Financial Stability News

News about financial stability, central banking and theory of money

Tag Archives: Greece

EU’s unemployment continue to increase

Unemployment continue to increase, as reported by Eurostat yesterday. Depressing figures; should be of greater concern for everybody! For a good review of the situation, see this blog from Professor Bill Mitchell, University of Newcastle, NSW Australia.


The EU Core remains massively exposed to the PIIGS

This table from Credit Suisse has recently updated the bank exposure (by country) to peripheral sovereign debt that shows just how massively dependent each peripheral nation’s banking system is on its own government for capital and more importantly, how the core (France and Germany) remains massively exposed (in terms of Tier 1 Capital) to the PIIGS.

See Zero Hedge for the full story.


Greek default is inevitable

According to Zero Hedge, who quotes several rating agencies, Greek default is by now inevitable. According to Handelsblatt, the agreement with private creditors (Private Sector Initiative) seems to be insufficient. Greece will then try to make the “voluntary” write-down mandatory, which will technically imply a default, with all the unforeseen ramifications.

… the rating agencies have long warned a Greek default is now inevitable, and a CDS trigger will follow. The only thing that there is massive confusion over is whether and how this event will impact everyone else, and whether it will lead to an expulsion of Greece from the Euro zone.

We are certainly heading into uncharted territory!

Better for Greece to default

Marshall Auerback argues in this post on Naked Capitalism today that it will be better for Greece to default than to accept the deal on offer. He notes that Germany may indeed have come to the same conclusion:

Politically, of course, the Merkel government can’t actually come out and advocate a Greek default or, indeed, outright expulsion from the euro zone. Far more politically astute to promote fiscal austerity on top of yet more fiscal austerity, (even though that is certainly not winning Mrs. Merkel any popularity points in Greece), until the Greeks themselves scream “Uncle!” and default outright.

It would certainly be messy, but he notes that

With a super-cheap exchange rate, Greece would be a Mecca for retirement homes, research hospitals, trans-European liberal arts colleges, and maybe low-overhead software startups. Plus, a permanent home for the Olympics. It could live happily ever after, as Florida does, on the pension income of the elderly and the beer money of the young.

It is difficult to judge which way will prevail, but surely anything is be better than the current austerity program that, combined with a totally unrealistic exchange rate, will keep Greece on its knees for years to come.

EU moving towards political union

According to Monti, who spoke at the Peterson Institute in Wash DC today …

“We are moving perhaps even without being aware towards some form of political union”, Mr Monti said, adding that the Greek crisis has helped this along.

Interestingly, Monti is in the US while all his colleagues are in Brussels for tonight’s EU Council meeting. The distance allowed Monti to plead for flexibility for Greece. According to this WSJ story he urged the Trokia to award Greece an expanded loan package even with “a minimum of compliance”

Highlights from ECBs press conference today

Lots of interesting tidbits here from ECB chief Draghi’s press conference today. My favorite quote:

The new Fiscal Compact is a major political event. For the first time governments are giving up some of their sovereignty and are ready to put this into their primary legislation. This is a sign that the Euro is strong. It is a first timid step to fiscal union. This will not be a transfer union! All countries should stand on their own without continued subsidies from the others

But, what is the point of being together if you have to mange alone??

I have included my notes below. There are some new info about the LTRO coming up end of month. See also recent Zero Hedge post for more on the weakening collateral position and what it say about the banking sector in Europe.

  • ECB has more optimistic outlook than IMF for Europe, especially for Germany
  • Don’t see substantial downside, but rather stabilization of economy at a low level
  • But lots of uncertainty!
  • EU (consolidated) is in much better fiscal shape than the US and Japan
  • Inflation expectations are well anchored and remain low
  • ECB is very concerned about the current credit crunch, especially to SME (account for 80 % of EU employment)
  • Normally large banks would take money from ECB and distribute locally, but with interbank market not working, we have to enable them to get it directly from us
  • Therefore the ECB has relaxed the eligibility criteria for LTRO collateral  to enable smaller bank direct access
  • This will expose the ECB to more risk, but the risk is very, very well managed
  • Loans will be over-collateralized by a lot (haircut of 2/3)
  • The first LTRO was used by many banks to refinance their own debt; also many are facing higher capital requirements
  • We expect more will be used for lending (and purchasing government bonds) in the next LTRO
  • What they use LTRO for will be their own business decision (we cannot force them to lend)
  • But we are looking very closely at what is happening (with lending) and will review our policy options in 6 month time
  • Size of next LTRO will be substantial and (probably) at around same level as the first one
  • LTROs are non-standard (extraordinary) monetary policy operations that should not be continued when we get back to normal (funding markets)
  • LTRO is not an alternative to a rate cut. LTRO is addressing quantity constraints and liquidity deficiencies. Interest rate changes would address pricing conditions, subject to normal functioning financial markets. Markets are not functioning now, therefore LTRO.
  • Difficult for us to say how large next operation will be. There is no stigma attached to LTRO borrowing! There has been some press reports that it is undignified to borrow from the new facility; such “manhood” statements are not correct. Actually many much better banks (than the one quoted) have taken funds under LTRO1. Since this crisis originated as a sovereign crisis, many banks in better placed countries will not need the money. They should thank their countries for being well managed.
  • TARGET2 imbalances are inherent in a monetary union. Some are in surplus while others are in deficit. These imbalances are usually not high under normal conditions. Since the interbank markets are not working now, some countries have accumulated balances and others have seen negative balances grow. However, this does not represent any more risk; it is part of the normal functioning of the ECB.
  • Greece should focus on reform, not refinancing
  • ECB will not take haircut; not our intention to violate monetary financing prohibition
  • European Financial Stability Facility (EFSF) is a Government institution, i.e. if we make a loss on a transfer of Greek debt to EFSF, it will be monetary financing (of Governments)
  • Another matter if ECB transfer part of its profits to EFSF (i.e. Governments); that is not monetary financing
  • The new Fiscal Compact is a major political event. For the first time governments are giving up some of their sovereignty and are ready to put this into their primary legislation. This is a sign that the Euro is strong. It is a first timid step to fiscal union. This will not be a transfer union! All countries should stand on their own without continued subsidies from the others
  • Q: Do you have a plan B for Greece? D: We never have plan Bs (we will work this out, but cannot say more until after the EU Council meeting tonight)
  • Whatever is decided of haircuts for Greece (Private Sector Initiative) should not lead to precedent for other countries (including Ireland)
  • Ireland should be commended for the bold and courageous measures that are being taken


Dramatic drop in Greek budget revenues

This recent report shows that the Greek economy is imploding:

Revenues posted a 7 percent decline compared with January 2011, while the target that had been set in the budget provided for an 8.9 percent annual increase.

Worse still, value-added tax receipts posted an 18.7 percent decrease last month from January 2011 as the economy continues to tread the path of recession: VAT receipts only amounted to 1.85 billion euros in January compared to 2.29 billion in the same month last year.

And while the economy collapses, the Troika wants Greece to cut another 150,000 people, and to cut minimum wage even more. Where will this end?