14th December 2011
Before I address the problems that are already emerging from the latest Euro zone summit plan I will cover off events at last nights Federal Open Markets Committee meeting. You may have figured my view by the lack of mention of it! However there were some expecting policy action in the US equity market at least as the S&P 500 index which had nearly touched 1250 earlier in the day turned lower to close at 1226 after the announcement which in essence said see you on January 24th 2012.
In fact the only change in the FOMC ‘s statement was to tell us that there had been 'some improvement in overall labor market conditions'
And so it was only stating what had recently happened.
The Euro zone plan is unravelling
Contributions to the IMF
This really was quite a wheeze and it involved the central banks of the Euro zone lending money to the IMF which the IMF could then lend to the peripheral nations in trouble. This wheeze was required as the European Central Bank is prohibited from direct debt monetisation.
Even if you thought they could raise 150 billion Euros and persuade others in the European Union to top the amount up to 200 billion Euros then a problem occured over the weekend. You see the largest central bank in the Euro zone the German Bundesbank which would be required to finance some 45 billion Euros of the loans is not keen on the idea. It feels that it will need specific permission from the German Bundestag and also needs to go to the German Constitutional Court. Even if these give permission it will take time and of course this is the Euro zone’s second weakest factor (after money…).
The Bundesbank also has worries about the fact that the IMF is a preferred creditor and sent a letter pointing out this problem with it becoming even more involved.
In the specific case of Europe, it should be noted that the risk for other inter-government rescue loans could rise significantly
I would imagine that the various politicians either did not think of this or cared little for it. So yet again their fantasies and wish lists combine awkwardly to say the least with reality.
Another problem is where will the non Euro zone 50 billion Euros come from? There are some media reports that the UK will be asked for a lot of it but I notice that the Bundesbank is interested in what China and the United States will do. So it would appear that there is no detailed plan for thsi at all and IMF head Christine Lagarde has shown her willingness to let bombast and hype overcome economics and detail yet again. When you read the next fawning interview with her please remember that she has a poor track record to say the least.
Balanced Budgets: the Greek example
On Friday I pointed out how unrealistic the balanced budget proposal was even for a country like France. Today I would like to look at the latest numbers for Greece which after all has been under the troika’s care for just over eighteen months now. It is a topic which is much misunderstood as I was reading an article only this week talking about her having a primary fiscal surplus in 2012. I have discussed the problems of using this concept before.
Regular readers will recall that back on the 6th of December I pointed out that the usually reliable Kathimerini was reporting more revenue shortfalls in the latest Greek public-sector figures. Yesterday we received the formal update from the Greek Ministry of Finance.
the (budget or fiscal) deficit amounts to 20,516 million Euros compared to the new target of 21,063 million Euros set in the voted Budget for 2012. During the same period in 2010, the State Budget deficit amounted to 19,516 million Euros.
The numbers are always better than the new latest revised target which raises thoughts of the writings of George Orwell! Whereas in reality the deficit is larger than last years by some 5%. Ouch as remember how often we have been told it is/will improve?
If we break the numbers down we see that revenues have fallen (in spite of higher tax rates) by by 3.1% and that expenditure has risen by 3%. So in every respect Greece has a position which is worsening. In some ways the biggest indictment of the troika “rescue” programme is the number below.
This is mainly due to a significant increase in interest expenditures of 2,638 million Euros or 20.4% thus far in 2011 relative to 2010.
Why is this so bad?
Because one of the original aims of the policy was to allow Greece to borrow more cheaply. As you can see in spite of her only borrowing on a short-term basis the cost has risen. Furthermore this we were told would result in a position where she could resume borrowing on a longer-term basis somewhere around now.
An example of this problem came yesterday when Greece had to pay 4.95% for some 6 month borrowing. By comparison some German bill yields have gone negative at time recently and yes I do mean that investors in effect are paying to buy them. I discussed negative interest-rates back on the 2nd of September.
If we look to longer maturities we see that Greece has a ten-year bond yield of 35% and a five-year one of 53%. So any issue would imply a virtually immediate default particularly if we consider that these are the yields without any current bond issuance.
For those who prefer prices then many Greek bonds are priced at 20 right now compared to a par of 100.
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