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.