MacroScope

Geithner’s gauntlet: Social Security is a “separate process” from fiscal cliff talks

Social Security should not be part of the current negotiations over the U.S. budget – that was the message from outgoing Treasury Secretary Timothy Geithner over the weekend. During a veritable tour of Sunday shows aimed at addressing negotiations surrounding the “fiscal cliff” of expiring tax cuts and spending reductions, Geithner told ABC News’ “This Week”:

What the president is willing to do is to work with Democrats and Republicans to strengthen Social Security for future generations so Americans can approach retirement with dignity and with the confidence they can retire with a modest guaranteed benefit.

But we think you have to do that in a separate process so that our seniors aren’t – don’t face the concern that we’re somehow going to find savings in Social Security benefits to help reduce the other deficit.

What Greece’s latest debt deal might mean for Ireland and Portugal

Another week, another Greek debt deal. Third time’s a charm, EU and Greek politicians assure us. Under the agreement, Greece’s international lenders agreed to reduce Greece’s debt load by 40 billion euros, cutting it to 124 percent of gross domestic product by 2020 through a package of steps.

Marc Chandler, head of currency strategy at Brown Brothers Harriman, points out “an under-appreciated twist to the plot”: the Greek deal has potential implications for other bailed out European states like Portugal and Ireland.

European officials adopted a principle of equal treatment under the framework of the EFSF. Essentially, this means that consideration given out to Greece applied to the other countries who receive EFSF assistance, namely Ireland and Portugal.

Glimmer of Greek hope

There are signs of headway from Athens where we have just snapped a government source saying the IMF accepts Greek debt is “viable” if it falls to 124 percent of GDP in 2020, rather than the 120 that it had previously decreed was the maximum sustainable level.. The source said fresh measures have been found to reduce debt to 130 percent of GDP by 2020, leaving another 10 billion euros to be covered.

At the latest failed meeting of euro zone finance ministers on Tuesday, we confirmed that the EU/IMF/ECB troika had calculated Greek debt would only fall to 144 percent of GDP in 2020 without further measures, meaning roughly 50 billion euros needed to be knocked of Greece’s debt pile. A report circulated at the meeting concluded (apologies for the number soup) that debt could only be cut to 120 percent of GDP in eight years if euro zone government agreed to take a writedown on their loans, which they will not do for now.

If the IMF will now accept 124 percent as a target that means 20 percentage points of GDP – about 40 billion euros – would have to be lopped off Greece’s debt pile. If they are now only 10 billion short, then measures amounting to 30 billion have been found. It’s hard to believe that could have come from the Greek side which has already slashed to the bone, so maybe some or all of the options we know are on the table — a Greek debt buyback at a sharp discount, lowering the interest rate and lengthening terms on the loans and the ECB foregoing profits on its Greek bondholdings – have been agreed to.

China no longer tops list of global economic concerns

There are still plenty of macro factors to worry about around the world, but China seems to have dropped down the charts. Conversations with delegates at TradeTech Asia, the annual trading heads’ conference held in Singapore, revealed that the U.S. fiscal cliff, food inflation, geopolitical risks in the Middle-East and Europe all trumped China as the major risks out there for financial markets.

Last time this year China was public enemy #1 for investors. But according to the latest Bank of America Merrill Lynch Global fund managers’ survey confidence in the outlook for China’s economy has surged to a three-year high – a big turnaround from a year ago when the fear was that shrinking company profits, rising bad loans and weak global demand at a time of stubbornly high inflation would all add up to a “hard-landing” for the world’s second largest economy. The consensus opinion among economists now is that the worst is over and growth bottomed in the third quarter that ended in September.

Money has come back to the market too. Nine straight weeks of inflows have seen $3.2 billion pumped into China equity funds, according to EPFR, in the lead up to the 18th Party Congress where China’s new leadership was unveiled.  Hong Kong, still the main gateway for foreign investors into China, has seen optimism over China combined with the U.S. Fed’s third round of asset purchases lead to strong capital flows into the market. The territory’s monetary authority was forced to repeatedly intervene to defend the HK$’s peg against the US$ last month while the Chinese yuan is hitting fresh record highs.

NY Fed’s Dudley: “Blunter approach may yet prove necessary” for too-big-to-fail banks

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It was kind of a big deal coming from the Federal Reserve Bank of New York’s influential president William Dudley. The former Goldman Sachs partner and chief economist has offered a fig leaf to those who say the problem of banks considered too-big-to-fail must be dealt with more aggressively. Some regional Fed presidents have advocated breaking up these institutions. But Dudley and other powerful figures at the central bank have maintained recent financial reforms have already laid the groundwork for resolving the issue.

At a gathering of financial executives in New York last week, Dudley said he prefers the existing approach of making it costlier for firms to become big in the first place. Still, he left open the possibility of tackling the mega-bank problem more directly:

Should society tolerate a financial system in which certain financial institutions are deemed to be too big to fail? And, if not, then what should we do about it?

Don Rajoy de la Mancha: Spain’s “quixotic” adventures

 

Spain will not seek aid imminently, says Prime Minister Mariano Rajoy. And by imminently, he means, not this weekend. Just the latest twist in a European crisis plot that now sees Spain as its primary actor.

The focus on Spain’s reluctance to see foreign aid, a pre-condition for additional European Central Bank purchases of its bonds, is ironic given the country’s record of goading weaker counterparts into similar rescue packages earlier in the crisis.

To Lena Komileva, chief economist at G+ Economics, the saga is all too reminiscent of the hapless meanderings of Don Quixote. Komileva argues that the country’s latest budget announcement marks only the beginning of a deeper, almost circular plight:

Spanish rescue could cause collateral damage for Italy

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Mounting speculation that Spain is prepping for a bailout begs the question – what happens to Italy?

Sources told Reuters Spain is considering freezing pensions and speeding up a planned rise in the retirement age as it races to cut spending and meet conditions of an expected international sovereign aid package.

Markets took this to mean it was preparing the ground for eventually asking for help. According to Lyn Graham-Taylor, fixed income strategist at Rabobank:

The pain in Spain … spreads to Italy

This morning, we exclusively report that Spanish Prime Minister Rajoy could be about to break another promise by freezing pensions and bringing forward a planned rise in the retirement age.

This latest austerity policy will be political poison at home but will give Madrid more credibility with its euro zone peers since that was one of Brussels’ policy recommendations for the country back in May. We know that at the end of next week the government will unveil its 2013 budget and further structural reforms which all smacks of an attempt to get its retaliation in first so that the euro zone and IMF won’t ask for any more cuts if and when Madrid makes its request for aid.

The pensions shift could well be kept under wraps until regional elections in late October are out of the way. It is less likely that the government can defer a request for help from the euro zone rescue fund, after which the ECB can pile into the secondary market, for that long given some daunting debt refinancing bills falling due at the end of next month.

No time for complacency

After a tumultuous fortnight where the European Central Bank, U.S. Federal Reserve, German judges and Dutch voters combined to markedly lift the mood on financial markets, we’re probably in for a more humdrum few days, although a raft of economic data this week will be important – a critical mass of analysts are saying that after strong rallies, it will require evidence of real economic recovery, rather than crisis-fighting solutions, to keep stocks heading up into the year-end.

A weekend meeting of EU finance ministers reflected the progress made, but also the remaining potential pitfalls. Our team there reported the atmosphere was notably more relaxed and Spain’s announcement that it would unveil fresh economic reforms alongside its 2013 budget at the end of the month sent a strong signal that a request for bond-buying help from Madrid is likely in October. If made, the ECB could then pile into the secondary market to buy Spanish debt  if required and hopefully drag Italian borrowing costs down in tandem with Spain’s.

BUT. The Nicosia meeting also exposed unresolved differences between Germany and others over plans to build a banking union. German Finance Minister Wolfgang Schaeuble said handing bank oversight to the European Central Bank is not in itself sufficient to allow the euro zone’s rescue fund to directly assist banks – another key plank of the euro zone’s arsenal. It sounds like that debate went nowhere.
Having largely been the dog that hasn’t barked so far, public unrest is on the rise with big marches in Portugal and Spain over the weekend against further planned tax hikes and spending cuts.

Inequality and the crisis: the other missing link of macroeconomics?

Ever since an epic financial crisis hit the United States in 2008, mainstream economists, most of whom utterly failed to foresee the oncoming train wreck, have been scrambling to introduce a financial sector dimension to their models. It was a conventional approach that detached the study of financial stability from macroeconomic variables, the narrative goes, that prevented the experts from seeing the build-up of an unsustainable housing bubble that, when it crashed, took down the economy down with it.

Research by James Galbraith, professor of public policy at the University of Texas at Austin, suggests finance is only one blind spot for the economics profession. Another key and increasingly relevant factor in the public debate that has been largely ignored is the issue of inequality. The first chapter of Galbraith’s latest book, “Inequality and Instability,” begins like this:

In the late 1990s, standard measures of income inequality in the United States – and especially of the income shares held by the very top echelon – rose to levels not seen since 1929. It is not strange that this should give rise (and not for the first time) to the suspicion that there might be a link, under capitalism, between radical inequality and financial crisis.