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).

Wednesday, 31 August 2016

Are Greek retail sales greying at an alarming rate ?

If one bothers to look closely at DG ECFIN's business surveys he/she might be able to make out an interesting divergence that's been building since the start of 2016. Namely, the divergence between ELSTAT's retail trade volume index and DG ECFIN's retail trade business activity development series.

source: ELSTAT, DG ECFIN, own calculations

The only explanation my linear thinking mind can come up with is that an increasing part of Greece's retail sales is going underground.

One fact though that is mightily puzzling (and not really consistent with the chart above) is that government receipts from value added taxes are doing rather well at the same time.

source: Hellenic Ministry of Finance

Now if you're wondering how is it possible for value added taxes receipts to do well when official retail sales are plummeting, I'm afraid I don't have any explanation ready to offer.

P.S. I wouldn't pay much attention to the parabolic rise of receipts in June (and to a lesser degree, May) since this is compared to June 2015, which was bang in the middle of the Greek government's debacle with our creditors and people were kind of reticent to pay their taxes at this particular moment.

Monday, 29 August 2016

Greek GDP - Q2 2016 update

Οfficial figures for Greece's Q2 2016 GDP were announced today. The Greek economy contracted by 0,95% compared to Q2 2015. Here's the official announcement

source: ELSTAT

The only GDP component that grew when compared with Q2 2015 was Gross Capital Formation.

source: ELSTAT

If we try to analyze GDP's components, the ones preventing a larger GDP decrease were Gross Capital Formation and Imports (which continued to slide).

source: ELSTAT, own calculations

One has to remark on the household final consumption's accelerating slide and on the continued slump in exports, a slump that started since the imposition of capital controls.

To wrap this up, Greek GDP continues its stay in no man's land with the tax-raising policy picked by the government not bearing much fruit and seemingly pushing an increasing part of the economy in the grey area.

Wednesday, 15 June 2016

Greek deflation: just due to import prices falling?

When one looks at Greece’s inflation dynamics, he/she is bound to draw the conclusion that the deflation spell that the country is experiencing is due to the 24% drop in final consumption expenditure. That’s textbook stuff right? Well, textbook stuff rarely apply to Greece’s monstrously distorted economy.

One look at import prices though may prompt people to think differently and start examining other eventualities.

source: ELSTAT
As you can see a couple of months before Greece’s consumer prices index entered deflation territory, import prices index had done so. Moreover, the renewed dive in CPI in late 2014 was again preceded by a dive in import prices.

Someone could think, “ok but we all know that prices display at least some degree of downward rigidity”. In Greece some means prices peaking about four years later than final consumption expenditure did. Final consumption peaked in 2008 while CPI peaked in 2012.

source: Eurostat, own calculations

In Ireland on the other hand, consumer prices peaked on the same year that final consumption did. They did of course start rising again before final consumption rebounded but most likely this was due to indirect taxes being hiked in 2011. 

source: Eurostat, own calculations

One further objection that could be raised is that the hiking of taxes (direct and indirect) that took (and still takes) place these past (not so) few years distorted inflation’s trajectory in Greece’s case as well. 

Luckily, Eurostat publishes a HICP time series under the assumption of constant tax rates. If one bothers to look at it she/he will find out that this indicator peaked in 2012 as well. The difference between the two is that under constant tax rates, consumer prices would have peaked 6-7 months earlier. 

The period until end-2012 bore the brunt of the decrease in final consumption. However, consumer prices not only didn't fall as a response to plummeting demand but continued to rise.

source: Eurostat, own calculations

To wrap this up, the evidence presented above show without any doubt that calling products and services markets in Greece simply distorted is a euphemism. It would not be excessive for one to claim that they barely function at all. If prices had fallen along with demand (at least up to a degree), consumers’ purchasing power would have been less hard hit and the depression would feel (a bit) less severe.