Eco+Nomics

We reed at Reuters that  "Greek stocks plummet as bond yield surge threatens bailout exit" ! The over optimism of the Greek government turned out to be a huge bomb they have been playing with for a very long time. Perhaps, in an attempt to shape expectations, or to tame the animal spirits...  Anyway, as I wrote a few months earlier the borrowing cost was,  is and will remain   prohibitive  for a very long time. Until we raise adequate budget surpluses to finance our debt obligations, including annual interest payments, we cannot cut all ties with the IMF. Why particularly the IMF? Because, our Euro partners will find it hard to convince their tax payers to fund us even more, and the markets know that.  Added to the enormous borrowing cost, considerable political unrest is about to unveil. Naturally, after almost five years of continuous social turmoil - increasing unemployment, poverty, social exclusion, income losses - it would be naive to expect...

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?

I will only refer to a few facts; no conclusions, no comments at all.  In 2010 the Greek Government issued 5-YR bonds yielding 6.1% ( Naftemporiki ), while HICP annual rate change was 4.7% (EUROSTAT), and that of CPI was 5.1% (EL.STAT.). Currently, the cost of the 5-YR borrowing is 4.95% and price developments are expected to remain near zero for 2014 (-0.9% for HICP and -1.7% for CPI; negative in 2013). In addition, since the coupon rate is 4.75% ( Bloomberg ) the Government budget shall incur some 142.5mn € (0.0475*3bn €) of additional annual interest payments for the next five years. That's all folks!

NOT AT ALL!!!  There is conspicuous concern about the aftermath of the current fiscal impasse in the US. Debt ceiling has to be increased by the Congress by the end of October 17th, and there is a budget that needs to be passed by the house and whose delay resulted the government shut-down, with Obamacare being the bone of contention. (I must I have got it right...) Large market players and the IMF are warning of the consequences of any delay in the payout of federal government's liabilities. What is the probability of such a delay? The probability is minuscule! First of all, the US economy is the largest one and its political leaders will not sacrifice its prevailing status for any dispute. No matter how stubborn any of the two sides might be, nor the Tea Party, nor any Conservative, nor any Democratic will risk the magnitude of their nation whatsoever. Secondly, if the undoing of this Gordian knot exceeds the four-day deadline each side will subseq...

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 have been trying to explain for a long time why stock prices in the US have been increasing regardless the troubling recovery of the economy. This morning, I was browsing the Bagliano & Bertola (2004) book (a rather comprehensive with a fascinating subject if you ask me) when I saw an equation regarding the capital gains the profits and the short term interest rate. Extending this equation can very well justify the blooming US stock exchange. Let me elaborate on that. In equilibrium state the sum of operational-profits-to-assets and the capital gains equal the short term interest rate rate of government debt securities. It makes sense: if bond rate is higher demand for these securities increases, so does their price and subsequently interest rate falls; if the returns of the government debt is lower than the sum of profits-to assets and capital gains, demand decreases, price falls and subsequently interest rate increases. The following illustrates what happens when the short t...

When I read Feldstein's article at Project-Syndicate.org  where he was expressing his rigorous concerns about the low long-term US public debt yields, I admit I begun to worry about yet another bubble crush this time due to manipulation by the FED. Shortly after that my concerns faded away... On the one hand, increasing market prices of the Government issued debt securities partly depicts the continuous, though sluggish, increase of US real GDP since 2009Q3 and the decreasing public consumption and investment since 2010Q4 (US BEA). The result of this developments of the economic climate was the anchoring of the debt concerns and the subsequent increasing trends in bond prices. These trends, finally, intensified by the FED's Maturity Extension Program and Reinvestment Policy (MEP) resulting to a further decrease of the debt yields.  Bernanke gave a speech a month ago concerning the low long-term interest rates . Shortly, he attributes the decrease of the long-term yield...