MacroScope

Some key positions were staked out on Greece over the weekend – ECB power-behind-the throne Joerg Asmussen became the first euro policymaker to say on the record that euro zone finance ministers meeting on Tuesday would be intent only on finding a deal to tide Greece over the next two years. But IMF chief Christine Lagarde told us in an interview that she would push for a permanent solution to Greece’s debts to avoid prolonged uncertainty and further damage to the Greek economy.
  
Sounds like those two positions could be mutually exclusive. However, it may be that something like a behind-the-scenes pledge from the German government that it will act decisively after next year’s election will keep the IMF on board.

Eurogroup chief Jean-Claude Juncker said at the weekend that intensive work was being done on a compromise with the IMF and progress was being made, after the euro zone sherpas put their heads together on Friday. And even hardline German Finance Minister Wolfgang Schaeuble said a deal had to be struck on Tuesday and would be. Juncker and Lagarde clashed last week over his suggestion that Greece should be given an extra two years, to 2022, to get its debt/GDP ratio down to 120 percent, the level the IMF has decreed is the maximum sustainable. Lagarde looked surprised and firmly rejected the idea.

IMF officials have argued that some writedown for euro zone governments is necessary to make Greece solvent but Germany has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal. 
Among ideas under consideration to plug the funding gap are further reducing the interest rate and extending the maturity of euro zone loans to Greece, a possible interest payment holiday and bringing forward loan tranches due at the end of the programme, according to euro zone sources.

Asmussen said loans alone did not help as they raised the long-term debt and that a solution had to be found that did not raise Greece’s debt level. It sounds increasingly like the ECB, which could forego profits it has made on its Greek bondholdings worth 12 billion euros or more and allow that to be thrown into the Greek pot (or should I say urn), is prepared for euro zone governments to take a loss on their  bondholdings. But it can’t countenance doing the same itself.

Even hardline Bundesbank chief Jens Weidmann said late last week that a new haircut of Greece’s debt could come as a reward for Athens implementing the reforms it has signed up to. Klaus Regling, the head of the euro zone’s rescue fund, also left more wiggle room than the German government has, saying a haircut could only happen in “exceptional circumstances”.

Polling data courtesy of Chris Reese

We’ll know it when we see it. That’s essentially been the Federal Reserve’s message since it launched an open-ended bond-buying stimulus plan that it says will remain in place for as long “the outlook for the labor market does not improve substantially.” Which begs the question: how much larger is the central bank’s $2.9 trillion balance sheet likely to get?

Minutes from the Federal Reserve’s October meeting point to solid support within the central bank for ongoing monetary easing via asset purchases well into 2013.

A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market.

So said Winston Churchill of Russia. The Greek debt saga isn’t quite that unfathomable but the economic necessities continue to clash with the political realities.

Eurogroup Working Group – the expert finance officials from 17 euro zone nations who do the clever preparatory work before their finance ministers meet – will convene to today try and get the Greek debt process back on track after a ministerial meeting got nowhere on Monday and in fact ended up in an unusually public spat between its chair, Jean-Claude Juncker, and IMF Managing Director Christine Lagarde.

The Eurogroup plus Lagarde will meet again next Tuesday and there are big gaps to bridge although we intercepted the IMF chief in Manila this morning, insisting that a deal was possible, or at least that’s one way of reading her “it’s not over until the fat lady sings” quote.

Janet Yellen, the Federal Reserve’s influential Vice Chair and possible future replacement for Chairman Ben Bernanke, delivered an important speech this week. Entitled “Revolution and Evolution in Central Bank Communications,” Yellen traces the deep shift in sentiment towards the importance of policy transparency.

In 1977, when I started my first job at the Federal Reserve Board as a staff economist in the Division of International Finance, it was an article of faith in central banking that secrecy about monetary policy decisions was the best policy: Central banks, as a rule, did not discuss these decisions, let alone their future policy intentions. While the Federal Reserve is required by the Congress to promote stable prices and maximum employment, Federal Reserve officials at that time avoided discussing how policy would be used to pursue both sides of this mandate. Indeed, mere mention of the employment side of the mandate, even by the mid-1990s, was described in a New York Times article as the equivalent of “sticking needles in the eyes of central bankers.”

In her remarks, Yellen endorsed the concept of policy thresholds first championed by Chicago Fed President Charles Evans. Her backing suggests such numerical guideposts for policy – we’ll keep stimulating until jobs improve and as long as inflation doesn’t creep too far from the Fed’s 2 percent target – are effectively a done deal, though it remains unclear how quickly policymakers can agree on the details.

The “fiscal cliff” is widely seen as a massive threat looming over a fragile U.S. recovery. But with a little imagination, it is not difficult to see how the combination of expiring tax cuts and spending reductions actually presents an opportunity for tilting the budget backdrop in a pro-growth direction, even if political paralysis makes this scenario rather unlikely.

For Steve Blitz, chief economist at ITG in New York, the cliff presents a unique chance for the United States to avoid sinking deeper in the direction of Japan’s growth-challenged economy by shifting incentives away from consumption and towards investment:

If current negotiations end up simply turning the “cliff” into a 10-year slide an opportunity to help the economy regain a dynamic growth path and close the gap with pre-recession trend GDP would, in our view, be lost and raise the odds that, in the coming years, U.S. economic performance looks more like Japan’s. […]

2012 has been a year to forget for Brazil’s struggling industry – just like the year before. But a weekly central bank survey of around 90 financial institutions says that will all change next year and industry will grow at healthy 4 percent pace.

Will it?  One year ago, the same survey predicted 4.1 percent growth for 2012. Despite massive stimulus by President Dilma Rousseff’s government, including record-low interest rates and billions of dollars in tax cuts that were off everyone’s radar, industrial output in Latin America’s largest economy is set to fall by 2.3 percent.

The same pattern happened the year before. Two months before the start of 2011, analysts expected an expansion of 5.3 percent in Brazil’s industrial output but in the end it grew by only 0.3 percent.

The Greek government pulled it off last night, winning parliamentary approval for an austerity package which offers yet more deep spending cuts, tax rises and measures to make it easier and cheaper to hire and fire workers. But boy was it tight. With the smallest member of the coalition rejecting the labour measures, Prime Minister Antonis Samaras carried the day by just a handful of votes. The overall budget bill is expected to be pushed through parliament on Sunday.

So the show remains on the road and this government has shown more resolve than its predecessors which may buy it some goodwill from its lenders. Attention today turns to the monthly policy meeting of the European Central Bank, a key player in negotiations to put Greece’s debts back on a sustainable path.  Mario Draghi could well rule out taking a haircut on the Greek bonds it holds, something the IMF has pushed it and euro zone governments to do but which Germany and others won’t countenance.  However, the ECB could forego profits it has made on Greek bonds it bought at a steep discount. Those profits have to be funneled through national euro zone central banks and would only be realized when the bonds mature but it would still help.

Greece is set to get two more years to make the cuts demanded of it and EU economics chief Olli Rehn told us yesterday that lengthening the maturities on official loans to Greece and lowering interest rates on them could be done but a haircut was out. There is the possibility of a meeting of the Eurogroup Working Group (the expert officials who prepare for euro zone finance ministers’ meetings) but it seems less likely that a deal will be struck at next Monday’s Eurogroup meeting, with officials now giving themselves until the end of November to come up with something. There were suggestions that Washington had urged big decisions to be put off until after the presidential election. True or not, that roadblock is now out of the way.

The American people have spoken but for the markets the votes of 300 Greeks could be of even more importance in the short-term. German Bund futures have opened flat, not really reacting to Obama’s victory, while European stocks have eked out some early gains.
       
We await a knife-edge parliamentary vote in Athens on labour reforms to cut wages and severance payments, which the EU and IMF insist are a key part of a new bailout deal, but which the smallest party in the coalition government has pledged to vote against. That leaves the two larger parties – New Democracy and PASOK – with a working majority of just nine lawmakers and on a less contentious vote on privatizations, a number of PASOK deputies rebelled. Ratcheting up the pressure is a second day of a general strike which will see thousands take to the streets.

We know that the troika has advised that another 30 billion euros needs to be found to keep Greece afloat. We also know that the IMF has been pressing for the ECB and euro zone governments to take a writedown on Greek bonds they hold, which Germany refuses to do so (which means it won’t happen, for now at least). The Eurogroup is awaiting the troika’s final report and it’s looking less likely that a definitive plan will be signed off at next Monday’s meeting of euro zone finance ministers.

Nonetheless, it’s in no one’s interests to let Greece crash at this point so the presumption is a deal will be done, probably featuring Greece getting two extra years to make the cuts demanded of it, extending maturities on its loans and cutting the interest rates. Talk of the ECB foregoing profits on the Greek bonds it holds (rather than taking a loss, since it bought them at a steep discount) continues to do the rounds. A further German condition is for a ring-fenced escrow account to hold some Greek tax revenues to ensure that it services its loans. Greece will probably also be allowed to issue more t-bills to tide it over though that requires the ECB’s acquiescence since Greek banks are entirely dependent on central bank liquidity and have been offering those t-bills up as collateral. Mario Draghi is speaking today.

El Pais has seen tomorrow’s European Commission forecasts for Spain and they’re grim. The Commission predicts the economy will slide by 1.5 percent next year while Madrid’s forecast is for a 0.5 percent contraction. That puts the target of getting the budget deficit down to 3 percent of GDP  even harder to attain – the Commission predicts a deficit of 6 percent next year and 5.8 percent in 2014 while the Spanish government insists it will get it down to 2.8 percent in two years’ time.

Peering through the numbers, the key question is whether this vista will make it more likely that Spanish Prime Minister Mariano Rajoy will seek help from the euro zone rescue fund, after which the European Central Bank can intervene to buy Spain’s bonds.

Rajoy has been in no hurry to seek help and given Spain’s funding needs for this year will be met in full after an auction on Thursday there is no pressure on that front. But with the economy in dire straits its borrowing needs are likely to climb next year so a pre-emptive strike would have some merit. It would also give the euro zone the broader benefit of showing the ECB will put its money where its mouth is. ECB policymaker Ewald Nowotny said yesterday that the ECB’s bond-buying programme should be put into use to dispel market doubts – not that that is a consideration for Rajoy.

Economists love motor analogies, and for good reason: they are very useful in illustrating the ebb and flow of economies. In coming months, maybe even years, the help from the auto sector could become a lot more literal, argues Paul Dales, senior U.S. economist at Capital Economics in London. In particular, he expects rising sales following years of depressed consumer spending on vehicles in the wake of the Great Recession could add as much as 0.25 percentage point to U.S. gross domestic product growth per year over the next four years. Here’s why:

The rise in new vehicles sales in September, to 14.9 million from 14.5 million in August, was significant as the number of new vehicles being purchased is now higher than the number being scrapped. This comes after four years in which the total number of vehicles in operation has been declining.

That fall was because when the recession hit and credit seized up, both households and businesses had little choice but to run their existing vehicles for longer. It is possible that 10 million fewer new vehicles have been sold than would have been the case if there was no recession.