But, again, seven months of negotiations shows it’s not all that easy to come to agreement, and also that for reasons probably not entirely disclosed the bond holders have substantial bargaining power.

Greece hopes for debt swap deal by end of week

Jan 26 (AP) — Greece is aiming to complete negotiations on its debt swap deal by the end of the week, the government’s spokesman said Wednesday, adding that the talks were at their “most delicate phase.” Charles Dallara, head of the Institute of International Finance will head back to Athens on Thursday for the negotiations on a bond swap, known as the Private Sector Involvement. Athens is trying to get its private creditors to swap their Greek government bonds for new ones with half their face value, thereby slicing some euro100 billion ($130 billion) off its debt. The new bonds would also push the repayment deadlines 20 to 30 years into the future.

]]> http://moslereconomics.com/2012/01/26/greece-hopes-for-debt-swap-deal-by-end-of-week/feed/ 8 http://moslereconomics.com/2012/01/24/the-fed-is-starving-economy-of-interest-income-us-business-news-blog-cnbc/ http://moslereconomics.com/2012/01/24/the-fed-is-starving-economy-of-interest-income-us-business-news-blog-cnbc/#comments Tue, 24 Jan 2012 17:00:08 +0000 WARREN MOSLER http://moslereconomics.com/?p=14977

The Fed is Starving Economy of Interest Income

By Warren Mosler

He left out the part about needing a fiscal adjustment to compensate but this is part one of a three part presentation of something I wrote.

Preface. I generally subscribe to the view that in free currencies, deficits are mostly self-funding, and ‘enormous’ deficits needn’t be accompanied by higher yields. Government builds a bridge, pays the bridgebuilder, who pays the grocer, who eventually either buys the Treasury or deposits in a bank whose reserves are fungible vs T-bills via the intermediating Fed. Government dissavings and private sector savings are equal and offsetting, as long as the Central Bank has a working spreadsheet and an interest rate target. Yields are just a function of duration needs of savers vs borrowers, but the AMOUNTS always match up. Likewise, I don’t believe that the creation of bank reserves is inflationary or hyper-inflationary; bank lending is capital – not reserve – constrained. Loan officers don’t check the vaults. There is always enough. I continue to marvel at the armies of deficit vigilantes who take aim at Treasuries and JGBs, armed with Gold Standard thinking or even the latest Reinhart/Rogoff, only to retreat 2-3 year later. It didn’t work shorting US Treasuries in 2009-2010 for the ‘money supply’ or ‘deficit spike,’ and that roadside is stacked with corpses. Even the Home Run deficit vigilante hitters who nailed Europe this year (and Europe is, for now, operating as a quasi-Gold standard and an entirely different set of risks) offset those gains with losses betting the other way on the US, UK, and Japan. It’s evident in the returns.

*DJ Greece, Creditors Close To Agreeing Step-Up Coupon Of Around 3.5%-4.6% -Source
*DJ Greece, Creditors’ Deal Would Have Average 4%-4.2% Coupon On New Bonds -Source
*DJ Greek Creditors’ Real Writedown Seen At 65%-70% Under Deal Terms -Source
*DJ Final Details On Greek Coupon Deal Still Under Discussion, May Change
*DJ Greece Creditors Deal Could Have Grace Period Of About 10 Yrs On Principal

Yes!

Paul Krugman Goes MMT on Italy

By John Carney

November 11 (CNBC) — It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking.

As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman.

“A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

…I actually don’t have a firm view. But it seems to be an important puzzle to resolve.”

But today’s column is basically right out of MMT.

“What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”

But to no avail. In fact, with the Rubicon crossing decision to haircut Greek bonds 50% for the private sector’s holdings, expect the check writing to continue to intensify.

And expect economies to continue to slow under the pressure of continuing austerity demands that also work to make their deficits higher.

From today’s headlines:

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen
A Successor, Picked by a Tainted Hand
EU Lowers Euro-Region Growth Forecasts
Italy’s Senate Speeds Austerity Vote
Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says
Greek President to Meet Party Leaders as Unity Aim in Disarray

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen

By Paul Dobson

November 10 (Bloomberg) — Italian government bonds rose as the European Central Bank was said to purchase the securities and after the nation sold the maximum amount of one-year bills on offer at an auction.

The advance pushed the yield on 10-year securities below 7 percent. Italy’s senate is set to vote tomorrow on a package of austerity measures designed to clear the way for establishing a new government and restore confidence in Europe’s second-biggest debtor. The nation sold 5 billion euros ($6.8 billion) of bills at an average yield of 6.087 percent, up from 3.570 percent on similar-maturity securities sold last month.

“Together with reported ECB buying, this auction result should support further Italy outperformance,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate and Investment Bank in London.

The yield on two-year Italian government notes slid 55 basis points to 6.66 percent at 9:43 a.m. London time. The 2.25 percent securities due November 2013 rose 0.915, or 9.15 euros per 1,000-euro face amount, to 92.205.

The ECB bought Italian government bonds, according to five people familiar with the transactions, who declined to be identified because the deals are confidential. It also bought Spanish securities, two of the people added. The ECB was not immediately available for comment when contacted by telephone.

Yes, all governments have the authority, one way or another, to confiscate an investors funds. But they don’t, and work to establish credibility that they won’t.

But now that the EU has actually announced they are going to do it, as a fiduciary you’d have to be a darn fool to support investing any client funds in any member nation debt.

The last buyer standing is and was always to be the ECB, which will now be buying most all new member nation debt as there is no alternative that includes survival of the union.

And when this happens there will be a massive relief response, as the solvency issue will be behind them, with the euro firming as well.

Then the reality of the state of their economy take over, as GDP continues to fade and unemployment continues to rise until they figure out austerity can’t work and instead they need to proactively increase their member nation’s budget deficits.

Hopefully this doesn’t take quite so long as it took to figure out the ECB has to write the check.

But this one might take even longer as it will be a function of blood in the streets rather than funding capacity.

   
>   (email exchange)
>   
>   On Wednesday, November 09, 2011 5:37 AM, Dave wrote:
>   
>    For BTPS & SPGBs all inter dealer screens have gone blank and there is no liquidity left.
>    There are really no quotes for even 10y BTPs for example and the last bids were hit
>    about 80BP wider for the day vs Bunds.
>   

(Nikkei)–Prime Minister Yoshihiko Noda vowed Thursday to gradually raise the nation’s consumption tax to 10% by mid the 2010s during a summit meeting of the Group of 20 leading economies in Cannes, France.

The announcement at the summit has effectively made the tax hike an international pledge, and is expected to be included in an action program due out Friday.

Noda stressed the importance of rebuilding debt-ridden Japanese finances and told G-20 leaders that fiscal consolidation is a must “for Japan to be put back on a sound economic growth path, regardless of the debt crisis in the euro zone.”

He also spoke to reporters that a Diet dissolution should be carried out before implementing the tax hike. “If we go to the people in a general election (to seek a mandate on the consumption tax hike), we should do so after passing related bills but before implementing them,” he said.

As to Japan’s participation in the Trans-Pacific Partnership free trade pact, Noda told reporters he will accelerate efforts to iron out differences within the Democratic Party of Japan, which he leads. “We have to close ranks and shouldn’t be split,” he said.

Noda showed his flexibility in making concessions to a controversial redemption period of reconstruction bonds aimed at funding rebuilding efforts of the March 11 disaster, in hopes of enlisting support from the Liberal Democratic Party and New Komeito, the main opposition parties.

“Our policy chief said that we envisage a 15-year period (for the redemption of reconstruction bonds), but there’s room for concessions,” he said.

After QE2 the supply out to 10 years started to be replenished auction by auction.

This was quickly followed by twist which began working to remove supply from the long end and add it to the short end.

The net is an ongoing multi trillion shift taking supply out of the long end and adding it to the short end that will continue to be a major influence on spreads.

Additionally, the Fed is seeing no material evidence of any monetary derived inflation, credit expansion, escalating inflation expectations (not that they actually matter), etc. and they are also seeing the global economy gradually slowing, and the euro zone imploding. So higher rates from the Fed remain a highly unlikely scenario.

A no vote means a lot more immediate austerity than a yes vote.

A no vote means Greece can’t borrow at all, and therefore govt. checks will only clear if Greece immediately cuts back to where it is only spending tax revenue.

A yes vote means Greece can continue to spend quite a bit more than tax revenues, to the tune of the check from the benefactors.

And with no one in government at any level having any kind of a plan to leave the euro, and no idea how to manage a new currency in any case, that option continues to have no political support.

So the choices are:
Yes, we accept a relatively modest deficit cut as per the EU proposal.
No, we prefer to go cold turkey to a balanced budget and a seriously draconian cut.

Meanwhile, tick, tick, tick, the entire euro economy continues to slow, and continuously nudge up the entire region’s budget deficit, as they all work their way towards the same fate as Greece.

And, tick, tick, tick, the US deficit reduction process moves forward, with multi trillion dollar reductions already proposed by both parties.

Greek Vote Threatens Bailout

By Alkman Granitsas, Marcus Walker, and Costas Paris

November 1 (WSJ) — ATHENS—Greek Prime Minister George Papandreou stunned Europe by announcing a referendum on his country’s latest bailout—a high-stakes gamble that could undermine the international effort to preserve the euro.

A “yes” vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.