Two year escape hatch

IMF Chief Economist Olivier Blanchard in a new blog post defending the 2010 Greece program against various criticisms, including the absence of debt restructuring –

Moreover, private creditors were not off the hook, and, in 2012, debt was substantially reduced: The 2012 private sector involvement (PSI) operation led to a haircut of more than 50% on about €200 billion of privately held debt, so leading to a decrease in debt of over €100 billion (to be concrete, a reduction of debt of 10,000 euros per Greek citizen). And the shift from private to official creditors came with much better terms, namely below market rates and long maturities.

Below the fold, a few relevant sentences from the IMF’s own ex-post evaluation of the 2010 Greece program, issued in 2013. Bottom line: what could be achieved in 2012 was severely constrained by what was (not) done in 2010, and the 2012 restructuring destroyed a core assumption of the 2010 program. In particular, when debt restructuring [private sector involvement (PSI)] was done, the hit on the remaining private sector creditors, including Greek banks, had to be larger because other private creditors were gone and official creditors that had taken on their debt, including the ECB, were off the table in the restructuring. It was then much harder for Greece to return to the market as the 2010 program had assumed, and the banks needed a lot more money to recapitalize.

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When extreme circumstances warrant setting up a lender of last resort within a larger currency union

From address by Professor Cormac O’Gráda, School of Economics, University College Dublin, to the Central Bank of Ireland Whitaker Lecture, 29 June 2011. The context is the Irish Free State’s 1 for 1 currency peg with the pound sterling, a continuation of the pre-1922 UK pound for Ireland –

The Emergency (World War II) also produced a defining moment in Irish banking history. Until then, Ireland’s lack of a central bank had not worried its joint-stock banks; on the contrary, they did not relish the idea. For over a century the Bank of Ireland had played the role of quasi-central bank, while looking on the Bank of England as its friend in need. Just a few days before the outbreak of war a delegation from College Green (Bank of Ireland HQ) traveled to London for reassurance about the availability of foreign exchange and the free repatriation of Irish bank assets held in London. In what must have been a difficult moment for the Irish bankers, the Governor of the Bank of England Montague Norman told them that:

notwithstanding the long and intimate relations between the two institutions he was not prepared to commit the Bank of England by promising to come to the assistance of the Bank of Ireland in an emergency of the nature under discussion. As an ordinary banking transaction there would be no question whatever about making an advance to the Bank, but in an emergency situation there was an important principal (sic) involved. The Bank of England looked upon Eire as a Dominion… Mr. Norman stressed the view that the Bank ‘whose centre of gravity was in Eire’ should look to their own Treasury or the Currency Commission to help them over difficult periods. Sir John [Keane, Deputy Governor of the Bank of Ireland] pointed out that the position in Eire did not admit of a solution in that way, as the [Irish] Treasury came to the Bank when it was short of funds, and the [Irish] Currency Commission was not a lender of the last resort. Mr. Norman then urged that as Eire was a separate political entity it should have a Central Bank of its own.

And so it took the Emergency and Montagu Norman to persuade the Bank of Ireland to switch its loyalty fully to the new state, and for the other joint stock banks to appreciate the need for an Irish central bank. The Central Bank Act followed in 1942.

The sterling currency union nonetheless survived up until Ireland joining the Exchange Rate Mechanism of the European Monetary System in 1979.

Low payoff from structural reforms in Greece?

The IMF has released a preliminary debt sustainability analysis for Greece — undertaken before this week’s cash crisis but after its adjustments to the numbers to take account of the deterioration in the relationship between Greece and its creditors since January. The document can be read cynically as the IMF using Syriza as an excuse to dump all the unrealistic assumptions in their earlier calculations, but it’s still helpful in spelling out those assumptions — which were there for everyone to see. Arguably the most incredible scenario was for growth (see Box 2):

What would real GDP growth look like if  total factor productivity (TFP) growth were to remain at the historical average rates since Greece joined the EU? Given the shrinking working-age population (as projected by Eurostat) and maintaining investment at its projected ratio of 19 percent of GDP from 2019 onwards (up from 11 percent currently), real GDP growth would be expected to average –0.6 percent per year in steady state. If labor force participation increased to the highest in the euro area, unemployment fell to German levels, and TFP growth reached the average in the euro area since 1980, real GDP growth would average 0.8 percent of GDP. Only if TFP growth were to reach Irish levels, that is, the best performer in the euro area, would real GDP growth average about 2 percent in steady state. 

That last assumption — 2 percent long-term growth — was the one that was actually in the program until now! These are of course results from an economic model that could be right or wrong. But that’s part of the political challenge of these lending programs: undertake massive effort on “reforms” and you might, if everything else goes well, get a not-especially-exciting growth rate. And the voters on Sunday don’t even know which set of “reforms” they are voting on, let alone their long-term consequences.

UPDATE: Note that the debt sustainability analysis is on the ballot on Sunday!

Occupational shifts in the UK

Following up on the ideas in this post, here’s an interesting chart from the Bank of England Inflation Report.


In our model, people advance along at least locally optimal career paths in expansions, and then have to find a new one in recessions. So you’d expect job tenure, marked in green, to reflect the business cycle – people accumulate it during expansions and lose it in recessions – and that’s precisely what we see. In 1996-2000, when unemployment dropped sharply, it was a strongly negative contributor to wage growth. After that, it began to be a positive contribution as the new hires progressively accumulated tenure and advanced along their career paths. We also see a bit of this after the .com crash. However, it didn’t become a big negative item after the great financial crisis, perhaps because unemployment didn’t rise as much as expected.

The effect of change in qualifications has been quite surprising; it was negative for most of the boom, and then very positive immediately post-crisis.

From 1999 to 2007, workers changing between occupations seems to have been a significant contributor to wage growth (about +0.2% a year). Between 1996 and 2002, workers changing between industries was a positive contribution, but it then swung negative between 2002 and 2006, before becoming positive again in 2007.

During the great financial crisis, it was significantly negative, and it then became positive in the recovery. Since then, it’s disappeared as a factor. Change between occupations, however, was strongly positive in the crisis, erratic and noisy in the recovery, and since Q1 2013, has become very strongly negative. So has the effect of job tenure. At the moment, the combination of tenure and occupational change accounts for -0.75 percentage points of wage growth. The strong negative tenure effect is comparable to that in the late 90s expansion, implying significant net hiring. The occupational change effect is, however, unprecedentedly awful, and it is increasing.

This is consistent with the perverse selection I proposed in the original post. The big difference between now and the 90s experience, though, is that the occupational shift effect is much bigger.

Which is also consistent with making Jobseekers’ Allowance claimants stand around Finsbury Park station wearing a hi-viz vest to no particular purpose.

If Greece Had Not Existed, Europe’s Leaders Would Have Had to Invent It

He must be chosen from among you as a scapegoat. Hipponax

One of the more intriguing aspects of the whole modern Greek drama is the tragicomic way the country seems to be constantly condemned to live out well known themes which come from its own mythology. The latest example is the way what was once the cradle of European civilization has allowed itself to be converted into the role model for everything its fellow Europeans are not. Or at least, this is the story we are supposed to believe. Continue reading

ECB Taper News

What Business Insider’s Mike Bird somewhat ironically calls #euroboom2015 seems to be well and truly with us.

The WSJ’s Simon Nixon spelled  it out for us in his “QE is Working Better than the ECB Dared Hope” article:  “one month into the ECB’s €1 trillion ($1.06 trillion) quantitative-easing program, and ECB President Mario Draghi was only too happy to take credit for a remarkable turnaround in the economy’s fortunes at Wednesday’s news conference.” And he goes on to give examples:

“Growth forecasts have been continually revised up since January when the program was announced: the International Monetary Fund said this week it now expects the eurozone to grow by 1.5% in 2015. Business and consumer confidence are the highest since 2007. Bank lending is finally picking up.”

“The strongest growth is coming from former crisis countries: Spain is forecast to grow by up to 3% and Ireland up to 4% this year. Meanwhile German policy makers fret that with growth likely to hit 2.5%, the economy may overheat.”

 Naturally, as he also says, “not all of this can be traced to quantitative easing.” But then, here comes the point: “Indeed, if the ECB had delayed its decision on quantitative easing until March, as the Bundesbank had urged, it may have concluded it didn’t need to buy any bonds at all.” Continue reading

The snakes-and-ladders model, again

They say the first rule of editing is “kill your darlings”. The first rule of science, however, is “sacrifice your darlings humanely in accordance with the research ethics committee guidelines, but keep their brains for further investigation”. So it is with this post. Per Mason, apparently the GFC looks a lot different to past recessions and it’s important to include the full span of the ECEC data back to 1986. So here goes.

The ECEC civilian workers series doesn’t go back to 1986, and neither does all workers, so I picked on the series for “private industry” – after all you’d expect public sector employment to be less responsive to the business cycle by definition – which does. The orange dots on the chart mark ECEC data points, while the blue ones mark the composition-weighted ECI series for private industry. ECEC after 2002 is quarterly, and is averaged to give an annual figure.


The big orange outlier is 2002. ECEC was issued as a slightly different series in 2002-2003, so perhaps we should exclude that one. I’ve plotted regression lines for the two series, orange and blue respectively, and for ECEC excluding 2002, black.

As you can see, ECI is still more cyclical than ECEC (R^2=0.33 vs 0.03 – ten times as much). Excluding 2002 helps a bit, but not enough (R^2=0.33 vs 0.11, three times as much). The correlation between the change in ECEC for the private sector and the output gap is 0.19, and that between private sector ECI and the output gap is 0.58. The blue outlier is 1985-1986.

Purely visually, it looks like the difference between the two series is in fact greatest in the 1980s, but any effect is accounted for by three data points (’86, ’87, ’88) and in any case, it seems to have disappeared 30 years ago. Alternatively, the BLS has changed the method it uses to collect ECEC several times in that period and this might be an artefact.

Is The Crisis Now History In Spain?

Mariano Rajoy is a man who is not shy when it comes to being controversial, as the storm surrounding his stance over the recent Greek bailout negotiations clearly illustrates (and here). So it is perhaps not surprising that he did not notably blush when he informed a Madrid audience recently that “In many ways, the crisis is history.” Such was the storm that followed that he was forced to at least partially retract the offending phrase after a meeting with union officials some four days later. “In many ways the crisis is history, but its consequences are not,” he clarified.

Of course all of this is mainly political rhetoric at the start of what is set to be an election year, but still, it does raise interesting questions. Where exactly is Spain? What is the outlook for the future? Is the country still in crisis, or is it, as Rajoy 2.0 suggests simply suffering from the legacy of an earlier one? These questions are not as easy to answer as they seem at first sight, nonetheless in what follows I will take a shot at it. Continue reading