MacroScope

Greek bond rebound masks stark economic reality

Ten-year Greek government bond yields tumbled to their lowest in nearly three years one day after Fitch upgraded the country’s sovereign credit ratings.

Borrowing costs fell to 8.21 percent – the lowest since June 2010, just after Greece received a bailout from the International Monetary Fund and European Union. The difference between 10- and 30-year yields was also at its least negative since that time.

The move comes after Fitch Ratings raised Greece to B-minus from CCC citing a rebalancing of the economy and progress in eliminating its fiscal and current account deficits that have reduced the risk of a euro zone exit.

The fall in borrowing costs suggests investors are pricing out that possibility, as well as the prospect of another debt restructuring, analysts say.

But the move has also coincided with a broad fall in euro zone borrowing costs in April fuelled by abundant central bank cash in the financial system. Thin liquidity in a debt market that was restructured in March 2012 also likely exaggerated the fall, say traders.

There is no sovereign debt crisis in Europe

Evidence that Europe’s austerity policies are not working was in ample supply this morning. The euro zone as a whole is now in its longest recession since the start of monetary union. France has succumbed to the region’s retrenchment. Italy’s GDP slump is now the lengthiest on record. And Greece, still in depression, shrank another 5.3 percent in the first quarter.

To understand why this is happening, Brown University professor Mark Blyth says it is necessary to forget everything you think you know about the euro zone crisis. The monetary union’s troubles are not, as often depicted, the result of runaway spending by bloated, profligate states that are finally being forced to pay the piper. Instead, argues Blyth, it is merely a sequel to the U.S. financial meltdown that started, like its American counterpart, with dangerously-indebted risk-taking on the part of a super-sized banking sector.

In a new book entitled “Austerity: The history of a dangerous idea,” Blythe writes that sovereign budgets have come under strain primarily because taxpayers of various nations have been forced to shoulder the burden of failed banking systems.

Mervyn King’s economic ray of light may be too bright

In his valedictory Quarterly Inflation Report, Bank of England Governor Mervyn King shone a ray of light on the British economy, saying it should grow 0.5 percent in the current quarter.

But according to the latest Reuters poll of more than 30 economists, published on Tuesday, that might be too optimistic.

The consensus showed gross domestic product would only expand 0.2 percent, weaker than the 0.3 percent expansion seen in the first quarter when the country missed sinking into an unprecedented triple-dip recession.

Cameron’s dilemma

Britain’s David Cameron began the day on Monday gently slapping down two Cabinet colleagues who said if they had a vote today, they would opt to leave the EU. It was senseless, he said, to throw in the towel before he had had a chance to renegotiate Britain’s relationship with Europe. He ended it by caving into rebels in his Conservative party who are demanding legislation now to commit to an in/out referendum before the next election.

The 25 year history of the Conservatives and Europe – internecine warfare and successive election defeats as they obsessed about something which figures low on most Britons’ priority list – suggests no good can come of this and if Cameron wins the 2015 election it moves Britain incrementally closer to the EU exit door. The more immediate question is whether Cameron has lanced the boil. Again, history suggests that if you give ground to the eurosceptics they merely demand more. And what the PM’s pro-EU Liberal Democrat coalition partners make of this isn’t hard to imagine which means he might not even have the numbers to get the bill through parliament. One of the leading rebels seized on that point, saying the move could well fail.

The anti-EU fringe party UKIP, which could well not win a single seat at the next election but has seriously spooked the Conservatives with strong showings in recent local elections, must be laughing all the way to the bank. If it can remake the Conservative party in its own image, its job will be done. But just as likely is a split party. The irony of Cameron doing all this while in Washington to bang the drum for an EU/U.S. trade deal is hard to ignore. President Obama pointedly said the British premier should fix its relationship with the EU.  If Cameron believes Britain should remain part of its main trading bloc, as he says he does, he is going to have to start explaining why and that is difficult to imagine.

What no crisis?

 

It seems eons since the euro zone finance ministers’ meetings which made such a hash of the Cyprus bailout but they were only two months ago. Monday’s Eurogroup will be altogether less eventful with some of the gathering probably a little jaded having spent part of their weekend at the G7 outside London where the usual differences about growth versus austerity and banking reform were aired.

No one will be sorry for a more routine meeting and there are no icebergs on the horizon but the agenda is still a full one. Featuring will be the economic situation on the basis of the Commission’s latest forecasts, the state of play in Cyprus, the decision already taken to release more bailout money to Greece, the new steps taken by Portugal to fill the gaps in its budget after the country’s top court struck some measures out, a review of European Commission reports on what is ailing Spain and Slovenia and a broad discussion about the merits of the ESM bailout being allowed to recapitalise bank retroactively from next year.

Italy offers a range of bonds at auction worth up to 8 billion euros which should be snapped up given the European Central Bank’s underwriting of the euro zone and Japanese money coursing through the financial system.

What’s it all about?

G7 finance ministers meet London on Friday and Saturday. Since they and many more met in Washington only three weeks ago and not much has changed since, it’s tempting to ask what is the point of this British gathering. There have been mutterings from some of the travelling delegations to that effect.

If there is an angle, it is the unusual focus on financial regulation (usually not part of the Group of Seven’s remit) with some feeling that more than four years after the collapse of Lehman Brothers, efforts to put in place structures to prevent similar events spinning out of control in future are flagging. That puts the euro zone’s fluctuating plans for a banking union firmly in focus, which in turn puts German Finance Minister Wolfgang Schaeuble right in the spotlight.

On Tuesday, he said elements of a banking union would have to be pursued without lengthy and arduous treaty change, something he’d previously said would be necessary. Was that a softening of his position? Er, probably not. More likely, the subtext is that because treaty change takes too long, Berlin will pursue only those elements of banking union that don’t require it – i.e. bloc-wide regulation yes, but forget about a bank resolution mechanism let alone a joint deposit guarantee.

What did he mean by that?

“What did he mean by that?” 19th century Austrian diplomat Metternich is said to have asked of  Talleyrand when he heard the French statesman had died. The euro zone crisis, and the response of its leaders, has often required the same question to be asked.

There were some carefully chosen words from Germany yesterday with Finance Minister Wolfgang Schaeuble saying that elements of a banking union would have to be pursued without lengthy and arduous treaty change, something he’d previously said would be necessary.

Now you could view this as a sign of softening opposition, certainly the French read it that way. However, the subtext could just as easily be that because treaty change takes too long, Berlin will pursue only those elements of banking union that don’t require it – i.e. bloc-wide regulation yes, but forget about a bank resolution mechanism let alone a joint deposit guarantee. That would be a pale imitation of what was proposed nearly a year ago and wouldn’t provide the sort of structure that would foster confidence that a future financial crisis could be contained.

I’ll say it again…

 

European Central Bank chief Mario Draghi felt it necessary yesterday to depart from the script at a ceremony awarding an honorary degree to reiterate his message from last Thursday – that the ECB could cut interest rates again and was looking at pushing the deposit rate which it charges banks for holding their funds overnight into negative territory in an attempt to get them to lend again.

Nothing new in the message obviously but the fact he felt the need to repeat it at a forum at which nobody would expect him to could be telling. Draghi has form here. It was at a pre-Olympics conference in London last July that he delivered his “whatever it takes” to save the euro pledge that fundamentally shifted the terms of the currency bloc’s debt crisis.

That the recession-plagued euro zone economy could do with a shot in the arm is beyond question though Draghi insisted countries must not let up on their debt-cutting. Very different tone from the prime ministers of Italy and Spain who demanded action to cut unemployment though Italy’s Enrico Letta said growth could be boosted without increasing debt.

Small rays of hope brightened Canada’s economic outlook last week

 All data released last week point to a far better first quarter growth in Canada than previously expected, prompting economists to revise up their predictions.

In a Reuters poll conducted early last month, forecasters predicted that Canada’s economy expanded by just 1.6 percent on an annualised basis in the first three months of this year.

But that consensus could prove to be too low, with many now expecting growth to be close to 2 percent or even higher, likely a welcome sign for Stephen Poloz who was named Bank of Canada’s new governor last Thursday and will replace Mark Carney on June 3.

Scotland catches up with the UK economy – and maybe more?


Updated to show Scotland’s composite PMI has bettered the UK equivalent for seven straight months now, after Monday’s data.

For the first time in a long while, Scotland’s economic performance has caught up with the UK average– and there is at least some evidence to suggest it’s doing slightly better than the British baseline.

In general, the Scottish economy has come second-best behind the poor UK average, at least since the full onslaught of the global financial crisis hit in September 2008 with the collapse of Lehman Brothers.