The future of the Eurozone is decidedly hanging in the balance at the moment. As I said earlier in the week, the problem isn’t a simple question economics anymore: everything now is all about credibility, about who does what, and when, and how everyone else reacts. As the crisis trundles on and on, news that Greek bond spreads have hit ever higher post European Monetary Union records has become such a regular event that the process now seems almost a monotonous one. However, what happened on what we could now call this week’s Greek “Black Thursday” certainly marked a new, and more worrying milestone in the ever evolving crisis. The news this morning that Greece has demanded the activation of the EU-IMF loan - news which apparently took even the EU Commission itself by surprise it seems - only adds to the general sense of confusion that abounds.
The problem we are presented with is not only that Greek 10-year bond yields reached 8.83 per cent, their highest levels since 1998, or that the cost of insuring Greek government debt against default hit a record high of 616 basis points. The really disturbing development was that spreads on government bonds all around Europe’s periphery – including countries like Hungary and Bulgaria - widened sharply, raising heightened concerns that Greek contagion may move from being a mere possibility to becoming a reality. And the cost of protecting peripheral eurozone borrowers against default also hit record levels, with Spain and Portugal touching record highs for their Credit Default Swap prices.
The surge in Greek bonds followed news that Eurostat, the European Union’s statistical service, had revised its estimate of the country’s 2009 deficit to 13.6 per cent of gross domestic product from 12.7 per cent, and the announcement that Moody’s Ratings Agency had downgraded Greek sovereging debt to A3 from A2.
Markets are obviously nervous at the moment, and understandably so, with two issues in the forefront of their minds. In the first place the real level of commitment of core Europe, and especially Germany, to supporting the periphery through several years of difficult and painful structural adjustment is far from clear. On the other, the ability of political leaders in Greece and other affected countries to carry their citizens with them through the sacrifices which will be required to maintain the monetary system intact continues to remain in doubt.
German voters are notably uneasy about lending money to Greece, and a sizeable majority of them are against any form of aid. Reticence on the part of Angela Merkel’s coalition partner also makes obtaining parliamentary backing for the loan difficult, and the FDP senior spokesman on financial questions, Frank Schaeffler, stated bluntly this week that either Greece needed to intensify its austerity plan or it should leave the Euro.
Most observers, however, consider a Greek withdrawal to be only a remote possibility, given that any return to the Drachma would make the country’s debts even less payable. In fact the threat to the integrity of the currency union comes from an altogether different quarter. What is in now increasingly in doubt is the ability of Germany’s political leadership to carry voters with them should either Greece decide to default while continuing with Euro membership, or should other member countries be forced to apply for loans.
At the same time, some sort of Greek default is now no longer simply a theoretical possibility among many others, indeed talk of the inevitability of some form of debt restructuring (albeit voluntary) grows with every passing day. Erik Nielsen European Economist with Goldman Sachs said this week he is expecting Greece to offer some sort of “voluntary debt-restructuring” to creditors over coming months, while JP Morgan issued a research note saying that while such restructuring may not be imminent, the move would make sense given that Greece could be seen as “the sovereign analogue of a ‘bad’ company with a bad capital structure”.
Restructuring is simply a polite word for default, with the difference that it is normally carried out by agreement. The most likely form of restructuring in the present context would be debt rescheduling, whereby short and medium-term debt is converted into a long-term version, as happened with the so-called “Brady bonds” devised by the US Treasury to resolve the debt difficulties of a number of Latin American countries in the late 1980s.
One indication that the ground may be being prepared for some kind of restructuring can be found in the decision reported by German Deputy Finance Minister Joerg that any aid to Greece would come in the form of pooled loans from the euro-zone countries and not through the purchase of Greek bonds. Plans to purchase bonds are “off the table,” he said. This procedure implies that government loans would be strongly guaranteed, while private bond holders would really pay the price for the Greek “rescue”.
At the same time voices are now being raised asking whether it would not be a better idea for Germany, rather than financing more and more loans, simply to put its losses down to experience and go back to the Deutsche mark? According to Joaquin Fels, Chief Global Economist at Morgan Stanley, the Greek rescue measures could “set a bad precedent for other euro- area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time,” in this case “countries with a high preference for price stability, such as Germany, might conclude that they would be better off with a harder but smaller currency union.”
Evidently such statements can be read as bargaining postures, attempts to get politicians and voters in the South of Europe to focus their minds on the problem in hand, but they can also be read as warnings of what could happen if they do not. At the present time the situation is extraordinarily confused. Greek Prime Minister George Papandreou's formal request for financial financial support seems to have taken almost everyone completely by surprise although it shouldn't have, since as I reported in my earlier post the Greek Finance Minister George Papaconstantinou had previously warned that his country could call on loan backup from the EU and the IMF even while talks with the 20 strong EU, ECB and IMF mission were continuing. Actual details of the level of financial support which will be offered remain scant at this point. According to G20 sources who spoke to Reuters, the Greek government have only asked at this point for a first tranche downpayment, to give them working capital to keep going while the talks continue (think of the JP Morgan distressed company talks with the receiver analogy). What is quite striking, however, is how the government let things come to this pass before striking the decisive agreement - evidently they could not hold out till after the German regional elections, and that is another worrying sign. When all is said and done, one thing is obvious, the forthcoming loan will clearly have some kind of super-senior status (which means it would be payable before ALL other creditors - German voters would settle for nothing less), and this implies that it is likely to be existing bondholders, and not EU national governments, who are going to be invited invited to pay for the Greek bailout. How they will react to this realisation is what remains to be seen in the days and weeks to come.
Friday, April 23, 2010
Tuesday, April 20, 2010
Do I See Movement In The Greek Trenches?
This isn't about economics anymore, this is now about who does what, and when, and how everyone else reacts.
Certainly the news that Greek bonds hit another post-EMU record high yesterday can hardly be said to have come as a surprise. 10-year bond yields reached 7.76 per cent at one point and closed up 26 basis points on the day. This morning Greece comfortably sold 1.5 billion euros worth of 3 month Treasury Bills - in the end they sold 1.95 billion euros of them - but the yield on the bonds more than doubled to 3.65 percent, from 1.67 percent for a sale of similar debt on January 19. And the the extra yield investors demand to hold Greek 10-year bonds instead of German bunds, the euro-region’s benchmark government securities, rose again today - to as much as 472 basis points - the most since Bloomberg records began in 1998. The average spread over the past 10 years has been 61 basis points. Greek two-year notes also fell, pushing the yield 23 basis points higher to 7.51 percent.
On the other hand, Bundesbank President Axel Weber was out there yesterday telling a group of German lawmakers that Greece was going to need more, not less money.
Why, I ask myself, is a conservative, and normally discreet, figure like Axel Weber out there stressing precisely this point at this moment in time, when German voters are notably nervous about any sort of aid to Greece, reticence on the part of Angela Merkel's coalition partner makes a parliamentary debate on a loan difficult, and voices are even being raised about whether it would not be a better idea for Germany simply to put the losses down to experience and go back to the Deutsche mark?
All these statements can be read as bargaining postures, attempts to get people in the South of Europe to focus their minds on the problem in hand, but they can also be read as warnings of what could happen if they do not.
Certainly, nothing at this point is very clear. Especially, as the FT reminds us this morning, when we live in a world where the unthinkable has finally become thinkable. So we could now ask ourselves whether the financial markets are not in fact, and before our very eyes, gearing themselves up for an event which many had not previously been factored into the realms of the possible: Greek debt restructuring.
The Financial Times also reports that the IMF is likely to raise the question of debt restructuring at their forcoming meetings with the Greek finance ministry - you know, the ones that have been delayed by the symbolic intervention of all that volcanic ash. According to the FT source it is not likely to be a detailed discussion “just a pointed reminder of the debt forecast”.
Of course, the term "debt restructuring" does sound a lot better than default, and the expression does cover a wide range of possible outcomes, running from unilaterally changing the terms of the bonds one the one hand, to voluntary renegotiation to ease refinancing pressure at the other.
One proposal which has been advanced (most recently by Wolfgang Munchau) is for recourse to some form of Brady bond:
Brady bonds were initially issued to ease the debt difficulties of a number of Latin American countries in the late 1980s (and they are modeled on the earlier Japanese par bonds - you can read more about them in wikipedia here). The essential idea in the Greek case would be that current debt instruments would need to be swapped for some longer term bond with a lower than market rate coupon (or implied interest rate).
Of course, as Munchau points out, in order to get the existing bondholders to trade their debt on a voluntary basis, they would have to be put under some sort of pressure:
Which makes this little detail about the form of the EU loan rather more interesting than it might seem at first sight:
So we could imagine that the forthcoming loan would have super-senior status (German voters would settle for nothing less), and, if this interpretation is correct, it will be existing bondholders, and not the EU governments, who will be being invited to "bail Greece out". Well, maybe we won't have to wait too much longer to find out, since the Greek Finance Minister George Papaconstantinou stated today that the country could call on loan backup from the EU and the IMF by as early as next month depending on loan conditions and the progress of talks with the EU, ECB and IMF joint mission, which is composed of around 20 people according to reports. Plenty to talk about, and plenty of people to do the talking. Too many, perhaps?
Certainly the news that Greek bonds hit another post-EMU record high yesterday can hardly be said to have come as a surprise. 10-year bond yields reached 7.76 per cent at one point and closed up 26 basis points on the day. This morning Greece comfortably sold 1.5 billion euros worth of 3 month Treasury Bills - in the end they sold 1.95 billion euros of them - but the yield on the bonds more than doubled to 3.65 percent, from 1.67 percent for a sale of similar debt on January 19. And the the extra yield investors demand to hold Greek 10-year bonds instead of German bunds, the euro-region’s benchmark government securities, rose again today - to as much as 472 basis points - the most since Bloomberg records began in 1998. The average spread over the past 10 years has been 61 basis points. Greek two-year notes also fell, pushing the yield 23 basis points higher to 7.51 percent.
On the other hand, Bundesbank President Axel Weber was out there yesterday telling a group of German lawmakers that Greece was going to need more, not less money.
Greece may require financial assistance of as much as €80 billion ($107.92 billion) to escape its debt crisis and avoid default, Bundesbank President Axel Weber told a group of German lawmakers Monday, according to a person familiar with the matter.
The estimate, considerably more than the €45 billion that European countries and the International Monetary Fund are currently prepared to extend Greece this year if it needs a bailout, suggests that a rescue of the country may come in several stages and reach beyond 2010.
Why, I ask myself, is a conservative, and normally discreet, figure like Axel Weber out there stressing precisely this point at this moment in time, when German voters are notably nervous about any sort of aid to Greece, reticence on the part of Angela Merkel's coalition partner makes a parliamentary debate on a loan difficult, and voices are even being raised about whether it would not be a better idea for Germany simply to put the losses down to experience and go back to the Deutsche mark?
Germany might consider exiting Europe’s current monetary union to create a smaller bloc as the Greek crisis threatens to turn the euro area into a region of “fiscal profligacy,” Morgan Stanley said.
Greek rescue measures “set a bad precedent for other euro- area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time,” said Joachim Fels, co-chief global economist at Morgan Stanley in London, in an April 14 note. “If so, countries with a high preference for price stability, such as Germany, might conclude that they would be better off with a harder but smaller currency union.”
All these statements can be read as bargaining postures, attempts to get people in the South of Europe to focus their minds on the problem in hand, but they can also be read as warnings of what could happen if they do not.
Certainly, nothing at this point is very clear. Especially, as the FT reminds us this morning, when we live in a world where the unthinkable has finally become thinkable. So we could now ask ourselves whether the financial markets are not in fact, and before our very eyes, gearing themselves up for an event which many had not previously been factored into the realms of the possible: Greek debt restructuring.
Even as Greek bail-out discussions continue – talks between representatives of the European Commission, European Central Bank and IMF were delayed on Monday by the volcanic ash cloud – market watchers are starting to question whether, in the long term, Greece can avoid a restructuring of its debts or even an outright default.
“Investors and analysts are now running the numbers to see what a haircut to Greek bonds would be,” says Steven Major, global head of fixed income research at HSBC. “One way to do this is to compare restructurings for emerging market sovereigns. Based on the defaults over the last 12 years the average long-term recovery rate is close to 70 per cent. Ultra-long Greek bonds currently trade at a price below this.”
The Financial Times also reports that the IMF is likely to raise the question of debt restructuring at their forcoming meetings with the Greek finance ministry - you know, the ones that have been delayed by the symbolic intervention of all that volcanic ash. According to the FT source it is not likely to be a detailed discussion “just a pointed reminder of the debt forecast”.
The IMF has already told the finance ministry informally that Greece’s debt will reach 150 per cent of GDP by 2014, according to this person. Greece’s debt to GDP level – 113 per cent in 2009 – is already the highest in the eurozone. The IMF calculates that Greece will need to find €120bn ($162bn) over the next three years.
Of course, the term "debt restructuring" does sound a lot better than default, and the expression does cover a wide range of possible outcomes, running from unilaterally changing the terms of the bonds one the one hand, to voluntary renegotiation to ease refinancing pressure at the other.
One proposal which has been advanced (most recently by Wolfgang Munchau) is for recourse to some form of Brady bond:
Restructuring is a form of default, except that it is by agreement. It could imply a haircut – an agreed reduction in the value of the outstanding cashflows for bond holders. The Brady bonds of the late 1980s, named after Nicholas Brady, a former US Treasury secretary, worked on a similar principle. An alternative to restructuring would be a debt rescheduling, whereby short and medium-term debt is converted into long-term debt. This would push the significant debt rollover costs to well beyond the adjustment period.
Brady bonds were initially issued to ease the debt difficulties of a number of Latin American countries in the late 1980s (and they are modeled on the earlier Japanese par bonds - you can read more about them in wikipedia here). The essential idea in the Greek case would be that current debt instruments would need to be swapped for some longer term bond with a lower than market rate coupon (or implied interest rate).
Of course, as Munchau points out, in order to get the existing bondholders to trade their debt on a voluntary basis, they would have to be put under some sort of pressure:
One way to force the debate would be to attach super-senior status to the EU loan to Greece. I understand this is still an unresolved issue. Super-senior means this loan would be repaid before existing debt. Should Greece ever get into a liquidity squeeze, bondholders would be put in a back seat. In such a situation, they might prefer rescheduling.
Which makes this little detail about the form of the EU loan rather more interesting than it might seem at first sight:
Any aid to Greece would come in the form of pooled loans from the euro-zone countries and not the purchase of Greek bonds, German Deputy Finance Minister Joerg Asmussen said Tuesday.
He also said that Greece will be an issue at the meetings of finance ministers and central bankers from the Group of Seven leading industrial nations and the Group of 20 industrial and developing nations this weekend in Washington.
"Of course, Greece will be an issue," Asmussen told reporters Wednesday. He also said that "if financial aid for Greece will be given, then the pursued path will be to provide pooled loans." Germany would provide its share of such loans through the state-owned KfW Banking Group and the loans would be guaranteed by the government.
Plans to purchase bonds "is off the table," he said. The advantage of providing pooled loans is that there can be stricter conditions to paying out such loans, such as demanding the implementation of fiscal reforms.
So we could imagine that the forthcoming loan would have super-senior status (German voters would settle for nothing less), and, if this interpretation is correct, it will be existing bondholders, and not the EU governments, who will be being invited to "bail Greece out". Well, maybe we won't have to wait too much longer to find out, since the Greek Finance Minister George Papaconstantinou stated today that the country could call on loan backup from the EU and the IMF by as early as next month depending on loan conditions and the progress of talks with the EU, ECB and IMF joint mission, which is composed of around 20 people according to reports. Plenty to talk about, and plenty of people to do the talking. Too many, perhaps?
Saturday, April 17, 2010
Lies, Damn Lies And Statistics In Sweden (of all places).
This post is basically a follow-up to my earlier Just What Is Going On In Sweden? one, and has been stimulated by an article which appeared in Bloomberg earlier in the week, detailing a number of issues which have arisen in conjunction with the Swedish Statistical Office.
The Story So Far
Basically, most of us were, I imagine, pretty shocked to learn at the start of March that Sweden had unexpectedly fallen back into recession in the fourth quarter of last year: we were shocked not only because the news in itself was bad, but also because we had been under the impression that the Swedish economy was recovering nicely. Yet despite all our prior expectations the Swedish statistical office reported that gross domestic product contracted by a seasonally adjusted 0.6 per cent in the fourth quarter of 2009 (when compared with the previous three months), while, in addition, the third-quarter figure was revised to a 0.1 per cent quarterly decline (down from an original 0.2 per cent gain). And two consecutive quarters of contraction meant that, technically speaking, Sweden was well and truly back in recession.
Faulty PMI Readings
But there was more, since if those of us who had been following the performance of the Swedish economy were more astonished than surprised, it was because the Silf Swedbank manufacturing Purchasing Managers Index had been showing not only robust growth for Sweden's industrial sector, but even suggesting it had been experiencing one of the fastest rates of expansion on the entire planet (and for several consecutive months, see chart below).
Yet far from expanding, Sweden's manufacturing industry has now been stagnant, and for many months. At least according to data supplied by the Statistics Office to Eurostat (see chart below) it has. Of course, maybe the data the Stats Office has collected about manufacturing output is faulty, but looking at the GDP numbers that seems unlikely, unless of course even the revised GDP numbers need revising...
Yet Another Shoe Drops
And just to show that concerns about the kind of data we have been seeing out of Sweden of late are not unfounded, we have the case of what Cecilia Skingsley, head of macro research Swedbank calls the "shoe adventure". Basically, and as Bloomberg reports, when the Riksbank raised interest rates in September 2008, 11 days before Lehman Brothers collapsed, Sweden's central bankers based their decision on inflation figures from the Statistics Office. Unfortunately, later that month four months of inflation data had to be corrected after the Office discovered that a computer inaccurately calculated a 28 percent increase in shoe prices (although the problem, I imagine, lay with the person who entered the data, rather than a malfunctioning computer). As Cecilia Skingsley points out, apart from the impact on central bank monetary policy, “The shoe adventure meant we ended up with a different price base amount, which in turn affected benefit payouts.” In fact Bloomberg estimate that the mistake cost the government something over 600 million kronor ($84 million) in excess benefit payouts.
Statistics Sweden boasts a proud career which dates all the way back to 1686, when a church law became the basis for the Swedish population census. It released 74 publications last year and 371 press releases, cataloging everything from how many moose are shot annually, to the number of Swedes that are named after a Christmas tree ornament. But for all its venerable history, the office (which employs 1400 people) has evidently seen better days, since over 10 percent of 71 statistical reports published in February and March were corrections of earlier data releases.
And it isn't only the inflation and GDP data which has been causing problems, Figures for local government finances were corrected last month to a deficit of 2.2 billion kronor from a surplus of 2.4 billion kronor. The Swedish government uses these figures to draw up its annual budget.
Another area of contention revolves around central bank rates and home mortgages. The Statistics Office had to correct on Feb. 25 its estimate for the proportion of Swedish households with adjustable-rate mortgages, revising the time series as far back as far as September 2005. The figure for December was adjusted to 58 percent from 48 percent. The revision prompted speculation the Riksbank may have forecast higher-than-necessary interest rates at its February 10 meeting.
All these issues are rather serious, even if some are more important than others, and certainly go to show that statistical issues in Europe extend well beyond those we have seen in the recent highly publicised Greek case. Bloomberg cite many analysts who are rightly angry about the current state of affairs, but let me add my own personal beef about Swedish statistics here: the lamentable state of the SILF Swedbank PMI readings has lead me to suspend Sweden from my monthly global manufacturing report. Quite frankly this sort of faulty measurement only fuels the (largely unjustified) scepticism which tends to surround this kind of qualitative performance measure, yet from what I can see Markit Economics country reports are, by and large, reliable within a reasonable margin of error. Which only makes the Swedish case stand out further, and makes it, at least for my part, incomprehensible that Swedbank haven't felt the need to make some sort of correction/statement on the topic.
The Story So Far
Basically, most of us were, I imagine, pretty shocked to learn at the start of March that Sweden had unexpectedly fallen back into recession in the fourth quarter of last year: we were shocked not only because the news in itself was bad, but also because we had been under the impression that the Swedish economy was recovering nicely. Yet despite all our prior expectations the Swedish statistical office reported that gross domestic product contracted by a seasonally adjusted 0.6 per cent in the fourth quarter of 2009 (when compared with the previous three months), while, in addition, the third-quarter figure was revised to a 0.1 per cent quarterly decline (down from an original 0.2 per cent gain). And two consecutive quarters of contraction meant that, technically speaking, Sweden was well and truly back in recession.
Faulty PMI Readings
But there was more, since if those of us who had been following the performance of the Swedish economy were more astonished than surprised, it was because the Silf Swedbank manufacturing Purchasing Managers Index had been showing not only robust growth for Sweden's industrial sector, but even suggesting it had been experiencing one of the fastest rates of expansion on the entire planet (and for several consecutive months, see chart below).
Yet far from expanding, Sweden's manufacturing industry has now been stagnant, and for many months. At least according to data supplied by the Statistics Office to Eurostat (see chart below) it has. Of course, maybe the data the Stats Office has collected about manufacturing output is faulty, but looking at the GDP numbers that seems unlikely, unless of course even the revised GDP numbers need revising...
Yet Another Shoe Drops
And just to show that concerns about the kind of data we have been seeing out of Sweden of late are not unfounded, we have the case of what Cecilia Skingsley, head of macro research Swedbank calls the "shoe adventure". Basically, and as Bloomberg reports, when the Riksbank raised interest rates in September 2008, 11 days before Lehman Brothers collapsed, Sweden's central bankers based their decision on inflation figures from the Statistics Office. Unfortunately, later that month four months of inflation data had to be corrected after the Office discovered that a computer inaccurately calculated a 28 percent increase in shoe prices (although the problem, I imagine, lay with the person who entered the data, rather than a malfunctioning computer). As Cecilia Skingsley points out, apart from the impact on central bank monetary policy, “The shoe adventure meant we ended up with a different price base amount, which in turn affected benefit payouts.” In fact Bloomberg estimate that the mistake cost the government something over 600 million kronor ($84 million) in excess benefit payouts.
Statistics Sweden boasts a proud career which dates all the way back to 1686, when a church law became the basis for the Swedish population census. It released 74 publications last year and 371 press releases, cataloging everything from how many moose are shot annually, to the number of Swedes that are named after a Christmas tree ornament. But for all its venerable history, the office (which employs 1400 people) has evidently seen better days, since over 10 percent of 71 statistical reports published in February and March were corrections of earlier data releases.
And it isn't only the inflation and GDP data which has been causing problems, Figures for local government finances were corrected last month to a deficit of 2.2 billion kronor from a surplus of 2.4 billion kronor. The Swedish government uses these figures to draw up its annual budget.
Another area of contention revolves around central bank rates and home mortgages. The Statistics Office had to correct on Feb. 25 its estimate for the proportion of Swedish households with adjustable-rate mortgages, revising the time series as far back as far as September 2005. The figure for December was adjusted to 58 percent from 48 percent. The revision prompted speculation the Riksbank may have forecast higher-than-necessary interest rates at its February 10 meeting.
All these issues are rather serious, even if some are more important than others, and certainly go to show that statistical issues in Europe extend well beyond those we have seen in the recent highly publicised Greek case. Bloomberg cite many analysts who are rightly angry about the current state of affairs, but let me add my own personal beef about Swedish statistics here: the lamentable state of the SILF Swedbank PMI readings has lead me to suspend Sweden from my monthly global manufacturing report. Quite frankly this sort of faulty measurement only fuels the (largely unjustified) scepticism which tends to surround this kind of qualitative performance measure, yet from what I can see Markit Economics country reports are, by and large, reliable within a reasonable margin of error. Which only makes the Swedish case stand out further, and makes it, at least for my part, incomprehensible that Swedbank haven't felt the need to make some sort of correction/statement on the topic.
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