Oh mamma, can this really be the end? (Nth reprise)

November 8, 2011

Only in Italy do markets bounce, the currency strengthen, and gold weaken when the leader of political ‘right’ says he will step down (in order, as the traditional Italian formulation has it, to spend more time with his bunga-bunga girls).

Of course Sil hasn’t said when he will go.

As if to remind us that whatever the Greeks can do badly, the Italians can do at least as badly, this limp political comedy will continue.

Meanwhile, the IMF has been invited to Rome, which will give staffers a pre-change-of-government chance to reflect on what actually needs doing to keep Italy in the Euro. Most economists quoted in the press focus on the need to deflate. But this is impractical — Italians couldn’t take the deflation any more than Greeks could. No society can watch its real incomes shrink by a quarter or a third in order to make economists’ graphs look the way they ought to.

The only real way forward for Italy is very serious structural reforms which unlock fairly quick productivity gains and hence growth.

There is no theoretical reason why this cannot happen.

However, the job that will confront the IMF if it is called in to run a programme — which I continue to believe it will be — would exceed anything it has undertaken before.

Not only the labour market and outsize public sector need to be overhauled, but the entire justice system has to be reworked.

Can a foreign agency do such things outside the settlement terms of a catastrophic war? I suspect not. Which leaves two choices. Either give Italy German money and accept the country will not change and will remain a fiscal burden on the centre. Or kick Italy out of the Euro and refocus the group on a more northerly European caucus of states that can actually deliver political, social and fiscal integration.

In the end, it is all politics.

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We like dull

November 8, 2011

Three recent articles make me think how dull and conservative good industrial policy in developing countries needs to be. And how China is proving the point.

The first piece reveals that only 106 plug-in electric cars were bought in the UK in the third quarter of the year. The second indicates that after biding its time, General Electric is making a move into the solar industry (FT sub needed) — but not into the poly-silicon technology that has dominated thus far, instead into the thin film approach that grew out of the US semiconductor business. The third article concerns GE’s third quarter results (FT sub needed), which were none too bad but which were not helped by falling wind turbine prices, a business where GE is already very active.

China has designs on all these green energy businesses. It also has large domestic firms in each sector which are screaming for subsidies. The government could have thrown its money at the most exciting technology — electric vehicles — or at the one where Chinese scientists lead the world — poly-silicon solar. But instead it chose to place its big bets on wind turbines, where the technological path is most established and the cost of green energy lowest, throwing billions of dollars at the construction of Chinese wind farms. It was the boring choice, but it looks like having been the right one — hands down.

As recent press shows, the market for electric vehicles remains tiny. If China had gotten too far ahead of the demand curve, the country could have wasted vast sums on e-vehicle technologies that fizzle. In the solar business, where private Chinese companies dominate global production of poly-silicon cells, there is a real risk that poly-silicon is not going to be the winning long-run technology.

The shape of the evolving wind turbine market, by contrast, is easier to see. It is largely a matter of making the same turbines bigger. In this context, China has created some of the world’s largest wind turbine producers in the space of a few years and there is little chance going forward that they will be ‘technologically disrupted’. They are competing first on price — hence the pressure mentioned by GE in its third quarter results — capturing market share, over-running the entire production value chain so as to ‘own’ the technology, and they will then start to compete on quality and service later.

Sensible industrial policy in a developing country involves plucking low hanging technological fruit. Then you bring cheap capital — human and financial —  to bear.

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Liberal parenting II: blending seamlessly into Cambridge

October 31, 2011

I have gotten into the habit of taking the kids on a very beautiful walk in Cambridge. We cycle five minutes down to the west gate of Kings, lock up the bikes, and enter the college via its back door. We walk down to the college’s internal bridge over the river Cam, survey passing punts and geese, take a loop around the gardens, and exit the front gate to a tiny cake shop down an alley opposite. This is the pay-off for the children. Caked-up, the three of them gambol merrily around the corner to Clare College — to me the most beautiful — via whose courtyards, bridge and fellows’ garden we return to the other side of the river and our bikes.

It is hard not to feel pleased with yourself in such august surroundings with three attractive children behaving with reasonable decorum. I am normally too nervous of them to enter any of the college buildings. But today, seeing there is a service in Clare chapel I accept the request of the eldest to take a look. Arriving early, we mill around with devout, serious-looking old people in the narthex. After a couple of minutes, I am summoned animatedly by the eldest child, eight, to view a large book displayed in the middle of the room in which people are writing names.

‘What is this?’

[I ponder.] ‘It is an ‘In Memoriam’ — in memory — book where people are invited to write the names of those who have died in the last year so that they can be remembered in prayers.’

‘Grandpa died three years ago. Who can we write in the book?’

[Pause.] ‘I don’t know anyone who died in the past year.’

‘I do — Gaddafi.’

‘You are not writing Gaddafi’s name in that book.’

‘Why not? He died this year and someone should remember him.’

‘Because, because…’

‘He died a few days ago… How do you write his name?’

Luckily, at this point the eight-year-old’s younger male sibling butts in with a very loud ‘I don’t like churches’. Before the four-year-old — who originated this refrain and caused a major scene in St Peter’s in Rome last year — can join in, I herd them out.

 

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De-icer

October 29, 2011

[brightcove vid=1245377657001&exp3=45533486001&surl=http://c.brightcove.com/services&pubid=45228659001&pk=AQ~~,AAAACofWkTk~,d-cWVfCeeBH2u4-MzWQrjKX5_f_MoDWg&lbu=http://www.imf.org/external/mmedia/view.aspx?vid=1245377657001&w=300&h=225]

Here is an interesting panel discussion about the Icelandic financial crisis. It is chaired by Martin Wolf (see blogroll), and includes Paul Krugman (see blogroll), Simon Johnson (see blogroll), a deputy director of the IMF, the current head of the Icelandic central bank, and another knowledgeable Icelander.

To recap: Iceland had by some measures the worst financial crisis in the history of the world (Wiki summary here.). However, because there was zero chance the country could bail out its banks — and it is not a Euro area member — they had to go bust, capital controls were introduced, and foreign wholesale funders of the Icelandic banks took the main financial hit. The obvious comparison is with Ireland, which has a similar-size crisis but is in the Euro and partly as a result was forced to go the bank rescue route. So, while Iceland has written off much of its bad debt and is recovering, Ireland is presently set to honour every European cent it owes and faces a decade of painful adjustment.

The event was filmed this week and runs to 1.5 hours. It is just about worth watching the whole thing, but if you don’t have time, scroll through and check these highlights as a taster menu of the way the world has changed — intellectually — as a result of the global financial crisis.

6 mins: Martin Wolf talks about the previously unthinkable phenomenon of the IMF admitting to mistakes.

30 mins: An IMF deputy director actually says: ‘Capital controls were probably the best thing that could be done at the time’. Remember that when the Asian crisis broke in 1997 the IMF was trying to change its articles of association to make a battle against capital controls a centre-piece of its mandate.

57 mins: Martin Wolf talks about the ‘new, cuddly IMF’.

62 mins: The point is made that the lessons of Latin America 1982 and south-east Asia 1997 have were finally learnt such that they could benefit a country (Iceland) whose population is the size of a mid-western town in the US. Roughly speaking, bad US, IMF and World Bank policies were used on approximately 1 billion people in order to learn positive lessons that have been applied to 300,000 people.

89 mins: Martin Wolf talks about the Vickers plan for UK financial sector reform, which he refers to as ‘modern Glass Steagall’. I think it would be fair to say he hopes that this is what it will turn out to be, since the ring-fencing strategy put forward by the final Vickers report has not in fact been tried before.

 

Final thought: the very moment when the IMF is said to have become ‘cuddly’ may be the one when it needs to not be cuddly. Italy, which I continue to believe will require IMF intervention, cries out for the toughest and most invasive kind of IMF action if it is to remain in the Euro area. This includes intervention in institutional areas like legal system reform where the Fund has never previously (to my knowledge) been active. Just when the IMF decided to be nice and listen to Icelandic policy makers, it needs to be Mr. Bad Cop to have any chance with Italian ones. In saying this, I stand by my own preference for Italy to be pushed out of the EU and forced to confront its problems itself — because only that will really force the country to grow up.

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Shaggy dog

October 27, 2011

It’s another fudge from Europe. The European Financial Stability Fund has been ‘theoretically’ expanded through approved leverage to perhaps Euro1 trillion. Private holders of Greek bonds will ‘theoretically’ take a 50 percent hair-cut, though no details have really been agreed. Silvio Berlusconi has delivered a letter ripe with fulsome promises of structural reform in Italy, to add to lots of other fulsome promises he made before.

It was clear in recent days the markets were ready to accept some more thin European gruel as ‘good news’. Corporate earnings in the US continue to be strong and the latest US GDP figures suggest the American economy is slowly crawling away from the abyss. The very slow improvement in the US macro numbers is the bigger economic story, albeit less trumpeted in the press.

The European train wreck waiting to happen has been moved back down the line. But not far. In the absence of any substantive structural change in Italy, a train wreck there will be. The base case remains remains an Italian fiscal crisis and IMF intervention in the absence of any EU capacity to address the problem.

In the mean time, Italy’s negotiating position can only be strengthened by the ECB’s continued purchases of its debt (EU debt socialisation by the back door) and by the Greek debt hair-cut (What about us, another ‘young’,  ‘peripheral’ European state?). Time to write about something else for a while.

Next day update:

Porco cane! Rome auctions some debt this morning and the market still wants 6 percent (FT sub needed)… In fact the cost of Italian public debt has gone up to a new record. Is it possible that people outside the Italian elite are less stupid than they thought?

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Un-modern family

October 24, 2011

You’ve got a big mummy who hasn’t aged that well but has cash. Your dad is a bit flash but somewhat light-weight and ineffectual. And you are still sponging off your parents despite the fact you are 75 years old.


Sound familiar? That’s right, it’s the Germany-France-Italy relationship.

The sight of Frau Merkel and Sarko-I-can-do-a-serious-face-too chastising Big Baby Silvio Berlusconi is like watching some super-sick sitcom that makes Modern Family seem like straight play.

Sil is going to have an emergency cabinet meeting (FT sub) to talk about really really really doing something to sort out Italy’s structural problems.

I am soooooooo excited.

Betchuartooo.

 

Mum and Dad are questioned about Sil:

Here is the presser where a journalist asks in French if Mummy Merkel and Daddy Sarko find Sil’s promises about what he is going to do convincing. The facial expressions are priceless. There have been a couple of hundred thousand page views already.

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Sunday bloody Wednesday

October 20, 2011

Italian debt yields are back over 6 percent. So France and Germany react by announcing that Sunday’s last-chance saloon summit on European debt and economic restructuring will go ahead, but won’t reach any decisions. Instead there might be another summit on Wednesday. Or Thursday. Or next weekend. Maybe Sarko and Merkel are hoping the markets will really fall apart so they can be seen to be forced to do something. This is the most likely endgame. But of course if they are forced by a market crisis, France and Germany will react with a bail-out package rather than a new political agreement that puts the EU on a sustainable track to being the world’s most desirable economic bloc to live in. That would involve a political and institutional agreement, not a conclave of thieving banker types trying to structure the EFSF in a sufficiently complex way that the world is conned into thinking that all is well.

While pondering this, I check the press at the end of the day and am saddened to discover that Berlusconi is dead. ‘Maverick dictator with little regard for reality’ says the headline of the obit in the FT (sub needed). It is a bit tough to say of a deceased G8 leader that he ‘had a grandiose vision of himself and of his country’s place in history’. None the less, Italians certainly ‘were impoverished and repressed by his policies but nonetheless forced to pay homage to the illusion that he was a political visionary’. However, surely the FT has got it wrong with the claim that Berlusconi was born in a tent near Sirte in 1942? Wasn’t he born in Milan in 1936?

 

 

 

 

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Flummoxed

October 11, 2011

The latest remarks of European leaders about the EU crisis, and the markets’ positive response, leave me at a loss to understand what is going on. The idea seems to be that having a bit more argument about the shape of a Greek debt write-off, and moving forward with the recapitalisation of banks, is all that needs to be done.

The rhetoric assumes that this is a financial crisis. It isn’t. At heart this is a political crisis of the EU. It requires two societies — Greece and Italy — to decide whether they are going to adjust to the requirements of EU- and Eurozone membership. There are good arguments why both these states might want to cut and run. If they really cannot adjust their institutional frameworks to allow them to compete at European levels, they are better off outside the union.

But whatever is decided, the problem is a political one with only political solutions. Martin Wolf (FT sub needed) seems to think the same.

 

 

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And mayonnaise all over

October 6, 2011

In the finest traditions of the Italian judiciary, the presiding judge in the Sollecito-Knox appeal — Claudio Pratillo Hellmann — has been giving interviews to the press.

You can guess what he said: this has been a terrible mess, creating appalling trauma for innocent people, in particular the Kercher family. We really have got to get an independent prosecution service set up — like the CPS in the UK — and start following our rules about criminal investigations. Plus, we need a full public enquiry into the whole thing, not least the conduct of the police, why no tapes of the Knox interviews were ever produced, allegations of physical attacks on journalists, and so on. And don’t even get me started on Mignini…

But of course I am joking. What Hellman really said (let me stress I have not had time to read the original text in Italian but John Hooper is a serious correspondent) is that it is quite possible Sollecito and Knox were party to the murder, that Mignini is at the top of his game, and that the issues are really very complicated.

Many open-minded Italians will forgive Hellman because his brave decision to do the only sensible thing and have the forensic ‘evidence’ looked at by more serious people decided the outcome of the case. He is likely just covering his fanny, as they say in America. But in covering his fanny he is ensuring that everything will stay the same. Which means that people less interesting, less white, less attractive and less well funded than Sollecito and Knox will continue to get stitched up unnecessarily.

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Who knows more about extortion, Part II

October 5, 2011

You will remember that back at the start of August in Banking the Sopranos I took a look at Italy’s debt profile and suggested that a) the markets were going to realise that Italy is a much worse risk than Spain and b) that the scale of the Italian liability is such that the power of extortion lay with the Italian side in its dealings with the EU. The Italian government then — in a stroke of comic genius — promised to legislate to make itself solvent.

Two months later we have senior IMF officials saying the Fund is ready to buy Italian debt, and northern Europe (Germany) readying to recapitalise banks such that they can survive big write-downs in ‘peripheral’ country sovereign bonds. The Sopranos look to be almost home and dry without even having to make Mrs Merkel an offer she can’t refuse.

But have the Germans really thought this through? Even if German banks had to write down 50 percent of the value of their (Greek and) Italian bonds they could manage with government back-stop of Euro100 billion, or less than 3 percent of GDP. It is a heavy price, but the return would include pushing Italy out of the Euro as a very profound lesson to other EU miscreants (particularly the eastern European periphery) and giving a world-first lesson about moral hazard to the banking sector, which would eventually have to pay off the write-down. People say that Italy is an important market for Germany, but given the condition of the place it is not going to be a growth opportunity for anyone. Sometimes, as the Chinese say, you need to cut a monkey’s head off to scare the chickens.

I say all this as someone whose family assets are largely concentrated in Italy. We have more than most to lose. And yet I think it would be better to throw Italy to the dogs than to move forward with a bail-out that enforces no fundamental structural change. Either Italy should be inside the Euro with a dramatic structural reform programme led by the IMF, or else outside it with a debt reduction but no one to turn to but itself. As I have written before, if Europe wants a more worthy cause for its patience, why not try Turkey?

 

More:

There are FT discussions of latest European bank bail-out plans here and here (sub needed).

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