Greek Lesson: We Are All In The Same Boat

[LiveAndLetBuy]

http://blogs.telegraph.co.uk/finance/edmundconway/100004906/greek-lesson-we-are-all-in-the-same-boat/

click link to see graphs

How much worse off is Greece than the rest of the developed world? The answer, according to Dylan Grice of Societe Generale, is: not as much as you might have assumed. In fact, he points out that in many senses it is actually a little better-off than many other countries, which ought to be slightly alarming for the rest of us.

In particular, he strips out a useful chart which underlines the fact that Greece (and for that matter the UK) have, on average, a far longer-dated stock of government debt than most other countries.

maturity

What does this mean? Grice helpfully presents another chart which tells the story. Essentially, if you’re having to roll over lots of your debt each year, as you will when it expires so often (and because you don’t actually want to pay it back when it expires) it means you have to issue a hell of a lot more debt at the day’s going interest rate. Which in turn leaves you far more vulnerable to a sudden sharp increase in interest rates.

issuance

Now, one should also bear in mind the fact that Greece has an extremely large current account deficit, and a large net investment shortfall (essentially the cumulated balance sheet for the country). But then so do plenty of the other countries in these charts. The difference? Effectively that Greece suddenly lost credibility in the markets. So in the end it was the capriciousness of investors that was the deciding factor. Or, as Grice puts it:

“the most chilling similarity between the Greeks and everyone else isn’t in the charts above showing that their various debt metrics are in the same ballpark, it’s in the realisation that we too are subject to the same iron-clad laws of budget sustainability and that we too are as helplessly vulnerable to any reassessment of sovereign risk by the famously fickle Mr Market.”

In the end, all Western nations face a long-term dilemma (which has been the case since before the crisis, but is more front-and-centre of everyone’s minds now). Over the past 50 years we have committed ourselves to massive welfare states which our economies are simply not generating enough cash to finance. This final chart sums up the problem.

offbalancesheet

We go on about the mass of off-balance sheet debts faced by the UK government (eg pensions, healthcare, PFI etc) but this is not a problem peculiar to the UK. However, it is an issue that all democracies should be discussing. In his manifesto launch yesterday, David Cameron talked about the most radical overhaul in welfare since the system was launched. That is precisely what is needed. The problem, as I wrote in the paper today, is that neither the Tories nor any of the other parties has provided much detail on how they would go about doing it.

Gist of article is that Greek debt (like that of UK) has long maturity and less debt needs to be rolled over in the short term. However that didn't seem to save Greece from being "attacked" by the market. So my question is: do the markets take debt maturity into account when deciding who is vulnerable?

Also, doesn't the fact that UK debt doesn't need to be rolled over too soon mean that the chances of interest rate rises (as a result of higher yields on gilts) are reduced?

(sorry if this has already been discussed on the gilts thread)

[LiveAndLetBuy]

http://blogs.telegraph.co.uk/finance/edmundconway/100004906/greek-lesson-we-are-all-in-the-same-boat/

click link to see graphs

How much worse off is Greece than the rest of the developed world? The answer, according to Dylan Grice of Societe Generale, is: not as much as you might have assumed. In fact, he points out that in many senses it is actually a little better-off than many other countries, which ought to be slightly alarming for the rest of us.

In particular, he strips out a useful chart which underlines the fact that Greece (and for that matter the UK) have, on average, a far longer-dated stock of government debt than most other countries.

maturity

What does this mean? Grice helpfully presents another chart which tells the story. Essentially, if you’re having to roll over lots of your debt each year, as you will when it expires so often (and because you don’t actually want to pay it back when it expires) it means you have to issue a hell of a lot more debt at the day’s going interest rate. Which in turn leaves you far more vulnerable to a sudden sharp increase in interest rates.

issuance

Now, one should also bear in mind the fact that Greece has an extremely large current account deficit, and a large net investment shortfall (essentially the cumulated balance sheet for the country). But then so do plenty of the other countries in these charts. The difference? Effectively that Greece suddenly lost credibility in the markets. So in the end it was the capriciousness of investors that was the deciding factor. Or, as Grice puts it:

“the most chilling similarity between the Greeks and everyone else isn’t in the charts above showing that their various debt metrics are in the same ballpark, it’s in the realisation that we too are subject to the same iron-clad laws of budget sustainability and that we too are as helplessly vulnerable to any reassessment of sovereign risk by the famously fickle Mr Market.”

In the end, all Western nations face a long-term dilemma (which has been the case since before the crisis, but is more front-and-centre of everyone’s minds now). Over the past 50 years we have committed ourselves to massive welfare states which our economies are simply not generating enough cash to finance. This final chart sums up the problem.

offbalancesheet

We go on about the mass of off-balance sheet debts faced by the UK government (eg pensions, healthcare, PFI etc) but this is not a problem peculiar to the UK. However, it is an issue that all democracies should be discussing. In his manifesto launch yesterday, David Cameron talked about the most radical overhaul in welfare since the system was launched. That is precisely what is needed. The problem, as I wrote in the paper today, is that neither the Tories nor any of the other parties has provided much detail on how they would go about doing it.

Gist of article is that Greek debt (like that of UK) has long maturity and less debt needs to be rolled over in the short term. However that didn't seem to save Greece from being "attacked" by the market. So my question is: do the markets take debt maturity into account when deciding who is vulnerable?

Also, doesn't the fact that UK debt doesn't need to be rolled over too soon mean that the chances of interest rate rises (as a result of higher yields on gilts) are reduced?

(sorry if this has already been discussed on the gilts thread)

[Guest happy?]

http://blogs.telegra...-the-same-boat/

click link to see graphs

Gist of article is that Greek debt (like that of UK) has long maturity and less debt needs to be rolled over in the short term. However that didn't seem to save Greece from being "attacked" by the market. So my question is: do the markets take debt maturity into account when deciding who is vulnerable?

Also, doesn't the fact that UK debt doesn't need to be rolled over too soon mean that the chances of interest rate rises (as a result of higher yields on gilts) are reduced?

(sorry if this has already been discussed on the gilts thread)

Stop saying that. We are not all in the same boat.

[interestrateripoff]

Some good graphs there, however this ignores the recovery.....

[lowrentyieldmakessense(honest!)]

Some good graphs there, however this ignores the recovery.....

has it been locked in yet

Edited April 14, 2010 by lowrentyieldmakessense(honest!)

[Timm]

(...)Also, doesn't the fact that UK debt doesn't need to be rolled over too soon mean that the chances of interest rate rises (as a result of higher yields on gilts) are reduced?

(...)

Funnily enough, I was just thinking this.

It might be hard to roll over a large chunk of borrowing at 3 - 6%, but what if in a few years you need to pay 7 - 12%. I suppose this only matters if you were rolling debt onto long dated securities.

Does anyone know what terms the Greeks are trying to roll onto?

[Bearfaced-Chic]

Stop saying that. We are not all in the same boat.

The only thing you've been in that I've been in is this fkking tub of humous!

[billybong]

Doesn't France looks a bit borderline as well.

[AvidFan]

If I keep posting my "What's a Greek Earn Urn?" joke, do you think it'll stick?

^^^ A greek urn.

[moneyscam]

http://blogs.telegraph.co.uk/finance/edmundconway/100004906/greek-lesson-we-are-all-in-the-same-boat/

click link to see graphs

Gist of article is that Greek debt (like that of UK) has long maturity and less debt needs to be rolled over in the short term. However that didn't seem to save Greece from being "attacked" by the market. So my question is: do the markets take debt maturity into account when deciding who is vulnerable?

Also, doesn't the fact that UK debt doesn't need to be rolled over too soon mean that the chances of interest rate rises (as a result of higher yields on gilts) are reduced?

(sorry if this has already been discussed on the gilts thread)

Yes it will, the shorter your duration the more you have to roll over each and every year. So if you are running high deficits and can't retire the debt then you will be judged to be more vulnerable to default which will be reflected in the yield demanded. However it is the fact that you are running such a high deficit (which is then exacerbated by your shorter average duration position)which puts you in trouble in the first place. This is why despite it's longer than EU average maturity Greece got punished by lenders.

To answer your second question it will be the same for the UK because of the explanation above. Rough out of the top of my head figures suggest new issuance each year will be about 25% of the outstanding debt stock, so you can see the average maturity becomes less important. The pressure on yields will come from the huge amount of new supply (and investors' confidence in it) that has to be sold more than what needs to be rolled over although it will also be a factor. Don't forget they are also competing for funds against a lot of other nations doing the exact same thing and in size!.

To really understand what the rollover risk is for UK, you need to look at amounts outstanding for each maturity for each point on the curve. An average, especially a simple one, doesn't reveal enough information. Having to rollover 40% of your debt in the next 3 years is a much bigger problem than having to roll 10% over the next five for example. I'm sure if someone can be bothered they could dig out this amount by maturity schedule from somewhere.

[@contradevian]

Stop saying that. We are not all in the same boat.

Ok we are all in different boats, some have more leaks than others ...some have life jackets, some don't and the tides going out ...and a storm is brewing and ...ummm..

[LiveAndLetBuy]

Yes it will, the shorter your duration the more you have to roll over each and every year. So if you are running high deficits and can't retire the debt then you will be judged to be more vulnerable to default which will be reflected in the yield demanded. However it is the fact that you are running such a high deficit (which is then exacerbated by your shorter average duration position)which puts you in trouble in the first place. This is why despite it's longer than EU average maturity Greece got punished by lenders.

To answer your second question it will be the same for the UK because of the explanation above. Rough out of the top of my head figures suggest new issuance each year will be about 25% of the outstanding debt stock, so you can see the average maturity becomes less important. The pressure on yields will come from the huge amount of new supply (and investors' confidence in it) that has to be sold more than what needs to be rolled over although it will also be a factor. Don't forget they are also competing for funds against a lot of other nations doing the exact same thing and in size!.

To really understand what the rollover risk is for UK, you need to look at amounts outstanding for each maturity for each point on the curve. An average, especially a simple one, doesn't reveal enough information. Having to rollover 40% of your debt in the next 3 years is a much bigger problem than having to roll 10% over the next five for example. I'm sure if someone can be bothered they could dig out this amount by maturity schedule from somewhere.

Thanks for taking the time to reply. When I look at the graph "% of stock of outstanding debt to be issued this year" it looks like the UK has least debt to be issued this year, even taking into account the new issuance. It doesn't make sense to me: how can the UK run one of the highest deficits and yet have one of the lowest issuances of new debt?

[Guest happy?]

Ok we are all in different boats, some have more leaks than others ...some have life jackets, some don't and the tides going out ...and a storm is brewing and ...ummm..

Bearfaced-Chic spotted it.

Would you like a saveloy?

[moneyscam]

Thanks for taking the time to reply. When I look at the graph "% of stock of outstanding debt to be issued this year" it looks like the UK has least debt to be issued this year, even taking into account the new issuance. It doesn't make sense to me: how can the UK run one of the highest deficits and yet have one of the lowest issuances of new debt?

No it doesn't make sense. The chart show the new issuance sliver to be 4% of outstanding stock, which IIRC is currently 800bn so 32bn. But the govt has said it is borrowing about 175bn this year, roughly equal to the deficit!?.

Or maybe they're going to buy the difference of what they can't sell of their own bonds with freshly printed cash. Do it through one of their Caribbean island 'pirate cove' SIV / conduits like BVI or Caymans, or just ask the Fed for a good old circle jerk currency swap. sorry too stoned to write anything more sensible

Edited April 14, 2010 by moneyscam

[The Masked Tulip]

They have slapped a 20% tax on holiday villas! - LMAO!

http://www.telegraph.co.uk/finance/comment/edmundconway/7590939/Greeces-debt-the-horror-story-has-only-one-ending.html

Even if you don't own a holiday home in Europe, I suggest you take a long, hard look at what's happening in Greece. Athens's latest wheeze to fill the gaping hole in its public finances is to levy a tax of up to 20 per cent on people who have had extensions built on their holiday villas. And it is hardly a coincidence that the foreigners most likely to suffer – aside from the British – will be the Germans.

[South Lorne]

They have slapped a 20% tax on holiday villas! - LMAO!

...to enable many of the locals to carry on not paying any....