by Calculated Risk on 9/18/2011 08:57:00 PM

From the WSJ: Greece Seeks Further Cuts

Greece's government held an emergency cabinet meeting Sunday to plan new measures to bring its unruly budget deficit into line, after heated warnings from the other euro-zone nations over the weekend that its efforts were insufficient and might threaten the delivery of future aid.

During a late-evening break in the meeting, Finance Minister Evangelos Venizelos pledged that Greece would adopt a raft of new budget-cutting measures endorsed by the "troika" ... Greece agreed in March this year to lay off 80,000 public-sector workers by 2015. But the government has also hired around 25,000 new workers in the past two years to fill shortages in select areas of the public sector.

Now, with Greece unlikely to meet its deficit targets this year, the troika has upped the target for public-sector layoffs to 100,000 ...

The population of Greece is around 11.3 million, so this is similar to about 3 million layoffs in the U.S.

From the NY Times: Greece Nears a Tipping Point in Its Debt Crisis

The Greeks face an October deadline to qualify for 8 billion euros, or $11 billion, in aid, without which Greece will certainly default on its growing debt.

The payment is just one installment in a larger package of 110 billion euros in aid agreed to by euro zone members in spring 2010; a second bailout fund, for 109 billion euros, was agreed to in July, though that has yet to be ratified.

To reach the financial targets, Greek leaders discussed a range of draconian layoffs and pay reductions ... While these measures have long been planned, but never carried out, to the frustration of foreign lenders, the discussion of these cuts represented a marked change in approach for the Greek government, with the emphasis on reductions over revenue increases.

The Greek 2 year yield declined to 55%. The Greek 1 year yield is at 110%. Both significantly off the highs.

Yesterday:
• Summary for Week ending September 16th
• Schedule for Week of Sept 18th
• Links for Sovereign Debt Series

by Calculated Risk on 9/18/2011 03:05:00 PM

There will be a two day meeting of the FOMC on Tuesday and Wednesday. This meeting was originally scheduled for one day, but was expanded to two days to allow for a "fuller discussion"¹ of "the relative merits and costs" of the "range of tools that could be used to provide additional monetary stimulus".
¹Words in quotes are from Fed Chairman's Jackson Hole speech on August 26th.

The FOMC statement will be released around 2:15 PM ET on Wednesday.

In July, during his Congressional testimony, Fed Chairman Ben Bernanke reiterated that another round of monetary accommodation (aka QE3) would depend on both a further deteriorating in the economic outlook and the renewed threat of deflation. Bernanke said: "[T]he possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support."

The recent inflation reports indicated an uptick in the core measures of inflation at just above the Fed's target. That would seem to argue against QE3. However Chicago Fed President Charles Evans recently argued that the Fed should remember the dual mandate and take more action:

[W]hen unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.

Clearly the economy is weaker than the Fed had expected, but I suspect there will be quite an argument about inflation.

QE3 is unlikely at the September meeting, but not impossible - however most observers think the FOMC will announce a program to change the composition of their balance sheet (extend maturities). It is also possible that the FOMC will announce a reduction in the interest rate paid on excess reserves (currently 0.25%).

Also the FOMC statement might change. It is possible that the outlook on the unemployment rate might be downgraded. From the August statement:

"The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate."

Many forecasters think the unemployment rate will start to increase again - or at least not "decline gradually". As an example, Goldman Sachs is forecasting the unemployment rate to rise to 9.3% in Q4, and to hold flat at 9.4% in 2012.

Of course the key sentence "economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013" will remain.

Yesterday:
• Summary for Week ending September 16th
• Schedule for Week of Sept 18th
• Links for Sovereign Debt Series

by Calculated Risk on 9/18/2011 09:19:00 AM

From Scott Reckard at the LA Times: Bank deposits soar despite rock-bottom interest rates

Americans are pumping money into bank accounts at a blistering pace this year, sending deposits to record levels near $10 trillion ...

In the last three months, accounts at U.S. commercial banks have increased $429 billion, or 10%, almost double the increase for all of last year.
...
The large amount of cash only adds to expenses such as paying for deposit insurance premiums. ... [banks] have slashed interest payments to discourage customers. Wells Fargo & Co. ... halved its payments on one-year certificates of deposits to 0.1%; Citigroup ... dropped its payment to a paltry 0.3%.
...
[Some banks are] stashing it in a safe but unrewarding place: Federal Reserve banks, which are paying them an interest rate of just 0.25% to tend the funds. Such deposits rose to more than $1.6 trillion at the end of August from about $1 trillion a year earlier, according to the Fed.

And the Fed might lower the interest rate paid on excess reserves this week.

Yesterday:
• Summary for Week ending September 16th
• Schedule for Week of Sept 18th

by Calculated Risk on 9/17/2011 10:35:00 PM

CR Note: This series is from "Some investor guy". He wrote these posts just over a year ago. The series starts with some basics, and concludes in Part 5 with some speculation. The data is a year old - as an example the probability of default for Greece is now close to 100%! (as opposed to over 50% last year).

• Part 1: How Large is the Outstanding Value of Sovereign Bonds?

• Part 2. How Often Have Sovereign Countries Defaulted in the Past?

• Part 2B: More on Historic Sovereign Default Research

• Part 3. What are the Market Estimates of the Probabilities of Default?

• Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

• Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

• Part 5B. Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange

• Part 5C. Some Policy Options, Good and Bad

• Part 5D. European Banks, What if Things Go Really Badly?

Earlier:
• Summary for Week ending September 16th
• Schedule for Week of Sept 18th

by Calculated Risk on 9/17/2011 06:55:00 PM

Nothing was resolved. It sounds like there will be another round of stress tests including exposure to sovereign debt. About time!

• From the WSJ: EU Ends Talks With Little Progress in Overcoming Divisions

At the end of two days of informal talks here, the finance ministers made little progress in overcoming divisions ... they continued to spar over a range of issues, including whether to impose a financial transactions tax, boost the euro zone's rescue fund and how to address Finland's demands for collateral in return for its contribution to Greece's bailout.
...
Michel Barnier, the EU's commissioner for financial regulation, said that while the 2011 tests were an improvement over last year's, "we must also acknowledge that the tests did not restore the credibility in banks strength in the way we would have hoped."

The tests should be strengthened, he said. "In particular, I think we need to reconsider how we treat sovereign exposure and liquidity, and further improve coordination between supervisors," Mr. Barnier said.

• From Bloomberg: Greece’s Premier Cancels U.S. Trip Before ‘Critical’ Week (ht jb)

Greek Prime Minister George Papandreou canceled a U.S. visit that was to begin tomorrow, saying he needed to remain in the country for a “critical” seven days in its effort to avert a bond default.

“The coming week is particularly critical for the implementation of the July 21 decisions in the euro area and the initiatives which the country must undertake,” said a statement e-mailed today from Papandreou’s office in Athens.
...
EU and International Monetary Fund inspectors will hold a conference call with Finance Minister Evangelos Venizelos to resume and accelerate their review on Sept. 19

• From the Irish Times: €10bn interest-rate cuts on State bailout signed off

EU FINANCE ministers have signed off on a package of interest rate cuts on Ireland’s bailout which will benefit the State by up to € 10 billion during the course of the rescue.

Earlier:
• Summary for Week ending September 16th
• Schedule for Week of Sept 18th