By Rok Spruk, on January 16th, 2012
Recent debacle at the summit of Brussels in the midst of the political intervention of the EU leaders to facilitate the institutional agreement between the European countries towards the formation of the European fiscal union has caused not only a long-standing dissolution of the “core countries” of the Eurozone and the UK but, more importantly, a non-solvable puzzle on the end scenario of the European debt crisis that pervaded both the eurozone and the countries outside it ever since the beginning of the 2008/2009 financial crisis. The anatomy of the European debt crisis is a multifaceted process that is heavily interrelated with the economic principles of the process of European integration and the unintended consequences that erupted in the recent debt crisis.
The introduction of Maastricht criteria that stipulated fiscal prudence by obliging EU member states to adhere to the level of public debt below 60 percent of the GDP and low fiscal deficit boosted the expectations of stable macroeconomic environment, partly sustained by the European Central Bank which, since its inception in 1999, successfully maintained price stability. Despite an enviable achievement in the stabilization of inflation expectations, the EU Treaty did not stipulate stringent fiscal rules in case of the breach of treaty obligations on behalf of EU member states, neither has European Growth and Stability Pact (EGSP) provided selective mechanisms that would hinge on the EU member state in case Maastricht criteria were not fulfilled. On the other hand, the gradual enlargement of the European union did not finalize in the economic union characterized by the realization of four basic freedoms.
In 1977, Portugal and Spain were acceded into the European Union. Four years late, Greece was admitted as the 12th member of the European community. Over time, the EU grew from an integrated area of 15 Western European countries into a conglomerate of nations that did not impinge of the full-fledged liberalization of the internal market in 1988 but, moreover, has evolved into the spiral that accelerated the community toward the political union. In the mean time, member states of the Eurozone have continuously breached the rules laid out by Maastricht treaty. In bearing the fiscal consequences of the reunification, Germany repeatedly breached the Maastricht criteria both in public debt and fiscal deficit which postponed the introduction of the Euro, following a large shock from gigantic fiscal transfers from high-income West Germany into low-income East German regions. In a similar manner, until 2005, France did not manage to reduce the debt-to-GDP ratio under the 60 percent threshold stipulated by the Maastricht criteria.
Nevertheless, peripheral countries such as Spain and Portugal entered the Eurozone at an overvalued exchange rate relative to German mark before the introduction of the common currency. In the following years, these countries, notably Spain, accumulated significant current account surpluses resulted from the inflows of direct investment from the core countries such as Germany and France. These surpluses were, of course, artificial in the sense that the downward convergence of interest rates in the peripheral countries stimulated the over-leveraging of the financial sector which triggered a balloon in the housing sector.
For years, Italy and Greece have repeatedly breached the Maastricht treaty in the fiscal sense. Prior to adjoining the European Monetary Union, Greece repeatedly experienced volatile inflation rates and default on its external obligations and subsequent Drachma depreciation. Italy’s macroeconomic stabilization hinged on the discretion of government spending which, after excessive rises under various transition governments, cumulated in one of the highest debt ratios within the EMU. How could EMU countries, despite a stringent set of rules delineated by the Treaty of Maastricht, pursued discretionary fiscal policies and jeopardized the macroeconomic stability of the national economies and the Eurozone? Prior to the onset of the financial crisis by the end of 2007, little was known on the perils of excessively leveraged balance sheets which investment banks used to seek high rates of return on high-yield and relatively risky peripheral regions. Until 2007, the exposure of major German investment to over-leveraged financial sector in countries such as Spain and Greece generated sizeable spillover effect. Before the onset of the financial crisis, Spain enjoyed sizeable current account deficit resulted from excessively high and robust overall investment. In 2007, Spain’s investment-to-GDP ratio (31 percent) was roughly comparable to developing Asia. In such highly volatile environment where economic growth departed from its long-run fundamentals, even small-scale macroeconomic shocks can result in a substantial loss of economic activity, notwithstanding the spillovers in the banking system and labor market.
The asymmetry in political structures and underlying macroeconomic fundamentals across member countries casts significant doubt in the long-term stability of the Eurozone as an area with common monetary policy. The necessary condition for the inception of common monetary policy does not hinge on the political initiatives that pervaded the process of European integration but on the careful consideration whether adjoining countries adhere to the macroeconomic criteria as denoted by the Maastricht Treaty. The failure to adhere to the contours of fiscal prudence and budgetary discipline by the major EU member states, with few notable exceptions such as the Netherlands, Austria and Finland, lies at heart of the underlying reasons why significant asymmetry and non-coordination in fiscal policy resulted in the adoption of dispersed economic policies whereas the adverse outcomes were not foreseen neither by the politicians neither by policy advisers and academics. To a large extent, as the recent debt crisis has succinctly demonstrated, the ultimate goal of the European monetary integration was the build-up of political union. But whereas European politicians were preoccupied with all-embracing design of the EU as unitary political union, they forgot to acknowledge that political union would require the full convergence of economic policies including the integration of the labor market which hardly any political initiative within the EU deemed feasible.
The non-coordination of fiscal policymakers was highly evident in the division of member states on the core countries and EU periphery. Considering the peripherical countries, Italy, Spain, Portugal and Greece repeatedly proved ill-disciplined in managing the levels of public debt and the magnitude of the budgetary imbalance. Portugal is often the case in point. Prior to the introduction of the Euro, Portugal experienced unprecedented economic boom. Between 1995 and 2001, economic growth averaged 4 percent per annum and the unemployment rate reduced from 7 percent to 4 percent by the end of 2001. At the same time, nominal wages grew rapidly without the necessary productivity growth compensating for the increase unit labor cost. Alongside the overheating of economic activity, driven by construction boom, current account deficits increased significantly, lowering domestic savings rate. After the country experienced a mild recession in 2003 when domestic output decreased by 1 percent on the annual basis, the slowing of artificial economic growth driven by the Euro boom, turned from temporary into permanent. In the period 2002-2010, growth of domestic output averaged at the level of no more than 1 percent per annum with stagnating productivity and significant pressure on nominal wages. Since the size of the labor cost is the major deterrent on growth, the cure for Portuguese ailing economy is the structural adjustment in the public sector such as the reduction of public debt by generating substantial primary fiscal surpluses and the lowering of government spending. Similarly, the experience of Greece, Spain and Italy suggests the evolution of the same pattern evolving over time although Italy has been known as low-growing economy during the boom time.
However, fiscal policymakers in peripheral countries repeatedly produced ill-conceived fiscal mismanagement of public finances. In 2008, the level of budgetary deficit in Greece exceeded 13 percent of the GDP whereas the country has not adhered to Maastricht criteria ever since the introduction of the Euro. After the depreciation, the net debt as percent of GDP in Greece reached 85 percent of GDP and increased to 110 percent of GDP by the end of 2008. As IMF’s recent forecasts suggest, by 2012, Greece’s public net debt could reach 175 percent of GDP. The failure to adhere to the common set of principles as delegated by the Maastricht treaty and EU Stability and Growth Pact in the peripheral countries stemmed largely from the mismanagement of public finances and structural rigidity of the public sector with resulting increases in the burden of the labor cost. In addition, the adoption of extraordinary measures embedded in the public sector such as very low effective retirement age and substantial bonuses for civil servants exacerbated the burden of the public debt with unforeseen net financial liabilities of governments which have not mitigated the persistent burden of public debt that grew substantially over time in the EU periphery.
A natural question is whether the exclusion of peripheral countries from the Eurozone might be feasible and whether Greece’s default on external obligations might help overcome country’s mountainous strain on public debt. First, the re-adoption of domestic currencies is hardly a solution to overcome the intricacies of debt crisis. If Greece re-introduced drachma, external obligations would be strained by a painful and enduring bank run since investors would withdraw the deposits from the portfolio and invest it into safer holding with less volatility and uncertainty ahead. Another argument in favor of Greece exiting the Eurozone is that a devaluation of drachma would boost inflationary expectations and consequently reduce the burden of the public debt but given junk score on government bonds, a rather immediate bank run would follow the devaluation of drachma rather than macroeconomic stabilization. In addition, when Greece’s domestic output is growing far below the long-term potential, inflationary expectations is not a feasible tool to revive the economy from deflationary trap with 16 percent unemployment Moreover, the only feasible and meaningful short-term strategy to boost growth is the reduction of the size of the public sector including the privatization of inefficient state-owned enterprises to generate substantial fiscal surpluses since this is the only plausible measure to tackle the increasing burden of the public debt. As the history of financial crises suggests, the eruptions of banking crises occurred mostly when governments rested on currency devaluations as the ultimate tool to reduce the burden of external debt. In addition, if Greece defaulted on its external obligations, CDS spreads could indicate a snowball effect where Spain, Portugal and possibly Italy could follow the same track.
The question is whether non-coordination between European fiscal policies helped facilitate over-leveraged financial sectors which asked for the bailout by central governments in the wake of the 2008/2009 financial crisis. Over-leveraged financial sectors were attributed to the determinants of various extent. Some argued that over-leveraging is the outcome of innovative financial engineering where fancy mathematicians and physicists applied VaR models to calculate the probability of losses in the portfolio distribution of returns whereas the financial derivative schemes developed by advanced and complex mathematical models were so complicated that nobody, sometimes even mathematicians themselves, could understand sensibly. On the other hand, the monetary policy perspective of over-leveraged financial sectors has been rather overlooked in policy discussions since periodically low interest rates encourage excessive risk-taking which further facilitated the construction of portfolios with excessively volatile returns that increasingly relied on VaR assumptions whilst fundamentally ignoring the instability of returns from over-leveraged investments. But a more intriguing question pertaining to the banking perspective of financial crises is whether more prudent financial regulation as envisaged from recent stress tests by European Banking Authority can be achieved by raising capital adequacy standards. Unfortunately, the history of Basel accords demonstrates that the banking sector has been prone to search alternative channels to avoid raising capital adequacy ratios through innovative accounting tricks whereas neither Basel I and II envisaged the adverse outcomes from excessive risk-taking. As stress tests indicated, capital adequacy ratios should be increased substantially but, moreover, the regulatory framework should not only build on increasing criteria on Tier I capital and common equity but also on the safeguard despositary insurance of contingent liabilities to mitigate liquidity risk that led to the systemic crisis.
The solution to revive the Eurozone economy and revive it from a decade of flawed political imperatives should not exclude multiple options. The focal point of the Eurozone’s recovery from debt crisis should be to help peripheral countries establishment fiscal prudence, discipline and soundness of the public finances. In fact, the recovery from the debt crisis will endure for more than a decade. The structural adjustment does not rest on the ability of the EU to provide financial assistance to peripheral countries but on the principled and coordinated action to reform inefficient public sectors which are at the heart of the debt spiral since years of generous entitlements to civil servants have tremendously raised the net present value of public debt to the point that peripheral countries are on the brink of default on its external obligations. Without generating substantial fiscal surpluses, there is no feasibility and no realistic scenario under which public debt level would be brought under the control in the near-term perspective. Hence, recent discussions of the consequences of debt crisis in Europe have simply overlooked the importance of growth-enhancing measures as the real cure for growing debt-to-GDP ratio where the measures do not apply to peripheral countries only.
First, in the wake of fiscal insolvency of public pension systems, effective retirement age should be raised substantially for men and women alike. The studies have shown that under the increase in effective retirement age to 65 years, long-term fiscal obligations would reduce and consequently an important step towards long-term macroeconomic stability would be achieved. Nearly every European country is facing low-fertility trap followed from increased affluence and generous early-retirement policies from 1970s onward. Consequently, European government have amounted a mountain of net financial liabilities that exceeded the size of GDP by several times, respectively. Decreasing the size of net liabilities to contemporary and future generations of retirees, requires a robust increase in effective retirement age. Higher retirement age threshold would substantially increase working-age population by encouraging labor market participation among the elderly. Current levels of effective retirement age are unsustainable in the long-run since a growing burden of pension obligations can seriously threaten the stability of the public finance and increase the probability of fiscal insolvency.
Second, European countries suffer from low productivity growth. In some countries, such as Italy productivity growth has remained stagnant over the course of recent two decades while elsewhere productivity growth is to slow to compensate for the increase in nominal wage rates. The evidence, in fact, overwhelmingly suggested that high tax rates are the prime obstacle to greater labor market participation, particularly among the elderly who face high implicit tax rates on work. In particular, to facilitate the channels of productivity growth, marginal tax rates should be decreased substantially. At current levels, marginal tax rates restrain labor supply significantly. In the Netherlands, the top marginal income tax rates reached 52 percent in 2011 which is a serious hinder on the working activity. In this respect, bold tax reforms should be complemented with more flexible labor markets which remain saddled with employment regulations and distort labor supply incentives. Less regulated labor market to supplement greater labor force participation, especially among women, elderly and the youth is vital to enhance productivity growth since living standards by the end of the day are determined by productivity improvements.
Ultimately and most importantly, peripheral countries should be given a free choice whether to withdraw from the EMU since recent financial crisis has shown that Eurozone is a suboptimal currency area which emerged from non-cooperative fiscal policies among its member states that caused adverse outcomes and asymmetric adjustment where macroeconomic stabilization outcomes are mutually exclusive among member states. Asymmetry adjustment that currently threatens the existence and stability of Eurozone lies at the heart of Eurozone’s debt crisis. As a general matter, economic policies have failed to recognize that structural measures in the labor market and fiscal policy regime could facilitate growth enhancement and provide the necessary impetus to stabilization of crisis-impeded monetary union. Recent suggestions by France and Germany for EU member states to form a fiscal union have led to sustained resistance from the UK which dissolved from the fiscal pact. The ultimate grain of truth in the fiscal union is that a monetary union necessarily requires the coordination of fiscal policies to prevent adverse and asymmetric policy outcomes within the union. The fateful conclusion from recent EU debt crisis is that without the integration of the labor market on the EU level, the monetary integration cannot exist in coherence with asymmetric fiscal policies. In the future, stricter adherence to budgetary discipline will be necessary through budgetary authority. In this respect, countries that fail to adhere to Maastricht criteria and deviate from the fiscal discipline either marginally or substantially should be condemned and pay for their actions of fiscal imprudence by withdrawing from the monetary union.
 Join the forum discussion on this post - (1) Posts
By Claus Vistesen, on January 5th, 2012
One point that I have been shouting from the proverbial roof tops in my research, to partners and colleagues is that 2012 may well be the year when all major central banks will be conducting both conventional and unconventional monetary easing at the same time. I think this is a very strong testament not only to the severity of the ongoing debt crisis in the developed world, but also to the propensity of central banks to choose inflation as the desired route to recovery. We need not initially discuss whether they are deploying the proper set of policies or even whether such policies represent moral hazard or a ponzi scheme on government debt.
The main thing is to realise that this is an unprecedented global monetary experiment.
My message to investors in 2012 would then be not to underestimate this inflation bias by part of global central banks. Inflating your way out of too much debt won’t work in the long run without considerable defaults and/or economic stress (hyper inflation). Events since 2008 are ample evidence of this, but the simultaneous inclination to create inflation and debase your currency (to generate more inflation and exports) by all major central banks will continue to exert a profound effect on asset prices and the global economy.
In so far as goes the idea that an investors’ interest in asset prices is conditioned on return and volatility we can say that central bank policy will affect both. Financial assets will certainly benefit from excess liquidity, but the unravelling of too much debt through inevitable defaults and the central bank policies themselves will generate volatility. Whether the combination of such volatility and return means that you should stay out of the market entirely is a question for the individual investor. I believe that
From a macroeconomic point of view, the downbeat assessment remains however that it is difficult if not impossible to paint a picture of where sufficient growth is going to come from and on the investment side of things, the higher level of volatility will tend to shake the foundation of investors even if money is to be made for short periods of time.
Most attention has been centered on the ECB, whether the 3y LTRO represent QE and whether the continuing rejection to buy government bonds outright means that the ECB is a laggard among global central banks (see this excellent report by Hinde Capital for additional analysis relative to the points below).
750 Billion USD, and counting …
Europe remains the center of the global debt crisis, a role the continent has now decisively taken over from the US which stood at the forefront in the initial phases of the crisis in 2008. Apart from the almost endless summits and meetings among government officials the significant measures continue to be the ones coming from the ECB.
In my view, the European interbank market is virtually dead and dusted, and the ECB and the Fed are now effectively the only thing between Europe’s banks and large scale failures. Since early September 750 billion USD worth of liquidity has been provided to the European banking system of which 100 billion sits on the Fed balance sheet through USD swap lines.
Who will bet against the final 3y LTRO auction to take this beyond one trillion USD?
Spanish and Italian curves are now nicely steep again after a brush with inversion which obviously was one of the main objectives even if it was always debatable whether banks would buy government bonds with the liquidity taken up at the ECB.
The question is; how do you unwind all this? 750 billion USD to roll short term liabilities with the ECB and the Fed seems to me to be one of the biggest gamble in monetary history.
While the BOE and the Fed have been transparent in their QE efforts and the BOJ never really having left the zero bound the ECB has been more covert. However, it is my contention that with the expansion of the securities market programme (SMP) in 2011 to buy considerable amounts of government bonds (1) as well as the 3y LTRO the ECB is now fully engaged in quantitative easing.
I base this on two points.
- The ECB has acted as a sovereign debt buyer of last resort in times of crisis. It is common knowledge in the market that the ECB has been Italian and Spanish bonds in times of particular stress on the notion that these two economies in particular could not be allowed to fatally succumb to the debt snowball dynamics.
- ECB support for the banking system in the form of collateralised liquidity and wholesale funding is not temporary but structural and permanent in nature. The interbank market in Europe is not working and has not been working since the crisis started in 2008.
The ECB will of course vehemently deny this but investors should understand that such denial is mainly out of political reasons. When Draghi unveiled the ECB’s attempt to backstop the crisis in Europe by offering full allotment liquidity on a 3y basis, the market was disappointed because the central bank president also reiterated that the ECB would not step up its purchases of government bonds.
I think that the ECB will be forced into a much more direct and active role where unsterilized purchases in the primary market (monetisation) will be needed, but I fully appreciate the political issues. We are currently in a delicate situation where new governments in most of the involved countries are saddled with forced mandates to impose austerity. It is very difficult for all parties involved to push this agenda if the ECB had stepped up a full backstop. Moral hazard risks are consequently paramount here.
As such, investors must content with the ECB’s attempt to shore up the European banking system which is no little feat given the bank rollover schedule in 2012 as well as new Basel II regulation which will further impair already shaken balance sheets. The ECB’s initiatives then follows the steady deterioration of conditions in the European (indeed global) banking system which initially culminated in the coordinated action by global central banks to supply dollars through Fed swap lines and which found its European answer in the ECB’s decision to provide unlimited liquidity yet again.
The problems look ominous for European banks and the global financial system in general. No matter what, European financial institutions will have to delever significantly which will spread its tentacles wide and far due to the high penetration by European banks in emerging markets (Eastern Europe in particular).
Behind the scenes however, significant ink has been spilled to debate and speculate on to the exact significance of the ECB’s liquidity operations.
John Hempton for example suggests that the ECB’s policy move is an open invitation to play the carry trade game using almost free liquidity to buy higher yielding government bonds.
Well the Euro fix is in. Whether it works – that is another question. But the fix is this: European banks can borrow unlimited amounts for three years to buy Euro government debt. The debt often yields 5 percent. The money costs 1 percent.
I agree that the incentives are certainly there for the banks to play this game especially in the context of government bonds as zero risk weighted assets. The problem is that many European banks have spent more than a year and two stress tests to get rid of substantial amount of peripheral government debt (which do not count as zero risk weighted assets according to Basel III) and as such weak governments are unlikely to benefit from this.
The flip side of this is that most of the liquidity taken up by banks go straight back to the ECB at the deposit facility which is now standing higher than at any time between 2008 and 2010.
Quote Reuters
The euro zone banking system starts the new year awash with record levels of liquidity but few signs that institutions are prepared to lend to each other, leaving money markets frozen.Most of the near half trillion euros of three-year funds borrowed from the European Central Bank in the last week of 2011 have made their way back to the ECB’s overnight deposit account.
The Reuters piece goes on to argue that most of the liquidity will probably go to aid the large refinancing need banks face in 2012 and thus effectively as a replacement for a non-functioning interbank market that would normally be able to roll this financing. If this does nothing to solve the problem of sovereign insolvency and illiquidity it will work wonders through the fact that banks won’t act as a drag on their respective sovereign’s balance sheet as long as the ECB is involved.
I would note though that even though the liquidity is mainly reflected in reserves held at the ECB, it still represents excess liquidity as noted by Danske Bank.
Some market commentators have argued that the first 36 months long-term refinancing operation (LTRO), in which banks took EUR490bn in total, has so far not worked as planned because the extra liquidity has simply been placed on the deposit facility at the ECB. However, this argument is false.The sharp increase in outstanding open market operations (MRO+LTRO) increases excess liquidity (defined as open market operations plus recourse to the marginal lending facility minus autonomous liquidity factors minus reserve requirements) and this excess liquidity shows up as deposits at the ECB in just the same way as it did in 2008-10.
However, nothing is easy and despite the fact that collateral can be posted for liquidity the sovereign is still on the hook as my friend Edward Hugh points out.
Banks are being encouraged to keep rolling over what are basically NPLs by financing them at 1% at the ECB (foreclosing on them in Spain and keeping the property on the books may cost something like 8% in comparison). But the ECB isn’t assuming the risk here, the national sovereign implicitly is, and is getting in deeper by the day.
This is certainly true by the letter of the law but one has to wonder whether the ECB will ever get paid back here. I mean 3 years is an awful lot of time. The ECB can roll these loans as long as need be (it has already effectively been rolling bank funding since 2008) while maintaining the figue leaf that it is not funding sovereigns. This may be true, but it is effectively funding the sovereign’s banks and postponing the day of reckoning which is bank failures or nationalisation or both.
If the ECB is then forced take a hit on the collateral or the loans themselves, it will need to create the money to pay for these loans by printing euros. This sounds as a plan to me except that it does not solve the funding risks of governments which may or may not be able to ask their banks for help. The likely answer is that they won’t be unless the ECB and EU decide to wield the ultimate weapon of financial oppression which would be to penalise reserves over a given level with negative interest rates at the same time as banks would be forced, through regulation, to hold government bonds.
But Edward makes another interesting point;
Looking at the Greek PSI, what they would try and do (if all this gets that far, I mean if the Euro holds together long enough in this Byzantine world) ) is load up the private sector share of the haircut, and keep the ECB as untouchable official sector. At the limit they can use ELA to keep the banks afloat while the sovereign restructures and then recapitalises.
(…)
Why would any ex Eurozone third party want to be counterparty to anything which might end up being subordinated to ECB exposure later on down the line. The more I think about it the more it seems to me that the 3 yr LTROs might end up choking the European banking system to death.
It is difficult to disagree on the gist of this point, namely that the ECB is digging itself a very big hole. If banks can exchange under water assets at the ECB for a deposit asset at the ECB (albeit with a negative carry) the ECB is running the risk that it becomes the sole counterparty of bad assets in the euro zone in which case seniority will mean very little.
The Greek situation is a good example. Private creditors face an almost certain 100% wipeout exactly because they represent such a small tranche of the total stock of debt. In such a situation the asymmetric relationship between subordinate and senior debt holders mean that the latter essentially become equity holders. But once subordinate creditors are wiped out the turn comes to the senior debt tranches and the further the ECB goes along the road of providing full allotment liquidity the higher will be its implicit direct claim on assets of all sorts of qualities.
In conclusion, it is my view that the ECB is now the only thing between the economy and widespread bank failures, but I also concur that the consequence of this is a permanent outsourcing of the interbank market in Europe to the ECB’s balance sheet and, quite possibly, Fed’s USD swap lines.
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(1) – Even if such purchases have been fully sterilised.
By Simon Grey, on November 11th, 2011
Will you allow this question to “occupy” your minds for a moment? Seriously, what would happen to our country if we all chose to do nothing but take up space on “public” property (or even on other people’s private property as some of you have done), consume resources at other people’s expense, and spend several days in a row not producing things? Have you even thought of what might happen, if the rest of us followed your “example?”
Well, I suppose it would first depend on who all quit their jobs. If every politician, bureaucrat, and bankster quit their jobs, I would be willing to bet that everyone would considerably better off. Toss in superfluous workers that are only necessary because of government interference, like tax lawyers, compliance officers, safety managers, CPAs, etc., and suddenly this country wouldn’t be shackled in economic regression. As for everyone else, point taken.
However, it should probably be pointed out that many OWSers are able to OWS because they don’t have jobs. See, the funny thing about recessions, even those caused by massive government intervention leading to housing bubbles which are then exploited for massive profit by Wall Street banks who are defrauding home owners as well as Americans by using the Fed as an ATM machine, is that jobs tend to be more scarce. And when that recession turns into a depression, those scarce jobs don’t come back for a while. So, for the most part, Occupy Wall Street is not a matter of people quitting their jobs as much as it is a matter of people not having jobs in the first place because the government, acting as a pawn of the banks, decided to wreck the economy.
Participants in the nationwide “occupy” movement would probably be shocked to know this. But the fact is, their oh-so-important demonstrations are able to occur as they do because the majority of us in America do not think and act the way they do. In fact, to be even more precise, their choices are enabled in no small part by – gasp!- American-styled Capitalism! Yet just as those who burn the U.S. flag fail to understand that the object they desecrate is emblematic of the freedom they exercise, the occupiers fail to see that the “C-word” which they loathe is precisely what makes their occupying possible. [Emphasis added.]
Actually, it is the distinctly American form of crony capitalism, as typified by TARP and other recent bailouts, that led to the current set of choices OWSers face. The banks have looted the American economy, quite illegally, it should be noted (and note that the linked article only concerns itself with judicial rulings, not investigative allegations, which means that the assertion of fraud was either proved in a court of law or admitted to by the perpetrators!) Jobs are scarce because politicians had to tax small business and mid-sized businesses to death in order to fellate pay off the major banks that have bought them contributed to their campaigns in the past election cycles. And the cost of those taxes have been jobs that would have otherwise be filled by those currently OWSing.Quite simply, the free market is dead in America, and has been for decades. The result is exceedingly high unemployment—the U6 index indicates it’s been in the high double digits for some time—which is the direct result of massive government intervention in the economy, for the benefit of enriching the banks. This is in no way free-market capitalism. In fact, a certain someone has noted quite acutely that America doesn’t actually have a free market, in practice. Yet, said someone wants to act as if suddenly the market is perfectly free and all the decades of government intervention no longer have consequences and therefore all those who are currently OWSing are simply socialists who want to redistribute the wealth.
But yes, American-styled capitalism has not only made OWSing possible, in that it has eliminated productive jobs, but it has also made it necessary because the system is corrupt and redistributionist.
Also, in regards to the burning of American flags, could Mr. Hill please provide proof of this occurrence? I searched on Google for photographic evidence of OWSers burning the American flag, but all I could find was the occasional desecration, and a few instances of burning the Israeli flag, presumably in honor of Ben Bernanke. I would very much like proof that OWSers are actually the anti-American protestors that the conservative media make them out to be.
(For those who are interested, Karl Denninger has a rather thorough takedown of Thomas Sowell’s article on OWS.)
By Eldon Mast, on November 30th, 2010
The Troubled Asset Relief Program will cost taxpayers far less than initially feared, with the new price tag estimate now just in at $25 billion. That according to the Congressional Budget Office report released on Monday.
The nonpartisan group underscored that, “it was not apparent when the TARP was created two years ago that the costs would be this low. Because the financial system stabilized and then improved, the amount of funds used by the TARP was well below the $700 billion initially authorized and the outcomes of most transactions made through the TARP were favorable for the federal government.”
The once much debated program, now has fewer and fewer skeptics. And it seems each month brings better news from the CBO. In August, the CBO report predicted a cost of $66B. Just last month the the Treasury Department estimated that TARP cost could end up being as little as $29 billion. Monday’s report bested even that. At the $25B estimate, the program will cost less than half of what it took to clean up the massive savings and loan crisis of the 1980s.
The program which provided the equivalent of U.S. taxpayer loans to automakers, big banks, and bad loan brokers has ended up costing far less than expected because of a number of reasons. Most banks that received bailout funds repaid their TARP money sooner than even the most optimistic forecasters had projected 18 months ago. In addition, participation in a program designed to aid struggling homeowners with their mortgages has turned out to be much lower than forecast.
Indeed we now are seeing objective measures that point to 2008 gloom and doom claims that were massively overblown and our report that “TARP is Working” in early 2009, was right on.
By Claus Vistesen, on November 25th, 2010
With apologies to John Paul Young …
Bailout in the air
Everywhere I look around
Bailout in the air
Every sight and every sound
And I don’t know if it’s just the Irish
Don’t know if we can afford it
But it’s something that I must believe in
And it’s there when I look in your eyes
Bailout in the air
And the Euro’s going up
Bailout in the air
In the Union that we got
And I don’t know if Porto is next
Don’t know if Proell will pay
But it’s something that I must believe in
And we hope that they do what they say
Bailout in the air
Bailout in the air
oh, oh, oh…
Bailout in the air
In the rising of the debt
Bailout in the air
Now the scores must be set
And I don’t know the Euro will make it
Don’t know if Spain wiill fold
But it’s something that I must believe in
And I hope that the debt will be sold
And I don’t know if it’s just the Irish
Don’t know if we can afford it
But it’s something that I must believe in
And it’s there when I look in your eyes
Bailout in the air
Bailout in the air
oh, oh, oh…
Love is in the air
Everywhere I look around
Love is in the air
Every sight and every sound
And I don't know if I'm being foolish
Don't know if I'm being wise
But it's something that I must believe in
And it's there when I look in your eyes
Love is in the air
In the whisper of the trees
Love is in the air
In the thunder of the sea
And I don't know if I'm just dreaming
Don't know if I feel sane
But it's something that I must believe in
And it's there when you call out my name
Love is in the air, Love is in the air, oh, oh, oh...
Love is in the air
In the rising of the sun
Love is in the air
When the day is nearly done
And I don't know if you're an illusion
Don't know if I see it true
But you're something that I must believe in
And you're there when I reach out for you
Love is in the air
Every sight and every sound
And I don't know if I'm being foolish
Don't know if I'm being wise
But it's something that I must believe in
And it's there when I look in your eyes
Love is in the air, Love is in the air, oh, oh, oh...
(Contributed by Shay Griffiths - May 2002)
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By Emmanuel Tabones, on November 23rd, 2010
I finally came around to reviewing some of last week’s news regarding GM’s successful IPO. While this had obviously led to the usual and expected, self-congratulatory verbiage from President Obama and his political allies, others had expressed a bit more caution, and rightly so. With GM stock closing at $34.50 last Thursday (November 19), some members in the media, such as Reuters, were quick to remind readers that this was still way below the $53 needed for the government to finally recoup its investment, of which a sizable $9.25 billion (about a “37 percent stake,” according to Steve Calogera at egmcartech.com), remained. And it was not clear when that will occur. Meanwhile, that same day, Mat Phillips over at the WSJ’s Marketbeat, reported a CRT Capital recommendation of GM as a “buy,” projecting the price at $45-an encouraging sign, no doubt, but certainly not enough to satisfy critics who have raised questions about the validity and necessity of such large-scale government bailouts, not to mention that GM stock at this price would still be $8 less than the “break even” point. It is obviously a bit premature for Obama to crow about the “success” of this initiative, and it remains to be seen to what extent the government should put up such large sums in the name of “saving U.S. industry and jobs.”
An AP article published in TBO.com, referred to a Center for Automative Research claim that this financial rescue of two of the Big Three automakers (the other being Chrysler) “saved” about 1.4 million jobs, covering the two year period of 2009-2010, but at the risk of billions in taxpayer funds. GM alone received $49.86 billion, according to Reuters.
However, unless both companies generate sufficient and consistent, growth and profits over an extended period, the bailouts will represent nothing more than billion-dollar, money-draining, taxpayer funded subsidies meant to insure that certain political entities will reap huge benefits come election time. Only the most optimistic and perhaps naive, observer could claim that this IPO represents the vindication of a policy, that has yet to convincingly prove itself.
By Ajay Shah, on November 19th, 2010
What is a government to do when a company faces a near-death situation? In almost all cases, the right answer is to let the company go under: It is not the job of a government to prevent companies from dying. Indeed, creative destruction is central to the proper functioning of capitalism. Capitalism without failure is socialism for the rich.
But sometimes, the cost-benefit ratios can look startling. Sometimes, the disruption to the economy that comes from the death of a company can be rather large. Let’s look at three stories.
Three examples
GM: In July 2009, the US government chose to put $50 billion into the auto maker General Motors (GM) as part of a complex rescue, which included wiping out the existing shareholders and embarking on a complex restructuring of the firm. The old GM died there. GM got back to profitability this year. Seventeen months later, on 17 November, GM got back on its feet with an IPO which raised $23.1 billion. How impressive! See this story by Michael J. de la Merced and Bill Vlasic in the New York Times. This IPO was at $33. With this IPO, the US Treasury got down from 61% ownership to 26% ownership, so this IPO was the re-privatisation of GM. From here, if the US Treasury is able to sell its remaining 0.5 billion shares at $53 a share in the future, it will fully recoup the $50 billion that went into the rescue (ignoring time value of money).
Satyam: On 7 January 2009, Satyam announced that a lot of money was missing from their balance sheet. In the aftermath of this crisis, the government put Deepak Parekh, Kiran Karnik, Tarun Das, and three others in charge. Read this interview of Deepak Parekh with Tamal Bandyopadhyay in Mint, and this blog post by John Elliott. The new board put the firm up for sale. It was bought by Tech Mahindra. A collapse of the firm was averted; the employees and customers largely stayed in place.
UTI: When UTI got into trouble, I was opposed to government intervention. But by and large, I think the intervention worked well. US-64 unitholders did suffer losses: half of the gap between the NAV and market value was paid by the unitholders and half by the government. And the follow-through was excellent. The staff quality that MoF was able to muster on the problem was outstanding. The UTI Act was repealed, and UTI was turned into an ordinary company. `Bad UTI’ was separated out by `Good UTI’. The ownership was modified including the recent work of bringing in T. Rowe Price as a shareholder. All in all, the exchequer did well when selling off the shares in SUUTI. Privatisation hasn’t yet come about, but where we are is progress.
When is it right for a government to go in?
Should the US government have gone into GM? There was a fair amount of criticism of the Obama administration for the decision. There was concern that they were doing this owing to pressure from trade unions. But the outcomes have been quite nice, so (at least ex post) it looks like a good call.
In the case of Satyam, the existing shareholders were not expropriated. It can be argued that the failure of the firm was not their fault. But by that argument, many firm failures in India in the future will justify government intervention since most public shareholders are fairly powerless when the inside shareholders have over 50% shares. In his interview, Deepak Parekh says Had it happened to a consumer finance company or a small, or even big, manufacturing company, the government would not have come out and superseded the board. The normal procedures for bankruptcy and liquidation would have taken place.. I am not sure how the future will work out.
The problem of execution capability
Satyam, GM and UTI are success stories in that the government packed a mean punch in the execution. In particular, in Satyam’s
case, I had simply not expected that such a nice outcome could be achieved by the government. We should really admire the teams that worked on these problems.
But can we count on such high quality execution on such problems in the future? Our success in the Satyam or UTI stories should not be generalised to the view that in the future such high quality execution will always come about.
The exit strategy
The really amazing feature of the GM story is the clarity and commitment of the government in getting out of `Government Motors’
by doing a privatisation just 17 months after going in. All too often, government interventions turn into nationalisation and then
you’re stuck with a public sector company for a long time, with all the usual politics of the privatisation.
In the deep past, numerous weak companies have been nationalised in the decades of Indian socialism (e.g. National Textile Company) and generally the outcomes have been bad.
A particularly attractive feature of the Satyam story is that no government money was involved. The presence of government money
makes things much harder. In India, all too often, it’s easy to ask for government money and it’s easy to get it. And if the government
had got shares in Satyam, it’s not easy to see how they would have got out of it.
Similarly, a nice feature of the UTI story is that in the end, the UTI Act was repealed, and UTI is on course for turning into a
normal financial firm. Government intervention in the rescue did not yield an ossified PSU.
At the same time, while Satyam and UTI are good stories in terms of the exit path, we cannot generalise too much from this given the fact that GOI is at a standstill on privatisation. In general, we have to assume that what is purchased is never sold, which puts a crimp on a vast array of situations where government intervention might be evaluated.
To summarise
When most firms approach death, the decent thing to do is to let the firm die. We must rejoice in the extent to which Indian capitalism is able to bring about a steady pace of firm death. Building a good quality bankruptcy mechanism will increase the class of firms where resolution is handled in a routine and humdrum way, without the possibility of a special intervention. (Note that going through the bankruptcy process was an integral part of the GM story).
When a potential intervention situation arises, six questions need to be asked:
- Are the negative externalities of firm death really that onerous?
- Can government intervention be envisaged without requiring money?
- Are the Union ministers involved in the problem known for being smart and clean?
- Can a top quality team be put together which will work on a time-bound project starting from intervention until exit? Does this
team combine competence with cleanness?
- Do we see an exit strategy through which, within a short time, the firm will be fully out of government hands?
- Are we very sure that in the end, we will endup imposing no costs upon the government?
Ex post, these questions worked out well for GM, UTI and Satyam.
By Eldon Mast, on August 13th, 2010
On Thursday, General Motors Corp. posted its best quarterly profit in six years in one of the clearest signs yet the ailing automaker (and its beleaguered industry) is on a road to recovery.
The record profits were posted slightly more than 12 months after a steep drop-off in sales caused by the financial crisis of 2008/2009.
GM says that the strong profits will pave the way for the company file for an IPO and begin to rid itself of a more than US$50-billion taxpayer liability — company equity that is majority owned by the U.S. government.
Total second-quarter earnings came in at US$1.3-billion, a huge reversal from the US$12.9-billion it lost in the same period a year ago. Revenue jumped 44% to US$33.2-billion during the quarter.
Last year the government had estimated that it would take perhaps 8 years for the GM to pay taxpayers back. The quick GM rebound however has surprised even the most optimistic of forecasts.
“Given the extraordinary turnaround — frankly, faster and better than what we had imagined — I think the IPO could be very successful if the overall markets co-operate,” Steven Rattner, the Obama administration’s former Car Czar, said in an interview on Bloomberg Television.
By Claus Vistesen, on May 18th, 2010
Edward does a nice job to sum up the flurry of the past week which saw the ongoing problems in Greece elevated to a full fledged systemic crisis in the Eurozone economy which, if it ultimately blows, will have ramifications far beyond the borders of the European continent. Being a firm believer in the notion of markets as conversation it is funny to see that although Lehman Brothers is dead and buried, people are talking an awful lot about it.
Consequently, the official figure for a Greek bailout has now risen to EUR120-130bn and with S&P downgrading Spain earlier this month it suggests that the ultimate cost of this mess may exceed the already dizzying number note above many times over. As the Economist neatly puts it this week;
THERE comes a moment in many debt crises when events spiral out of control. As panic sets in, bond yields lurch sickeningly upwards and fear spreads to shares and currencies. In September 2008 the failure of once-stellar Lehman Brothers almost brought down the world’s banking system. A decade earlier, Russia’s chaotic default on its sovereign debt rocked the credit markets, felling Long Term Capital Management, a hugely profitable American hedge fund. When the unthinkable suddenly becomes the inevitable, without pausing in the realm of the improbable, then you have contagion.
As the Economist goes on to argue events are indeed spiraling out of control, a statement with which I concur in full. One question then which, at the moment, may not seem particularly important is how we managed to get ourselves into this mess.
In my most recent working paper entitled Quantifying and Correcting Eurozone Imbalances – Fighting the Debt Snowball I try to provide an intial answer to this question. Well actually, I don’t set out to address this question specifically. But, I do think that if you want to understand why the Eurozone has ended up where it is today and why it is essentially threatened as an economic entity you need to take a long hard look at the issue of intra-Eurozone imbalances and why correcting them from within the Eurozone is almost impossible without some form of disruptive sovereign default in key member economies.
As an introduction, here is the abstract:
This paper quantifies and discusses the concept of Eurozone current account imbalances. Using panel data estimations, the analysis shows how the external positions of the Eurozone economies can be modelled as a function of divergences in unit labour costs. Specifically, the results indicate that the formation of EMU has exacerbated the extent to which even relatively small divergences in unit labour costs may materialize in large current account imbalances. These results are framed in the context of the idea of a debt snowball effect and why the idea of an internal devaluation as a tool to correct external imbalances is inconsistent with the current setup of the Eurozone.
So, do I bring anything new to the table in terms of the overall discourse on the Eurozone’s economic problems? Not really. The story I tell is pretty well known but I still see the main contribution of the paper as the attempt to give a concrete quantitative perspective on the effect of divergent inflation rates (in my case unit labour costs) in an economic setting where countries are grouped together with seperate control over fiscal policy and no sovereign monetary policy and exchange rate.
Crucially, I argue that the forces which have lead to the build-up of imbalances are joined at the hip with the same forces which make it almost impossible to correct from within the Eurozone. Specifically the idea of a debt snowball effect is a good way to show why it will be almost impossible for some economies to correct their external imbalances without an explosive evolution in government debt and since they need to correct external competitiveness issues in order to achieve economic growth, the whole thing turns into a vice and essentially a catch 22.
Please note that this is a first draft only and still subject to several re-reads and editing (especially the tables) before I send it off for hopeful approval somewhere. However, for now your comments are welcome both on the paper itself as well as the topic.
By Claus Vistesen, on May 14th, 2010
As we are about move into the fourth day of the week where EU policy makers together with the IMF and the ECB launched an unprecendented series of aid tools to combat the mounting risk of a collapse in Greece and elsewhere in the European periphery I am finally ready to move in with some comments. First of all, there has been no shortage of comments, opinions and market calls on the back of the bailout package and while risky assets have indeed rallied, it is if the underlying reality of the situation looms ever more prescient underneath the surface than what one would have expected from such a collosal dose of stimulating policy.
And for good measure, let us re-cap the list of stimulating efforts taken by Europe and the IMF based on, no less than, Macro Man’s last post as a financial blogger;
* €60 billion in cash from the European Commission, funded by bond sales
* €440 billion in loan guarantees, via pooled support of member governments
* Up to €220 billion from the IMF
* Outright bond purchases from the ECB, to be sterilized (this has evidently already started)
* 3m and 6m full-allotment LTROs
* Reactivation of FX swap lines
This is an impressive laundry list if there ever was one and among the points is the very, very interesting u-turn at the ECB which will now, albeit sterilised, be buyers of real assets. This last change of policy and the effectual skydive by part of the Trichet and his accomplished out of the ivory tower may be what eventually clinches it for Europe. Together with the most recent news this week that Portugal and Spain now seem to be getting the message in the form of introducing some very own austerity measures of their own (which as the song goes are of course complete voluntary and preemptive [1]) this might just be the combination of policy moves that Europe needs to see this through without a nasty default of a further intensification of the crisis.
But then again, it might not. I am sceptical here although I concede that if it is backed up by serious and real measures to rein in deficits I might just be turned into a believer here. However, there are some things that still bugs me.
Firstly, it should not escape us here that what our dear policy makers effectively are doing is to fight fire with fire. More debt will thus be substituted with even more debt and it is not clear just what the end game is supposed to be. However, one thing which is now crystal clear to me is that if there is any way that the EU and the Eurozone are to make out of this in one piece it will mean a much tighter coordination of fiscal policy. This will require a monumental rethink of the EU setup and while I believe that the joint effort of EU policy makers could indeed be pooled to make this happen the chance of it actually materialising is slim. In this sense it will be interesting to see what exactly it will mean for the fiscal coordination (if any) that Eurozone economies are now jointly asking the market for funds to pool in that loan guarantee entity.
Secondly, the introduction of implementation of all these so-called austerity measures are not linear and we can’t feed them into linear models and expect these models to come up with usable results. In this sense, and abstracting a minute from the general risk of doing too little too late, the road ahead is very difficult. On the good side it now appears that Spain and Portugal have awoken to the fact that they too need to turn on the screw and that what ultimately distinguishes them from Greece is merely market timing. This is universally good news, but it this is only the statement of intent. In fact, before we close the book on 2010 this is all we are going to see since the 2010 budgets (already passed) are thoroughly in the red. The biggest problem here is simply that for all the good intentions in various EU commission and IMF proposals the actual process of implementation on the ground may proove near impossible. And here I am not talking about some innate laziness or non-voluntarism by part of the Greek, Portuguese and Spanish people; I am simply talking about the near impossibility of letting the entire burden fall on internal price and competitiveness adjustment from within an fixed currency union, but this of course has been the main issue all along. As I noted in another context, any state can only take so much of having to fight its own citizens with water and teargas week in and out even if they are trying to do good.
The considerations above have slowly, but surely convinced me that while I support the efforts by EU policy makers (both in spirit and in terms of the technical measures) I have increasingly converged on the idea that some form of debt restructuring in Greece (and possibly elsewhere in EMU) has to be included in what we could call the main scenario going forward. In coming to this conclusion of course, I am met with formidable resistance.
Take for example the IMF’s communiqué on the situation in Greece and why a debt restructuring would be a very bad idea (see also Emmanuel’s take).
Restructuring debt would not help Greece’s capacity to grow. The type of fiscal and structural reforms being put in place under the Government’s program are designed to do that – to bring down costs, to make the labor market more flexible and to improve the business and investment climate.
The web of economic and political inter-linkages—including that Greek bonds are held by a wide variety of private investors and public entities—severely complicates alternatives to the program the government has put in place. Any perceived positive near term effects of a debt restructuring need to be weighed against contagion effects.
Most of the adjustment in Greece is needed to eliminate its large primary deficit (the deficit net of interest payments). This is the main issue for Greece, not the level of the debt.
My main problem here is simply I think the IMF misses the main point by a mile. It is thus exactly the combination of too high interest rates and negative nominal growth rates (deflation) which make the situation in Greece unmanageable and also why I believe it was a mistake not to include some form of hair cut on Greek sovereigns (up front) as part of the Sunday’s shock and awe move. Now, I don’t dispute the point that the fiscal and structural reforms wouldn’t help, but the numbers just don’t add up. Greece is currently running a fiscal deficit to the tune of 12-15% and even if we assume that this will come down during the envisioned horizon Greece will still be caught in a debt trap once we are done. For a lack of a better comparison, Greece will come to resemble the Baltics and trust me, this is not a comparison you would like to be branded with. In this way, it is in fact the level of debt that will eventually force a debt restructuring in Greece and it will do so exactly because the terms with which Greece is about to embark on her structural adjustment are unsustainable from within a monetary union.
This brings us to the newfound QE profile by the ECB which could, in theory, make a lot of the problems of Greece (and Spain and Portugal) go away. However, we are alo moving into uncharted territory here. Consequently, echoes from Japan are coming closer and it is not altogether clear how the ECB would deal with the fact that it would have to permanently [2] massage the yields of Greek sovereign bonds in order keep the boat afloat. I emphasise permanent here since there is a real risk that the ECB has now decisively had its Japan moment and should the ECB commit to unwavering support for the Eurozone periphery it would not be a misnomer to dub the Eurozone Japan 2.0.
Among the long list of comments and analysis that has so far been ditched up to provide a view on the situation, I think that the one by John Hussmann comes very close to an adequate picture of the situation where you will forgive me, I hope, the following lenghty quote;
Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It’s certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two – the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.
Notice also that the capital that is used to provide the bailout goes from the hands of savers into the hands of bondholders who made bad investments. We are not only allocating global savings to governments. We are further allocating global savings precisely to those who were the worst stewards of the world’s capital. From a productivity standpoint, this is a nightmare. New investment capital, properly allocated, is almost invariably more productive than existing investment, and is undoubtedly more productive than past bad investment. By effectively re-capitalizing bad stewards of capital, at the expense of good investments that could otherwise occur, the policy of bailouts does violence to long-term prospects for growth. Looking out to a future population that will increasingly rely on the productivity of a smaller set of younger workers (and foreign labor) in order to provide for an aging demographic, this is not a luxury that our nation or the world can afford.
“Failure” and “restructuring” mean only that bondholders don’t get 100 cents on the dollar. We can continue to bail out the poor stewards of capital who voluntarily made bad, unproductive investments, and waste our future productivity in order to make those lenders whole, or we can turn the debate toward deciding the best strategies for restructuring existing debt.
I agree with all of the above and it echoes my general sentiment which is not that Europe is about to sink into a hole, but that a real hard look at the face value of the obligations in Greece and elsewhere is needed. Naturally, and as a counter argument to this point is the increasingly worrying barrage of numbers purporting to show the exposure of European and US banks to Greek sovereign bonds and indeed the bonds of the Southern Europe. No matter where you look, the numbers aren’t small and it does not take a lot of imagination to see how this could very easily turn into a Lehman 2.0 moment for banks and thus the real economy. The only problem this time would be that we would be, for the most part, all out of firepower. It is important for me to point out that it is not because I discount this event too easily that I am calling for a preliminary look into debt restructuring. It is simply because I believe that with the current road map, the end game is given in advance. This won’t of course make the exposure any less grave, but did we really think that a haircut on the debt could be avoided here?! Especially, if we are talking about banks playing the funky chicken on the short end of the Greek yield curve (is there any other?!)by sucking up liquidity in Frankfurt only to park it a couple of thousand kilometers further south, then it really escapes me if people had seriously imagined that this would not unravel at some point.
We all know that it will be a regime change when the first OECD economy pushes the restructuring button, but it was bound to happen at some point. I’d thus recommend that we stopped kicking the can down the road and in stead picked it up and threw it away; only in doing so will be able to say that we are indeed still standing.
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[1] – This is pooh-pooh of course, but as long as they believe it themselves I am happy to indulge them.
[2] – Let us say for 10 years to begin with.
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