-Common Sense Capitalism

Should give us the chills, amounts to nothing less than an annexation of Greece. I listened to the German ambassador on radio re Ireland the other day. Eurobonds are out, it would amount in Germany’s opinion to permitting members to continue the budget spree party. They want instead closer political and fiscal alliance, I suspect on the lines of that you have described are laid out for Greece.

We need a referendum. I suspect Irish people at his point know more of what this country requires, than other ’sources of information’.

http://www.youtube.com/watch?v=79vdlEcWxvM

Assurance of Compliance in the 2nd GRC Programme
I. Background
According to information from the Troika, Greece has most likely missed key programme objectives again in 2011. In particular, the budget deficit has not decreased compared to the previous year. Therefore Greece will have to significantly improve programme compliance in the future to honour its commitments to lenders. Otherwise the Eurozone will not be able to approve guarantees for GRC II.
II. Proposal for the improvement of compliance
To improve compliance in the 2nd programme, the new MoU will have to contain two innovative institutional elements on which Greece will have to commit itself. They will become further prior actions for the second programme. Only if and when they are implemented, the new programme can commence:
1. Absolute priority to debt service
Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.
2. Transfer of national budgetary sovereignty
Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.
The new surveillance and institutional approach should be formulated in the MoU as follows: “In the case of non-compliance, confirmed by the ECB, IMF and EU COM, a new budget commissioner appointed by the Eurogroup would help implementing reforms. The commissioner will have broad surveillance competences over public expenditure and a veto right against budget decisions not in line with the set budgetary targets and the rule giving priority to debt service.” Greece has to ensure that the new surveillance mechanism is fully enshrined in national law, preferably through constitutional amendment.

http://www.ft.com/intl/cms/s/0/33ab91f0-4913-11e1-88f0-00144feabdc0.html#axzz1kjd041ok

Those proposing it know that so it must be the final sign that they want Greece to exit. Curtain up for the third act of ‘Back to the Past’ as we watch Greece hurtle back to the 1900’s and poverty - and probably a coup later down the road. I presume they will have to force their exit from the EU too so that Greeks can’t leave the country in droves and look to settle in other EU countries.

Portugal must be looking over its shoulder right now. How far behind might we be - or will we be kept on as the poster child?

“while senior lenders to Greek banks are made whole”

I thought I read somewhere that most Greek bank bonds where held in Greece (pension funds etc.) but I could be wrong … but I take your point though.

My ‘growth watch’ (meaningless statements about growth and jobs from various so-called leaders) will have to resume soon because there will sure be a lot of hot air about it coming out of the next EU summit.

I was just reading that “Europe is confronting a descent into chaos and conflict. Soros predicts riots that will lead to a brutal clampdown that will dramatically curtail civil liberties.” I wonder if he’s aware that more than six million people are under “correctional supervision” in the US – more than were in Stalin’s Gulags.

It seems I may be off to do some work in Germany pretty soon. I must do some sampling of the man on the street out there during my time off i.e. in the bar in the evenings - see if there’s any truth in the rumours of a move afoot to ditch the Euro. It has been useful but now it is ze time to move on and draw a line under zat. Zer is no ozzer game in town unt no alternative. For you Paddy, ze economy is over.

The Greenspan Fed was all about shifting inflation from consumer prices to asset prices. The inflationary process was disguised and the myth of the Great Moderation took hold.

It’s all about shifting losses around now, and we only find out where the thimble is after we have been stung.

When Draghi prints 500bn, he is significantly altering the dynamics of the credit system. The guy means business, but whose business is he running ?.

What assets is he inflating, and what kinds of claims is he devaluing as a consequence. Where is the concealed inflation this time ? Answers on the back of an envelope please.

“Investors are aware inflation may become a deliberate (on the quiet) policy to address debt overhang at some point.”

…and vs potential defaults, are absolutely fine with that inflation risk.

And what government bond buying do you mean? Its not happening, the banks are now out to drag down governments in the EZ, see here:

“International banks cut their loans to fellow lenders and governments in Italy, France and Spain in the third quarter, hoarding German, Japanese and U.S. bonds instead, data from the Bank for International Settlements show.

French Retreat

French banks shed the most Italian government debt, reducing their claims by 23 percent, the BIS said. They also retreated from other European assets including German bunds and German and Italian bank debt, which they cut by 28 percent. Instead, they shoveled $41.3 billion into Treasuries, increasing their U.S. government claims by 39 percent.”

This not the EZ being abandoned by the core? The irony is the stock weight of US treasuries probably the only anchor the EZ has left.

http://bloom.bg/xdQ7qD

ECB has said ‘no’ to that and Germany backing currently.

@eamonn

No one outside Germany or the Harvard history department thinks the current bond buying will cause inflation. Investors are aware inflation may become a deliberate (on the quiet) policy to address debt overhang at some point.

You are right. Pre EMU ‘risk free’ assets meant your local government bond market basically, everything else had at least FX risk.

Post EMU you had a veritable smorgasbord of supposedly ‘risk free assets, and even the others had no pesky FX considerations. Lots of analysts then didn’t bother thinking about the things that used to allow them to gauge FX risks - or in some cases, any kind of risk.

Asset books became very international and that process is reversing.

re inflation - there’s so much excess supply out there, i dont see how government bond buying is gonna cause any/much inflation, especially when we’re gonna have deleveraging and austerity for the next 5yrs min. Deflationary pressures are much stronger than inflationary ones right now in the periphery. Inflation is something we can only hope to have further on down the line at some point.

What are the consequences if the ECB does take a haircut? Especially for Greek banks, who presumably use Greek bonds as collateral to raise money from the ECB? I don’t know but interested to find out. And if the ECB does end up taking a loss on their Greek bonds, who ultimately picks up the bill for that?

I was reading some speculation that the ECB could avoid taking a haircut by selling them on at purchase price to the EFSF/ESM and letting them take the hit…… hang on…. haven’t we been there before…… packaging up a load of dodgy debt and passing the parcel on to others to shoulder the subsequent losses? Isn’t that how we got into this mess in the first place?

History has a bad habit of repeating itself…..

If Italian banks buy Italian debt. Spanish banks buy Spanish debt. Irish banks buy Irish debt, etc. It’s pretty clear that risk is getting concentrated. And it’s important to ask who is getting ‘off-risk’? You could argue that earlier ECB operations enabled German(/core) banks/wealth get safely repaid risky investments in the periphery’s banks. You could now argue that the LTRO is enabling German(/core) private wealth get safely repaid risky investments in the periphery’s sovereign debt. Could this be a Plan B strategy which makes it easier to eject countries?

Do you expect to see significantly more inflation in the Eurozone as a result?

Given what the ECB are now saying, why are Portugal’s Bond yields continuing to sore?
Wouldn’t we expect Portugese banks to be buying up bonds and bringing the bond rates down as Ireland’s seem to be?

i mentioned this a couple of months back, but i dont think people picked up on its significance at the time.

One of Draghis first act was to reverse the foolish position taken on by Trichet, namely that of “shaming” (not publicly) “addict banks” that were using large amounts of ECB liquidity. Draghi and Sarkozy (in a rare positive policy by him) actively encouraged EZ banks to take up as much as possible in the LTRO, and completely removed any stigma attached to its use. In essence, the ECB finally became a functioning LOLR to the banking system. Do not expect to hear the phrase “addict bank” any time in the next few years, if ever.

http://www.zenwealth.com/BusinessFinanceOnline/BV/BondPrice.html

Again, appreciate links to anything more technical

Last year The ECB were putting pressure on Ireland to reduce their ECB exposure.
This could not have happened without the approval of the ECB.

Re “Its a rather pointless debate in many ways.”

Nope, I appreciate your expertise in evaluating those yields; but also would appreciate any links off list or on list to help plaster over any holes in my own understanding. I don’t work in a trading house

did you value you as at today, or as at 2014? Bloomberg gives me around 112.42 fwiw, with a 4% yield, as at 1/1/14. The high coupon on it explains the high price. But such a discussion ignores where relative rates are at that time - ie if Bunds are at 1%, then a 4% Irish yield is not particularly cheap or different to now. If Bunds are at 5%, we could never expect Irish yields to be at 4%, and so having them at 6% would be “good”. Its a rather pointless debate in many ways.

One of my alma mater was UCD’s Math department I attended for a number of years to add Math to a postgrad degree I had in English. It was a great course, but could in hindsight have done with Economics module; but arguably Economics lacks a scientific edge in some of its formulae

So I can use math formulae but rely on google to learn eg the standard formulae used in bond trading eg
http://www.investopedia.com/university/advancedbond/advancedbond2.asp#axzz1kcJcOQwG

My question is: what is the formula used to get 111 in the above statement? I’ve approached the question using a method I would need to verify, but I get 114.5

Also, if someone dedicates themselves to extending the knowledge of humankind, appreciate link to an online textbook they regard beneficial re questions similar to this?

‘If it makes some people more optimistic,let them,there is no harm in that’

Hmm..

http://www.youtube.com/watch?v=19oKNwYuEcE

April ‘07, then Feb, April, June and July of last year were the only occasions in the last 5 years when out of the money 3 month S&P500 puts were as expensive compared to out of the money calls.

This usually occurs when ‘risk on’ has driven risk assets to the point where downside hedging is being paid up for.

It’s merely a technical indicator, but it is often worth making a note.

An interesting view from Davos by Jeremy Warner.

http://www.telegraph.co.uk/finance/financetopics/davos/9041788/Davos-2012-Can-the-Germans-stop-being-German.html

There is, however, a major hole in his reasoning. German goods sell because of their quality and value for money and this is the competitive challenge that other countries, notably the UK and the US, have to meet. Neither is Germany entirely dependent on the European market by any means and can probably see out the looming recession in the manner of the last one.

Nevertheless, with a common currency, the situation is unsustainable (as Larry Summers, of whom Warner is evidently not a fan, pointed out in Davos).

The goings-on in the markets are but a symptom of this underlying malaise of current account imbalances between the nations of Europe.

On another note - do you think that Irish taxpayers’ money, as has been injected into the Irish banks, should be invested to drive down yields in Germany, or where do you think it might best be placed?

Who knows - your answers might steer the ship of state, and all who sail in her, to a better place. Or a worse one. But at least those reading your posts would have an inkling that you knew what you were talking about, or otherwise. It just could be a win-win.

I think Grumpy has got it above. There is no big picture here. It’s just a few groups of pols, civil servants and bankers seeing an opportunity to serve their own petty interests to the strains of Ireland’s Call.
No offence meant to the followers of the oval ball. I enjoy it as much as the next man.