jakke

May 25 2012 ∞
“ We don’t mind how they do it if it allows us to have enough liquid assets in order to pay, and do it in time, because we all have bills to pay at the end of the month.
—

Wow, okay. So if this statement (from Catalan President Artur Mas) is indicative of the entitled and wholly uninformed attitude of European politicians, then the Spain is in huge trouble right now.

As more power has been devolved to the regions, they have responded by borrowing more - and fast. As Moody’s recently noted, the ratio of total debt to government revenue in Catalonia is well above 200% and rising quickly. The government ran a deficit more or less twice what it pledged last year, and no one believes they can actually balance the budget (or even come close).

So at this point they are more or less totally out of options for financing the 13.5 billion euro they’re going to have to borrow from new lenders to pay back to old ones this year. Investors are unlikely to buy their bonds, bank loans will probably be very expensive (the neighbouring region of Valencia is currently paying 7% for a six-month loan which is obviously unsustainable), and the region-issued vigourously-nationalist “Patriot Bonds” (if your government ever issues these DO NOT BUY THEM) already account for a quarter of Catalan savings so that market is probably tapped out. 

So what is the regional president’s suggestion? Well. He’s demanding that the central government help pay off his region’s debt. Or, if not pay off, then arrange for bonds that pay the average rate of all the regional governments which any regional government can issue but all the regional governments have to pay for. If this doesn’t sound unfair enough, consider that Catalonia is the richest part of Spain.

So that sounds… alarmingly out of touch with reality, right? And demonstrative of the big problem that the Spanish government faces but the Greek, Irish, and Portuguese ones didn’t: Spain is composed of lots of autonomous regions with broad control over their own spending, and all of those regions are going to try to blame the central government for their problems rather than raise taxes or cut spending. And in the end, the central government is almost certainly going to have to bail them all out anyway.

(Source: telegraph.co.uk)

6 notes

May 19 2012 ∞
“ The Bank of Greece dismisses categorically an article in a Sunday newspaper which refers to an alleged plan to limit withdrawals and capital movements abroad.
—

Okay so the fact that the Bank of Greece even had to issue this denial indicates that things are about to get much worse there. Between the leftist anti-austerity parties planning to nationalize the banks and the warnings from the European Central Bank that they’re unwilling to prop up the Greek banking sector and the possibility that everyone’s account is going to get surprise-converted to drachma, no one trusts the banks to preserve their value. Bank customers are withdrawing hundreds of millions of euro a day.

Obviously, the banks don’t actually have enough cash to cover everyone’s accounts if everyone withdraws at once - so panic is self-reinforcing, because when you see all your peers draining their accounts then you realize you need to do the same thing while the bank can still give you cash. This process is called a bank run, and it generally leads to riots and wiped-out savings and free-fall economic collapse.

To prevent this from happening, the Bank of Greece may be getting ready to announce limits on withdrawals - say, no more than fifty euro per day. Obviously they’ll deny this right up until it actually happens, but if the withdrawals continue there will be no way around it.

Controls like these lead to huge hardship for consumers and widespread panic, of course. Worse yet, it’s almost certain that the wealthy will be able to evade restrictions - so the pain falls mostly on people who are already impoverished. But once society loses confidence in the banking system then massive disruption is basically inevitable no matter what policy response the government adopts.

(Source: reuters.com)

52 notes

+ ∞
“ The world’s richest people lost a combined $32.8 billion this week as concerns over a possible Greek exit from the euro area pushed the Standard & Poor’s 500 index to its biggest weekly loss since November 2011.
— Yes that is tens of billions of dollars in one week and they’re still all billionaires. In case you needed a reminder that all the power in the world is in the hands of a very small group of people whose priorities and challenges are totally alien to yours.

(Source: bloomberg.com)

47 notes

May 18 2012 ∞

mikerickson replied to your photoset: I realize no one wants to hear about Greece and…

Well come on, can you blame her for voicing her frustrations? And the only arguments I’ve heard so far for trying to keep Greece in the Eurozone are purely ideological.

Well actually when you’re trying to get another country to cooperate with you it’s probably not the best idea to give them the idea that you want them to take an action that they’re not currently constitutionally allowed to take and then accuse them of having totally misunderstood you. Merkel has expressed her frustration more directly and without calling for (or strongly implying) direct interference in the Greek political process in the past.Today’s duelling press releases were probably intended to send some signal to German swing voters about her intentions, but it doesn’t seem to have been very effective.

And perhaps I’ve been unfair to the case for keeping Greece in the eurozone, because there is definitely an argument to be made that switching currencies is going to be really disruptive in Greece. Switching currencies requires a combination of relatively technical policy changes all at once:

  • All the bank accounts need to be be switched over in secret to prevent depositors from panicking and taking a run on the banks - like, banks close Friday taking euro deposits and open Monday giving drachma withdrawals.
  • The new institutions need to be set up to resist the temptation to print too much money and cause the currency to inflate hugely.
  • Immediately after the switch, all kinds of social support will be necessary to make sure people get the food and fuel that they need but can no longer afford to import.

These are tricky policies to get right even in well-run countries - and the Greek government can’t even tweak tax collection or deregulate the truck-driving industry without riots and general strikes, so it’s reasonable to assert that these changes might be a little difficult to coordinate.

Personally I can’t see any way for Greece to get itself out of the current recessionary spiral without letting its economy find its own price level, and given the strength of labour institutions this is going to be really difficult within the eurozone. But there are definitely pragmatic arguments for why leaving the eurozone might be even worse for Greek citizens.

+ ∞

I realize no one wants to hear about Greece and the eurozone on a Friday night - but today has been particularly exciting. Went something like this:

  1. German Chancellor Angela Merkel apparently proposed to (figurehead) Greek President Karolos Papoulias that Greece should hold a referendum on whether they wanted to stay in the eurozone at the same time as their re-run election in June. 
  2. The Greek government issued a press release explicitly stating that Merkel discussed “thoughts about the holding of a referendum parallel to the elections on the question of whether the Greek citizens wish to remain in the eurozone” but pointed out that the caretaker government wasn’t allowed to do this according to the constitution.
  3. Every politician and commentator in Greece reacted hugely negatively to the news. The caretaker government can’t legally authorize this kind of referendum and it’s not Germany’s business to call for such a referendum and when a previous Prime Minister called for a referendum six months ago the EU sacked him and replaced him with an unelected technocrat.
  4. The German government went into denial mode, insisting that Merkel had said no such thing and eventually accusing the Greek government of misunderstanding her remarks.
  5. The Greek government was pretty unimpressed by this accusation since Papoulias is totally fluent in German and the conversation was apparently in Greek anyway and there was no ambiguity about the translation.

So this is kind of an embarrassing and farcical argument all around with the German government probably calling forr something the Greek government can’t do and then the two governments unable to coordinate stories on what actually happened. It’s like something out of The Thick of It or Yes, Minister. The Guardian has an excellent (if massively confused) liveblog of the whole thing. 

This is obviously not a good day for Angela Merkel (on the left, above). Remember, her objective here isn’t to force austerity on Greece or to somehow overhaul the European financial system, but to convince German voters that they should re-elect her in 2013. To do that, she needs to convince them that her policies towards Greece aren’t going to cause big financial hardship for the German voters (as taxpayers, workers, and bank customers). Today’s ineptitude probably didn’t make anyone feel any better.

However, this is an awesome day for Alexis Tsipras (on the right, above). He’s the leader of the leftist anti-austerity SYRIZA, who are in a really tight race for first pace in next month’s Greek election. His main opponents want to cooperate with the rest of the eurozone on an austerity and bailout plan. News of German interference in the Greek political process bolster his claim that the current system is not in Greece’s best interest.

Anyway, this kind of ridiculousness is why all my financial-market posts get tagged “the wonders of capitalism”. It seriously seems like no one has any idea what they’re doing sometimes.

13 notes

May 17 2012 ∞
Naked credit default swaps let large investors take out insurance against Greek government default without actually owning Greek government bonds. Honestly not sure how much of an effect naked CDS have on the Greek fiscal crisis, but it’s provided probably the worst set of incentives possible.

Naked credit default swaps let large investors take out insurance against Greek government default without actually owning Greek government bonds. Honestly not sure how much of an effect naked CDS have on the Greek fiscal crisis, but it’s provided probably the worst set of incentives possible.

6 notes

+ ∞
“ Customers of troubled Spanish bank Bankia, nationalized last week, have taken out over 1 billion euros ($1.3 billion) from their accounts over the past week, El Mundo newspaper reported on Thursday.
—

So this is probably kind of inevitable.

The Spanish government has had to acquire a 45% stake in Bankia to prevent it from going under, and now citizens are aggrieved at the government spending so much on the banks and also worried that Bankia will become insolvent - that is, it will lack the cash to cover their deposits if they need to withdraw. Therefore, money is getting withdrawn really quickly. This only makes the problem worse, since it makes the bank more unstable and therefore creates greater incentive to withdraw your money before the bank collapses. Taken to its extreme, this leads to a bank run.

What can the Spanish government do to fix things? A good start would be guaranteeing that they’ll cover all deposits in all banks in the event of bank collapse; right now they only guarantee the first 100,000 euro. (If this sounds like an impossibly huge amount to have in a bank account, imagine that you’re two years from retirement and have no pension.) The same guarantee was relatively effective in reassuring consumers in Ireland. 

Also if it wouldn’t kill Bankia maybe they could come up with a better response than “no comment”. That’s seriously not reassuring anyone.

(Source: reuters.com)

4 notes

May 16 2012 ∞

ECB stops regular operations with four Greek banks

Not that you should be alarmed or anything but this is a sign that European institutions are gearing up in a big way for disruption in Greece including bank nationalization, reneging on bailout obligations, or exiting the eurozone. (I just can’t bear to say “Grexit” even though that is the term the cool kids are using for Greece exiting the eurozone.)

One of the main roles of the European Central Bank is to be the lender of last resort - that is, they are there to step in and stabilize banks with cheap loans in times of crisis with cheap loans. Lately they’ve been doing this a lot for banks all over Europe as the eurozone spirals downward.

But now four Greek banks (not named here, but that’s most of the Greek banking sector) are getting cut off from ECB funding. If things go badly, they’ll have to rely on funding provided by the Greek central bank, which generally doesn’t do this sort of thing. And all that Greek funding is subject to ECB approval anyway.

This is a really bad place for the Greek banks, because depositors are pulling out their money very quickly. If the banks don’t have the cash on hand to cover the withdrawals, there will be panic and almost certainly collapse of the banking system.

To access ECB funding again the banks have to raise a bunch more capital so that they’re shielded against any potential crash (e.g., further fiscal deterioration of the Greek government or bank collapse in Spain) but this would be basically impossible right now because SYRIZA (the Coalition of the Radical Left, who look set to win the new round of Greek elections in a month) are pretty gung ho about nationalizing the banks and no one wants to invest in banks that will be taken over by the government in six weeks.

So basically this is an absolutely terrible situation if you happen to have money in a Greek bank account and aren’t able to quickly store it all under your mattress. If European institutions like the ECB keep playing extreme hardball like this, the concern over Greek withdrawal from the eurozone will become basically self-fulfilling.

6 notes

+ ∞
“ This week, the Obama administration is poised to slap potentially hefty tariffs on imports of Chinese solar products, a move that will satisfy a protectionist urge but undercut the U.S. energy agenda. It’s no secret China is aggressively subsidizing its solar manufacturers, driving down prices for solar panels and components. Here’s the question: Is that a bad thing?
—

This is actually a pretty excellent point. If the US wants more solar power, it makes sense to take advantage of the huge subsidies to solar power manufacturers in other countries and just import them cheaply. This tariff going to make solar panels way more expensive in the US, and it’s not like there’s an easy domestic substitute because post-Solyndra it’s very unlikely that the US will see any additional solar subsidies in the next few years. And the tariff isn’t going to encourage manufacturers to shift from China to the US, because relocating is very expensive and China already has the subsidy and the manufacturing expertise and relatively low-wage technical workers.

Moreover, the WTO will almost certainly allow China to retaliate (because the US tariff violates international law) with duties on polysilicon - and since that’s a solar panel component, this is just going to make solar energy even more expensive. So that’s suboptimal all around.

(Source: bloomberg.com)

15 notes

May 05 2012 ∞

Canadians Dominate World’s 10 Strongest Banks

CIBC was No. 3 in Bloomberg Markets’ second annual ranking of the world’s strongest banks, followed by three of its Canadian rivals: Toronto-Dominion Bank (No. 4), National Bank of Canada (No. 5) and Royal Bank of Canada (No. 6), the country’s largest lender. 

[…]

Canada’s regulator, the Office of the Superintendent of Financial Institutions Canada, has gone beyond those levels in its requirements, a stance that has shielded lenders from some of the financial follies that undermined other global banks, especially in 2008. As far back as January 1999, OSFI sent a letter to Canadian banks telling them to set aside at least 10 percent of total capital as a cushion for losses. “I do not think it was popular at the time,” says Julie Dickson, OSFI’s superintendent. “That’s where having a supervisor with a pretty clear mandate allows you to take those unpopular decisions.”

The Canadian regulator also set criteria on the quality of banks’ assets, requiring them to hold 75 percent of their capital in equity. “When the crisis erupted, we realized we had stuck to a fairly basic rule, which was that the bulk of Tier 1 capital had to be in equity,” Dickson says. “That turned out to be very, very important.”

So that’s really surprising; it turns out that the country that enacted really strict capital safety restrictions during a boom still has really safe banks even though the economy is basically stagnating. What’s kind of cool is this:

TD Bank has accelerated a U.S. expansion strategy that Clark began in 2004. In 2008, the bank took over Commerce Bancorp of Cherry Hill, New Jersey, in a $7.1 billion transaction that helped give the Canadian lender 1,284 branches in the U.S. today — more than the 1,150 it currently has in Canada. TD’s green logo is now a common sight on the streets of New York, where it aims to become the city’s third-largest lender by number of branches within four years, and in Boston, where its name adorns the TD Garden, home to the Boston Celtics basketball team and Boston Bruins hockey team.

So basically, the overregulated Canadian banks are outcompeting the underregulated and highly-subsidized US banks. Seeing as the Canadian government is basically requiring the banks to park their assets in safe assets with low returns, this is basically the opposite effect you’d expect. This is basically a sign of how badly the modern banking system has misaligned incentives for top executives; they effectively have to be ordered to not drive their firms into the ground, or they end up requiring billions in emergency bailout funding.

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