Greek fact of the day

Via my boss:

If Greece had a dollar for each time they were blamed for the global financial crisis, they’d be able to pay their bills

I think this is worth keeping in mind.  Although, if they could pay their bills there wouldn’t be a crisis.  Then they wouldn’t be blamed for it.  Then they wouldn’t be able to pay their bills.  So I’m not sure we really have a stable equilibrium here.

Note: Another work colleague notes that if they were blamed enough to pay down the stock of debt, then we have a stable outcome.  My presumption was that we were saying they received enough to just pay back interest, not principal.  As a result, the total flow of funds from people willing to give Greece a dollar is very important here.

Now markets are hellishly volatile at the moment.  I think that this is due to the world waiting on an announcement from Europe which will tell us exactly who is going to lose out from the ultimate Greek default.  However, it probably also has something to do with Dan Carter getting injured – damn.

Why I’m in a bad mood

Agnitio asked me what has been going on recently, as I was complaining its a mess.  I emailed him my summary, so I thought I’d also put them down here:

The ECB announced that its going to accept some things as collateral – but dump others.  Leaving markets confused about what the hell was going on, and what it means for sovereign debt purchases.

The US followed this up by saying that they would buy a smaller amount of long-term debt than forecast, sell short-term debt, and flatten the yield curve.  They say it will be stimulatory because NK models say so – however, a flat yield curve is a bit dodgy, given that it’s formed by expectations of either weak growth or weak inflation in the future.  In essence NK models say “get the long-run real interest rate down as much as possible” which you do by increasing inflation expectations, not nominal rates – so markets collapsed after that.

US government decided to get involved by refusing to extend the debt limit AGAIN, if they can’t make up by Sep 30 the US will default.

Then the European commission decided that it was a good time to say they were going to introduce a financial transactions tax – just when financial markets are panicking – and for good measure they said they hadn’t figured out what level it would be at, or what would be taxed yet, just to add to uncertainty.

While all this is happening Italy and Greece have continued to say they’ll get their fiscal situation in order – but they keep delaying introducing actual policies.  Given Greece is effectively insolvent, the dithering by them, other European governments, and the ECB, makes it unclear who holds the liability the entire European financial system is at a stand still.  Given the exposure of Australian banks to this, we have seen funding costs rise considerably (luckily no-one in NZ is actually borrowing anything).

With Europe having fluffed around while the crisis has been in full swing over the past 2 months, purchases from China have pulled back, seeing activity there slow as well.  A slowdown in China will have the impact of lowering our export prices.


This mix of awesome factors has seen the cost of insuring against default in Australian banks increase to within a whisker of their Lehman Brother peaks.  It has seen uncertainty measures push at new highs.

Unlike the Lehman Brother’s collapse there is no reason for these indicators to be high solely based on the financial fundamentals – the debt burden, and who holds what, is known.  However, while policy makers were trying to improve outcomes during the crisis in 2008, they seem more interested in trying to cause a crisis this time around.

The EU needs to get its priorities straight

Seriously.  These guys have been fluffing around for so long that the entire financial system is in a panic.  So they decide its a good time to announce they are going to start taxing financial transactions – but they haven’t decided the level yet or the full scope yet.

Is Europe’s motto, during times of uncertainty add more uncertainty?  This is ridiculous.

If we have another financial crisis here, the blame mainly falls on the politicial systems in Europe (and to a lesser extent the US).  When everything I try to say to people regarding the outlook for the economy is conditional on politicians being sane, its hard to really believe that what I’m saying is damned right.

FYI, I’m against a Tobin tax.  At some point this deserves a fuller post, I have a couple of little guys sitting around here and here and here  though.

Will the Swiss event start a series of competitive devaluations?

In so far as we believe monetary policy in most countries is “too tight” there could be a significant upside to the Swiss decision to set a minimum value on their Euro change rate – if currency intervention is copied by most other countries it will lead to a loosening in monetary conditions.

Scott Sumner hints at this, and its an issue we’ve discussed here before.  Although it is true that “not all countries can depreciate their currencies at once” they can devalue their currency relative to goods – they can create inflation.  If there are risks of deflation, or inflation expectations are below the central banks target, such intervention could be justified.

Now, when writing about the Swiss event I wasn’t quite as confident.  This was due to the fact that the Swiss actually went out and set a value on the currency – rather than just loosening policy.

I can understand why they did it, they felt there was an asset price bubble in their exchange rate – and they wanted to provide a lower focal point that traders could shift too (since expectations were driving the currency … note the increase in risk associated with intervention is also important).  But if everyone sets “targets” there is the risk that we get an exchange rate regime where this rate doesn’t respond to changing economic fundamentals – and given that economic fundamentals change constantly, this is a concern.

Swiss national bank “pegs” the currency: What’s it mean?

With people running away from European banks, and global investors nervous, they have been moving swiftly towards “safe” assets – such as the Yen and the Swiss Franc.

There has been sustained intervention in these currencies since late-July, but now the Swiss National Bank has gone a step further – they have set a minimum exchange rate. [Marginal Revolution also discusses here]

So they’ve pegged their currency to the Euro!

Not quite – they’ve set a cap regarding how high strong currency can be against the Euro.  They’ve said in their statement that:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

This is still, in a large part, consistent with an inflation targeting mandate – they have just said the following:  “be aware that we are going to print money and buy up foriegn currency until our currency is back at a level that is consistent with our inflation mandate” – they have just identified a level of the exchange rate that wouldn’t carry the strong risks of deflation they are currently experiencing.

Furthermore, it seems apparent that the Swiss National Bank views the current level of the currency as a bubble – people running to saftey see the Swiss Franc as attractive, and people who want to invest expect this to continue, leading to a self-fulfilling expectation driving up the value of the Franc.

Now I’m not the biggest fan of messing around with relative prices in this way – as it could just be that Europe is so far in the toilet that the weak Euro is telling us something … as a result, my preference would be for the Swiss to just print a whole lot of money and buy currency without setting an explicit “target” in the way they have (outside of stabilising inflation rates).

My CONCERN is that this will lead to further exchange rate management around the world – although not as dangerous as protectionism, I can still see nasty side effects from this.

The real problems are in Europe – and they need to sort them out.  However, given they won’t other countries are stuck introducing “second best” policies (with the potential for unintended consequences) which is sad.

In terms of NZ this means nothing – they are worried about an asset price bubble in currency markets due to people running to “low risk” currencies … we are the polar opposite 😉 .  Also they are worried about deflation, we aren’t.

A point on debt

Around the world there are a lot of complaints that there is too much debt, that debt will prevent a recovery, and that debt is the root of all problems – be it fiscal deficits, debt fueled consumption, or a debt powered housing market.

While there are undeniable issues to keep in mind, there are a few things to remember with these large debt levels – and one of the most important is that there are some people on the otherside of this debt.

Unknown to some is the fact that, as a planet, we are not actually in a net debt position with the rest of the galaxy (although the statistics say otherwise, I think there is an error – rather than us owing money to Martians).  As a result, for every person who has a liability owing there is another person or group who views that as an asset.  When we look at what the “issues” are with debt, we have to keep this point in mind.

Now this sounds like me stating the bleedingly obvious AGAIN … but lets think about some of the conclusions that come out of this:

Read more