Archive for the 'recession' Category

optimism

November 1, 2011

The Greek Prime Minister wants to hold a referendum on the new bailout deal to be signed with the Europeans. It appears that this was an unexpected move which has caused anger throughout the Eurozone (also here). The details are not yet available, but it seems that Greece will negotiate the rescue plan first, and then will put the proposal to a vote. The Greek people will decide if they agree or not.

To be honest, I thought that this was the best piece of news (for Greece) to come out recently. Negotiations thus far were a two-party game, which has now been forcibly turned into a three-part asymmetric game:

  1. The Greek Government who are on one side of the negotiating table,
  2. The EU, ECB, bankers, IMF, etc. who are on the other side of the negotiating table, and
  3. The Greek people who are voting on the outcome when negotiations are complete.

Now one has to only think: whose negotiating power increased immensely and whose negotiating power took a dive, when the third party entered the game. Yes, it is the Greek government who now drive the process.

Also, it is worth remembering that what Eurocrats fear most is democracy. The history of referenda on EU policies is not stellar, and I suspect that they really don’t want to lose this one. It will not surprise me if Greeks get away with an 80% uniform haircut including the ECB, and bank recapitalisation for free.

Unlike what Greek commentators keep repeating, Greeks have the option to say No: a standard EU policy is to keep having referenda until a Yes vote is won, giving more and more sweeteners in the process.

PS: All is not clear sailing though. A requirement is that the Greek government will maintain its slim majority until January, which is not certain. Another Greek MP resigned today, most probably because of the referendum proposal itself. The opposition leader does not want to hold a trump in his hands, and promises to stop the referendum at all costs.

The chance of Greece descending into a chaotic horde of witch hunters has gone up by another notch.

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rush for the exits

September 11, 2011

There is talk of capital leaving Greece at an unprecedented rate. Obviously this will be hard to investigate or quantify in real-time as events unfold, but here is a small piece of evidence from the property market.

Obviously for capital to leave, a decent quantity of capital must exist in the first place. I therefore focus on the Athenian seaside suburb of Voula, an affluent area popular with the Greek nouveau riche and ex-pats. I asked a top Greek real estate portal the following question: how many properties were added to the site in the last week with an asking price of EUR1m or more? The answer 127 properties.

How can we benchmark this number? Well, let’s take the London borough of Kensington and Chelsea, the most expensive borough of one of the most expensive cities in the world, popular with Hollywood stars, Russian oligarchs and Arab sheikhs. A similar query on a UK portal revealed that 103 properties were added to the site (with asking price of GBP1m or more, over the last seven days).

For completeness, Voula is three-quarters the size of Kensington and Chelsea in terms of area (8.7 versus 12.1 sq Km), but only one-sixth in terms of population (30,000 versus 180,000).

If that’s not a rush for the exits, I don’t know what is.

consequences of a euro break-up (ubs analysis)

September 6, 2011

UBS economists published today a research piece on a possible breakup of the Eurozone. They contrast feasible solutions like Greece leaving the currency union or Germany doing the same. They also explain why other alternatives (like expelling Greece) are not feasible.

They estimate that Greece leaving the Euro will incur a one-off cost of about EUR10,000 per person during the first year, and about EUR4,000 each year after that. There are obviously severe social costs that cannot be monetized. The one-off figure for the Germans (should they choose to leave instead) is somewhat lower at about EUR8,000.

Contrast that to the cost of bailing out Greece, Portugal and Ireland simultaneously, which is about EUR1,000 for each German taxpayer. It seems clear that the only viable solution at this stage is a default within the Eurozone, even though this could eventually take us to the same point in a few years’ time.

EUR60bn currency shield

September 6, 2011

The crisis in the Eurozone seems to be dragging on and on. The loosers have their heads on the chopping board, but are there any winners? On one hand the slump in Greece is perhaps going to continue for the foreseeable future, while Germany is posting record exports (in the second quarter of 2011) and is set to easily beat the staggering EUR1tr once more this year.

As the Independent shows, Germany’s main trading partners are in the Eurozone, therefore it would not make sense for Germany to initiate the breakup of the common currency. As one can easily see in the chart below, three-quarters of all German exports go to countries within the EU. The article goes even further, blaming Angela Merkel for not making clear to the German people what the benefits are. Could one make the case that this continuing fiasco is actually benefiting the German economy, and that Merkal’s objective should be to keep the circus going?

Breakdown of German exports

In the same chart, one can also notice that this mix seems to be changing: as the crisis intensified in 2010 the share of German exports outside the Eurozone steadily rises and a spike is forming. Overall, there seems to be a relative shift of about 5%. Now one can argue that this is due to the falling demand within Europe, and this can be correct. But other things equal, such an export surge would cause the currency to appreciate, making exports more expensive abroad, negatively affecting demand, and finally bringing back the revenues (as a footnote, the caveat here is the Marshall-Lerner condition). Obviously this currency appreciation has not happened, as the future of the currency itself remains uncertain.

Which brings us to the question: has Germany benefited from the uncertainty surrounding the future of the Euro? and if yes, to what extend? This is not easy to answer, as we do not have access to an alternative universe where the Euro experiment never took place. Peter Brandt uses the Swiss Franc as a proxy of what a Deutschemark would look like, and we take this approach a step further.

Fortunately, European currencies have been moving in step with respect to USD for a while now. We take exchange rates of the old Deutschemark (DEM) and other non-Eurozone currencies from 1971-2000 (British GBP, Swiss CHF, Swedish SEK and Norwegian NOK). Out of these, a regression analysis (in logs) shows the the DEM can be approximated rather well by a mixture of CHF and GBP. We then apply this mixture and impute a fitted DEM exchange for the period after 2000. The results are shown below, with some emphasis on the recent period after the crisis begun.

German exchange rate

German exchange rate (detail)

The fitted DEM explains rather well the movements of the DEM pre-Euro, and of the Euro afterwards, up to the crisis. After that point the two series deviate substantially: the Euro appears weaker by about 10% during 2010, and has weaken even further to over 25% by mid-2011. A freely-floating DEM should have been 25% more expensive in terms of USD, and obviously for a net-exporter like Germany this can have very significant implications.

A back-of-the-envelope calculation goes as follows: Germany exported EUR990bn worth of goods in 2010, and is expected to reach EUR1,150bn in 2011 (EUR550bn was achieved in the first half). We can assume that 25% of these exports went out of the Eurozone, and therefore benefited from the weaker Euro. The size of the benefit depends on the so called ‘export elasticity’, which the EU estimates to be around 0.60 (this means that every 1% depreciation will cause a 0.60% rise in exports). Putting all these together we can estimate that in 2010 the benefit of the crisis for Germany was EUR15bn, which rose to about EUR45bn in 2011. In total, the benefit that the German economy extracted from the ongoing lack of direction amounts to EUR60bn, and keeps rising fast. Perhaps the Greeks should factor this out in their negotiations with the EU, as they are the ones providing this EUR60bn currency shield.

This German advantage cannot continue in perpetuity, and the currency wars are on. Today the Swiss central bank (SNB) have decided to weaken the Swiss franc by pledging to buy foreign currencies at ‘unlimited quantities’. It is perhaps a matter of time for the rest of the advanced economies to step in and restore a more level playing field.

fair markets

August 24, 2011

Some are still talking about it:

ATHENS (AFP) – Greece will hasten its efforts in the next four months to check a runaway public deficit that threatens recovery goals agreed with its creditors, the finance minister said on Tuesday.

Some have actually done it:

Ireland’s trade surplus hit a record in June, rising by 8 per cent to €4.08 billion, new data from the Central Statistics Office said.

And the results are here for everyone to see…

Greek 2Y bond index

Greek 2Y bond index

Irish 2Y bond index

Irish 2Y bond index

Who said that markets are unfair?

argentine illusions

August 24, 2011

The Greek stock market (the Athens Stock Exchange, or Ase) has now reached a 15-year low at 900 points, as the country marches towards formal default. For some time now, a number of commentators, politicians and various forum dwellers have started making comparisons with late 2001 Argentina. The general line is that the Buenos Aires (Merval) index was 200 points when the country defaulted, and reached 500 points within three months. This offered the patient (or intrepid) investor a 150% return before you could say ‘I-am-broke’.

This is an argument to support one of the following: either “if you happen to be in the stock market, and feel possibly creamed at the moment, don’t panic and make the mistake to sell”, or “if you are not holding stock this is the best time to get a bit adventourous and go long; after all, how much lower can the stocks go from here?”.

Both messages, if taken at face value, would contribute to slowing down the rapid market decline. I can see that trying to prop up a collapsing stock market or forecasting happy days in the near future serves the punters’ own agendas, but they are misleading the public.

Since many middle class Greek families are “entrapped” in the falling market, pundits aligning with the ruling Pasok party are quick to claim that there is hope for a quick rebound. Supporters of the opposition, after placing the blame on the current governments amateur approach to the problem, want to put themselves in a position to reap any potential future benefits. A significant number of (probably badly burnt) investors roam unregulated investment fora spreading the same lines, presumably believing that they are looking after their own interests.

But notwithstanding ones intentions, they are blatantly wrong. Greece might be similar to Argentina, but only to the extent that they both found themselves committed to an exchange rate peg that they find hard to support. Pundits are confusing real and nominal returns, or returns denominated in hard or soft currencies. And while small investors might argue that they were ignorant, politicians and commentators should know better.

Merval, Merval$ and the Ase

Merval (in ARS), Merval$ (in USD) and Ase (in EUR) indexes

In the chart above I put forward the Merval index from 2000 to 2005 (in blue). I rebase the index to 100 in November 2001, which is when the final leg of the crisis begun to unfold. This makes it easier to assess the performance as we approach or move away from the crisis. Merval is denominated in Argentinian Pesos (ARS), the local currency. I also chart the Merval$ (in red), which is the same index denominated in USD and rebased at the same point. Before the end of 2001 there a one-to-one fixed exchange rate between the ARS and the USD; for that reason the two charts overlap in the former part of the chart. This peg broke in November 2001, and the ARS rapidly lost three quarters of its value in the next few months; therefore, following the default, the Merval index produced divergent nominal returns for investors in ARS or USD.

It is true that the Merval rebounded in nominal terms, and more than doubled after the country defaulted and the peg to the USD was broken. But investors received cashflows in a worthless currency that was had lost 75% of its purchasing power; the 150% increase is irrelevant. Denominated in USD, the Merval index has a different story to tell: even after Argentina formally defaulted, the market carried on sliding at the same pace, and bottomed out after it had lost another 50% within the next six months. It then took a further year to return to the level it was when the currency peg was broken.

But how does that relate to Greece? I also collected nearly two years’ worth of the Ase index, and rebased them to the same point (as if we are sitting in November 2001) to make some comparisons. For a start, the decline in the two markets looks surprisingly similar, given that they are ten years apart: both have lost two-thirds of their value over the same length of time. For all practical purposes Greece is essentially pegged to the Euro, in the same way Argentina was up to the breaking point. The decision to be made (by Merkozy perhaps?) is whether this peg is to be maintained.

The Argentinian experience suggests a path for both eventualities: Staying within the Eurozone implies that the Ase investor is still a Euro investor, and the USD-based index indicates a further drop by 50% before recovery begins. This means that one should brace themselves for a ride down to 500 points. Leaving Euro for a New Drachma (or some dual currency setup) can cause the index to rebound, if it is denominated in this new heavily devaluated currency. Then the gains are illusional, as the ARS-based index gains were.

Obviously things are much more complex in practice, and the path of Argentina is not going to be followed exactly by every country that defaults. One should hope so, given that Argentina experienced a 10% contraction during 2002 (the year after default was declared), inflation which topped at more than 10% per month, and more than 50% of the population below the poverty line. Argentina only recently re-entered the capital markets; the abundance of agricultural commodities she produces and rising commodity prices kept her at a surplus through the years following default. This was a relief that Greece does not seem to possess. But it gives an indication of where things can go from here, and a message to the punters to keep their mouth shut.

memory lane is a place greeks avoid

August 3, 2011

[…] in my first talk with him, referred to many government employees as “camp followers” and “coffeehouse politicians” and described the whole civil service as a kind of pension system for political hacks. These are harsh words, but are not unwarranted. The civil service is overexpanded, underpaid and demoralized. The low salaries have been augmented by a completely baffling system of extra allowances by which a few civil servants probably get as much as four times their base pay.

The result is complete disorganization. I have never seen an administrative structure which, for sheer incompetence and ineffectiveness, was so appaling. The civil service simply cannot be relied upon to carry out the simplest functions of government – the collection of taxes, the enforcement of economic regulations, the repair of roads. Thus the drastic reform of the civil service is an indispensable condition to getting anything else done in Greece. But the civil service is just the beginning. There is far more intricate and explosive question of the political leadership of the country.

One could be excused for guessing that the above was taken from a recent report on the Greek sovereign crisis. Unfortunately, it was written in 1947 by the (former by that time) US Presidential Emissary to Greece. And it highlights the Greeks’ acute lack of memory, who strongly believe that their current plight can be traced to either the 80s or 90s, depending on which “camp” they follow. The grim reality is that the Greek psyche has been stubbornly refusing to modernize; the dreams, aspirations, motivations, hopes and fears of the modern Greek family are the same as they were when the Greek state was established in mid 1800s.

And the flirtation of the Greek state with bankruptcy, collapse and chaos is not new neither. This week hordes of taxi owners have been blocking airports, ports and major roads at will, as new legislation would open their profession to competition. Next week another group will take to the streets and make a complete mockery of the state. The head of the British Economic Mission in the 40s makes a point, which seems to be as valid today as it ever was:

When visitors on arriving in a new country [..] run into a sandstorm or a hurricane, they are always told how unusual the weather is. But the situation you are running into here in Athens – the monetary crisis, the possible civil service strike, the pending fall of the government is the normal [..] political climate of Greece. So far as I could see, the Greek government has no effective policy except to plead for foreign aid to keep itself in power [..] It intends, in my judgement, to use foreign aid as a way of perpetuating the privileges of a small banking and commercial clique which constitutes the invisible power in Greece. [Assurance of foreign aid] was not to stimulate the government to further efforts, but to give it the relaxed feeling that it was delivered from the necessity of having to do anything at all. So it declared a national holiday; there was dancing in the streets. And at the same time it shelved a plan for the immediate export of surplus olive oil – a plan which had stepped on the toes of some private traders

The collective amnesia of the Greeks is constantly kept in check by an army of incompetent journalists, commentators, politicians, academics and general “public” figures. A little bit before Greece had her Will E. Coyote moment, I found myself at a round-table event where some hotshot from the National Bank of Greece was speaking just before me. Rather than boring the audience with equations and figures, he went through the script: the “common journey of the NBG and the Greek nation”, the many ways “NBG supported the Greek state throughout the journey”, and how neither of them have anything to fear if they stick together. I am sure that the audience left the event relieved that this long-standing special relationship of mutual support has been there. The Emissary has a different opinion:

[..] behind the government is a small mercantile and banking cabal, headed by [Georgios] Pesmazoglu, governor of the National Bank of Greece and a shrewd and effective operator. This cabal is determined above all to protect its financial prerogatives, at whatever expense to the economic health of the country. Its members wish to retain a tax system rigged fantastically to their favor. They oppose exchange controls, because these might prevent them from salting away their profits in banks in Cairo or Argentina. They would never dream of investing these profits in their country’s recovery

The Pesmazoglus were a family of bankers from the Greek community of Egypt, which moved to Athens in the late 1800s. Since, they have produced generations of politicians, bankers and newspaper owners. Georgios was all three. The Pesmazoglus are now revered in Greece as national heros; the old Athens stock exchange is on Pesmazoglu street.

Greek shipping was born in the 40s, and the great Greek shipowners of the past are the stuff of legends. Everyone speaks of their business acumen, their ability to succeed where others have failed, their courage entering new markets and pushing frontiers, and ultimately their undying love for their country. The ones that spared some change to build an orphanage or a girls’ school have achieved sainthood to the eyes of the modern Greek.

The shipping interests are in a particularly scandalous position. Today the Greek merchant marine is enjoying a boom, and the shipowners are raking in the profits. But the bankrupt Greek government is benefiting almost not at all from this prosperity.[..] Greek shipowners are making most of their profits out of Liberty ships sold to them by the US Maritime Commission after the Greek government had guaranteed the mortgages. The yearly earnings of a Greek-owned Liberty ship will probably run between $200,000 and $250,000. Of this, only the ridiculously small amount of $8,000 goes to the government in taxes. Foreign experts have urged the government to raise the tax requirements to about $30,000. But the political strength of the shipowners has prevented any effective action.

The US Emissary finished his article on a positive note: although Greece has issues that need to be addressed, when you compare her to Turkey or the Communist Balkan states she is still a long way ahead. This was in the 1940s; now Turkey and the Balkan states are marching forward, while Greece is once again bracing herself for default. The collective amnesia will take care of the rest.

it’s in your hands

April 9, 2010

You can do your bit to help this decent, hardworking but misunderstood nation by donating at least £5 here. No amount is too small, every penny is important. You showed your charity to the people of Haiti, now the proud Greek civil servant is asking for a helping hand.

Before you leave remember to browse through the comments left by distinguished donors like Angela Merkel, Jean-Claude Trichet, Gordon Brown and many others.

floating shorts

January 26, 2010

The markets have pounded Greece heavily last week, both in the equity and the debt front. There is widespread concern on the ability and comittment of the new government to service the country’s debt. Social unrest is evident. Greece also stands acused that, for years, statistics produced by her agencies were flawed at least.

Unlike statistics that are subject to interpretation, creative public accounting or outright reporting fraud, I take a look at the debt Greece issued over the last few years. These amounts are unambiguous, and any patterns that change over the years can give useful insights. To this end, I collected all information on Greek bonds and bills that Bloomberg records from 1993. As debt before 2001 was issued in old dracmae as well as an assortment of different currencies (ranging from pessetas to yen), I focus on the data after 2001. I expect Bloomberg to keep a representative, if not complete, sample.

Hopefully the data can shed some light on any policy changes that relate to the structure of debt. Also, the historical issues can serve as a yardstick to assess the magnitude of new bond or bill issues. One of the key years is 2004: this is the year of the overly expensive Olympic games, and also the year when the “socialist-technocrat” government of Costas Simitis was ousted, with a “conservative-liberal” government of Konstantinos Karamanlis taking their place in power.

In the attached tables you can find 105 short term Bills issues and 88 longer term bond issues. Number 23 in this list is the infamous structured bond that was in the center of the scandal that rocked the country, involving hedge funds, Greek state-run pension funds and JP Morgan.

The table below gives my summary, year-by-year:


YEAR
OF ISSUE
T-BILLS
ISSUED
(MIL EUR)
BONDS
ISSUED
(MIL EUR)
BOND
MATURITY
(YEARS)
PERCENT
FLOATING
2009 14,560 60,589 7.25 18.30%
2008 1,788 35,736 6.66 15.67%
2007 1,364 46,527 18.50 0.60%
2006 1,804 24,562 7.11 11.11%
2005 2,072 40,416 13.40 14.56%
2004 2,273 32,526 7.81 13.37%
2003 1,702 33,004 9.94 1.00%
2002 1,471 31,713 10.36 2.21%
2001 1,178 10,041 8.21 4.86%

Treasury Bills are issued many times in a year, offer no coupons, and have maturities of 13 weeks (~3 months), 26 weeks (~6 months) or 52 weeks (~1 year). Bonds offer coupons payable every six months that can be fixed or floating, and have maturities that range from 2 to 50 years.

One immediate observation is the spike of T-Bills issued in 2009, which is an order of magnitude larger than the typical amount of the previous decade. Presumably this is an attempt to accommodate the appetite of the lenders (or lack of it) to long-term commitments. It also indicates severe cashflow or liquidity problems on the part of the borrower (in the same way one goes to loan sharks for a few weeks until the benefits’ check comes through). And this trend looks likely to continue, if January auctions are an indication (EUR1.6bn and EUR1.2bn borrowed this January, compared to a total of EUR2.55bn last year).

Longer term borrowing has also increased substantially, standing now at about six times what is was 10 years ago, and two times the 2004 levels. But there are some details here worth mentioning: up to 2004, nearly all debt had maturity up to ten years, with the exception of only EUR18bn issued for longer maturities. After 2004, there appears to be an attempt to spread the debt across maturities, a policy that ended abruptly in late 2008. From this point on, most of the debt is very short, with the typical maturity being 5 years. And the new bonds issued this month will also have a 5 year maturity. Investors don’t seem to like putting their money on Greece for the long run.

Another interesting policy shift that happened in 2004 was an increase of floating debt. Up to this point practically all bonds offered fixed coupons, while at the moment about 20% pay interest which is linked to an external index, like the Euribor or some other combination of interest rates. A notable exception is 2007, which follows the scandal of the structured bond (yes, I know that correlation does not mean causation…) The last issue of 2009 pays 2.5% above Euribor; the new EUR8bn 5-year January issue will pay a premium of an extra 3.5% (for comparison, in January 2009 Greece borrowed EUR12.5bn, at 5.50% fixed coupon rate). This means that any interest rate rises in the next years will be increasingly painful for the Greek government, since interest payments for these new bonds will also increase.

These observations indicate investors that are only prepared to lend short-term, demand substantial premiums to do so, and do not want to bear any risk of future interest rate moves. These inverstors are nervous, and nervous investors can pull their money from the table if the going gets tough. Had Greece been able to borrow long-term and at fixed rates, she would not have to worry about investors getting itchy and pulling their money.

And all this matters. The Greek government keeps repeating that it is “they” and not “the markets” that determine their policy, but reality is different. As the figure above shows (borrowed from this FT article), Greece is heavily dependent on foreign investors, as they are holding about 30% of issued debt. As Greece takes her place as a central node in a potential systemic crisis, the probability of foreign banks that try to get out first increases. And this is an event that sets the domino off. The Greek government is desperately trying to front-run this eventuality, trying to expand the debtors’ base by promising bonds in USD and JPY.

The finger will remain on the trigger until investors decide to move away from short term government debt into long term fixed-rate issues. Only then will Greece have the space needed to produce a meaningful strategy that will put her house in order. It is chicken and egg once again…

the small print

January 11, 2010

It appears that the IMF will send a team to Greece in order to offer ‘technical assistance’. I am as clueless as you are on what ‘technical assistance’ actually means, but everyone in Greece is forcefully repeating that it does not mean ‘money’.

Greek bond description

I noticed the small print in the screenshot above, which describes a bond issued by Greece which is denominated in Yen (and is held mostly by a Japanese syndicate)

If issuer loses IMF membership or use of IMF funds, majority of hldrs (sic) may request issuer to call

I was not sure how to interpret that statement. Does it mean that using IMF funds constitutes an event of default, or that losing the potential use of IMF funds is actually the default event? If the former is the case, the Greek government is right to steer clear of any note with the IMF stamp on it. But I suspect it means the former, which is rather unlikely as even Zimbabwe remains an IMF member to date.