Rigour Montis Sweeping Italy?
-Edward Hugh (Don’t Shoot the Messenger)
This weekend I have been thinking about a lot of things, from the priveledged vantage point of Lucca, Italy, tucked away in the splendid olive-laden hills of Upper Tuscany.
The horrific slaughter in Houla is without doubt the main thing that has attracted my attention. Will this never end, or be put to an end?
But beyond that we have had the continuing “will she won’t she” speculation about a hypothetical Greek exit from the Euro, with journalists even tracking down a London printing firm who had supposedly been put on alert to let the presses role. Personally I think people are jumping the gun far too quickly here. It is pretty plain that the Greeks don’t want to leave, and forcing them out unwillingly would be a political disaster for all of Europe, while the disorderly default which would follow would surely send the next best thing to a tidal wave sweeping across the entire global financial system.
A fully compensated and negotiated amicable exit and devaluation which would enable the Greek economy to recover from the hole into which it has been pushed by a set of unachievable and unrealistic policies would be another matter, but that is unlikely to happen since countries like Portugal, Ireland, Italy and Spain might seek similar treatment. So we are left waiting to see who blinks first.
There has been a lot of talk about a Europe wide deposit insurance scheme in recent days, and Citi analysts even go so far as to include redenomination cover, which would be pretty fair on citizens who are at risk due to policy errors not of their own making, but which I think are pie in the sky in affordability terms. So one more time, if push comes to shove, banks are likely to get bailed out before the citizens who use them.
Here in Italy Beppe Grillio of the Five Star movement seems to be all the rage. His followers, the so-called “grillani” just made sweeping advances in the local elections, including most notably the town hall in Parma. The movement is extremely diverse, and in that sense is quite representative of the “indignados” type movements now to be found across Southern Europe. Tired of the old political elites they bring together those who want cleaner cities, small savers angry at the unfair treatment they feel they receive from the financial system on the right, and anti-welfare spending cuts protestors on the left. The job add for the new director general in Parma says they are looking for a person not tied to traditional parties with proven competence and no criminal record.
Herein, of course, lies the danger, since as is evident all of this has more than a hint of populism about it. Grillo himself is a comedian, and is often extremely funny, in fact the title for this piece is his. But beyond lies a kind of “cult of the personality”, since he refuses to give interviews, debate in public, etc, and simply sends his message out across his blog, in Facebook, or via Twitter. He is outspoken on the Euro (he wants out), and on the need to clean up Italian politics. Maybe some will think it is about time European politics was shaken up like this, but forgive me for wondering where it is all leading. As reform fatigue in Italy grows, just who will actually follow Monti in next year’s elections – assuming he can manage to hold the country and his coalition together that long? Are Europe’s leaders, by obsessively defending the Euro in its present form simply shattering the democratic foundations that gave birth to the common currency in the first place?
Low Safe Asset Yields Are Here to Stay
-Emre Deliveli (The Kapalı Çarşı: Emre Deliveli’s blog on the Turkish economy)
Last Wednesday’s German treasury auction, when the two-year bond carried a zero coupon for the first time, has got me thinking.
Click to enlarge
It is easy to argue that the ultra-low yields on safe assets are temporary. After all, U.S. and German bond rates have been on a downward trend for a long time, thanks to the low policy rates and the recent Eurozone worries. But then again, there are other factors at play as well. Regulatory changes are increasing the demand for safe assets, and supply has decreased thanks to the recent downgrades.
I am not talking about peanuts here: A recent report by investment bank Morgan Stanley and financial services com Oliver Wyman predicts that the shift of over-the-counter derivatives to central counterparties could alone generate demand for an additional $500-800 billion of safe assets. In its latest Global Financial Stability Report, the IMF notes that safe asset supply could decrease by $9 trillion by 2016, equal to about 16 percent of total projected sovereign debt.
Being a Turkish economist specializing on Turkey, I could not help but think the emerging market (EM) consequences of a world of low safe asset yields. When I elaborated on this topic in my latest Hürriyet Daily News column, I argued it would lead to a surge in capital flows to EMs once the global economy recovers, even if central banks start mopping off liquidity rapidly. But now I am not sure. For one thing, it depends on what the EM monetary policy reaction would be. I should give this some more thought and then do a follow-up post in a few days. In the meantime, I’d love to hear what you think. I want any and all ideas so I can pass them off as my own (0.08-0.11)…
Response by Avian Architects to Changing Opportunity Cost of Investment
-Ed Dolan (Ed Dolan’s Econ Blog)
During this long holiday weekend I thought I would take a vacation from economics, but alas, economics is everywhere. Sitting by our pond, watching the barn swallows going about their business (no holiday weekend for them), I was reminded of an interesting avian response to changing opportunity cost. When we first built our barn, some 12 years ago, the barn swallows moved in almost immediately. The nests that appeared on all the cross beams were of a very minimalist style, small cups built out of mud held together with horsehair. They seemed to work and the colony came back year after year, but there was a certain amount of infant mortality caused by fledglings that fell out of their nests before they could fly. Then, four years ago, we built a pond about 100 yards from the barn; previously there had been no natural water within a much farther distance. Immediately, the swallows changed to a much more elaborate, fully covered style of nest with a gourd-like neck and a narrow entrance. Much less risk of the little ones falling out, but much more material required to make them. It took me a while to figure out that the cause of the change was a sharp drop in the opportunity cost of mud! When you have to fly the mud in one gram at a time, cutting the distance from a quarter mile to 100 yards must make a big difference.