Monday 19 January 2015

One week left for the Euro?

It was interesting to see the currency traders panic last week when the Swiss National Bank suddenly decided to end its policy of shadowing the Euro for the Swiss Franc (CHF). A net +30% revaluation was not a trade to be on the wrong side of - which of course the Swiss National Bank was.

Noticeable for me too was the supposed surprise of the move and the lack of understanding of why the Bank had given up the peg so suddenly. There was some thoughts of it getting to expensive to maintain.

But the reality is twofold. There is imminent Quantitative Easing for Euroland being loaded up. €550 billion euro's of it in theory. This will push down the value of the Euro (so beware a UK Sterling appreciation event on a smaller, but similar path to the CHF). Whay hang around with a a peg when your neighbours are about to ruin you. The SNB made the sane choice.

However, the second issue is the more important one, albeit related. Syriza are very likely to be in Power in Greece in one weeks time from now. It is even possible that they will have an outright majority.

Their, leader Alex Tsiparas, has declared that his policy is to negotiate a huge debt write down for Greece and to end the Troika imposed austerity that has so ruined the Country. Either Greece or Germany will win, even a compromise will be a victory for Greece really.

Syriza are maintaining that they do no want Greece to leave the Eurozone, however it is highly likely that Germany will try to force this through. otherwise the principles of sound money, if there is such a thing, are for the birds as far as the Euro is concerned.

To me, it is clear that the QE that is being revved up is being put in place to help manage the euro crisis that will out in a better manner than was possible in 2011. Back then the whole continent was plunged into a terrible crisis which could have wrecked many of its economies. This time it seems better preparations are being put in place. It will still be a roller-coaster rise no doubt.

As for poor Greece, there is no good end to the story. Tsiparas will be deeply unpopular if he leads Greece back to the drachma as this will entail the savings of the Country being wiped out entirely. Neither will be be popular if he negotiates only a partial deal with Europe that still leaves Greece with an untenable debt burden. So, as with most radicals, he will be forced to become centrist or mad. My bet would be on centrist which will come as a shock to many of his followers.


Steven_L said...

How can the EU stop Greece using the Euro?

If Greece defaults, or otherwise breaches EU treaties, can they be booted out of the EU or can the EU just fine them?

If kicking someone out qualified majority or veto? If there even a mechanism to kick someone out who refuses to implement treaty obligations or pay fines?

Usually they ignore all the treaty violations from club med (failing to implement directives etc). So what if Greece default and the EU shake their fists a lot and bail out affected banks with some sort of QE?

What can they actually do bar shake their fists and deduct any fines from their grants (which is probably less than debt interest)?

CityUnslicker said...

SL - The ECB can stop funding them. Then they can't pay any debt and default. They also then can't issues Euro's - so will have been kicked out.

The mechanisms to get to that point will not play out over a day or two mind.

BE said...

"The SNB made the sane choice"

Absolute tosh. Sorry to put it like that, but. Switzerland has negative inflation. How on Earth does appreciating the currency by 20-30% against its main trading partner help with that?

I don't know exactly what the SNB's legal mandate is, but if the Bank of England did something like that it would be well outside its legal framework. Imagine if in the face of negative inflation the Bank of England did a huge monetary tightening. Would you be saying "ooh yes, how sensible"? The prospect of Euro QE makes the SNB's action even more perverse - Switzerland will now be importing deflation like nowhere else in history.

Also, Greece isn't going anywhere. Even Tsiparas observes that the ECB keeps what is left of the Greek economy alive. Greece doesn't have any real banks left, just cash points connected to the computer in Frankfurt. Apparently at the last peak of the crisis, there were regular air-lifts of freshly printed Euros into Greece to keep the ATMs from running dry. If Tsiparas genuinely thinks he has a strong negotiating position, he might consider what happened to Argentina after pesification.

No, there will be a lot of hot air then a slight softening of the rate of repaying the IMF/EU loans or reduction in the interest rates to reflect recent developments or something similar. Nothing which can't be applied to other bailout countries.

What is the German government going to do, threaten to leave the EU?

Steven_L said...

The ECB can stop funding them. Then they can't pay any debt and default.

Kind of like you have to lend your waster flatmate yet another tenner? If you don't he'll get the hump and never give you the £200 he owes you? Because he'll get off his backside, stop smoking weed and get a job one day, won't he?

Sebastian Weetabix said...

I should have thought any Greek with savings would have moved them offshore some time ago. When more than half the people under thirty are not even in work at all and the economy has shrunk by 30%+ over the last 6-7 years or so it is hard to imagine that the average Greek is that bothered about a savings. Things have worked out a lot better for Iceland than for Greece, have they not?

dearieme said...

In some countries a native education is of little use, because all the exams are corrupt, and cheating and string-pulling are standard. It's therefore more valuable to get a degree from a foreign institution that might be (somewhat) more honest.

It's a bit like competition between currencies.

Anonymous said...

At least we will see what happens this time. Going to be very hard for the EU to paper over the cracks in this one and pretend that everything is fine, as they have been doing so far.

Now we may finally see what happens if a nation exits the EU. Does it collapse, fracture.
Collapse and a quick recovery?
Have its debt written down and prosper?

The knock on will be the worrying bit. Ireland and Portugal so far along the austerity road, I doubt they want to turn back.
But Spain ?
And Italy ?

Italy especially worrying. The anarchy party doesn't need very much more support to become a ruling coalition and dump the euro.

If a Greek exit made that look like an option, it would be all over.

We may only have a few days to wait to find out what th future is going to hold.

Either way. Don't book your holiday yet. Euro is coming under pressure

Timbo614 said...

Maybe the Greeks will do us all a great big favour and spark off the writing down/off of all the unrepayable debt that is pretty much everywhere. This should have happened 5 or 6 years ago.

As far as I can read the unresolved debt burden is the root of all the problems, it should be resolved. Painfull but necessary.

The numbers are too big, the banks holding the debt are still too big. It's time for things to get smaller for a while.

CityUnslicker said...

BE - SNB had no choice to maintain the peg they were buying more Euro's every day. When they know these will be worth less and less and less. What was the choice?

BE said...

Hmm let's see... buy something else? alter the peg? change the monetary target?

Almost anything other than what it did!!

CityUnslicker said...

it had to abandon the peg. The really bright thing for them to do would be to print enough CHF and monetyise it to make everyone very rich in Switzerland; but that would rather go against their ideas around hard money.

They are in a right fix with declining economies all around them!

John miller said...

I think it's very important to factor in that any statistics for employment in Greece are wildly inaccurate.

The goverment has not a clue about the vast numbers of people who are working, but below the radar - cash in hand.gedup

BE said...

Indeed. There were about 14,009 better things the SNB could have done. As a bright spark suggested at themoneyillusion, they could buy up prime overseas real estate and use the rent to finance a tax cut in Switzerland. The possibilities are endless, which is why their actual decision does not appear "sane".

Peter MacFarlane said...

The principles of sound money are for the birds anyway, if the ECB starts to rev up the printing presses - which it will: the Germans will be neutralised somehow, their Constitutional Court either nobbled (most likely) or brushed aside (the alternative).

Out of the ruins of sound money, some grubby deal will be put together to keep Greece in the (much devalued) Euro.

And The Project will roll on.

I may not be an economist, but this is not about economics, it's about power politics, and the colleagues aren't for giving up yet - or ever.

Anonymous said...

If/when Syriza take charge in Greece you're going going to get a Tsiparas vs Merkel face off, neither of which wishes to step back. The attempts to bully Greece into voting "correctly" have been pretty naked, and I've no doubt that if Greece plays hard Merkel *will* engineer their exit.

If Syriza won't roll over to what Germany wants, then I can see Merkel being conciliatory towards the likes of France and Italy over monetary policy in exchange for hoofing Greece out - having made the calculation that a post-Euro exit would be painful enough for Greece to ensure no one else votes for a collective hair shirt, and painful enough for those still in the Euro to not let things get that bad. The message being those who get behind the German policy get carrots, those who don't, they get the stick.

Greece will be the sacrifice to keep the Euro together. And my sympathy is very much tempered by the fact Greece itself has done most of the harm to itself.

Once out, I've no doubt it'll be horrible for several years, but I suspect not as painful as many may think. The markets are very forgiving, and Greece has plenty of real estate, good holiday destinations and is well placed for access to Africa and the ME for anyone wanting to set up military bases.

Hell, open up talks to Russia and I'm sure NATO would cheerfully find some change behind the sofa for a member state to remain just that.

MyThomasCookName said...

Hang on a second..... wouldnt it make more sense to actually book a holiday now rather than wait for inflation to take off in the Eurozone?

Still its a monumental balls-up no matter which way you look at it.

CityUnslicker said...

There won't be any inflation in the eurozone whilst commodity prices continue to fall. What is going to cause the inflation?

QE has little effect anyway as we have seen in the UK. When you give €100bn to a bank it puts it on deposit and congratulates itself about how rich it is and maybe thinks about spending it when the crisis is over.

The only real effect is to keep interest rates low.

In time money printing should cause inflation, but when money has been destroyed so fast by devaluation and right-offs then there is little chance of this - same as applied to the UK in 2008/9.

andrew said...

interesting post in alphaville yesterday.
basically the SNB is a private bank with shareholders that pays dividends. as such it is behaving in its interests.

Suffragent said...

All the national Banks are private BOE, FED etc basically an Oligopoly of all the large banks in a certain area (so basically for the shareholders of the shareholders). Who’s interests do you think they are working for and why do you think that as part of the ERM, the national Banks had to break any ties with government (officially the last time the eyebrow was allowed to be raised at the BOE.) Don’t want the representatives of the people having any say, in the destruction/dilution of their money. (not a fan of government meddling but in my fairy-tale, all the people come to their senses and vote for a new party full of honest descent people instead of ALL the thieves we have now)
Tinfoil hat stuff I know but I’m just a plebe who’s sick of bread and the media circus is getting a bit old.
As for the Swiss, don’t see them as much of an export economy, so how would deflation be so bad. Apart from cheese most of their products will be manufactured in china. Their banking sector took a hit when it had to open its books because of small business, contractor and Russian oligarch terrorists not paying their taxes. They will be stuffed to the gills, when the EU starts printing along with the others and everybody is looking for somewhere to protect the value of their savings. With their money value increasing, imported living expenses fall through the floor. Unemployment benefit and early retirement would be terrible when it more than covers full board at a Greek Hotel. Can’t see a down side with deflation apart from Negative equity.