Please, God, Make it Stop!

If I am sick to death of the Greek talks, how are Greek politicians feeling? Their latest agreement was met with cold demands from European leaders that more be done. The EU is the harsh teacher that is never satisfied; to use the obvious analogy of Kill Bill Volume 2, it is playing Pai Mei ( to Greece’s Beatrice. It had better be careful that Greece does not turn out to be Elle Driver, who rebels against Pai Mei’s harsh tuition and kills him by poisoning his fish heads. The Greeks cannot win a straight fight with the EU for cash — after all, it is the Germans’ cash — but they can poison its fish heads by defaulting on their debt and causing chaos.

You are not making a serious prediction unless you have a model. I have criticised a lot of political predictions that I have read during the euro crisis because they either do not appear to flow from a consistent model, or because the model is obviously wrong (e.g. a model where politicians always act in line with their public statements). I use a model wherein a politician acts in his own interest within the constraints of his belief system. Since the consequences of a default are unpredictable but could be very negative, and the consequences of the removal of EU funding for the Greek government are predictable and definitely negative (an immediate disappearance of the government deficit, causing large and sudden damage to the economy and further knock-on effects like a credit crunch), it is not in the interests of any Greek politician to allow either of those things to happen. Greek politicians likely believe this, so the model continues to predict that an agreement will be reached.

However, the model is not foolproof. It is not in Elle Driver’s interest to kill Pai Mei — indeed, she is eventually beaten in combat by Beatrice, who completed Pai Mei’s training — but she does it anyway, because she is angry. The EU is presently running the risk of a similar response from Greece.

Incidentally, finance minister Venizelos has told the Greek parliament (which he needs to pass the latest austerity agreement on Sunday) that the alternative to a bailout is euro exit. I still do not see why this should be so — though I see why he would say it. Several American states have defaulted within a currency union and not left as a consequence (although dollars issued by different states have traded at a premium or discount to those of other states, something that is possible for Eurozone bank notes but not for the far more important electronic money; the modern manifestation of the same phenomenon would be people preferring the liabilities of non-Greek banks, something that is already happening). Venizelos is playing a dangerous game, however. If depositors take his words at face value and no bailout is agreed, the deposit flight from Greek banks could become severe. The only sensible way to get out of the euro would be to impose capital controls before you announce your departure — the likely fall in your currency would probably bankrupt your banks anyway, but not by quite as much as if they suffered massive deposit outflows.

Robo-Signing Agreement

Some banks and lots of states have reached a settlement over the robo-signing scandal. Banks are to set aside $25bn, of which $17bn will be for various measures to help distressed homeowners including principal reduction, and the rest will be paid in compensation. The FT notes that the banks concerned are responsible for servicing half of the nation’s mortgages, but actually own only 8%, which will mean that the effect of the agreement is limited. The agreement is expected to help a million homeowners, which even assuming principal reduction for every one translates into $17,000 each, which is not a lot. On the other hand, Calculated Risk ( thinks that the measures will at least reduce the number of seriously distressed households (3.86m 90+ days delinquent or in foreclosure), which would be of some help, though not a game-changer for the housing market. With regard to the effect on the housing market, this agreement could break the foreclosure dam and therefore reduce existing home prices and, as a consequence, new home sales. That will keep residential investment from growing strongly, although the pick-up in multi-family construction is likely to keep growth positive.

CR also looks ahead to the HARP programme, which will begin in March and will allow borrowers in negative equity who are current on their payments and who have GSE loans to refinance. That should be a great help, and CR expects the number of borrowers with negative equity to decline “fairly quickly” in the coming years.


  • China trade surplus increased to a high level, b.e., Jan. Imports fell 15.3% YOY, while exports fell 0.5% YOY. Adjusted for the timing of the recent holiday, however, imports rose 1.5% YOY, compared to 86% in January 2010 and 51% in January 2009. It seems reasonable to think that Chinese growth is slowing. However, it is also noteworthy that Chinese crude oil imports rose to a record last month in volume terms — growth may be slowing, but Chinese commodity demand remains robust.
  • China new loans rose, d.e., to a relatively high level, Jan. Monetary loosening may well be real.
  • French IP -1.4% d.e. Dec. Coherent with the disappointing German figure.
  • UK PPI input 0.5% MOM b.e.

Today and the Weekend

  • Trade balance
  • Prelim. Michigan sentiment
  • Federal budget balance
  • Japan prelim GDP