Posts Tagged ‘financial crisis’

What’s the Greek, Portuguese, and Italian for ‘escrow’?

February 6, 2012

Naughty children shall not have their pocket money. So says every right thinking parent, and so says Frau Merkel about the insufferable Greek ruling class. Even if Greece does get its new bail-out, it won’t see the money. Instead, funds are to be held in an escrow account and released to little Johnny as and when he applies himself to various jobs in hand.

I really can’t say I disagree. Brave Dave Cameron has been urging Merkel and Sarko to ‘just bloody well hand over the dosh’, but since it’s not his money and he doesn’t even participate in Europe, he and the Fat Controller would say that.

Escrow, I think, will be a model arrangement for forthcoming bail-outs for Portugal and Italy. Europe has been round the block with Italy already in the 90s over Euro accession and not a thing got done in terms of structural reform. Frau Merkel is leading Europe. In another 20 years people will look back and realise how important this was. (And what a dreary footnote the Brits were.)

Meanwhile, Reuters seems to have arrived at my view of the Monti government’s efforts so far, posted a couple of weeks ago here.

This is the FT on escrow (sub needed).

The Latin American option

December 21, 2011

With the ECB doling out almost half a trillion Euros of 1 percent three-year loans to European banks, I am made to think of Latin America in the 1980s. Remember that the Latin American crisis started in Mexico in the autumn of 1982, but it wasn’t actually sorted out until 1989 with the Brady bonds deal (not very clearly explained here). In between, the Fed and other central banks conspired to keep the banks that had lent way too much to Latin America alive.

Maybe the ECB can do that with Europe. If it lends enough cheap money to European banks, perhaps enough of it will be spent by the ‘private’ financial sector on government debt to keep all countries in the Euro. Then the ECB can wait for the US economy to recover and restructure all the debt in a better economic environment — much as the US did at the end of the 80s rather than in the early 80s recession. Southern Europe, like Latin America, just has to put up with a lost decade of growth and steady capital flight. Which is hardly a new thing.

This scenario doesn’t really feel likely to me. Above all Italy and Spain are way more important to aggregate rich-country demand than 1980s Latin America was. Italy may want to think it is Mexico, but actually it is France behaving like Argentina. If you know what I mean.

Which seems to lead to the conclusion that this baby’s gonna blow. Oh dear. Did I mention the IMF before?

 

IMF, IMF, riding as to war

We all hope you will not be

As clueless as before

Oh! [repeat indefinitely until IMF arrives]

 

The wrong menu

December 5, 2011

With the publication of Monti’s ‘nation saving’ budget in Italy (here in Italian) and news that Frau Merkel and Sarko have agreed a ‘fiscal compact’ to save the Euro we can see the shape of a week that may postpone Italy’s exit from the Euro but which will surely make it yet more likely in the long run.

First, Monti’s budget looks like a classic Italian serving of pointless, bureaucratic complexity. There’s another expensive-to-collect tax on yachts, and one one private aircraft, which will doubtless raise a net of about 8 euros. There is the return of property tax on first homes, but at a pretty low level and with various possible exemptions. Note that there is no attempt at simplification of different house-related taxes by, say, merging the new levy with the tax on rubbish disposal (known by the acronym TARSU), and sacking half the people who collect these taxes. Monti, may be a technocrat in theory, but this looks like the standard, tried-and-failed fare of the left-of-centre parties. On that note, the Welfare Minister cried while announcing pension cuts (perhaps troubled by the enormity of her own salary).

Why not do tax like Italy does its food? Simple, digestible and to the point. And then apply the tax. You never get to leave a restaurant without paying.

Meanwhile Frau Merkel and Sarko are coming up with a scheme to sanction countries like Italy that don’t stick to budget targets. This plays to German political opinion, but completely misses the point.

It treats Italy as a debt problem. But it isn’t. Italy is a growth problem that can only be resolved with legal system, bureaucratic and labour market reforms that make growth possible. Italy needs to be made to work institutionally.

All this Merkel-Sarko deal is likely to do is to keep the fiscal squeeze on Italy and provide a temporary respite for the Euro. But if Italy cannot grow it will never be able to pay its debts, even at 5% interest.

What we are likely to get this week will be the worst possible outcome. There won’t be pressure for pro-growth reforms from Merkel. And Mario’s budget performance suggests he can’t produce institutional change either.

The Italian economy will just shrink away faster than cuts can be made and taxes levied.

More:

The FT (sub needed) on Merkel and Sarko’s agreement.

Improbable ideas

December 1, 2011

Martin Feldstein pens a curious opinion piece (FT sub needed) arguing that Italy is perfectly capable of saving itself from a Euro exit. Did anybody ever suggest otherwise? Italy is capable of anything. The problem is that the country’s political and professional classes are incapable of putting national interest before their own.

Is there a mechanism to make the professional class behave? My thought is that rather than some counter-productive tax raid on bank accounts (as is often suggested in Italy), what would be much more effective would be a mandatory conversion of a share of bank deposits over a certain minimum into government bonds yielding 5 percent interest. No one would have their savings confiscated — indeed they would get more interest than in the bank. Such a move would have the effect of forcing the Italian elite to take responsibility for debt and therefore for economic reforms that would lead to growth.

The cash raised could be used to pay down a chunk of debt, thereby reducing interest demanded on the rest. But the real objective would be to get Italians focused on reform.

It is often pointed out that Italy’s private wealth is three to four times its public debt. The real issue is getting people to take responsibility.

The problem? Can you imagine Monti calling the MPs into a closed-door meeting of parliament and demanding they vote to support such a move? They’d all be trying to make mobile phone calls to their bankers ordering TTs to Switzerland.

IMF headlines you thought you’d never see

November 30, 2011

The FT (sub needed) today has an article headlined ‘IMF raises alarm on capital flows’. I kid you not.

It is about a new IMF report highlighting cross-border risks from uncontrolled capital flows. This from the agency which helped global banks rape half the world by campaigning for the premature lifting of capital controls in Latin America and Asia in the 1970s and 80s. (You will remember that the IMF was trying to make the abolition of all capital controls an objective in its Articles of Association in the midst of the Asian financial crisis in 1997.)

The FT is apparently unaware of the ironies inherent in an article of this nature. One era just segues into another.

 

What I meant was more tank engines

November 29, 2011

As I stop for a tuna sandwich, the Fat Controller has left the Treasury and is heading for parliament. Here is what I predicted in January. Let’s see how Osborne’s admissions today measure up.

Next day:

1. Osborne changed his growth forecast for 2012 from 2.5% to 0.8%, so at this point he was out at the start of the year by a fact of just over three.

2. There will be a few more tank engines, but any real impact from the Fat Controller’s plan depends on the private sector coming in to leverage about £5 billion of public money. HM Treasury explication of its ‘clear’ infrastructure plan is here.

3. It is very small beer from Osborne, less than I expected. Outlook has to be that growth will fall even further than he now says and there will be some additional capex stimulus in the first half of 2012. He is going to follow the curve rather than influencing it throughout this crisis.

4. Politically the FC is taking the low road of a blame game. It’s all the fault of the Eurozone and the previous long-lived Labour government. There is a sufficient kernel of truth in this to deflect attention from the fact that Osborne himself has no new ideas about anything.

Chicken, with insufficient traffic

November 28, 2011

‘Chicken’ is supposed to be an exciting game, which ends with someone getting splatted on the road by an oncoming vehicle. But this Germany-Italy variant is going on way too long. Frau Merkel and (now) Mario stand in the road, ready to hop out of the way of the next speeding truck, but none passes.

Instead, there’s the odd slow-moving three-wheeler. The interest on Italian debt makes a new peak over 8 percent. So the ECB buys more bonds. The stock markets languish, then find some excuse to rally a bit. European growth goes down a bit, US growth goes up a bit. Frau Merkel does nothing. Mario does nothing.

Frankly, I’m nodding off. Rather than ‘chicken’, this is more like Italian football. It is touted as a great game, but turns out on inspection to be thoroughly dull. Each team tries to win by doing less than the other one.

Perhaps this is how the Great Depression earned its name? The politicians just bored everyone senseless.

 

Update:

Nouriel Roubini has a sensible analysis of why Italian debt will have to be restructured in the FT (sub required). He points out that the idea of a big, one-off Italian wealth tax is unworkable. It will just lead to massive capital flight and falling demand that causes real depression. Sure Italians have cheated their taxes for generations. Sure the professional class is unworthy of the name. But the problem is an institutional one and the only solution is institutional reform. Having another tax would be the equivalent of the standard Italian thing of having another law. What needs to change is systems, mechanisms, beginning with the legal one. So give the more-thoughtful-than-previously-IMF the remit, and send them in.

The fork in the road

November 17, 2011

It isn’t easy to see amid all the goings on, but there is a fork in the economic road. A third week of improving jobless claims in the US signals the very slow recovery of the world’s biggest economy. Meanwhile the spreading of the stress in European debt markets signals that the worst in that region is yet to come.

The world is suffering two different macro crises. A private debt disaster hit countries running the Anglo-Saxon model. As Hyman Minsky would have expected, the US is beginning to escape from this because its government carried sufficiently low debt that it could step in and bail the problem out with monstrous sums of public money. The US is also assisted by having a diversified economy that contains the planet’s best manufacturing firms in addition to its biggest banks (something not considered in Minsky’s ‘financial instability hypothesis’, but then he never claimed it was a complete theory). The UK, and Ireland, and Spain, are more one-dimensional and hence more stuffed. As this article makes clear in Britain’s case.

The second macro crisis is the public debt one of the Eurozone. Here the state cannot step in because its debts are the problem. Instead the state has to negotiate its way out. Which involves politics. Which is why the problem is more intractable than the private debt disaster where the solution is automatic (deleveraging, falling asset prices, misery for anyone who failed to ‘play the market’).

The major ‘negotiation’ of the public debt crisis in Europe is Italy’s, which is now in its ‘Chin Up, Let’s All Stand Together Phase’, under Mr Monti. The press today is being terribly positive. But I cannot see where a good outcome could come from. Italians are all in favour of Mr Monti because he has not yet set out clear policies. Once he does, the political parties will attack him, and allege that dark, conspiratorial forces are behind him. Without a clear roster of policies that have to be approved by a referendum, there is no practicable way forward. And no party is urging a referendum because it would involve making policy choices clear. The parties were not even willing to offer up ministers for the government. The preference is to let the ‘technocrat’ dig his own grave.

 

Rich and miserable, by graphs

November 15, 2011

Krugman highlighted a great site on his blog this week. And it is a great site, so here’s the link if you haven’t seen it.

The World Top Incomes Database has income distribution data for 22 countries, with more being added, over long periods of time. Go to the graphics page and you can call up series for different shares of the population for your favourite countries.

I went for the top 5 percent of tax payers in the UK, US and Denmark since 1900. The top 5 percent of earners in the US and UK have gobbled 25-30 percent of national personal incomes in recent years. In Denmark — the country which consistently tops out the rankings in European ‘happiness’ surveys — the percentage is consistently under 15 percent. (UK and US shares were of course lower until the well-known inflection point in the 1970s).

Unfortunately I can’t reproduce the graph here. But you can make your own.

Oooh la la…

November 14, 2011

Should have posted this rather nice graphic from the NYT a few days ago, showing debt relationships in Europe.

It reminds us, as Mario Monti goes to work, that the Italian debt buck stops in France.

For it is the French banking system that has a net exposure to Italy of something over US$350 billion.

When the history of recent world banking is written, US and  British bankers will take the prize for unadulterated, venal greed and selfishness.

But French bankers must surely lift the trophy in the combined greed-with-stupidity category.

The French liability in Italy is about 15 percent of French GDP. Which particular risk model were the French banks running when they decided that was a good idea?