Hopes for an agreement were raised by Mario Draghi, president of the European Central Bank, who indicated that he was willing to forgo profits on the bank’s €40bn in Greek bonds, a move that could wipe up to €15bn off of the Athens’ €350bn debt load. Without the ECB’s co-operation, the International Monetary Fund has determined that it will be impossible to reduce Greece’s debt sufficiently through the restructuring of private debt alone. Private bondholders have agreed to take a €100bn writedown on the €200bn in Greek debt they hold.
Economic growth in China could drop by half this year in the event of a sharp recession in Europe, the IMF predicted on Monday in a report that underscored the importance of global trade to the world’s second largest economy. “The risks to China from Europe are both large and tangible,” and “China would be highly exposed through trade linkages,” said the report, which was published by the IMF’s resident representative office in China. The FT reports that the IMF’s forecast for China’s annual growth in 2012 has already been lowered to 8.2 per cent from a previous forecast of 9 per cent but if Europe’s performance is worse than expected then China’s export-driven economy would be badly hit.
Eurozone states signed the final version of the treaty establishing the European Stabilisation Mechanism on February 2.
(Click the image for the full document) Read more
China is considering how to get “more deeply involved” in resolving Europe’s debt crisis by co-operating more closely with European rescue funds, Wen Jiabao, Chinese premier, said on Thursday. China “is investigating and evaluating concrete ways in which it can, via the IMF, get more deeply involved in solving the European debt problem through [European Stability Mechanism/European Financial Stability Facility] channels,” Mr Wen said in a joint press conference with German Chancellor Angela Merkel in Beijing. The FT reports that the comments have revived hopes that China, which holds by far the world’s largest foreign exchange reserves, could add some of this $3.2tn cash pile to existing and future European bail-out funds.
The FT’s James Mackintosh recently pointed out an interesting provision in the loan agreement Greece has with its bilateral official creditors – its fellow eurozone states.
They are entitled to require Greece to pay the whole loan back immediately if the country defaults on private bondholders. Click the image to enlarge (the full agreement is available here from the Greek finance ministry): Read more
The unstoppable force…
“If the level of Greece’s privately held debt is not sufficiently renegotiated, then public creditors, holders of Greek debt, will also have to participate in the financial effort,” Lagarde told journalists in Paris. Read more
The IMF has turned up pressure on European officials to take on more of the burden of filling a widening gap in Greece’s budget by pressing the European Central Bank to take a hit on its €40bn in Greek bond holdings, the FT says, citing unnamed eurozone officials said. The ECB bought the bonds at below face value as part of a programme to prevent the collapse of Greek debt markets in 2010. It has also been accepting Greek bonds as collateral for cheap loans to teetering Greek banks. The bonds, with estimated yields in excess of 7 per cent, will provide a big return if Greece does not default and they are held to maturity. An IMF official denied the fund was pressing the ECB to take writedowns on the bonds. But eurozone officials involved in the discussions said the pressure to earmark potential gains to fill Greece’s financing hole was being fiercely resisted by the ECB.
Well, this is cheery.
Let’s start with a graph. An AV-esque graph. Read more
Angela Merkel is prepared to let the existing EFSF, which has about €250bn in unused funds, run in parallel with its successor, the €500bn ESM, says the FT, citing unnamed German and eurozone officials. In return, the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments. The German offer emerged as Christine Lagarde, the IMF head who met Ms Merkel on Sunday, pressed Berlin for “a clear and credible timetable” to fold the existing EFSF into the ESM to increase its size. Without a larger bail-out fund, fundamentally solvent countries like Italy and Spain could be forced into a financing crisis, Ms Lagarde said in a speech in Berlin. “This would have disastrous implications for systemic stability,” she said.
The International Monetary Fund has slashed its global growth forecast for this year and exhorted the European Central Bank to boost liquidity to stave off a deeper eurozone crisis, The Telegraph says, citing a leaked draft of the IMF’s economic outlook, to be published next week. Global GDP growth is to be cut from 4 per cent to 3.3 per cent, with Italy’s economy forecast to contract by 2.2 per cent and Spain’s by 1.7 per cent, the newspaper says. The eurozone as a whole is expected to shrink by 0.5 per cent, down from growth of 1.1 per cent in the IMF’s last forecast made in September. UK growth was forecast at 0.6 per cent while China’s was revised downwards from 9 per cent to 8.2 per cent. The report also encourages the ECB to adopt a ”more accommodative monetary policy”.