Greek junk status timeline
This informative interactive graphic from the FT shows the rapid rise in Greek government yields over the past year, resulting in yesterday’s downgrade to junk status.
When S&P warns holders of Greek debt that they only had an “average chance” of between 30% and 50% of getting their money back in the event of a debt restructuring or default, its going to have consequences…
One result of going junk (or sub-investment grade…) is that many financial institutions (including pension funds) are not allowed to hold such investment instruments, which will lead to a big sell-off of these, causing the yields to rise further.
As the fears of contagion spread, Portugal was also downgraded and the Vix index, a measure of “fear” in the US stock market, rose by more than 30 per cent, its biggest one-day jump since the height of the financial crisis in October 2008.
The moves highlighted the potential that the Greek crisis – the result of too large a debt load and expectations that it may default or have to restructure that debt – could spread and have knock-on effects on the global economy.
In this month’s edition of Economax, there is an in-depth article on Greece’s fiscal crisis.
The (sovereign) default option is costly
No rich advanced nation has defaulted on sovereign debts since the end of the second world war but should the default option seem attractive governments should beware the longer term costs and consequences. The Economist this week has a feature on some recent research into the impact of sovereign debt default focusing in particular on the experience of Argentina. Three major effects are identified:
read more...»Lessons for economists from the crisis
Larry Elliot has a superb piece in today’s Guardian on the challenges facing the economics profession in the fallout from the global economic crisis. He flags up a new book by David Smith “The Age of Instability: The Global Financial Crisis and What Comes Next ” which is now available through Amazon and will be a great read for ambitious AS and A2 students. And he flags up the first major meeting of the George Soros funded Institute for New Economic Thinking which is meeting appropriately enough in Cambridge. Reading through the agenda for the conference it looks like a gold mine of top quality speakers and sessions - sadly by private invitation only!
The director of the Soros-funded Institute is quoted as saying
“Too much of modern economic theory relied on sophisticated mathematical models to predict market behaviour. A broader, interdisciplinary approach to economics, taking in history, psychology, natural science — to deal with issues such as climate change — and even literature was now needed”
Larry Elliot argues in his piece that
“There is no need to reinvent the wheel. It’s more important to strip away the layers of complexity that gave big-picture economics a spurious and dangerous exactitude in advance of the crisis. The big lesson in economics from Keynes is that we know less than we think we do, and that there is a vast difference between the output of economic models and the actual behaviour of individuals.”
Read: Rescuing economics from its own crisis
The Times reports that George Soros is to create a new economics institute at Oxford University.
Death to the speculators!
There’s been lots of discussions in the news these last few months about the power of speculators against sovereign debt. My students have been asking about this so I thought I’d write a short note here about it:
- There has been a lot of naked short selling of sovereign debt recently, particularly Greece debt.
- A naked position (also known as an uncovered position) in derivatives speak is when the seller of an option does not have the corresponding position in the underlying security
- A short sell is a strategy to aimed at taking advantage of an expected fall in prices
Presentation on Fiscal Deficits (ATTACHED THIS TIME!)
(Presentation attached this time!)
Given the Budget 2010 scheduled for next week, and given the importance of the budget deficit to the election campaign, here are some useful resources on the current fiscal situation in the UK:
- Following on from the economists’ letter last month, today, the EU also called for a quicker tightening of the UK’s fiscal position
- A video discussion here between Stephen Timms and Ken Clarke on how Labour and Conservatives would tackle the UK’s deficit - and how there is no clear message from any party on how they would actually achieve it!!
- And finally a PDF document here (which has been compiled by us at Merchant Taylors’ - thanks to Andrew Ellams and Harriet Thompson for their assistance on this!) which may be of use: FISCAL_POLICY_09-10_MTS.pdf
Sovereign debt hot spots
An interesting summary of the sovereign debt worries of a cluster of countries courtesy of the Wall Street Journal
Update on the Greek tragedy
Margins and risk - the spiralling cost of credit
There has never been a strong link between the policy rate decisions of the Bank of England and the interest rates charged to customers who take out unsecured loans using their credit cards. But withbase rates at 0.5% and lilkely to remain well below their neutral rate for some time to come, the chasm between this and the average of 18-19 per cent annual rate on unpaid credit card balances has rarely been wider.
The lenders claim that rising debt default levels from borrowers suffering from the recession and rising unemployment has increased the risks of loans and that higher rates are the inevitable result of this.
Consumer watchdogs take a less benign view and argue that the financial companies are exploiting consumers and whacking up their profit margins even during these difficult times.
This BBC news video from Brian Milligan provides food for thought on the credit card issue and makes a good resource to use when teaching monetary policy and personal finance. The BBC Radio 4 Today programme also covered this issue during the week.
Greek fiscal issues - Newsnight
This week’s Newsnight editions on Tuesday (first article) and Wednesday (from 13mins 35secs, Stiglitz vs Hendry) provide excellent discussions of the recent run on the Euro, given Greece’s severe fiscal problems and associated fiscal austerity measures. They provide excellent summaries of the main issues surrounding the problems and solutions, including the hedge funds who are taking a stance against Greece as well as the social unrest from the government’s austerity policies. It can also be used to discuss why the Eurozone is not an optimal currency area focusing on why the UK should not join; the issues of Eurozone enlargement; and how the fiscal limits on countries are too flimsy to be credible (a la Stability and Growth Pact).
A New Market for Bonds
A few weeks ago we waved on the issue of bonds and we think the corporate and sovereign bond markets could be the source of the big macroeconomic news stories during 2010. An interesting new development is the launch of Britain’s first retail bond market by the London Stock Exchange - an attempt to develop a wider base of investors prepared to put their money into bonds and perhaps (by offering an alternative to floating shares on the stock market) open up the supply of credit for smaller businesses.
According to Reuters, “Bonds are deemed safer than other forms of securities such as equities because interest payments are fixed and investors get their money back unless the company goes bust. But prior to maturity bonds’ value can vary and move inversely to their yield.” Just under fifty government and corporate bonds have been made available for trading as this new trading platform takes its first tentative steps. Here is a beginner’s guide to bonds from the Radio 4 Today programme.
In a related story figures show that Individuals in the UK own just 10% of the shares traded on the London Stock Exchange, down from 13% in 2006 and far lower than the 54% they owned in 1963. More here
Uh oh… S&P frowns again at the UK…
The news that the biggest credit ratings agency, Standard & Poor’s, announced yesterday that they “no longer classify the United Kingdom among the most stable and low-risk banking systems globally” sent sterling down, and does not bode well given Greece’s recent experience.
read more...»UK economy back to growth (just!)
There’s a video discussion here at the FT.com on the UK’s climb out of the longest recession since WWII. Whilst the UK economy finally returned to growth in the fourth quarter of last year, it was at a far weaker rate than expected.
read more...»Find a stock market game that works
For some time I have been searching for a real time stock market trading game that works, one where 99% of the hard-graft is done by the software rather than teachers having to input every change. And also one that is intuitive to the students and which gives them a full array of trading options. VSE Marketwatch has provided a neat solution and within a week of a launch, 152 teams of Year 10 and Year 11 students are trading away in our 2010 stock market competition.
read more...»Bond bubble
Following on from the G-Wave on the bond market, the FT’s John Authurs analyses the market here.
Capital flight
This describes an outflow of money from one country to another as investors lose faith and confidence in their external investments. Typically it happens when a nation’s currency is under strong downward pressure either because of speculative selling or because of fundamental factors such as a recession, poor trade performance or a steep fall in asset prices or interest rates. Another root cause is weakening faith in the creditworthiness of a national government especially when they are running up large budget deficits that might be unsustainable. Foreign investors may choose to withdraw their money if they expect a hike in taxes on their investments.
read more...»First Dubai… Now Greece… Who’s next?
First Dubai… Now Greece… Who’s next? Greece saw its credit ratings downgraded to the lowest level in the eurozone on Tuesday as fears mounted over its deteriorating public finances.
read more...»Dubai goes bust?
When the credit crunch first hit Western Europe and America, many of my banker friends rushed to the Middle East, particularly Dubai, to pretty much the only area that was still doing any debt-related business.
read more...»Reasons to expect a Nike Swoosh recovery
A failure of trust in global financial markets lies at the heart not just of the current recession but prospects for a sustained recovery in spending and jobs. Whilst journalists play the game of alphabet soup to describe the likely shape of the economic cycle, we might be better off thinking in terms of a Nike Swoosh. World growth is responding to an unprecedented policy stimulus but there is a real danger that the rebound inactivity will be constrained by a set of negative forces pushing down on growth. This was the message from Paul Donovan, Managing Director of Global Economics for UBS in his presentation to the Eton College Keynes Society last night.
read more...»
