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.
You may have come across this story about Barclays partnering up with a “Goldman-backed” bitcoin payments app called Circle International Financial, which uses bitcoin to transfer central bank currencies as digital money increasingly moves into mainstream finance, and thought “wow” that sounds innovative and exciting. But is it? Is it really all that innovative? Let’s break down some of the key claims being made.
Nick Rowe is the latest to try and define a helicopter drop. Cutting through the faff, it comes down to the idea that helicopter money is permanent. Which is problematic since we’ve recently been told nothing is permanent and have basically bought that argument. So, yeah, how are we going to know a helicopter drop when we see it? Take this for example:
The prime minister needs to show his mettle on British steel, Tui has a sunny view of summer bookings, AO World has beaten expectations. 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.
German Chancellor Angela Merkel said she had no “Plan B” for solving the refugee crisis and insisted there was nothing that would make her change course during an interview on Sunday. Ms Merkel said she could understand a recent poll that showed 81 per cent believed her government had lost control of the migrant crisis, but rejected the proposal backed by many in Germany to introduce an upper limit on migration. However, she admitted that the refugee crisis was the worst she had faced in her 10 years as chancellor, dwarfing even the eurozone debt problem. (FT)
A qualified defense of negative rates effects on banks’ net interest margins, you say? Go on then. From Andrew Garthwaite and team at Credit Suisse…
By David Beckworth An increasing number of observers believe that the United State is inching closer to a recession. They see the stock market rout, plummeting oil prices, and falling inflation expectations as an ominous sign for the economy. Some also worry that the Fed’s raising of interest rates in December may have gotten ahead of the recovery. They fear this tightening of monetary policy could intensify these other dire developments and be the tipping point that pushes the economy into recession.
Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be: If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis):
Craig Pirrong of the University of Houston has been concerned about CCPs concentrating risk for a very long time. But, as it turns out, he is also concerned about the role being played in system risk creation by real-time gross settlement systems. Following up on FT Alphaville’s piece on RTGS last week — in which we broke down the connection between the shift towards a real-time gross settlement system, central banks’ fear of netting risks, liquidity sacrifices and general collateral abuse — Pirrong adds some extremely worthwhile points to the conversation.
Smith & Nephew says its CEO has a “highly treatable” form of cancer, BT is reshaping itself following its EE acquisition. 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.
Unilever is looking to innovate to ride out volatile markets in 2016, Chinese GDP growth for 2o15 was its lowest since 1990. 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.
History never repeats and most analogies are wrong, but there are some intriguing parallels between the global macro environment in 1997-8 and today. Back then, the Federal Reserve controversially chose to ease policy, first by refraining from rate hikes anticipated by the markets and then by cutting its target for Fed funds by 75 basis points. Many believe this choice inflated equity prices and encouraged excessive business investment at a time when America’s economy was already running hot. Despite the subsequent fillips of tax cuts, a boom in defence spending, and a housing bubble, the aftermath was a massive decline in employment and painfully slow recovery.
Big insurers will be relieved the Bank of England has accepted their internal capital models as they count the cost of Storm Desmond. 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.
One common explanation why Europe had a worse crisis and weaker recovery than America: its companies depend far more on banks for financing than the capital markets. Those banks have been in perpetually worse shape than US lenders, mostly because of bad decisions from officials in national governments and the European Central Bank. The critics point hammer home their point with charts like this:
When Nixon’s treasury secretary told his European counterparts the dollar was “our currency, but it’s your problem”, he was referring to the tendency of foreigners to borrow and lend to each other using American money. The importance of these so-called eurodollars in other countries’ financial systems inadvertently gave American policymakers significant influence over credit flows outside their borders. (This is still true: a rising dollar tightens financial conditions abroad, while a falling dollar encourages foreigners to lever up.) Some Europeans wrongly thought this was deliberate and determined to rectify the situation by creating a competitor currency capable of functioning as a “global reserve”. A few even dreamed the euro would supplant the dollar.
More miners in trouble this morning, with Lonmin’s rights issue, BHP Billiton reviewing production targets and Nyrstar considering a complete exit. 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.