MacroScope

A Marshall Plan for Greece

The spectacular failure of “expansionary austerity” policies has set Greece on a path worse than the Great Depression, according to a study from the Levy Economics Institute of Bard College.

Using their newly-constructed macroeconomic model for Greece, the Levy scholars recommend a recovery strategy similar to the Marshall Plan to increase public consumption and investment.

“A Marshall-type recovery plan directed at public consumption and investment is realistic and has worked in the past,” the authors of the report said.

Employment in Greece is in free fall, with more than one million jobs lost since October 2008 — a drop of more than 28 percent, leaving the “official” unemployment rate in March at 27.4 percent, the highest level seen in any industrialized country in the free world during the last 30 years, the Levy Institute scholars said.

The study argues the austerity policies espoused by the “troika,” the group of international lenders who funded Greece’s bailouts, have failed and that continuing those prescriptions will only worsen Greece’s jobs, growth, and deficit outlook.

Raskin’s warning: ‘Shouldn’t pretend’ Fed capital rules are a panacea

Post corrected to show Brooksley Born is a former head of the Commodity Futures Trading Commission (CFTC) not a former Fed board governor.

Underlying the Federal Reserve recent announcement on new capital rules was a general sense of “mission accomplished.” The U.S. central bank, also a key financial regulator, has finally implemented requirements that it says could help prevent a repeat of the 2008 banking meltdown by forcing Wall Street firms to rely less heavily on debt, thereby making them less vulnerable during times of stress.

As Fed Chairman Ben Bernanke put it in his opening remarks:

Today’s meeting marks an important step in the board’s efforts to enhance the resilience of the U.S. banking system and to promote broader financial stability.

Portugal crisis to test ECB´s strategy

Portuguese bond yields surged to more than 8 percent as a government crisis prompted investors to shun the bailed-out country, raising concerns about another flare-up in the euro zone debt saga.

The resignation this week of two key ministers, including Finance Minister Vitor Gaspar who was the architect of its austerity drive, tipped Portugal into a turmoil that could derail its plan to exit its bailout next year.

Portuguese bond yields surged to levels near which it was forced to seek international aid two years ago. The sell-off spread to Italian and Spanish debt markets, but was not as pronounced there.

Broken (record) jobless data: Euro zone unemployment stuck at all-time high

Surprise! Euro zone unemployment was stuck at record high of 12.2 percent in May, with the number of jobless quickly climbing towards 20 million. Still, as accustomed to grim job market headlines from Europe as the world has become, it is worth perusing through the Eurostat release for some of the nuances in the figures.

For one thing, as Matthew Phillips notes, Spain’s unemployment crisis is now officially more dire than Greece’s – and that’s saying something.

Also, the figures remind us just how disparate conditions are across different parts of the currency union. While Spanish and Greek unemployment is hovering just below 27 percent, the jobless rate in Austria, the region’s lowest, is 4.7 percent.

France under the spotlight

An IMF team will conclude its annual review of the French economy and hold a news conference this morning.

It’s a safe bet that the Fund’s prescription will be similar to that of the EU and most other interested observers – the two extra years France has been given by Brussels to meet its debt-cutting targets must be used to liberalise and reform its economic structures. That was certainly Angela Merkel’s message to President Francois Hollande last week and also implicit in the Franco-German position paper which is intended to lay the ground for an EU summit at the end of the month.

The paper apparently contained a string of concessions from Germany – such as accepting a full-time president of the Eurogroup of euro zone finance ministers and paving the way for the next stage of a European banking union by accepting a “resolution board” to deal with restructuring or winding up failed banks, although that would be based on national authorities not the central body advocated by the European Commission and European Central Bank.

Why a German exit from the euro zone would be disastrous – even for Germany

Let’s face it: “Gerxit” doesn’t roll of the tongue nearly as smoothly as a “Grexit” did. While Europe continues to struggle economically, fears of a euro zone break-up have receded rapidly following bailouts of Greece and Cyprus linked to their troubled banking sectors.

Mounting anti-integration sentiment in some of region’s largest economies, raise concerns about whether the divisive monetary union will hold together in the long run. Indeed, the rise of an anti-Europe party in Germany begs the question of what would happen if one of the continent’s richer nations decided to abandon the 14-year old common currency. Never mind that, viewed broadly, the continent’s banking debacle has actual saved Germans money so far.

Billionaire financier George Soros, has argued that Germany should either accept a closer fiscal union with its peers, including so-called debt mutualization – the issuance of a common Eurobond – or give up on the euro. Hans-Werner Sinn, head of Germany’s influential Ifo Institute, strongly disagrees, blaming the crisis on southern Europe’s “loss of competitiveness.”

Central bankers everywhere after Bernanke warning

It’s raining central bankers today which is well-timed after Federal Reserve Chairman Ben Bernanke dropped the bombshell that the Fed could take the decision to begin throttling back its money-printing programme at one of its next few policy meetings. If that’s the case, and it’s not yet a done deal, then it will be the Fed that will move first in that direction, presumably putting further upward pressure on the dollar and send financial markets into something of a spin.

European stock futures look set to open sharply lower – 1.5 percent or more down – buffeted by suggestions that the Fed could soon change tack. Safe haven German Bund futures have opened higher for the same reason, though in a much more measured fashion. One of Bernanke’s colleagues, James Bullard, speaks in London today. Another, Charles Evans, is in Paris.

The European Central Bank has never got into the realms of QE but it did produce the single most important intervention over the past three years. Ten months after his pledge to save the euro fundamentally changed the dynamics of the currency bloc’s debt crisis, ECB chief Mario Draghi returns to the scene of his game-changing promise – London – to deliver a keynote speech. Draghi does not speak until the evening but his colleagues – Weidmann, Noyer, Coeure, Liikanen and Nowotny – all break cover earlier in the day. Draghi has said the ECB is prepared to act further if the economy worsens, having already cut interest rates to a fresh record low this month and ECB chief economist Peter Praet said last night that its toolkit could be expanded if necessary. But what?

Possibility of Spanish downgrade looms over euro zone

Spanish government bonds have had a good run since the European Central Bank said it would protect the euro last year. But some analysts say the threat of a rating downgrade to junk remains an important risk.

Credit default swap prices are discounting such a move, according to Markit. Spain is only one notch above junk according to Moody’s and Standard & Poor’s ratings, and two notches above junk for Fitch. All three have it on negative outlook.  Bank of America-Merrill Lynch says it sees a “high probability” of a sovereign rating downgrade in the second half of the year.

As the table above shows, a cut to sub-investment grade would prompt Spanish sovereign debt to fall out of certain indices tracked by bond funds, resulting in forced selling, which could drive Spanish borrowing costs higher.

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.

Why euro zone bond yield ‘convergence’ may be something to fear

 

Are European bond investors looking for love in all the wrong places?

The premium bankers demand to hold various types of euro zone debt over that of Germany has recently come down. In normal circumstances, this might suggest markets are no longer discriminating between the risks associated with different member countries’ bonds. But analysts say the recent convergence is based on a precarious belief of ECB action rather than any real improvement in economic fundamentals.

Spain and Italy still offer a comfortable premium over Germany. But a narrowing in yield spreads that is being driven by a fall in the funding costs of Spain and Italy, rather than by a rise in German yields, gives reason for pause.

According to Lyn Graham-Taylor, fixed income strategist at Rabobank:

The fact there is almost no movement from Germany and a huge movement in peripherals is indicative to us of this convergence for the wrong reason.