Greek Debt Negotiations 'Edge Closer To A Deal' – Once Again
As the FT reports today, the Greek debt talks remain caught in Xeno's paradox and are once again halving their distance to the elusive deal. None other than the world's most reliable walking, talking contrary indicator, EU economic and monetary affairs commissioner Olli Rehn is saying so (again):
„Olli Rehn, European commissioner responsible for economic and monetary affairs, said on Friday that talks with representatives of holders of some €200bn of Greek bonds were close to a deal.
Speaking on a panel with the French and German Finance ministers at the World Economic Forum in Davos, Mr Rehn said: “We’re just about to close a deal on private sector involvement between the Greek government and the private-sector community. Preferably, still in January rather than February.”
If Olli says it, then it probably means that there will never be a deal. The man has an uncanny knack for predictions that turn out to be 180 degrees wrong. As a reminder in this context, mere days before the crisis began to engulf Italy and Spain, he insisted that the eurocrats had managed to 'contain' the crisis to the bailed out 'GIP' (Greece, Ireland, Portugal) trio.
Managing Expectations
On occasion of yesterday's FOMC rate decision, the Fed for the first time published its 'policy targets' as per the newly devised communication policy. This strategy's main aim is to 'manage inflation expectations'.
The speed at which the purchasing power of a fiat money declines is not only dependent on the rate at which its supply is increased. The other major determinants of the 'money relation' are goods-induced (the rate of growth of the amount of goods and services the economy produces) and most importantly, the demand for money. The demand for money is nowadays not really often encountered in the vocabulary of economists. In the famous 'qantity equation', the 'pick what you like' variable is the so-called 'velocity of money'.
Credit Market Watch, January 26
Below is our customary collection of charts updating the usual suspects: CDS spreads, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Wednesday's close.
While most moves in these markets have been rather unremarkable lately, one must keep a close eye on what is happening in view of the chock-full 'event calendar' in the euro area over coming weeks.
Most euro area sovereign CDS and bond yields have seen a little bounce yesterday, but the most notable moves are still occurring in CDS and yields on Portuguese government debt. As mentioned yesterday, Portugal is now clearly in the market's crosshairs. This is partly a result of the Greek debt fiasco, but mostly it is due to the somewhat belated realization that even in the wake of recent economic reforms, Portugal will simply not be able to cope with its debt as envisaged in the original bailout package.
Portugal's prime minister has pleaded for more time: if only the markets would give him time, or the EU somehow arranged to give him enough time, all would be well. Alas, time is in short supply these days. The markets no longer believe it will make a difference. In fact, the belief is probably that over time, things are bound to still get worse, given the recent economic downturn.
As laudable as for instance Portugal's recent labor market reforms are, they have been put in place a year or two too late.
The Economics of Large Pools of Property Assets
For spot REOs [REO = 'real estate owned', the euphemism for properties repossessed in foreclosures, ed.], which are primarily all single family, condos and some 1-4 family units, the pecking order of potential buyers could not be simpler:
1. Owner occupants.
2. Small investors who own no more than a handful of units.
3. Large investors who own multiple units in one market.
4. Large investors who own multiple units in multiple markets.
5. Mega bulk investors.
For some strange reason, our government is comtemplating bypassing all the more suitable buyers listed above in favor of the worst buyers possible. There can be no explanation for this aside from stupidity and/or corruption.
Credit Markets Chart Update, January 25
Below is our customary collection of charts updating the usual suspects: CDS spreads, bond yields, euro basis swaps and several other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). CDS prices are as of Tuesday's close, except yields and basis swaps which are as of today.
Credit conditions in euro-land continue to ease across the board, with the notable exception of Portugal.
Also, one of the Middle Eastern CDS spreads that have broken out recently continues to march higher, namely CDS on Bahrain. Bahrain is under Sunni rule, but has a Shi'ite majority population. This could create complications in the context with the recent confrontation between the West and Iran.
BoE's Posen Committed to More Money Printing, Seconded by Uncle Mervyn
The BoE, still not finished with its 'QE2' program, already talks about going for 'QE3'. In the forefront of this push we find – not surprisingly – Adam Posen, who thinks that any slowdown in money printing reeks of 'policy defeatism'.
At least he wants to await the much vaunted 'data' before putting the pedal to the metal again. Alas, economic history – which is what the economic statistics represent – is entirely irrelevant to economic theory.
The likely outcome of money printing can only be appraised by employing a correct theory. The past is the past – money printing will have an effect on the future. This can roughly be described as follows: for a little while, it will appear 'successful'. It will 'buy' a little bit of fake prosperity. During the artificial upswing, the economy will weaken even further under the hood, as scarce capital will be wasted and consumed. Once the initial false prosperity effect wears off, the economy will be in an even worse state than before. The downturn will resume with even greater ferocity.
This is in short what Adam Posen's policy will achieve.
The Critical Events List
Below is a lost of upcoming 'key milestones' in the euro area recently published by the WSJ:
- Wednesday, Jan. 25: Preliminary data on the Spanish government’s annual budget deficit expected around this time. German January Ifo business climate index. ECB seven-day dollar operation. ECB three-month long-term refinancing operation. German bond auction. World Economic Forum begins in Davos, Switzerland (through Jan. 29).
–Thursday, Jan. 26: Italian bond auction. EUR45 billion of three-month ECB LTRO funds mature.
–Friday, Jan. 27: Italian T-bill auction. Spain fourth-quarter unemployment data.
–Monday, Jan. 30: EU leaders’ summit. Italian, Belgian bond auctions.
–Tuesday, Jan. 31: Greece aims to conclude talks detailing new EUR130 billion loan deal, debt-exchange program with private-sector creditors by this date.
–Wednesday, Feb. 1: EUR25.8 billion of Italian BTP bonds due. Portuguese T-bill auction. German bond auction. Euro-zone January manufacturing PMI data.
–Thursday, Feb. 2: Spanish and French bond auctions.
–Friday, Feb. 3: Euro-zone January services PMI data.
–Monday, Feb. 6: Italian parliament must have approved government’s fiscal, growth package by this date.
–Wednesday, Feb. 8: German bond auction.
–Thursday, Feb. 9: ECB interest-rate statement, press conference.
–Friday, Feb. 10: EUR1.0 billion in Greek debt maturing.
–Monday, Feb. 13: Deadline for formal Greek debt restructuring offer to creditors. Italian T-bill auction.
–Tuesday, Feb. 14: Italian BTP auction. Greek and Spanish T-bill auctions. German February ZEW economic sentiment indicator.
–Wednesday, Feb. 15: Portuguese T-bill auction. Flash data on fourth-quarter EU gross domestic product.
–Thursday, Feb. 16: French and Spanish bond auctions. Spain fourth-quarter final gross domestic product data.
–Friday, Feb. 17: EUR1.6 billion Greek T-bills maturing.
–Monday, Feb. 20: Euro-zone finance ministers meet. Flash euro-zone February PMI data.
–Tuesday, Feb. 21: European Union finance ministers meet. Greek and Spanish T-bill auctions.
–Wednesday, Feb. 22: German bond auction.
–Thursday, Feb. 23: German February Ifo business climate index.
–Friday, Feb. 24: Italian bond auction.
–Saturday, Feb. 25: Group of 20 finance ministers, central-bank governors meet.
–Monday, Feb. 27: Belgian bond auction, Italian T-bill auction.
–Tuesday, Feb. 28: ECB three-month, three-year long-term refinancing operation. Italian bond auction.
–Wednesday, Feb. 29: EUR10.6 billion of Italian CTZ bonds mature. German bond auction.
–Thursday, March 1: EUR14.9 billion of Italian BTP and EUR12.3 billion CCT bonds mature. Euro-zone February manufacturing PMI data. Spanish and French bond auctions.
–Thursday, March 1-Friday, March 2: EU leaders summit.
–Monday, March 5: Euro-zone February services PMI data.
–Tuesday, March 6: Revised EU fourth-quarter GDP growth data.
–Wednesday, March 7: German bond auction.
–Thursday, March 8: ECB interest rate decision. German January industrial production data.
–Monday, March 12: Euro-zone finance ministers meet.
–Tuesday, March 13: German March ZEW economic sentiment indicator. Italian and Greek T-bill auctions.
–Wednesday, March 14: Italian bond auction.
–Thursday, March 15: Spanish and French bond auctions.
–Tuesday, March 20: EUR14.4 billion of Greek government bonds mature. Spanish and Greek T-bill auctions.
–Wednesday, March 21: German bond auction.
–Thursday, March 22: Flash euro-zone March PMI data. –Monday, March 26: German March Ifo business climate index. Belgium bond auction.
–Tuesday, March 27: Spanish T-bill auction. Italian bond auction.
–Wednesday, March 28: ECB three-month long-term refinancing operation.Italian T-bill auction.
–Thursday, March 29: Italian bond auction.
-Friday, March 30: Euro-zone finance ministers meet.
Portucrumble, Act Two
On October 31 last year, we wrote an article entitled 'That Strange Currency'. At the time we opined that Portugal was set to become the 'next Greece'. This was after warning for several weeks that Portugal was the weakest link in the euro area crisis chain and likely to become the next major market focus. The denouement in Italy's bond market then intervened, but it appears that it is now indeed Portugal's turn in the barrel. We wrote:
„Meanwhile, the country we have for some time identified as the one markets are likely to focus on next has begun attract some media attention of late, as its economic fundamentals continue to deteriorate. As we noted previously, we don't see a whole lot of difference between Portugal and Greece – both nations suffer from a crushing debt burden and a dysfunctional banking system. As it turns out, the deposit base of Portugal's banking system has begun to shrink at an accelerated rate lately, in a manner reminiscent of Greece and indicating that a genuine money supply deflation is now underway in the country.“
Portugal's economy meanwhile is now expected to contract by a deeper than expected 2.8% next year. This has led to the announcement of further austerity measures, which in turn provoked the country's unions to threaten a general strike (a dynamic that is certainly reminiscent of Greece as well).“
Luxembourg's Foreign Minister Makes A Point
Sometimes the truth slips out of the mouth of a politician, either by mistake or because he thinks he can afford to be truthful. In the case we're discussing here, it seems to be the latter. Luxembourg's foreign minister Jean Asselborn has just given an interview to the German news magazine 'Der Spiegel' and was rather frank in his assessment of the so-called 'fiscal compact'. A pertinent snippet from the interview follows below:
„SPIEGEL ONLINE: The latest example of this was the so-called fiscal pact. For months German Chancellor Angela Merkel and French President Nicolas Sarkozy have been trying to implement a rigid fiscal austerity regime complete with legal "debt brakes" and threats of punishment for those who would transgress budgetary rules. Will this help Europe?
A Crisis of Capitalism?
Ever since the 2008 financial crisis we have frequently remarked in these pages how ludicrous the assertions are – which keep being repeated ad nauseam in the mainstream media – that the financial and economic crisis was a result of 'laissez faire' allegedly gone too far. Not a week has passed since then without someone coming out and blaming the non-existent free market for the calamity.
First of all, it should be perfectly clear that the Western regulatory democracies do not represent free unhampered market economies. They have a socialistic, centrally planned monetary system and free enterprise and production are restricted by a mountain of licensing laws and administrative legislation that is unsurpassed in the history of mankind. At the center of the financial crisis we found in fact one of the most regulated sectors of the economy.
It has never been easier to qualify for a loan
I have repeatedly stated how easy it is to qualify for a loan and have been bombarded with emails telling me what an idiot I am and that I obviously know nothing about how difficult it is to qualify these days. To support this case, every builder that reported earnings recently mentioned how difficult it is for buyers to qualify. Existing home sales released today talked about a cancellation rate of over 30%, mostly attributed to the difficulty of obtaining a loan.
Since it seems to be receiving so much attention, I would like to clarify my opinion.
In our entitlement society, everyone has been trained to assume that the irresponsible underwriting practices that pertained during the subprime era are the norm. If a borrower cannot get a loan because of bad credit, insufficient income, no downpayment or no documentation, then qualifications standards are too stringent. You hear the idea that it is difficult to qualify repeated so often that most assume that it must be true.
The Loan: An Exchange of Wealth for Income
As the title of this essay suggests, a loan is an exchange of wealth for income. Like everything else in a free market (imagine happier days of yore), it is a voluntary trade. Contrary to the endemic language of victimization, both parties regard themselves as gaining thereby, or else they would not enter into the transaction.
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