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Tuesday, 12 December 2017

On Sepp, Yanis, blackmail and interest rates

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Anthony Peters on corruption, manipulation and a fidgety Fed.

The world around us has rarely been more exciting and the outcomes have seldom been less predictable. But that is as much as I will say with respect to the arrest of a number of FIFA officials in Zurich.

There have, for many years, been more than mere suspicions of deep-seated corruption in world football but if it walks like a duck and quacks like a duck, it most probably is a duck. If Sepp Blatter ran the business and knew of corruption, he should resign, and if he ran the business and was oblivious to corruption, he should resign even quicker, which brings me more or less seamlessly back to Greece.

I don’t quite know how Yanis Varoufakis sleeps at night. He took office in the Tsipras administration in the firm belief that the rest of the Eurozone would pay whatever it takes in order to keep Greece afloat and the vision of an inalienable and perpetual single currency block alive. I agreed with him. What neither I nor his negotiating partners had expected was the blithe arrogance of that assumption which has over time begun to manifest itself as flagrant blackmail.

Greece is looking down the barrel of a gun as it needs to find €310 million to pay to the IMF on June 5 with a further €348 million due to the IMF on June 12, €581 million on June 16 and €348 million on June 19. On June 30, the four month extension of the bailout package expires and Athens has yet to present anything approaching a credible programme for fiscal reforms.

I could go on but the big hurdle, should it survive that long without defaulting, comes on July 20 when it faces a redemption of €3.5bn of government bonds plus a mere snip of €130 million of interest on the redemption as well as interest payments on a number of other outstanding bond issues. That is, of course, not until after July 13 when it should have already paid out €465 million to the IMF. Yes, how does Yanis Varoufakis sleep at night?

More to the point, how does the President of the European Commission and Muppet-in-Chief, Jean-Claude Juncker, sleep with his own words of April 20 ringing in his head: “We are prepared for all kinds of events, but I am excluding at 100% this Grexit, or Greek exit. There will be no default.” I’m glad he knows what we don’t and, as far as I can tell, the distressed debtors in Athens don’t know either.

There is a saying that socialism works until one runs out of other people’s money. This has not infrequently been applied to the proposed policies of Syriza. Fiscal conservatives have, however, long had the same sentiment with respect to Brussels and Mr Juncker’s unshakable reassurances would appear to confirm that view, especially if you are Estonian, Slovenian or even Finnish and are wondering why your hard earned taxes are being shovelled with gay abandon into a black hole “down there”.

That said, at a time of stress with Russia, the strategic position of Greece as the last man in the NATO line ought not be underestimated and America’s interest in the region can most probably only be put down to geopolitics. I (just) remember the 1960s when the old Athens airport belonged half to the US Air Force and when “Yankees” more or less funded the country. The Papandreou clan put an end to that although I can’t imagine any of them being on the breadline as a result.

Tsipras and Varoufakis might have overestimated the strength of their respective hands. One way or the other, after years of inflating and deflating expectations, the credibility of the eurozone has suffered significant damage. If Greece exits, all the promises will have been broken. If it stays in, all and sundry will be aware that the compromises reached will have been achieved at such a high cost as to leave open the question as to how hollow the edifice might have been at the outset and as to what credibility the single currency project will be left with.

At this juncture, the desire to create an image including both FIFA and competitive can kicking is nearly but not quite irresistible.

Closer

Meanwhile, the heat in the US is rising after some pretty solid releases yesterday, not least of all on the housing front. Jon Hilsenrath of the Wall Street Journal put the cat amongst the pigeons when he reminded that the Fed’s dual remit is based on inflation and employment and that growth has nothing to do with it. Thus, with inflation creeping up towards 2% and employment growing steadily, the Fed might be closer to tightening than the market is discounting.

Received wisdom is that the market is mostly ahead of the Fed and that the Fed has a track record of being overly optimistic when it comes to the strength of the economy. On the other hand, the FOMC last raised rates on June 29, 2006 so probably around half of the traders on the desk have never seen a rate hike.

The Street is still vaguely pricing the beginning of the tightening cycle at the end of this year or even at the beginning of next year but I am beginning to wonder whether Hilsenrath might not be right and that the Fed might do the central bank of equivalent of the journalists’ “Publish and be damned….”

There is probably no elegant way of starting the process of normalising rates so maybe the best might be just to get it over with. Whatever the conversation is, it won’t be reflected in the minutes but I’d love to be a fly on the wall when Madame Yellen meets with her peers.

She has, incidentally, let it be known that she will not attend the Jackson Hole off-site this year. Now I wonder who will. I loved the image of our esteemed central bankers in shorts and hiking boots while whistling a happy tune. Shame.

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