Wednesday, 18 July 2018

On Greece, Yellen and the Great Wall

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Anthony Peters sets up the weekend with some thoughts about Grexit and central bank moves.

It’s been a pretty topsy-turvy week again framed by the two big “Will they? Won’t they?” questions, those of course concerning Greece and the Fed.

There is a third one in the background but one which hasn’t made front page news, namely the one whether the PBOC will or won’t cut the minimum reserve requirement again this week-end or when and by how much.

I suppose that might be more of a “When will they? How much will they?”, but the central bank clearly remains keen to both stimulate the slowing economy and bring down the cost of borrowing for the panting local authorities at the same time.

The “G” word

I know it’s getting boring but here comes Greece. We “teenage scribblers”, as we were once referred to by the then British Chancellor of the Exchequer, Nigel Lawson, now all seem to be quite proud if we can get through a day without using the “G” word but the clock is ticking and it looks progressively as though there really is only a binary outcome.

The drama (for the uninitiated, Drama is in fact an ancient town in North-Eastern Greece) continues to play but yesterday EU President, Donald Tusk, threw all diplomatic niceties out of the window by instructing Prime Minister Tsipras in no uncertain terms, pardon the use of City parlance, to either piss or to get off the pot.

This followed the IMF’s negotiating team walking out of talks citing “major differences in most key areas”. Technically, it’s not game over, for the EU could, theoretically at least, stand in and provide Greece with the €9 billion which the IMF has held back.

The IMF spokesman went on: “there has been no progress in narrowing these differences recently, and thus we are well away from an agreement”. This shouldn’t really come as hugely surprising news to the keen observer of the situation but it is the first time that we have seen the creditors really bang the table. The cry was a very clear “Shape up or ship out”, with a sub-text that shipping out is now an option which the lenders are no longer afraid of.

Tusk put it quite clearly during a press breifing when he said “There is no more time for gambling….The day is coming, I am afraid, that someone says the game is over.”

I’m beginning to suspect that a Grexit might easily have risk markets rally rather than retreat simply on the relief that clarity has returned to markets and, let’s not forget, Greece is a tiny economy and its inclusion or exclusion from the wider world will ultimately be neither here nor there with its GDP of less than half of that of Bavaria.

The Great Wall

If we were to lose Greece and were it to disappear from the headlines, what would be the next big thing to focus on? Simon Ballard of Bloomberg News put it quite succinctly when he remarked that “We’ve hidden reality behind a wall of low interest rates”. How big this wall is and what is behind it might not become clear until the Fed makes its move. A large part of this week’s up and down has been driven by the debate as to whether September is now the front runner for that initial shift towards a normalisation of interest rates in the US and subsequently across the globe or whether the IMF’s plea to hold back until next year will take root in the minds of the FOMC members individually and then in the Committee as a whole.

I can’t think of the FOMC, as a collective, ever having voted against the opinion of the Chair even if there is occasional dissent. Janet Yellen has remained coy – I still believe that her decision to skip Jackson Hole is aimed at avoiding too much questioning in public so shortly before the September 17th FOMC meeting – and she is faced with doing what she’s paid to do which is to set and implement monetary policy appropriate to the US economy or, alternatively, to play God to the rest of the world.

She is reputedly an instinctive dove. She can, however, not risk being held up by her detractors in Congress as being the Fed Chair who chose not to act first and foremost in the interest of the American economy in order to assuage foreign competitors. In other words, my guess is that the more vocal the IMF and the World Bank become, the more likely they are to push Yellen into backing the September move. And, as noted, whatever the Chair wants, the Chair gets.

Back in Beijing

Back in China, there is unanimity with respect to an impending easing of credit conditions but there is disagreement as to when. This week-end could be a good time for the PBOC to push through its third easing of the year.

I was charmed to see a Moody’s report which notes progress on reform and rebalancing within the economic edifice but which cites the tail risks from a correction in property or stock markets and from rapid and ill-prepared capital account liberalization. That looks like a pretty thick and rather long tail to me.

Overall, the global economic picture isn’t bad but there are eddies in the stream. Should they coincide and should we end up with the perfect storm, there could be a disaster.

If they don’t coincide, however, we might be able to rumble on for a number of years without Armageddon. One thing at a time; Greece first.


Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. The Grass Court season has begun; Henley is nearly upon us; the Aussies are coming to play for the Ashes; in September we have the rugby World Cup… and I’m supposed to worry about Greece and the FOMC. Ged’ oud’a town!

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