It appears that the Greeks have been given a deal by the EU, where Germany have agreed to a package rumoured to be up to €25bn of support if the IMF comes in on the deal. Now it appears to the Raven from looking at the IMF website and doing his maths that the IMF will be able to lend €10bn at a blended rate of 2.7% (below where Germany could borrow). One would imagine that the Germans would be canny enough to argue that they (and France) should lend the remaining capital at a higher rate, say 4%? which would give Greece an average cost on €25bn of 3.48%.
The Raven thinks this is a ridiculous plan, which only serves to increase moral hazard and does nothing to either clear up the problem or to really stop the risk of contagion.
First lets but €25bn in context, thats pretty much the debt that Greece needs to roll over in the coming two months, and is ~8% of the total government debt.
Secondly it doesn't solve what really is becoming a solvency issue. Greece has moaned very loudly that is having to pay 6%, one has to wonder really whether they are good for the money they've borrowed already if they can't deal with a 6% interest rate. Its entirely irrelevant what what interest rate other EU governments have to pay on theirs.
The Economist had some numbers this morning that highlighted that the percent of GDP that would be taken up with interest payments will grow from 5% to 8.4% from 2009 tp 2014. They also highlight that government debt will be ~ 350bn which as a % of today's GDP is 147%. As a long term investor the Raven really doesn't think that the Greeks will ever be able to pay that back or grow their economy quickly enough to shrink that number relatively.
http://www.economist.com/business-finance/displaystory.cfm?story_id=15772801&source=hptextfeature
The structure of this "support" from the EU appears to be that they will step in when Greece can't borrow from the market. Surely Sarkozy can see that this encourages speculation? The real question is if this package is big enough and scary enough to make the market feel that Greek paper is safe and that you'll be bailed out if you buy it, in which case Sarko won't be firing his bazooka just yet.
Personally the Raven thinks this announcement will cause a small rally in Greek paper, but the market will come back and push the hand of the EU, either on Greece or another one of the UPIIGS.
Friday, 26 March 2010
Thursday, 18 March 2010
the FSA "business plan"
Hector Sants has come up with a new business plan for the FSA;
http://www.fsa.gov.uk/pages/Library/Communication/PR/2010/048.shtml
Basically Sants seems to believe that by adding 460 new "high quality staff" to the FSA and increasing their budget overall by 9.9% that they'll magically be able to spot asset bubbles. One would imagine that the "high quality staff" that they intend to hire will be among those made redundant in the credit crunch.
The FSA has only recently found the ability to find and bring mildly punitive action to 3 cases of insider trading. Odd that its been said that approximately 1 in 5 m&a deals are thought to have been traded on before being publicly announced. 3 cases in 9 years, good job guys?
Does £455mm represent good value annually? especially as that money is going to come from consumers of financial services, ultimately the UK public. The UK treasury estimates that the governments assistance in the financial crisis cost ~£10bn, given this crisis was about 1 in 20yrs event then actually the cost of having the FSA is going to be equal to the cost of the crisis, except the Raven would imagine that the chance of the FSA stopping a crisis accurately without predicting 5 out of the last 1 recessions before hand to be rather low.
The Raven thinks that Buffet's maxim that the firm should be simple enough for an idiot to run because one day an idiot will run it should be applicable to a regulator, because clearly and idiot does run it already. Rules should be simple and easy to enforce and should aim to do less harm than good.
http://www.fsa.gov.uk/pages/Library/Communication/PR/2010/048.shtml
Basically Sants seems to believe that by adding 460 new "high quality staff" to the FSA and increasing their budget overall by 9.9% that they'll magically be able to spot asset bubbles. One would imagine that the "high quality staff" that they intend to hire will be among those made redundant in the credit crunch.
The FSA has only recently found the ability to find and bring mildly punitive action to 3 cases of insider trading. Odd that its been said that approximately 1 in 5 m&a deals are thought to have been traded on before being publicly announced. 3 cases in 9 years, good job guys?
Does £455mm represent good value annually? especially as that money is going to come from consumers of financial services, ultimately the UK public. The UK treasury estimates that the governments assistance in the financial crisis cost ~£10bn, given this crisis was about 1 in 20yrs event then actually the cost of having the FSA is going to be equal to the cost of the crisis, except the Raven would imagine that the chance of the FSA stopping a crisis accurately without predicting 5 out of the last 1 recessions before hand to be rather low.
The Raven thinks that Buffet's maxim that the firm should be simple enough for an idiot to run because one day an idiot will run it should be applicable to a regulator, because clearly and idiot does run it already. Rules should be simple and easy to enforce and should aim to do less harm than good.
Monday, 15 March 2010
UK Household balance sheets and inflation
The Raven chose his lunch break yesterday as an opportunity for mastication of the proverbial cud. He chose to reread the weekend's Economist in a state more awake and alert than he had been on Saturday morning, sans coffee. The Economics Focus section had a couple of comments which he disagrees with, but had blithely slipped under his radar;
"Spending in rich countris, such as America and Britain, will flounder as long as householdslook to pay down debts they aquired to buy expensive homes. A burst of inflation would speed up this process by eroding the real value of mortgages".
Well this may well be true in the US, but the Raven takes issue with applying the same logic in the UK. In the US its pretty normal to take out a fixed rate mortgage, whereas in the UK its a small percentage of people that fix and when they do its usually for 2yrs or less. Therefore this glib statement that inflation and the associated higher interest rates would be beneficial to UK household balance sheets is not only wrong, but dangerously lazy in its thinking.
Lets look at the effect on the 'average' or more precisely median household in the UK of inflation of the 1970s style.
HBOS survey "average houseprice" of £160k.
median household income of £30k.
current floating mortgage rate of 5% for a first time buyer with LTV of 90%.
so mortgage payments of £8k a year, approx 26% of gross income. lets say inflation is 10% for one year, and lets say our first time homeowners are especially skilled at wage negociations, they manage a 5% real wage increase so that their household income is £34.5k (+15% gross). But lets also be kill joys and say that perhaps the BoE acts and raises interest rates to 8% (only!), so mortgage rates go to 12%, which would then make the mortgage payments £19k, 55% of gross wages. You don't have to be a genius to see that consumer spending would get shafted and house prices would be smashed by a wave of foreclosures and reposessions. In fact at that point one would imagine that house prices would face a really serious fall, and a proper buyers strike, and unfortunately that would be the same time that a lot of home owners would be locking in their exposure to houseprices, because after they've been forced to sell if prices rise they're not going to be participating.
Its not like the Raven has been dramatic with his assumptions there, what happens if the worker only got inline with inflation wage rises? and if the BoE had to raise rates the same amount? then we're talking £33k, and mortgage payments of £23.5k, so approx 71% of gross income. Now that is negative convexity and something that could destroy households in the UK.
Yet its something that has happened in living memory and very very few households would be prepared for. So perhaps readers can see why the Raven thinks that the commentary from the economist this weekend is a liiiiiiitle dangerous.
"Spending in rich countris, such as America and Britain, will flounder as long as householdslook to pay down debts they aquired to buy expensive homes. A burst of inflation would speed up this process by eroding the real value of mortgages".
Well this may well be true in the US, but the Raven takes issue with applying the same logic in the UK. In the US its pretty normal to take out a fixed rate mortgage, whereas in the UK its a small percentage of people that fix and when they do its usually for 2yrs or less. Therefore this glib statement that inflation and the associated higher interest rates would be beneficial to UK household balance sheets is not only wrong, but dangerously lazy in its thinking.
Lets look at the effect on the 'average' or more precisely median household in the UK of inflation of the 1970s style.
HBOS survey "average houseprice" of £160k.
median household income of £30k.
current floating mortgage rate of 5% for a first time buyer with LTV of 90%.
so mortgage payments of £8k a year, approx 26% of gross income. lets say inflation is 10% for one year, and lets say our first time homeowners are especially skilled at wage negociations, they manage a 5% real wage increase so that their household income is £34.5k (+15% gross). But lets also be kill joys and say that perhaps the BoE acts and raises interest rates to 8% (only!), so mortgage rates go to 12%, which would then make the mortgage payments £19k, 55% of gross wages. You don't have to be a genius to see that consumer spending would get shafted and house prices would be smashed by a wave of foreclosures and reposessions. In fact at that point one would imagine that house prices would face a really serious fall, and a proper buyers strike, and unfortunately that would be the same time that a lot of home owners would be locking in their exposure to houseprices, because after they've been forced to sell if prices rise they're not going to be participating.
Its not like the Raven has been dramatic with his assumptions there, what happens if the worker only got inline with inflation wage rises? and if the BoE had to raise rates the same amount? then we're talking £33k, and mortgage payments of £23.5k, so approx 71% of gross income. Now that is negative convexity and something that could destroy households in the UK.
Yet its something that has happened in living memory and very very few households would be prepared for. So perhaps readers can see why the Raven thinks that the commentary from the economist this weekend is a liiiiiiitle dangerous.
at 17% inflation it doesn't matter what a household in the UK does, they are broke. Yet most households would take that risk, and for what gain a 1% or 2% difference in their mortgage payments? speculation indeed...
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