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Authored by Martin Feldstein, originally posted at Project Syndicate,

Recently, newspaper headlines declared that Greece would have a balanced budget for 2013 as a whole. The news came as quite a shock: Recall that when Greek officials came clean about the true state of their country’s public finances in 2010, the budget deficit was more than 10% of GDP – a moment of statistical honesty that triggered the eurozone debt crisis. It seemed too good to be true that the Greek deficit would be completely eliminated in just three years.

In fact, it is too good to be true. Any reader who went beyond the headlines soon discovered that the prediction of a zero budget deficit was in fact misleading. The International Monetary Fund was predicting only that Greece would have a zero “primary” budget deficit in 2013.

A “primary” budget deficit (or surplus) is the difference between a government’s outlays for everything excluding the interest payments that it must pay on its debt and its receipts from taxes and other charges. In the case of Greece, the interest payments apply to government debt held by Greek individuals and institutions, as well as to government debt held by the IMF, the European Central Bank, and other foreign lenders.

The overall budget deficit is still predicted to be 4.1% of Greece’s GDP in 2013 – a substantial improvement compared to 2010 but still far from fiscal balance. The difference between the overall deficit and the primary deficit implies that the interest on the Greek national debt this year will be 4.1% of GDP.

Moreover, the Greek government’s interest payments are exceptionally low. Given that its debt will still be about 170% of GDP this year, the 4.1%-of-GDP interest bill implies that the Greek government pays an average interest rate of just 2.4% – far less than the nearly 9% rate that the market is now charging on ten-year Greek government bonds.

The difference reflects a combination of the lower rate on short-term debt and the highly favorable terms on which Greece is now able to borrow from official lenders at the IMF and the ECB. If Greece had to borrow at the market interest rate on ten-year bonds, its deficit would rise by 6.5% of the Greek government debt or 11% of GDP. In this case, the overall Greek deficit would be about 15% of GDP, putting its debt on a rapidly exploding path.

Greece’s economic weakness increases the current level of the deficit. Five years of declining GDP have depressed tax receipts and increased transfer payments. The IMF estimates that these cyclical effects on revenue and outlays have raised the overall deficit by nearly 5% of Greek GDP. On a cyclically adjusted basis, Greece’s overall budget would show a surplus of 0.6% of GDP this year.

This also implies that if Greece could escape from its current recession, its national debt would decline, both absolutely and as a share of GDP. More generally, the national debt of any country grows by the size of its budget deficit or declines by the size of its budget surplus.

Even an economy with an overall budget deficit will have a declining government debt/GDP ratio if the growth rate of its nominal GDP exceeds that of its debt. For Greece, with an overall deficit of 4.1% of GDP and a debt/GDP ratio of 170%, the debt ratio would fall if the combination of inflation and real (inflation-adjusted) GDP growth exceeded 2.4%. Stated differently, now that Greece has achieved a zero primary budget deficit, its debt burden will decline if its nominal growth rate exceeds the average interest that it pays on its government debt.

Budget deficits and the resulting national debt are important not only in themselves; they also contribute to a country’s current-account deficit, which is the difference between its level of domestic investment by businesses and households in structures and equipment and the amount that it saves to finance those investments. That amount, which includes the saving of businesses and households, is reduced by the amount that the government borrows.

In the case of Greece, the saving of businesses and households exceeds the level of investment in businesses and housing by just enough to outweigh the dissaving by the government, resulting in a very small current-account surplus. Stated differently, Greece is now able to finance its current level of consumption and investment, including government and private spending, without relying on capital inflows from the rest of the world.

Looking ahead, the IMF predicts that Greece will have a gradually rising primary surplus and a gradually declining overall deficit over the next several years. But, unless Greece is able to increase its rate of economic growth, the budget will remain in deficit and the debt will remain at nearly its current share of GDP.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/bcfKo_3fYUw/story01.htm Tyler Durden

As many expected (due to his tax fraud conviction):

• *ITALY SENATE REJECTS MOTIONS TO ALLOW BERLUSCONI TO KEEP SEAT
• *FORMER ITALIAN PREMIER BERLUSCONI OUSTED FROM SENATE

Of course, Sylvio is not happy:

• *BERLUSCONI SAYS HIS OUSTING WON’T LEAD HIM TO RETIRE TO CONVENT
• *BERLUSCONI SAYS TODAY IS ‘BITTER DAY’ FOR DEMOCRACY

Indeed!

Perhaps our favorite…

• *BERLUSCONI SAYS HE WAS ACQUITTED IN 57 TRIALS

Which reminds us of the old story that ends… “… and I shag one sheep…”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4YSXbtGlIe0/story01.htm Tyler Durden

If this week’s 2 year auction was an indication of a rising Bid to Cover, and the 5 Year yesterday showed a modest decline, the just completed 7 Year auction was evidence that any rumors of a pick up in ultimate demand in the belly and the long-end of the curve are greatly exagerated. The initial indication of how weak the auction would be came moments before the 11:30 am announcement, when the When Issued was trading at 2.094%. When the formal announcement from the Treasury came that the bond had priced at a high yield of 2.106%, or tailing by a 1.2 bps, the bond complex promptly exhaled. Things only got uglier when looking at the internals: as noted above, the Bid to Cover came at 2.36: a sharp drop from the last auction’s 2.66, well below the TTM average of 2.62, and the lowest going back all the way to the 2.26 in May 2009. The takedown was just as unimpressive, with Direct interest sliding to just 16.14% of the final allocation, Indirects likewise seeing their allotment tumble from 42.30% to 34.07%, the lowest since February, which left Dealers holding half of the auction, or the most since June 2012.

In other words, demand for anything to the left of the belly is strong. But once one enters the 7 Year and onward bucket, things are starting to get shaky.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/A7NIVZ5-xCk/story01.htm Tyler Durden

In late 2010, we wrote: “The World’s Most Important Trading Desk Is Not At Goldman, But Is On The 9th Floor Of 33 Liberty Street” in which we said “even though our good Samaritan friends at One New York Plaza may take offense to this designation, the trading desk that controls the formerly free world is not located anywhere on the premises of Goldman Sachs, but is instead situated on the 9th floor of 33 Liberty Street, also known as the home New York Fed. From a trading desk cluster at this location, 39 year old Brian Sack controls the uber-secretive money flows that determine the daily fate of credit, equity and virtually all other markets, that have now been subsumed by the government’s central planning ambitions and aspirations to determine each and every uptick in the increasingly more irrelevant S&P 500.”

Since then Brian Sack has moved on, replaced by the levitating market wizard, Simon Potter, and his disciple Kevin Henry. However, while we identified long ago the “wealth effect” nerve center of the New Normal, one thing largely unavailable, was pictures of this trading desk with seemingly no sell buttons. Until now: below, courtesy of Wall Street on Parade, we present a modest compilation of not only what the current NY Fed trading desk looks like but also compare it to its predecessor, as it appeared on vintage photos from the 1930s.

Now:

The Trading Desk at the New York Federal Reserve Bank can influence and manipulate our markets. William (Bill) Dudley is Manager, CEO, and continuing member (vice chairman) of FOMC. (Source)

 

 

 

 

 

 

Blake Gwinn, left, and James White in the operations room at the Federal Reserve Bank of New York (source)

 

 

 

 

 

 

 

 

A Trader Monitors Four Computer Screens on the Open Market Trading Desk at the Federal Reserve Bank of New York (source)

 

 

 

 

 

 

 

Is that Kevin in the foreground? Open Market Trading Floor at the Federal Reserve Bank of New York (source)

 

 

 

 

 

 

 

And then:

New York Federal Reserve Bank Trading Floor Before Computer Screens (source)

 

 

 

 

 

Trading Area of New York Fed, Vintage Photo (source)

 

 

 

 

h/t Wall St. On Parade

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ByMql4zHz-w/story01.htm Tyler Durden

In late 2010, we wrote: “The World’s Most Important Trading Desk Is Not At Goldman, But Is On The 9th Floor Of 33 Liberty Street” in which we said “even though our good Samaritan friends at One New York Plaza may take offense to this designation, the trading desk that controls the formerly free world is not located anywhere on the premises of Goldman Sachs, but is instead situated on the 9th floor of 33 Liberty Street, also known as the home New York Fed. From a trading desk cluster at this location, 39 year old Brian Sack controls the uber-secretive money flows that determine the daily fate of credit, equity and virtually all other markets, that have now been subsumed by the government’s central planning ambitions and aspirations to determine each and every uptick in the increasingly more irrelevant S&P 500.”

Since then Brian Sack has moved on, replaced by the levitating market wizard, Simon Potter, and his disciple Kevin Henry. However, while we identified long ago the “wealth effect” nerve center of the New Normal, one thing largely unavailable, was pictures of this trading desk with seemingly no sell buttons. Until now: below, courtesy of Wall Street on Parade, we present a modest compilation of not only what the current NY Fed trading desk looks like but also compare it to its predecessor, as it appeared on vintage photos from the 1930s.

Now:

The Trading Desk at the New York Federal Reserve Bank can influence and manipulate our markets. William (Bill) Dudley is Manager, CEO, and continuing member (vice chairman) of FOMC. (Source)

 

 

 

 

 

 

Blake Gwinn, left, and James White in the operations room at the Federal Reserve Bank of New York (source)

 

 

 

 

 

 

 

 

A Trader Monitors Four Computer Screens on the Open Market Trading Desk at the Federal Reserve Bank of New York (source)

 

 

 

 

 

 

 

Is that Kevin in the foreground? Open Market Trading Floor at the Federal Reserve Bank of New York (source)

 

 

 

 

 

 

 

And then:

New York Federal Reserve Bank Trading Floor Before Computer Screens (source)

 

 

 

 

 

Trading Area of New York Fed, Vintage Photo (source)

 

 

 

 

h/t Wall St. On Parade

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ByMql4zHz-w/story01.htm Tyler Durden