Categories Uncategorized GDP-indexed bonds; ECB and Greece Post author By Philip Lane Post date February 6, 2015 14 Comments on GDP-indexed bonds; ECB and Greece Economist article on economics of GDP-indexed bonds here. FT editorial on ECB and Greece here. Related ← MGI: Debt and (not much) deleveraging → Are Economists Overrated? 14 replies on “GDP-indexed bonds; ECB and Greece” One of the advantages of having a former professor of economics as new Greek finance minister is that he has set out his opinion on the core dispute with admirable clarity (blog post 2012). “The establishment view in Europe is that the problem is too much debt (by profligate countries like Greece) and, therefore, that the solution must involve (a) austerity and (b) structural reforms (which increase the competitiveness of the weaker states). The problem, however, is that the establishment view is profoundly mistaken and, as a result, the proposed treatment poisons the patient. ” A former adviser to Rajoy of Spain has set out with equal clarity the dilemma that this creates for the patients half way through the treatment when one decides to abandon it. http://www.ft.com/intl/cms/s/0/42ace124-abc4-11e4-b05a-00144feab7de.html#axzz3Qtnt8PRH The crux of the problem would appear to be in the balance achieved between austerity and structural reform, the measure of success being to what extent the balance was optimal. It is remarkable that in all four countries affected, the political class made the same error i.e. introducing changes under both headings while failing to change the way of doing politics which gave rise to the need to do so in the first place. Greece got the balance most out of kilter and now seems set on abandoning a core element i.e. concentrating on developing the traded sectors of the economy and persuading those involved in the process to pay their taxes. Directing fire at the oligarchs is to simply to divert attention from the objectives and interests of those now in control of the government cf. this link. http://www.nytimes.com/2015/02/05/opinion/deciphering-greeces-debt-crisis.html?_r=0 Against such a background, it is doubtful whether even the most sensible ideas such as GDP-linked bonds have much of a chance; other than in the context of giving some concession to defuse the situation. Paradoxically, further egregious errors by our own government, notably in relation to Irish Water, seem to have pushed the balance further in the right direction by underlining that rent-seeking group interests can be highly detrimental to the achievement of productive and efficient solutions. The ability of trade unions and employers in Germany and the Scandinavian countries to come to agreements that accept that the main objective must be to make the product cake bigger ahead of discussions about how it is to be divided is the one to be emulated. (With apologies in advance to those who have real knowledge of Greek, I suggest the name “polloigarchy”, and “polloigarchs”, for such groups and participants to underline the fact that it is not legitimate trade union activity that is at issue). @all GNP indexed bonds locally? @all at all Text from Blind Biddy in Athens: Greek “Rock Star” Cleaning Ladies 1: Troika 0 Defiance and Charm: A Measured First Week for New Greek Leader By Manfred Ertel, Julia Amalia Heyer, Walter Mayr and Juliane von Mittelstaedt Syriza’s victory in the recent Greek elections set off a wave of concern in Europe. But even as the new prime minister tries to woo other leaders, his left-wing government is already busy getting down to work. Many of its first moves have been the right ones. http://www.spiegel.de/international/europe/alexis-tsipras-tours-europe-as-greek-government-begins-reform-a-1017147.html#ref=nl-international Worth reading; methinks a few lessons for the locals … and other EZ “debtcroppers” and supine serfs. The media coverage, especially in the newspaper of record, is all over the place this morning, especially the suggestion that Ireland does not have a dog in this fight and that the fight is confined to Greece, Germany and the ECB. Neither is there any evident understanding, or any thought even given, to the reasons why the ECB has acted as it did (as explained in some detail by the FT in its leader). There is also little evident understanding of the unique role of finance ministers within the Eurogroup. They MUST act as a club because they also have a common currency to defend. Either Varoufakis grasps this and accepts the rules of the club or the road ahead will be extremely rocky. http://www.independent.ie/business/world/noonan-to-join-emergency-eu-meeting-on-greek-question-30971158.html As to the supposed complexities of ELA, this item on the ECB’s website explaining it in some detail. http://www.ecb.europa.eu/pub/pdf/other/201402_elaprocedures.en.pdf “However, Article 14.4 of the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB) assigns the Governing Council of the ECB responsibility for restricting ELA operations if it considers that these operations interfere with the objectives and tasks of the Eurosystem. Such decisions are taken by the Governing Council with a majority of two-thirds of the votes cast.” A key question is also, of course, whether Ireland is not alone perceived to be joining the club of Northern economies but whether the structural changes that will firmly ensconce the country in that club are actually happening. Two links that suggest that they may be. http://www.labour.ie/press/2015/02/05/pay-policy-must-support-growth-and-competitiveness/ http://www.irishtimes.com/business/economy/home-grown-business-is-driving-the-recovery-more-strongly-than-multinationals-1.2088436 Greece is certainly not joining the Northern club any time soon! http://www.independent.ie/business/world/greek-finance-minister-says-euro-will-collapse-if-greece-exits-30974196.html The Eurozone finance ministers are preparing an ambush for Varoufakis on Wednesday. He will probably be given an ultimatum. Over the past few weeks, there has clearly been a concerted campaign by the anti-Greek mob within the Eurozone and various banking interests to cajole and coerce wavering states to back the official EZ line. Noonan went from debt conference supporter to debt collector, without batting an eyelid. I wonder why? What happened? Perhaps he was told that, if he did not play ball, the ECB would insist on the central bank selling its PN bonds next week. The ECB would not do that would they?? @JR What happened?- domestic politics happened. If the new Greek Government secures substantial concessions for little in return it will undermine the position taken by centrist governments across the debtor countries viz. that there was no alternative to austerity and the troika. Hence the lack of support for the Greeks in Lisbon, Dublin and Madrid. We are all Germans now. Varoufakis is now holding out the prospect of an agreement! http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_09/02/2015_547033 It seems to me unlikely, however, that anything other than some temporary holding pattern can be achieved this week, unless the officials of the troika so derided by him have actually made him see the light. The fan dance that both he and his prime minister are engaged in vis-a-vis those that elected them can hardly continue much longer. The message in that Irish Times article by John Fitzgerald seems a bit confused. Based on the numbers he quotes, FDI accounted for 14% of private sector employment in 2012, and accounted for 23% (7,000/30,000) of the increase in employment between 2013 and 2014. That demonstrates the economy becoming more reliant on FDI, not less. Those figures actually strongly suggest that FDI may have been the predominant driver of private sector employment grow the between 2013 and 2014. A sizeable chunk of the other 77% of growth in private sector employment is likely to have arisen from more goods and services being purchased by multinationals, and from increased spending by employees of FDI companies and their Irish suppliers. How an eventual agreement might look (H/t Alphaville)! https://medium.com/bull-market/greece-looking-on-the-bright-side-7869a8debc24 And what may force certain fans to be dropped i.e. those that “lock in the kind of relative cost imbalances which ensure that the need for fiscal transfers from the core to Greece will never end”. http://www.bloomberg.com/news/articles/2015-02-09/plenty-of-time-to-panic-in-bond-market-as-greeks-pledge-defiance Simon Nixon of the WSJ. http://www.wsj.com/articles/syrizas-missing-ingredient-investor-respect-1423434186 @DOCM 7/11 = ~64% of thread! Pray tell – why are you so afraid of Greek Democracy? @David, the ECB has intentionally shot almost all the arrows in its quiver short of Grexit, and said “over to you now” to the Eurozone governments. Spamming PR provides an illusion of continued relevance. Comments are closed.