In this guest post, Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator, argues that reforms to the European Stability Mechanism can pave the way for Eurobonds. The views expressed here are his personal opinions and do not necessarily reflect the views of Consob.
Target2 balances reflect euro area’s potential to be better than traditional exchange rate peg regime
Think of it within the context of the balance of payments as foreign exchange reserves that can never be depleted.
There are lots of good reasons to study history, but perhaps the best is to avoid being misled by people who claim to have “learned the lessons” from the past when they don’t actually know what they’re talking about. For example, the policy mistakes exacerbating the euro crisis may have been partly caused by a profound misunderstanding of the causes of the French Revolution. The thought occurred to us while reading The Euro and the Battle of Ideas, an intriguing new book we reviewed in this weekend’s FT. Two of the authors, Markus Brunnermeier and Harold James, are academics at Princeton. The third, Jean-Pierre Landau, was Deputy Governor of the Banque de France from 2006-2011 after a long career in the French Treasury and the International Monetary Fund. Consider the following passage, from pages 256-7 in the hardcover, emphasis ours:
Fresh from the inbox, first from Goldman: We expect the BoE to implement policy actions aimed at maintaining market functioning (in difficult circumstances), by activating swap lines with other major central banks and by announcing additional liquidity operations, including the provision of term funding for UK banks.
The replacement of market funding with increasingly concessional loans from the “official sector” may have reduced the Greek government’s balance sheet debt by as much as €200bn, yet the headline numbers haven’t captured any of this alleged gain. In our previous post we looked at whether this was reasonable, focusing on several sets of accounting guidelines to see how they might apply to Greek sovereign obligations: International Financial Reporting Standards (IFRS), International Public Sector Accounting Standards (IPSAS), the European System of Accounts (ESA 2010), and Eurostat’s Manual on Government Deficit and Debt (MGDD).
Ashtead and Crest Nicholson have built some strong profits from the construction sector, Premier Farnell has agreed to a £615m Swiss takeover. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
We’ve raised the possibility Greece’s sovereign debt burden is far lower than the headline figures — and the potential significance of this — in previous posts. Now it’s time to dig in. (The idea was brought to our attention by Paul Kazarian, whose Japonica Partners has a position in Greek government bonds and would stand to profit from a compression in risk premiums. His interest in the outcome doesn’t necessarily mean he’s wrong.)
After years of failed attempts to stabilise the Greek economy, the Greek government finally got debt relief in 2012. As we explained in our previous post, interest payments fell by more than half between 2011 and 2013. Since the 2012 modifications, Greece’s sovereign debt service costs have been significantly smaller as a share of total output than in Italy or Portugal. Yet it hasn’t helped much. The economy continues to contract and Greece’s depression since 2008 is among the absolute worst of any country in the world since 1980. Investment spending had already plunged by 60 per cent in real terms between the peak in 2007 and the end of 2011. Since then, it’s dropped another 13 per cent. Overall, Greece has had no economic growth since the beginning of 2013: Part of the reason: the debt modifications failed to convince private investors to return to Greece, despite having “solved” the problem of government debt service costs.
Time is a flat circle, which is why the Greek government is set to run out of money before debt payments are due to the European Central Bank in July — just like last year, and despite last summer’s supposed deal between the Greek government and its various “official sector” creditors. As before, the immediate cause of this latest crisis is the persistence of disagreements about the size of the budget surpluses (excluding interest) the Greek government is expected to generate, the specific “reforms” the government needs to implement, and the need for debt relief. The fundamental cause, however, is that the Greek government can’t raise money from the private sector at reasonable rates. Why?
Last summer, after watching one of the Republican debates when Donald Trump’s fondness for corporate bankruptcy protection came up as a topic, I saw an immediate link to one of my favourite subjects, and tweeted this.
Every little sales increase helps Tesco, which is back in the black; McCormick has dropped its bid for Premier Foods; the FCA wants to shake up the IPO process. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
Back when the Basel III regulations were being debated in the wake of the crisis, it was common to hear dire warnings that rules limiting how much banks can borrow would constrict lending and lower real output. Even some who ostensibly support higher equity capital requirements think there are “trade-offs” between a safer financial system and economic growth. New research from Leonardo Gambacorta and Hyun Song Shin of the Bank for International Settlements suggests this thinking is backwards: “both the macro objective of unlocking bank lending and the supervisory objective of sound banks are better served when bank equity is high.”
So you thought bearer securities weren’t a thing any more. And that jurisdictions left, right and centre were banning the bearer structure (much depended on in the past by the eurobond markets) precisely because of its association with tax-efficient offshore dealings. Except, as we outlined on Monday, one of the things revealed by the Panama Paper leaks is the extent to which bearer securities were depended upon by the offshore finance network. And yet, as we also noted, it’s not like bearer securities have entirely gone away either. We referenced as an example the Bank of England’s series of $2bn dollar-denominated bearer bonds paying a coupon of 1.25 per cent, which take the form of the so-called “New Global Note (NGN)” structure.