About P O Neill

is Irish and lives in America.

Send lawyers and money

ReutersGreece admitted on Wednesday it will struggle to make debt repayments to the IMF and the European Central Bank this year as Germany’s finance minister voiced open doubts about Athens’ trustworthiness. A day after euro zone finance ministers agreed to a four-month extension of a financial rescue for the currency bloc’s most heavily indebted member, Finance Minister Yanis Varoufakis gave a frank assessment of Greece’s financial position.

“We will not have liquidity problems for the public sector. But we will definitely have problems in making debt payments to the IMF now and to the ECB in July,” he told Alpha Radio.

He put no figure on the funding gap. After interest payments this month of about 2 billion euros, Athens must repay an IMF loan of around 1.6 billion that matures in March and about 7.5 billion for maturing bonds held by the ECB in July and August.

German Finance Minister Wolfgang Schaeuble, revelling in his role as the euro zone’s grumpy paymaster, said no further aid would be paid out until Greece fulfilled the conditions of its bailout programme.

This situation is bringing a major — and strangely under-remarked upon — issue to the foreground.

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Confusion in Frankfurt or Athens

European Central Bank statement last October in reaction to a New York Times article about Emergency Liquidity Assistance management in Cyprus –

The ECB neither provides nor approves emergency liquidity assistance. It is the national central bank, in this case the Central Bank of Cyprus, that provides ELA to an institution that it judges to be solvent at its own risks and under its own terms and conditions. The ECB can object on monetary policy grounds; in order to do so at least two thirds of the Governing Council must see the provision of emergency liquidity as interfering with the tasks and objectives of euro area monetary policy.

Reuters story today based on Bank of Greece source –

Greece’s central bank has moved to protect its banks from any fallout from the coming general election, asking the European Central Bank to approve a stand-by domestic emergency funding line, a Bank of Greece official said on Saturday. The move comes after two major banks applied to be able to tap an emergency liquidity assistance (ELA) window on Friday as Greeks withdraw cash before the snap election on Jan. 25. “We have sent a request to the ECB on ELA approval for all four major banks to have a shield for the banking system,” the official said, declining to be named.

UPDATE: Karl Whelan points out that the ECB has given itself some approval authority through certain “in the event of” clauses in the ELA rules.

Swiss time was running out

The reviews are in on the Swiss National Bank (SNB) abandoning its CHF 1.2 per Euro minimum peg and they are unfavourable. It seems people are shocked that Switzerland might act in a unilateral fashion and without seeing the need to coordinate with other countries.

Anyway, the departure point for many analyses seems to be an assumption that nothing was especially wrong with the peg. Sure, the SNB was committed to buying unlimited quantities of foreign currency, and thus unlimited growth in its balance sheet, but what exactly was the constraint on that? Well, for one thing, it was producing some economic outcomes that Swiss voters — remember those people? — didn’t seem to especially like, not least rapid growth in asset prices such as housing and questions about huge holdings of foreign currency assets.

But let’s take the liquidity trap diagnosis at face value. Switzerland has been at risk of deflation, and the tendency of investors to pile into its currency at the same time forces it to appreciate, making the deflation problem even worse. The peg was supposed to solve that, but the domestic politics around that was turning sour. One way to break the deflationary cycle: get people thinking that the SNB might be just a little crazy and liable to do things at short notice which make investing in the currency not such a good idea. And furthermore, realizing that your peg is going to crack at some point in the future, acting abruptly now in a way that causes the exchange rate to, er, “overshoot” its true higher long run value so that investors expect it to depreciate over the foreseeable future, meaning rising prices and … more incentive to spend today!

Yes. it sounds crazy. But the liquidity trap is itself crazy. This particular exit option just might fit the times.

Confidence to spend

draghi_euThis slide is from Mario Draghi’s presentation to the European Union council today. As the caption states, he says it shows that investment is suffering from a lack of confidence. But it perhaps more clearly shows that private investment has suffered as public investment has been slashed. And public investment is nothing to do with mercurial confidence — it’s something governments control! A “you first” approach to investment is not going to get us very far.

Multipliers and adding up

Bank for International Settlements 84th Annual Report, page 11 –

Second, as growing evidence suggests, balance sheet recessions are less responsive to traditional demand management measures (Chapter V). One reason is that banks need to repair their balance sheets. As long as asset quality is poor and capital meagre, banks will tend to restrict overall credit supply and, more importantly, misallocate it. As they lick their wounds, they will naturally retrench. But they will keep on lending to derelict borrowers (to avoid recognising losses) while cutting back on credit or making it dearer for those in better shape. A second, even more important, reason is that overly indebted agents will wish to pay down debt and save more. Give them an additional unit of income, as fiscal policy would do, and they will save it, not spend it. Encourage them to borrow more by reducing interest rates, as monetary policy would do, and they will refuse to oblige.

Note the contradictory logic of the two reasons. The first says that banks will only lend to bad borrowers and willing good borrowers can’t get credit. The second says people getting extra income from fiscal or monetary stimulus will only use it to  pay down debt, reducing demand. But what about those good borrowers who can’t get credit due to the first reason? And what about those people who are paying down debt, thus helping banks get into better shape and thus, er, lend?

What starts out as an argument for weak multipliers doesn’t add up, and it’s not made any easier to follow by the apparent decision not to directly address their main critic on this point, Paul Krugman.

Before the Euro, there was the EMS

IE_CSO_unemploymentPaul Krugman, reacting to what appears to be a somewhat self-serving discussion by EU elites at the ECB Forum in Portugal –

Sorry, but depression-level slumps didn’t happen in Europe before the coming of the euro. 

The chart is unemployment in Ireland since 1983; we’ve used the longest span of consistent series produced by the Central Statistics Office. And the mid-1980s was no picnic for other high-debt EEC (as it then was) countries either. Granted, the Euro probably locked in some of the forces that could be quarantined back then through devaluations. But you don’t have be that old in Ireland to have been around for the second macroeconomic destruction of your economy in your lifetime.

The central bankers are in Sintra, Portugal discussing how banking supervision and monetary policy should evolve in the aftermath of the global financial crisis. They might want to discuss instead whether anything fundamental about the politics of boom and bust has changed in the last 6 years.

Those Ukraine speeches really knocked him out

As the expression has been put back in the news, here’s the text of what became known as the Chicken Kiev* speech of President George HW Bush (the elder) in 1991. The title speaks to the changed times: Remarks to the Supreme Soviet of the Republic of the Ukraine in Kiev, Soviet Union. The speech takes as a guiding frame that the USSR will continue in some form and is sceptical about the ongoing process of USSR disintegration, especially economic disintegration. The paragraph that caused Bush 41 trouble back home (a reaction that no doubt had some influence on Bush 43) was this one:

Yet freedom is not the same as independence. Americans will not support those who seek independence in order to replace a far-off tyranny with a local despotism. They will not aid those who promote a suicidal nationalism based upon ethnic hatred. 

For US domestic politics, too deferential to the Soviet status quo. But he did manage to avoid accusations that he was stirring things up and a few months later, Ukraine had voted for independence. Anyway, read the whole thing.

*The appellation is apparently due to William Safire.

Lvov Offensive


Does Herman van Rompuy really need to be telling the people of western Ukraine that if it wasn’t for some pesky border-drawing issue, they would be 3 times better off than they are now? For a Brussels elite that likes to pitch every European Union achievement in terms of the aftermath of World War 2, it’s a remarkably tone-deaf boast.

ECB uses legal word games to dodge bailout accountability

The European Parliament sent a questionnaire to the Eurozone bailout “Troika” members (ECB, IMF, and European Commission) so as to better understand their specific roles in the 4 lending programme countries (Ireland, Greece, Portugal, and Cyprus). The ECB has published its response. One set of questions and answer is as follows –

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Was the Ukraine shambles avoidable?

With Saturday bringing news of police in Kiev brutally breaking up what had been a peaceful pro-EU protest, it’s even clearer now than before the botched partnership summit in Vilnius that things could get out of hand on a large scale. Perhaps what stands out the most about Ukraine is the sense of slow-motion crisis: an indigenous “colour revolution” that was diverted, every economic indicator pointing to an old-style IMF program very soon, and months of signals from Russia that its Eurasian Customs Union would be an offer that its neighbours couldn’t refuse.

The day also brings a fairly toughly worded statement of condemnation of the protest break-up from the European Commission, but what hope it has of generating any momentum is not clear with the world into its weekend (and for the USA, Thanksgiving) distractions. But the question for the EU has to be: what did they expect? The noises were there for months when Armenia wavered at the Eastern Partnership. There was a further message in how aggressively Russia played its cards on Syria, but maybe that was given a pass for having headed off US military action.

Even over the last few days though, the mis-steps mounted. It was clear ahead of the Vilnius Summit that President Yanukovich was boxed in by pressure from Russia. So why maintain the pretense that a deal could be done, why go ahead with the summit theatrics, why release the video of him getting a dressing down by Angela Merkel, and then put a bullseye on Moldova as what a country might get if its plays nicely with the EU?

There were other pitfalls embedded in the EU-Ukraine negotiations process. Writing in the New York Times, Oleh Kotsyuba notes the way that social conservatives in Ukraine used the partnership component on tolerance of sexual orientation against it. For others, it became a polarised personality dispute with the focus on Yulia Tymoshenko ($ link).

Of course, we don’t know the dynamics inside the EU capitals and Brussels about who wanted what (was Iran consuming their attention?). But there seems to be several points at which expectations could have managed and temperatures lowered. Perhaps the bigger question is whether the EU has a full understanding of what kind of Russia it is dealing with. It’s going to be a fun Russian G8 Presidency in 2014!