I couldn’t help being struck earlier this week by the following statement in an interview the Financial Times had with Hungarian Finance Minister, Peter Oszkó:

“Structural reforms of the pension and social welfare systems, plus a rebalancing of the tax system, should allow the government to report a 3.9 per cent budget deficit in 2009, on a par with the preceding year and in line with IMF requirements”.

“Structural reforms”, I asked myself, “exactly which structural reforms are we talking about here?” Certainly the EU Commission and the OECD have been pounding away at the Hungarian authorities on the pressing need for major changes in the health and pension systems (these areas – and the way they are rising as the population ages – are, after all, the underlying cause of the structural deficit in the Hungarian budget). In fact it seems to me that the FT is merely re-iterating here Peter Oszko’s own claim that the government’s austerity measures are working (and no matter how many times you repeat something, it doesn’t make it true). Continue reading →

Pressure on Greek finances continues unabated. According to European Voice this morning the EU Commission and Finance Ministers remain most reluctant to call in the IMF (which I think would be the best solution) but they are themselves actively comtemplating providing some kind of IMF-type “straightjacket loan”. My only big fear here is that they take too long to put the necessary mechanisms in place while the situation in Spain continues to deteriorate, leaving wide open a serious contagion risk.

European Union officials are exploring the possibility of providing a heavily-conditioned loan to Greece instead of seeing it turn to the International Monetary Fund. Officials are worried about the possible impact on banks elsewhere in the eurozone of Greece defaulting on its sovereign debt. But they would prefer to avoid the ignominy of a eurozone country seeking IMF assistance.

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FROB, for those of you who are wondering, stands for “Fund for Orderly Bank Restructuring” and is an entitly created by the Spanish government in June last year, in order to facilitate (in particular) the restructuring of Spain’s hard hit Savings Banks (Cajas). There is just one problem: as of the present time – and over seven months later – the FROB still is waiting to receive approval from the European Commission.

“The essence of the FROB in fostering the reorganisation of the sector in an orderly manner and in the most financially efficient way, as well as the key role of the Bank of Spain in most of the phases of the restructuring and integration processes, are positive.” says Carmen Munoz, Senior Director, Fitch’s Financial Institutions group. “Fitch will assess the rating impact, if any, on a case-by-case basis with respect to financial institutions.”

“While the number of financial institutions that could receive support from the plan remains uncertain, Fitch believes that the orderly consolidation process reduces the risk of multi-notch downgrades for financial institutions that act as counterparties in securitizations,” says Rui J. Pereira, Managing Director, Fitch’s Structured Finance group. “At present, FROB will have a neutral affect on outstanding Spanish structured finance ratings and any later developments will be analyzed on a case-by case basis.”

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OK, just for a change let’s start with some math. The increase in a country’s sovereign debt stock to GDP ratio is given by the following formula:

where D is the total debt level, Y is nominal GDP, PD is the primary deficit, i is the average (nominal) interest paid on government debt, y is the nominal GDP growth rate and SF is the stock-flow adjustment.

Now, if like me, you don’t especially love maths, you may want to ask “what the hell does this rigmarole mean?”.

Well, in simple plain English the above equation – which in fact comes from the recent Danske Bank report on EU Sovereign Debt- means that movements in the critical debt to GDP level depend both on the level of the annual fiscal deficit (the primary deficit, on which so much attention is currently focused in the Greek case) and on changes in the ratio between the value of the stock of debt and the value GDP. The key term is the one in brackets, and it is often referred to as the “snow-ball” effect on debt – the self-reinforcing effect of debt accumulation (or de-cumulation) arising from the difference between the interest rate paid on public debt and the nominal growth rate of the national economy. Continue reading →

Last Wednesday was Epiphany. In Spain it is also a public holiday – Los Reyes Magos – a festival which celebrates the visit of the three wise men who came from the East to find the infant Jesus. Coincidentally on the eve of Epiphany this year the Moncloa did receive a visit from three wise men, although it is not clear whether they came (as tradition would have it) bearing gifts, or whether they brought with them a list of demands from further East in Europe about what Spain’s government ought to be doing to stop its economy falling apart.

Unfortunately, due to a technical fault (some say the website was hacked) there to meet them as they entered the gateway and fired up the browsers on their xmas-new I-Phones was not the Spanish Prime Minister, but a strange interloper, otherwise known as Mr Bean. Continue reading →

This is really a follow-up to the earlier piece I wrote on my own blog today and my last piece on Eurozone imbalances and internal devaluation. In particular, I want to point you towards two things. Continue reading →