Posts filed under “Currency”
Last week’s rally in Euroland was short lived with today’s big sell-off (see charts below). The political tensions are coming to the surface and markets don’t like want they see and don’t see a positive outcome.
As the Germans think out loud about a Euro breakup (see cover Der Spiegel below) here’s an excerpt from an interview with German Finance Minister Wolfgang Schäuble. He sums up the fundamental and now core problem stifling a comprehensive solution to the Euro crisis — the surrender of national sovereignty.
Schäuble: The most important thing is that we create a fiscal union, one in which the nation states give up their jurisdiction in terms of fiscal policy. In addition, the problems of the Spanish financial institutions reveal, once again, that Europe would be better off with a bank union. We need a European supervisory authority, at least over the major lenders, which can then influence the banks directly. Then we can also save them with joint funds.
SPIEGEL: For months, Germany has been under pressure to agree to joint government bonds, the so-called euro bonds. It would certainly be seen as a confidence-building measure if you complied with the wishes of the other European countries.
Schäuble: As long as we don’t have a fiscal union, we cannot assume joint liability for debts.
The Germans and French are moving further apart at a very critical and dangerous moment in the crisis. Here’s how Angela Merkel closed Friday’s Rome meeting,
If I give money to Spanish banks, I’m the German Chancellor but I can’t say what these banks can do.
(click here if charts are not observable)
Faced with financial ruin, Greece votes to stay within the European Union and enact strict austerity measures — but no one bothered to tell the drachma. The Daily Show with Jon StewartGet More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook Monday June 18, 2012 (04:55)
As if they don’t have enough to worry about in Europe these days, what with the relief of the Spanish bank bailout fading within hours yesterday and with a Greek election looming this weekend that could lead to a disorderly exit of the nation from the currency union, now there’s apparently a “loose cannon” by…Read More
Michael Belkin is the author of the eponymously named Belkin Report — a highly respected institutional quantititative/technical service that looks at global markets in equities, commodities, currencies and bonds. His report this week is tongue-in-cheek titled “Where Else Are You Going To Put Your Money?” and begins with this delightful spoof of the Euro bailout…Read More
June 04, 2012 THE EURO – WHAT SHOULD HAVE BEEN “I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind…Read More
A world map used by Erik Penser Bankaktiebolag to visualize economic markets. The map contains approximately 3,000 coins and every continent is built out of its countries’ currencies. Used in various medias during 2009. Click to enlarge: ˜˜˜ ˜˜˜ ˜˜˜ Source: Erik Penser Bankaktiebolag
The New York Times – In Spain, Bank Transfers Reflect Broader Fears Ángel de la Peña, a Spanish government worker, is seriously considering the once unthinkable: converting some of his savings from euros to British pounds. Alvaro Saavedra Lopez, a senior executive for I.B.M. in Spain, says many of his corporate counterparts across the country…Read More
Reuters – U.S. lets China bypass Wall Street for Treasury orders China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters. The relationship means the People’s Bank of China…Read More
The press and the market continues to speculate about the negative impact of an exit of Greece from the Euro (expectations seems to be over 50%) and both the financial consequences of such an exit on the EZ (indeed everyone else) and, in particular, on the adverse contagion issues in respect of the other PIIGS and core EZ countries, for that matter. Yes it is true that the Greek party Syriza (comprising leftist anti bail out elements) came a surprising second in the last elections and, until recently, has lead in the polls. However, the most recent polls suggest that the Greeks may well be rethinking. New Democracy (23.1%) is narrowly back in the lead (with indications that its support is increasing), followed by Syriza and then Pasok some 10 points behind. If the next elections (due on 17th June) reflect recent polls, a coalition comprising New Democracy and Pasok will be able to form a working majority in Parliament, something which I believe the market has not picked up on as yet
Early days, but I for one believe that the trend away from Syriza will continue. Greeks, by an overwhelming majority (between 75% to 80%) want to remain in the Euro, as they realise that the reintroduction of the Drachma will result in an effective devaluation of at least 50%, by all accounts. The resultant hardship (the need to close the current account deficit to zero immediately) will make the current austerity plans seems like a mild dose of influenza, compared with the pneumonia that will follow an Euro exit. Yes the EZ will be negatively impacted, but the Greeks will make up their minds, based on the likely impact on themselves. This suggests to me that voters will swing away from Syriza and to New Democracy, in particular.
Whilst the Greeks want to remain in the Euro, they do not want to abide by the austerity measures, which their previous administration agreed to. Yes the austerity measures are tough, very likely too tough, but Greece needs to sort out the fiscal mess which it created for itself. The EU suggests that the Geeks will be offered some “sweeteners” if they chose to remain in the Euro, including some kind of growth measures (whatever they are) and possibly a watering down some aspects of the austerity measures. Will this be enough to persuade the Greek voters from following the nonsensical path proposed by the head of the Syriza, Mr Tsipras. Personally, I am beginning to believe that it may. Am I convinced - certainly not, but as days go by, I would not be surprised if the polls indicate that support for Syriza ebbs away and New Democracy’s lead increases.
If I’m right, markets should begin to recover. Personally, I just wish that Greece goes away. The gloom and doom scenario guys are overstating the impact of a Greek exit in my humble view. Yes, there will be huge losses for the EZ, but certainly not of the order of E1tr suggested by Mr Dallara of the IIF – do you think he has a vested interest – of course he does, as he acts for the small group of remaining private sector bondholders who will lose everything if Greece exit’s the Euro. He has every interest in exaggerating the size of the potential losses, in an attempt to get the EZ to offer more assistance to the EZ. Estimates of losses for the EZ (including banks etc) from a Geek exit, range from E150bn (too low in my opinion) to Mr Dallara’s E1tr (ludicrously high) – big numbers in any event. However, a Greek exit will force the ECB to act. Citi estimates that the ECB will have to provide some E800bn in liquidity to mitigate a run on EZ banks in the event of a Greek exit. In addition, the ECB will lower interest rates, buy Spanish and Italian bonds (quite possibly other country bonds) in size and introduce QE, etc, etc, something which is necessary. Draghi will have the perfect excuse to act. As a result, after the initial shock, I for one believe that the EZ will finally have begun to take the action necessary to start to resolve the crisis – there would be no alternative. Consequently, I really hope that Greek voters follow Syriza, but I fear that they wont.
Trying to predict anything involving the Greeks is virtually mission impossible. However, I am beginning to wonder whether the current excitement/panic is way overdone. I have closed all my shorts and remain hugely cashed up, but may well nibble away a bit more in coming weeks. However, it is impossible, in my humble view, to come up with an informed view at present and, as a result, extreme caution is the name of the game. There will be time.
The Yen’s Looming Day of Reckoning
By Andy Xie
Japan looks set to depress the value of the yen to boost trade – how China must brace itself for the impact
Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan’s major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan’s neighbors and its distant competitors like Germany. The yen’s devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan’s neighbors must have a strong banking system to withstand a bigger devaluation of the yen.
Japan’s nominal GDP contracted 8 percent in the four years to the third quarter of 2011, and six percentage points of that was due to deflation. Without increased government expenditure, the contraction will be one percentage point more. Japan has not seen this kind of sustained deflation since the 1930s.
Without government deficits, Japan’s economy will decline much more. Central government bonds and borrowings plus its guaranteed debts rose by 116.3 trillion yen during the period, equivalent to one-fourth of the level of the nominal GDP in the third quarter of 2011. If Japan had adopted balanced budgets, its economy would have contracted two to three times more. This will lead to a debt crisis in its private sector.
A strong yen, deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. When wages and asset prices rise, a strong currency can be justified. When wages and asset prices fall, a strong currency is suicide. Japan’s nominal GDP peaked in 1997 and its nominal wages did too. Its property prices have declined every year since. The Nikkei rose in only four out of the last fifteen years and is still close to a three-decade low.
Japanese policymakers, businesses, academics, currency traders and the average Mrs. Watanabe all believe in a strong yen. This belief is wrong but self-fulfilling. It has lasted so long because the Japanese government adopts policies to offset the destabilizing effects of deflation due to a strong yen. Hence, Japan’s national debt has marched upwards along with the value of yen. It is expected to top yen 1,000 trillion in 2012, 215 percent of GDP, 7.8 million yen (or roughly US$ 94,000) per person, and about half of net household wealth per capita.
The sustainability of Japan’s deflationary path depends on the market’s confidence in Japan’s debt market. As Japanese institutions and households hold almost all of the government’s debts, their faith in the government’s creditworthiness is the mojo for Japan’s seemingly harmless deflationary spiral.
A Vast Bubble
In a normal market, greater supply leads to lower prices. The opposite occurs in a bubble; faith in price stability or appreciation exaggerates demand. Japan has the highest level of government debt and the lowest bond yield. The later is necessary for the former. Even though the yield on 10-year Japanese Government Bonds (JGB) is only 1 percent, the interest expense is expected to top 22.3 trillion yen in the fiscal year that begins next month. This is one-quarter of the general account budget. If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen.
In addition to its fiscal vulnerability to a rising interest rate, Japan’s budget deficit is still too high. The government budgeted 44 trillion yen in net additional borrowing in the next fiscal year, nearly half of its expenditures. It needs to double its tax revenue to balance the budget. But, as the economy is deflating with declining private consumption, a major tax increase would cause the economy to go down more, shrinking the tax base and requiring even bigger tax increases to balance the budget. Even though the government plans to achieve a primary fiscal surplus, i.e., revenue above non-interest expense, by fiscal 2020 to 2021, it is difficult to see how.
The justification for the low JGB yield is deflation. The real interest rate (the nominal rate plus deflation) is comparable to that in other countries. This rationale requires deflation to persist. But, deflation shrinks the nominal GDP or tax base. How could the government pay back its escalating debt by taxing a shrinking economy? It can only sustain its debt by borrowing more. This fits the definition of a particular type of Ponzi scheme.
The JGB bubble explains the seeming lack of pain in Japanese society. A strong yen and deflation haven’t led to an employment crisis because the government deficit is pumping up aggregate demand. As long as wages decline in line with prices, one doesn’t feel the pain. Japan’s household debt is only half of GDP, about half of the level in the United States. Deflation doesn’t cause much balance sheet trouble.
The Strong Yen Bubble
Yen bulls usually point at Japan’s trade and current account surplus as supporting factors. A trade surplus can reflect a country’s competitiveness or lack of it. Current account surplus is savings minus investment. When investment declines, the trade surplus is boosted. When a country cuts investment, it signals declining competitiveness. Hence, the current account surplus shouldn’t be viewed as a supporting factor for strong currency.