The Convergence and Subsequent Divergence of Long-Term Government Bond Yields in the Eurozone

April 15th, 2015

Eurozone Bond Yield Convergence 1990-1999Greek ConvergenceDivergence of Eurozone BondsGreek Divergence

Greece Fact Sheet

April 14th, 2015

Top 5 Exports: Refined Petroleum (35%), Packaged Medicaments (3.1%), Aluminum Plating(1.9%),Non-Fillet Fresh Fish (1.7%), and Raw Cotton (1.7%)

Total Exported: $33.8 Billion

Total Imported: $60.5 Billion


Greek Current Account % of GDP data can be found at and modifying the search to look at more years. The data goes back to 1995.

Greek Government Budget: Where does the money go?

April 6th, 2015

The following link shows a visual breakdown of Greece’s government budget allocation in 2011.

  • Interest Payments on already issued debts: 19.8%
  • Social Security Pensions: 26.1%
  • Health and Welfare: 9.8%
  • Education: 8.3%
  • Local Administration: 7.2%
  • Development Financing: 6.9%
  • Defense: 5.5%
  • Infrastructures and Transportation: 3.9%
  • Foreign Relations: 2.5%
  • Public Safety and Security: 1.9%
  • Agricultural Development: 1.9%
  • Civil Rights, Immigration Policy: 1.5%
  • Culture, Religious Affairs, Athletics: 1.1%
  • Justice: 0.9%
  • Environment and Urban Development: 0.7%

Background to Argentine Default

March 26th, 2015

Background to Argentine Crisis(Joint Economic Committee, United States Congress)

  • Turbulent History
    • Chronic economic, monetary, and political problems
    • Until late 1800’s, provinces and national government financed deficits by printing money
      • Inflation and little growth
    • Rapid Economic growth (late 1800’s, early 1900’s)
      • Due to rising exports of beef and wheat to Europe
        • Possible because of new technologies
      • In 1930, important trade partners discriminated against Argentine exports
        • Argentina switched to “import substitution”
          • Closes, self-sufficient economy with high tariffs and government direction
          • Low growth and frequent inflation
        • Inflation typically in triple digits from 1975 onward
      • Economic Reforms in the 1990’s
        • Carlos Manem became president in 1989
          • Adopted free market approach
          • Centerpiece was Convertibility Law
            • Established pegged exchange rate with the US Dollar
              • Backed money issues by Central Bank with dollars
            • Peso replaced the Austral in 1992 as official currency
              • Caused a large drop in inflation
            • Quick Reforms
              • Real GDP grew by less than 10% per year in 1991 and 1992
                • 60% in 1993 and 1994
              • Inflexible labor laws and high taxes made creation of new jobs difficult
                • High unemployment
              • Entered recession in 1998, full blown depression by 2001
                • Some causes:
                  • External Forces provoked a recession
                    • Currency crises in East Asia and Russia
                      • Caused investors to be wary of investing in developing countries
                    • Brazil had a currency crisis (major trading partner)
                      • Argentine-Brazil trade decreased
                    • Tax increases in 2000 killed growth
                    • Poor monetary policy

NY Times- 2011

  • Argentina defaulted in $100 billion in mostly foreign debt
  • As of 2011, still couldn’t enter global credit market
    • No longer seen as serious country
  • Argentina is/was a large supporter of agricultural products
    • Generally runs a foreign trade surplus
    • Bulk of Greek economy is based around services, mostly tourism
      • Generally runs a trade deficit
    • Argentina’s debt when it defaulted was 54% of GDP
      • At the time of this article, Greece’s debt was 150% of GDP
    • In 2003, Argentina’s president pursued an economic strategy
      • Weak currency
        • Fosters exports, discourages imports
        • Maintains fiscal and trade surplus
      • Rising global prices for agriculture helped this strategy work
    • Argentina waited until 2005 to conduct first 2 debt restructurings
      • Already in recovery
      • Nongovernment foreign investors (biggest were pension funds) took haircuts, costing them 2/3rd’s of investment
      • International Monetary Fund was paid back in full in 2006
        • Official creditors not likely to take haircuts
      • Even when eventually reentering the global credit market, there will be huge interest rates for Argentina

Stratfor – 2/11/15

  • Like Greece, Argentina couldn’t apply monetary policy
    • Pegged to the dollar to prevent hyperinflation
    • Only option was fiscal policy
  • Between 2003 and 2007, Argentine economy grew by an average of 8%
    • Unemployment went from 20 to 8%
  • Argentina converted dollars that were in accounts into pesos using an official conversion rate
    • Only affected wealthy Argentines
    • Argentina never abandoned their national currency
    • Most unaffected
      • Euro to Drachma would be problematic
    • Argentina benefited from international commodity boom
    • Venezuela bought around $5.6 billion in Argentine debt
      • Not a given Russia would buy Greek debt
    • Argentina was self-sufficient in energy during the 2000’s
      • Return to Drachma for Greeks would make energy imports much more expensive
        • Makes Russia even more important for Greece
      • Argentina imposed protectionism
        • Greece cannot do this, would violate the founding principle of the EU
          • Would likely be expelled
        • Greece has much less room for action than Argentina

Bloomberg- 2/15/2012

  • In 2005, Argentina’s president offered to swap defaulted bonds for ones worth 70% less
    • ¾ accepted the deal
      • Others took the issue to court
    • After defaulting, Argentina abandoned one-one peg and let the currency float

Greece leaving scenarios

March 26th, 2015

Two Scenarios of Greece leaving the Eurozone

  1. Domino Effect
  • Nervous depositors in other struggling eurozone countries, such as Spain or Italy, may also move their money to the safety of a German bank account, sparking a banking crisis in southern Europe.
  • If Greece exits the Eurozone, investors will begin to view the weaker European economies- Cyprus, Ireland, Portugal, Spain, and possibly Italy as risks.
  • The European Union accounts for about one-fifth of global trade. As the fallout from the crisis spreads from Greece to the EU, onlookers fear that it won’t stop there.
  • “The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.”-Varoufakis the Finance minister of Greece
  • “For the Eurozone, the biggest risk from Grexit is that membership appears optional. Despite all laws and institutions designed for permanence, any member – even Germany – could be viewed as having one eye on their own exit should some economic disjuncture become unbearable. Moreover, domestic euroskeptic parties would surely try to capitalize on the momentum provided by Grexit. The Eurozone would face a true risk of break up.”
    • Fear of Eurozone breakup could be used as a political incentive to motivate deeper fiscal integration


  • Under European law as it stands, abandoning the euro probably also means leaving the European Union. A lawyer at the European Central Bank wrote in 2009 that “withdrawal from EMU without a parallel withdrawal from the EU would be legally impossible”.
  1. No effect/no collapse of the Eurozone
  • “The danger of implosion will force Germany finally to agree stand unambiguously behind the euro.This could be done through “banking union” in which responsibility for supervising, winding down and recapitalising big banks is done by some supranational European system. Another option is “fiscal union”, in which at least some of the sovereign debt is mutualised through jointly issued Eurobonds. Doing both would even more convincingly break the deathly embrace of zombie banks and zombie sovereigns.”
  • “A second argument is this: if Grexit provides the powerful impulse for integration, it would also remove the greatest impediment to it. It is hard to imagine any country, let alone Germany, being willing to assume liability for Greek banks that may be about to implode, and for the national debt of a state that has failed to abide by Germany’s prescription for reforms. German officials have a tendency to go out of their way to praise other troubled countries that are reforming, if only to highlight the failures of Greece, and to express their bemusement at the markets’ inability to understand the good that is being done. If Hellas is gone, the pro-Grexit argument goes, then Germany would have fewer excuses to refuse to deploy its full economic might behind the rest of the euro zone.”


Political Issues:

  1. Greek Domestic Politics
    1. “Greece’s left-wing Syriza party leads the polls ahead of the elections and is in favour of changing the conditions of the country’s international bailout deal. That would likely anger the rest of the eurozone, which has given Athens the bulk of the rescue loans.”
    2. “Many of Tsipras’s policies “are unlikely to be accepted by the troika of international lenders, despite Syriza’s position having moved to the center in recent times,” said Diego Iscaro, an economist at IHS Global Insight in London. “But it would not be the first party to become more pragmatic once in power.”
    3. “There’s a 15 percent chance Greece will leave the 19-nation currency union if Tsipras forms a coalition government with one of the centrist parties, the Bloomberg survey shows. That compares with 5 percent under an alliance led by New Democracy.”

These three quotes suggest that Greece’s future is unclear at the moment and that a having a newer party in power with a different economic agenda does not necessarily mean that irreparable damages will be made in EU-Greek relations. It is currently too early to assess what action the Syriza party will take in the long-run in terms of withdrawal from the Euro since their strategy may change as they adapt to current circumstances. Also, despite having the “majority” of votes, this is not an indicator of political dominion in politics due to Greece’s multi-party system. In this case, the majority is roughly less than 20% meaning that Syriza must still depend on the other parties’ consent before taking action which would soften the Syriza party’s demands, effectively easing Eurozone officials’ reservations on dealing with Syriza’s restructuring of the current bailout plans. For one, its aim to cut back Greek debt in half is unrealistic and the Eurozone members will likely disapprove of that strategy.

Angela Merkel is specifically unhappy with the demands the Greeks have presented. She firmly believes that in dealing with Southern Europe, it is essential to not appease to their demands because doing so prevents them from making national economic reforms necessary for the EU as a whole. Recently, a consensus has formed among the Northern European powers that the Eurozone could do without Greece, adding to the belief that there is no reason to bargain with Greece. However, Syriza’s lack of government experience also deems it inexperienced in international affairs, potentially causing conflicts with other countries or making reckless negotiations, thus creating a security concern for the EU later on. For this reason the EU would also likely be reluctant to let Greece leave without the ability to at least somewhat manage its political affairs.

Currently, Greece’s politics are relatively stable, in comparison to how bad they could be if Greece were to leave the Euro. If the Greek economy gets (even) worse without the Euro’s monetary power to keep it afloat, then it would become a catalyst for political instability alongside economic instability which would again affect the EU due to increased instability on the continent. Therefore, it is unlikely Greece will sacrifice the relative political stability it has by leaving.

If on the off-chance Greece leaves the EU and other European countries such as Spain or Portugal take initiative playing out the aforementioned domino effect, leftist parties will also gain momentum in these countries creating an ideological rift in the EU. After Syriza’s win, leftist parties in Spain such as Podemos, have been gaining power and popular support. This would further drive northern and southern Europe apart from one another.

Therefore, the Grexit is not merely economic, but also political. For optimum political stability, both for Greek domestic politics and the transnational politics of the EU as a whole, heavily depend on as much cooperation between the Syriza government and the EU as possible. Northern Europe’s worry that southern Europe will adopt leftist governments as means to assuage its economic burden would be lessened if the ECB shows itself to be the more dominant negotiator but still cooperates with Greece enough to show that the Eurozone policies are more effective than the proposed Syriza ones.



The European Central Bank

March 25th, 2015

ECB – located in Frankfurt

Co-exist with national central banks to create the euro system.

Main goal of ECB: define and implement monetary policy of the Euro area. This means maintain price stability keeping inflation below but close to 2%.


Why 2 %?

  • Adequate margin to risk of deflation
  • Low enough for users of the Euro to make accurate long-term economic and financial decisions.


Tools: interest rates + buying government bonds


Important decisions are made by governing council of the ECB:

  • Made up of the governors of the national central banks of the Eurozone + the members of the ECB executive board.
  • The governors do not represent their own countries but votes to represent the interest of the Euro area as a whole.



  • Ensuring the smooth operation of payment systems.
    • Cash-less payments to make transactions faster
  • Holding reserves of foreign currencies
  • Authorizing the issuance of Euro banknotes
  • Set the rules for national banks´ reserve levels – 10% standard.
  • Act as the bank of the national banks – provide loans to national banks – now they to it with very low interest rates to banks that need it in their regular operations.



What have they done since the crisis started?

  • Lowered interest rates
  • Bought sovereign debt from Greece, Spain, and Italy in 2010-2012, and covered bonds in 2009-2012.
  • Quantitative Easing introduced on March 9th. Planned to buy public and private bonds worth €60 billion each month and a total worth of €1.1 Trillion by September next year. Compare to US GDP of $16.77 Trillion. An effort to stimulate the economy and increase the inflation rate. Experienced deflation in late 2014.
  • The ECB has an emergency liquidity assistance program that provides liquidity assistance in emergencies, in form of central bank money, to solvent financial institutions that are facing temporary liquidity problems. Greek banks have gotten this assistance.
  • They created the banking union in 2012 to create financial stability. They created a rulebook that would supervise the larger banks in each Eurozone country (approximately 6000). They monitor the banks in order to tackle problems early on. This is due to the crazy lending and borrowing the occurred prior to the crisis.
  • Created a single resolution fund financed by the banking sector to save European banks that are close to going bankrupt.
  • Countries lost even more sovereignty by joining the banking union.
  • The ECB does not allow governments to issue unlimited T-bills that National banks can buy, to avoid more debt in the system. This is what is going on in Greece now. Tsipras is pissed at the ECB for not letting their government issue more Treasury bills.
  • In Greece´s case, the ECB might not even let the Greek banks extend the current bonds that are about to mature.
  • The ECB has made loans to Greece worth €100 billion – 70% of their GDP.
  • ECB has run stress tests on European banks and all four major banks in Greece passed it, but the ECB also recognized that without deferred tax credits, the banks core capital falls to about 5%, which is far below the required 10%.
  • The ECB is not the only source of funding for Greece. There are major funds held by the European Stability Mechanism that can be made available to safeguard financial stability. It raises funds by issuing long-term debt with maturities.


Chapters 7 and 8 of The Euro Crisis

March 22nd, 2015

Chapter 7
The situation in southern Europe is mostly seen through the lens of Greece. The author claims that had Ireland asked for financial assistance first, then Greece would not be the center of the Euro crisis, but in fact it would be Ireland. Politically speaking, Ireland is a less attractive scapegoat because it involves a situation similar to that of the U.S.   Debt to GDP ratio was 54% of GDP in 1998 and came down to 25% in 2007.
Greece on the other hand missed the 1999 entry into Euro and joined Euro in 2001. Covered up debt and budgetary deficit was never below 4.5% (Ceiling was 3%) Public Debt was 129% of GDP (60% benchmark). Greeks used more pension money, had a lower retirement age, and did not spend EU grants well.

Euro Crisis revealed two flaws in the Euro Area framework.

First is assumption that threats to stability would come from Public Sector. Private sector is also major source of instability.

The second mistake was assuming that monitoring deficits year after year was enough to prevent a public finance disaster.  Financial crises often appear very suddenly and there needs to be a plan in place for when things go wrong.

The author goes on to say that blaming Greece for the crisis is an oversimplification of the problem: “Since the state is the insurer of last resort, its finances are vulnerable to all sorts of economic and financial shocks. Acknowledging this potential fragility and designing an adequate surveillance framework is more difficult than stigmatizing a small Mediterranean country for its (very real) turpitudes”

Chapter 8
Inflation rates across the Euro area  were very different, but the ability to spend was the same (interest rates). A Price differential occurred in non-tradable goods across the currency union, thus leading to differing rates of inflation. With the nominal interest rate being fixed for each country,  real interest rates began to differ as a result of the differences inflation.  This means that the ease with which households could borrow money depended on the inflation rate of the country they lived  in. When Spain adopted the euro in 1999, interest rates dropped as a result of accelerated convergence. This resulted in lots of credit and massive real-estate investment. The net effect was Spain’s external deficit widened from 4% to 10%. Divergence in Euro Area become a problem around 2005 and 2006. Even worse, the Central Bank of Spain could not do much to fix this because interest rates are set by ECB.

In short, European institutions did not hold up their end of bargain to monitor inflation rates and ensure that they were similar across the Euro Area.  Policy makers failed to act because they believed external deficits were not  big deal in a currency union.

Notes on Chapters 5 and 6 of The Euro Crisis and Its Aftermath

March 21st, 2015

Chapter 5

In short, those who promoted common currency hoped it would eventually lead to common political institutions.   Euro-area members, however, kept their respective seats at IMF, G7, and other international organizations. So the members of the Euro did not completely unify themselves politically.  Economic policies do not have to be identical to be part of a currency union but counties do have to put more thought into unintended consequences of their economic policies.

European countries should have put more thought into whether or not joining the Euro was a good idea economically. The United Kingdom ran stress tests to determine whether or not it should join monetary union. Clearly the decision was political and the tests where just a way of checking a box, but more countries should have adopted an approach similar to that of the UK.

Chapter 6
France ran it larges current account surplus in its history when entering the Euro in 1999, while Germany ran a large deficit. Twelve years down the road and Germany was running a surplus while France was running a deficit. Why?

It took time for Germany to get back on its feet after reunification. East and West Germany formed a monetary, economic and social union. West Germany was economically competitive and East Germany was not. People in the East wanted to buy goods in the West. Infrastructure and capital stock had to be replaced. Germany chose to reinvent itself by removing parts of its economy which it knew it did not have a comparative advantage. It focused on thinks like technology that required a highly skilled labor force. People began exporting parts and importing partial goods as firms began to embrace globalization. This eventually resulted in destabilizing factors.

Germany  saved during the first decade of the Euro which caused problems. As a result of saving, demand in countries in the north decreased will demand in south kept increasing. Before long, countries in the north were financing countries in the south.

The other destabilizing factor was the interest rate policy. The monetary policy had to be set for the euro area as a whole, not individual countries. This means that a country like Germany who deserved a low interest rates was causing other countries like Greece to get the same low rate. In other words, the monetary policy was too expansionary for the countries in the south.

Graphics about Greece leaving the Euro

March 20th, 2015

FT-breakdown-896x1024 xcms_bst_dms_36658__2 Screen Shot 2015-03-19 at 8.25.26 PM

“Blockupy” protests turn violent in Frankfurt

March 18th, 2015