Monday, 25 July 2011



Readers will have noted that I have refused to write anything on Thursday's Summit outcomes and the new Greek bailout. The fact of the matter is that the amount of information in the public domain is pitifully inadequate - and that's not just me saying this. I will try to update this post as new information comes out.

Greek readers can, for now, consider the very competent if politically charged discussion by Techie Chan on this matter. The gist of it, with which I completely agree, is that private creditors have taken far smaller losses than the 21% trumpeted by European leaders, and in fact will in some cases make a reasonable profit from this deal, that Greek debt is still unsustainably high, and that a large transfer of risk has taken place from Europe's banks to the European taxpayer. Stay tuned for my own discussion of this.

I am particularly disturbed by the triumphalism with which some news outlets aligned to the Greek government were reporting on the deal late last week, essentially calling doubters and naysayers out on their sour-faced skeptical remarks. They'd be shouting 'IN YOUR FAAAACE! IIIIN YOUR FACE!' if they could get away with it. Cue of course, a chorus of world-weary defaultniks lamenting the continued loss of sovereignty, decrying Shock Doctrine tactics (Naomi Klein's tedious political version of the Philosopher's Stone, which explains everything under the sun), denouncing the new interest rate as usurious and the like. Let them all talk.

I'd rather focus for now on a topic that fewer commentators are talking about back in Greece and for which the facts are actually out. This is the CDS market - remember the evil specuLOLtors that were supposedly betting on Greece going bust (some of whom were in fact Greek banks themselves)? Well they're pretty fxed now.

You see, the most important implication of Thursday's grand bargain was no outcome of the Summit talks themselves, but the earlier announcement by ISDA that such a deal would not constitute a credit event triggering CDS payouts. By confirming that politicians will use this loophole to its fullest extent, Thursday's announcements mean that CDS are now virtually a non-asset-class: they only ever pay out if Greece sticks two fingers up to our creditors a la #Debtocracy, or if some suit at the IMF forgets to put our welfare check in the mail. Neither of which will ever happen. Some back home may be cheering that CDS spreads are down but that's because the actual value of the CDS as a hedge is down, not because Greek debt is any safer. It's like police procurement chiefs cheering the savings created by the falling price of bulletproof vests, following test results that prove they can't stop bullets.

You may think this is something for teh EVIL specuLOLtors to sort out among themselves, but what it actually means is that Greek bonds are now going to become much more illiquid (and that's saying something considering how illiquid they are now), because investors can't hedge against losses. The same goes for Greek bank stocks: in the past, people might use a Greek bank + CDS combo to replicate a European bank portfolio and skim some of the arbitrage out of the market or use Greek CDS to hedge exposures in the Balkans and Eastern Europe. But worse, far worse, the same goes for other PIIG and European bonds, and their banks. The entire Eurozone's financial system has become less liquid overnight. Surely that can't be a good thing?

UPDATE: only a few hours after I wrote the few lines above, this happened. QED.


Thursday, 21 July 2011


As the details of the latest bailout slowly trickle out, and in case you're wondering why we need another one, ponder this update on the execution of the Greek Budget.

It's shit. You know it's shit because the Ministry of Finance homepage is stuck at the previous announcement. It's also remarkably close to the preliminary estimates, so at least we're getting better at knowing in advance how fhxed we are.

My naive model tells me we're on track for a primary state deficit of EUR8.7bn, which lest we forget is 40% higher than last year's. This is what the forecast looks like:

And the monthly play-by play below. Hollow datapoints are my naive forecasts.

Wednesday, 20 July 2011


You've seen the rap-off between the two masters. And then the second part.

Now watch their homies slug it out in London.

LSE and BBC Radio 4 public debate

Date: Tuesday 26 July 2011
Time: 6.30-8pm
Venue:  Old Theatre, Old Building
Speakers: Professor George Selgin, Professor Lord Skidelsky, Duncan Weldon, Dr Jamie Whyte
Chair: Paul Mason

How do we get out of the financial mess we're in? Two of the great economic thinkers of the 20th century had sharply contrasting views: John Maynard Keynes believed that governments could create sustainable employment and growth. His contemporary and rival Friedrich Hayek believed that investments have to be based on real savings rather than fiscal stimulus or artificially low interest rates. BBC Radio 4 will be recording a debate between modern day followers of Keynes and Hayek. 

George Selgin is Professor of Economics at The Terry College of Business, University of Georgia. Selgin is one of the founders of the Modern Free Banking School, which draws its inspiration from the writings of Hayek on the denationalization of money and choice in currency. He has written extensively on free banking, the private supply of money and deflation. George Selgin is the author of The Theory of Free Banking: Money Supply under Competitive Note Issue (1988), Less Than Zero: The Case for a Falling Price Level in a Growing Economy (1997), and Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage (2008).

Robert Skidelsky is Emeritus Professor of Political Economy at the University of Warwick. His three-volume biography of the economist John Maynard Keynes (1983, 1992, 2000) received numerous prizes, including the Lionel Gelber Prize for International Relations and the Council on Foreign Relations Prize for International Relations. He is the author of The World After Communism (1995) (American edition called The Road from Serfdom). He was made a life peer in 1991, and was elected Fellow of the British Academy in 1994. His latest book is Keynes: The Return of the Master.

Duncan Weldon is a former Bank of England economist and currently works as an economics adviser to an international trade union federation. He has a long standing interest in and admiration for Keynes but also a respect for Hayek. He blogs at Duncan's Economic Blog.

Jamie Whyte was born in New Zealand and educated at the University of Auckland and then the University of Cambridge in England, where he gained a Ph.D. in philosophy. Jamie remained at Cambridge for a further three years, as a fellow of Corpus Christi College and a lecturer in the Philosophy Faculty. During this time he published a number of academic articles on the nature of truth, belief and desire, and won the Analysis Essay Competition for the best article by a philosopher under the age of 30.

Jamie then joined Oliver Wyman & Company, a London-based strategy consulting firm specialising in the financial services industry, for which he still works, as the Head of Research and Publications. Jamie has published two books: Crimes Against Logic(McGraw Hill, Chicago, 2004) and A Load of Blair (Corvo, London, 2005). Jamie is a regular contributor of opinion articles to The Times (of London), the Financial Times and Standpoint magazine. In 2006 he won the Bastiat Prize for journalism.

He is on the advisory board of The Cobden Centre.

The debate will be chaired by Paul Mason, economics editor of BBC 2's Newsnight and author of Meltdown: The End of the Age of Greed.

Transmission date of programme: Wednesday 3rd August, 8pm (repeated on Saturday 6th August at 10.15pm) on BBC Radio 4.

Suggested hashtag for this event for Twitter users: #lsehvk

Friday, 15 July 2011



Kill me no. 4 is the sequel to the original 'Kill Me' post available here, which in turn is the sequel the Dog Ate my homework v. 2 post and of course the original 'Dog Ate my Homework' post. All of these posts are reactions to the IMF staff reviews of Greece's standby arrangement and the subsequent letters of intent from the Greek Government. 

Together the two sets of documents could explain how the Greek Government is from Venus and the IMF is from Mars, except of course everyone knows where the Greeks are originally from

Anyway dear readers, I know you've been waiting for this so here goes. 

Here are the quickest possible highlights of the Fourth Review by the IMF with only a little play by play from me.

Open discussions of Greece’s financing challenge and euro-zone countries’ insistence on private sector involvement to resolve this have convinced markets that Greece will restructure its debt (pg. 4)

[Translation: The market expects a default.]

The fiscal position has stalled (pg. 6)

[Translation: Current austerity measures aren’t working]

Wholesale funding markets remain closed, and exceptional ECB liquidity support has grown (pg. 5)

Banks’ combined market value of €13 billion falls well-short of their reported Tier I capital of €30 billion (pg. 6).

[Translation: The market says that the stuff regulators say your banks are OK to hold as capital is actually crap. Nice job everyone.]

First quarter 2011 targets were met, with the help of temporary factors (pg. 7)

[Translation: Q1 2011 targets were ONLY met with the help of temporary factors. Your coach is about to turn into a pumpkin]

GDP is now projected to contract by 3¾ instead of 3 percent in 2011 (an outlook broadly in line with that of other forecasters). (pg. 9)

[Translation: Everyone else’s forecasts haven’t changed; we should have listened to them]

Risks remain skewed to the downside in the near term (p.g. 9)

[Translation: You are more likely to miss your targets than meet them for the next few quarters]

The scope for shortfalls in policy implementation or in macroeconomic outcomes is limited […] stress testing shows that full and timely program implementation is absolutely critical: incomplete fiscal adjustment, privatization shortfalls, or delays in structural reform implementation (producing a considerably slower economic recovery and fiscal adjustment) would see debt remain at very high and likely unsustainable levels through 2020 (p.g. 10)

[This point is repeated in various different ways throughout the report. Translation: You mess this up one more time and it’s Good Morning Harare!]

The discussions focused on Greece’s deeper medium-term policy needs and identifying ways to replace the expected market financing that is now likely no longer available (pg. 10)

[Translation: you can’t borrow from the markets anytime soon.]

At the end point, Greece would be targeting a primary surplus in the range of 6½ percent of GDP (pg. 11)

[Translation: The adjustment programme only works if you achieve an impossible primary deficit target]

there is a good motivation to switch the headline program targets to focus on primary balances, namely to insulate the fiscal assessment from the potential variability in interest payments (pg. 11)

[Translation: In addition to the markets we also expect a default, which is why we’re not counting interest payments anymore]

The government has prepared a medium-term fiscal strategy (MTFS), which would […] reduce the size of the Greek state: overall spending would decline from 49.5 in 2010 to 43.1 percent of GDP by 2015 (pg. 12)

[Translation: The nightmarish small state we have in mind for you is the same size as Canada’s.]

All administratively complex programmes are massively back-loaded (this is not verbatim, but see Pg. 13)

[Translation: We’ve given up on administrative reform]

[T]o begin implementing the strategic plan for medium-term reforms, the authorities will begin […] a number of major institutional changes (creating a central directorate for debt collection, a large taxpayers unit, as well closing and merging several uneconomic and inefficient local tax offices). (pg. 14)

[Translation: You don’t have a large taxpayers’ unit or a debt recovery unit? WTF?!]

[T]he system will remain heavily reliant on ECB support […] peak support could top €130 billion. Greek banks cannot by themselves rapidly reduce their existing level of ECB exposure (pg. 16)

The authorities also committed to encourage banks to seek foreign merger partners (pg. 17)

[Translation: Someone has to bail out your banks. We’d rather it was other banks from abroad.]

The BoG […] may appoint a commissioner with managerial powers to run a troubled bank; it may withdraw a bank license and then put the bank into liquidation; and it can impose a moratorium on a bank's claims. However, the Greek legal framework lacks specific bank resolution tools towards lowering the cost of resolving banks. [T]here are no techniques to allow the continuity of banking operations, including sustained depositor access (pg. 18)

Reforms are also needed to ensure that the deposit insurance fund can be used to fund such techniques, and to establish depositor preference over unsecured creditors. (pg. 18)

[Translation: If you default before you fix this shit, your citizens will not be able to get their deposits back.]

[UPDATE: Since people are asking, this doesn't mean people will lose the deposits necessarily, and it could just be a scare tactic. But what it does mean is that in the event of a default, restoring people's access to their deposits will take time and the Greek government will have to negotiate the status of depositors' claims. Unless of course we sort out the legal framework first.]

The supervisor has thus requested that undercapitalized banks meet regulatory requirements or find appropriate merger partners by end-September. (pg. 18)

[Translation: Your banks need to put a fire sale together pronto.]

Still, for the timetable to hold, market demand must exist. This is a significant risk which the authorities can manage by ensuring that foreign investors can participate, and by establishing a track record of even-handed and timely execution of transactions (to demonstrate to bidders they have a real chance to acquire the assets). (pg. 20)

[Translation: Even if you hold a fire sale, who is going to buy this crap? They don’t even trust you to honour your end of the bargain]

firm-level collective agreements, introduced in late 2010, would allow for wage reductions below sectoral minima (to the nationally-agreed floor) within the formal bargaining framework, thus overcoming this rigidity, but had been used little to date. (pg. 23)

[Translation: Businesses aren’t using the one good labour market reform you managed to push through. Someone isn’t playing ball.]

the end-March indicative target on the accumulation of new domestic arrears by the general government was again missed in March. A waiver of applicability is being requested for end-June performance criteria (except concerning external arrears). (pg. 27)

[Translation: you’ve missed your targets but we’ll look the other way.]

A tailored downside scenario exposes additional vulnerabilities. Debt would peak at 186
percent of GDP in 2015 and remain above 178 percent of GDP in 2020, a situation highly unlikely to allow continued market access. (pg. 70)

[Translation: You know how you keep missing targets? Well if you stay on that path you’re on track to owe fuckloads forever.]

Wednesday, 13 July 2011


Readers not living under a rock in the past few days will have noticed that financial contagion has spread to Italy's banks, putting strain on the sovereign itself. You can follow the snafu as it unfolds here.

My Greek readers need not worry that this is somehow our fault too - apparently it is the Spaniards' fault - no, really.

I will add more to this story later today but for now I must share with you the following paper, which just landed in my inbox. The timing is perfect.

You see, the IMF have by now realised that one by one all of the PIIGS will fall, that the EU as a whole is insolvent and that the battle lines will be drawn around the UK and France. So instead of obsessing about the next bailout, a clever IMF wonk, one D. Kanda, has tried to estimate what the optimal fiscal adjustment programmes might look like for six European countries -France, Germany, the Netherlands, Italy, Ireland and the UK- given the preferences of policymakers and existing commitments. The results can be seen here, or in the tables below for short:

Coming soon to a negotiating table near you.

Sunday, 10 July 2011


Apologies for the radio silence, dear readers - it's been a busy week.

Now that I've caught up with my sleep and the in-tray for the day job I feel ready for another post, and predictably it is a new batch of statporn, though I promise you haven't seen this before - not from me anyway.

I have strong but mixed feelings about Debt Clocks - here's one of ours, courtesy of the awkwardly transliterated Xrimanews.gr. In countries where government debt is not the number one issue on the agenda, a good deal of the population tends not to know just how much debt the state has picked up in their name. This is not too dissimilar to what individuals in too much debt do (a more academic treatment here and here) and the behavioural results are similar too. Such tools can give the people a sense of proportion. But while being able to visualise debt in this way tends to make people think, in practice it is not very actionable. By the time a country has a Debt clock built for itself, it is usually in too much debt already.

I was wondering, on the other hand, what kinds of clocks we could build for Greece that would mean something to the Greek people. If we're counting down to anything these days, it is surely D-Day, the day we get to default. And this is not a matter of time but of fiscal dynamics. Converting these into time variables is not straightforward.

As it happens, there are three sets of figures we can use that do sort of suggest timings.


The first is the primary deficit, which counts down the distance left to run until we can secure an orderly default. I should point out that, unlike the Greek ministry of finance and some defaultniks, I'm counting public investment against the primary deficit. The reason is simple: public investment is the most productive part of government spending, as we've discussed here, here and in Greek here. In the event of default, it should be among the last budget items to go.

So how is that primary deficit coming along? Below is a graph of our monthly primary deficits, collated by yours truly from the monthly budget execution bulletins available here. Please note this is the Central Government budget as opposed to the General Government budget, where the data take much longer to produce and are much less reliable. Even with these caveats, I can only go as far back as Jan 2009 and can only follow the data up to May 2011 - but I will update as more data come in.

[Correction: The Y axis on this graph previously read 'surplus'. This was of course wrong. Many thanks to @ggementzis for spotting this. The hollow datapoints are my own naive forecasts, read on for details on how these were calculated.]

The bottom line here is that the 2011 budget isn't really working out. While 2010 was an improvement over 2009 in nearly every month, 2011 hasn't been an outright improvement on 2010 so far - only two out of five months have returned a smaller deficit or larger surplus. If the above graph doesn't really speak to you, maybe this one does: it would suggest austerity as currently pursued depends hugely on political timing and is producing diminishing returns.

Actually, this graph is a little scarier than that, because it's actually very easy to describe the trend involved. It's essentially a negative sine with a linear trend thrown in, or at least that's what it behaves like. Crucially, the trend points upwards.

[UPDATE] My longtime reader Chris Voltaire has pointed out over Twitter that running a regression with 15 observations is risky. He is too kind, of course. It is stupid and pointless. However, my purpose is not really to derive a forecast (even though I do). I only want to show what the trend has been so far and because of the seasonal variation involved I can only do this by deriving a forecast of sorts. Apologies.

If you run these figures forward, the forecast is for a primary deficit of EUR5.893bn, against EUR6.231bn last year. So we're only really on track to shave EUR338m off the primary deficit this year and at this rate it will take us 17 years to be able to default. Not good. It is probably this realisation that underlies our latest batch of austerity measures, which I've seen fellow libertarians criticise quite strongly. I will return with more commentary there. For now I should point out that there's more than one way of delivering a primary surplus, and I'm on the record as saying that taxation isn't a very effective one, for reasons to do with administration and equality.

Chris also points out that the Greek state is looking forward to some extraordinary income from property tax arrears in 2011, which readers would do well to take note of. Now in my days of trying to scrape by on £5 a day in London so I could afford my rent and the occasional drink, I used to have a rule: there is no truly extraordinary income and no extraordinary expenses. Better to assume that every month £100 will get spent that you can't plan for, and £20 will come in that you don't expect. It's a similar case here. The Greek state had extraordinary revenue in 2010 from the 2009 business levy, then more extraordinary revenue with the tax amnesty, and probably more that I can't keep track of. My point is that these 'extraordinary' income drives are driven by cyclical revenue figures rather than vice versa, so in one sense it doesn't really matter what income we're looking forward to.

But this is dodging Chris' argument. The real answer is that I can only keep monitoring the data - when that money comes in, I'll check again to see whether it's shifted the trend. That's all anyone can do really. For instance, just today (11 July) the preliminary figures for June came in - indicating a primary deficit of EUR1.356bn for the month. This in turn is consistent with a EUR7.1bn primary deficit for the year, taking us way off course.

Incidentally, the first graph I've presented here also reveals one more useful thing: that the most fiscally positive months for Greece are January, July and October in that order. This will be important to anyone trying to time a Greek default while we're still still running a primary deficit.


The second way of timing a default is to look at the exposure of European (in particular French and German) banks to Greece, particularly the Greek sovereign and Greek banks. The only reason we are in this state of suspended animation, from a foreigner's point of view, is in order to prevent massive losses to European banks and the associated contagion. If they could magically remove their exposure to Greece overnight, we would be forced to default at once, whether we liked it or not. This begs the question of how far along they are in dumping Greek assets.

I should note at this point that the markets for most Greek assets are currently very illiquid, so banks are very worried about dumping them as they are unlikely to get a good price. Moreover, when they sell banks have to record losses, whereas a rapidly depreciating bond can be held to maturity without showing a loss. All of this makes it difficult for foreign banks to dump Greek bonds.

You can review the latest data on exposures to Greece with commentary from yours truly here. But what is the trend? Well here we have a problem because the Bank of International Settlements (BIS), the source of all such statistics, has only started providing data with a sector x country breakdown in Q4 2010. Further back, we can only look at aggregates, which are much less useful. But let's see what we can find. The graph below outlines the exposure of banks in Europe, France and Germany to Greece (that's total exposure, including the Greek sovereign, Greek banks and the Greek non-bank private sector:

These data suggest that since the Greek crisis began in late 2009, French and German bank exposure is falling at a rate of 2% every month, or about EUR2bn per month. At this rate, it will take 44 months, or until August 2014, for them to reduce their exposure to zero.

Realistically, French and German banks will never manage this, and even if they could or wanted to, they don't need to wait that long, as they only need to cut their exposure enough so that they can remain capitalised when we default. Also recall that this is total exposure to the country, and although it makes sense to dump Greek banks alongside Greek bonds, it probably doesn't make sense to dump all Greek assets altogether.

But this is the general direction of travel.The query in question can be replicated by trying this link.

More to come, as I've still got data to crunch. For now the verdict is that we're more likely to be pushed than to jump unless we can come up with a real show-stopper. Somehow I doubt we will.


There is of course a third clock ticking away. Every quarter I watch the labour market statistics for clues of rising stress. My favourite index is of course the share of the unemployed that turned down job offers in the last quarter; the rationale is that once the fat has gone out of the land and people are forced to take whatever crappy job comes along or drop out of the labour force altogether the result is very angry people in the workplace or on the streets. Regular readers should not need any reminder but the graph as of Q1 2011 is as follows:

A naive extrapolation suggests that we will run out of unemployed people turning down  job offers by Q4 2013. This suggests to me that the apeshit scenario is approaching us faster even than the being pushed scenario. Everyone buckle up.