Sunday, February 22, 2015

Gold near seven-week low after Greek debt deal

Gold near seven-week low after Greek debt deal


[SINGAPORE] Gold was hovering near the key US$1,200-an-ounce level on Monday, its lowest in seven weeks, as support for the safe-haven metal eased after a deal was struck over Greece's debt, while the absence of major consumer China also took a toll.
FUNDAMENTALS
Spot gold was little changed at US$1,201.98 an ounce by 0039 GMT, after dropping to US$1,197.95 in the previous session. The metal also recorded its fourth straight weekly decline on Friday.
Eurozone finance ministers reached an agreement on Friday to extend heavily indebted Greece's financial rescue by four months, officials on both sides said.








An agreement removes the immediate risk of Greece running out of money next month and possibly being forced out of the single currency area. It provides a breathing space for the new leftist-led Athens government to try to negotiate longer-term debt relief with its official creditors.
Bullion had seen some safe-haven bids as the uncertainty over Greece clouded market sentiment for most of last week, though that was offset by a stronger dollar and robust US economic data.
Public holidays in No. 2 gold consumer China due to the Lunar New Year also put some pressure on prices. Chinese buying typically provides a floor for falling prices.
The dollar index gained on Monday, hurting gold's appeal as a hedge and making the metal more expensive for holders of other currencies.
The greenback has been robust in recent months on expectations the Federal Reserve would soon raise rates on the back of a strong economic recovery in the United States.
Investors remain cautious about gold's price outlook. Hedge funds and money managers cut their bullish stance in gold futures and options for the third straight week, taking it to a six-week low in the week to Feb 17, US Commodity Futures Trading Commission data showed on Friday.
However, holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.23 per cent to 771.25 tonnes on Friday - its second straight day of inflows.
REUTERS


















Saturday, February 21, 2015

Money, Banking, and The Federal Reserve System (Video)

Money, Banking, and The Federal Reserve System

Money, Banking, and The Federal Reserve SystemThomas Jefferson and Andrew Jackson understood The Monster. But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates.
Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and featuring Ron Paul, Joseph Salerno, Hans Hoppe, and Lew Rockwell, this extraordinary new film is the clearest, most compelling explanation ever offered of the Fed, and why curbing it must be our first priority.
Alan Greenspan is not, we're told, happy about this 42-minute blockbuster. Watch it, and you'll understand why. This is economics and history as they are meant to be: fascinating, informative, and motivating. This movie could change America.
Watch the full documentary now

Why has investment in the Eurozone been so weak?




Why has investment in the Eurozone been so weak?

By Bergljot Bjørnson Barkbu




Investment in the euro area, and particularly private investment, has not recovered since the onset of the global financial crisis.
In fact, the decline in investment has been much more drastic than in other financial crises; and is more in line with the most severe of these crises (see Chart 1). TheOctober 2014 World Economic Outlook showed that many governments cut investment because their finances became strained during the crisis. In addition, housing investment collapsed in some countries, reflecting a natural scaling back after an unsustainable boom. But what is holding back private non-residential investment?

EUR Weak Investment.chart 1
In an IMF Working Paper, we have looked at the driving factors of private non-residential investment in seven euro area countries – Germany, France, Spain, Italy, Ireland, Portugal and Greece – and the euro area as a whole until 2013. We find that low growth is definitely a big part of the story. But crisis legacies, such as high corporate leverage, financial constraints, and policy uncertainty are also holding back investment in some countries.
A vicious “Catch 22”
Much of the dip in investment since the crisis can be explained by low or negative growth. Effectively, this creates a “Catch 22”: growth is weak partly because investment is low, but investment is low because companies don’t have sufficient demand for their products. The shortfall in investment dims both short- and medium-term prospects for the euro area. Countries need higher investment to raise demand now, increase the productive capacity of their economies, and secure permanently higher incomes. Yet, without higher demand, firms are unwilling to invest.
This is particularly true for Spain, where changes in real GDP explain the variation in investment well.  But in many euro area countries, investment has declined by more than suggested by the changes in output since the beginning of the euro area debt crisis.
… reinforced by crisis legacies
So what other factors are at work? In some countries, investment is too low because of high corporate debt, policy uncertainty, and borrowing constraints.
Uncertainty makes firms more wary about investing in future capacity, and has been an important factor holding back investment in several of the countries, such as Spain, Italy, Greece, and Ireland, as well as in the euro area as a whole.
Similarly, higher indebtedness impairs firms’ credit worthiness and ability to borrow and invest, reducing investment in Portugal, Italy and France, particularly during stressed periods.
A very difficult borrowing environment, especially access to bank finance is also impeding investment in Italy and Portugal. On the other hand, some firms finance investment by their own cash streams, with higher cash inflows associated with more investment in Spain and Germany.
The significance of these other factors in explaining investment in some countries since 2010 becomes clearest when comparing the cumulative difference between the predicted and the actual level of investment, i.e., the unexplained shortfall in investment.
While the cumulative difference between investment predicted by output changes alone and its actual level ranges between  3 and 6 percent of GDP, this shortfall narrows to ½ -2 percent of GDP when taking into account the other factors mentioned above, such as uncertainty, indebtedness, borrowing costs, cash buffers, and financial constraints. (see Chart 2).
In Italy and Portugal, for example, the unexplained shortfall in investment thus declines from about 6 percent of GDP to less than 1 percent of GDP.
EUR Weak Investment.chart 2
What does this imply for policy? First, investment should pick up as the recovery strengthens. As outlined in the last year’s staff report on the euro area, continued accommodative monetary policy and the use of available fiscal space at the national level should help support investment by raising current demand.
But demand support is not enough to stimulate investment. Our analysis confirms that corporate indebtedness impedes investment and that dealing with the debt overhang and high non-performing loans should be a priority. Firms also need better access to capital, and at a lower cost. Completing the banking union and building a capital markets union would increase the prospects of  boosting investment.
In addition to making financial intermediation more effective, more flexible labor and product markets and reforms to improve the business environment would also raise investment by raising growth expectations. Overall, a comprehensive policy effort would reduce policy uncertainty, revive the animal spirits, and contribute to a sustained recovery in investment.
This article is published in collaboration with IMF direct. Publication does not imply endorsement of views by the World Economic Forum.
To keep up with the Agenda subscribe to our weekly newsletter.
Author: Bergljot Bjørnson Barkbu is the IMF’s Deputy Resident Representative to the European Union. 
Image:European Union flags fly outside the European Commission headquarters in Brussels. UNICS REUTERS/Thierry Roge. Hanni Schölermann is an Economist at the IMF Europe Office in Brussels. S. Pelin Berkmen is a senior economist in the European department, where she works on the euro area. 

What drives the major currencies?



What drives the major currencies?

By Michele Ca'Zorzi and Jakub Mućk


Forecasting nominal exchange rates
In their classic paper, Meese and Rogoff (1983) argued that forecasting nominal exchange rates is basically impossible, as all plausible macro-models fail to beat the random walk. For the last three decades, the lively debate in the literature has not changed the prevailing view that exchange rates are not forecastable. In this respect, a glimpse of light comes from the analysis of Engel et al. (2008) who argued that the dismal performance of exchange rates models arises from the pervasive impact of estimation error. This might explain why the performance of macro models tends to improve with large panels of data (e.g. Ince 2014) and be very poor for shorter samples.
Hope from the Purchasing Power Parity (PPP)?
There is, however, at least one exchange rate theory that is not totally discredited and has even enjoyed a positive reappraisal over recent years: PPP theory. It is indeed one of the oldest theories of economics, as it goes back to the Salamanca school in the 16th century and, in modern times, to Cassel (1918). But if we look back at the 20th century economic history, the consensus on the validity of PPP has shifted back and forward several times. As Dornbusch (1985) has put it “by different authors at different points in time has been considered an identity, a truism, an empirical regularity or a grossly misleading oversimplification”. According to Taylor and Taylor (2004), after a period when the real exchange rates were thought to behave as random walks, the literature has turned full circle to the pre-1970s view that PPP holds in the long run. If this is the case, real exchange rates should presumably be forecastable – at least over medium- to long-term horizons. Surprisingly, the articles that look at this issue directly can be counted on the fingers of one hand. Meese and Rogoff (1988) reached the conclusion that, like nominal exchange rates, real exchange rates are disconnected from economic fundamentals, whereas two studies from the mid-1990s argued that the random walk can be beaten for large datasets (Lothian and Taylor 1996, Jorion and Sweeney 1996). The question that we tackle in this paper is therefore the following:
Can the mean reverting property of real exchange rates be exploited to beat the random walk in relation to real and nominal exchange rate forecasting?
Forecast competition for real exchange rates
To beat the random walk one needs to consider both the crucial role of estimation forecast error and the strong persistence of real exchange rates. The strong persistence in the real exchange rate was affirmed in a series of studies conducted in the mid-1980s and early 1990s, which employed more than a hundred years of annual data. From an informal meta-analysis of these studies, Rogoff (1996) inferred that it takes between 3 and 5 years to halve real exchange rate deviations from the mean (HL, half-life). This has led to a broad, but not universal consensus, on the degree of persistence of real exchange rates, which is sometime dubbed the ‘Rogoff’s consensus’. In what follows, we shall evaluate the validity of this range exclusively from a forecasting perspective. As this range was determined only on the basis of pre-1990s data while our forecast evaluation sample starts in 1990, what we conduct is a true ‘out of sample’ forecasting exercise.
We are thus ready for undertaking a forecasting competition. At the start of the race, we have three equally plausible models:
  • One is based on the hypothesis that real exchange rates follow a random walk; and
  • Two on PPP, where real exchange rates are assumed to linearly adjust toward their mean.
The only difference between the two PPP models is that, in one case, we set a half-life adjustment of 5 years (HL), while in the second we estimate the duration of half-life adjustment using a simple autoregressive model (AR). We shall consider the real effective exchange rates of the euro (EUR) and the US dollar (USD) for the period between 1975:1 and 2012:3.
The forecasting scheme is a 15 year rolling window and the forecast horizon ranges between one and sixty months. To evaluate forecast accuracy we plot the mean squared forecast errors of the two PPP models divided by the mean squared forecast error of the random walk at different forecast horizons (Figure 1). Values below unity thus indicate that a given model forecasts better the real exchange rate than the random walk. The calibrated HL model (solid blue line) clearly beats the random walk both in the case of the euro and the dollar. Particularly persuasive is that the result holds also at short- term horizons and not just at longer horizons.
Figure 1. Mean squared forecast errors for real exchange rates (relative to the random walk).
Source: Author’s calculations.
Notes: The dashed red and solid blue lines stand for the AR and HL model, respectively. The forecast horizon, shown in the x-axis, is expressed in months.
The estimated AR model (dashed line) instead performs poorly, not only vis-à-vis the HL model but also vis-à-vis the random walk. In the extended version of this article (Ca’ Zorzi et al. 2015), we show analytically why for estimation windows of around 15 years of monthly data, the estimation error associated to the AR model is much more severe than the misspecification error associated to the random walk. This is exactly the reason why the random walk model appears to be successful, even if PPP holds. In the same paper we also provide several other robustness checks to confirm the validity of these results. In particular, it can be shown that the HL model beats the random walk for the entire 3 to 5 years half-life range proposed by Rogoff. The results hold also for several, albeit not all currencies in our sample.
Forecast competition for nominal effective exchange rates
The final step in our analysis consists in testing whether the mean reverting nature of the real exchange rate helps us to forecast nominal exchange rates. A simple approach is to assume that the real exchange rate adjustment predicted by our three alternative models, is entirely achieved via changes in nominal exchange rates, and that relative price changes play no role. Given the volatility of exchange rates, this is what one could expect in the case of flexible exchange rate regimes. The calibrated HL model (solid line) performs visibly better than the random walk while the estimated AR model (dashed line) underperforms both in the case of the euro and of the dollar (Figure 2). Our previous results hold also for the case of nominal exchange rate forecasting.
Figure 2. Mean squared forecast errors for nominal exchange rates (relative to the random walk).

Source: Author’s calculations.
Notes: as in Figure 1.
Currencies do not walk randomly
A long standing result of the academic literature is that exchange rates are not predictable as macroeconomic models cannot generally beat the random walk. The vast exchange rate literature provides, however, at least two reasons for being cautiously optimistic.
First, as discussed in Engel et al. (2008), estimation error is one of the root causes for the dismal forecasting performance of exchange rate models, which explains why the random walk is less competitive for larger datasets.
Second, the literature on PPP has shown that there is evidence of mean reversion in real exchange rates.
In this study we have illustrated how these findings can be exploited in exchange rate forecasting. In particular, we have proposed a simple model that just imposes a gradual return of the real exchange rate to its sample mean. From a theoretical perspective, this is a much more appealing alternative to the random walk for it takes into account that PPP holds over long-term horizons. The key finding of our study is that a calibrated half-life PPP model beats overwhelmingly the random walk in relation to real exchange rate forecasting. Our results are intuitive and not trivial:
  • The preferred forecasting model for real exchange rates resembles the random walk in the short-run while it gradually approaches PPP over long-term horizons.
  • A second key finding of our analysis is that, if the speed of mean reversion is estimated, rather than calibrated, the model performs significantly worse than the random walk due to estimation error.
  • Finally, we have shown that the mean reverting nature of real exchange rates can be exploited to outperform the random walk in relation to nominal exchange rate forecasting.
For both the case of the euro and the dollar we find that the nominal exchange rate has contributed to the mean reversion process of the real exchange rate rather than just followed a random walk.
This article is published in collaboration withVoxEU. Publication does not imply endorsement of views by the World Economic Forum.
To keep up with the Agenda subscribe to our weekly newsletter.
Author: Michele Ca’Zorzi is Senior Economist in the Directorate International, European Central Bank. Jakub Mućk is an Economist, National Bank of Poland. Michał Rubaszek is an Assistant Professor, Warsaw School of Economics; Senior Economist, National Bank of Poland
Image: A picture illustration taken in Warsaw. REUTERS/Kacper Pempel 

Friday, February 20, 2015

Greece wins eurozone bailout deal with strict conditions

Greece wins eurozone bailout deal with strict conditions


[BRUSSELS] Europe on Friday granted Greece a crucial extension to its massive debt bailout, ending weeks of tension, but at the cost of huge concessions including a commitment to spell out reforms within two days.
The 19 single currency finance ministers reached the hard-won deal to end a standoff pitting Greece against an angry Germany, suspicious that the radical leftist government in Athens was looking to ditch its austerity obligations.
"The meeting was intense because it was about building trust between us," said Eurogroup head Jeroen Dijsselbloem, after the talks ended with a two page statement setting out the tough conditions Athens will have to fulfil.
In exchange for the four-month extension, Greece agreed it would submit a list of economic and other reforms by Monday which its eurozone partners will then review to see if they go far enough.



On Tuesday, they will report back to Greece and decide whether to proceed with Friday's agreement.
Greek Finance Minister Yanis Varoufakis said the deal would mark a new era for Athens and its relationship with the European Union.
"Today was a pivotal moment because Greece for five years now has been lonely, isolated in the Eurogroup. Today that isolation has broken," Mr Varoufakis said.
Markets reacted positively to the deal, with the Dow and S&P 500 surging to fresh records on Wall Street.
The effort to agree a deal torpedoed two earlier Eurogroup meetings, with deep divisions emerging between Greece and its eurozone partners over the conditions of extending the bailout.
Greece formally requested a six-month loan extension on Thursday, offering concessions including a return - if not in name - of the hated "troika" of creditors that had audited the Greek economy in the last years during the bailout.
"Four months is the appropriate delay in terms of financing and future challenges," Mr Dijsselbloem said.
Mr Dijsselbloem worked overtime Friday to get the make-or-break deal as Germany insisted Greece stick with the austerity commitments included in its bailout programme.
The fraught discussions focused on a new package of concessions beyond those contained in the Greek request submitted Thursday.
MERKEL, HOLLANDE URGE ACCORD
Up to the very end, the deal with Greece seemed fragile, with its possible exit of Greece from the eurozone an increasing risk.
Hardline German Finance Minister Wolfgang Schaeuble on Thursday rejected the Greek extension request out of hand but a lengthy phone call between Greek Prime Minister Alexis Traship and German Chancellor Angela Merkel appeared to get the talks back on track.
Meeting in Paris Friday with French President Francois Hollande, Dr Merkel said the German position "since the beginning of the Greek programme" had been that Greece remain in the euro.
Berlin "would do everything to continue along this path," she said.
Mr Hollande said: "Greece is in the eurozone. Greece has to stay in the eurozone." Time was pressing to find a solution before the current bailout programme ends for fear that failure could see Greece run out of money and be forced out of the eurozone within weeks.
European officials said the stand-off had come down to a clash of personalities with Schaeuble furious at the negotiating style of the casual Varoufakis, who remained markedly sombre on Friday.
The issues go beyond that, however, and echo a divisive debate in the European Union whether the austerity policies adopted to cope with the debt crisis have done more harm than good.
For Germany, fiscal discipline and tight spending controls are the only basis for the sustainable growth needed to deliver much-needed jobs.
It will be now up to the Tsipras government to persuade austerity weary Greeks that an electoral promise to end austerity has been kept.
AFP







Greece nears bailout deal with euro zone: Sources

Greece nears bailout deal with euro zone: Sources

PUBLISHED ON FEB 21, 2015 2:09 AM
Greece's Finance Minister Yanis Varoufakis arrives for an emergency Eurogroup finance ministers at the European Council in Brussels on Feb 20, 2015. -- PHOTO: AFP


BRUSSELS (AFP) - Greece and its sceptical European partners neared a much-needed compromise on Friday over a request by Athens to extend an EU loan programme that expires this month, with sources saying a determined Germany had been satisfied.
The euro zone’s 19 finance ministers were gathered in Brussels for the third time in little over a week to consider Athens’ take-it or leave-it proposal.
“It seems that there is a deal in the form of a statement,” a European source told AFP.
“We must wait because this is not yet official and certain delegations may still raise objections,” the source added.
Another European source said: “There’s a general optimism", adding that there was talk of only a four-month extension.
The effort to write a final deal statement is what torpedoed two earlier Eurogroup meetings, with deep divisions between Germany and Greece over the conditions of extending the bailout.
Greece made the formal request for the loan extension on Thursday, offering concessions including a return – if not in name – of the hated “troika” of creditors that had audited the Greek economy during the bailout.
Eurogroup head Jeroen Dijsselbloem worked overtime Friday to get the make-or-break meeting back on track as Germany insisted Greece stick with the austerity commitments included in the loan programme.
“I do not have to tell you it’s quite complicated ... there is still reason for some optimism but it is very difficult,” Dijsselbloem, who is also Dutch finance minister, said of the Greece-Germany stand-off before the start of talks.
“I will now go back to try to get the show back on the road,” he said.
A Greek source said the discussions were on “a new package of concessions” beyond those contained in the Greek letter sent Thursday seeking a six-month extension to its bailout programme.
Arriving for the talks, Greek Finance Minister Yanis Varoufakis said he hoped for a deal, given the effort made by Athens.
“The Greek government has gone not the extra mile but an extra ten miles and now we are expecting our partners to meet us not half way, but one fifth of the way,” he said.
MERKEL, HOLLANDE URGE ACCORD
German Finance Minister Wolfgang Schaeuble on Thursday rejected the Greek request out of hand but a lengthy phone call between Greek Prime Minister Alexis Tspiras and German Chancellor Angela Merkel appeared to calm the waters.
Meeting in Paris Friday with French President Francois Hollande, Merkel said the German position “since the beginning of the Greek programme” had been that Greece remain in the euro.
Berlin “would do everything to continue along this path,” she said.
Hollande said: “Greece is in the euro zone. Greece has to stay in the euro zone.” The Merkel-Tsipras call came after a Greek government source released a document said to outline Berlin’s defiant stance at lower-level talks Thursday.
Greece’s proposal “is not clear at all... a Trojan horse, intending to get bridge financing and in substance putting an end to the current programme,” the German statement said, according to the source.
Time is pressing to find a solution before the current bailout programme ends, for fear that failure could see Greece run out of money and be forced out of the euro zone within weeks.
A top European official said the stand-off had come down to a clash of personalities with Schaeuble furious at the negotiating style of the casual and fast-talking Varoufakis.
The issues go beyond that, however, and echo a divisive debate in the European Union whether the austerity policies adopted to cope with the debt crisis have done more harm than good.
For Germany, fiscal discipline and tight spending controls are the only basis for the sustainable growth needed to deliver much-needed jobs.
GREEK CONCESSIONS
In its request, Greece offered some major concessions including a return, if not in name, of the hated “troika” mission of creditors that has overseen Athens’ finances through two bailouts.
Tsipras insists he can satisfy both the demands of Greece’s partners and meet a promise to voters to end the detested austerity conditions which he says destroyed the economy.
“The government... is not asking for an extension to the memorandum,” an official source in Athens said, referring to the reform agreement between Greece and the troika – the EU, European Central Bank and International Monetary Fund creditors.
Instead, it wants an extension to the loan part of the mammoth 240-billion-euro (S$370-billion) rescue that came with commitments to push through austerity and deep reforms.
Germany says this distinction is unacceptable and Greece has to accept the austerity commitments of the full programme.


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