The Invisible Hand That Adam Smith Forgot

The population regulation one.

“The chief goal of all other species is to turn food into offspring. More food means more offspring. It is this biological logic that underlies the perennial fears of human overpopulation. Most creatures live in environments that correspond to open access commons. Recent fertility trends strongly suggest that the simple biological model of human breeding is wrong, or at least, is wrong when the institutions that support economic freedom and the rule of law, e.g., markets, price stability, honest bureaucracies, security of private property, and the fair enforcement of contracts, are well-developed. Economic freedom and the rule of law are the equivalent of enclosing the open access breeding commons, causing parents to bear more and more of the costs of rearing children. In other words, economic freedom actually generates an invisible hand of population control.”

Ronald Bailey, Reason magazine’s science correspondent, in The Invisible Hand of Population Control – The tragedy of the commons meets economic freedom. Now go read!

Is Hungary Also Distancing Itself From the IMF?

So many things are so unclear at the moment. What attitude does the IMF actually have towards the current Latvian bailout programme? Is there really a “spat” taking place between the EU Commission and “the Fund”, and just what is going on in Hungary? In fact, I have a longer post going up later on today which will ask just this very question, but in the meantime, we could ask why the Hungarian Finance Ministry was so happy to pay 6.79 percent to sell one billion euros worth of bonds last Friday, considerably more, for example, than the the 5.9 percent on existing euro-bonds due May 2014, and more than they would pay the IMF for the forthcoming tranches of their loan.

Hungary sold its first debt to foreign investors since last year’s International Monetary Fund bailout, taking advantage of the world’s strongest bond market rally to borrow 1 billion euros ($1.4 billion). Investors ordered 2.9 billion euros of the securities, nearly six times the 500 million euros the government initially planned to raise, Finance Minister Peter Oszko said in an interview today. The government lured buyers by offering a yield of 6.79 percent on the five-year debt, more than the 5.9 percent on existing euro-bonds due May 2014.

According to some this sale was a huge success:

“The transaction has a very positive message,” said Gabor Orban, head of fixed income at Aegon Hungary Fund Management in Budapest, who manages about 3 billion euros of assets. “Hungary is able to return to market financing, both in forint and euros.”

But the explanation may be far more complex. According to Portfolio Hungary this morning, it is now possible that the next tranche of the IMF credit facility due in September will be drawn by the central bank and not the Hungarian government (citing András László Borbély, Deputy Chief Executive of Hungary’s Government Debt Management Agency – AKK). If this were to be the case the next time the government would need to resort to the IMF’s stand-by arrangement would be in 2010. On the other hand, the next tranche of European Union’s share of the bailout would still be drawn.

Now perhaps if I were not so focused on what is happening in Latvia nothing here would strike me as odd. But there is a pattern which does seem to be repeating itself, with both Latvia and Hungary ceasing to be dependent on IMF funding. In fact the 1.43 billion euro June tranche of the IMF loan was already drawn by the National Bank of Hungary and not the government. The key difference is that when the NBH draws on the credit facility, the money drawn does not increase the level of government debt, although it does raise the stock of foreign exchange reserves, and thus provide added protection against speculative attack. The loan on the one hand cannot be used to finance the budget deficit, but on the other the IMFs hand is weakened in negotiations about structural reforms etc.

András Borbély is even quoted as saying that it is possible Hungary will not need not to resort to any more IMF help this year, as its access to market-based financing has increased given the successful Eurobond issuance last week, which could become a substitute for the next IMF tranche of about EUR 1.5 bn due in September. At the same time, the government is still planning to draw on the credit facility made available by the European Commission. So is it just me, or is there actually an institutional backdrop to all this? Certainly having the IMF take responsibility for EU states never made a great deal of sense to me, but with the EU Commission now assuming a large chunk of Latvian sovereignty, and with the same possibly about to happen to Hungary, not to mention other CEE states, and Ireland, Greece and Spain, are we not, perhaps on the point of witnessing an epoch making tectonic shift in EU institutional architecture? And all without anyone visibly being aware that it was in fact taking place.

Danskebank’s EMEA Daily Latvian Quote Of The Day

Quote of the day: “Representatives sitting in Washington and educated at Yale do not fully understand what is going on in Latvia”, Latvian Economics Minister Kampars yesterday on the Latvian TV programme 900 sekundes.

As they point out, when the borrowers publicly criticise the lenders in this way, something must be going on.

While Mr. Kampars might be right on his assessment of the IMF staff, it is certainly unhelpful for further negotiations (if there are to be any) to bad mouth the institution that is supposed to give Latvia a loan. In our view it increasingly looks like the IMF will not pay out the next instalment on Latvia’s loan. This not only has ramifications for Latvia, but should also be a reminder to investors that the IMF is not just a “money machine” that automatically bails out all countries with funding needs.

Also Danskebank provide some simple calculations to illustrate the extent to which Latvia does still need the IMF funds:

A back of the envelope calculation illustrates this. In June, central government spent about EUR 125m more than came in revenues and funding. Assuming that this “burn rate” continues for the rest of the year (August-December) then that adds up to EUR 625m for the rest of the year. Furthermore, during the rest of the year EUR 715m worth of t-bills are maturing which need to be rolled over. Hence, the refinancing of maturing debt and the monthly cash burn adds up to EUR 1,340m. In our assessment the Latvian state treasury probably has EUR 540m in liquidity at the moment. That leaves the Latvian central government with a funding need of EUR 799m. This is why it is important that the EC in the Supplemental MoU ties up half of the EUR 1.2bn instalment for the financial sector, as the amount that will be “free” to cover the budget deficit will be less than the funding need (EUR 600m vs EUR 799m).

Thus, according to Danske the Latvian government will be around 200 million euros short by the end of the year – unless it is able to roll over more than half of the maturing debt, something which would require sustained perfect conditions for issuance in the local money markets for the rest of the year, unlikely given that the international markets are more or less closed to Latvian debt, and that non receipt of the IMF share would hardly increase the risk appetite.

Parex Update

The situation at Parex bank seems to be giving rise to all sorts of speculation at the moment. It has been suggested that the Banks owners have been systematically taking advantage of the bailout to line their own pockets. Some support for this view can be found in the statement of the Latvian Finance Ministry last Friday that it had asked the state prosecutor’s office to probe Parex takeover last year.

RIGA, July 17 (Reuters) – Latvia’s Finance Ministry said on Friday it had asked the state prosecutor’s office to probe the state takeover last year of a major bank that helped trigger the need for the country’s IMF-led bailout.

The IMF has delayed its latest share of lending in the bailout, though the EU has decided to give a further 1.2 billion euros. The prime minister said he would hold more talks next week with the International Monetary Fund (IMF). Some local media reports and politicians have criticised the wisdom of taking over the country’s second largest bank, Parex, and the way it was done. Most recently the media has reported that some former employees left with big handouts. Finance Minister Einars Repse said he had asked the prosecutor’s office to investigate the takeover to clear up such controversies

What the connection is (if any) between the “Parex affair” and all the other unknowns we have in our equation set at the moment still remains to be seen.

And finally, to close, here’s yet another Latvia quote, this time from former IMF chief economist Ken Rogoff:

“It is so clear that Latvia’s peg is ultimately unsustainable, all protestations by Latvian government officials notwithstanding,” said Kenneth Rogoff, a former chief economist at the I.M.F.. “But ultimately unsustainable pegs can go on for years before crashing and burning, and Brussels seems to be willing to pay a lot to get past the financial crisis before cutting the cord on Latvia.”

Brief Latvia EU Loan Update

Well, there is still effectively no word from the IMF. But The EC did today release an addendum to its memorandum of understanding with Latvia identifying a number of economic and fiscal policy measures it wants the country to enact before it receives next chunk of funding. The document, which is a pretty rough-and-ready PDF photocopy, can be found here. Reading the document, one thing seems certain: the upcoming tranche of 1.2 billion euros will not now be sufficient to cover the budget deficit for 2009, since the EC requires half of the money to be set aside for the financial sector – which prompts the question, is the nationalized Parex bank really as healthy as the government and the bank’s leadership have previously said it was?

Other items of interest in the document are the proposal to raise VAT in 2010 from 21% to 23% if other forms of revenue raising cannot be identified. The impact on already very hard pressed retail sales is not too hard to imagine. The introduction of a residential real estate tax is also proposed with local authorities being empowered to increase the real estate tax to 3% of cadastral values. If implemented, this will do only one thing: further reduce Latvian real estate values which are already down 50% from their peak, and on whose bottoming-out any hope of ultimate recovery depends.

Which is another way of saying that in macro economic terms the document leaves rather a lot to be desired, and essentially it is hard to find any item which is actually going to stimulate rather than flatten a recovery.

Also worthy of note is the requirement that Latvia now has to closely coordinate policy with the EU and the IMF.

“All significant Cabinet decisions or other decisions with a fiscal impact, including on social security or any guarantee scheme, shall be announced and undertaken only after discussions with the EC and the IMF,”

The document also stipulates that the government will have to report every month on all key aspects of spending and revenue, including providing a breakdown for each ministry as well as for local governments. These performance criteria, given the now near total dependence of the country on external support – de facto, as a sovereign state Latvia has effectively ceased (at least temporarily) to exist, some 19 years or so after its foundation – are not surprising in and of themselves, but it could have been hope that the country would have been better served in terms of the kind of advice which is being offered. The document repeated that Latvia should aim to reach a budget deficit of 10 percent of gross domestic product (GDP) this year, 8.5 percent in 2010, 6 percent in 2011 and 3 percent in 2012, numbers which, if my back of the envelope calculations are not totally awry mean that Latvia’s debt to GDP will be outside the EU 60% limit by the time the deficit comes down under 3%, depending on GDP performance in 2010 and 2011. In any event it will be touch and go. So you enter by one door, only to leave by the other.

Russian journalist killed in Chechnya

This woman may have had the most dangerous job in the world:

A prominent Russian human rights activist has been found dead hours after being kidnapped in the North Caucasus region.

Natalya Estemirova worked for Memorial, one of Russia’s oldest human rights organizations. She was bundled into a car early on July 15 as she left her home in the Chechen capital, Grozny, her Memorial colleague Aleksandr Cherkasov said.


Estemirova was a lawyer who documented abductions, torture, and other human rights abuses in Chechnya. She worked with reporters, including murdered journalist Anna Politkovskaya, and other human rights groups.

Tanya Lokshina of Human Rights Watch said Estemirova’s work was vital to uncovering abuses in Chechnya. She said Estemirova “was one of the main people who documented the most terrible crimes during the second Chechen war: torture, extrajudicial executions, abductions.

“Natasha has until now remained one of the few people who have continued reporting crimes perpetrated by forces controlled by Chechen President Ramzan Kadyrov.”


Estemirova was awarded the first Anna Politkovskaya Prize in 2007 by the Nobel Women’s Initiative. Speaking to RFE/RL’s North Caucasus Service shortly after, she said the authorities were doing nothing to investigate abuses documented by Memorial.

“Changes have happened, changes for the worse. As far as human rights go, it is worse because, first of all, nothing has been done to investigate the crimes that have been committed in Chechnya since 2000,” Estemirova said.


Estemirova is the latest of many prominent Kremlin critics to have been killed in what human rights groups say is an atmosphere of impunity. Lawyer Stanislav Markelov, another of those to have worked with Estemirova, was gunned down on a Moscow street in January.

Dangerous jobs: being a human rights investigator, human rights lawyer, or investigative journalist in Russia. Really dangerous jobs: being a human rights investigator in Chechnya.
Continue reading

IMF Imposes New Conditions On Latvia

Izabella Kaminska at FT Alphaville has the story (via Reuters):

The International Monetary Fund has put forward new, difficult conditions for Latvia to receive further loans, the prime minister said on Wednesday in a further sign the Fund is being tougher than the European Commission.

It isn’t clear at this point what these conditions are. Rumour has it they may be an end to the flat income tax, or a hike in VAT. A hike in VAT would be more hari-kiri, since this would again hit consumption AND would boost inflation at a time when they are trying to deflate to carry through an internal currency correction. It also isn’t clear whether this is a serious attempt to add new conditions (which I find unlikely, given how advanced the distemper is) or whether this is a way for the IMF to get themselves off the hook (ie leave the EU Commission to stew in its own juice) without having a public and potentially damaging break with the EU. The IMF need to find some sort of exit strategy I think (since Latvia evidently at this point doesn’t have one), or it risks losing its own credibility if it puts a seal of approval (by granting the next tranche) on something which most external specialists now think could end up in a very messy grande finale. Argentina ghosts are stalking the corridors in Washington, not because of the similarities between the two countries (they are, at the end of the day pretty different), but because of the way giving a final “kiss of death” loan to a country can ultimately come back and haunt you.

Update One

The local Latvian news agency is saying that if Latvia and the IMF do not sign the new agreement by Friday, Latvia may not see the next chunk of the IMF loan and it could jeopardize the further funding from the EC. This could be brinksmanship, but even brinkmanship can go badly wrong if the other party can’t concede. And who is the other party here? Latvia or the EU Commission, since they already said they are happy with progress. What a muddle!

Update Two – Thursday Afternoon

Bloomberg’s Aaron Eglitis reports this afternoon that Friday may in fact not be any kind of deadline. He quotes Caroline Atkinson, head of external relations at the IMF, in Washington, to the effect that the head of the IMF mission in Riga is returning to Washington this weekend as scheduled, while the mission itself would “continue its work.” This suggests there will be no final decision this week. She also said there was “broad consensus among all the parties involved” about the goals for Latvia, declining to go into specifics.

Rumourology has it that the IMF wants the government to become more effective in revenue collection, with the fear that the current contraction may be so strong due to the fact that part of the economy is disappearing back into a “grey area” as a backdrop. Various proposals are being floated around, but perhaps it would be better to wait for some concrete information before speculating about this.

Latvian central bank Governor Ilmars Rimsevics has also been holding a press conference in Riga today, and he took the opportunity to suggest that the country’s budget deficit was likely to grow to between 9.5 percent and 10 percent this year. If this is the case, then this would obviously put Latvia outside the 60% gross debt to GDP criteria by 2010, which would make euro membership as an exit strategy non viable over the relevant horizon in my view. Just a long shot, but maybe that is what they are all arguing about. The EU clearly has to offer the four peggars more in the way of a carrot, although they themselves need to remember – looking over at Slovakia and Slovenia – that mere euro membership is no panacea to cure all ills.

Russia’s Contraction Eases But Knife-edge Risks Remain For 2010

The Russian ruble strengthened the most in more than three months against the dollar this morning (gaining 1.7 percent to 32.2247 per dollar at one point) as oil rebounded above $60 a barrel and OAO Sberbank reported better-than-expected earnings. Sberbank shares jumped 5.1 percent after first-quarter net income turned out to be above analyst estimates. But the rise was also helped by the fact that Russia’s central bank spent approximately $2 billion from reserves to try to stop the ruble from falling yesterday, taking central bank reserve spending over the two working days since they lowered interest rates half a percantage point on Friday to around $4 billion, according to reports in the newspaper Kommersant.

Russia’s central bank cut its main interest rates for the fourth time in less than three months at the end of last week after the government estimated the economy contracted an annual 10.2 percent in the January-May period. Bank Rossii lowered the refinancing rate to 11 percent from 11.5 percent following on initial reduction on April 24 and two further cuts on May 13 and June 5.

But the striking thing here is that today’s ruble surge followed seven consecutive days when it fell – including yesterday when it dropped 0.5 percent against the euro and 0.1 percent against the dollar to hit the lowest close against the central bank’s currency basket since May 4. Indeed only last week the ruble posted its steepest slide against the euro and dollar since January as oil prices fell and Russia’s budget deficit contined towiden. And to top it all, as I say, the central bank reduced interest rates for the fourth time in less than three months. Continue reading

The IMF/EU Commission Rift On Latvia Seems To Be Deepening

Two weeks ago I drew attention to a revealing press conference given by IMF First Deputy Managing Director John Lipsky and European Central Bank governing council member Christian Noyer where it seemed a rather different posture was being taken on the Latvian question than that which is being transmitted from Brussels. Then P O’Neill found a message on Twitter which suggested the topic of the Latvian budget had been unexpectedly added to the EcoFin agenda.

Today Bloomberg report that Barclays Capital’s chief economist for emerging Europe Christian Keller thinks that the IMF’s posture of continuing to withhold funds even after the approval of the spending cuts “signaled that the rift between the IMF and EU has widened” .

Now I don’t want to see connections were there are none, but it is a coincidence that Christian Keller works for the same Barclays capital whose Head of Emerging Markets Strategy Eduardo Levy-Yeyati recently published a lengthy analysis on the influential Voxeu – entitled Is Latvia the new Argentina? – where he argued that: “The strategy of engineering an “internal” depreciation under a peg in Latvia (via contractionary fiscal policy, wage cuts and price deflation) implicit in the IMF program is proving too painful, if not self-defeating as in the 2001 collapse of Argentina’s currency board”

Now the publication of this article was interesting since Eduardo Levy-Yayati is not just any old economist. Previous to joining Barclays Capital, as his Voxeu biography informs us, he was

“a Senior Financial Sector Advisor for Latin America & the Caribbean at The World Bank. Previously, a Senior Research Associate at the Inter-American Development Bank, the Director of Monetary and Financial Policies and Chief Economist for the Central Bank of Argentina, and the Director of the Center for Financial Research and Professor of Economics and Finance at Universidad Torcuato Di Tella. He has also worked as consultant for the IMF, the World Bank, the Inter-American Development Bank, the Japan Bank for International Cooperation, among many public and private institutions. His research on emerging markets banking and finance has been published extensively in top international economic journals. “

That is, Señor Levy-Yayati is an extremely experienced economist, an old Argentina hand, and enjoys some considerable influence over emerging markets issues in Washington. So was the appearance of the article in Voxeu at the end of June totally coincidental? He certainly is experienced enough to know what he is doing in these matters. And was it also a coincidence that only a week later former chief economist at the International Monetary Fund Ken Rogoff – surely another person who knows perfectly well what he is doing – gave an interview where he said that “Latvia should devalue the lats to avoid a worsening of its economic crisis” and that “the IMF made the wrong decision when it allowed Latvia to keep its currency peg”?

The IMF cannot say what it really thinks for obvious reasons, but could we construe Levy-Yayati and Rogoff as thinking out loud on the funds behalf?

The clash between the two institutions (should such a clash exist) derives from “ideological differences” according to Keller. “The IMF is focused on economic questions such as the sustainability of the currency peg, the use of economic stimulus or the idea of fast-track euro adoption……The EU’s main concern is political, such as euro-adoption rules and the implementation of convergence programs”.

This all rings pretty true, and it rings even truer when you note that the Latvian Prime Minister Valdis Dombrovskis said only last week that the country “may not need the IMF share of the financing”. As Keller says, “The Latvia program has become a headache for the IMF.” Continue reading

Cliff Hanging In Bulgaria

The International Monetary Fund this week forecast the recession in Bulgaria would be deeper than it previously predicted. Such a decision should come as no surprise to anyone, since the country’s economic dynamics in both the short and long term look extremely unstable, and Bulgaria is now almost certainly headed towards a series of more or less hair-raising roller-coaster rides. Even the briefest of glances at the population chart above should lead all but the most sceptical among us to stop and think a little about the possible economic implications of such an appauling demographic outlook. As can be seen, the opening to the west brought a sharp outflow of people in the late 1980s (mainly ethnic Turks), but the important thing to note is that the decline has continued almost continuously ever since. That is, the decline was not a one-off demographic “shock”, but rather it has become a way of life (or, if you prefer, of death, since deaths constantly outnumber births, even before you consider emigration). And it is this “terminal style” dynamic which virtually guarantess that the coming ride will be a bumpy one, not only in the short term (guaranteed by the size of the current account deficit – 25% – which Bulgaria needs to correct) but in the longer term, since according to any known growth theory there is simply no way any country can sustain headline GDP expansion with potential labour force and population contractions of this magnitude lying out there in front of them. Continue reading

How Not to Meet European Standards

What happens on a Wednesday night if you’re one of the city’s most wired people, an avid Twitter and Facebook user, plugged in with non-governmental organizations, with a penchant for visiting like-minded folks in other European cities? In most cities and countries, not much remarkable: meeting friends, tweeting or sms’ing to coordinate, maybe romance arrives, maybe the night closes with parties or dancing or a good drink. But maybe if the city is Baku and the country is Azerbaijan and the person is Emin Milli, something else entirely happens.

Maybe while you’re in a cafe with friends two toughs come up to you in the cafe and start cursing you. Then before you can get in a word edgewise, they start to hit you and your friend Adnan Hadji-Zadeh. What happens when the police get involved? You go to the station to deal with the complaint. The toughs are let go. You are kept overnight and, by several accounts, beaten again, this time by the police. When the case — on charges of hooliganism — comes before a judge on Friday, you get two months of prison. The toughs? Long since let go. Apparently sitting in a cafe talking with friends constitutes hooliganism in today’s Azerbaijan.

(There’s a small chance that this will backfire for the government. Hadji-Zadeh has done PR work for BP, one of the largest investors in Azerbaijan. The country’s president is in London on Monday, and this case has gone up the ranks quickly enough that it will be raised with Aliyev in person. US, EU, German, OSCE and other international representatives are pressing the case in-country. French, UK and Austrian media are reporting. Radio Free Europe/Radio Liberty is on the case. Reports and organizing efforts are also crossing social networking sites. Authoritarians don’t like looking foolish, and this case makes the authorities in Baku look very foolish indeed. Detentions for “hooliganism” are an old Soviet tactic; they have no place in a country that has ratified numerous European agreements on human rights and that aims for closer relations with the European community of nations.)