Eco+Nomics

Been away for a while due to studying commitments... Following the decision of the ECB about the eligibility of the Greek bonds , I was initially panicked, too. However, after Karl Whelan's post things got straight. Now that I, finally, have some time, I checked the  balance sheets of the four largest  Greek Banks, from the 3rd Quarter (September 30,2014), with respect to the eligibility of collateral for weekly ECB MROs. These are the results, as well the depositsthese Banks owe: Piraeus Bank Group (in millions of Euros) ( link ) Greek Sovereign Debt: 567.1  Other Countries Government debt: 358.5 EFSF bonds and non- Greek IOUs: 14, 438.4 Deposits (Liability): 54, 824 On Sep. 30, 2014 the outstanding repo transactions - MRO, LTRO - with the Eurosystem (ECB & BoG) was 10 bn EUR; that is the Piraeus Banks had, at that time, absorbed liquidity of approx 10 bn from the Cebtral Bank - so, not that dependent after all. Group of the National Bank of Greece (in...

So, Mario Draghi said that an inflation much lower than 2% is against his mandate. And it is! If you ask me, early 2015 is the right time, if not too late, to buy sovereign bonds. Let me, please, tell you what I think. First of all, given that Eurozone economy is below its potential, inflation risk will remain low, and the zero lower bound will prevent monetary policy to be "hazardously" inflationary. But, this is an argument why we should not fear of inflation, if the ECB decides to take bold action. True! For now... Moreover, given that we remain below our potential output, member states have begun to deviate from austerity and call for more expansionary budgets. Sooner or later, they will start creating budget deficits as a mean of expansion. And this has two implications. The first one, which relates to my previous argument is that budget deficits will boost expansion, and, hence, the return to the potential output. Therefore, the later the ECB decides to act, the mo...

Asset values have been rising somehow intensively, following amid liquidity injection (QE) by major Central Banks over the last few years. A controversial, yet rather effective, policy choice. And this controversy, currently, derives from the asset bubble argument. In other words, the increase in the value of assets is a bubble, and, inevitably, it will burst. Is this policy controversy well justified? Perhaps, not very well. I will not argue whether asset inflation is a bubble or not. That is not the point I am trying to make.  I will argue, however, that the rising asset values is exactly how the whole policy should work! It is a key mechanism of transmitting monetary policy to the real economy. Not only for banks, but for households, as well. If you own assets, their value rises your net value rises, too, and, hence, you can borrow more or/and at a lower cost. Most importantly, households and businesses can remain solvent while deleveraging stops, and their liabilities rise...

While French Hollande is ready to negotiate for pro-austerity, "fiscal consolidation" if you will, others take serious steps for the best of the entire Eurozone's interest. Mario Draghi is (claims to be) ready to take bold action against deflation threat  ( Reuters ),  and Matteo Renzi publicly denouncing budget cuts in a recessionary environment ( Le H uffington Post ). Both are in the trenches with Berlin. At the same time, the rest of the leaders are conspicuous by their absence. I do not know anything about politics, but while the "fiscally sound" Eurozone failed to ram unemployment, an actual human index, the US did far more better job. The "cost" of fully recovering from recession was an approximately 9% of GDP additional debt burden for the US. Hopefully, Euro leaders will realize that unemployment is far more important than fiscal soundness, before it's too late!

European Union's "Food and Live Animals" (SITC01) exports to Russia in 2013 accounted for some more than 7.3% of the block's flows towards this trade partner (see European Commission Trade Statistics with Russia ), and were of approximately 8.6bn Euros gross value. Not outstanding in aggregate, but in industry level whose total exports had a value of approximately 75.3 bn Euros (see European Commission Trade Statistics with the World ), gross, it is something. Image Source: http://www.tradeandexportme.com/2013/12/eurozone-inflation-rises-in-november/ What does this mean for the inflation? It is simple! SITC01 firms of the Eurozone will have to cut their prices to boost the demand of their undisposed goods in the interior and in other trade partners. Should this scenario be realized, it will add further downward price pressure in the already fragile price and product developments of the Monetary Union. On the other hand, the SITC01 firms might seek to li...

There is some concern about the anticipated QE from the ECB, with respect to the public debt yields (e.g. Reuters article ). In other words, there is some widespread (?) concern that Eurozone bond yields will rise due to higher inflation expectations following the highly awaited intervention of the ECB. Expectations matter, but what about the Supply & Demand Laws? If we take under consideration the vast shift in the demand for bonds, their price will move upwards and, hence, their yields will fall. This is what happened in the US following each QE. So, inflation has been firmly tamed and both long-term and short-term Government debt yiels have decreased.  Is there any case with monetary expansion accompanied with increases in Government's cost of borrowing while GDP being way off course?

There is much talking about deflation lately in both sides of the Atlantic. How probable deflation is? How did we get to worry about negative price developments while last year some economists (fortunately, not too many) were arguing for the risk of high inflation as a result of the expansionary monetary policy?  10 months ago Paul Krugman was looking for the " Missing Deflation ", and I made an attempt  (with some mistakes...) to find it. Currently, energy cost evolution is weak (Eurostat) and growth in the EMU remains feeble, while the US are getting better. I will attempt to explain the recent deflationary pressure through a Medium term Aggregate Demand - M/term Aggregate Supply (AD-AS).  In Figure 1, economy's midterm equilibrium is at point A, where AD and AS intersect over the Full Employment locus- that was back in 2007. The negative aggregate demand shock following the Great Recession of 2008 is represented by the shift of AD to AD', where the expect...

ECB board members meet today. As shown in the following graphs overnight interbank rate (EONIA, 1st graph*) presents great volatility upon Emerging Economies' capital outflows, Eurozone inflation declines (blue line, 2nd graph*), and recent developments  do not leave much space for optimism.  Reuter's Paul Carrel examines the available policy tools of ECB , but which one would be the most probable? The board will surprise me (a lot) if they decide to suspend Sterilization operations and to proceed to aggressive QE, which are rather unconventional. The other three policy responses, namely forward guidance, cutting rate (currently at 0.75%) and LTROs at low rate are much more likely (and convnetional) to happen. P. Carrel also mentions negative deposit facility rate; an innovation. So, no marvel for now! (I might be wrong though, as previously - do not bet any money!!!!) Apart from interbank lending which will become cheaper and somewhat less volatile upon today's ...

There is something I need to admit... I am sick of the so called "success story" and the naive- false and deceitful, if you are as malicious as I am- declarations of the opposition. Here are the facts: During 2008, Greece produced goods and services of 240 bn euros. During the period April 2012- March 2013 GDP in current prices was 190 bn euros ( EL.STAT .). By the end of March 2013 the debt of the Central Government was 309 bn euros ( Ministry of Finance ), i.e. 161% of Greek GDP.  Additional measures need to be taken in order to make sure that the Central Government debt will be less than 110% of GDP by 2022. The most auspicious scenario is that the current taxation will remain unchanged for at least until 2015 with the hope that recession will deescalate. Anyway, I do not really believe that there is any more space left for heavier taxation. On the other hand, we are still missing the big picture: while oscillation between anemic growth and periods of recessions ten...

Many times, the private debates in which I have participated have been fueled by the debt and the banking crisis and the imminent recession. What went so uglily wrong? What should have been done? Is it too late? Can things take a turn for worse?  Firstly, it is essential to unfold the exact chain of events the way I apprehend it based on my knowledge of economic theory. Everything began in 2007-2008 when the financial sector of the US devastating losses following the collapse of both the sub prime lending and its securitization and gradually the rest of the world was infected. After Lehman Brothers everyone realized that there was nothing to end painlessly. In their effort to prevent a broader contamination, governments borrowed large sums in other to strengthen the balance sheet of the banking and financial sector and safeguard their economies. Put differently, tax payers are asked to pay for a risk they never undertake and for which they never compensated. Nations with we...

I would like to point out a few thoughts of mine with respect to a speech by Mario Draghi on April 15, 2013; " The role of monetary policy in addressing the crisis in the euro area ". Firstly, it is the controversial Outright Monetary Transactions (OMT). OMT was announced by Draghi on September 6, 2012 . When I first heard the news I couldn't believe my ears and I watched the whole press conference. After that I was kind of emotionally overheated believing that Mario Draghi crossed the Rubicon and Euro area would never be the same again! A few months later my expectations dashed. What happened is that I fooled my own self by playing down the condition of ESM involvement... So far the unlimited bond buying mechanism has never been activated; bank deposits haircut is on its way instead. ECB is not allowed to finance sovereign debt; it is a matter of credibility. Indeed... But the question that needs an answer is how credible our banking system and our hard currency is n...

This post is an attempt to use my rather inexperienced and naive instinct in economics in order to respond to the allegations of the necessity of austerity and tight monetary policy. More specifically, I post  my reply to the arguments presented in "The Live arguments of austerity right now: A bestiary" by Mr. DeLong . Please, forgive me if I am wrong. The first group stresses the importance of tight monetary policy. "The Jeremy Stein argument" : Stein ignores the other element of GDP; the consumption. With lower interest rates households can more easily substitute future for current income. Secondly, risk premium is added to the risk-free rate both when the risk-free is 0% and when it is higher, e.g. 10%, and hence risky assets yield by definition higher returns regardless the level of the risk-free rate. Therefore, bank managers will always prefer more risky assets due to the higher returns they offer anyway. Thirdly, there is always the Basel Accord tha...

I honestly have to admit that I never was, and I hope I will never be, a supporter of the EMU dissolution, or of the exit of any member-state from the Euro. I have previously expressed myself as far as Cyexit is concerned and I am not intending to reconsider my views. When Krugman wrote that the only solution left for Cyprus given the current circumstances is quiting Euro  I started thinking about debt dynamics, currency in circulation, destabilization, spillovers, etc. A couple of hours later Krugman described Cyrpus being between Scylla and Charybdis  and as a matter of fact Cyprus is indeed between the two monsters of Greek Mythology.  The main argument is that by cutting a deal with troika austerity measures- the one and only panacea- will be implemented, Cypriot economy will dip into recession and thus debt will become explosive. Correct! Absolutely correct!  I believe that everyone who has at least some non-neoclassical logic left would agree. Below,...

It has not been a very long time (at all) since I begun my undergraduate studies in economics and from what I remember there were only a few (conventionally) risk free assets: cash, government bonds, deposits. At this moment we really need to focus on the Euro-zone. Government bonds, i.e. debt issued by government, although involving some risk this is low- currently a little higher; cash is the bills and coins in circulation and is totally riskless, unless in cases of over-inflation; and deposits which... used to be risk-free. That is because European Commission is thinking of de jure haircutting savings when the firm that accommodates them is at stake. If that is approved, Euro will never be much of a  hard currency  and hence there is no point at all calling upon low inflation exclusively.  In addition, we have to start thinking of our deposits as risky and, as a matter of fact, the probability that we lose a given fraction of our deposits equals the probability of b...

Over the past few days, the Cyexite scenario has been communicated several times, either via journalists or bloggers and some other times as a leverage for negotiations... I shall  examine some implications of this undesired though improbable- if you ask me- scenario First of all, Cypriot firms, both financial and non-financial, and households have issued debt denominated in Euro, such as loans, bonds, commercial credit, cheques etc. Then, in case Cypriot pound (CP) substitutes for euro a practical question arises: the just mentioned debt will be repaid in what currency? If some of you see an obvious answer, please take some time to reconsider your thoughts. First of all, the debt holder will have to agree to be paid back in an other that the agreed currency and then he will have to negotiate the exchange rate this will happen (for now let us ignore the exchange rate related problems). On the other hand, the debt issuers, will have to find adequate funds to pay back its borrower...

A while ago, I read an article of WSJ written by  Katie Martin  concerning the market tranquillity with respect to what happens in Cyprus; the probable bank deposits haircut and the non-attainment of any agreement among EMU member countries. Among the explanations of this calmness reported by apparently successful analysts I found one, that of Mr.  Beat Siegenthaler, a UBS analyst, who more or less states that the risk of diffusion of a crunch in Cyprus is perceived to be low. I really do not know if that is indeed a general sense- although several other rather interesting interpretations are listed- but that is not the case at all and claiming the opposite is naive especially in the aftermath of Lehman Brothers collapse. The risk of contagion following a crash in the Cypriot financial system is high and most certainly non negligible. I shall elaborate. After doing some trivial digging I found an article that matches my needs; Billio et al. (2012)[1], concerning the es...