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Showing posts from May, 2016

The Eurogroup statement on Greece, annotated

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The Eurogroup (part of which is pictured above) has produced a statement on the outcome of the latest debt talks with Greece. As ever with Eurogroup statements, it confuses more than it enlightens. So here is my attempt at translating Eurogroup-speak into plain English.
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The Eurogroup welcomes that a full staff-level agreement has been reached between Greece and the institutions.  Phew. We got that through before the Brexit referendum.
Also, the Eurogroup notes with satisfaction that the Greek authorities and the European institutions have reached an agreement on the contingency fiscal mechanism, which is in line with the Eurogroup statement adopted on 9 May in particular as regard the possible adoption of permanent structural measures, including revenue measures, to be agreed with the institutions. It therefore provides further reassurances that Greece will meet the primary surplus targets of the ESM pro…

Have we done enough to prevent another financial crisis?

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Notes from a talk given at Trinity Business School, Dublin, on 26th May 20164
Well, it depends what sort of crisis you mean. Have we done enough to prevent a crisis like the last one?
Yes. We have scared ourselves so much about the dangers of disorderly bank failure that no way are we going to allow that to happen again – at least, not until we who lived through the crisis, and our children and grandchildren whom we tell about the crisis, are long gone and our legacy forgotten. No-one now would allow a bank like Lehman to fail. We might close it down, but we wouldn’t simply allow it to go bankrupt overnight.
We learned from the 2008 crisis that systemically-important banks must not be allowed to fail. And since we do not really know which banks are systemically important and which are not, that means that anything large enough to save, must be saved. Only very tiny banks can fail. The rest will be rescued, one way or another.
Most often, banks are rescued by merging them with other …

Where on earth is growth in Greece going to come from?

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It's not going to come from people working more. Excerpt from the IMF's latest Debt Sustainability Analysis for Greece, just released:


Oh dear. Quite apart from the negative contribution to growth, the prospect of unemployment taking 44 years to return to something approaching normality is simply appalling for Greece's population. I've looked in more detail at this here (Forbes).

Well, if labour isn't going to drive growth, there's always investment, yes?

Er, not really. The outlook for capital investment doesn't look too good either:

Yeah, about that financial sector.....Greek banks are still in crisis, it seems. The IMF thinks they will need another 10bn Euros on top of the 43bn they have already received, and even with this, they aren't going to lend. And they aren't worth anything, so can't even be sold to raise money. Greek banks are zombies, and like all zombies, they drain the lifeblood of their victims. They are a serious obstacle to Gre…

Keynes and the Quantity Theory of Money

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"Best diss of the Quantity Theory of Money comes from Keynes", commented Toby Nangle on Twitter, referring to this paragraph from Keynes's Open Letter to Roosevelt(Toby's emphasis):
The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor. But is Keynes really dissing the Quantity Theory of Money (QTM)? Well....no. He is objecting to the way in which it is used, a…

The safe asset scarcity problem, 2050 edition

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S&P forecasts a serious shortage of safe assets by 2050 if the developed nations, in particular, do nothing to adjust their fiscal finances in the light of ageing populations. This has serious implications for government and investor behaviour - and the future of the ratings agency that issued it.

Here is S&P's hypothetical sovereign ratings chart out to 2050. Yes, ratings - although as we shall see, ratings will become largely irrelevant in the weird world of the future.

Clearly the price of sovereign bonds will rise significantly, particularly for those in the three "A" categories. S&P doesn't indicate which nations would be the issuers of these rare breeds, but it is a fair bet that their sovereign bonds are already trading at negative rates for some distance along the yield curve. So we are looking at fully negative yields for certain countries in the not too distant future.

The "A" team

These countries will be paid to borrow. Of course, no-o…

Pilate's game

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After the Welsh Assembly elections - in which UKIP did rather well - I had a Twitter exchange with an angry Welshman. He said:
@dsquareddigest@Frances_Coppola Most UKIP votes came from, erm, English migrants to Wales. Unbelievable. The famous 'white flight'. — Gweirydd (@gweirydd) May 6, 2016
I challenged this, of course. But in the ensuing heated discussion, I misquoted him:

@gweirydd@dsquareddigest Why? You didn't support your assertion that UKIP voters were all English immigrants. — Frances Coppola (@Frances_Coppola) May 6, 2016
As far as I am concerned, I misquoted him because I had not remembered his tweet accurately. Memory is fallible. But as far as he is concerned, I misquoted him because I am a liar. We do not disagree on the facts, but on their interpretation. Who is right?  What is the truth?

In Greece, the Debt Truth Committee has drawn together facts about the origins of Greece's debt. And from this, it has deduced what it believes to be the truth. Greece&#…

Dangerous assumptions and dodgy maths

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The last published accounts for the NI Fund show that, contrary to popular mythology, it does not have an enormous surplus. In fact it is currently running a deficit, as it has been for the last five years. Its reserves have fallen to the point where the Government was forced to top them up to prevent them falling below the statutory minimum of 1/6 of payments out of the fund.

So I was somewhat surprised to read written evidence to the Work and Pensions Select Committee which appeared to contradict the accounts. The evidence comes from Rita Abrahams and references the Social Security Up-Rating Report by the Government Actuary, published in January 2016.

Here is how Ms. Abrahams has interpreted the Government Actuary's findings: The latest Actuary report published in January projected that by April 2021 our National Insurance Fund will have a balance of £58 billion; thus after setting aside the working balance requirement of £18.52 billion (1/6th of payments) a surplus would remain…