A Hungarian Waltz On The Wild Side

The Hungarian government’s much publicised unorthodox plans to cut the country’s public debt level has been attracting a lot of attention of late, both from the media and from the rating agencies. Some observers have been quite positively impressed. Fitch Ratings, for example, raised their outlook on Hungary’s sovereign credit rating in early June from negative to stable, citing government plans to reduce what is currently the largest accumulated public debt among the European Union’s eastern members. Others, however, continue to have their doubts. Moody’s, for example, has decided to maintain a negative outlook on the country’s due to concerns about the general trend in government policy, and the possibility of slippage with deficit objectives. Either way, these are changes within very defined margins, since at the end of the dat Fitch currently still rates Hungary at BBB- and Moody’s at Baa3, in both cases these ratings amount to the lowest investment grades. Continue reading

Les grandes vacances and the financial crisis

As the European policy elite prepares for their normal practice of taking August off — because, after all, nothing big ever happens in August or September that you’d need to be ready for — there are conflicting messages about whether this is actually a good idea.  First, a nice quote via a Reuters story arguing that it helped when everyone decamped from their offices last year:

“Last summer, the crisis cooled partly because euro zone politicians went to the beaches and stopped contradicting each other in public every day,” one senior EU official involved in the Greek rescue negotiations said. “That moment can’t come soon enough this year.”

On the other hand, we’re coming up on the 1 year anniversary of the disastrous absence of Official Ireland from its desk (on what was actually a July-September inclusive getaway for the then-government), a problem later noted by outgoing ECB board member Lorenzo Bini Smaghi

Whereas [PM Brian] Cowen and his ministers had responded swiftly during 2009 as fiscal conditions worsened, Bini Smaghi says there was no comparable action to reassure markets when the heat came on last year. Ireland was listing from the summer, its position worsening all the time as investors took fright.

“Markets waited and waited and since they saw no policy reactions they started to lose confidence in the course of the summer. Remember there was a downgrade – in August – but there was no policy reaction, no announcement that a tough budget was in preparation and no announcement of the measures. The loss of confidence also affected the banking system and this created a spiral which led to the crisis and in the end the request for financial assistance.”

Splitting the difference between these positions is currency strategist Stephen Jen

With signs of anxiety resurfacing late Friday — a rally by Spanish bonds fizzled at the market’s close — the idea that investors would wait patiently for two months for Europe’s leaders to provide the fine print on their grand proposal was met with disbelief in some quarters.  “I would suggest that if the eurocrats want to go on vacation that they bring their cellphones,” added Mr. Jen.

Back when Nicolas Sarkozy was popular, one of his catchy slogans for reaching target voters was “the France that wakes up early.”  Could we get a similar chic in Brussels, Frankfurt, and the national capitals around “the Europe that works during August?”

Recession Warning On Europe’s Periphery

As Europe’s leaders struggle to convince markets that their Greek debt problem-resolution-proposals are actually viable, and will really do the trick, last week’s flash PMI readings seem to have attracted rather less attention than they might. Nonetheless, the fact of the matter is that it is steadily becoming clearer that the current slowdown in Eurozone economic growth is turning into something more than just another one of those pesky “soft patches”. The pace of economic expansion in core Europe has slowed dramatically, falling back in July for the third consecutive month, according to the latest flash PMI. Commenting on the flash results Chris Williamson, Chief Economist at Markit said: “The Eurozone recovery lost almost all of its momentum in July, recording the weakest growth since August 2009 when the recovery first began. Excluding the financial crisis, the July survey was the most downbeat since the Iraq war in 2003, and consistent with a flat trend in quarterly gross domestic product.

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Debt restructuring in Greece and Dubai

It’s useful to compare and contrast the terms of the Greece debt restructuring as outlined by the Institute of International Finance and the Dubai World debt restructuring of last year.  In both cases there is a mix of options for the new debt with varying coupon structures and levels of government guarantee.  The Greece case is a little more blunt about the discounted nature of the new debt, but there are enough options so that outright haircuts to principal can be avoided if a creditor so wishes — the impact is being achieved in net present value terms.

Thus there is a sense in which Dubai and its bailout partner Abu Dhabi were ahead of the EU curve.  This is despite considerable differences in circumstances: Dubai was restructuring corporate debt of state owned companies that were perceived as having a government guarantee but in fact did not, whereas Greece is restructuring sovereign debt.  The government of Dubai succeeded in walling off its own sovereign debt burden from its kinda-sorta-maybe legacy guaranteed liabilities — Ireland, take note — and was even able to issue new sovereign debt this year, without a credit rating!

Also in Dubai, the commercial banks grumbled but ultimately took the offer.  Which brings up another issue.  When the government of Dubai needed to restructure debt to commercial banks, it brought in restructuring specialists who came up with the offer to the commercial banks.  When the EU needed to restructure the Greek debt owed to commercial banks, they brought in, er, the commercial banks.  There must be synergy in having poacher and gamekeeper as the same person.

Shut up about “welfare”

I have a lot of time for Eric Alterman, but this piece on THE TWILIGHT OF SOCIAL DEMOCRACY misses the point. Alterman’s been to some sort of intellectual shindig in Paris to discuss the nature and causes of said twilight. Perhaps it wasn’t quite the grinding arse-paralyser that sounds. There’s a reason someone called a band Future of the Left – it loves having meetings about its future. But this one included Thomas Piketty of Piketty-Saiz fame and Ronald Dworkin and various other impressive crania.

Unfortunately, I can’t get past this.

People, it turns out, do not generally appreciate the opportunity to be forced to subsidize, through tax and transfer policies, the lifestyles of those they deem to be different from themselves. The French historian Pierre Rosanvallon noted that “it is here that the anti-immigration argument gets its force. On the left the view is one of nostalgia. An extremely weak response to a strong attack and it’s hard to see how it can survive the argument ‘the immigrants are stealing the welfare state.’”

Two things. For a start, perhaps this has something to do with the fact that the transfers seem to get less every time the matter is discussed. It is not in fact true that US or Western European workers have repeatedly turned down a big increase in the social wage because of the Muslims. Rather, it hasn’t been offered.

Secondly, surely the key to the problem is accepting the whole dogma of “welfare”. It may indeed be hard to persuade, yadda, yadda. But then it’s always hard to persuade someone of anything if there is nothing in it for them. New Labour ran its blood to water trying to come up with ever more cynical arguments to get people to be grateful for marginal improvements to the NHS, while never really noticing that UK workers experienced zero real wage growth from 2003-2010 at best.

Social democracy is more than just schools’n'hospitals politics. To be fair, Alterman nearly gets to this at the end of his piece but it doesn’t really add up to the sort of frontal, neo-brutalist self assertion that the advocates of wage-led growth set as a minimum standard.

Simple and repellent: update

Does anyone else think the simple and repellent plan is getting a little traction? Certainly, more and more mentions of the idea of buying back tons of distressed Greek debt and therefore both reducing the total and converting it into a liability between Eurozone official institutions seem to be out there.

They better be: here’s a study into the effects of the crisis on European suicide rates.

EBA stress tests: sovereign debt is local

One of the interesting things upon 1st quick read of the European Banking Authority stress tests is the way it downplays the sovereign debt issue:

The data from the sample of 90 banks (Dec. 2010) shows the aggregate exposure-at-default (EAD) Greek sovereign debt outstanding at EUR98.2 bn. Sixty-seven percent of Greek sovereign debt (and 69% of the much smaller Greek interbank position) is in fact held by domestic banks (about 20% refers to loans which are mostly guaranteed by sovereign). The aggregate EAD exposure is EUR52.7 bn for Ireland (61% held domestically) and EUR43.2 bn (63% held domestically) for Portugal. Importantly, EAD exposures are different from similar exposures reported on a gross basis in the disclosure templates …

Given the distribution of the exposures described above, the direct first-order impact, even under harsh scenarios, would primarily be on the home-banks of countries experiencing the most severe widening of credit spreads. In such cases the capital shortfall should be easily covered with credible back stop mechanisms such as the support packages already issued or being defined for Ireland, Portugal and Greece. In this context these countries have announced capital enhancement measures requiring banks to hold capital to a higher level than that used for the EBA’s EU wide stress test. Additional capital strengthening measures have been, and will be, announced to ensure this.

In other words, most of the Greece, Ireland, and Portugal debt is held by domestic banks which is good news for the other EU banks that might otherwise be feared to be sitting on this stuff and thus should be bad news for the domestic banks of these strained sovereigns — but since they are already under official lending programs, these can be tapped to ensure that the domestic banks (and their lenders) don’t lose money.

Leave aside the concern that Exposure at Default is a technical measure that allows some netting of exposures that might not happen as smoothly in practice as on a balance sheet.  Think about the claim that since sovereign debt is domestic, losses can be handled as long as there is an official lending program in place.  Doesn’t that invite attention on countries with lots of domestically held debt, but no program?

We hope to have more when the individual bank results are revealed.  Note also the filename of the EBA document — it includes a “v6″ at the end.  That’s a lot of meetings!

Germany is not turning on itself

I’ve recently read some interesting but somewhat shocking article, recommended by FT alphaville, in The Globe and Mail (Canada): “Germany’s season of angst: why a prosperous nation is turning on itself”. Fortunately, the author Doug Saunders is wrong.

Describing Germany’s booming economy, he writes:

These are, by several measures, the most successful people in the world. Yet it is very hard to find anyone here who is happy about this state of affairs.

And from my personal anecdotal evidence, he is right. When I talk to my fellow Germans about the economic situation, I have the same impression. But why is that? Doug’s interpretation, that Germany is afraid of change, involvement with the outside world, immigration or technological progress may be fitting with an earlier image of Germany. But I find other explanation much more plausible.

For starters, Germans fear the consequences of the Euro crisis in part because some politicians, academics and the media deliberately nurture fear. From “defending the Euro” to Prof Sinn’s exaggerated Target-2 arguments, from claims of high inflation to a Lehman-moment, the Germans are being told that the economic risks for them are huge and imminent, which is only partly correct (if at all). Interesting enough, the political risks – that the German taxpayers will become the major creditors of the periphery thanks to fear-induced bailouts (money and friendship…) – is discussed much less often.

But more importantly, Germans have lived through 15 years (!) of near-stagnation or mind-bogglingly high unemployment or both. That shapes your expectations in two important ways.

First, Germany knows how difficult it is to integrate and reform an economically (much more) devastated country of roughly the size of Greece. In fact, they have just been through it. So not only are they jolly well fed up with paying for something like that: after cumulated net public transfers of €1400bn (it’s not a typo), there are still €6bn in net transfers going to Eastern Germany. Per month. (The brain drain from former Eastern Germany was heavy, so how much “Western” Germany really payed is debatable.) At the same time, many Germans feel obliged to help European friends according to a recent poll:

A new survey finds that 60 percent of Germans believe their country has to help Greece in the eurozone debt crisis — like it or not.

Anyone caught in this tension will stray to extremes at times (like the person that Doug interviewed). The trigger may be when the Greek press retaliates with Nazi-jargon to German tabloids’ disgraceful headlines. Or when German politicians – supported by part of the German press – keep talking about “rescuing Greece” instead of being honest about what is actually being rescued: German investors and banks.

Second, after a decade-and-a-half-long economic struggle, Germans simply cannot believe that those times have finally passed for good, which is fully understandable for a country in whose national psyche security comes first. And no, Doug, the German boom is neither built on the birth of the Euro nor on “a deliberate strategy to keep labour costs low and productivity high”. It is built on Germany having re(!)-gained its competitiveness (warning: shameless cross-linking) and an ECB that will have to conduct too loose monetary policy for Germany in the years to come.

Doug’s other examples, immigration and a new protest movement, as well as nuclear power and the Libya war, have multiple roots that are too complex to discuss in a single post. He might have a point here, but there are more sympathetic and equally plausible explanations. For instance, the success of a populist and alarmist book by Thilo Sarrazin about the alleged decline of Germany is a late response of the German public to problems that have been piling up largely unaddressed over the last 30 years. In this context, Doug much too easily dismisses the internationally underappreciated contrast to Italy, Netherlands, France or even Sweden (!), not to mention Austria, that no right-wing populist party has made it into the federal parliament during the last 20 years, despite an unmatched economic malaise and a proportional election system.

Germany is not turning on itself. Germans just have a hard time dealing with and making sense of the current economic situation – and who could blame them? But if you give it some time, you will see that the 2006 & 2010 World Cup euphoria was not just a break from a national state of angst.

Did Latvia really lose that much competitiveness???

Please think of this as a supplement and a slight challenge to Ed’s fine 23 May 2011 piece on Latvia. Besides giving us the most interesting (or weird? :) ) title for a long while, he raises some very important questions: Is the Latvian internal devaluation really over and has it been successful? Ed is not convinced – neither am I but I am not as pessimistic as he seems to be. Continue reading