Creative accounting is nothing new for the Eurozone

Frances Coppola blogs on the Austrian government’s crash investigation into the failure of Hypo Alpe-Adria (latest detail – the biggest participant in the run on the bank was its garantor), also known as Haiderbank, and on the related topic of the Juncker Commission’s “investment plan”. The link is that the investment plan relies on a succession of heroic accounting assumptions to bulk up the final number without putting in any, you know, actual munn, and the Austrians’ response to the Haiderbank’s failure was based on a lot of funny figures. Frances so:

But what struck me from this report was the sheer naivety of the government officials involved. They were like children playing with fireworks. The instruments they were handling blew up in their faces and they were badly burned. And Juncker wants government officials to do MORE of this sort of thing?

There is a worrying tendency at the moment for public officials worried about deficits and debt/gdp ratios to hide public liabilities off the balance sheet. But the HGAA saga should sound an alarm about this practice. The Carinthian guarantees were all off-balance sheet – but collectively, they were enough to bankrupt Carinthia, which as a sub-sovereign must balance its books. In fact they were sufficient to place the finances of Austria itself under considerable strain, as well as setting up a nasty spat between Austria and Germany with EU-wide implications. And it is painfully evident that government officials lack the expertise to understand the legal and financial implications of the complex financial instruments involved. The ease with which BayernLB’s experts could deceive Austrian government officials is frightening.

I disagree. I would be very surprised if Austrian finance ministry officials were at all naive about the possibilities of structured finance at the edge of the zone of acceptability. Why? Well, way back in the day when Hypo Alpe-Adria was doing its thing funding Jörg Haider’s career and I lived in Vienna, I remember that time Karl-Heinz Grasser, then finance minister before being disgraced in a corruption scandal, got the federal government to sell the lakes of Carinthia to the federal forestry service, for which the government extended its foresters €215m in credit until they could sell other property to meet the bill.

Somehow, because the deal was “Maastrichtkonform” in the jargon of the day, this meant that Grasser could book the money as in-year revenue but not any additional government debt in the EUROSTAT definition (because while the foresters had acquired a liability of €215m, the fisc had a matching receivable of €215m), and as a result, that he (and Haider as junior coalition partner, and prime minister Wolfgang Schlüssel) were lionised for achieving, you guessed it, a “schwarze Null”, although that wasn’t the expression they used.

I’ve no idea how the accounting treatment could possibly work, but of course that wasn’t the point. By the time the matter had gone up to where-ever it needed to go in Brussels, the relevant deadline would have passed, and if the European Commission complained, well, there would be a fine opportunity to indulge in nationalist whining. Hauptsache, the budget was balanced, for an instant, under their preferred definition, on the relevant day. As it turned out, the assets were worth about a quarter of that.

Wonderfully, since then, some of the same property has become the object of another financial scandal.

The point of this bit of dated little-country political gossip is that funny figures aren’t an exception in the eurozone. They’re constitutive of it. The original Stability Pact launched a culture of creative accounting that is still well with us. France got in because France Telecom “voluntarily” loaded up its balance sheet with debt to finance a “voluntary contribution” to the government that just so happened to be enough. The phone company could do this because the government still owned it and guaranteed its debts.

I’m sure every other country in the eurozone has at least one similar story – it was the first great era of financialisation and privatisation, creating all sorts of interesting opportunities just at the same time as there was a huge incentive to cook the books.

That said, you’ll get no disagreement from me about this:

This is no way to do public investment. We should be keeping public investment ON the balance sheet, where the risks can be seen and properly managed, not sweeping it under the carpet and pretending it doesn’t exist. Juncker’s call for EU member states to make greater use of “innovative financial instruments” is madness

It’s Baaack: Looming Greek Elections Threaten To Re-ignite the Euro Crisis

If at first you don’t succeed, try, try again……  aka third time unlucky.

The Euro crisis has all the signs of being back amongst us, and this time it may be here to stay. After two earlier false alerts – one in July around the collapse of the Portuguese Banco Espirito Santo, and another in October over the state of the Greek bailout negotiations – the announcement this week that the Greek presidential decision was being brought forward to December has sent the markets reeling off into a complete tizzy. Continue reading

Three economic history papers you should totally read

The Berkeley Economic History Lab is blogging a lot of its recent working papers, and they’re a goldmine of great stuff. Here’s Richard Sutch writing in October this year, whose The Liquidity Trap, the Great Depression, and Unconventional Policy: Reading Keynes at the Zero Lower Bound basically recovers an important idea from the General Theory and Keynes’ practice during the Depression.

Sutch’s gloss of Keynes is that an important way in which the zero lower bound constraint bites is that there is always a term-structure of interest rates, rather than anything like a single economywide rate of interest. As a result, even if short rates hit the ZLB or even go negative, a large segment of the yield spectrum will still be significantly positive. This of course has some consequences for the debate about when Keynes broke with the Wicksellian idea of a single market interest rate that might deviate from a full-employment natural rate.

He argues that Keynes micro-founded this on differences between the risk profiles of borrowers and lenders. Borrowers and lenders both face the risk that whatever enterprise is being financed will fail and the loan won’t be paid off. Borrowers stand to lose whatever security is put down for the loan, while lenders stand to lose the difference between the security and the principal (i.e. their risk is fundamentally about estimating how much security is enough). In theory, arbitrage should transmit lower rates at the short end along the whole curve, because if you can borrow for a year and roll it over cheaper than you can borrow for 5 years, you will.

But here’s the problem; lenders bring their own idiosyncratic risk to the table. Each event of refinancing brings with it the risk that potential lenders have become illiquid, a so-called sudden stop. This always exists unless the life of the loan matches the life of the asset exactly, and it is an attribute of lenders, not borrowers. Therefore, long-term credit comes at a premium, and in a sense what is “long” is defined in relation to the typical life of capital investments.

Therefore, it’s quite possible for the policy rate to hit zero or even theoretically drive through the ZLB, while a large proportion of the universe of credit still has significantly positive real interest rates. This implies that unconventional policy of some sort – perhaps a combination of QE and an “Operation Twist”-like effort to target long rates, or direct fiscal reflation – would be needed and that’s what the man concluded.

An example of the sudden stop would be another of their papers, Olivier Accominotti and Barry Eichengreen’s The Mother of All Sudden Stops: Capital Flows and Reversals in Europe, 1919-1932. In this one, Accominotti and Eichengreen have literally discovered a trove of historical documents in an archive. It’s a catalogue of major capital-raising exercises in Europe in the 1920s and 1930s, covering the major financial centres and most of the second tier as well. The conclusion is that the rolling financial crisis starting with Creditanstalt in 1931, defined as a sudden stop of international lending followed by capital flight, was driven by volatility in the stock market – it was, in fact, the Great Crash and its lesser crashes that did it. The correlation with volatility in world equities was much higher than with any economic variable in the countries affected.

An example of policy would be Eric Monnet’s Financing a Planned Economy: Institutions and Credit Allocation in the French Golden Age of Growth (1954-1974). This one comes from Paris School of Economics – surely the fac Piketty these days – and you can tell because it’s crunchy with empiricism. Monnet has constructed a database of lending registered with the Banque de France that provides series into very detailed industrial sectors, and another one of firms’ operating results based on tax returns, going through what sounds like epic pain to match the excisemen’s classification up with the central bankers’ and further with the national statistics. The key result is that the change in the state-directed, or as he would put it, state-influenced lending was very strongly correlated with internal rates of return, implying that the system worked well as an allocator of capital.

He’s also done a lot of qualitative work to understand how the French financial sector worked at the time. It was a lot more complicated and subtle than the caricature of being directed by the government, and it evolved over time. To begin with, a lot of lending really was directed by government and issued by the finance ministry, mostly to large capital projects in infrastructure and heavy industry. With time, the heavy lifting moved to a new layer of specialist lenders who faced projects in manufacturing, housing, and tourism. Influence rather than control was very much the point. The key financial product was long-term lending of 5 years plus.

There’s much more stuff in there – the fall of the USSR in a trade perspective, equities and anti-Semitism, Ottoman and Austrian administration and their long-term effects on growth.

Euro-nationalism is still a terrible idea.

This piece about Catalan #indyref crystallises everything I hate about what I call Euro-nationalism. It’s wonderful that they’re all so engaged:

Kilted men wearing saltire capes and foam fingers on both hands danced in the aisles as “The Red Hot Chilli Pipers” played a bagpipe version of Don’t Stop Believing.

Sorry. That was the other lot. Let’s try that again.

Clara, 20, a university student, is one of nearly fifty thousand volunteers who made Sunday’s vote on Catalan independence possible. I meet her sitting behind a ballot box in a school-turned-polling station in Barcelona, a big smile on her face…

But what is it they actually want to do with independence? Well, stop paying into the Spanish government’s finances. What this means is nicely demonstrated by the following map from here. Blue regions’ per capita GDP is at 90% or more of the EU average. Yellow ones are between 90% and 75%. Red ones are 75% or lower.

European_regional_policy_2014.svg

So what we’re really saying here is “Stop paying social insurance for people in places like Extremadura, some of the poorest people in Europe. Punkt, ende.” That fundamentally selfish and meanspirited impulse is what unites Clara, the SNP, and UKIP; the Euronationalists have spoken and they said “Want! Me! Me! Me!”

Abenomics 2.0 – Just What Are They Trying To Achieve?

The recent move by the Bank of Japan to take further measures to accelerate the rate at which it ramps up its balance sheet took almost everyone – market watchers included – completely by surprise. The consequence was reasonably predictable – the yen has once more fallen strongly against almost all major currencies – and most notably against the USD – and Japan’s main stock indexes are sharply up. Continue reading

I saw the wall Mr Gorbachev tore down.

In October 1989, I was in Berlin for the first time. Small town boy, big city lights. We flew with Pan-Am back then. The airline also doesn’t exist anymore.

I caught about the last possible glimpse at the wall in its concrete dividing brutality, looking eastward from the visitor platform at the Brandenburg gate. The next time I experienced a similar feeling was in 2008, on the UN premises in Panmunjom, South Korea, looking north. And in 2012, in the Banksy gift shop, right next to the wall in Bethlehem.

West-Berlin was an oasis of calm before the storm. On October 18th, my mother, who hails from East Germany, my sister and I were having lunch at the famous Kaffee Kranzler on the Ku’Damm, at the time West Berlin’s main shopping street. I was facing a big info wall attached to a building across the street. When I read and told my mother that, according to news reports, Erich Honecker, the GDR’s head of state and chairman of the state council since 1971, had just been removed from power, she could hardly believe it. That was a common reaction to a lot of things happening in those days.

Just that afternoon we were doing a state-run bus tour of East Berlin. Some parts of the tour could still be executed according to the last four year plan. Forced currency exchange, Soviet war memorial, and Pergamon museum. Others not so much. There was not enough cake left for the Kaffee klatch at the state-run coffee house, not even for Western tourists paying in Dollars or Deutsche Mark. Too many former employees had already answered the call of freedom and had left the socialist workers’ and famers’ state for Hungary.

Decay and new hope were palpable with both hands in East Berlin that day, while nearby, the GDR’s top brass desperately hoped that replacing Erich Honecker with Egon Krenz would allow their regime to survive. On the way back to the West, our bus was searched for 45 minuts by the East German border control. At a border that would only exist for a couple more days.

In June 1990, I was in Berlin for the second time. One week before East Germany was to become part of the two Germany’s economic and currency union. This time, I walked through the Brandenburg Gate. On the way to Potsdam, border police didn’t even bother to check our passports anymore. A lot can happen in seven months.

These days, I’m in Berlin relatively often. Because what belonged together, grew together, eventually. Of course, there are still a number of things, biographies, opinions, that divide East and West Germany, particularly in Berlin. But it is no longer a wall. Not in the city, and not in the hearts.

To Europe! To Germany! To Berlin! Poor, sexy, but united. And to the hope, that, one day, families, friends, and lovers will no longer be separated anywhere by walls and borders on maps and in minds.

[ I originally posted this story in German on https://fallofthewall25.com/weltweit#Tobias+Schwarz where you can find more personal wall-stories from all over the world. // photo credit: Press foto / Visualisierung der LICHTGRENZE am Brandenburger Tor © Kulturprojekte Berlin_WHITEvoid / Christopher Bauder, Foto: Daniel Büche / http://www.berlin.de/mauerfall2014/presse/pressebilder ]

Wolf Biermann trolls the Bundestag

So the German parliament invited legendary songwriter, dissident, and wonderful professional malcontent Wolf Biermann to the session celebrating 25 years since the revolution. That went as badly as you might expect, or perhaps as well.

Where do we start here? Obviously there’s the bit where he calls the Left Party MPs the “wretched remnants of everything we so fortunately overcame”. There’s the speaker of parliament, the CDU’s Norbert Lammert, a man who looks and talks exactly like a conservative called Norbert, who calls him to order on the grounds that he was invited to sing, dammit, and if he wants to speak he can always get elected. Biermann remarks that the DDR didn’t manage to shut him up and Lammert won’t.

While this goes on, the breaking news caption informs us that the association of the post-1945 expellees is electing a new president. Geschichtsträchtig.

There’s the performance itself, as if the rest wasn’t part of the performance. And then there’s the bit where Lammert tries to make up for it by congratulating Biermann on his silver wedding, and Biermann breaks off from chatting (does he chat? I rather think not) with, or at least to, Sigmar Gabriel to remind him that it’s also the anniversary of the great, socialist October Revolution, as he puts it.

Even if Lammert’s intervention might not have been wholly serious, it’s a masterpiece of awkwardness. As well as a guitarist of note, a brilliant lyricist, and an unmistakable voice, Biermann is one hell of a troll.

Confidence to spend

draghi_euThis slide is from Mario Draghi’s presentation to the European Union council today. As the caption states, he says it shows that investment is suffering from a lack of confidence. But it perhaps more clearly shows that private investment has suffered as public investment has been slashed. And public investment is nothing to do with mercurial confidence — it’s something governments control! A “you first” approach to investment is not going to get us very far.

Does The Secular Stagnation Theory Have Any Sort of Validity?

In a number of blog-posts (Paul Krugman’s Bicycling Problem, On Bubble Business Bound, The Expectations Fairy) I have examined some of the implications of the theory of secular stagnation. But I haven’t up to now argued why I think the hypothesis that Japan and some parts of Europe are suffering from some kind of secular stagnation could well be a valid one.

Strangely, while I would suggest the most obviously affected countries are those mentioned above, most of the debate has centered around the US economy. Since it is not at all clear that the US economy is actually suffering from either a liquidity trap or secular stagnation at this point, this has lead many to question whether the idea might not be ill-founded. The Economist, for example, in a revue article (Fad or Fact) of Teulings and Baldwin’s Vox e-book  on the topic conclude the concept “remains a baggy one”, one which is “arguably too capacious for its own good”. Continue reading

Open Letter to the Economist on Catalonia – J’accuse

Those who have interest in neither Catalonia nor the issue of journalistic standards will probably find this posting long, tedious, and not especially interesting. Perhaps you might like to stop at this point. Those of you who are interested in one or other of these, well, I invite you to read on….. 
Continue reading