Sober Look

Greece’s fight against "fiscal waterboarding" will halt economic recovery


We are about to witness a historic showdown between the major euro area institutions and Greece. Greece’s newly appointed finance minister Yanis Varoufakis, a staunch bailout critic, will lead the negotiations on debt haircuts. On the other side will be the creditors: the International Monetary Fund and the European Commission – with additional support from the ECB. Private bondholders may get dragged into the fight as well (although many of them are Greek banks who will do what the government tells them). A number of Eurozone politicians have already expressed skepticism about any debt forgiveness for Greece. But Varoufakis is likely to focus on the argument that Germany has to take a great deal of the blame for the situation in which Greece now finds itself – calling the imposed austerity measures “fiscal waterboarding”. Here is a good quote from Strafor:

Stratfor (via Forbes): Another version, hardly heard in the early days [of the Eurozone crisis] but far more credible today, is that the crisis is the result of Germany’s irresponsibility. Germany, the fourth-largest economy in the world, exports the equivalent of about 50 percent of its gross domestic product because German consumers cannot support its oversized industrial output. The result is that Germany survives on an export surge. For Germany, the European Union — with its free-trade zone, the euro and regulations in Brussels — is a means for maintaining exports. The loans German banks made to countries such as Greece after 2009 were designed to maintain demand for its exports. The Germans knew the debts could not be repaid, but they wanted to kick the can down the road and avoid dealing with the fact that their export addiction could not be maintained.

The debate will also focus on the fact that Greece has done an amazing job in cutting its debt/GDP ratio – in spite of the falling GDP.

Source: @RBS_Economics 

Greek government bond yields spiked on Syriza’s rhetoric as well as on the right-wing antiausterity party becoming Syriza’s new coalition partner. The battle lines have been drawn.

The Greek government bond yield curve has become more inverted as markets price in principal reductions that are likely to apply evenly across the curve (which is what typically causes such inversion).

It is expected that if such haircuts are applied, they would hit both official and unofficial accounts (including bonds held by the ECB). Of course debt forgiveness would haircut the government bonds held by Greek banks – who are some of the largest holders. That’s why shares of Greek banks got decimated today. New bank bailouts will be required if there is any hope for credit availability to the private sector. For now most credit activity will come to a grinding halt – and with it any hopes for economic recovery.

Source: @WSJGraphics

The overall equity market fell over 9% today as government officials halt privatization and extend an olive branch to Russia (see story).

The newly elected government may ultimately get its debt forgiveness. But in the process the damage done to the nation’s private sector will be severe – just as the nation begins to come out of a depression that rivals some of the worst downturns in global history.


Sign up for our daily newsletter called the Daily Shot. It’s a quick graphical summary of topics covered here and on Twitter (see overview). Emails are NEVER sold or otherwise shared with anyone.

Tough times ahead for the Swiss economy


The Swiss National Bank’s unexpected abandonment of the Swiss franc cap continues to reverberate across global markets (examples listed below). The currency settled around parity, which is about 17% above the cap (the euro is 17% lower). At this level the SNB loss on its massive foreign currency position (mostly euro) is somewhere around CHF 75 bn.

Note: The chart shows the EUR falling against CHF (CHF rising 17% above the cap level)

The buildup of euros was the result of having to defend the franc cap when capital was flowing out of the Eurozone into Switzerland (the SNB had to buy euros and sell francs). The central bank came under enormous criticism domestically for becoming so exposed to the Eurozone. But now the central bank is cutting its losses and walking away from having to buy any more euros.

In the past few years, the currency cap resulted in (relatively) easy monetary policy by keeping the franc artificially weak while the SNB balance sheet expanded via the euro purchases. While the mechanism was different than what we had with other central banks who have undertaken quantitative easing, the SNB’s balance sheet had ballooned in recent years (see chart).  As a result, the nation’s stock market had outperformed other European markets by some 30% since the cap was instituted. When it comes to pumping up the stock market, easy monetary policy clearly works.

Source: @acemaxx  

But once the valve was opened and the Swiss franc was allowed to appreciate, the Swiss stock market gave up some 15% in just two days (chart below). In effect the SNB ended its version of “quantitative easing” in a few seconds rather than by “tapering” as was the case in the US.


With this decision the SNB has lost a great deal of credibility – not due to the change in policy but due to its execution. The central bank looks divided, uncertain, and subject to political pressures.

Switzerland was already entering deflation before the currency was allowed to appreciate. Now the nation is about to undergo what Japan had a few years back. During the Eurozone crisis, the yen which – just as the Swiss franc – was a “safe haven” currency, strengthened significantly, nudging Japan into deflation. The situation in Switzerland is now similar, except that rather than easing policy further as the BOJ did, the SNB tightened it. For the Swiss economy difficult times lie ahead.

Examples of the fallout from the SNB’s sudden policy reversal:

2. Alpari UK
3. Everest Capital


Sign up for our daily newsletter called the Daily Shot. It’s a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via and are NEVER sold or otherwise shared with anyone.