Greece And The Eu

[Malcolm Robinson]

Like it sizsells, when you are talking about a pack of cards built on quicksand in an earthquake zone someone blarting at the wrong time could produce cataclysmic effects!

Remember that 0.1% (4th quarter GDP estimate) which got us out of recession........well it's been revised up to 0.3%. Sounds like better news but the 3rd quarter has also been revised from -0.2% down to -0.3% which leaves us exactly where over the 2 quarters?

[Malcolm Robinson]

Has the UK already lost its AAA debt rating? Looks like the markets have already pronounced on that with German and French bonds yielding 3.10% and 3.42% while ours yield 4.03%. (There is talk about the next tranche of Greek bonds yielding up to 7% and remember they are in the same currency!) Even Italy 4 places below the UK in terms of international credit ratings weigh in with 3.97% so it looks as if the markets have re-rated UK bonds for themselves! That isn't as bad as a couple of weeks ago when they touched 4.30% so Merv's statement about maybe buying more might have had the desired impact. Interesting to see if that is fleshed out next Thursday when the Monetary Policy Committee meet.

The slide in the pound exchange rates must be worrying but just maybe the Pru hedged their takeover of AIG which would distort the market in the short term? However this will impact onto the inflation figures, so much of the raw materials we buy are priced in $'s and of course we import too many finished goods from the likes of China!

[Malcolm Robinson]

Well people seem to be reading this stuff so I will keep it going.

The reason I picked Greece to watch it because I think it could be what is in store for the UK once we get someone into No10 who will actually tackle our budget deficits instead of inflating them. The euro question complicates the ease of comparison somewhat but essentially........

So Greece has agreed a new austerity budget to improve her public sector fiscal position and that amounts to a 4.8 billion euro hit. It is split between higher sales taxes on stuff like baccy and booze and public sector cuts, notably civil servant pay. As a part of these moves VAT has gone from 19% to 21%, remember these figures we might just hear the same sort of thing in the near future! That glass of ouzo any Greek bound holidaymakers were looking forward to in the beachside tavernas this summer has just up significantly. These new measures, taken with the discounted original ones, should add up to the about 4% cut in deficit needed. The Greek government have now begun trying to get their house in order and we should now look to the ECB to see how they will repay that commitment. This has already had a reaction by the markets and Greek debt has fallen to 6.03% already with a spread below 3% over Bunds. Slowly slowly catchy monkey! A word of caution, for the initiative to really succeed Greece needs economic growth which might not be possible in the short to medium term as identified by BNP. (That's not the BNP you love so much monsta!)

Problems, these are always problems within euroland doesn't matter how sensible a suggestion is, the designated euro banker, Germany, is actually forbidden by its own laws from large scale intervention. Herr Issing, now currency strategist for the ECB and formally council member for the Bundesbank, says that a decision way back in 1993 precludes Germany from anything resembling a bail out or fiscal help for any euro member state, even to the point of issuing a guarantee for another member state to stabilise any fluctuations in the euro. So it might not be a case of the EU leaders not knowing what to do or how to do it, it could well be a case of them not seeing this eventuality at all and therefore not preparing for it, which should bring into question the competence of all concerned!

We could look across the pond at out transatlantic cousins for inspiration and especially at the Californian scenario, which in some ways is like the Greek tragedy playing out in Europe now, but there is one thing missing, political union. The yanks have political union which leads to fiscal union; the Europeans have fiscal union which they hoped would lead to political union. It's a bit like the tail trying to wag the dog!

As I am writing this up Greece has announced she is going to issue new debt into the markets. The yield is, today, 6.11%. So the question for internal buyers is this....... do you take the debt at a fantastic yield and hope if anything goes wrong the IMF or the ECB will underwrite it or is Greece a basket case with no reasonable prospects of repayment?

[Malcolm Robinson]

Something for the chartists amongst us............

Just look at Italy on the pie chart!

[Malcolm Robinson]

Just had a leaflet though the door claiming the housing market has turned, 'It's moving again'. This is the second of our illustrious, if not overtly optimistic for reasons of self indulgence, locally based estate agents to proclaim their take on the market. Well here is another take.......

Remember that pesky sub prime stuff which caused the financial world to implode and how it wasn't really anything to do with us? Our bankers unknowingly bought into the junk bonds is the current excuse. (BTW the same bonds which used fractal chaos theory to prove their valuations!!!!) Anyway just come across some rather revealing stats on the issue. Only about 44% of the book was for residential properties which means 56% was for commercial, that's shopping centres, shops, offices etc. This stuff is not written the same way as residential mortgages are, commercial ones of this sort are given 3-7 year terms. We are primarily talking USA here but banks worldwide own this paper. So this stuff is close to becoming due for repayment soon and what state is the commercial market in? Look around Bedlington for an example! If it cannot be repaid because of non lets, and remember we are in or supposedly emerging from recession, this will rebound and this time we have no safety net, we have used everything including the kitchen sink to save the residential stuff! How can banks generate capital receipts, impose very tight default terms on lending then fire sale repossessions and as they must now own by far and away the vast proportion of houses in the UK at a time of limited economic opportunities watch out if you are relying on the governments soft touch for mortgagees in default! The markets turning again, yep but it might be another financial tsunami coming our way!

I hate to say this but GGG's apocalyptical 'depression not recession' might well be true after all.

[Stephen]

The Germans have come up with a helpful suggestion for Greece - sell their islands

Maybe we can sell the Isle of Wight?

[Malcolm Robinson]

The Germans have come up with a helpful suggestion for Greece - sell their islands

Maybe we can sell the Isle of Wight?

They have also bought a third of that Greek bond issue. Merkel says it isn't bailing Greece out only helping a fellow EU member. Well that's one way to get around your own regulations I suppose. I wonder if they have the same appetite when there are 4 times the amount on offer?

[Andy Millne]

They could sell the rest of the Elgin Marbles

[Malcolm Robinson]

They could sell the rest of the Elgin Marbles

Thought we just pinched them.........

[Malcolm Robinson]

Interesting snippet at the Chilcot inquiry.......GB has just said he was running the UK economy (Chancellor at the time) by having current accounts met by taxation and capital accounts by borrowing. OK but that means at the peak of the economic cycle with historical low levels of unemployment and record tax and VAT receipts there was nothing left in the pot to use for capital investment once general running costs were met? Hardly an inspiring balance sheet!

[threegee]

... The markets turning again, yep but it might be another financial tsunami coming our way!

I hate to say this but GGG's apocalyptical 'depression not recession' might well be true after all.

£200bn doesn't buy you very much time when you insist on throwing it at all the wrong things. Makes all previous "cynically engineered pre-election booms" look magnificent value!

http://www.bedlingto...ant-you-to-see/

Hopefully Joe Public will wake up to the fact that "the recovery" is another hoax before 6th May. But part of me wants GB to scrape home on our badly skewed voting system, usual minority vote, and tide of Mandelsonian BS. Out of the resulting complete disaster might just come the social revolution we need.

Whichever party wins the next election is going to rapidly become the most unpopular government in history. The honeymoon period won't last past the Summer. Why David Cameron, or any other sane person would want to lead this is beyond me. That's a question you probably don't need to ask about Gordon though as I don't believe he qualifies!

We are already in that depression Malc - but it's a "repressed depression". The only thing which will realistically get us out of this is years of roaring inflation with all the terrible damage that will do to people on fixed incomes. Exactly what our amateur economist told us he'd ended! As you say, he was spending when he should have been saving, and when the smoke turned to flames he threw fuel on the fire.

The best course now is a ten year slog, with a lot of pain to re-build a sustainable economy. But does any politician have the guts to spell this out and come clean with the electorate? I fear not, and that we are in for a very rough and very long ride.

[Malcolm Robinson]

If they were going to tackle the impending inflation time bomb, if it isn't already started, they would have raised interest rates last week. The whole thing is starting to look like pre election manipulation on an ever grander scale than normal! We have falls in our exchange rate and the producer price inflation report last week seems to spell out raging inflation to hit very soon. The output price index has been rising for the last 6 months and the input price index has gone from -6.2% to 6.9% over the same period. Interestingly 2 or 3 of the 'shadow' monetary policy committee have called for a rise in interest rates but of course that fell on deaf ears! When these figures and rates falls start to trickle though into the economy proper the current 3% inflation figure will look like a walk in the park!

One thing is for sure whoever wins the next election will not be able to keep all the balls up in the air.

If they had let the market correct itself a bit more we might have been chugging along the bottom but we would not face the prospect of dropping off a cliff!

[Malcolm Robinson]

Getting back on topic for a mo, the Greek bond issue last week looks to be a success, according to press article, but a bit more detail is coming though now. For instance which country bought 20% of the issue, only surpassed by Greece itself, the UK?????? Germany and France bought about 14% and 7% respectively so the great bastions of the euro only backed the issue to about the same level as us? What's going on? Looking a bit closer it would seem UK hedge funds filled their boots! So Greece got her 5 billion euro 10 year bonds away but at what price ........6.47% yield, no wonder the UK fly boys got into the action, as long as they get repaid of course! The problem is that it translates into a 22.5 million a year repayment over 10 years at a time when Greece should be building its way out of the hole it is in. The outlook still looks bleak for Greece in the short term with large debt repayment due 2011, 2012 and 2014 and with possible declining output and economic growth hard to see how she can make the repayments with resorting to issuing more debt of course, if only she had the QE route to take, not!

Sarko of France said he stands ready and waiting to help Greece, but obviously not ready and willing to put his hand into his pocket! Interestingly the German finance minister Herr Schäuble proposed the euro equivalent of the IMF to help members in financial trouble such as Greece is experiencing at the moment. The EMF would enable member states to issue bonds in its name instead of the sovereign states and so should make them easier and cheaper to get off. Shouldn't something like that have been formed at the inception of the euro not its death throes? Like the rest of the 'civilised' world the EU is managing its economies and finances by the well tried and tested business model, crisis management!

[threegee]

So what's wrong with the IMF? Easy one to answer: they don't control it! No gravy-train jobs there for washed-up europoliticos. No, do what we tell you because we have the power to remove you. No, put hard economics before political manoeuvring.

crisis management a bit strong Malc. Not the crisis bit, the management bit!

BTW did you notice Greek VAT up from 19% to 21%? UK VAT to 20% within months - that's now a cert! Even VAT on food being contemplated. Who's going to be the first to use the phrase The Decade of Discontent?

[Malcolm Robinson]

Back to the UK economy and following on from the balance of payment figures we now have the manufacturing and industrial production figures. Industrial production figure was -1.5% (Jan10/Jan09) and the manufacturing figure +0.2% year on year. Of the 13 sectors in the manufacturing figure 11 fell! The problem I have here is that the manufacturing sector represents such a low make up of UKPLC these days a fractional rise is meaningless. It is about 13-15% of the economy, if I remember correctly, and has almost exactly swapped with the service sector, including financials, which is now just under 30%, or was until all the bubbles started bursting!

Why is this stuff important, because we have bankrupted the country trying to stabilise our situation and (like Greece) we now need to build our way back. Worryingly the figures show no such growth for the economy and considering the supposed financial stimulus HMG have made something is badly askew, either that or someone has their sums wrong for whatever (political)reason!

Interesting speech made by Kate Barker on Monday evening, she is about to retire from the MPC, in which she made several references to her time in office, the last 9 years. Interesting because she said the MPC realised the asset price bubbles building up in the economy could have a detrimental effect on the well being of the economy as a whole......well why didn't you do something about it Kate? She did say she was less then satisfied with her performance regarding the financial crisis. We can agree on that one then! Also in a thinly veiled reference......... 'It may however also have been the period in which a large error was made in allowing the belief to become established that policymakers had solved the issue of economic instability.' Now who said they had abolished boom and bust? She goes on to say that she doesn't (and by association the MPC as a whole?) see the new asset bubbles building in the economy as yet endangering the economic prospects for UKPLC, however she does mention the debt associated with such peaks. So back to normal then Kate no lessons learnt! It is starting to look like our Central Bank is actually encouraging debt laden asset bubbles and for that read house prices and stock markets.

[Malcolm Robinson]

As an antithesis to Kate's speech there has been a report by the IMF done by Daniel Kanda entitled, 'Asset Booms and Structural Fiscal Positions.' Bit heavy, maybe, but it focuses on the Irish economy and their housing bubble which in a lot of ways replicates our own.

Quote:

'Asset booms and sectoral changes can distort traditional estimates of structural fiscal revenue, and could lead to serious fiscal policy errors. This paper extends the estimation of structural revenues to take account of asset prices and sectoral changes, and applies this to the case of Ireland, where a property bust has revealed a large hole in the public finances. It is shown that excluding these factors led to a substantial bias in the estimation of structural revenues and the structural balance prior to the crisis was much larger than earlier estimated.'

What this means and what the paper goes on to say is that Ireland took the revenue generated by the likes of the housing bubble to increase its public sector provision thinking income, VAT, stamp duty, capital gains tax etc, would continue. Without that 'extra' tax income they were left with a burgeoning public sector which was unable to be supported by an economy entering recession. (BTW this is exactly where I think France and some of its continental partners have it wrong, their take is that the private sector is only there to support the public sector, dumb or what, quite obviously the wrong way around unless they really are a communist state!) Anyway we can easily draw comparisons with the UK and Ireland in this respect; however Ireland has already begun the much needed austerity measures to get its finances back into some semblance of order. Bit like Greece needs to do now if the people allow it! What is clear is that UKPLC will have to at some point, and the sooner the better, revalue not only its assets, and get the froth out of them, but also examine the public sector and trim that cloth to suit. With the biggest employer in our county the public sector worrying times ahead.

While there is much in this single IMF report to congratulate there is also a contradictory view of the organisation as a whole. The Polish finance minister quoted in the FT said of the IMF,

'Spain is complaining that the same institution which was urging them to increase their budget deficit last year is now telling them what a dreadful mistake it was this year. We were on the end of that same advice but we took a contrarian view…

Well done Poland and can you have a word with Gordo........

[Monsta®]

its and you wonder why gordo looks stressed!

[Malcolm Robinson]

Here comes the rewording............

http://uk.news.yahoo.com/22/20100313/tpl-uk-greece-20b2d2f.html

[Malcolm Robinson]

To show just how out of touch if not incompetent the current ruling Euro politico class are here is a statement made by Romano Prodi , one time prime minster of Italy and former European Commissioner.

"For Greece, the problem is completely over, I don't see any other case now in Europe. ”

I disagree Signor Prodi, and I guess the 25,000 strikers in Athens the other day would too. Even with this 'new' package of backing announced by the EU, Greece still has a hard road to go down to get its deficit back under control. The austerity programme their government is trying to implement to get the fiscal deficit back to the Euro level of 3% of GDP by 2012-13 will produce even more populous unrest and once we consider other states stumping up their own domestic cash to help Greece out we will soon see unrest there too as their populations ask why they should have to go without to further the grand EU experiment. As I have said before without political union..........

BTW, if Greece does manage that trick it will beat the German plan to get their deficit under that threshold!

I wonder if Signor Prodi has heard of Latvia who the IMF 'helped' out with a similar austerity package when their economy went bits up? They are now in junk bond status with a B rating and dropping.

Remember those Greek bonds which went out at such a premium our hedge fund managers fell over themselves to get in the action, well the market is catching them up and eroding that premium. Currently Greek 10yr bonds attract 6.33% not so far off the 6.75% the 5 billion issue went out at. I expect we have seen some reassessment of positions in those figures!

[Malcolm Robinson]

Well it would seem the Guardian's 'senior European source' might have jumped the gun as we still wait for official news of the Greek bailout. France's finance minister, Madam Largarde, has just spoken out in the FT seemingly at pains to point out German culpability? The point of her tirade, she says the Germans are as much to blame for the euro crisis because of their productivity gains, increased competitiveness and trade surpluses? WHAT, oh yes this is France!!!!!!! She then goes on to say the successful German economic model is not one the rest of the EU can sustain, or would want to for greater convergence. (Is that what you call a backhanded compliment or what?) The Germans meanwhile go on with their, non aggressive this time, take over of continental Europe insisting on fiscal discipline and stable prices, always centre pin in German economic after their own spectacularly disastrous QE programme! Can anyone really expect Germany to somehow stop being as industrious, stop insisting on a stable currency and ask it workers to work unpaid overtime to allow its continental partners to benefit from their more relaxed way of life? No wonder the leaders can't agree, the whole thing is nuts and all the while Greece is left like a gaping sore on the side of the Euro!

[Malcolm Robinson]

So the EU have come out now and criticised the UK and in particular the Brown/Darling deficit reduction plans. This from an organisation which cannot even sort out its own house.........the problem is they are right: its just we never like 'Johnny Foreigner' telling us where we are going wrong! The reason for this statement is that we have breached EU stability rules, exactly the same as France and Germany!!!!!!!

So the B/D plan is to half the deficit in the next four years, possible, maybe, probable no, they are now hooked on a huge PSBR which has been inbuilt into the system. This deficit figure doesn't even take in the real position as the likes of PFI, public sector pensions, etc are not included. If we look at public sector pensions and take our own county as an example of this particular black hole country wide, we find 50% of the total combined overall budget for county is the same as their pension deficit, over £400 million and being reassessed (upwards) as we speak! When I questioned county about this, after being told we (ratepayers) will just have to keep paying into it, I was then told as it was a countrywide problem it was almost being ignored. Sound financial planning indeed and conveying a high sense of confidence in abilities to actually manage a billion pound a year business! If we then think about the fact that almost 50% of all jobs in our county are in the public sector I hope we can all start to see the very real problems we are about to face, its called reality!

The forthcoming election (only concentrating on the two major parties sorry Stephen) now seems to have some blue water between the parties, fiscally anyway. We have a choice of either paying more and more into an ever increasing black hole of debt or seeing policies implemented which could result in 10,000 plus redundancies locally, and that's just public sector ones. Neither would seem particularly appetising but sometimes that's politics! I think it boils down to 'Do we take the medicine now or put it off for a while?'

[threegee]

The EU are right of course, and amateur economist AD once again totally wrong! Has he ever been right about anything, including his advice to GB about not going to the country at the only time he had any realistic chance?

But if you go along with the myth that this is a "global problem", and the myth that the height of the post-millennium party is a normal state of affairs; then it's quite easy to kid yourself that the party going on isn't really the party going on, but a prudent period of pre-adjustment to lower levels of alcohol consumption.

There's a very real chance that the markets will lose confidence in Sterling if this stupidity continues. It's a re-run of the "balance the books over the length of the economic cycle" crap. The length that was never defined, but where an end to the cycle was always just around the corner. Until that end became the "global" recession, and we had a whale of an excuse to throw all pretence of prudence to the wind.

We're now told that there will be a spending review after the election. So a government which has been in power for thirteen years and asks us to believe that it is in full control of our affairs (except of course for this pesky "global problem" of our own gross overspend) needs a review of what it itself has been up to? Why can't this so-called review be carried out now, and we be told the true extent of the necessary cuts before election day? You can pretty well anticipate the Mandelsonian ducking and weaving that following this line of questioning will produce.

[Malcolm Robinson]

Moodys has just come out and said with a deficit of 12.6% of GDP even with AAA rating the UK Gov will be hard pressed to make headway without resorting to another round of QE. Looks like we will have to keep paying the mortgage with the credit card for some time!

[Malcolm Robinson]

Interestingly the Nordic, or the countries being asked to bale out Greece, have their own take on the situation. With 95% of their population not willing to see their hard earned savings disappear into the Club Med area they have come up with their own bale out plan, chuck Greece out of the Euro blaming fraudulent entry. That may well end up the case.

Seems the Greek finance minister et al are now, privately, asking the ECB to underwrite their bond issues in the short term anyway. Not only underwrite them but take them at a preferential rate. Having to pay upwards of 6% to get their bonds away Greece is being locked into repayments which it cannot hope to make. These really have to be met by increased productivity at a time when Greece will be going through an austerity package which will mean an increase in unemployment etc. The two just do not meld no wonder they would like to set a benchmark of around 4% not the 6% the markets insist on. With no real details emerging of any rescue plan by the EU and even more asinine remarks by the likes of the chair of the committee, Luxembourg Prime Minister Jean-Claude Juncker, "We think the question (of aid for Greece) will not arise”, the benefits of membership of the euro club for Greece are becoming less and less apparent.

[Malcolm Robinson]

Might be worth mentioning Standard and Poors statement about Greece here. Not because they have taken Greece off their long term credit watch negative but for one of the more generalised sentences contained in that report.

'In light of these considerable budgetary challenges and the difficult economic environment, it remains to be seen whether Greece's leaders will demonstrate the political will necessary to achieve fiscal consolidation.'

Now where have I seen, almost to the word, that sentence before? Ah yes the latest Government inspection report into our county council! In fact transposing 'NCC' for 'Greece 'anyone would think the same person wrote it!