EUCOM Economic Analysis - Part I

[Surferbeetle]

James Edward Miller: Greece and the EU Face Their Walt Kelly Moment, Posted by Ellen on 10 November 2011, 11:02 am, UNC Press Blog

Among the peoples attracted into the orbit of Europe during the era of Enlightenment and industrialization, Greece proved a particularly quick study. Created in 1829-33, the Greek kingdom speedily acquired a European constitution, universal suffrage, and a set of national ideas that focused on territorial expansion at the expense of its Balkan and Ottoman neighbors. Economic expansion, efficient public administration, education reforms, infrastructural development, and even military professionalization played second fiddle to “redeeming Greek” lands and people. Greece ran up. However, Greek ambitions ran contrary to the calculations of the European great powers. “Europe” repeatedly intervened to throttle Greek designs. Greece grew fitfully through concessions made to the Greeks after the powers had arranged their own interests. Greece’s large, unpaid external debts to European banks led the powers to impose an oversight board to regulate its finances in 1893.

A legacy of military defeat and repeated European encroachment on Greek sovereignty were at the core of the 1909 Goudi military revolt. The military summoned Eleftherios Venizelos to initiate long overdue internal reforms and give the country an independent foreign policy. In the wake of World War I, seeking to create a nation of “two continents and five seas,” Greece conducted a war in Asia Minor against Turkish nationalists, throwing its army into an expanding conflict without clear military objectives. “Europe” turned on Greece. The Italians and French backed Turkey, and Britain withdrew its support for Athens.

In 1922, Greece lost its army and its war. Victorious Turkey expelled over a million Asia Minor Greeks, retook Constantinople, and reasserted its territorial claims to Eastern Thrace. Defeated, impoverished, divided, Greece plunged into an era of military coups, economic stagnation, the authoritarian dictatorship of John Metaxas, and a crushing German occupation. Civil war ensued from 1943 to 1949. The United States poured money and know-how into Greece, defeating a Communist-dominated insurrection and bringing Greece into Western institutions. In 1961, Greece applied to membership in the European Economic Community (EEC).

The United States and the Making of Modern Greece History and Power, 1950-1974, By James Edward Miller

Focusing on one of the most dramatic and controversial periods in modern Greek history and in the history of the Cold War, James Edward Miller provides the first study to employ a wide range of international archives--American, Greek, English, and French--together with foreign language publications to shed light on the role the United States played in Greece between the termination of its civil war in 1949 and Turkey's 1974 invasion of Cyprus.

Miller demonstrates how U.S. officials sought, over a period of twenty-five years, to cultivate Greece as a strategic Cold War ally in order to check the spread of Soviet influence. The United States supported Greece's government through large-scale military aid, major investment of capital, and intermittent efforts to reform the political system. Miller examines the ways in which American and Greek officials cooperated in--and struggled over--the political future and the modernization of the country. Throughout, he evaluates the actions of the key figures involved, from George Papandreou and his son Andreas, to King Constantine, and from John Foster Dulles and Dwight D. Eisenhower to Richard Nixon and Henry Kissinger.

Miller's engaging study offers a nuanced and well-balanced assessment of events that still influence Mediterranean politics today.

James Edward Miller is adjunct professor in the School of Foreign Service at Georgetown University and chair of Western European Studies at the Foreign Service Institute.

Marshalling capital for euro periphery, February 24, 2012 7:30 pm, Financial Times, www.ft.com

Greeks scrambling to do the homework demanded from them by Berlin and the rest of the eurozone are being given an encouragement of sorts. It takes the form of calls by the Federation of German Industries and the European Investment Bank for a “Marshall plan” to restart economic growth in Greece. The term is a misnomer and the proposal unlikely to see the light of day. But the idea is right.

For Greece in particular and the eurozone in general, the solution to the debt crisis has been cast as public sector austerity and structural reform. While the latter is essential and should produce long-term growth, the need to buoy up demand through the adjustment has been all but ignored. In return for deficit country reforms, surplus country governments should have boosted spending. Since this seems ruled out, only the core countries’ private sectors can save the eurozone from adjusting through stagnation rather than growth.

Die griechische Regierung startet den Schulden-Umbau, 25.02.2012, 10:19 Uhr, aktualisiert 10:44 Uhr, Handelsblatt

AthenMehr als 160 deutsche Finanzbeamte stehen nach Informationen der „Wirtschaftswoche“ bereit, Griechenland beim Aufbau einer modernen Finanzverwaltung zu helfen. Für die Aufbauhelfer seien englische Sprachkenntnisse Voraussetzung, ein Dutzend spreche auch Griechisch, sagte Staatssekretär Hans Bernhard Beus aus dem Bundesfinanzministerium der „Wirtschaftswoche“. Besonders viele Freiwillige kommen demBericht zufolge aus Nordrhein-Westfalen.

„Wir sollten bei der Hilfe für Griechenland auch die Möglichkeit der Reaktivierung deutscher Steuerbeamter im Ruhestand in Erwägung ziehen“, empfahl der hessische Finanzminister Thomas Schäfer (CDU) in der „Wirtschaftswoche“. So könnten „große praktische Erfahrungen mobilisiert werden“.

Das Programm läuft bis 2042. Die neuen Anleihen sollen bis 2015 einen Zinssatz von 2 Prozent haben. Danach soll der Zinssatz stufenweise steigen - bis 2020 auf 3,0 Prozent, 2021 3,65 und danach 4,3 Prozent. Verzicht und veränderte Konditionen summieren sich nach Berechnungen von Experten auf einen Verlust von mehr als 70 Prozent des Nominalwerts der Anleihen. Das Angebot sieht vor, dass die privaten Gläubiger auch zum Forderungsverzicht gezwungen werden könnten, falls die Beteiligung am freiwilligen Schuldenschnitt zu niedrig ausfallen sollte. Der Schuldenschnitt betrifft ausstehende Anleihen mit einem Gesamtvolumen von 206 Milliarden Euro. Die griechische Schuldenlast soll durch den Gläubigerverzicht um 107 Milliarden Euro schrumpfen.

La Grèce lance officiellement son offre d'échange de dette pour les porteurs privés, LEMONDE.FR avec Reuters | 24.02.12 | 21h20 • Mis à jour le 24.02.12 | 21h20

La Grèce a officiellement lancé, vendredi 24 février, son offre d'échange de dette pour les porteurs privés d'obligations dans le cadre du deuxième plan de sauvetage de 130 milliards d'euros qui lui a été consenti. Un communiqué du ministère des finances grec confirme les modalités de cet échange telles qu'elles ont été présentées cette semaine.

Cette procédure a été finalisée après des mois de négociations tortueuses entre Athènes et ses créanciers, compliquées par les exigences sévères posées par les partenaires européens de la Grèce, la présence de hedge funds jouant la montre afin que le pays fasse défaut et qu'ils puissent encaisser les CDS sur les obligations grecques et celle de la Banque centrale européenne.

Cet échange de dette doit permettre à la république hellénique de réduire son endettement public de 100 milliards d'euros sur un total qui dépasse 350 milliards. Les banques, les assureurs et d'autres investisseurs détiennent un total de 206 milliards d'euros d'obligations grecques qui subiront une décote faciale de 53,5 % avec une perte réelle entre 73 % et 74 %.

Selon les termes de l'accord, les investisseurs empocheront des obligations assorties de maturités allongées d'une valeur représentant 31,5 % des titres qu'ils détiennent ainsi que des obligations à court terme émises par le Fonds européen de stabilité financière représentant 15 % de la valeur des anciennes dettes. Les nouvelles obligations serviront un coupon moyen de 3,65 % et seront régies par la législation britannique.

[Firn]

La Grèce lance officiellement son offre d'échange de dette pour les porteurs privés, LEMONDE.FR avec Reuters | 24.02.12 | 21h20 • Mis à jour le 24.02.12 | 21h20

So the Greek bonds I purchased seem to be make a good nominal gain but will lock in the capital at low rates for quite some time. With an average inflation rate smaller then 3% over the next 30 years the investment should not suffer a loss of value, if there will be such an agreement and if Greece will be able to pay back....

Anyway a proper reform of the tax collection system should a pillar of the Greek reforms, however I don't think that Germany will get much love for helping the Greeks to do so.

[Fuchs]

You should factor in opportunity costs in an investment.

[Surferbeetle]

Firn,

Good to hear that you are still standing.

Consistently assessing risk properly and reaping the appropriate rewards or paying the appropriate penalties is not an easy business. Investors/clients have very definite expectations; at the end of the day however, it is Capitalism (Mr. Market) that’s powering much of the 7 billion or so of us who are happily consuming food, water, electricity, security, and other ‘public goods’ each and every day.

Fuchs,

If it matters, I use long-term dollar cost averaging into well-diversified, low cost, index funds (equities and bonds) for all my heavy investment lifting. IMHO it reduces risk and increases the chances of a ‘reasonable’ return. As economist would you agree or recommend something else?

For enjoyment I ‘playing/modeling/trading' with equities, however, as a former bill collector for a large international bank (in my pre-degrees days), i am 'religious' about my resultant profits and losses.

Bonds, although they appear simple, are arguably a different level of complexity.

Bill Gross bio by Wikipedia

Gross graduated from Duke University in 1966 with a degree in psychology.[5] At Duke he joined Phi Kappa Psi.[6] He then served in the Navy and earned an MBA from the UCLA Anderson School of Management in 1971. Gross briefly played blackjack professionally in Las Vegas, and has said that he applies many of his gambling methods for spreading risk and calculating odds to his investment decisions. He is also a CFA Charterholder, earning his credentials while working as an investment analyst for Pacific Mutual Life between 1971 and 1976.[7]

Gross manages one of the world's largest mutual funds, focusing mostly on bonds. Called "the nation's most prominent bond investor" by the New York Times,[8] he co-founded Pacific Investment Management (PIMCO) and currently manages PIMCO's Total Return fund (the world's largest bond fund and fifth largest mutual fund) and several smaller ones.[9]

_________________________________________

Gentlemen,

Any thoughts about Japan's recent decision to follow everybody else by taking up quantitative easing/soft money policy? I for one was very surprised when I saw Switzerland take this route, and now Japan. International debt levels are approaching breath-taking levels...

_________________________________________

The toxic distortions of the market resulting from the Greek Kleptocracy and it’s Political Sycophants are disturbing to us all; not least because similar things are in various stages of display throughout the world.

Thinking music: Dire Straits (with Eric Clapton), Live At Knebworth, Money for Nothing on 'the YouTube'

[Fuchs]

Fuchs,

If it matters, I use long-term dollar cost averaging into well-diversified, low cost, index funds (equities and bonds) for all my heavy investment lifting. IMHO it reduces risk and increases the chances of a ‘reasonable’ return. As economist would you agree or recommend something else?

I would recommend not to try to beat the market. It's like trying to win against a casino. It happens, but the attempt is foolish unless you consider it to be very entertaining.

Diversification is reasonable (but limited by 'transaction costs'), but the problem is that it's difficult to do a proper analysis of links between risks ('systemic risks'), and without it you have really no idea about the effectiveness of your diversification.
You might feel that Spanish bonds, a house in Florida and shares of a Wall Street bank are a well-diversified portfolio and *boom* it's suddenly 2007 and all are hit by the same crisis. Who'd have thought so in 2006?


I won't write more on this. There would be a lack information (such as age, sums in question) even if I was a consultant for private savings.

[Surferbeetle]

Eric Clapton - "Pretending" [Official Music Video] on the YouTube

One PSI Chart To Rule Them All, Submitted by Tyler Durden on 02/24/2012 11:35 -0500, Zero Hedge Blog

As the Greek PSI deal rears its ugly head on our screens once again with Merkel, Schaeuble, and Papademos all pulling from one angle or another (and Dallara disquietingly silent in his uselessness), BNP created a simple flowchart of the various steps and probabilities of participation rates, retroactive embedded CACs, CDS triggers, and actual debt reduction that may (or may not) occur in the next week or two. The price action in Greek CDS and Bonds strongly suggest the CDS will trigger (as we have been vehemently explaining for weeks/months now) but there is a long way between here and there.

G-20 Official: Communique Cites Aim For EU Firewall Decision Next Month, By Ian Talley, FEBRUARY 26, 2012, 2:49 P.M. ET, WSJ

WASHINGTON (Dow Jones) -- World financial leaders from the Group of 20 industrialized and developing economies will include an explicit March timeline for Europe to boost the size of its emergency bailout fund, a senior G-20 official involved in the discussions said Sunday.

The official G-20 communique will link the strengthening of Europe's bailout fund as "essential input" into its considerations of bulking up the International Monetary Fund's own lending resources, the person said.

Although the G-20 statement won't incorporate specific amounts officials are targeting for the European Union firewall and IMF coffers, the finance ministers and central bankers pointed to an IMF study recommending $2 trillion in combined backstop facilities as a reference point.

Mexico City G20 Communique: full text, Sunday 26 February 2012, The Telegraph

The world's leading economic powers have said they will not stump up more cash to fight Europe's debt crisis until the eurozone members increase their own contributions. Here is the G20 communique text in full.

2. Substantial policy actions have taken place since our last meeting, and recent economic developments point to the continuation of a modest global recovery and an easing in global financial market stress. We welcome the important progress made by Europe in recent months to strengthen their fiscal positions, adopt measures to reduce financial stress, build stronger institutions, implement growth enhancing structural reforms and to put Greece on a sustainable path. We also welcome the market improvement associated with the actions undertaken by the ECB. Nevertheless, growth expectations for 2012 are moderate and downside risks continue to be high. The international economic environment has continued to be characterized by an uneven performance, with weak growth in advanced economies and a stronger, albeit slowing, expansion in emerging markets. Structural problems, insufficient global rebalancing, a persistent development gap and high levels of public and private indebtedness and uncertainty continue weighing on medium-term global growth prospects. While volatility in international financial markets has declined, it generally remains high and we are committed to further reduce downside risks. We are alert to the risks of higher oil prices and welcome the commitment by producing countries to continue to ensure adequate supply. With unemployment still too high in many countries, we are firmly committed to supporting growth and job creation.

4. G20 members have been actively engaged in taking the steps needed to safeguard the global financial system and to avoid adverse scenarios. At Cannes, our Leaders asked us to review the adequacy of IMF resources. This review is particularly important against the backdrop of continued downside risks. Euro area countries will reassess the strength of their support facilities in March. This will provide an essential input in our ongoing consideration to mobilize resources to the IMF.

5. We are reviewing options, as requested by Leaders, to ensure resources for the IMF could be mobilized in a timely manner. We reaffirmed our commitment that the IMF should remain a quota-based institution and agreed that a feasible way to increase IMF resources in the short-run is through bilateral borrowing and note purchase agreements with a broad range of IMF members. These resources will be available for the whole membership of the IMF, and not earmarked for any particular region. Adequate risk mitigation features and conditionality would apply, as approved by the IMF Board. Progress on this strategy will be reviewed at the next Ministerial meeting in April. Other options mentioned by Leaders in Cannes such as SDRs are under review.

[Firn]

@Surferbeetle: Excellent choice of music.

Switzerland eased due to suffering heavily from being regarded to be such a nice and safe reduit in the Alps in a war, sorry, financially torn Europe. In relation to the economy they might have done more in this regard then even the USA. I'm mean you have to counteract to such degree the negative effect of all those Euros pouring in, for example from Greece?

Whrend mit Bundesinnenminister Friedrich (CSU) am Wochenende erstmals ein Mitglied der Bundesregierung Griechenland geraten hat, aus der Eurozone auszutreten, ist in Athen eine heftige Debatte darber entbrannt, ob die Namen von Parlamentariern verffentlicht werden sollen, die im vergangenen Jahr je mindestens 100.000 Euro von ihren griechischen Konten ins Ausland berwiesen haben. Finanzminister Venizelos hatte dem Parlament berichtet, eine bedeutende Anzahl Abgeordneter habe hohe Betrge unter anderem nach Grobritannien und in die Schweiz berwiesen just zu dem Zeitpunkt, als Athen die Griechen aufforderte, ihr Geld im Lande zu belassen, um griechische Banken nicht zu gefhrden. Laut Venizelos besitzt das Finanzamt Erkenntnisse ber groe Summen, die 2009 und 2010 auer Landes geschafft wurden, sowie eine entsprechende Liste fr 2011. Die Liste umfasse Politiker und Verwandte von Politikern mit berweisungen in Hhe von mehr als 100.000 Euro.

Anyway the Corriere della Sera run an very important article, highlighting that Italy has indeed become un paese per vecchi, even when it comes to your busta paga. Especially the young earn very little compared to many 'old' EU members. (the online article doesn't come with the graph, but Europstat should have all the data)

In Italia la disoccupazione, soprattutto quella giovanile un problema grave. Ma anche chi un posto di lavoro ce l'ha e pure a tempo indeterminato non se la passa troppo bene. E non solo per il peso del carico fiscale e contributivo. In Italia infatti gli stipendi medi sono tra i pi bassi dell'Eurozona. Addirittura inferiori a quelli della Grecia. E in assoluto superiori solo a Malta, Slovacchia, Slovenia e Portogallo, Paesi non certo comparabili al nostro per dimensioni e sviluppo industriale.

---

As the Greek made an offer one hardly can refuse I will give it a very close look. We will see.

@Fuchs: Of course the opportunity costs are 101 stuff one should always take into account. I just made a very rough guess without knowing all the facts, we will see.

The correlation between various markets and assets does fluctuate on an, in general increasingly higher level. At least those witnessed in 2008/2009 was something to behold. Still not everything moved in step.

As for beating the market: It is perfectly right that one should be aware of the dangers of trying to be too smart. However Mr. Market does on occasions offers sometimes after some intensive study some very bad ones and many neutral ones some really excellent deals. If you want you can pass on or accept them. It is still surprisingly difficult to trust your hard-won intellectual judgement.

Anyway my graph of the day to illustrate the turst into financial services of the eurozone. Go to chart and max setting to look back how thinks developed since 1986. (Needless to say that one should keep inflation and economic growth in mid).