Category: Markets

Why is the new Syriza (far left) government in Greece a concern?

  • New PM is anti-austerity and wants to renegotiate Greece's debts.
  • Ending austerity would cause ballooning budget deficit, Greece would have to leave the EU (as members need to adhere to certain budget rules), and could face deep economic crisis (like the situation Venezuela is in right now).
  • Debt renegotiation effectively means Greece reneges on past commitments to creditors, so would effectively lose future access to international capital (situation Argentina is in right now).

Brazil macroeconomic snapshot?

  • Not good.
  • Slow growth (< 1% this year), negative trade balance (first time in 14 years) + lack of investor confidence.
  • Budget deficit, massive public debt + major drought.

Why is Venezuela’s economy such a mess?

  • Years of massive government overspending under Chavez (budget deficit of over 17% of GDP).
  • Even though oil price was high then, government spending was way beyond its means - this unsustainable system remains in place.
  • Now that oil price has fallen, entire economy is out of control, but China keeps lending money (in exchange for oil) which has masked the need for urgent reform.

Likely impact on Swiss economy of abandoned currency cap, assuming currency remains high?

  • Tourism and exporters will suffer.
  • Companies with high costs that they can't move out of Switzerland (healthcare, banking) will suffer.
  • But Swiss central bank believed they would have had to abandon the peg anyway once the ECB started QE.

Why did Switzerland ditch their currency cap?

  • Because ECB is about to embark on QE (a massive bond buying program) which will send euro interest rates lower and create an increase in demand for Swiss francs (as they will pay relatively higher interest).
  • So there would be big upward pressure on the franc, which, if the currency cap remained in place, the Swiss central bank would have to neutralise by meeting that demand (i.e. buying euros and selling francs).
  • It could eventually start running out of francs, and therefore be forced to abandon the peg anyway.

What was Switzerland’s currency cap?

  • Up until 15 Jan 2015, Switzerland maintained a currency ceiling against the euro (in place since 2011).
  • This would stop the Swiss franc from appreciating too much.
  • In times of strong franc demand, the Swiss central bank would let the franc appreciate to a point, and then stop the appreciation, by selling as many francs as the market wanted (and thereby accumulating foreign currency reserves).

Which countries have used QE recently?

  • US (2009, 2011, 2013 - ended 2014).
  • UK (2009, 2012, 2013), Japan (2009, 2011, 2013).
  • Europe (starting now - Jan 2015 - would have started earlier but resistance from Germany).
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