Friday, 12 May 2017

How to bring on Hyperinflation: the Argentine experience as a cautionary tale for Greece

We have lately seen a lot of comparisons between the current Greek depression and various sudden stop episodes in different countries. All those pieces though have missed the case most apt for such a comparison. The Latin American Debt Crisis of the 80s. Out of all the Latin American countries that went through extremely hard times back then, I'll focus on Argentina due to greater data availability. I won't go into comparing the performance of the two economies in this post but I'll focus instead on the occurrence of hyperinflation towards the end of the decade and the causes for that occurrence.

In both cases there was a cluster of sudden stop episodes encapsulating the whole region (in Argentina's case Latin America, in Greece's case the European periphery), making the countries' access to capital markets rather pricey if not outright impossible. 

In Argentina's case, which had what many Grexit-advocates prescribe as a way for Greece to overcome its plight, i.e. the ability to print money at will, the lack of access to capital markets was plugged the usual way. By putting the printing presses to work.

The next chart makes rather obvious that when government revenues dropped, inflation in Argentina spiked something that implies a jump in seignorage. It is worth noting that throughout the 80s inflation dropped below three-digits only once, in 1986 (during the Austral plan), when it stood at ~90%.

source: IMF,

If we zoom in on the period right before and after the hyperinflation episode, it becomes crystal clear that hyperinflation was preceded by a momentous surge in monetary financing for the government by Banco Central de la Republica Argentina, the country's central bank.

source: BCRA,

Given that many Grexit proponents envisage that the country can e.g. raise its pension spending by printing money, the Argentine experience becomes rather relevant for Greece as well. Moreover, in case of a messy default and unilateral Grexit wouldn't tax revenues drop significantly? How would government finance the resultant deficit? Money-printing again seems to be the path of least resistance. If we add international trade disruptions and the subsequent shortages in the above mix, a "(much) more money chasing much fewer goods environment" emerges.

Many outsiders dismiss the possibility of hyperinflation in case of a messy Grexit as too far-fetched and unlikely. I, on the other hand, think that takes like this are overly optimistic and tend to ignore how a rather large part of the Greek political systems thinks and acts. I would advise them to take a look at the cluster of hyperinflationary episodes in Latin America during the 80s which came on as a result of the cluster of sudden stop incidents in the region. Suddenly, the possibility of hyperinflation making an appearance  in case of a messy Grexit doesn't seem that low, does it?

Thursday, 9 February 2017

Is Greece's underperformance compared to sudden stop episodes in other EMs really due to the Euro ?

Yesterday a post from Matthew C Klein under the title "Greece has done much worse with the euro than EM basket cases did with their own currencies" was published in FT Alphaville and caused quite a stir. I will try to pen a response piece since I believe that the said post overlooks some pretty essential points that, in a large part, explain the reason why Greece underperformed the EMs mentioned above. (hint: that reason is not each country's currency of choise)

A sudden stop episode is an abrupt halt/slowdown in private capital inflows into an economy that causes an abrupt current account reversal. Hence, I find it peculiar that there was no mention of the magnitute of the current account deficits involved in the episodes used by Mr. Klein in his analysis in order to draw any conclusions.
The magnitude of the pre-crisis imbalances involved defines the adjustment needed to be undertaken so that the economy in question acquires a more sustainable footing and also pinpoints the liquidity that will be taken out of each one of these economies because of the sudden stop.   

In the current post I only look at the respective sudden stop episodes of Argentina, Indonesia and Thailand because the size of the adjustment appears to be larger and as a result more easily comparable to that of Greece. In the charts posted later on in the post I define the pre-crisis year as the one before the current account balance exploded into positive territory. As far as the Asian crisis is concerned, this is not consistent with normal crisis timelines who define the pre-crisis year to be 1996.
First of all, the level of the current account deficit with which Greece came into the crisis makes the ones of the other three countries appear miniscule. 
source: IMF
The difference between the three EMs and Greece is that the sudden stop episode in their cases was really abrupt and within one year their current account balances swung from varying levels of deficit into hefty surpluses. Since Greece's current account deficit was humongous back in the pre-crisis year, if Greece chose to withdraw from the Eurozone, the amount of liquidity withdrawn from the economy would be monumental and so would be the ensuing depression. If Argentina's swing from a ~ 1,3% deficit to an 8% surplus meant a ~11% drop in GDP what would the resultant drop in Greek GDP be if the curent account swung from a 15% deficit to an unknown, but undoubtely large, surplus?  

One further point overlooked in Mr. Klein's post is the countries' fiscal imbalances, which played a really important role in their respective performance.
source: IMF
source: World Bank, own calculations

Here too, Greece's imbalances were huge. It's more than sufficient to say that if one summed up the respective deficits of Argentina, Indonesia and Thailand in the pre-crisis year, the resulting deficit would still be smaller than that of Greece. What's more, Greece's fiscal deficit grew about 50% larger the following year, magnifying further the level of the fiscal adjustment needed as well as the negative drag on the country's GDP.

Moreover, due to the composition of its economy Greece was not as good positioned as the three other EMs to substitute internal growth with external growth. During the 1960 - 2015 period, Greece posted a balanced trade account only once and that was in 2015. Calculating the cumulative trade balances for all four countries for the 1960 - 2015 period makes obvious that, in this respect too, Greece is an outlier. 
source: World Bank, own calculations

If one wants more evidence that an actual currency devaluation didn't induce Greek exports to perform she/he need look no further than the 80s. During that particular decade the Drachma depreciated by about 66%. According to plain vanilla economic arguments, Greek exports should have posted some stellar performance. Reality though was a bit different. Greek exports during the 80s performed worse than they did during the 00s (until 2008 that is, before the Great Trade Collapse) under the "hard" Euro. And this goes some way to show how simplistic arguments that equate currency devaluations with exports' overperformance are.

source: AMECO, own calculations
source: AMECO, own calculations

To wrap this up, I think that all the arguments outlined above prove that Greece was not only an outlier as far as its performance after the sudden stop episode is concerned but also and more importantly, in its fundamentals. Greece's imbalances were significantly larger than those of the other three EMs examined in this post and these imbalances would also take significant more economic pain in order to be ironed out. So even if Greece had reverted back to the Drachma in 2010, the ensuing contraction would still be much larger than that observed in other sudden stop episodes.

Friday, 28 October 2016

Does helicopter money have to be paid back ?

The definition of helicopter money is a bit fuzzy. One can hear a ton of different propositions on what it will entail or how it will be carried out. Α point of the whole debate that I find hard to grasp is that some commentators state that helicopter money doesn't have to be paid back to the central bank.

In all past applications of helicopter money that I've come across (and I've looked at quite a lot of CBs' balance sheet these past few months) helicopter money were recorded in the asset side of the ledger as a General Government's liability towards the local CB. 

For example here's the 2015 balance sheet of Bank of Greece.

source: Bank of Greece

If helicopter money doesn't have to be paid back it means that the relevant CB's capital will take a hit.

In the past such General Government's liabilities were paid back. 

Here is the example of Bank of Greece.

source: Bank of Greece

What's more, as far as BoG is concerned, in 2001 General Government's liabilities to the CB accounted for almost 33% of its total assets. The term, fiscal dominance springs to mind...

source: Bank of Greece

In case of Banco de Espana, helicopter money was repaid as well. 

source: Banco de Espana

It states that explicitly in the balance sheet's footnotes anyway.

source: Banco de Espana

The same goes for Bank of Italy.

source: Banca d' Italia

Here the said General Government's liabilities were converted into bonds.

source: Banca d' Italia

 If helicopter money doesn't get repaid and the local CB takes a hit what will the impact on CBs' credibility be? Are we sure we want to go down that road? Because it is perfectly possible that while trying to solve one problem we might end up with a bigger one in our hands.

Wednesday, 19 October 2016

Helicopter money in Argentina

You can't tune in on twitter these past (not so) few months and not read at least something about helicopter money. It is proposed like something novel when in fact it is such a dated practice. It was practices like this that regulators wanted to curb and Central Banks' independence was introduced (it certainly was in Greece's case).

Thing is that people are reading about it and thinking that applying it indiscriminately is something akin to a silver bullet that carries no negative consequences whatsoever.

It is interesting to take a look at the case of a country that continues to apply it like there's no tomorrow, namely Argentina. In Argentina's case National Government's obligations to the local CB (Banco Central de la Republica Argentina) took the form of either the CB buying government securities or (especially during the last few year) the form of transitory overdrafts to the National Government. The last form is what is known as helicopter money. 

Here's is the breakdown. 

source: BCRA

Since, Argentina is an inflationary country in my humble opinion it is more interesting to expand the timeline of the chart above to include the 90s and see it expressed as a % of GDP.

source: BCRA, World Bank, own calculations

I think that now is the time to post the chart of the USD/ARS exchange rate for the same period.


As the chart makes plain to see, during the 90s (the years of the currency board) BCRA kept government financing in check and the currency board arrangement held. After the end-2001 default, government's monetary financing from the CB spiked until end-2004 but then decreased until the end of 2008 and the quasi-peg against the USD was maintained. After that though, monetary financing started to spike again and the USD/ARS exchange rate started to decreciate en cue.

Οne more point hammered home from the Argentine experience of monetary financing is that once it is initiated as a practice it is difficult to stop. It is stopped only after some (serious) damage is done, if ever. Today's fragile political landscape with populist pressure from all ends of the spectrum mounting, is certainly not one that lends credibility to any notions that helicopter money will, if initiated, be a one-off apparition.

To wrap this up, since 2009 the Peso has depreciated about 77% against the US Dollar. My point is that one has to differentiate. The effects of monetary financing of the government in emerging markets are totally different than those in developed economies with reserve currencies and cannot be proposed lightly. Central Bank independence after all was established for a reason. We don't have to rediscover that reason from scratch.

Tuesday, 11 October 2016

Is MoU-induced trade balance adjustment sustainable or not ?

Some of the issues that were supposed to be addressed by the MoUs in different EU/EZ countries were structural competitiveness issues. With most countries having graduated from their financing programs maybe it's time to judge whether this objective was fulfilled or not.

Hereby I will take a look at Latvia, Portugal and Cyprus that have all graduated from their respective programs. 

One of the features of all the aforementioned countries was that, during the previous decade, as their output gaps became increasingly positive, their trade balances became increasingly negative. Now, in all cases, output gaps have either started to become less negative (Portugal and Cyprus) or are in positive territory (Latvia).

Hence one way to judge whether structural competitiveness issues have been addressed is to see whether these positive developments regarding output gaps are being accompanied by trade balances moving in the opposite direction again or not. If the answer is no, maybe something akin to a paradigm change has taken place and a critical mass of firms has become more export-oriented.

In Latvia's case, the output gap is now positive and after a hiccup in the first year, the country's trade balance seems to be moving in the same direction (not positive that is, but narrowing further).

source: AMECO, own calculations

In Portugal's case, the output gap has started to narrow but the country's trade balance has not turned negative as a response to that. 

source: AMECO, own calculations

Finally, in Cyprus' case, the output gap has started to narrow as well but the trade balance seems to be moving in the opposite direction for the time being. Time will tell if this will prove to be a case alike to Latvia's first year of return to growth or not.

source: AMECO, own calculations

To wrap this up, as far as whether structural competitiveness issues are concerned, indications are positive for Latvia and Portugal but not so much for Cyprus.

Friday, 30 September 2016

Why Greek GDP might actually increase in Q3.

The Greek government has repeatedly stated its strong belief that Greece's GDP will rise in the 3rd quarter and the economy will turn the corner. And of course they are doing their best to help bring this about. 

No, I'm not talking about fudging official GDP figures but for a whole different thingy. We got a lot of articles this summer about how revenue authority's inspections in islands (infamous for tax evasion during summer months) did intensify and as a result VAT receipts spiked

This way, government officials try to kill two birds with one stone. VAT receipts rise and they stave off the need for the introduction of new measures in case deficit targets are missed. At the same time they "de-grey" a chunk of retail sales that was formerly part of the grey economy. The "de-greying" of a part of retail sales that would otherwise go unreported works towards increasing households' final consumption, hence towards increasing 3rd quarter GDP.

source: ELSTAT
Today, retail sales figures for July were reported and a 8,8% spike was recorded. This was the first month during 2016 that retail sales volume increased. The biggest part of this increase was due to the fact that this is compared to the very month that capital controls were introduced last year (and as a result firms were unable to restock properly, driving sales volume down by 7,1% YoY). Hence the base effect was one of the drivers. The other driver was increased revenue authority's inspections that helped the official retail sales figure climb. 

source: ELSTAT, own calculations
If this trend kept on for the remaining two months of Q3 (and according to news reports it did) then Q3 GDP could very well record a year-on-year increase. 

P.S. Someone could ask why am I attributing this spike to increased tax inspections and not to increased tourism related expenditures. That is simply because travel services exports decreased in July as they have for most months of 2016. 

source: Bank of Greece

Friday, 9 September 2016

A positive sign from Greece's housing market.

Today, after quite a long time, I took a peek at the rentals component of the Harmonised Index of Consumer Prices. And I was in for a surprise. The index has stopped falling, on a monthly basis, for the past 7 months.

source: Eurostat, own calculations

The question that instantly springs to mind is "are we closing in on the bottom here?". Well, it certainly seems like it, not only from a rentals perspective but also from an apartments' prices perspective.

Actually, the rentals' trajectory lately is quite similar to that of apartment prices. 

source: Eurostat
source: Bank of Greece
Let's see how the wave of housing auctions will affect the market and if it will kill these quasi-green shoots in their tracks. Let's at least hope that this time round the market will be allowed to follow its path without any political disruptions that could delay further the, so much needed and awaited, stabilisation (and hopefully recovery).