Post-Syriza post

There are many positives and negatives in the Syriza victory.

The most obvious positive in the Syriza result is that especially in a young and fragile democracy, it’s good for the established politicians to be kicked out once in a while, without prompting a military coup, just to show the next lot that it can happen.

It’s also compelling that the Troika struck the wrong deal, and Syriza’s craziness, if it is real, might give them the credibility to extract one that is better for Greece and the Eurozone as a whole.

But there are some negatives.

First is the demonstration that promising the Moon works.  Syriza’s promises, so far as they are intelligible, are not affordable.  But no-one cared about that, or no-one understood.

This strategy was adopted by the SNP.  And it worked for them too.  They didn’t win the independence referendum itself.  But they decisively changed their own political power, the constitution, and may yet win independence in the longer term.  What lesson does that teach future politicians who contemplate explaining things as they really are and really could be?

Another negative is the industry of drawing false lessons from Greece.

George Osborne draws the lesson:  we need more austerity ourselves, or we will end up like Greece too.  For a month or two after the May 2010 election, there was some justification for thinking this.  But never since.

The left draws the lesson:  Syriza have rejected austerity, we need to do it too, and can.  Well, there’s austerity and austerity.  The electorate was choosing back in 2010 between two plans that were pretty similar relative to the sharp contraction enforced on Greece by the Troika and their financial crisis.  In the end, the Coalition reneged on its deficit reduction plan and, with the assistance of the BoE, inflation was allowed to cruise more than 3 percentage points above target.  Rejecting austerity and an associated 25% cut in GDP doesn’t contribute much to forming an opinion about what the UK government should have done.  That’s like using an argument against famine to lobby against a slight trimming of one’s calorie intake.

The left also draws the lesson:  you see what capitalism and neoliberals do?  Let’s dump the lot.  But Greece represents not a failure of market economics, but instead a failure to construct a market economy, and a failure to construct a functioning public or ‘socialist’ sector alongside it.  And it’s almost utopian to hope that the state failure that poisoned markets and allowed the public sector to deliver so little for what taxes were collected, is going to be fixed by that same state.

Another negative:  the suggestion in some press commentary, that Syriza’s victory is one for democracy [fine thus far] and that if they don’t get what they want, that is democracy being thwarted.  Well, no.  If they don’t get what they want, it’s because leaders of other democracies calculate that giving more money to Greece would not be popular with their own electorates.

And one more:  Syriza’s harking back to reparations for World War 2.  This is bound up with an attempt to make a case that debt relief is moral.  I believe it is, on the grounds that the debt was in part the fault of reckless Northern bank lending.   But going back to past grievances.  Where does that end?  This is is a nationalist ploy that stirs up separatism that makes fiscal union (of the kind that would have avoided this mess) impossible.

 

 

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Greece’s fragile primary budget surplus is not much of a bargaining chip

One reason cited [1] for why Syriza will be able to talk tough with the Troika, presuming it wins today, and can form a government, is that it has a healthy [circa 5%] primary budget surplus.  That’s the difference between revenues and spending, once we ignore the cost of servicing debt.  The hypothesised threat is that the new Greek government renounces the debt and has no more need to borrow from capital markets, taking more in taxes than it spends.

However, this is not the whole story.

Cut adrift from the Troika, the Greek government does not have the funds to stand behind its own banks.  They would be left insolvent by a Greek default [economically, they are already, really].  A run on Greek banks, either prompted by default or the threat of it, could not be stemmed by a credible guarantee of deposits.

The primary surplus would fast disappear as the contraction in money, credit and economic activity played out.

It’s these events that would precipitate the Greeks ejecting themselves from the euro – there being no legal mechanism currently for the EZ to do that itself – as they scramble to print Drachmas to pay their ongoing liabilities like pensions, government salaries, and social security.

And the prospect of self-ejection, done messily and slowly, since the Greeks have none of the requisite infrastructure to pull it off, will reinforce the likelihood of a bank run and capital flight, even if, as JP Koning rightly suggests, the Drachmasation may ultimately fail.

Quite apart from this, are two factors.

First, there’s the matter of new and unfunded government expenditure in the Syriza manifesto.  Who knows what would eventuate in the coalition-formation process, but they are not currently affordable [ie they would bust the primary surplus on their own].

Second, as the FT reports, tax collection is plummeting right now as Greeks forecast that unpopular property and other taxes will be ended, and perhaps also that there will be less appetite to collect on legacy obligations that the new political leaders discredited.  Ironically, this drop in tax collection reduces Syriza’s ability to deliver on the promised goodies which will win them the election.

It’s interesting that as the election has approached, there has been no precipitous rise in other spreads that might signal that markets were worried about contagion from events surrounding Greece.  That could indicate blind faith that a Syriza-led government and the Eurozone would see sense and find a sensible deal [which, to be clear, for me would involve drastic debt forgiveness in exchange for…].  But it could also indicate that they have judged a disorderly workout of the problem as largely a problem for Greece and no-one else.  If the latter were the case, this too limits Syriza’s leverage at the bargaining table.

[1] See, for exmple, Simon Wren Lewis.

On the lack of equity purchases in the ECB QE plan

There’s disappointment from some that the new ECB QE plan won’t incorporate the purchase of equities.  A few points.

1.  Equities are issued by companies that can!  [Don’t ever criticise this blog for lack of depth on finance matters].  And which don’t need to go via banks.  So, if there are finite funds/risks to take on the public sector balance sheet, one could argue they should be concentrated on segments of the financial system that are most dysfunctional.

2.  On the other hand, even if there were no financial friction in the equity issuing sector, on second best grounds, it would be justifiable to buy them to offset a distortion somewhere else, especially if the purpose was to boost overall spending on the grounds that this were inefficiently low.

3.  Purchasing equities might stimulate firms at the margin who wouldn’t normally issue, or not as much, to tap this source of finance.

4.  A question:  what’s to stop member state governments tapping the extra demand for their bonds by ‘over-funding’, issuing more bonds than they need to cover a gap between G and T, and spending the proceeds on equities?  This would have a similar effect as the ECB doing it itself.  There would be no explicit risk sharing.  But maybe plenty of implicit risk sharing.  Some of the most strapped states would not be able to bear much more risk and such bond-financed purchases would be counter-productive for them. But some might.

 

 

QE as debt management means ECB vs 19 DMOs

Larry Summers and others have wondered how much the US Treasury’s tilt towards easing undid the Fed’s program of quantitative easing, pointing out that the central bank stimulus was hampered by an uncoordinated and opportunistic change in issuance as longer yields fell.

If you are in the camp that QE only works through altering the relative demand and supplies of debt of different maturities – for example, that, hypothetically, QE could be replicated by the issuance of very short duration debt for the purchase of longer duration debt – then this is a big deal.

We might wonder if a single central bank/government can’t coordinate a combined reduction in the amount of long duration debt held in the private sector, what hope is there for the Eurozone?  There, we have a single 19 member ECB policymaking committee, but 19 debt management functions, many acting on behalf of governments sorely short of funds.

How will the ECB stop member state debt management undoing QE?

 

ECB QE: get rid of ‘but below’ to sharpen open ended promise

So, ECB QE surprised a little.  60bn per month, not 50.  A re-emphasis of the determination to buy private sector assets too.  Most importantly, stressing that the purchases were open-ended, to be continued until there was a sustained improvement in the inflation outlook, and ‘at least’ until September 2016.  So no preliminary cap on QE as previously guessed.

This open-ended nature of the program, which mirrors QE3 in the US, would, however, be more compelling if the Governing Council did not have the fuzzy asymmetric target it ‘clarified’ for itself from the Treaty-given price stability mandate.  That stipulates that the ECB shall aim for inflation ‘close to, but below’ 2 per cent.

This has always been a problem with the ECB monetary framework.  Unjustified in theory:  if anything, because of the zero bound, undershoots to be avoided more strenuously than overshoots.  And injects a lack of clarity in practice that has no obvious benefit.  Other than it being something the previous German GC incumbents could agree on, that sounded tough, and somehow differentiated themselves from weak-kneed inflation targeters around the world.

I had guessed optimistically that with new leadership, and inflation being anyway not even ‘close to’ target, the asymmetric words did not make much difference to anything.

But now I think it could be important.  Because the ambiguity in ‘close to but below’ makes it unclear just when otherwise open-ended QE purchases would be stopped.  Is 1 per cent ‘close to but below’?  If it is, headline inflation could justify enough members on the GC mounting an argument for curtailment much sooner than if ‘close to’ means ‘within 0.3 percentage points’.

To increase the force of the promise for open-ended purchases, therefore, and to help ex-post accountability, it would be better to get rid of the ‘close to but below’ and simply re-‘clarify’ to make the target 2 per cent.  (Of course, preferably, at some point this would be raised further, to something like 4, to avoid another quick revisit of the zero bound, but there is no hope of that.)

 

ECB QE. Much too late and not to be counted on.

That’s my view, and for a few reasons.

First, the impact of macroeconomic policies is partly about how they affect expectations.  The slow, drawn out, reluctant, piecemeal way that the ECB has handled the crisis so far [OMT excepted, that was just slow, drawn out and reluctant] and the disputes that have raged about whether and how to do QE in particular, mitigate to minimise the bang per buck.  ECB QE is to be contrasted in this way with the Fed’s QE3, or the latest bout of QE in Japan.  These were bold, determined policy changes with little of the current fog of controversy obscuring their likely effects, or the resolve of the policymaking bodies.

Second, in so far as QE works by signalling intentions about future central bank rates, there is now little to be got by way of a stimulus through this route.  On account of acting so late, the recession has driven guesses at what the ECB would normally do with rates down so that they deliver an almost flat yield curve.  Expectations of future rates can’t fall much further.

Third, in so far as QE acts through lowering term, liquidity or other premia, it’s too late for that too.  Something has squeezed those premia out in Northern countries.  And the risk that the remaining premia in the South reflect is not going to be taken off the local sovereign balance sheet.  If you are in the camp that believes that this risk is not anyway material, that is no great sacrifice.  But neither are there other great benefits to point to either.

There are some who will hang on to the view that EZ QE will bring about a huge increase in M.  [They no doubt hope for more than the 5% of GDP thus far expected].  And, they will reason, since of course MV=PT at all times, this means QE will lead to a healthy increase in P.  However, theory – which suggests that at the zero floor to interest rates a boundless increase in M will not affect P – and the experience of the BoJ, Fed and BoE, is not encouraging for those banking on the money channel.

The best that is to be said for EZ QE is that will probably do no harm, and is worth a shot.  Unless its labelling as ‘monetary socialism’ [Tweeted extract from German press, HT Mark Shieritz/Christian Odendahl] leads Northern politicians to redouble their opposition to good old fiscal ‘socialism’, which would, in fact, be a much better bet right now.

PS.  About size.  So I read supposed leaks that there is a proposal to do QE at 50bn a month.  At that rate it will take 10 months to get to 5% of EZ nominal GDP.  And therefore 60months=5 years to get to 30%, a stock of comparable size to that achieved by the Fed and the UK.  Which, in the case of the UK, has arguably not solved our [considerably milder] deflationary problems.  So even if you are a QE believer, don’t hold your breath.

Swiss National Bank, or Swiss Private Seigniorage Machine?

One speculation in the blogosphere – for example in Gawyn Davies’ FT blog – is that the peculiar ownership structure of the Swiss National Bank is behind its decision to abandon the exchange rate cap last week.

Modern central banks are invariably wholly owned by their Treasuries.  They may be incorporated as corporate entities, but are no different, practically, from Government departments.  The Swiss National Bank, however, is 50% owned by private individuals, and 50% owned by the Swiss Cantons, [either directly, or via banks owned by the Cantons] regional, political entities that comprise the Swiss confederate nation.

The conjecture is that these owners, unlike a conventional Treasury owner, would be more concerned about ‘losses’ on a ballooning foreign exchange reserve account, the bi-product of creating new reserves of Swiss francs to buy foreign exchange in defence of the cap, only for these reserves to depreciate in value.

Recapping on my last post, and on the other various pieces on the internet, the ‘loss’ would come at the point where the SNB decided it was appropriate to reverse the creation of reserves in order to pursue its macroeconomic policy objectives.   For a complete reversal it would need an injection of funds from the Government to supplement the foreign exchange which it bought which now buys fewer francs.  If it turned out that its price stability policy did not necessitate a reversal of the money-creation, there would be no need for any ‘loss’ to be made up.

The idea is not a total non-starter, because of the way Swiss central bank accounting is performed, the ‘dividends’ that would normally be paid out to SNB shareholders on account of seigniorage, are not, if such ‘losses’ are incurred.  Surely, shareholders want to protect those dividend flows?

I don’t buy this.

First, the SNB governance, strange though it is, has delivered behaviour over the medium term that is – so far as our imprecise macro-finance toolkit could tell – reasonably sound up to now.  If that policy was distorted by concern about short-term dividends from seigniorage, then Switzerland would have been a high inflation, or even a hyper-inflationary country.

If anything, one might wonder at the extra influence wealthy private individuals might have via their stereotypical concern for ‘sound money’ [stereotypical, though contradictory, since the rich are normally well indexed] and antipathy for public intervention to counter the business cycle.

As for the influence of ‘The Cantons’, I don’t see why they should behave differently from traditional finance minstry owners.  They are, constitutionally, the units from which taxation and spending powers derive, some of which are ‘delegated’ to Federal authorities.

And both the Cantons and private shareholders are restrained by the Swiss constitution itself, which constrains the SNB to pursue macroeconomic policies in the wider public interest.

To the extent that any discretion to warp SNB policies to ends that would not be achievable in normal central banks exists, I suspect that this is limited by the guess that if this institution was seen to be broken, it would be fixed constitutionally.   Ie although it’s privately owned, there are little rents extracted for fear of provoking full nationalisation.

This said, private ownership of the SNB itself is surely anachronistic.  Even if it’s influence is undetectable, just the perception that SNB policy might be hijacked by private interests are damaging.   Surely time for a change.