The Madness of Negative Bond Yields
As we have frequently discussed in these pages, time preference must always be positive on a society-wide basis – it is a praxeological law that future goods and/or satisfactions are valued at a discount to identical present goods. We emphasize “identical” here because sometimes people are asserting that there are exceptions, such as in the famous example that men would prefer having ice in the summer over having it in the winter (thus, in wintertime, ice available in the future would be valued more highly). However, “summer ice” is not identical to “winter ice”, even though it has the same physical properties. The reason is that the satisfaction if provides is not the same.
Dudes, Where’s My Money?
Over the weekend, conservative German newspaper FAZ (Frankfurter Allgemeine Zeitung) reported that euro-group negotiators were allegedly “shocked” by the lack of viable reform plans offered by Greece and the general attitude of the Greek delegate. As Reuters reports:
“Euro zone officials were shocked at Greece’s failure to outline plans for structural reforms at last week’s talks in Brussels, a German newspaper on Saturday cited participants as saying, adding the Greek representative behaved like a “taxi driver”. A meeting of deputy finance ministers on Thursday gave Athens a six working day deadline to present revised economic reform plans before euro zone finance ministers meet on April 24 to consider unlocking emergency funding to keep Greece afloat.
Euro zone sources told the Frankfurter Allgemeine Sonntagszeitung that they were disappointed and shocked at Athens’ lack of movement in its plans, and in particular its reluctance to talk about cutting civil servants’ pensions.
The mood between Greece’s leftist government and its euro zone partners, especially Germany, has deteriorated in the last few weeks, with personal recriminations flying between ministers and calls from Athens for Berlin to pay war reparations.
The paper said at last week’s meeting the Greek representative just asked where the money was “like a taxi driver”, according to sources, and insisted his country would soon be bankrupt.
The euro zone sources told the paper that Greece’s creditors do not believe this is the case and that it would be a domestic political issue if Athens is unable to fully pay salaries and pensions.
The paper also said that German Finance Minister Wolfgang Schaeuble, who has taken a tough line toward Greece in bailout talks, would have to get the Bundestag lower house of parliament to vote on any fundamental changes to the reform program.
A Brief Update on Recent Developments
On Friday, the Greek government has submitted its latest reform proposals to the EU. According to press reports, these are supposed to raise €3 billion and consist of the following:
“[…] moves to combat tax evasion, more privatizations and higher taxes on alcohol and cigarettes. […] The Greek government said the 18-point reform program did not include any “recessionary measures”.”
In the meantime it has also emerged that the privatization of the port of Piraeus, which Syriza had previously reportedly opposed is about to go forward after all, and is expected to bring in proceeds of around € 500 m. Pressure on the Greek government has recently increased, not only due to the fact that it is expected to run out of money soon, but also as a result of a downgrade of its credit rating by Fitch late last week to a lowly CCC rating. This makes it even less likely that the government will be able to roll over maturing treasury bills.
Photo credit: Yorgos Karahalis / Reuters
An Accelerating Trend
While the euro itself has recovered a bit from its worst levels in recent sessions, euro basis swaps have fallen deeper into negative territory. In order to bring the current move into perspective, we show a long term chart below that includes the epic nosedive of 2011. We are not quite sure what the move means this time around, since there is no obvious crisis situation – not yet, anyway.
A negative FX basis usually indicates some sort of concern over the banking system’s creditworthiness and has historically been associated with euro area banks experiencing problems in obtaining dollar funding. This time, the move in basis swaps is happening “quietly”, as there are no reports in the media indicating that anything might be amiss. Still, something is apparently amiss:
John Dizard Has the Right Idea
John Dizard is one of the few FT columnists we actually like to read (much of the paper’s editorial line consists of boring, if in our opinion dangerous, Keynesian shibboleths). Anyway, Mr. Dizard’s most recent column doesn’t disappoint. It contains what is known as “actionable advice” and is entitled “Embrace the contradictions of QE and sell all the good stuff”. It starts with a quote attributed to New York based short seller Ben Smith, reportedly uttered in the fall of 1929: “Sell ’em all! They’re not worth anything!”
Bail-out or not, one way or another it’s eventually going to become a default …
Photo via desicomments.com
They Didn’t Want to Call it the “5 Year Plan”
We have already commented on previous occasions on the EU’s “investment plan” (see: “EU Planning to Spend Money it Doesn’t Have” for details), which is bound to result in the production of countless white elephants across Europe (such as Poland’s “ghost airports”). These investments are apt to “boost GDP” in a number of countries, but will very likely leave nothing but proverbial bridges to nowhere behind. It is going to be yet another giant waste of scarce resources.
Apparently the EU has now given its placet to a “Four Year Plan” with the aim of investinf €315 billion, with various EU governments vying for the best place at the trough. It seems they didn’t want to make it a “Five Year Plan” – that would have been too reminiscent of the Soviet GOSPLAN agency, so a four year plan was adopted. However, what they may not have been aware of is that Stalin actually gave orders that the Soviet Union’s five year plans had to be fulfilled in four years:
An old Soviet GOSPLAN poster: “Let’s fulfill the five year plan in four years!”
The Song and Dance Resumes
In recent days it has become increasingly clear that the political theater between the EU and the new government Greece is set to continue. For a while, markets were convinced that what is widely considered the worst case scenario (a Greek default and exit from the euro) had been avoided, but it appears it hasn’t been avoided just yet. Various EU politicians have expressed concern over the public statements of Greek politicians in recent weeks, as they are making it tougher for them to sell the agreement to their own parliaments and citizens, but these statements may be mainly designed for the Greek government’s domestic audience anyway.
Photo credit: btwcapture
Not Quite Right in the Head?
The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.
Photo credit: Michael Probst
A Billion Here, A Billion There …
We always wondered a bit why the Austrian government was so eager to adopt the EU’s bail-in law (a.k.a. the Bank Recovery and Resolution Directive) one year earlier than demanded by the EU Commission. What was the rush? Well, now we know. Last year, the decision to wind down the former Hypo Alpe Adria (HAA) “in an orderly manner” helped push Austria’s government debt above 87% of GDP – a level perilously close to what has so far in many cases proved to be the point of no return.
Heta Asset Resolution, formerly Hypo Alpe Adria International: The situation is hopeless, but it isn’t serious …
Image credit: fmh
Greek Government Seemingly Blinks
Alexis Tsipras has tried his best to sell the outcome of Greece’s negotiations with the EU to his voters over the weekend. As far as we can tell, the Greek government hasn’t achieved even a single one of its aims so far. The bailout was extended by four months, but in spite of a few cosmetic changes to the wording accompanying it (e.g. the “troika” has been renamed “the institutions”), it is still precisely the same bailout agreement as before.
Yanis Varoufakis and Alexis Tsipras. What’s the plan?
Photo credit: Alkis Konstantinidis / Reuters
Game of Chicken Continues, EU Ratchets Up Pressure on Greece
After the ECB has made Greek debt no longer eligible for repos (note that this mainly concerns government bonds however, bank bonds that have been “guaranteed” by the government will however no longer be eligible after February 28 2015 either – these amount to a quite large € 25 billion), fears of an intensifying bank run in Greece are growing. At the end of December, Greek banks owed about € 56 billion to the euro system. This is estimated to have jumped to about € 70 billion since then.
These debts to the system have grown concurrently with a sharp decline in deposit liabilities since November last year, when it dawned on people that there might be an election. Unfortunately more up-to-date data aren’t available as of yet, but we will try to post them as soon as the Bank of Greece makes them available. However, there exist estimates regarding the extent of the decline in deposits since the end of December as well – very likely an additional € 15 billion has fled from the Greek banking system since then.
We stand with the Communists!
That’s right – shoulder-to-shoulder, singing “The Internationale” with Syriza, the ruling party of Greece, after an election campaign marked by an unusual degree of honesty.
At least, one party was telling the truth when it sent an “open letter” to the voters of another nation! More on that in a minute.
First, let’s follow up on our travel memoirs. We are a reluctant tourist; wherever we go, nothing quite measures up to Baltimore. Once you have come to know Charm City, well, there’s nothing else like it.
Which is too bad for a rogue economist, condemned to wander the earth in search of fleeting insights. He sees the most bizarre, appalling, and often fetching, things… and they all remind him of home.
Adios, Toxic Trash Debt from the Hellenic Province
The ECB continues to play the role of “bad cop” in the current back and forth between the Syriza-led government of Greece and the EU. The latest salvo entailed the ECB suddenly rescinding the waiver that made junk-rated Greek debt eligible for refinancing operations with the central bank. Here is the wording of its statement:
Eligibility of Greek bonds used as collateral in euro system monetary policy operations
The Governing Council of the European Central Bank (ECB) today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The waiver allowed these instruments to be used in euro system monetary policy operations despite the fact that they did not fulfill minimum credit rating requirements. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing euro system rules.
This decision does not bear consequences for the counterparty status of Greek financial institutions in monetary policy operations. Liquidity needs of euro system counterparties, for counterparties that do not have sufficient alternative collateral, can be satisfied by the relevant national central bank, by means of emergency liquidity assistance (ELA) within the existing euro system rules.
The instruments in question will cease to be eligible as collateral as of the maturity of the current main refinancing operation (11 February 2015).
Photo credit: Jonas de Ruytter
Varoufakis’ Tour of Europe
Greece’s new finance minister Yanis Varoufakis has toured Europe, trying to drum up support for – actually, we’re not quite sure what for exactly, as the precise nature of the Greek government’s demands is currently in flux (this is a parallel to Syriza’s ever-changing pre-election statements). Essentially, he seems to be gauging what they can get away with.
Not surprisingly, France’s political leadership has announced its support for a “debt deal” in principle (whatever that means), as the spendthrift French government is so to speak an ideological partner-in-crime of Syriza. However, the French government stopped short of supporting a partial write-down of Greece’s debt (Michel Sapin: “No we will not annul, we can discuss, we can delay, we can reduce its weight, but not annul”). Similar noises have issued from Berlin and Madrid.
Greece Gains Vastly in Entertainment Value
As we always point out in these pages, the best one can as a rule hope for in a politician is that he will provide us with entertainment. Syriza chief and new Greek prime minister Alexis Tsipras and his ministers have certainly exhibited far greater entertainment value so far than their rather dull predecessors.
Within hours of taking up his post, Alexis Tsipras issued a number of zingers in the general direction of Brussels. First it was widely reported that he threatened not to support new EU sanctions against Russia, the imposition of which requires unanimity. It was then said that the Greek government quickly withdrew its opposition after consulting with the rest of the EU. However, the real story seems to be that Tsipras was simply miffed that the EU claimed that there was unanimous support for the sanctions package without deigning to even ask the new Greek government whether it agreed.
Yanis Varoufakis, Greece’s new minister of finance.
Photo credit: Kostas Tsironis / Reuters
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