“The EU should create a mechanism to help out countries which found themselves in Greece’s shoes. But one has to believe Greece will solve its problems by itself.” This is the view expressed by Marek Belka Director of the IMF’s European Officein an interview with Reuters last week. Asked whether the IMF would be ready to help bail out Greece, Belka said: “Yes, we are ready. But it depends on whether the EU or Greece will request it.”

In a separate interiew with IMF Survey Magazine (worth reading in its entirety) Belka cites Ireland and Spain as “good examples” of countries with “homemade imbalances” based primarily on “real estate and asset price bubbles”. As he points out, Ireland and Spain (unlike Greece) entered the financial crisis with “relatively low levels of public debt”, something which has enabled them “to react to the crisis by using the fiscal space that they had accumulated in good times”. “Now of course, both countries have been forced to start fiscal consolidation”. And since, “In a monetary union, depreciating your economy out of the crisis is not an option…countries must rebuild their competitiveness through factory-price adjustment, which often means unfortunately, cutting wages.” He thus essentially reiterates the central point that Paul Krugman, I and numerous others have been making about this situation. Continue reading →

Only a few short weeks ago the financial and economic world declared itself staggered to learn that the 2009 Greek fiscal deficit was going to come in at 12.7% (mind you, as the conservative Dutch newspaper NRC Handelsblad pointed out, there was plenty of evidence of what was coming available long before for those who really wanted to look into the matter). Well, now get ready to be staggered again, since according to a spate of articles that have started appearing in the Greek press, the number which only so very recently had us all reeling in shock may be on its way up again, if only by “a few tenths of a percentage point”. How many “tenths of a percentage point?” Well at this stage this isn’t exactly clear. On 28 December the web portal Capital.gr reported (in Greek, but try Google translator):

“Temporary (cash) data from the flow of government revenues have fallen quite substantially when compared to those of the last quarter of 2008,… not only data for October-November, but the first indications for December show that the delay in the flow of public tax income (mainly) is important. The Treasury has also begun to “mumble” about the possibility that the deficit in 2009 is going “to close a few decimals above the anticipated 12.7 %…”. How many decimals? This is unknown at present, although the General Accounting Office (YPOIK) displayed some optimism that the gap will not exceed 0.1% – 0.2% of GDP (ie the deficit will remain below 13%) even if some do not hesitate to speak of a deficit of over 13% of GDP.”

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I have an interview with Paul Krugman in today’s edition of La Vanguardia (in Spanish). Below I reproduce the English original. As will be evident, there are many topics about which Paul and I are far from being in complete agreement. But on one topic we are in complete harmony: the diffficult situation which now faces Spain, the need for internal devaluation, and the threat which continuing inaction on the part of Spain’s current leaders represents for the future of the entire Eurozone.

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Edward Hugh: In your NYT article “How Did Economists Get It All So Wrong”, you state what I imagine for many is the obvious, that few economists saw our current crisis coming. The Spanish economist Luis Garicano even made himself famous for a day because he was asked by the Queen of England the very question I would now like to put to you: could you briefly explain to a Spanish public why you think this was?

Paul Krugman: I think that what happened was a combination of two things. First, the academic side of economics fell too much in love with beautiful mathematical models, which created a bias toward assuming perfect markets. (Perfect markets lead to nice math; imperfect markets are a lot messier). Second, the same forces that lead to financial bubbles – prolonged good news tends to silence the skeptics – also applied to economists. Those who rationalized the way things were going gained credibility until the day things fell apart. Continue reading →

The Latvian government is getting nervous about the level of lending coming from Swedish banks. According to the Financial Times, “Latvia’s prime minister has warned Swedish banks they risk choking off recovery in the Baltic state’s crisis-hit economy unless they resume lending”. The Latvian authorities are complaining, it seems, that banks such as Swedbank and SEB, which dominate the Latvian market, have reined in credit as they struggle to contain rising bad loans amid the deepest recession in the European Union.

“The . . . abrupt stopping of credit is a very problematic issue,” said Valdis Dombrovskis, the prime minister. “We expect Swedish banks to start [lending] again. “Of course you can say that Latvians were borrowing irresponsibly but to borrow irresponsibly you need someone to lend irresponsibly,” he said. “We had very easy credit in a very overheated economy. Now we have almost no credit in a very deep recession.”

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The Greek government is having a hard time of it at the moment. Only today the Finance Ministry issued a statement that it was ready to “intensify its efforts to restore the viability of fiscal and economic trends in Greece” in response to the Moody’s decision to downgrade the country’s credit rating, while just one week ago the Finance Minister was accusing Standard & Poor’s of failing to “assess correctly” new moves by Athens to tackle its swollen budget deficit – echoing a similar response from Spanish Prime Minister José Luis Rodriguez Zapatero. George Papaconstantinou’s critical outburst followed the earlier downgrade decision by the rating agency of the nation’s long-term sovereign debt. Today, the Greek Government got the answer they should have expected, since Moody’s effectively followed the path of the other two main agencies (Fitch already have the Hellenic Republic on BBB+) and downgraded Greece to A2 from A1. The move means Greek debt is one step closer to being cut off from eligibility as ECB collateral, since Moody’s have put the rating on negative outlook, which means they consider a further downgrade more likely than an upgrade over the next twelve to eighteen months, while the ECB are scheduled to revert to the pre-crisis criteria of only accepting Sovereign Bonds which retain at least one A- from one of the main ratings agencies as collateral for lending. Certainly Lucas Papademos, ECB vice president, said last week that the ECB would not change plans to tighten its collateral rules in December 2010 simply to accommodate Greece. Continue reading →