Friday, December 30, 2011

Luxembourg PM Calls Euro-Area Debt Crisis “An Exaggeration”

Covered by both Der Spiegel and the Voice of Russia

Jean Claude Junker, Prime Minister of the EU’s wealthiest member nation and head of Eurogroup, the EU’s monetary union committee has sharply criticized Standard & Poor's threat to downgrade the AAA credit ratings of leading Eurozone economies as wild exaggeration. The ratings agency Standard and Poor’s is exerting pressure on Eurozone member nations to slash their budgets overnight as an answer to the Euro area debt crisis.

Juncker said the S&P announcement was "a knockout blow" to countries that were cutting their budget deficits. "I find what Standard & Poor is saying completely exaggerated," Juncker told Deutschlandfunk radio. "I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit; this can't be a coincidence."

The Hysteria of the Moment – A Self-Fulfilling Prophecy
When one looks up news on the Eurozone crisis, economic coverage almost invariably focuses on Greece, one of the Eurozone’s smallest and poorest member nations. Greece’s population represents just 1/40th of the Eurozone’s population, and even less of the region’s GDP. How is it then that the bankruptcy of such a small player in the European market can lead to headlines proclaiming that”The Euro is Dead” in places such as in the Economist and Der Spiegel?

In US terms, it would be as if the economic collapse of Vermont and Rhode Island would prompt the Wall Street Journal to print the headline “The Death of the US Dollar”. It’s more than a bit ridiculous.

Shock Doctrine – The Euro Edition
No matter what one says about the Eurozone Debt Crisis, one thing is certain: The Leaders and the Parliaments of the Euro-area nations have turned to IMF-backed austerity measures as a way out of the Eurozone crisis. This is not just limited to Greece, where the crisis actually is. Portugal is a country who has passed an extremely austere budget – and suffered the consequences of the ensuing economic destruction – due to lack of confidence in Portuguese sovereign bonds and financial markets. This is all despite no fundamental economic changes or banking collapses over the over the past decade and a half.

The pressure from S&P has become so large that 15 of 17 Eurozone members have been threatened with a ratings downgrade if the Eurozone crisis is not resolved in December 2011. This list includes Germany. The ones not included – Cyprus and Greece. In other words, the pressure is on to get austerity packages pushed into the entire EU- and the default of 1/40th of its population is the pretext for all of this madness.

The Germans however, are not intimidated. "Germany will not let itself be influenced by ... the short-lived verdict of one ratings agency," said German Finance Minster Phillip Rösler, Reuters reported. "We think nothing of such threats. We have no difficulties on the financial markets." Investors for their part have not lost confidence in German bonds, preferring to believe the fundamentals rather than the hype.

Jean-Claude Juncker is the Prime Minster of Luxembourg, the EU’s wealthiest member nation. He is the longest standing head of government of any European Union state. Juncker has also been president of the Euro Group since 2005. 

Thursday, December 29, 2011

US Debt Ceiling - Canadian Debt Wall

N. Klien's Shock Doctrine in Action

A crisis of government leads to widespread calls for massive budget cuts. Pressure coming from the rating agencies lead to a loss of confidence in the stability of the national debt. It was only a matter of time in fact before our country’s bonds turned into complete junk. Something had to be done. More importantly, something had to be done to balance the budget. In the name of saving the nation, cuts had to be made. 

This story has in fact twice in recent North American history. More to the point, recent Canadian history has shown this to be a manifestation of economic destruction executed via shock political tactics. Nevertheless, the story has repeated itself south of the border in the US.

2011 - The US Debt Ceiling Crisis
In 2011, as national debt figures reached 100% of the country’s GDP. This was ostensibly due to the huge expenses borne by both the Bush and Obama administrations in relation to the eruption of the 2008 financial crisis. The fact of the matter is that while US debt/GDP levels have reached recent high-water marks, they are in fact comparable to those of the US in the 1950’s, a time of widespread economic expansion in US history.

Evolution of US indebtedness

How could such a scare therefore have been stirred up about the budgetary stability of the world’s largest economy in a matter of weeks? What actually happened?

Earlier the same year, in January of 2011, the newly elected republican House repealed the Gephardt rule. One of the key clauses of this rule was the automatic debt-ceiling rule. Under the Gephardt rule: “joint resolution specifying the amount of the debt limit contained in the budget resolution automatically is deemed to have passed the House by the same vote as the conference report on the budget resolution”

In other words, the US fiscal budgetary credit limits were an internal part of the budgetary debate and not a separate item. With this provision gone, conservative forces were free to fabricate a national sovereign credit crisis where none had existed before. Indeed, the statutory debt limit was used as justification to strictly limit the US Federal Government’s credit facilities if no action was taken by August 2nd 2011. In other words, if nothing was done, the US would run out of credit because it would hit a debt ceiling, which had been wholly fabricated just a few months before. The Letter from Tim Geithner to Harry Ried outlines the ultimatum:

What followed was the Budget Control Act of 2011, which stipulated $917 billion of cuts over 10 years in exchange for a $900 Billion increase in the US debt limit. $21 Billion in budget cuts were slated for the fiscal year 2012. A debt adjustment which was hitherto mechanical was turned into a matter of crisis and political shock tactics to try to force cuts in public services and jobs in the middle of a recession and economic crisis period. On August 5, 2011, the US was downgraded by the rating agency Standard & Poor's. This led the Dow to lose 6.5% of its value the following day.  

The real answer to the question of what actually happened takes a page out of the Canadian strategy book and brings it into play on the US side of the border.

1993- The Canadian Debt Wall
In February 1993, Canadian press began running stories about the impending exhaustion of Canadian sovereign credit borrowing capability. Apparently, the country’s credit was about to run out and Canadian sovereign debt was on the brink of being downgraded dramatically, casing a massive pullout of investor funds from the both Canadian bonds and Canadian economy at large. The only apparent solution was to massive cuts in Canada’s democratically popular healthcare and social expenditures. The Canadian Liberal party ultimately did just that.

Two years after the fact, Vincent Truglia, the senior analyst at Moody’s in charge of issuing Canada’s credit rating, divulged to the media that had come under constant pressure from Canadian corporate executives and bankers to issue damning reports about the country’s finances. Because he considered Canada an excellent, stable investment, he refused to do so. In other words, Truglia was being pressured to corroborate the view that Canadian debt was way too high and some massive cute had better be made.

The Gephardt Rule
The Gephardt Rule is outlined in this Wikileaks document. While it is actually a 2003 change in the House Rules for the Congressional Budgetary Process, by which time the Gephardt Rule already existed, this document represents the most recent working version of the rule.

While this is not the first time that the House has done away with the Gephardt Rule, it is the most recent. 
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands

Tuesday, November 15, 2011

Fed Study: Inflation? What about Deflation?

What Should a Central Bank do in the Following Situation?
A real estate bubble causes Foreign Portfolio Investment to flow into the country. Suddenly, the bubble bursts and the country's financial system collapses. The left blames lax financial standards, while the right blames an inflated money supply.  With all this in mind, the key question is….    What to do With Interest Rates and With the Money Supply?

Japan: Once Upon a Crisis
In early 1990, the Japanese asset price bubble (lit. baburu keiki) came to an end. During this period, Japan renounced currency price intervention and the subsequent bubble attracted foreign speculative funds on a massive scale, in proportion to Japan’s role as the world’s second largest economy (at that time). At the end of the bubble, asset prices and then economic growth declined dramatically. While the Bank of Japan did engage in monetary loosening, the consensus view in retrospect was that the BOJ’s monetary response was wholly insufficient. Stated otherwise, the response of the BOJ to the Japanese asset price bubble was too little, too late.

The BOJ’s policy response came slowly. In March of 1991, a year after the bubble burst, the BOJ’s policy rate was still at its high of 8.2%. This was gradually brought down to 2% in 1995. In 1993-94, there was a brief thaw in the Japanese crisis. This thaw served to dissuade the BOJ against further stimulatory action.

After asset prices collapsed in Japan and firms’ balance sheets deteriorated, interest in lending and borrowing from both the lender side and the borrower side had radically diminished. This in turn eroded the possible effectiveness of monetary action by the BOJ. In this respect, the BOJ missed the crucial opportunity to turn things around – for an entire year–.

This was exacerbated by a “wait and see” attitude adopted by the Ministry of Finance with regard to bank intervention, which persisted until 1997 when Japan’s government used fiscal policy to recapitalize the banks –seven years after the crisis began– . By 1995, Consumer Price Inflation was negative, despite the fact that interest rates were essentially at zero.

Unfortunately, deflation is a much more difficult phenomenon for central banks to remedy. Deflation strongly discourages both investment and consumption. After all, why would, one buy something today when it will cost less tomorrow? For that matter, why would one dare to invest in assets which will only have lesser monetary value next year? Furthermore, how can the central bank react to deflation? Given that deflation occurs during a recession, it certainly can’t solve anything by raising interest rates. In the other direction, interest rates can only be lowered as far as the Zero-lower -bound.

What it Means for us Today
The key lesson about Japan’s crisis, recession, liquidity trap, and deflation, is that if a central bank and an economy are to overcome large economic shocks, the reaction must be swift and it must be decisive. The consequences of hesitating during a crisis amount to exacerbating the crisis and triggering deflation, which is difficult to emerge from.

The Politicians Keep Getting it Wrong
One thing which has clearly emerged in the discourse in the US is conservative anger about the monetary expansionism of the Federal Reserve. On one hand, Herman Cain has proposed switching altering the Federal Reserve’s mandate from two goals – inflation stability and economic growth – to a mandate with the sole aim of inflation stability. On the other, ex-cargo pilot-turned Texas politician Rick Perry calls Ben Bernanke a traitor, ostensibly for not sinking in the US economy in the Japanese fashion.

The Federal Reserve Study
In 2002, the Federal Reserve published a study on the causes, effects, and consequences of the Japanese recession. The study comes to the conclusion that, considering the risks of liquidity trap, deflation, and the difficulty of emerging from the situation, both monetary and fiscal stimulus during a crisis situation should go far beyond conventionally established norms.
About the Author:
The Federal Reserve is the Central Bank of the Unites States of America. 

Monday, October 31, 2011

Economie van België in een Notendop

De Economie van België in een notendop is een snel analyse van de economie van België. Deze presentatie werd gegeven voor de Verbond van Belgische Ondernemers (VBO) in Brussel in September 2011.
The Economy of Belgium in a Nutsheel is a quick analysis of the Belgian Economy This presentation was given for the Federation of Belgian Enterprises (FEB) in Brussels in September 2011.

De BBP van Belgie ligt rond 471,2 Miljard USD.

Principale Sectoren
  • Automobielindustrie
  • ICT Sector
  • Chemische producten
  • Elektronische industrie
  • Farmaceutische industrie
  • Bouwkunde
  • Diamanten 
  • Staal


Duitsland:         19.58%
Frankrijk:         17.71%
Nederland: 11.84%

Nederland:        17.93%
Duitsland:         17.14%
Frankrijk:     11.69%

- Antwerpen: De tweede grootste haven van Europa alsook de meest belangrijke diamantmarkt ter wereld.
- De haven van Zeebrugge is de belangrijkste haven in Europa voor “Roll on/Roll off” handel en aardgas.
- Vlaanderen is bron van 60% van de BBP van België

Wallonië & Brussel
- De sillon industriel was de eerste geïndustrialiseerde zone op het Europese continent.
- Charleroi  en Luik zijn belangrijke industriele  steden vandaag.
- De wapenindustrie in Luik is een essentiele bron voor de NAVO
- Brussel is de tweede expert arbeidsmarkt ter werlde (na Washington DC)

SWOT-Analyse van België
-Koopkrachtige consumenten
-Logistieke draaischijf

-Grote welstandskloof: 13.5% van de bevolking ligt onder armoedegrens
-Sterke arbeidsmarkt regels met een complexe salarisstructuur.

-Modernisering van industrie
-Versterking van onderzoek en ontwikkeling

-Hoge Niveau van Overheidsschuuld
About the Author:
-Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Sunday, October 30, 2011

Consequences of Deregulation for US Real Estate Market

The Destruction of American Housing

In early October 2011, Marketplace, National Public Radio's financial and economic news segment reported on a bizarre phenomenon emerging on the landscape of the US housing market.

At first glance, it would appear that the forces of supply and demand are at work. What we are really seeing are the unmitigated forces of the unregulated market recklessly creating at first far too much housing, then destroying it in a messy process in which many are needlessly made homeless and the live savings of many families are destroyed. What we should be asking is: 

Why has there been no attempt to dampen the business cycle? Why, with our massive economic, administrative, and regulatory capabilities did we not see to it that the growth of the housing market in the US proceed along lines which more closely resembled growth in fundamental value, and growth in consumption demand for housing? 

Some may see this as a story of creative destruction, along the lines of Schumpeter. Frankly, this is never how the destruction of housing (and possibly the destruction of infrastructure) should be seen. What this story is really about is the process of flat-out destruction of economic value caused by bad policy, improper management, and greed. Here are the steps:

The Process of Economic Destruction
1: This story begins during the bubble. The inflationary and unrealistic asset values in the housing market lead to an oversupply of housing being created. By definition, the bubble also absorbed savings, profits, and retained earnings in large scale from the rest of the economy. Shortsightedness and Poor Regulation

2: Record numbers of foreclosures across the US after the housing bubble ended. While various US media sources described this process as one of questionable legal legitimacy, what is clear is that American banks have broadly been unwilling to do loan modifications, or extend new loans. Instead, they have simply been in a hurry to get their hands on as many people's homes as possible. Greed

3: The simultaneous attempt to sell-off all of the foreclosed homes led to the destruction of asset value in an economic and financial sense. Broadly, this affects not only the prices of foreclosed homes, but also their ability to be sold and the property values of those who try to cling to their homes. Poor Regulation and Bad Business Practices

4:  Since homes weren't being sold and banks were not extending real estate loans, foreclosed homes sat empty. While empty, they began to deteriorate and depreciate, losing not just financial value, but more importantly, fundamental value. As the saying goes in the Real Estate industry "Homes like to be lived in" Poor Asset Management

5: After bad business practices turned people's homes across the US into vacant houses and they began to deteriorate, now they are being destroyed outright. Assets are being destroyed.

This is a cycle of the impoverishment of people, the destruction of assets, and ultimately the contraction of the economy. This is exactly the opposite of what economic policy might hope to achieve. This is also especially ominous given the negative spillover effects that foreclosures have on a community. A score of negative things from crime rates to suicides increase as foreclosures rise. In the end, it comes down to what economists call Negative Externalities.

What is even sadder about the story is that this process could have been either prevented or mitigated at any of these five stages. And yet, nothing has been done.
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Tuesday, September 27, 2011

A New Way of Bank Stress Testing


In January 2009, during the depths of the financial crisis, the Basel Committee on Banking Supervision published its view that the bank stress-testing which had so-far taken place across Europe and the US was insufficient for a number of reasons.

While the financial market had grown considerably more complex and less transparent since the previous round of financial crises at the end of the 20th century, stress-testing had not kept up with the times. Forward-looking information was not-being taken into account. 

Rather, stress-test so far has been undertaken in the so-called frequentist way, meaning that purely quantitative and statistical approaches have been used. By definition, this way of doing things only examines historical data. Subjective data, which, in expert hands could be used to detect when it is that the current circumstances are likely to change -perhaps even in a heretofore unseen way- is overlooked. Also overlooked is forward-looking information of any kind. Nassim Taleb's famous book The Black Swan swan points to precisely this sort of thinking as being a major weakness in daily wisdom of financial economists prior to the start of the crisis. The idea that the situation might change was not appreciated. Nor was the idea that we may need to update our information to take into account current happenings.

In 2009 and 2010 Committee of European Banking Supervisors (CEBS) implemented the first and second EU-wide stress tests which were conducted along frequentist lines, examining at first only the largest 22 banks in Europe and later all of the systemically most important bank at the national level in Europe. Not surprisingly, the first two European stress-tests were widely considered failures. In 2011, the newly commissioned European Banking Authority (EBA) has thus taken to the task. Because the European stress tests tried to answer the question of what would happen in the event of both current loss expectations as well as a worst-case scenario whereby losses far exceeded current loss expectations but overlooked the possibility of multi-stage economic shocks, they represented the frequentist point of view. Essentially, they do not revise losses in a dynamic way. Thus, they have left something to be desired, irrespective of the number of banks or percentage of GDP investigated. 

Many experts now consider that the key missing ingredient from stress testing procedures is a solid way of capturing the co-relationships between the various stress events. With this in mind, the Bayesian net can help us understand the relationship between some of the key events. Consider for example the relationship between events A and C. 

The Bayesian Net

The most important aspect needed in stress testing in order to overcome black swan events is a forward-looking element. Subjective probability is a plausible way in which this can be achieved. A subjective probability is essentially an opinion – hopefully a well-informed one – regarding the probability distribution of an event occurring. While there is no mathematical proof behind the answer, one can expect that in addition to historical probability distribution, a subjective probability might be influenced by expectations, indicators as to what may occur in the future, and indicators as to why this time might be different. The most significant upsides to this approach are the incorporation of a wide range of indicative and qualitative data, as well as the non-reliance on vast and often difficult-to-obtain amounts of data. The latter factor would render this approach particularly valuable during scenarios involving one or more extremely rare (statistical tail) events.

Another important issue which needs to be addressed in stress testing is correlation of shocks. In many stress tests, this has truly come to be a key missing ingredient. The simple fact that a financial institution survives an economic shock may might not be perfectly indicative of bank-survivability when the economic shock in question might also set off (or might otherwise be associated with) a chain reaction of economic shocks.  
About the Authors:
-Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.
-Kevin Hoefman is a lecturer of software programming at Hogeschool West-Vlaanderen and a former software engineer and video game programmer. 

Wednesday, September 14, 2011

German Constitutional Court Accepts Eurozone Bailout - Of Course

German Court Rejects Challenge to Eurozone Bailouts
On September 6, 2011, the German Constitutional Court reached the decision to reject the challenge posed by six prominent German Eurosceptics to Germany bailing out Eurozone countries. The bailouts shall be subject of course to German parliamentary approval. 

As the BBC article states, the German decision has implications for the whole region in light of that fact that it is the largest economy in the entire region. 

Not a Surprising Ruling
To those who have a good understanding of Germany's national interests, this ruling should come as no surprise. In fact, what has just been decided, is that the German Parliament shall essentially decide the future fate of the Eurozone, in absence of (or possibly in advance of) strong and well-organized EU-wide Eurozone stability measures. This means that the German Parliament may come into a position to decide the terms of not only future bailouts, but also of the wider economic infrastructure of the Eurozone. Indeed, as Constitutional Court President Andreas Voßkuhle was quoted as saying "this is not a blank check". This means that German politicians may even come to dictate national-level economic policy guidelines for other Eurozone member nations. 

In other words, this ruling is really a question of German national interest.

Why This Makes Economic Sense
Aside from reasons of control and regional influence, there are concrete economic reasons why Germany would be interested in maintaining the Eurozone, even at the cost of bailouts. In light of the Eurozone, The following facts must be realized. 

1: Germany, is the world's second largest exporter. That is, Germany is an export-dependent economy. This is particularly the case for the industrial and manufacturing sectors in Germany.

2: The presence of the Mediterranean-area member-states brings down confidence in the euro as well as in the stability of the Eurozone. This causes prices for the Euro to be lower than what they otherwise would be. Moreover, this is achieved without interference in the currency markets of any kind. 

3: Having an undervalued currency means having under-priced exports. This is good for German exporters. Its quite straightforward really. Nevertheless, the traditional method of achieving this - devaluing the currency on international markets - is now considered to be a beggar-thy-neighbor policy. This means that while such a policy has worked for Japan in the past and works for China today, it might bring Germany afoul of international trade (WTO) law. Therefore, another mechanism is needed. Preferably one not elaborated in the law, and which would be beyond the reach of Germany's major trade competitors for emulation purposes as well. The common currency is perfect for that. 

German Export-Led Growth Needs the Euro
In light of the troubles in the Eurozone, and the decline of international confidence in the Euro, German GDP growth has recovered in 2009-2010, lead by strong export figures, which have also influenced the growth of the German DAX since 2009. 

German exports are the main source of German GDP growth. Both of these figures have been on the rise since 2009, while the Greek sovereign debt crisis marched onward and confidence in the Euro as well as in the stability of the Eurozone languished.

In 2009 and 2010, this relationship was also reflected in the performance of the DAX. While the Eurozone was suffering a crisis of confidence the DAX saw a strong post-crisis recovery. 

While it is indeed true that the DAX has seemed rather unstable in the last month, this is only because the markets have begun to signal that the bailout is simply taking too long and it does not have the support of the people on the street in Mediterranean Eurozone countries because of the austerity. Furthermore, on September 14,  researchers at the  Institute for Economic Research Halle (IWH) identified lack of political as the key economic threat. "Due to lack of political support from the Member States there no longer seems impossible that the institutions that currently guarantee the stability of financial markets in the euro area no longer can fulfill their role so that the European financial system falters again.
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands

Tuesday, September 6, 2011

Central Banks as Agents of Development

The Overlooked Role of Credit Policy
UN University Study

What is the precise role of a central bank? What are its tools? While the common-consensus has focused on the central bank's role concerning price-stability and economic growth by means of manipulating key interest rates and money supply. During times of crisis, (as we have seen), this has been expanded to managing the supply of other financial instruments as well. e.g. MBS, bonds.

What we have not considered lately are questions about not simply how much credit and money supply there is in the economy, but also where and under which conditions this money and credit is allocated in the economy. Nevertheless, these questions are highly relevant to both crisis response and to economic development. In other words, the current paradigm in monetary policy only considers half the story. 

Front-page news or not, Many of the world's principal central banks actually have thought about this question  since the 2008 collapse of Lehman Bros. Since then, the Liability side of central bank balance sheets in the US, EU, and UK (representing funds flowing from the banks into the economy at large) have undergone broad diversification.

The UN University Study
In this UN University study focusing the role of credit policy in development economics, the history of central bank involvement in sectoral development policy, industrial policy, export-promotion. The tools of these policies were primarily credit allocation, subsidized loans, and capital controls. They were used to:

1.       To finance government debt at lower interest rates
2.        to reduce the flow of credit to  the private sector without raising domestic interest rates
3.       to influence the allocation of real resources to priority uses and
4.       to block channels of financial intermediation and thus to assist restrictive general monetary policy

This study outlines the historical role that credit policy in the industrialization of continental Europe, as well as the development the of  UK's financial sector. Japan's industrialization was also underwritten by strategically-placed funds and subsidized loans.

What does this mean for developing countries ?
The New York Federal Reserve’s historian, Arthur I. Bloomfield reported in 1957 “the central bank can seek to influence the flow of bank credit and indeed of savings in directions more in keeping with development ends.” The fact is that virtually throughout their history, central banks have financed governments, used allocation methods and subsidies to engage in ‘sectoral policy’ and have attempted to manage the foreign exchanges, often with capital and exchange controls of various kinds.

This is was what developed countries needed then, and it is what developing countries need today.

About the Author:
Gerald Epstein is the chair of the department of economics at University of Massachusetts Amherst since 1997 and a former UN University researcher. He holds a PhD in Economics from Princeton University. 

Friday, September 2, 2011

An open letter to Dr. Paul De Grauwe

Een open brief aan Dr. Paul De Grauwe over de Europese overheidsschuld crisis
(August 3, 2011 9:42 pm)
We moeten niet overreageren ten opzichte van de Europese schuldencrisis. Hoe kan het zijn dat een schuldencrisis in Griekenland wordt een existentiële crisis voor de Eurozone, terwijl een schuldencrisis in Californië geen internationale nieuws is? Het verschil heeft te doen met vertrouwen in de sterkte van het het financiële systeem.

Prof. De Grauwe is helemaal correct te zeggen dat de ECB alsook Europa moet een grotere rol spelen om credibiliteit in de economie van de Eurozone op te bouwen. Hij is ook correct te zeggen dat de ECB moet  meer meer serieus zijn met betrekking tot zijn rol als Lender of Last Resort. Het is ook jammer dat inflatiebeheer en prijsstabiliteit is de enige taak van de ECB.

Maar, de situatie is minder sterke dan wat legt hij uit. De EFSF kan in het toekomst een credible verzekering zijn. Vooraal als het gaat door the EFSM versterkt worden.

Een essentieel punt dat tot nu vergeten is in dit debat is manier dat nieuw geld in de economie geplaatst is. Tijdens the Britse Eerste Wereldoorlog financiële crisis geanalyseerd door Skidelsky, het belangrijk punt was dat nieuwe geld werd direct bij de import-export banken geplaatst om het effect van de Duitse embargo te annuleren. Het nieuwe geld werd gestuurd naar de bron van het probleem.

Daarom moeten we ook vandag proberen om nieuwe geld te plaatsen  naar de bron van het probleem. Dus niet alleen een kwestie van hoe veel, maar waar.

An open letter to Dr. Paul De Grauwe regarding the European sovereign debt crisis
(August 3, 2011 9:42 pm)
We should not over-react vis-à-vis the European debt crisis. How can it be that a debt crisis in Greece is an existential crisis for the euro zone, while a debt crisis in California is no international news? The difference has to do with confidence in the strength of the financial system.

Dr. De Grauwe is also completely correct to say that the ECB and Europe must play a greater role in building the credibility in the Eurozone economy and that the ECB should take seriously its role as lender of last resort. I also agree that it's really a shame that the inflation and price-stability is the only goal of the ECB.

However, the situation is less alarming than what is outlined by Dr. De Grauwe. EFSF should evolve into a credible insurance scheme in future. Especially when it goes through the EFSM strengthened.

A crucial point which has until now been overlooked in this debate is manner whereby new money is placed in the economy. During the First World War British financial crisis analyzed by Skidelsky, the important point was that new money was directly placed in the import-export banks in order to counteract the effects of the German embargo. New money was sent to the source of the problem.

We should therefore adopt a similar approach today, sending new funds directly to the source of the problem. Thus its not only a question of how much but also of where.
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.
Paul De Grauwe is  is Professor of international economics at the KU Leuven and former Belgian senator for the Flemish VLD Party.

Thursday, August 25, 2011

Ernst & Young on the State-Owned Enterprises (SOE) Debate

A Question of Corporate Governance

In this private study, the international consultancy Ernst & Young outlines its moderated and nuanced position with regard to SOEs.

The main thrust of Ernst & Young’s argument is that SOEs can indeed be important pillars of the economy. In fact, towards the future SOEs will remain a key bulwark defending strategic industries and guaranteeing the adequacy of infrastructure, such as electricity, power and communication grids, basic networks and transport. However, Traditional governance structures and vague missions have tended to make it difficult for SOEs to do perform well.

This position is reminiscent of the quote for Barrack Obama: “We have so much time debating the size of government that we have neglected to consider the more serious question of how well our government actually works

Contrary to the established theoretical view which permeated through academia and later throughout society in the last 25 years, reflecting the view of state-run enterprises as lethargic, inefficient, and bureaucratic does not hold. These traits were found to be neither particular nor specific to SOEs. This should of course to no surprise to anyone who has ever read a Dilbert comic, to say nothing of the commonly held opinion about corporate America.

Rather, this paper focuses on improving and maximizing the quality of SOE governance. All too often, inefficiencies within specific SOEs have been used as a justification for their dismantling, ultimately leading to a reduction in welfare as employment levels are reduced, and the business cycle deepens as yet another firm takes pro-cyclical rather than counter-cyclical action. This is roughly akin to using the fact that your puppy has soiled the carpet as a justification to having him euthanized. This paper seeks instead to train best behavior.
In particular the goals of SOE policy should be:

1. Protect the interests of all the stakeholders (including customers, minority shareholders, society, etc.) and guarantee the autonomous economic development of the firm.
2. Appoint competent and skillful board members in a transparent, skill-based nomination process.
3. Guarantee the autonomy of the boards but still allow governments to exert authority at a strategic level through regular board evaluation mechanisms.
4. Create other processes that promote accountability and transparency.

Table 1: Key Sectors of SOE Operation

Ernst & Young outline that SOEs are mainly concentrated in key strategic sectors of the economy, where the hand of the state is seen as a key part of the continued stability and governance of the economy. Accordingly, public support of the presence of SOEs varies by sector, with some sectors drawing widespread SOE skepticism while others sectors draw widespread SOE support. 

SOEs can have a vital role in forcing market discipline in otherwise difficult regulate markets. The paper goes on to outline the torch-bearing role that SOEs have in Chinese reforms and the buttressing effect that Indian SOEs have on economic growth.

Figure 1: Support for State Ownership of the Sector

Government and enterprise is a series of studies and initiatives examining various facets and aspects of governments’ relationships with enterprise. We open the series with this study which focuses on state-owned enterprises, where the aim is to delve deeper into the issue of government ownership, understanding how the state operates in this particular role. 

Upcoming initiatives in the series will continue to develop the government and enterprise theme, delving deeper into what governments (national and local) own, what they co-deliver in partnership with the private sector, and where they regulate provision from the market.
About the Authors:
-Philippe Peuch-Lestrade is the Global Government & Public Sector Leader at Ernst & Young
-Alessandro Cenderello  is the Global Government & Public Sector Markets Leader at Ernst & Young

Friday, August 19, 2011

BBC: Franco-German calls for "true euro economic governance"

What was Said was Only Half the News

What Was Said
A need for further financial and economic integration was identified by France and Germany. Merkel and Sarkozy outlined a vision of closer multilateral coordination whereby bi-annual meetings of the 17 heads of the eurozone governments would take place, chaired by the president of the European Council. The main objective would be to gradually further Eurozone fiscal and economic integration.

Three important revenue ideas were put forward by France and Germany. These were the establishment of a financial transactions tax or "Tobin Tax" in order to dampen volatility on the financial markets while simultaneously providing a large and stable source of revenue, and the harmonization of corporate tax rates to prevent a race to the bottom among Eurozone countries - an issue which has cost many jobs in both Germany and France in the last decade. Also, a requirement for balanced government budgets to be enshrined in constitutional law was proposed. While this last requirement would restrain countries from engaging in crisis-response, it may b somewhate prudent in other parts of the business cycle. Any fiscal rules should in my view respect the reality of crisis response as well as counter-cyclical fiscal needs.

This development is generally quite positive in the sense that the crisis demonstrated a clear-cut need for closer coordination between the Eurozone countries. While the the architecture for financial-regulatory convergence has been laid out by the European Union in setting up the European System of Financial Supervisors (ESFS) and the European Systemic Risk Board (ESRB), the issue of fiscal coordination has been overlooked by the European Union for the moment (other than the purely theoretical idea of actually enforcing the Maastricht Treaty).

What Wasn't Said
What was conspicuously missing from the headlines was the impetus to organize economic governance at the European level. rather, the multinational level was emphasized. Seen from the point of view of the markets, this means that Europe has opted for a coordinaiton system which is both informal in nature - whereby  any agreements reached might not have the binding force of law, and may only be addressed twice a year, which may frankly be insufficient - and slow to react to changing circumstances on the ground. 

In short, there will be no oraganized institutionalized attempt by the European Union to address the fiscal issue. The idea of "Eurobonds" -the most stable anti-crisis fianancial instrument possible- was downplayed. it seems that regional economic stability has taken a backseat to German naitonal interest.

Needless to say, the markets didnt like the result of this. The market detects a missed opportunity to optimally address the fiscal disparity issue within the Eurozone.  

What was the Result?
Both the French CAC and the German Dax took a more than 5% plunge in the aftermath of this announcement. The reason: markets saw this as missed opportunity. The Eurozone's leadership could have declared a committment to address both the Eurozone crisis and the financial market volatility in an organized, transperent, and instituional fashion. Alas, they didn't. This of course was enough to prompt finiky investors to sell.  

Thursday, August 18, 2011

Debt Sustainability in the Caribbean

One interesting issue in development economics is the effect of debt service costs on the effectiveness in terms of economic programs and poverty alleviation, as well as the fiscal health of a government. All too often, the debt service costs of a developing country consume a massive share of budgetary revenues. Additionally, because of inflated risk premiums, debt service costs are particularly brutal in many developing countries.

While sovereign debt reduction is primarily a fiscal matter, it is vitally necessary to due everything possible to minimize the pressure of debt service costs on fiscal budget revenues. In this area, a lot of progress can be made. Active Debt-Management Policies (ADMP) aim to achieve just that. In particular, developing country policies often fail to take advantage of bond markets. 

In bond markets, the sovereign risk premium can be reduced via a series of ADMP measures, thereby reducing debt-service costs. These measures include staggering the maturity dates, retiring foreign-currency demonimated sovereign debt issues, and the transition to coupon bonds.

In the Caribbean region, we have seen a virtuous-circle ADMP trend whereby several countries have issued increasing sophisticated sovereign debt bonds, thereby decreasing the risk-premium. The revenues from these bonds has then been used to retire riskier, less sophisticated sovereign bonds, some of which were issued in foreign currency such as US Dollar of British Pound. 

This paper is a draft case-study about ADMPs in the Caribbean region conducted at the Inter-American Development Bank. Policy recommendations on ADMP sovereign debt policy are also outlined. 


This paper examines debt sustainability in the Caribbean region in general given the emerging market status, and small size of Caribbean economies. Particular emphasis is given to six countries within the region with respect to debt sustainability techniques and policies. The size, scope and effects of sovereign indebtedness are also discussed. Policy options and recommendations for ensuring debt sustainability and reducing indebtedness are examined herein.

About the Authors:
-Desmond Thomas is the Chief Economist for Barbados at the Caribbean Country Department of the Inter-American Development Bank at the Inter-American Development Bank.
-Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.