Fukushima-A year Later
A year ago, the world experienced it’s second biggest nuclear accident. The accident, managed by TEPCO still leaves many questions. We were definitely not told the true back then. A few articles on Fukushima;
Sterilised QE Analysis
Guest post by Azizonomics.
From the WSJ:
Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.
Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.
This confirms four important points that relatively few economic commentators have grasped.
First, if QE was intended — as Bernanke always said it was — solely to lower the interest rates on government debt, and force investors into “riskier” assets, rather than to directly stimulate the economy, why were the first two rounds of QE not sterilised? Is Bernanke making it up as he goes along? No — the first two rounds of QE were undoubtedly reflationary:
Sustainability of Italy’s sovereign debt
On the sustainability of Italian debt by Voxeu. In late 2011 as risk spreads on Italian government bonds surged to levels that had been associated with debt crises in Greece, Ireland, and Portugal, some leading economists called for a restructuring of Italy’s debt.1 With the recent easing in borrowing rates, such proposals look at best highly premature and at worst reckless. A pre-emptive move to restructure debt for the world’s seventh largest economy, especially in a manner imposing debt reduction, would likely trigger bank runs, a severe new round of financial instability, and perhaps the breakup of the euro.
The calls for debt forgiveness tend to leap from a simple combination of the 120% ratio of debt to GDP with an interest rate of 7% to reach a diagnosis of insolvency. In contrast, my calculations indicate that Italy could manage even such high interest rates for some considerable time, for two central reasons.
- First, Italy has reasonable prospects of achieving a relatively high primary surplus (fiscal surplus excluding interest payments) that can pay for most of the interest bill rather requiring ever more net borrowing.
- Second, the relatively long maturity structure of debt means that only about 10% of long-term debt needs to be refinanced each year. This profile delays the effective arrival of higher interest rates and provides time for demonstration of good policies (including especially growth-oriented reforms) to restore market confidence and reduce interest rates once again before the bulk of the long-term debt needs to be refinanced. (full article here).
High-Frequency Trading: Menger vs. Walras
By Paul Koning of Mises Institute.
While Carl Menger and Léon Walras simultaneously discovered the principle of marginal utility, their ideas about the nature of market prices are very different. Walras was more interested in the final equilibrium prices arrived at by traders than the process by which these prices were formed. Therefore, he dramatically simplified the pricing process by imagining it as if it were governed by an auction mechanism capable of instantly calculating all prices in an economy.
For his part, Menger was fascinated with the actual process by which prices are formed. Rather than trying to abstract from the messy process of haggling by devising an artificial auction mechanism, Menger worked with a number of real-life pricing scenarios including isolated bargaining, monopoly, and competitive exchange.
Remember Trichet? A default by Greece on its debt is out of the question
On the trustworthiness of those leading us out of this crisis.
A default by Greece on its debt is out of the question, European Central Bank president Jean-Claude Trichet.
Video below to refresh your memory.
Friday evening in Greece-Default
With many strangely enough surprised by the Greek credit event, let’s review the definition of a credit event. From Credit Derivatives:
1. Bankruptcy
Bankruptcy in the 1999 Definitions mirrors the wording of Section 5(a)(vii) of the ISDA Master Agreement. It is widely drafted so as to be triggered by a variety of events associated with bankruptcy or insolvency proceedings under English law and New York law, as well as analogous events under other insolvency laws.
ISDA is aware that the scope of the definition of Bankruptcy may be wider than insolvency-related events falling within the credit assessment criteria used by rating agencies. Certain actions taken by the reference entity, for instance, a board meeting or a meeting of shareholders to consider the filing of a liquidation petition, could be argued as being in furtherance of an act of bankruptcy and thus triggering a Credit Event, even though such act would not generally be considered a bankruptcy event in the context of credit assessment by a rating agency. Therefore, the inclusion of this Credit Event could provide credit protection ahead of such circumstances.
By contrast, a guarantee would not typically provide any protection against insolvency-related events ahead of an actual failure to pay.
Risk On and Off…
…depending on what you focus on. While the DAX is pushing higher, the Euro is pointing down. The metals are showing increasing signs of fatigue. Let’s see who’s right and who’s wrong, but last time (yesterday) the Euro traded here, the DAX was 150 points lower….Charts below.
Pyrrhic Victory
Open Europe on the not so great deal. Probably the best and easiest explanation of what’s going on in Greece. The conclusion says it all, from Open Europe.
Therefore, this deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone.
Open Europe has responded to the agreement between the Greek government and its private creditors which laid out how much and under what format the country’s massive €360bn debt burden should be written down. The deal involved private sector bondholders agreeing to a 53.5% nominal write-down, while so-called Collective Action Clauses (CACs) will be used meaning that Greece is now technically in a state of default – precisely what EU leaders have spent two years trying to avoid. While marking a small step forward, Open Europe notes that the deal is unlikely to save Greece, and that the country is still on course for a full default in three years’ time, if not sooner.
The Greek deal, fixed…..
Comments on the Greek Deal. Courtesy Copper at BGC.
One of the 17 Eurozone countries has now defaulted (whatever the politicians and policymakers say)
E152bn of Greek law bonds were tendered for the debt swap, out of E177bn – a participation rate of 85.8%. Athens has triggered the Collective Action clause to force participation for the rest, therefore all the E177bn will be exchanged. Of the foreign law bonds, E20bn was tendered for the debt swap, a 69% participation rate. To try and persuade these holdouts to follow the herd and participate too, the Greek government has extended the deadline for acceptance (just for these foreign law bonds) until 23rd March. So the E177bn of Greek law bonds and the E20bn of foreign law bonds equates to a total of E197bn of bonds being swapped, or 95.7% of the total bonds outstanding. That meets the debt write down targets of the IMF and EU.
Dalio-Man and Machine
Simply the world’s best hedge fund manager, Mr Dalio. From the Economist.
“THE most beautiful deleveraging yet seen” is how Ray Dalio describes what is now going on in America’s economy. As America has gone through the necessary process of reducing its debt-to-income ratio since the financial crash of 2008, he reckons its policymakers have done well in mixing painful stuff like debt restructuring with injections of cash to keep demand growing. Europe’s deleveraging, by contrast, is “ugly”.
Mr Dalio’s views are taken seriously. He made a fortune betting before the crash that the world had taken on too much debt and would need to slash it. Last year alone, his Bridgewater Pure Alpha fund earned its investors $13.8 billion, taking its total gains since it opened in 1975 to $35.8 billion, more than any other hedge fund ever, including the previous record-holder, George Soros’s Quantum Endowment Fund. (Full article here).
For more on Dalio, check out the must read article by The New Yorker from last year, as well as Dalio’s priciples. Link here.
Latest comments