A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.
Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. [..] When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”
Calling into question the continuity of tens of thousands of derivative contracts , he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe . Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”
In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…
If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.” [..] “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.”
Sounds like Carney knows a thing or two that Juncker et al haven’t sufficiently thought through. The EU plans to move all – or most- derivatives clearing to the continent, but such a thing is anything but easy. That’s another very tangled web, and an expensive one to boot. Brussels probably wants to use the issue to put pressure on London in some way, but a hard Brexit might make that unlikely if not worse. Bloomberg from June this year:
“Today, a significant amount of financial instruments denominated in the currencies of the member states are cleared by recognized third-country CCPs,” according to the proposal. “For example, the notional amount outstanding at Chicago Mercantile Exchange in the U.S. is €1.8 trillion for euro-denominated interest-rate derivatives,” the commission said. “This also raises a series of concerns.”
The financial industry has lobbied hard against a location policy. The International Swaps and Derivatives Association said requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin requirements by as much as 20% . The FIA, a trade organization for the futures, options and centrally cleared derivatives markets, has said forced relocation “could nearly double margin requirements from $83 billion to $160 billion.”
According to that Bloomberg piece, the notional amount outstanding of euro-denominated OTC interest-rate derivatives is some $90 trillion, 97% of which goes through the London Clearing House (LCH) based in .. well, you guessed it. Wikipedia:
LCH is a European-based independent clearing house that serves major international exchanges, as well as a range of OTC markets. Based on 2012 figures LCH cleared approximately 50% of the global interest rate swap market, and is the second largest clearer of bonds and repos in the world , providing services across 13 government debt markets.
In addition, LCH clears a broad range of asset classes including: commodities, securities, exchange traded derivatives, credit default swaps, energy contracts, freight derivatives, interest rate swaps, foreign exchange and Euro and Sterling denominated bonds and repos. LCH’s members comprise a large number of the major financial groups including almost all of the major investment banks, broker dealers and international commodity houses.
Shifting clearing of euro-denominated derivatives from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to companies, a global derivatives industry body says. [..]The London Stock Exchange’s subsidiary LCH currently clears the bulk of euro-denominated swaps, a derivative contract that helps companies guard against unexpected moves in interest rates or currencies.
Britain, however, is due to leave the bloc in 2019, putting it out of the EU’s regulatory reach. The International Swaps and Derivatives Association (ISDA), one of the world’s top derivatives industry bodies, said on Monday that a “relocation” in euro clearing to continental Europe would split liquidity in markets and reduce the ability of banks to save on margin by offsetting positions in the same liquidity pool.
Deutsche Bank has the world’s largest derivatives portfolio. Not all of it will be euro-denominated, but still. And I know it’s just notional amounts, but derivatives are not things one plays fast and loose with, lest the clearing becomes opaque and trouble starts.
Juncker better solve this thing. Oh, and this one too (yes, it’s quite fun to report on this):
As part of the transition period of around two years that she called for in her emollient Florence speech last month, Britain would continue to pay in to the EU budget to ensure that none of the member states was out of pocket owing to the decision to leave. These net payments of around €10 billion a year would fix the immediate problem facing the EU, the hole that would otherwise open up in its finances during the final two years of its current budgetary framework, which runs from 2014 to 2020.
[..] through its accounting procedures, the EU can and does commit it to spending that will be paid for by future receipts from the member states. What this means is that even after 2020 there will still be payments due on commitments made under the current seven-year spending plan. That pile of unpaid bills, eloquently called the “reste à liquider” (the amount yet to be settled), is forecast to be €254 billion at the end of 2020.
Estimates of what Britain might owe towards this vary, but taking into account what might have been spent on British projects it could be around €20 billion. On top of that – and the second main reason why the EU is holding out for more – the EU has liabilities, notably arising from the unfunded retirement benefits of European staff estimated at €67 billion at the end of 2016, which it is expecting Britain to share. Even taking into account some potential offsets from its share of assets, Britain may face a bill of between €30 billion and €40 billion on top of the €20 billion paid during the transition period.
The EU finances itself on the fly. It’ll have a €254 pile of unpaid bills in 3 years time. That is scary. Not for Brussels, but for its member countries. A hard Brexit, in which Britain may refuse to pay, is perhaps even scarier.
Anyway, once Juncker’s done with all that, he’ll have to move on to the next problem. Derivatives is a big cloud hanging over Europe, but this one is potentially shattering.
Ray Dalio, manager of the world’s biggest hedge fund, is shorting, placing large bets against, anything Italian, and given Italy’s size and hence importance to the EU, his bets are effectively bets against Brussels.
Bridgewater Associates is adding to its billion-dollar short against the Italian economy. The world’s largest hedge fund disclosed a $300 million bet against Eni SpA, Italy’s oil and gas giant, data compiled by Bloomberg show. Bloomberg previously reported that Ray Dalio’s firm had wagered more than $1.1 billion against shares of six Italian financial institutions and two other companies.
This latest bet is the hedge fund’s second-largest against an Italian company, trailing only the $310 million against Enel SpA, the country’s largest utility. Eni’s majority holder is the Italian government via state lender Cassa Depositi e Prestiti SpA and the Ministry of Economy. The public involvement also is reflected in the government’s role in appointing the chief executive officer. Current CEO Claudio Descalzi has been at the helm since 2014 and was reconfirmed this year.
$1.1 billion against the banking system, $310 million against the main utility, $140 million vs pan-European insurer Generali and now $300 million vs the national oil and gas company, That adds up to quite a bit more than the Bloomberg graph says, but I’ll include it anyway.
Dalio doesn’t call the bluff of Italy, and this is not just like George Soros’ shorting the British pound in 1992, he’s calling out the entire EU and its financial system. He’s saying I don’t believe you can keep up the charade. He’s making a mockery of Mario Draghi’s “whatever it takes”.
So what are Rome, Brussels and Frankfurt going to do? They can’t ignore the no. 1 hedge fund forever. They will have to pump money into Italy, in large amounts. Merkel won’t like that, neither will her new coalition partner FDP, and the Bundesbank may start legal action.
Dalio’s located the Union’s achilles heel, which is not just that Italy’s insolvent (it’s not alone in that), but that there’s a gigantic theater production being performed to give everyone the impression that things are going just swimmingly, thank you. So Dalio’s said: how much for a ticket to the show?, and paid it. And now he’s inside.
Bridgewater didn’t enter that theater for nothing. $1.85 billion is not chump change for them. Intesa Sanpaolo CEO Carlo Messina may have said that Dalio will lose his bets, but according to the IMF Italy’s non-performing loans levels were €356 billion at the end of June 2016, which is 18% of total loans for Italian banks, 20% of Italy’s GDP and one-third of total Eurozone NPLs. Intesa Sanpaolo holds a nice chunk of that.
‘Whatever it takes’ may well be too much to take for the EU, and Draghi looks outsmarted, as do Juncker and Merkel. How many billions will it take for Dalio to go away? And then, who’s next, which hedge fund, which politician, which ECB chief? Coming soon to a theater near you.
Why loans for Greece can diffuse the entire situation. But even then the debt must be restructured. Lenders must pay for bad decisions at least as much as borrowers.
One feature of the Greek sovereign debt crisis, which is widely misunderstood, is the following. Since the start of the crisis the Greek sovereign debt has been subjected to several restructuring efforts. First, there was an explicit restructuring in 2012 forcing private holders of the debt to accept deep haircuts. This explicit restructuring had the effect of lowering the headline Greek sovereign debt by approximately 30% of GDP. Second, there were a series of implicit restructurings involving both a lengthening of the maturities and a lowering of the effective interest rate burden on the Greek sovereign debt. As a result of these implicit restructurings, the average maturity of the Greek sovereign debt is now approximately 16 years, which is considerably longer than the maturities of the government bonds of the other Eurozone countries.
These implicit restructurings have also reduced the interest burden on the Greek debt. The effective interest burden of the Greek government has been estimated by Darvas of Bruegel to be a mere 2.6% of GDP. This is significantly lower than the interest burden of countries such as Belgium, Ireland, Italy, Spain and Portugal. As a result of these implicit restructurings the headline debt burden of 175% of GDP in 2015 vastly overstates the effective debt burden. The latter can be defined as the net present value of the expected future interest disbursements and debt repayments by the Greek government, taking these implicit restructurings into account. Various estimates suggest that this effective debt burden of the Greek government is less than half of the headline debt burden of 175%.
From the preceding it follows that the effective debt burden of the Greek government is lower than the debt burden faced by not only the other periphery countries of the Eurozone but also by countries like Belgium and France. This leads to the conclusion that the Greek government debt is most probably sustainable provided Greece can start growing again (so that the denominator in the debt to GDP ratio can start increasing instead of shrinking as is the case today). Put differently, provided Greece can grow, its government is solvent. The logic of the previous conclusion is that Greece is solvent but illiquid. Today Greece has no access to the capital markets except if it is willing to pay prohibitive interest rates that would call into question its solvency. As a result, it cannot rollover its debt despite the fact that the debt is sustainable.
There is something circular here. If Greece is unable to find the liquidity to roll over its debt it will be forced to default. The expectation that this may happen leads to very high interest rates on the outstanding Greek government bonds reflecting the risk of holding these bonds. As a result, the Greek government cannot rollover its debt except at prohibitive interest rates. The expectation that the Greek government will be faced with a liquidity problem is self-fulfilling. The Greek government cannot find the liquidity because markets believe it cannot find liquidity. The Greek government is trapped in a bad equilibrium.
What is the role of the ECB in all this? More particularly, should the OMT-program be used in the case of Greece? The ECB has announced sensibly that OMT-support will only be provided to countries that are solvent but illiquid. But, as I have argued, that is the case today for Greece. So what prevents the ECB from providing liquidity? There is a second condition: OMT support is only granted to countries that have access to capital markets. This second condition does not make sense at all, because it maintains the circularity mentioned earlier. Greece has no access to capital markets (except at prohibitively high interest rates) because the markets expect Greece to experience liquidity problems and thus not to be able to rollover its debt.
Greece’s central bank has issued a last plaintive scream before the axe falls, as if delivering an Aeschylean curse. The plagues of the earth will descend upon the Greek people if the radical-Left Syriza government of Alexis Tsipras persists in defying Europe’s creditor powers and opts for default. They will eat dirt for the rest of their lives. They will freeze in rags. They will moan and wail, forever. “Failure to reach an agreement would mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union,” it asserted. “A manageable debt crisis would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. The ensuing acute exchange rate crisis would send inflation soaring.”
The central bank did not present these as potential dangers in a worst case scenario – something we might all accept – it asserted that they would occur unless Mr Tsipras agrees to terms imposed by Brussels before the Greek treasury runs out of money. “All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.” Never before has such a “monetary policy” report been published by the central bank of a developed country, or indeed any country. It is a political assault on its own elected government.
Zoe Konstantopoulou, the speaker of the Greek parliament, rejected the document as “unacceptable”. Furious Syriza MPs called it an attempt to strike terror. Yannis Stournaras, the central bank’s governor, is not a neutral figure. He was finance minister in the previous conservative government. His action tells us much about the institutional rot at the heart of the Greek state, and why a real revolution is in fact needed. Where does one begin with the clutter of wild assertions in his report? It is not true that Greece would “most likely” be forced out of the EU following a return to the drachma. Such an escalation is extremely unlikely, despite a chorus of empty threats along these lines by Brussels.
The decision would be taken on political and geo-strategic grounds by the elected leaders of Germany, France, Britain, Italy, Poland, and their peers in the European Council, with Washington breathing down their necks. If they want to keep Greece in the EU, they will do so. European treaty law does not give categorical guidance on this issue. It is famously elastic in any case. The Swedes, Poles, and Czechs remain outside EMU, though “legally” supposed to join. The issue is finessed in perpetuity by a vague promise to join when the time is right. The same can be done for Greece, with a flick of the fingers.
The “blind insistence” on cutting Greek pensions will only worsen the country’s already dire financial crisis, Greek Prime Minister Alexis Tsipras wrote in a German newspaper commentary on Thursday. In a guest column for Der Tagesspiegel newspaper in Berlin, Tsipras also rejected the “myth” that German taxpayers are paying Greek pensions and wages. He said Greeks, contrary to the widespread belief in Germany, work longer than Germans. “The blind insistence of cuts (in pensions) in a country with a 25% unemployment rate and where half of all the young people are unemployed will only cause a further worsening of the already dramatic social situation,” Tsipras wrote. He said that pensions are the only source of income for countless families in Greece.
In Athens on Wednesday he also rejected pension cuts that creditors are seeking to unlock aid. Tsipras also wrote that the state’s expenditures for pensions and social spending were cut by 50% between 2010 and 2014. “That makes further cutbacks in this sensitive area impossible.” Tsipras also challenged perceptions among Germans, a majority of whom now want Greece to leave the euro zone, about who is paying for Greek wages and pensions: “Anyone who claims that German taxpayers are coming up for the wages and pensions for Greeks is lying,” he wrote. “I’m not denying there are problems…But I’m speaking out here to show why the ‘cuts offensive’ of the past years has led nowhere.”
With Greece’s fate in balance, European finance ministers converge on Luxembourg with little hope for a deal as German Chancellor Angela Merkel seeks to restore calm to increasingly rancorous exchanges. Tensions are running high as Greek Prime Minister Alexis Tsipras turned to the classics to paint himself as a leader of stature ready to rebuff a bad deal come what may. He’s been on a tear, accusing creditors of nefarious intentions, and will meet with Russian President Vladimir Putin during a decisive week for the debt-ridden nation sliding towards insolvency. It may come down to Merkel, leading a country that is the largest contributor to Greece’s bailout fund, to steer the conversation back to common ground and realistic goals in a speech to German lawmakers.
Monitoring the state of play closely is Federal Reserve Chair Janet Yellen, who warned of an spillover effect in the U.S. if a resolution isn’t reached. Heading into Thursday’s meeting – billed as a last chance to seal an agreement on as much as €7.2 billion in bailout aid – optimism was in short supply. “I think we would be helped if there would be a bit more honesty in the debate on Greece,” European Commission Vice President Frans Timmermans said at news conference in Brussels. Officials from the Netherlands to Portugal are anticipating a breakdown in talks. The government of Ireland, itself once a recipient of aid, is just the latest euro member making contingency plans for a Greek default or ejection from the euro, a person with knowledge of the matter says.
Tsipras showed little inclination to change his tone with talks between Greece and its lenders hitting a wall. He penned an opinion piece in German daily Der Tagesspiegel railing against anyone who says German taxpayers are paying for Greek wages. On the eve of the euro-area gathering of finance chiefs, German Finance Minister Wolfgang Schaeuble -one of Greece’s sternest critics – told a parliamentary hearing that his government is bracing itself for the worst. That sentiment was broadly shared by others, too. That puts the onus on European Union leaders to disentangle the contentious issues such as sales-tax rates and pensions at a June 25-June 26 in Brussels, mere days before Greece’s bailout program expires. That will also be when Merkel and Tsipras will come face to face.
Greek journalists attended seminars funded by the IMF in order to present its positions favorably, said Greece’s former representative to the IMF Panagiotis Roumeliotis. Roumeliotis testified on Tuesday in front of the special parliamentary committee on the Greek debt. The former official said that several Greek journalists were “trained” in Washington D.C. in order to support the positions of the IMF and the European Commission in Greek media. Roumeliotis said that when he was in D.C. he accidentally met with Greek journalists who told him that they were invited to attend seminars on the function of the IMF. He further said that the committee can ask the organization’s Director of Communications Department, Gerry Rice, for a list of journalists’ names who attended the seminars.
Greek Parliament President Zoe Konstantopoulou, who heads the committee, adopted the proposal and appointed a committee member to draft a formal request to the IMF. “In Greece, certain individuals who work for the mass media were contracted to conceal the fact that the Greek debt was not sustainable.” Konstantopoulou went further and named television journalist Yiannis Pretenteris who, according to Konstantopoulou, has admitted in his book that he attended the IMF seminars. Roumeliotis claimed that many journalists were victims of misinformation and the omission of the fact that the debt was not sustainable was detrimental to the public interest. He further said that several economists and university professors attempted to convince the public that the debt was sustainable, adding that he puts them in the same category as the journalists.
Greek negotiators head into talks with eurozone finance ministers on Thursday to tackle the debt-stricken country’s deepening crisis after demonstrations against further EU-enforced austerity took place in Athens last night. Despite warnings that Greece was heading for a possible exit from the euro without an extension of its current bailout deal, the meeting on Thursday is expected to be short, with little likely to be decided. The gathering of finance ministers from the currency bloc’s 19 member states is due to discuss the gulf between Athens and its creditors, but is expected to delay any decisions to a summit of EU leaders next week, officials in Brussels said. With no fresh proposals on the table, the ministers have indicated that there is little point in a prolonged debate about a potential deal at the meeting.
The Greek government said it remained ready to join talks to secure an agreement, but could not accept the current proposals to cut pensions or achieve a 1% budget surplus in the middle of a recession. Financial markets are expected to greet the impasse between Greece and the troika of lenders with dismay, further depressing prices that have slumped in recent days. A war of words between the Greek prime minister, Alexis Tsipras, and the troika has become further inflamed after he accused the IMF of “criminal responsibility” for the situation and said lenders were seeking to “humiliate” his country. Jean-Claude Juncker, the president of the European commission, responded by saying he had “sympathy for the Greek people but not the Greek government”. Juncker was until recently rated as one of Tsipras’s only allies.
Bank of Greece Governor Yannis Stournaras came under attack on Wednesday from Parliament Speaker Zoe Constantopoulou and her SYRIZA colleagues after the central bank issued in one of its regular reports a warning regarding the consequences of the government failing to reach an agreement with its lenders. The report warned that Greece could tumble out of the euro area and even the European Union as a result of a default, which prompted SYRIZA to accuse Stournaras of “not only going beyond the boundaries of his institutional role but trying to contribute to the creation of a restrictive framework around the government’s negotiating possibilities.” Constantopoulou went as far as rejecting the report because it had been sent on a memory stick and not in printed format.
The document arrived ahead of Parliament’s debt audit committee – which is being presided over by Constantopoulou – delivering its preliminary findings. The parliamentary speaker claimed that the Bank of Greece’s report was an “undemocratic” attempt to “create a fait accompli and to prevent a challenge for debt relief.” The Debt Truth Committee’s initial report claimed that much of Greece’s debt should not be paid. “All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece,” said the authors’ report. “Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate and odious.”
Schäuble and Varoufakis may have shared the stage for only five months, but they’ve become archrivals in the battle of ideas that’s shaping the euro zone’s response to the worst crisis in its 16-year history. One man is a self-styled “erratic Marxist” who’s spent his career in the academy teaching economics and game theory. The other is a lawyer and stalwart of the conservative Christian Democratic Union who’s logged 40 years of lawmaking in the Bundestag, Germany’s parliament. Varoufakis has won praise from economists such as Joseph Stiglitz for his penetrating critiques of the euro area’s flaws. Schäuble helped form the 19-member monetary union.
Their contest is rooted in a question that was left unanswered when the single currency went live on Jan. 1, 1999: What’s the plan if and when one of its members is about to go bust? Greece seems to be nearing that fate at breakneck speed. Over the weekend, eleventh-hour talks between Athens and its creditors collapsed, with no indication the two sides could resolve their differences. At a Eurogroup meeting scheduled for Thursday afternoon in Luxembourg, Varoufakis, Schäuble, and other finance ministers would be scrambling to avert a calamity. Varoufakis argues that the troika has been making it up as they go along. He says selling the port of Piraeus to the Chinese or slashing state workers’ pensions won’t save his country or, for that matter, the euro area.
What’s needed, he says, is a redesign making it easier for rich nations such as Germany to channel “idle savings” into investments in poorer countries like Greece. “This is not a technical problem; it’s an architectural problem,” Varoufakis says. “And the current architecture can’t last.”
The IMF has a lot of experience of sovereign bailouts. These vary depending on the situation of the country, but typically they have several elements. Some debt is written off, often as much as half of it. The country devalues its currency, usually by 20-25%. It brings in a reform programme, sorting out its internal finances. And it receives new loans to tide it over until the reforms take effect. In the case of Greece, the first two elements were not there. Some private debts were written down (the so-called “haircut” imposed on bond holders) but the much larger public debts were not touched. Nor was there a devaluation, for Greece was in the eurozone. So all the burden was placed on the reform programme, which imposed deep austerity on the people, in return for which the country got some short-term loans.
Thus the IMF’s tried and trusted economic solution could not be applied because of politics. Sovereign debt in Europe could not be written down because to do so would have undermined the eurozone system; and Greece could not devalue. The result was a fudge, which we at this newspaper, along with many others, said at the time could not work. As it turned out, the catastrophe that struck Greece was even worse than many of us feared: the economy shrank by a quarter. This is at the outer limits of what any developed economy has experienced since WWII, and akin only to the sort of declines that struck the Eastern European countries when they abandoned communism. The difference there is that Eastern Europe recovered quite swiftly and then leaped ahead, whereas there is no sight of recovery in Greece.
Politics beat economics, but at terrible cost for the Greek people. So what happens next? There will be a huge political commotion, and huge pressure for Greece to carry on with yet deeper austerity. The conventional view is that it would be better for the country to submit to this pressure and that it would be a catastrophe were it to default and/or leave the eurozone. That is politics, and there are plenty of politicians, officials, central bankers, academics and commentators who will press this case. But to accept this is to accept that Greece will spend the next 42 years paying back an average of €10bn a year to its creditors. That cannot be right.
The north London neighbourhood of Tufnell Park has an abundance of family-owned Greek businesses and cafes. Most of the shop owners are familiar with each other – the Greek diaspora is a closely knit community that comes together often to discuss issues, both public and private. Everyone is talkative, and everyone has one thing on their mind: the economic situation back home.
Pavlina Kostarakou: ‘Give Us A Break, Let Us Breathe’: “What’s happening in Greece is very upsetting. I got a phone call from my dad on Sunday and I thought oh crap, has something happened? Are we out of the eurozone? But it turned out he’d just called me by accident,” says Kostarakou, a 23-year-old bookseller at Hellenic Books, which specialises in Greek and Latin literature. “My main concern is the effect the crisis has on how Greek people are perceived by the world. The casual annoying jokes about the Greek owing money everywhere and not working are insulting.” For Kostarakou, Greece’s “useless” politicians are not the only cause of the current crisis. “It’s as if somebody wanted us to go down and take advantage of the situation,” she says.
Friends her age in Greece are frustrated but do not want to leave the country. “It’s the most remarkable thing. They insist on staying there. But most of my older friends around the age of 30 are moving abroad. Many have moved to London for work purposes. “I’m worried about people like my younger sister. She studies dentistry, which means she’ll need to study an MA and get experience abroad. Someone like her will be really hit by a Greek exit [from the euro]. She won’t be able to afford to go abroad because no one will be able to support her.” The election of Syriza was a hopeful thing for the younger generation, Kostarakou adds.
“Everyone was praising Greece about electing a leftist government, and then in one night the international atmosphere shifted into a negative and critical one. What justifies this shift? Economically, I can’t blame people for thinking the demands that Greece pay are fair. There is an economical balance to keep. We signed papers, so we do need to pay. But there is a feeling that the big powers like Germany should give us a break. Let us breathe. “They know exactly what kind of economy they need to deal with. Why are all these countries that are pro-welfare state and want us to collaborate with them pressuring us?”
“There was a huge incapacity among the politicians to tell the truth and to collaborate with each other across party lines. The long-term interests of the country were repeatedly sacrificed at the alter of short-term political calculation.” This is how British historian Mark Mazower sums up Greece’s comparative disadvantage vis-a-vis the other eurozone countries that had to be bailed out. “Because, as a result, Greek governments were weak, they tended to go for the more superficial reforms, leaving the deeper pathologies untouched,” he says. Mazower, a professor at Columbia University, visited Greece recently to receive an honorary doctorate from the University of Athens. In his view, the economic policy that has been implemented since the crisis broke out here is “toxic.”
However, he points out, “the problem did not begin with the handling of the crisis. It began in the 1980s, with the massive expansion of a clientelist state, in which both parties of government participated with enormous gusto. We cannot blame the Germans, the IMF or the ECB for that,” he says. On top of mistaking the causes for the effects, Mazower says, the older generations also appear to want “to repeat the history of the Occupation and the Civil War” – this time hoping for a different outcome. “The most enlightening conversations I’ve had are with young people under the age of 30, who have not grown up with the mythification of EAM-ELAS and are looking for some completely new way of thinking about how to get out of the present predicament.”
Mazower does not go easy on the Europeans either. In March 2010, as Greece signed the first memorandum, he wrote an article in the Financial Times documenting the history of foreign interference in the domestic affairs of the newly founded Greek state – what the Greeks like to call “the foreign finger.” In a rather prophetic remark, he argued that the ability of George Papandreou’s government to convince Greek society about the need for radical reforms would depend on the extent to which “Europe stops looking like the latest great power trying to control Greece’s fate.” Five years on, his assessment is that the Europeans did not fare very well.
Five years ago, Sissy Vovou’s pension was €1,330 (£953) and landed in her back account 14 times a year: you used to get, she wistfully recalls, a full extra month at Christmas, plus a half each at Easter and for the summer. Now it is a monthly €1,050 – and there are only 12 months in the Greek pensioner’s year. “In all,” she said, “I’ve lost 30% of my income. And I’m one of the lucky ones. I’m in the top fifth; 80% of Greek pensioners are worse off than me.” Vovou, 65, who began work at 17 in the publishing industry and ended her career at the state broadcaster, ERT, is also lucky because her son, now 40, has a good job and a regular salary. She does not need to help him out. Eleni Theodorakis, on the other hand, retired in 2008 from her job as an administrative assistant in a regional planning service, aged 55.
“My pension is €942 euros a month – not too bad, really,” she said, almost shamefacedly, fishing the statement out of her handbag. “Fortunately my son is all right, just about, though sometimes he gets paid late. And once or twice, not at all. But my daughter’s husband has been unemployed for four years now. They have a baby … I give them what I can. It isn’t easy. Thankfully, my sister has a big garden. We grow things.” There are many like Theodorakis among Greece’s 2.65 million pensioners. According to a study last year by an employer’s association, pensions are now the main – and often only – source of income for just under 49% of Greek families, compared to 36% who rely mainly on salaries.
With a jobless rate of about 26% – youth unemployment is at 50% – and out-of-work benefits of €360 a month generally paid for no longer than a year, pensions have become “a vital part of the social security net for many, many people,” said Vovou. “Retired parents are having to help their adult children everywhere. And now they’re demanding we cut them even more? It’s just so very wrong.” Pensions have become arguably the biggest hurdle in the tortuous, on-off negotiations between the leftwing government of the prime minister, Alexis Tsipras, and Greece’s creditors.
Prime Minister Mariano Rajoy says the rise of new parties challenging the political establishment threatens Spain’s recovery. His own attempts to stay in office may actually do more damage to the country’s prospects. The prime minister is due to announce changes to his government team on Thursday to drive home the message that its his economic reforms rather than central-bank bond purchases that have spurred the fastest expansion in seven years. With almost a third of Spaniards at risk of poverty and the governing party beset by corruption allegations, some analysts are more concerned by Rajoy’s struggle to address the culture of cronyism that helped tip the country into economic crisis.
“Every analyst is saying privately, thank God there is the prospect of cleaning up the Spanish political system,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “There is no bull case for Spain under current conditions.” As he prepares to fight an election, Rajoy is pointing to Greece’s travails as a warning to voters that they risk derailing the recovery if they back insurgent parties like the anti-austerity group Podemos. In fact, even some ideological allies of the prime minister argue the emergence of new forces may help steer Spain toward more lasting growth by tackling graft and modernizing the machinery of government. “Corruption and crony capitalism are killers for any economic system,” Jorge Trias, a former People’s Party lawmaker, said in an interview. “So this is wholly positive.”
After 33 years in which either Rajoy’s People’s Party or its traditional rivals, the Socialists, have controlled the Spanish government, Rajoy has a fight on his hands to hang on to office as voters’ anger at corruption cases and the impact of austerity policies costs the party support. Following a cluster of regional and local elections last month, candidates backed by Podemos took power in Madrid, which the PP had ruled for 24 years, and Barcelona. Support from Ciudadanos, a pro-market party that emerged as a national force this year, allowed Socialist candidate Susana Diaz to become Andalusia’s regional president this month, and the party is in advance negotiations to support the PP in Madrid’s regional assembly.
In a (for me!) brief presentation with 7 slides, I explain why rising private debt necessarily causes increased inequality, and leads to an economic crisis when the rate of growth of debt exceeds the rate of decline of wages as a share of national income. Crucially, the actual breakdown is preceded by an apparent period of tranquility–a “Great Moderation”. This was a short talk to a public audience at ESCP Europe in Paris, which was presented in English and also translated into French by Gael Giraud, Chief Economist of the French Development Agency and the translator of Debunking Economics (so the soundtrack is in both English and French).
Earlier today we reported about a very sad development for the freedom of speech, or at least the illusion thereof, when one of, if not the best, critical Federal Reserve reporter in the mainstream media, WSJ’s Pedro da Costa founds he was no longer “invited” to the Fed’s quarterly press conference. His transgression: daring to ask Yellen some very uncomfortable questions during the March 2015 press conference[..] today we finally got a true glimpse of just what “access” financial journalism in the US has truly become: a petty clique in which everyone wants to be an “Andrew Ross Sorkin” access reporter, never daring to ask any important questions, always afraid to challenge either the subject or the status quo, and quite content with irrelevant fluff over actual matter.
For which we are grateful, because we now know why the Fed can and does keep getting away with its endless charade of repeating the same mistakes again and again. The reason is simple: the fourth estate no longer is a valid counterbalance to the stupidity of the self-anointed “infallible” central-planners of the western (and really with China now engaging in LTRO and Twist, eastern too) world whose only remaining craft is the last-ditch attempt to restore confidence in a world which, paradoxically, has seen ever greater central bank intervention with every passing year: a process which is so self-defeating we understand perfectly well why the career economists at the Fed are so blind to it.
Instead, said fourth estate is perfectly happy to produce worthless copy in some cubicle, happy to collect its pay, because it knows that just one complaint from the Fed would mean an immediate pink slip and a confrontation with the true state of the US economy, which contrary to Fed promises and erroneous mainstream media reporting, keep deteriorating further and further. Thanks to the Fed. Thank to Pedro’s “fellow Fed reporters”, none of whom had the balls to ask a simple question. Then again in retrospect, we can understand why. In a world in which the Fed perceives itself as omnipotent, and where anyone even daring to question its motives, its methods or its track record, is a threat to be eradicated or at least barred from all future opportunities for further humiliation and disclosure that the emperor has indeed been naked from day one, at even such token events as a press conference where questioners are generously afforded 60 seconds in which to expose said emperor.
This is what Pedro found out the hard way today, a discovery which also allowed the rest of us to finally comprehend the farcial, hollow facade this country has passing off as its crack “financial journalists” asking “tough questions” all of whom ended up being nothing more than “access scribes”, terrified to open their mouths and lose their access, an outcome which incidentally just might force them to do some real reporting for once, instead of sending rhetorical letters to the middle class asking why it keeps being “stingy” instead of spending its hard-earned money, and making the beloved Fed’s life so difficult…
An underdog Texas city that tried to ban hydraulic fracturing bowed to heavy political and legal pressure Tuesday night and repealed its landmark ordinance after seven months. Denton made headlines last November when voters in the university city of 125,000 on the Barnett Shale near Dallas decided to prohibit fracking amid concerns about the impact of its 280 wells on health and the environment. It became the first city to ban fracking in the heavily Republican, oil-industry friendly state. Denton had already issued a moratorium on new gas drilling permits in May last year. But victory for fracking opponents was short-lived. A trade body, the Texas Oil and Gas Association (TXOGA), filed a lawsuit the next day alleging that the city had exceeded its powers.
A state agency, the Texas General Land Office, also took legal action against Denton. Then last month Texas governor Greg Abbott signed a bill known as HB 40 which establishes that state laws trump local laws on oil and gas activities – in effect, banning Denton’s ban. After waiting for a couple of weeks and considering its options as construction trucks rolled back in and fracking resumed, the city council voted 6-1 to repeal the ordinance on Tuesday in the hope of reducing legal costs, a day after the TXOGA and Land Office amended their lawsuits in the wake of HB 40’s passage. The city said in a statement: “As this ban has been rendered unenforceable by the State of Texas in HB 40, it is in the overall interest of the Denton taxpayers to strategically repeal the ordinance.”
Oil field work was coming in fast when GoFrac doubled its workforce and equipment fleet at the beginning of last year, just one of hundreds of small oil service companies thriving on the revival of U.S. drilling. Founded in November 2011 with a loan of around $35 million, the Fort Worth, Texas-based company was by 2014 making nearly that much in monthly revenues, providing the crews and machinery needed by companies including ExxonMobil to frack oil and gas wells from North Dakota to Texas. Executives flew to meetings across the country in a Falcon 50 private jet, and entertained customers at their suite at the Texas Rangers baseball stadium in Arlington.
The firm would soon move into a 22,000-square-foot office on the 12th floor of Burnett Plaza, one of Fort Worth’s most prestigious office buildings. Eighteen months on, however, without work and unable to meet monthly loan payments, GoFrac has closed its doors, its ambitions gutted by a steep dive in oil prices. Of the 550-odd employees on the payroll at the beginning of this year, only six remain. At GoFrac’s only remaining outpost, a small warehouse and 40-acre gravel yard in Weatherford, 30 miles west of Fort Worth, its huge fleet of sand haulers, chemical blenders and pressure pumps that months before were being used to frack U.S. oil and gas wells, sit idle in long rows, waiting to be sold.
“We knew it was going to be rough, but nobody foresaw what was coming,” said GoFrac chief financial officer Kevin McGlinch, who was hired in November 2014 to see GoFrac through the slowdown. GoFrac’s end mirrored its beginning: steeper and faster than expected and driven by the unpredictable forces of international oil markets. U.S. oil prices dropped 60% from June to January due to oversupply from U.S. shale deposits, putting an end to the oil drilling boom and precipitating the sharpest industry downturn in a generation.
It’s tough being a low-yielding safe haven currency. In good times, nobody wants you and you are used for carry trades. In bad times, you’re highly sought after and your value seems completely decoupled from your economy. Such is the fate of the Swiss franc. The Swiss National Bank must feel like it’s Groundhog Day. Four years ago, as the Greek crisis heated up and everyone feared an imminent break-up of the euro zone, the SNB took radical action by pegging the Swiss franc against the euro. That worked beautifully for more than three years. Until the European Central Bank signaled it was going to embark on a massive round of bond-buying and the peg was no longer tenable.
You know the rest of the story: Shock de-peg by the SNB on January 15th. Year-to-date, the Swiss franc has gained some 15% against the euro and that has left a big dent in the country’s growth dynamics, exports and price levels. In the first quarter, the economy shrank 0.2% and exports suffered greatly. And now, the Greek crisis is back with a vengeance (not that it was ever fully contained) and the Swissie is seeing increased safe-haven flows again. So what choices does the SNB have to lower the attractiveness of its currency? Very few – according to analysts. Bank of America Merrill Lynch writes: “The SNB’s policy options are dwindling, given the size of its balance sheets, even if Q1 GDP and CPI may have raised the possibility of a response.”
Meanwhile, Credit Suisse analysts add: “With interest rates already negative, monetary policy is very limited” True, the SNB could lower its benchmark rate even further into negative territory (the three-month Libor target is currently -0.75%, a record low), or increase the number of banks required to pay negative interest rates on sights deposits, which it did in June. But both measures are expected to have marginal effectiveness.
Those expecting further swingeing interest rate cuts from Russia as the country’s inflation slows, or a U.S. Federal Reserve-style bond-buying program, may be disappointed. The Central Bank of Russia is concerned about cutting rates “too fast”, after a series of big cuts this year, Elvira Nabiullina, governor of the Central Bank of Russia, told CNBC. Nabiullina told CNBC “Attempts to reduce the interest rates too fast or even acquire certain assets may simply lead to stronger inflation, to an outflow of capital or to dollarization of the economy, and that would slow down the economic growth, other than promote it.” She added that the bank is ready to provide “raw liquidities” to the country’s banking system if needed.
Russia’s economy has faltered and inflation rocketed in the last year thanks to the triple shocks of sanctions from the West over its actions in Ukraine, the oil price decline, and the ruble rout. In December 2014, the central bank shocked the market when it hiked interest rates from 10.5% to 17% as it tried to shore up the weakening ruble and combat inflation. As part of its efforts to combat the weakening currency, it also announced in November plans to allow a free float of the ruble, pump more money into its banks and relax banking rules to minimise losses to banks from the currency crisis. “The currency was under a huge stress, under a huge pressure,” Nabiullina recalled.
Belgian bailiffs have demanded that 47 organizations inside the country reveal if they own any Russian state assets, several reports claimed on Wednesday. The move allegedly paves the way for a seizure of Russian property over the $50 billion Yukos case. The bailiffs were reportedly acting at the behest of the Isle of Man-based Yukos Universal Limited, a subsidiary of the Russian energy giant, dismantled in 2007. They have given the target companies a fortnight to comply. The story was broken by Interfax news agency, and later confirmed by several other leading Moscow-based news media sources. RBC.ru has quoted Tim Osborne, the head of group of former Yukos shareholders that brought a case for compensation to The Hague, as confirming the intent to seize assets.
A letter accompanying the notice, reportedly drafted by the law firm Marc Sacré, Stefan Sacré & Piet De Smet, accused Moscow of a “systematic failure to voluntarily follow” international legal judgments. The addressees included not just local offices of Russian companies, but international banks, a local branch of the Russian Orthodox Church, and even Eurocontrol, the European air traffic agency headquartered in Brussels. Only diplomatic assets, such as embassies, were exempt. Yukos Universal Limited was awarded $1.8 billion in damages by the Permanent Court of Arbitration in The Hague in July 2014, as part of a total settlement for approximately $50 billion, owed to its former shareholders and management.
The court concluded that the corporation, once headed by Mikhail Khodorkovsky, who spent more than a decade in prison for embezzlement and tax evasion from 2003 to 2013, “was the object of a series of politically motivated attacks.” Russia has not accepted the ruling, saying it disregards widespread tax fraud committed by Yukos, and constitutes a form of indirect retribution for Russia’s standoff with the West over Ukraine. Earlier this month, the Russian ministry of justice said it would take “preventative measures” to avoid property confiscation, and challenge each decision in national courts.
The world hasn’t had so many refugees or internally displaced people since 1945, and numbers are expected to increase, according to an Australian research center. About 1% of the global population, or about 73 million people, have been forced to leave their homes amid a spike in armed conflict over the past four years, the Institute for Economics and Peace, which compiles the Global Peace Index, said in a report published on Wednesday. “One in every 130 people on the planet is currently a refugee or displaced and most of that comes out of conflicts in the Middle East,” institute director Steve Killelea said by phone. The numbers in Syria, where as many as 13 million of its 22 million people are displaced, are “staggering,” he said.
The number of people killed in conflict rose to 180,000 in 2014 from 49,000 in 2010; of that number, deaths from terrorism increased by 9% to an estimated 20,000, according to the report. The impact of this violence on the global economy, including the cost of waging war, homicides, internal security services, and violent and sexual crimes, reached $14.3 trillion in the past year, it said. “To put into perspective, it’s 13.4% of global GDP, equivalent to the combined economies of Brazil, Canada, France, Germany, Spain and the U.K.,” Killelea said. “It’s also more than six times the total value of Greece’s bailout and loans from the IMF, ECB and other euro zone countries combined.” Iceland tops the index as the most peaceful country in the world, Syria as the least.
War, violence and persecution left one in every 122 humans on the planet a refugee, internally displaced or seeking asylum at the end of last year, according to a stark UN report that warns the world is failing the victims of an “age of unprecedented mass displacement”. The annual global trends study by the UN’s refugee agency, UNHCR, finds that the level of worldwide displacement is higher than ever before, with a record 59.5 million people living exiled from their homes at the end of 2014. UNHCR estimates that an average of 42,500 men, women and children became refugees, asylum seekers or internally displaced people every day last year – a four-fold increase in just four years.
By the end of 2014, there were 19.5 million refugees – more than half of them children – 38.2 million internally displaced people and 1.8 million asylum-seekers. Were the 59.5 million to be counted as the population of a single country, it would be the 24th largest in the world and one with about the same number of people as Italy. The numbers are up 16% on 2013 – when the total stood at 51.2 million – and up 59% on a decade ago, when 37.5 million people were forced to flee their homes. UNHCR says the four-year war in Syria is the single largest driver of displacement: by the end of 2014, the conflict had forced 3.88 million Syrians to live as refugees in the Middle East and beyond, and left 7.6 million more internally displaced.
In blunter terms, one in every five displaced persons worldwide last year was Syrian. The UN high commissioner for refugees, António Guterres, said that although the world was experiencing “an unchecked slide” into an era of massive forced global displacement, it seemed unwilling to tackle the causes. “It is terrifying that on the one hand there is more and more impunity for those starting conflicts, and on the other there is [a] seeming utter inability of the international community to work together to stop wars and build and preserve peace,” he said.
