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There has been a lot of noise over the weekend about Yanis Varoufakis' interview to Corriere della Sera, and the question of whether he did or did not mean to threaten a referendum "on the euro" if the eurogroup rejects the Greek reform proposal today. KT Greece has the original quote and subsequent denials from the Greek government. The euro reference was added by the newspaper and we learn from the follow-up statements that the referendum was never about euro membership, but government policies, see, e.g., @GreekAnalyst.
These are sideshows and distract from the more relevant issues arising from the reform list, leaked to the press ahead of today's meeting. Peter Spiegel from the FT got a copy of it and the letter the Greek government sent to Jeroen Dijsselboem. There are seven reform proposals in total, a request for technical meetings with the institutions to take place in Brussels rather than Athens and to start at the political level discussing a follow-up agreement, under the header of "Contract for Recovery and Growth of the Greek Economy." The proposals are
1. the activation of an independent fiscal council to monitor the budget process;
2. a new framework for budget preparation with ceilings for various government levels and corrective measures;
3. a VAT evasion fighting scheme that relies on the recruitment of "students, housekeepers and even tourists" as undercover spies to gather data on VAT and cash-in-hand fraud to change tax compliance culture;
4. a tax arrears scheme with positive incentives to pay upfront but no haircuts;
5. raising revenues through selling licenses to online gaming providers and regulating fees for online gaming;
6. a ban on public sector units to request (either from citizens or businesses) documents certifying information that the state already possesses;
7. and measures to combat the humanitarian crisis as presented last week.
There are some details and a lot of vagueness in the reform proposal. A good first analysis of is provided by this article by Dan Davies. He gives a positive verdict on the first two reforms about the fiscal council and budget preparation, as this increases transparency and central government control, though details are lacking. The gaming tax which the government estimates to raise €500m could also be a plus, though relying on gaming for income never feels good and the eurogroup might not be convinced. The humanitarian crisis measures are in line with Syriza's programme but the numbers on how to counter-finance it do not add up. Even more confusing is the tax arrears reform, also at the centre of Syriza's policies. The worst criticism though is reserved for the VAT-spy proposal. Not only is it economically precarious to raise VAT (even if only through enforcing compliance) in a still depressed economy. It is morally questionable if one attempts to rebuild trust. It also looks like the government has given up on going after the oligarchs and is now instead targeting poorer people instead. The idea to prevent government from demanding a document from a citizen more than once did not fare well. Macropolis argues that even though this might reduce the time people spend on admin, it is hard to see how this can incentivise the government to implement a new IT based platform for information exchange.
The measures are now up for scrutiny by the three institutions and no decision is expected at the eurogroup meeting today. First reactions from Berlin are not promising. FAZ quotes one official as saying that the Greeks wasted another week. There are also several voices saying that this is not a basis for an early release of an aid tranche as the document does not refer to the current programme. They insist that compliance to this programme is a prerequisite for the tranche release.
There were reports about widening revenue falls amid liquidity worries in Greece. Finance Ministry sources have told local media that the revenue shortfall widened to around €1.5bn by February from around €1bn in January, entirely due to revenue falls in taxes and dividends, Macropolis reports. Greece reportedly paid the first tranche of €300m to the IMF on Friday. Three more tranches totalling €1.23bn are due on March 13, 16 and 20. In addition, Greece has to pay €1.08bn mainly for interest payments, (€800m) within March. A bank official told Kathimerni amid the deposit outflow that banks have no money to lend to the economy, the money is just enough to manage the cash demands of their customers.
The latest Marc poll for @EFSYNTAKTON suggests strong support for the Greek government (64%), a belief that under a New Democracy government things would be worse (54%), that Greeks have no illusions about the extension agreement (75.4%) but that they are happy with the deal nevertheless (59.6%) according to @MacroPolis_gr.
Towards parity
On the day when QE starts, the euro was trading at $1.09 this morning - partly due to positive US employment data on Friday, and the usual speculation of what that means for US monetary policy. In an interview with the Wall Street Journal, Matteo Renzi said he wanted the euro to fall to parity - though omitted to say why. The comment tells us more about the Italian prime minister's way of thinking about the economy (or rather not thinking) than about any strategic policy goals.
The article also noted a further fall in bond spreads, with forecasts of negative two-year yields in Spain, Portugal and Italy. One other commentator argued that the discount rate lower floor for bond yields under QE will invariably boost demand for bonds with longer maturities if the ECB wants to hit its target.
On euro/dollar: parity is only symbolic. The euro/dollar rate vastly exaggerates the euro's true depreciation. What matters is the real effective exchange rate. According to the BIS, it declined by some 9% over the last year. This is not to be sniffed at, but it is not exactly earth-shattering either.
On the deposit rate floor: there are good reasons why the ECB chose this floor, but it can always lower the floor. There is no reason why the deposit rate could not be lowered to -1% if necessary. A bad day for German conservatives
This is a hard day for German conservatives. On the day of the launch of QE, Holger Steltzner's lead commentary in Frankfurter Allgemeine effectively accuses the ECB of debasing the currency, and conducting monetary financing. It's all name-calling, of course, and there is absolutely no substance to these deranged arguments, but this is Germany's most prestigious newspaper, generally of a pro-European disposition. He makes essentially two points - if you want to call them that. The first is that QE will bring permanently negative interest rates - which would result in massive distortions of investments. At zero interest rates, property prices would logically rise infinitely. The second point is that the ECB's protestations that it is not doing monetary financing in Greece ring hollow, as it funds 70% of all Greek economic activity.
The ECB and its supporters can count themselves lucky that its opponents are not all that effective. Steltzer commits the classic commentator's error of criticising, but failing to draw logical conclusions. The funding for Cyprus and Greece is genuinely worthy of criticism, but that would require a little more narrative effort. One can also criticise QE, but on different grounds than the effect on German savers. This is how one loses arguments.
The rise of euro borrowings in China
The FT reports that Chinese corporates are increasingly using the euro to raise debt, given the low interest rates and the advent of QE. The article quotes data from Dealogic - who trace these flows - according to which the amount raised so far this year has been $2.9bn, compared to $3.3bn for the whole of 2014. These are not exactly large numbers, but the article says that this was part of a wider trend. US companies, too, have raised their euro-funding three-fold this year.
Ciudadanos closes in on the PP
The rise of Ciudadanos continues as El País released a Metroscopia political climate poll showing the party still in fourth place, but virtually tied with the ruling PP around 18.5% vote projection, and within just 4% of the leading party Podemos, which has lost the support of 5% of voters. The PSOE splits the difference and is back in second place. IU and UPyD remain below 6% and 4% respectively, in the latter case dangerously close to the 3% threshold for parliamentary representation. In direct voter intent Podemos' lead is clearer and the PSOE is in third place barely ahead of Ciudadanos. Voters overwhelmingly disapprove of the PP's role in government and the PSOE's as leader of the opposition. Ciudadanos' leader is the best valued, but the least well-known (only 71%) - there is an inverse correlation between these two measures when the leaders of the 6 national parties are considered.
El País publishes a separate poll by Metroscopia for the Andalusian region, which is holding elections the Sunday after next. This is important as it is the largest and most populous region in the country. There Podemos and Ciudadanos are in third and fourth place, with the PP losing nearly half of its votes and seats since three years ago, and the PSOE in a clear lead but needing to make a deal in order to govern. Outgoing junior coalition partner IU also loses substantially and is now in fifth place as nationally.
Munchau on the next financial crisis
Wolfgang Munchau took a look at the impact of low interest rates on the German financial sector, which he says is in considerably more trouble than appears to be the case. The problem is that this largely unreformed sector runs on outdated business models that rely on achieving positive nominal yields that are then redistributed to customers. This model obviously does not work in an environment of negative rates. He quotes a study by the Bundesbank assessing the impact of low yields on the sector, and concluding that under an adverse scenario of returns of 1-2%, companies constituting almost half of the life insurance sector's market share are destined to go out of business. He says the adverse scenario is everything but extreme. The issue is not the level of interest rates today, but how long they will stay low. A longish period of negative interest rates would easily land us in the adverse scenario, or even worse. The problem is not confined to life insurance. It also extends to the market for corporate pensions, many of which are underfunded. Munchau says this is a slow-motion train wreck, but the cause of this problem is not the low interest rates, but the train itself.
A German parallel currency in the 1930s
Bob Parenteau has done quite a bit of work on tax anticipation notes and their possible use as a parallel currency in Greece. A much quoted antecedent have been the “Patacones” in Argentina, but Parenteau dug out another example from Germany in the early 1930s when Hjalmar Schacht, as minister of economics before he became president of the Reichsbank, introduced a similar note. This is from the Nuremberg trial, which describes the scheme as follows:
Eurozone financial data
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Montag, 9. März 2015
About those proposals The Greek government sends a list of seven reform proposals, but the news headlines are all about Yanis Varoufakis' interview in which he threatened a referendum;
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