Category Archives: Politics

Europe’s problem is monetary, but that’s not all

Lars Christensen has a pretty good post on how Europe’s problems are not fiscal when you compare it to the US. He points out — rightly, I think — that the difference in recovery between the US and Europe is monetary (see Pawelmorski for more). But then there’s this:

The fiscal tightening in the US and the in euro zone have been more or less of the same magnitude over the last four years. So don’t blame ‘austerity’ for the euro zone’s lackluster performance.

But I will, at least partly. The fact that relative difference stems from monetary policy doesn’t exactly mean that the fiscal multiplier is zero now. I think there’s good reason to loosen both where possible.

Cyprus deposit tax reading [updated]

Much has been written today on the deal from last night, and I don’t have anything to add, except to say that the deposit tax on small depositors is a very, very dangerous route to take… Here are the best links to explain why:

Will update. Links in ~chronological order. In pictures [hat tips Mark Dow and Aurelija Augulyte]:Graphed Cyprus deposit tax reading [updated]   Learn to swim Cyprus deposit tax reading [updated]

The size of Africa

This from Goldman Sachs is a very good picture of just how big Africa really is:

Screen Shot 2013 03 12 at 10.55.28 PM The size of AfricaNothing new, of course — but cool.

‘That’s a nice tie. How about £3m?’

Hilarious cartoon from Matt (h/t to David Keo) that captures well how one might get around the cap on bank bonuses:

Screen Shot 2013 03 01 at 5.38.05 PM Thats a nice tie. How about £3m?

For a little bit more serious stuff, I really like posts by Masa Serdarevic and Matt Levine.

Savers shouldn’t outperform the economy

Izzy is making a lot of sense over at her tumblr. It concerns the debate that savers are being punished, but given that everything isn’t the same as it always was, people tend to forget a few things:

Here’s the thing. Savings are not supposed to do anything but maintain relative value. They are not supposed to outperform relative to the economy. They are supposed to track it in such a way, that by the time you liquidate the savings, you can still buy the same amount of stuff you could buy when you first created them. The interest earned is supposed to compensate for lost purchasing power.

Good point.

Don’t we deserve better than Olli Rehn?

Yes, we do. Jonathan Portes puts it better than I possibly could, so here’s his post on Olli Rehn’s letter:

pointed out late last year that European Commission Vice President Olli Rehn has been predicting for at least two years that, thanks to the excellent policies recommended by the Commission and the European Central Bank, economic recovery in the crisis economies of the eurozone is imminent.

However, this week – perhaps noting that outside the financial markets, the light at the end of the tunnel that he is fond of referring to appears to be receding - he’s tried a different tack. Blame the economists – and in particular, economists who want actually to use proper, theoretically based and empirically grounded analysis to critique the Commission’s policies.  Mr Rehn, in a letter to European Finance Ministers, copied to other international financial luminaries like Christine Lagarde, says:

“I would like to make a few points about a debate which has not been helpful and which has risked to erode the confidence we have painstakingly built up over the last years in late night meetings. I refer to the debate about fiscal multipliers, ie the marginal impact that a change in fiscal policy has on economic growth.  The debate in general has not brought us much new insight.”

Much of the rest of the letter is devoted to Mr Rehn’s (and presumably the Commission’s economists) attempt to debunk the findings of IMF Chief Economist Olivier Blanchard, who found, to no-one’s great surprise, that the adverse impacts of fiscal consolidation were indeed much greater than that forecast by the Fund or the Commission.

I won’t attempt a point by point rebuttal, but would note the following:

  • as I said here, it is quite true that on its own the Fund analysis doesn’t demonstrate that the Commission and Mr Rehn (and here the Treasury, Bank and OBR) are wrong.  But the whole weight of the evidence, both theoretical and empirical, does.  Our estimates of the impact of self-defeating austerity are here.
  • while Blanchard’s analysis is far from the end of the story, it is a professional piece of work by one of the world’s leading empirical macroeconomists.  The Commission’srebuttal, by contrast, would, as I say here, shame a first-year Masters’ student. [Briefly, for nerds, including sovereign yields as a "control variable" for growth outcomes is so obviously misspecified - yields are an outcome, not an exogeneous independent variable - as to be a straight fail.]

But of course the really surprising thing is that Mr Rehn should be writing to Finance Ministers, and the IMF Managing Director, complaining that an academic paper on a very policy-relevant, but highly technical issue of empirical macroeconomics, represented “debate which has not been helpful”.  I’m not trying to get on any high horse about academic freedom; it just seems bizarre.

The optimistic conclusion is that Mr Rehn recognises that the economic justification, tenuous at the best of times, for the self-defeating austerity policies pursued by eurozone policymakers is crumbling – and that, if authored by the IMF Chief Economist, even quite a technical paper (and, who knows, even blogs like mine) can make a major contribution to undermining it and, maybe, lead to pressure for more sensible policies. Let’s hope so.

On this Carney + Draghi day

I think the best (and brief) explanation is from Macro Man, so I’ll just copy-paste:

ECB day – TMM felt that the last ECB meeting was dominated by Dr Aghi’s valedictory performance not unlike a returning Caesar entering Rome after defeating the Ursine tribes. All that was missing was the laurel wreath. SO where do we go from here? Data is indeed improving but as always markets are not about working out what will happen its about marrying what you expect to happen against what everyone else expects will happen and though TMM are comfortable that Europe is economically on the mend we do feel that EL Dottore and those piling straight back into Euro  may have over counted their chickens even before they have hatched.

Carney Day – Similarly, but conversely re market positioning, ahead of Mr. Carney’s testimony to the Treasury select committee. We wrote a post on our longer term thoughts on Carney last week but the hype is that he will give an outright dovish performance with some expecting him to go completely BoJ over policy. TMM can see him doing as little as possible to rock the boat as we are still four months off his official arrival and it would be foolhardy to lay the foundations for commitments that may well need to change before he takes up his post. Why paint yourself into a corner when you could have a free option instead.

So marrying these two events we suppose we should really be short of EUR/GBP into them.

Nationalbanken to post collateral on swaps

Nationalbanken, the Danish central bank, acting as a ‘banker’ to the Ministry of Finance, might start to post collateral on its swaps in 2013. The swaps are plain-vanilla interest rate swaps and a few currency swaps.

The decision to start posting collateral on its swaps has been underway since last year, as reported by Risk. Denmark will join Hungary, Ireland, Portugal and Sweden, who — according to Risk — already post 2-way CSA (credit support annex).

Here’s the statement from Nationalbanken, from its ‘Danish Government Debt Management Policy Strategy 2013‘ publication:

The central government uses swaps for management of the central government’s interest-rate and exchange-rate exposure. In order to limit any loss on a counterparty’s default, the central government only transacts swaps with counterparties that have concluded a collateral agreement. The central government’s collateral agreements are unilateral. This means that the central government’s swap counterparties pledge collateral if the market value of the swap portfolio is positive for the central government, but the central government does not pledge collateral to the counterparty if the market value is positive for the counterparty. In 2013, the central government will negotiate new bilateral collateral agreements (2-way CSAs) covering new swaps. The switch to bilateral collateral agreements could lead to better swap prices for the central government since swaps with bilateral pledging of collateral decrease the counterparties’ liquidity requirement compared with unilateral pledging of collateral. The 2-way CSAs are planned to be implemented during 2013.

Nationalbanken is mirroring other central banks. Bank of England, for example, started posting collateral in 2012. Here’s from Lisa Pollack’s excellent post at the time:

With any such derivatives contract, it’s a zero sum game. When marking the transactions to market, if one party is up £1m (“in-the-money”), that means the other party is down £1m (“out-of-the-money”).

In the normal course of things, the out-of-the-money counterparty would post collateral with the in-the-money-counterparty. This keeps everyone happy because it guarantees performance under the contract. The exact rules around posting collateral are determined by an agreement between them called a “credit support annex” (CSA). The majority of CSAs are “two-way”, meaning that both parties have to post collateral as and when they are out-of-the-money.

But, sovereigns never really went for that. Instead, they have “one-way” CSAs. They expect their counterparties to post collateral with them, but they don’t expect to have to post collateral themselves. Banks were, more-or-less, willing to put up with this when counterparty risk was less of a concern and things were going a lot better for them generally. Before, say, the latest wave of regulation that takes an especially dim view of uncollateralised exposures.

Regulations aside though, there has always been something of a funding problem with trades like these (with sovereigns) since banks tend to hedge their trades.

120622 BoE Example Nationalbanken to post collateral on swaps

In the above, we show that the Bank of England has entered into a swap with a dealer, e.g. an interest rate swap to hedge rates exposure. The dealer does another trade, or series of trades, with the dealer on the far left of the diagram to hedge the swap with the Bank of England.

Some time later, the dealer is in-the-money on the trade with the Bank of England, and out-of-the-money on the trade with the other dealer. This puts the dealer in a really uncomfortable position — collateral has to be posted with the other dealer, but the Bank of England doesn’t post any collateral.

So why should central banks, acting on behalf of the sovereigns, start posting collateral? It’s cheaper. Again from Lisa:

It seems they primarily did it to get better pricing on the derivatives contracts. It’s quite simple — the costs to the banks of putting the swaps together for sovereigns rose. It’s more expensive for banks to fund themselves, i.e. to get that collateral to post to their counterparties. It’s also more expensive to have uncollateralised exposure in terms of regulatory capital. The banks have been passing on these costs to their sovereign clients.

The Bank of England therefore concluded that it was cheaper to start posting collateral, as it should make the prices they are offered come down.

This makes a lot of sense for Denmark, too. Nationalbanken has a lot of assets in could post as collateral cheaply, and since they give up very little — the funding option — it’s cheaper to post the collateral. The banks, on the other hans, receives collateral that they can post to their counterparties (if they hedge), for capital requirements, and so on.

One could think that in a real crisis — where the government can’t pay — it might not matter much to to have Danish government debt, but that’s a whole other discussion which isn’t really that relevant. That’s not the issue. The point is that the swaps will be cheaper, and the opportunity cost to the central bank is very small.

Related links:
A turning tide for two-way CSAs? – Risk
Danish and Latvian debt offices weigh two-way collateral – Risk
The Bank of England gets economical with its derivatives – FT Alphaville

Stupid, stupid CEOs

Here’s a quote from today’s Børsen (translated by me):

The CEOs of EBH Bank and Sparekassen Himmerland weren’t familiar with the rules on market manipulation when they, from August to September 2008, agreed to let each financial institution buy stock in the other.

Both of them explained that they knew the rules about insider trading, but that they hadn’t received any education about the law of market manipulation.

That was how they explained it in court yesterday.

These guys ran banks. Really.

That is a bold statement, Mr. Rajoy

From the FT:

Mr Rajoy insisted that any doubts over the current state of the Spanish banking system were misplaced. “I am absolutely convinced that Spanish financial institutions will not require any more funds than were given already,” he said, arguing that Spain’s lenders had already been forced to reveal all their problematic assets in a “complete striptease”.

We’ll see…