Greek Treasury Bill issuance plans look unwise and problems for the European Central Bank

30th June 2010 by Shaun Richards

After the announcement by the Conference Board that it had miscalculated its leading indicator index for the Chinese economy and revised the figures as I discussed yesterday one might have expected some disappointment from markets. After all one of the remaining hopes for equity markets is a strong China helping to power the world economy. In the event equity markets had one of their worst days for some time with the UK FTSE 100 falling some 167 points and the Dow Jones Industrial Average falling 268 points. Many other equity markets mirrored these triple digit type falls in what became something of a rout. Particularly interesting was the US S&P 500 index which is a much wider index than the Dow (500 rather than 30 shares) which fell to 1041 which is not only its low for 2010 but according to some technical analysts is close to forming a head and shoulders pattern. This morning equity markets in Europe are trying to rally but I notice that the Shanghai Composite Index closed down 1.2% at 2398.

The Reliability of Economic Figures

I have discussed the concept of how reliable economic figures actually are on this site quite a few times. After yesterdays events I wish to reinforce that point as we had three potential issues for those who live in a world where economic figures are received like a gospel truth.

1. The announcement of a serious miscalculation by the Conference Board when it revised its leading indicator for April from +1.7% to +0.3%. My understanding is that the problem may well have been a miscalculation around the rate of growth in Chinese floorspace. This is somewhat underwhelming as doing such calculations seems to imply that they felt Chinese floorspace had doubled! Ooops, so much for doing a “sense check” on the results. Contrary to the press releases put out so far the Conference Board has made a serious error and it credibility is in question now.

2. In the UK we were supposed to receive an updated estimate for Gross Domestic Product (GDP) today from the Office for National Statistics. However due to a “potential error” the release has now been put back to July 12. Whilst the ONS may yet emerge with credit as after all it has acted before the event it is also troubling.

3. There has been a contradiction in economic surveys in the United States. A week ago the University of Michigan produced a report for June which stated that US Consumer confidence was the highest it had been since January 2008. Yesterday the Conference Board produced its own measure for Consumer confidence which showed it dropping from 62.7  in May to 52.9 in June. As they are both on the US economy they cannot both be true can they?


There are various degrees of unreliability in economic statistics and the last 24 hours have reminded us of this fact. It is not that often that miscalculations occur ( or perhaps are admitted….) but this is a danger. Many figures are revised quite substantially as time goes by. Of the main ones I would say that trade and balance of payments figures are the most inaccurate and that retails sales and durable goods figures are erratic and volatile. The truth is we never really know if even the final figure is accurate but they are all we have.

As to surveys I am always very cautious about their pronouncements. Apart from the obvious moral hazard issue of the respondents giving the answer they may want people to hear there is the issue of whether the survey itself is properly unbiased. In theory an unbiased survey is easy in practice it is harder. The problem with them is that they are often based on small statistical samples and therefore can be unreliable just as the two confidence surveys shown above have proved to be. If you look at how the US economy is proceeding it is the Confidence Board result which looks more accurate to me, but you see I thought that anyway which begs the question of how much value has been added by its existence.

The European Central Bank

On what may well be a significant day for the ECB (we will find out how much of its 3 month LTRO has been taken up) there are other issues it needs to address. It has been going through what a polite man like me would call a difficult phase. After being forced to start a Securities Market Programme by Europe’s politicians where it buys peripheral countries sovereign and private debt it announced that it would “sterilise” the monetary effects. Regular readers will be aware that I do not think that its sterilisation actually works and that its programme is much more like the UK’s quantitative easing than the ECB claims. So it is implementing a policy it has criticised in the past (boasting that its own policies were superior) and its way of excusing this does not work.

Well now even those who believe in its “sterilisation” have a problem as each week it issues instruments to implement the sterilisation and this week less than it wanted was taken up. It has so far purchased some 55 billion Euros of peripheral debt so it needs to issue 55 billion Euros of Term Deposits each week to “sterilise” this. Unfortunately for it only some 31.9 billion Euros were taken up leaving it with a shortfall of 23.1 billion Euros. There were other concerning issues as fewer banks bid (45 compared to the previous weeks 67) and the interest rate paid rose on average from 0.31% to 0.54%.


This policy is certainly creaking at the seams. After the “volte face” involved in beginning the policy the ECB proclaimed that it could sterilise the purchases of peripheral debt so that there was no impact on monetary policy. In my view its system failed to do so and adherents of this policy now have the problem of markets participants not taking up enough of the Term Deposits for them to claim that the policy is working in practice.

Quite why the ECB decided to sterilise with weekly instruments is somewhat baffling  to me.Plainly a longer period would have been both more sensible and also more credible in terms of the policy objective. Also I notice that the purchases of peripheral debt have been mostly of shorter dated maturities when (apart from Greece) pretty much all of the issues ( the “market imbalances” it is supposed to help) are much longer-dated. If you add to this the fact that the policy has no real objective or plan ,it looks somewhat half-hearted and in danger of falling into disarray. I wonder more and more if it was thought up late at night as May 9th became May 10th and in the “shock and awe” atmosphere nobody thought it through properly. To illustrate my point I would suggest that there are no criteria for success and no plan for one day reversing the policy.


Last week one of the commenters on this blog suggested that Greece was about to issue some Treasury Bills and it turned out that he was well ahead of the international news services so hat tip to him. I have to confess that when I read the article he quoted I was still slightly confused. Not by the article which was clear but by the extraordinary lack of intelligence shown yet again by those who should be taking care of Greece’s financial interests. Even by the low standards displayed over the Greek crisis period we may have reached a nadir.

If we go back in time the 110 billion Euro rescue package constructed by the euro zone and the IMF was presented as a vehicle which would take Greece away from financial markets for approximately three years. Yet barely three months later  we find that  the Greek government intends to roll over some 3, 6 and 12 month Treasury Bills which are maturing in July. Adding them together comes to a total issuance of 3.5 billion Euros and the auctions are expected to take place on both  Tuesday 13th and on Tuesday 20th July. Since the rescue package has plenty of ammunition to take Greece through 2011 and hopefully beyond and IMF observers are telling us that the Greek government is doing well with its austerity plans we are left with a puzzle. After all this borrowing should not be necessary. Either we are not being told the truth or someone who does not understand financial markets is in charge or of course both. It is not too late to reverse this issuance.

The Greek government bond market has recently been under pressure again and this move looks very unwise to me. The Financial Times publishes Global Government Bond indices and the one for Greece has fallen 25.5% in the last year but 11.7% in the last month. So the rally caused by displays of financial force from the euro zone did not last long and Greek ten-year government bond yields closed last night at 10.64%. Yields are at this level also for shorter-dated maturities which is in some ways even worse as much or all of their lifespan will be covered by the rescue package. So this is not the time for new issuance.

The 3 month Long term Refinancing Operation

News on this issue has come out as I type. This new LTRO has received some 132 billion Euros worth of requests for funds from some 171 banks which have been fully alloted. This is a smaller number than many expected and so looks good news for euro zone banks and markets although of course it would be wise to wait and see not only where the other 310 billion Euros has gone from its expiring predecessor but its impact.Initial impressions have been misleading before during this crisis.

As the number of banks applying has dropped from 1121 to 171 the amount they have applied for on average has risen from 340 million Euros to around 770 million so what looks good news for the overall system may also have the follow on effect of making investors worry about the liquidity needs of the banks who did apply.

A wry smile

Tucked away in the recent news has been the announcement that one ratings agency has downgraded another. Standard and Poors has put Moodys on negative watch.

7 thoughts on “Greek Treasury Bill issuance plans look unwise and problems for the European Central Bank”

  1. Shireblogger says:

    Dont you get the impression that authorities are running out of macro-economic tools.Sovereigns are joined at the hip to their banking sectors. The BoE state that UK banks’ credit artings are five notches above their financial strength rating due to the sovereign wrap. Politcians have to keep the wrap credible.QE/monetary boosts were to do the heavy lifting and take the strain and have reached their credibility limit. All that’s left is hope for trade growth funded by investors, not banks.

  2. Pete says:

    Hi, yesterday the following reasons for the Greek bond issuance were given in an article of Germany’s Frankfurter Allgemeine Zeitung (

    “Meanwhile, market participants expressed surprise that the Greek government is considering to return in mid-July with the issuance of Treasury bills on the capital market. Actually, many of the aid package from the International Monetary Fund (IMF) and the European Union in the amount of 110 billion euros for the full funding of Greece in the next two to three years, were surprised analysts from Goldman Sachs – and delivered to the statement: As part of the aid package had been agreed that Greece can spend with a limited view of its banks under short-term Treasury bills with maturities of 3-6 months. The objective is to equip the Greek banks, with titles that they can rent at the ECB in the context of securities repurchase agreements.”

    BTW: Great blog.

    1. Hi Pete
      Welcome to my corner of the blogosphere and thank you for the compliment and the link. Even within the limits of Google translate there is food for thought in the section “Greece can spend with a limited view of its banks under short-term Treasury bills with maturities of 3-6 months”. It strikes me that if this turns out to be literally true it is against the principles of the agreement struck….

  3. Actually one of the things that most concerned me when this crisis began was the scale of the response by monetary authorities and particularly by the Bank of England. I was afraid then that there was little left in the locker and was always worried about further down the line……

    I would not be surprised to see further quantitative easing in both the UK and the US if we continue on what in economic terms is a disappointing trend and I am more worried about deflation now than I was then. It is not the only or even the most likely outcome but some of the policy responses have in my view made it more and not less likely

  4. KG says:

    I found this article today, is it a correct view of ECB deviousness?

    [The ECB] …. is currently lending close to €900bn (£728bn) to eurozone commercial banks. This remains at near-record levels since the bank’s creation in 1999.

    Out of those, 1 in 7 (and that’s a lot of banks) needs the 3-month rollover loan at 1% (above market rates) and has opted to take it. This is the figure that comes to €132bn, in the LTRO column in the ECB’s accounts.

    This column was created solely because of what I call ‘the Eurobanks’ liquidity mistrust’ crisis. This is the same one requiring the ECB to act as, single-handed, the replacement for what in a healthy system would be called the Interbank Lending Sector.

    What most media commentators missed out was the fact that the ECB’s normal bank-lending operations column (the MRO) also has a rather large outstanding amount in it – €163bn. These loans are not over three months, but seven days.

    As this is also being offered at 1%, if you wanted to keep the markets calm, this would be a good place to stick some banking borrowers….as it costs them no more apart from more admin charges. It would also be a good place for banks themselves to hide from the glare of anxious investors – so one could say, “Ah, but we aren’t part of the €132bn loan-renewals”.

  5. Drf says:

    Shuan’s remarks about the failure of the MPC to control trend-rising inflation are brought into view today by the statements of two more MPC members expressing their concern about the clear inflationary trend. First we had the revelation that Andrew Sentance voted at the last meeting for an increase. Now we have David Miles admitting that the continuing present level of inflation is too far above the 2% CPI target. Adam Posen also recently made a similar statement in a speech he gave. So we now have 3 MPC members admitting in essence that they know that ongoing CPI is much too far above their target, and implying that they know they should really be voting for a rate increase to bring it back under control; although one has now actually done so, the other two seem to be indicating that although they know that according to their remit they should be voting for an increase, they have been instructed not to do so, and have some regret at having to follow that instruction?

    1. Hi Drf
      Yes there have been developments and I have been reading the speech given yesterday by Adam Posen (an MPC member) which veers between honesty and some rather extraordinary views. So I will write on this subject but we are back with Europe and bond markets center stage I think…

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