Posts Tagged ‘Greece’

18 May

Blaming the speculators, part MXXVI or whatever

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

The latest squeal at the sheer unfairness of ‘of the absolute power that the markets have over government decisions’ can be found at LibCon.  To be honest, I can’t make much of it: some of it literally makes no sense to me on the third reading.   For example, what does this mean:

Furthermore, this missed opportunity has allowed Anglo-Saxon hedge funds to speculate on Greek debt, and could lead eventually to the end of the Euro.

Anyone?

To be charitable, I think the author is calling for creditors (the ‘markets’) to take some of the pain in the Greek situation.  I sort of agree.  It takes two to tango.  Remembering what Megan said – “The fact that some moron is willing to lend you money is not a good reason to borrow it” – means that both moron and borrower deserve to learn some manners.  If creditors are NEVER punished, then the market never exercises discipline ex ante – and ‘ex ante’ is when you want the discipline to be exercised – when you can still make a difference.

But as Krugman and many others have pointed out for many posts, it is no good just funding the liquidity crisis if you can’t do something about the deeper problems – the pachyderm in the chamber being uncompetitiveness:

What makes Greek problems so intractable is the fact that there’s little hope for growth for years to come, because Greek costs and prices are out of line and will need years of painful deflation to get back in line. Spain wouldn’t be in trouble at all if it weren’t for the fact that the bubble years left its costs too high, again requiring years of painful deflation.

Some shocking examples of this are in recent FT’s.   From Munchau a couple of days ago:

A reader wrote from Madrid last week that, in his estimation, the price level in his city was about 30 to 40 per cent higher than in Germany – as a result of which he orders all his durable goods from abroad. It is not surprising therefore that we are starting to see core price deflation as Spain cannot maintain a large price differential with Germany forever

And Michael Skapinker today:

A more recent OECD document outlines how much Greece’s pensions weigh on its economic life. In Germany, a typical retired person receives a public pension equivalent to 40.5 per cent of average earnings. In the UK, the figure is 28.9 per cent. In Greece, it is 93.6 per cent

None of these are solved by either (a) bailing out the creditors or (b) whaling on the creditors.   See this graph from the IMF document about the source of the increases in debt: note to all the Spending Splurge Fanatics, only 10% is because of fiscal stimulus (taken from Ryan Avent at the Economist)

Note, again (yes, I am repeating myself): it is a loss of revenues.  But what that revenue loss means is: you need to cut spending at some point.  It is not happening (just) because the market is telling us.

All in all, people take the markets too seriously as some sort of person, or worse a deity. But as Aditya reminds us:

Rather than being one all-knowing entity, financial markets are a convenient term we apply to the hundreds of thousands of daily deals between buyers and sellers and middlemen. When the FTSE goes up, the price of government bonds normally goes down, and what the Swiss do with their interest rates can cause all sorts of mischief for the pound

The markets do exactly the job they should do – intermediate the givers and the takers of money.  They don’t always do it right, but there is no crisis of illegitimacy – as Stelzer writes:

The so-called bond vigilantes – investors who discipline borrowers by dumping their IOUs – are in control, as well they should be: it’s their money that is at risk.

Yup. Aditya is right – the market is not some knowing mind, like a deity. There is no ‘the market thinks this’ or ‘the market demands that’.  This is why setting it up in some sort of opposition to democracy is neither right nor wrong: it’s meaningless.  It’s like complaining about the right of the volcano to disrupt our traffic, or of the right that people have to prefer Eastenders to Shakespeare.

12 May

Some spiffing quotes, what

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

Gosh, I’m beginning to sound like a Tory already!  help

From Megan McArdle of the Atlantic – a wise and self-doubting piece about, well, Greece and intellectual triumphalism.  Could apply this to the whole Credit Crunch analysis:

You cannot graft rich-world policy onto emerging markets … Conservative fiscal and monetary policy… -emerges from the social and political institutions of a country; it cannot be imposed.

As Tyler Cowen says, “The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance.”  To which I’d add, the problem is often less the overall level of spending, than the fixed commitments … Because these obligations are very hard to adjust in downturns, their governments are, like individual debtors, more vulnerable to individual income shocks.  It also makes the coming pensioner problems harder to deal with.

As Felix Salmon says, banking crises often become sovereign debt crises, and vice versa.  There is no neat separation between “the government” and “the free market” in a financial crisis,

The fact that some moron is willing to lend you money is not a good reason to borrow it.

Underwhelming negotiation of the decade:

By afternoon the Labour team appeared to have shifted further towards the Lib Dems – they did come up with an offer on the third runway “in principle” and they seemed to come up with a better offer on increasing money for renewables “in principle”

If the Conservatives had known about Ed Balls’ attitude, would they have played harder?

Jonathan Freedland gets ahead of himself in predicting the outcome of 5 years of coaltion government.

the Lib Dems have already passed the peak of their power. They will never again have the leverage they have enjoyed this last week. Once they have signed on the dotted line, they will be at the mercy of their new Tory masters. They cannot threaten to walk away: if they do, despite the reported agreement on a fixed-term parliament, they risk triggering a general election at which the Lib Dems stand to be crushed. To use an idiom both these public schoolboys will recognise, Clegg has just become Cameron’s fag.

Shocking honesty about Labour councils in the North from Ellie:

Thatcherism destroyed the local economy (based on coal mining and steel), but in some cases the Labour-run local authorities made things deliberately worse. Sheffield City Council is widely thought to have tried to bankrupt itself in order to force a government bail-out. City funds were piled into paintings for the town hall and building Sheffield Arena (where ironically Neil Kinnock delivered his death speech in ‘92). Local rates were increased to such high levels that the poor couldn’t pay and were forced to default. Nationally this was mirrored in the rate-capping rebellion. Now they try to deny it, but party members were quite aware of what was going on. The strategy was to create huge difficulties for the Tory government, while maximizing local rage.

Read Labour history now and you’d forget why Thatcher remained so popular in the mid 1980s.

Some robust good sense from Sunny on Liberal Conspiracy:

This coalition won’t fail easily, and a lot of Labourites should be careful of being optimistic about that. Cameron and Clegg know that if their government fails soon, then a new Labour leader plus severe budget cuts would hurt them electorally. So expect this to be at least a 4-5 year parliament.

and his biggest worry

if the Con-Dem-Nation works well, then it may seriously re-align politics in a way that could put Labour out of power for a generation… If the future of politics is indeed coalition governments, then there is a real danger here that the future is anti-Labour majority than an anti-Tory majority.

Labour writers are often in the flush of unexpectedly strong tactical voting and Council results last week, which helps to set the framework for their ‘we’ll annihilate the Lib Dems’ stuff.  Maybe.  But 4 years is a long time.

6 May

Happy economies all the same: unhappy economies all different

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

As Tolstoy was said to have scribbled in the notes of his unpublished economics textbook, before happily switching over to Anna Karenina.*

Tyler Alex and I have been arguing beneath an earlier post about Greek/UK differences. I’m on the ‘Niall Ferguson Wrong Again’ side, but this does NOT mean that I lightly dismiss the problems of the UK.  Our massive government deficit is mitigated by our having our own currency, longer-dated debts, and a much lower current account deficit.  But the government still has massive challenges in turning the ship around.

Ed Conway has written a column examining what an incoming Chancellor could do.  Read it.  It happily takes up one of my suggestions: for an incoming government to look at redirecting the Bank of England to target Nominal Growth in GDP.   It has some striking suggestions: a debt tax – now that would be like sticking a hand grenade in the hen house – and some that just don’t work for me – the Office for Budget Responsibility (which I don’t like) has Ed writing

It’s not a bad idea: the nasty decisions would be left to experts, not politicians.

Um, that sounds like an Office for the Politicians Not taking Responsibility.   Ed sensibly goes on to argue against getting in the IMF to do an audit.  I think the IMF will be busy enough ….

…. which brings us back to Greece.  Gillian Tett cleverly asks whether Greece is producing a Bear Stearns moment.  This is a great insight (and a scary one):”

But the second reason why Bear had so much impact was that its implosion tipped investors into uncharted psychological waters. Before 2008, most investors found it hard to imagine that a Wall Street bank could collapse; afterwards, however, once-unimaginable scenarios became frighteningly easy to depict.

She goes on to say:

Just as investors used to fret about all the “interconnections” between Bear and other banks, they are now grappling to understand Greece. How many Greek bonds do German banks hold? What does Portugal owe to Spanish entities? Nobody truly knows.

Ah, but the New York Times has had a go at it here.  Which is one reason Johnson and Kwak are convinced that this is no longer just about Greece any more.   The way they – and Gillian – are presenting things is that for 2008, read 2010, for Banks, read Countries.

And I have a problem with this.  Countries are not ‘linked with numerous other entities via a complex web of dealings that few people understood’ like the Banks are or were.  The failure of Greece would produce a hit to a number of important portfolios – but it is not the custodian of important dealings between hedge funds and other finance houses, so that its failure would leave big financial players looking at their account sheets and saying “WTF? I don’t know what I have any more!!” – which is what the failure of Lehmans did to many many big players (read crisis literature, ad nauseam).

Banks also have intrinsically unstable funding structures – long the illiquid LT stuff, short the liquid ST stuff – and were 30 times leveraged.   Lehman was insolvent but not intrinsically incapable of earning because of uncompetitiveness – unlike Greece in the Euro (see Krugman). And that NYT graphic does not disentangle the natures of the debts – whether owned by private or public entities, on what schedule, with what transparency.  So, like the “UK is Greece” analogy, “Greece is Bear Stearns (and therefore Spain is Lehmans!)” is more alarming than helpful.

*this is pre-recorded. I am heading out to Richmond again. …

22 Apr

Speculators bring down Greece. Really?

Posted by freethinkingeconomist in Uncategorized. Tagged: , , , .

Serious people like Munchau of the FT have been willing to use Greece as an illustration of another ‘problem’ like the CDS market. So too has Michael Barnier.   While Munchau’s foray produced plenty of argument in the FT Letters page (see my summary), and quite a lot in the blogosphere (I won’t bother linking), the argument that Greece is being brought down by speculators seems to have faded a little since the EU bailout (which you can read about on Stephanomics).

For example, this long piece in the FT, while having some market data, is all about the real budget figures, in essence. Yes, their debt costs contribute to a spiral – if they could borrow at German rates, life would be easier – but a great chunk of the rise in debt to 150pc of GDP is surely from a fundamental budget mismatch, and a low expected GDP growth.

So, here are the latest facts (hat tip the Economist) from Bloomberg.

  • The EU’s statistics office said Greece’s deficit was 13.6 percent of GDP last year, topping the government’s two-week-old forecast of 12.9 percent and the EU’s November prediction of 12.7 percent. “Uncertainties” about the quality of the Greek data may lead to a further revision of as much of 0.5 percentage point, Luxembourg-based Eurostat said.
  • In the latest IMF World Economic Outlook Greece is expected to shrink in 2010 and 2011 – th e only country in Europe expected to shrink in 2011
  • It has a current account deficit of about 10% (comparison: UK = 1.6%)
  • Influential trades unions attack the IMF’s crazy idea that wage cuts might be needed to make Greece more competitive
  • They do not have a large manufacturing sector that is structurally able to export very much

Now you’ve read all that, a simple hypothetical question.   Suppose you had 1000 pounds to lend.  You can choose to lend it to Greece, Germany or Vodafone.   What interest rate would you require for each?  If you have a good think, and come up with a higher number for Greece than the other two, do you know what you’re doing?  You’re speculating

And if you come up with the same number for some reason of ‘fairness’, you’re mad.

18 Feb

Some very clever ideas, mostly from Americans

Posted by freethinkingeconomist in Economics. Tagged: , , , .

First, on Greece.  They need deflation, or they need everyone else to inflate (see Krugman’s graph).  With their own currency, they can’t become more competitive any other way – the natural way being to devalue.

Two clever ideas have come out. Martin Feldstein suggested them going back on the drachma, with a commitment to return to the euro at a lower rate:

More specifically, Greece would shift its currency from the euro to the drachma, with an initial exchange rate of one euro to one drachma. Bank balances and obligations would remain in euros. Wages and prices would be set in drachma. If the agreement called for Greece to return at an exchange rate of 1.3 drachmas per euro, the Greek currency would immediately fall by about 30 per cent relative to the euro and other non-euro currencies. If there is little or no induced inflation in Greece, Greek products would be substantially more competitive in both domestic and foreign markets.

Charles Goodhart and Dmitrios Tsomocos suggest a Californian solution. Discussing Portugal (it could be Greece):

When a subordinate state in a federal monetary union has severe fiscal problems and runs out of money, what does it do? It issues IOUs. Think California or the Argentine provinces before 2000. For example, in Portugal, we could coin a phrase and call such IOUs escudo. Essentially the government passes a decree that states that such escudo IOUs would be acceptable for all internal payments, except tax payments, between Portuguese residents, but not for any external payments between Portuguese residents and foreign residents

I doubt either would work; the same workers protesting against deflation (wage cuts, basically) would surely protest about being given what looks like monopoly money, that lowers their ability to purchase international goods.  Against Feldstein’s idea Eichengreen has what looks like insuperable objections.

Reintroducing the national currency would require essentially all contracts – including those governing wages, bank deposits, bonds, mortgages, taxes, and most everything else – to be redenominated in the domestic currency. The legislature could pass a law requiring banks, firms, households and governments to redenominate their contracts in this manner. But in a democracy this decision would have to be preceded by very extensive discussion.

While I’m writing, other useful cleverness: if you want to understand the Fed’s actions of the last two years, read this by James Hamilton.  You will need a colour monitor.

And on efficient market hypothesis: I see this post about the Invincible Markets Hypothesis as dealing with Sumner’s EMH views, which are all about how difficult it is to beat the market.  Sure. It’s also difficult to predict how a drunken donkey will cross a motorway.  That doesn’t mean the donkey is a good guide to how to allocate cash.

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