Citizen Economists » financial crisis

The perils of European debt crisis: divergence, retreat or decline?

Rok Spruk — Mon, 16 Jan 2012 12:20:26 +0000

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.

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Recruiting the right MD for the IMF

Ajay Shah — Fri, 27 May 2011 13:30:09 +0000

The recruitment of the IMF MD has turned into quite a controversy. For an interesting set of views, see this page on the website of The Economist. In a remarkable development, the EDs of India, China, Russia, Brazil and South Africa came out with a clear
joint statement on the silliness that is afoot.

There are four perspectives on this question which are worth noting:

There is an obvious gap between the power structure at the IMF, which reflects the way the structure of the world economy after the Second World War, as compared with the present reality. As an example, at present, the Netherlands has 2.08% while India has 2.35%. But the Indian GDP is now $1.6 trillion while Netherlands is at half that.
The world would benefit from a competent and capable IMF. The best man (or woman) for the job will not be obtained by having any restrictions on nationality. As an example, in today’s world, a name that leaps out to me is Stan Fischer. But he’s not European, and hence was never even considered for the top job in the last decade. (As with Montek, he is now over age 65 and is hence not eligible for the job today). Given that a large fraction of the top economists of the world are not European, this rule yields a less capable IMF.
I feel that a quota system where the IMF MD must now be from an emerging market is as bad as a quota system where the IMF MD is only recruited from a European country. The key is to get away from all these quota systems, to only recruit the best person for the job. The emphasis should be on technical capability. The person recruited should be a technical expert and not a politican. As an example, see how in the UK, they recruited an American into their Monetary Policy Committee.
In the standard narrative, one hears the idea that in this crisis in Europe, the Europeans are gaining from their
control of the IMF. I feel this is absolutely wrong. In the Asian crisis, it was good for Asia that the IMF was not conflicted
by considerations of domestic Asian politics. Similarly, the IMF program in India in 1981 and 1991 was uncontaminated by domestic Indian political considerations. This helped produce a technically sound program, which helped jumpstart India’s growth. It is not accidental that we see structural breaks in India’s GDP growth around these two dates.

What Europe needs most is a tough IMF, which will be a stern taskmaster, which will force difficult political choices so as to heal the economy. Economic policy in Europe today needs to be cruel to be kind. Instead, by placing a string of career politicians from France into the IMF MD’s job, the valuable role which the IMF could have played in solving the European Crisis is being negated. This damages Europe. The wise thing for Europe today is to say: Give us a tough and competent taskmaster, and let him be
anything in the world but let him not be a European politican. The biggest loser from the present arrangement is Europe.

Shuttling Wealth Through A Crisis

Bron Suchecki — Tue, 26 Apr 2011 18:40:46 +0000

Quote from FOFOA’s latest post:

That’s right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

Couldn’t agree more – gold is not meant to be used during a crisis, but after.

The Economic Future of Ireland

Rok Spruk — Thu, 28 Oct 2010 15:30:54 +0000

The economic and financial crisis of 2008/2009 hit Ireland heavily. The asset price bubble and the subsequent deflation have added to the uncertain macroeconomic outlook. How did the country went from the times of the “Irish miracle” to the prolonged economic slowdown? Following the beginning of the 2008/2009 economic and financial crisis, Ireland was hit by an unprecedented economic slowdown. In 2008, the GDP declined by 3.0 percent on the annual basis. In 2009, the GDP further declined by 7.1 percent in real terms. The unemployment rate increased to almost 12 percent.

Prior to the outburst of the economic crisis, Ireland enjoyed stable and predictable levels of public debt. In 2007, the country was known for having stabilised the public debt at 25 percent of the GDP – the lowest level of any Western European country. In 2009, the debt-to-GDP ratio increased to 64 percent of the GDP. Once known as the sick man of Europe, Ireland’s economic policymakers have implemented a set of fiscal policy measures aimed to boost the long-term economic growth and abolish the economic policy based on the state intervention, high tax rates on labor and capital and export-led growth.

Ever since the 1960s, Ireland pursued a soft version of industrial policy targeted at the promotion of inward foreign direct investment and the education of highly skilled workers. In addition, Ireland reduced the corporate income tax rate to 12.5 percent and provided a thorough technical assistance and to multinational companies located in Ireland. Indeed, U.S. multinationals such as Microsoft, Dell and Intel were encouraged to locate in Ireland mainly because of its geographic proximity to key European markets, skilled English-speaking workforce, membership in the EU, relative low wage level and favorable corporate taxation.

In early 1990s, the results of a precise set of economic policies were spectacular. By the end of 2006, the unemployment rate dropped to 4.6 percent from 18 percent in early 1980s. Between 1992 and 2005, Irish GDP increased by an average of 6.9 percent while the investment grew by 8.6 percent on the annual basis. The largest contribution to GDP growth was domestic demand (5.3 percentage point). Hence, Ireland’s public finance enjoyed a favorable outlook mainly due to the rapid decline of debt-to-GDP ratio from 1980s onwards, and from a relatively low demographic pressure on the budgetary entitlements.

During the Irish boom, Irish banking and financial sector were highly dependent on the wholesale funding. Due to largely positive macroeconomic outlook from 1990 onwards, Irish banking sector received high and consistent credit ratings from agencies such as Moody, S&P and Fitch. In turn, the reliance on fragile wholesale funding resulted in overleveraged balance sheets. After the failure of Lehman Brothers in September 2008, the short-term outlook on Irish banking sector signaled a significant rise in credit-default swaps which raised concerns over the ability of banks to provide the wholesale funding for a mountain of short-term debt liabilities. And since the overleveraged balance sheets downgraded the outlook on Irish banking sector, the institutional investors demanded higher risk premium to extend the funding channel to the Irish banks.

The Directorate Generale for Economic and Financial Affairs of the European Commission downgraded the macroeconomic forecast of Irish GDP growth. By the end of 2009, the economic activity plummeted by 7.1 percent. The housing market crash was largely a result of the asset price bubble channeled through the overinvestment in the construction sector which represented 12 percent of the GDP. Nothing could explain the deflationary pressures in the aftermath of the financial crisis than excessive housing prices during the pre-crisis Irish economic boom. After 2008, Ireland’s household savings rate increased to the level above 10 percent which is a result of the adjustment in the household balance sheet. In fact, between 2001 and 2007, the share of household debt in the GDP nearly doubled.

Meanwhile, the mountain of liabilities in the Irish banking and financial sector raised the concern over its solvency. The Irish Government immediately facilitated a bailout plan for the troubled banking sector. Consequently, the large budget deficit resulted in excessive debt-to-GDP ratio which grew by 39 percentage points between 2007 and 2009. In the annual European Economic Forecast (Spring, 2010), the European Commission estimated that by the end of 2011, the debt-to-GDP ratio could reach as high as 87.3 percent. while the cyclically-adjusted government balance is estimated to increase up to -10.2 percent of the GDP. The contraction of domestic demand which, by all measures, is the main engine of Ireland’s economic growth led to a rapid increase in the unemployment rate which increase from 6.3 percent in 2008 to 11.9 percent in 2009. By 2011, the European Commission forecast that the unemployment rate is expected to further increase by 1.5 percentage point compared to 2009. In World Economic Outlook, the IMF estimated that the unemployment rate in Ireland would increase by 1.1 percentage point by the end of 2011. In 2009, Ireland experienced net outward migration for the first time since 1960s in the wake of expected 13.8 percent unemployment rate in 2010.

The macroeconomic forecast for 2011 is favorable. The European Commission upgraded GDP growth estimate to 3 percent. Meanwhile, the investment is expected to increase for the first time since the 60 percent cumulative decline of the construction sector. The positive contribution of net exports to the gradual narrowing of the current account deficit could be an important measure to alleviate the rising pressure over debt-to-GDP ratio. On the other hand, Ireland’s Department of Finance revised the macroeconomic forecasts and estimated that by the end of this year, the GDP would grow by 1 percent on the annual basis.

The essential measure of Irish economic recovery is the retrenchment of wage rates in the public sector and the adjustment of public sector wages to the cyclical dynamics of economic activity to prevent the possibility of excessive inflationary pressures in the course of economic recovery. Current measures of retrenching public sector wages successfully anchored the inflationary expectations. According to the IMF, the annual inflation rate is estimated to peak at nearly 2 percent by the end of 2015. The falling wage rates in the private sector could induce the reallocation of resources in the tradeable sector, further adding to the contribution of net external trade to the GDP growth.

The key measures to alleviate the consequences of economic and financial crisis in both real and financial sector are the immediate narrowing of Ireland’s excessive budget deficit and public debt in the share of GDP. High public debt is mainly the result of government capital injection into Anglo-Irish Bank which represents about 2 percentage points of net deficit increase in 2010. The entire consolidation package represents 2.5 percent of the GDP.

Deutsche Bank recently published Public Debt in 2020 and estimated the levels of public debt by the end of that year for both advanced and emerging-market economies. The analysis by Deutsche Bank predicted the effect of a combined negative shock in real interest rate, primary government balance and real GDP growth. If the combined shock of all three variables were to change by about one-fourth standard deviation from the estimated growth rate, the public debt in 2020 would reach 154 percent of the GDP. If the combined shock of all three variables increased by one-half standard deviation from the baseline estimates, the public debt in 2020 would increase to 197 percent of the GDP. The difference in the estimated increase is due to higher intensity of the combined shock. In addition, to restore the debt-to-GDP ratio to pre-crisis level, Ireland would be required to increase the primary government balance to 6 percent of the GDP.

Given the enormous magnitude and burden of public debt and overleveraged corporate and financial sector, the immediate facilitation of measures to alleviate the public indebtedness is necessary. Ireland’s economic future is constrained by the persistence of budget deficit which adds to the future burden of public debt. Prudent efforts to reduce the burden of both debt and deficit are of the essential importance. Nevertheless, Irish policymakers should not neglect the economic policies that created the Irish miracle as well as the policy errors that caused the deepest economic decline in Western Europe during the 2008/2009 economic crisis.

Random Shots for October 5, 2010

Claus Vistesen — Tue, 05 Oct 2010 15:24:52 +0000

The Eurozone has its “does not compute” moment

First, it was there, then it left and then suddenly the Spanish prime minister Zapatero assured us that it was gone, but somehow the lingering European crisis of confidence in relation to the status of sovereign and private debt sustainability in key membership economies never seem to have gone away.

Now, please don’t think that the headline above is in any way related to the flurry of whether Spain has been faking its GDP numbers. FT Alphaville ran the story, got cold feet and took it down (although I reckon you can easily find the report if you try). Now, the flurry was real and the questions asked by the report fair I think. Clearly, if it was such nonsense it should be easily refutable and while some of the explanations I have seen for the the sudden dis-correlation between the Market Services Gross Value Added (GVA) and the Indicator of Activity in the Service Sector (IASS/SSAI) make sense (especially the import component point) the Spanish statistical office is still mute and the ministry of finance is just playing the part of an insulted child. So, if those of us who are skeptic are so stupid then really, now is the chance for those much more clever than us to give us a lecture.

But I digress.

Moving on, Ireland has recently been at the center stage of things and the latest number from the finance ministry is that the butcher’s bill for bailing out Anglo Irish amounts to more than 30% of GDP in the form of a running deficit in 2010. That is a almost unbelievable number by any standards and I would take very little comfort here in the fact that Ireland remains fully financed until mid 2011. What really matters here is that with this amount of debt overhang that needs to be transferred to the government’s balance sheet and ultimately over to the private sector in the form of taxes Ireland is being played straight into the hands of the IMF and the European Stability Fund. But this is not only about Ireland since the all the fundamental questions are still left unanswered.

How do you correct external competitiveness deficiency from within a currency union at the same time as implementing fiscal austerity without risking debt levels to spin out of control?
How long should Southern Europe and Ireland endure deflation relative to the core to restore external competitiveness (will Germany accept a lower external surplus as result)?
How might a sovereign restructuring in a Eurozone economy play out?

The last one is particularly important since no official inside the Eurozone has even begun to voice an opinion on this even if it is blatantly obvious that this is where we are headed. I mean, I am not talking about the entire stock of PIGS bonds being wiped out and marked to 0, but merely of a reasonable and fair estimate of the haircut we all know that is coming. Yet, so much water has gone under the bridge that it is difficult to see how such a memo would look. For starters, the stress tests carried out recently on Eurozone banks would have to be, uhm, redone with proper assumptions of haircuts and impairment in the context of real sovereign stress in the Eurozone.

However, what really clinched it for me and what leads me to note that we have now had one of (several to come) those does not compute moments was Wolfgang Munchau’s basic bond arithmetic of the the European Stability Funds lending conditions and the means with which it allows access to its funds. From FT Alphaville …

Münchau comes up with a rough estimate that borrowers could end up paying a total interest rate of about 8 per cent — far above and much more than the 5 per cent Greece paid when it tapped its €110bn European Union emergency loan back in May.

BarCap’s back-of-the-envelope calculations has the total borrowing cost above 8 per cent. That’s about 80bps (3m Euribor) + 300bps (EFSF mark-up) + 150bps (due to the fact that the interest has to be paid on the whole loan) + 300bps (service fees). As BarCap also note, requesting EFSF funds would also likely entail some strict policy conditions, similar to IMF conditionality.

Now, let me be quite clear here. 8% or even anything in that vicinity makes the whole exercise quite pointless since there is no way that any of the Eurozone economies would be able to pay off their debts at these conditions. So, if one or more Eurozone economies were to find themselves in a situation where they could no longer tap international bond markets due to the yield on offer, the alternative would be no better. I called this a catch 22 recently and even wrote a paper, in part, about it. However, Munchau’s article makes it all so clear. Whatever funds that are paid out of the stability fund at these conditions would in itself be subject to a haircut in the context of an inevitable sovereign debt restructuring and thus it is really and ultimately a question of on whose balance sheet the final loss will be put. One would only hope that this soon will come to compute a little better with the agenda that will and has to emerge in the Eurozone at some point.

Some (academic) food for thought

As many of you might have noticed I am about to start my research degree here in the UK and while I am in general surprised and disappointed about the utter lack of creativity on the part of the economic faculty in terms of constructing a curriculum with the sole purpose of testing your abilities in math (rather than you know, uhm economics!) I hope and believe it will be fun. On that note and while the cracks have clearly not yet transcended to the way underlings such as myself are treated, I found the following paper (The Dahlem Report) interesting and important (thanks Scott for sending it over).

The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

Now, as an immediate testament to the importance of this paper and echoing my points above I can say for certain that my generation of economists will be trained no differently on a PhD level than they were, I suspect, 30 years ago. Same old axioms, same old models, same booring (and often stupidly difficult) math problems. Two of the co-signers of the paper are David Colander and Alan Kirman and I recommend readers to have a look at their work if you want a good critique of the way we (still) do economics today (don’t forget James E. Hartley too). I don’t want to be a cry-baby, but surely; running through the proof of why a utility function should and might exist (in mathematical terms) is not only waste of good time, it is an insult to any serious economist eager to get on with some real work. But now, I really(!) digress.

To balance things a bit I did actually find much enjoyment in Oded Galor’s recent synthesis of what really kicked off the demographic transition back in the days of the industrial revolution.

This paper develops the theoretical foundations and the testable implications of the various mechanisms that have been proposed as possible triggers for the demographic transition.Moreover, it examines the empirical validity of each of the theories and their signicance forthe understanding of the transition from stagnation to growth. The analysis suggests thatthe rise in the demand for human capital in the process of development was the main triggerfor the decline in fertility and the transition to modern growth.

Here in the 21st century such a paper essentially reads as a piece of economic history as the demographic transition never really ended and whereas some form of the quantity/quality tradeoff might have started the whole process, we are now dealing with a much more complicated process in which both a quantum and tempo effect acts as a driver of the fertility decline (and eventual or potential(?) catch-up as the tempo effect fades). However, Galor’s recent paper provides an important finetuned representation of the way we think about the quantity/quality trade off and as such it is important.

I also take more than a passing interest here since it is after all my field and while I eventually opted for the original quantity/quality model by Becker and Lewis in my thesis I have almost been turned to Oded Galor’s theory with this recent paper. Yet, the two theories are still ultimately very close to each other and for laymen the finer grained theoretic subtleties of the trade-off are not important.

Perhaps you should read Oded Galor first and then the Dahlem paper afterwards. Actually, yes you definitely should!

Looking Back at Late 2008

Ajay Shah — Tue, 28 Sep 2010 18:46:07 +0000

P. Vaidyanathan Iyer has a great first draft of history, in the new Sunday magazine that goes with the Indian Express, telling the story of what happened in India in late 2008.

This was a difficult period with 6 shocks hitting us in a short time period:

The Lehman failure,
The crisis on the money market,
Difficulties at some banks,
Difficulties in some mutual fund schemes,
The Bombay attacks, and finally
The Satyam crisis.

Things could have turned out much worse. The individuals at MoF, SEBI, and RBI really came together and delivered. As India becomes a more complex economy, it becomes more and more important to bring top quality skills into policy making. The Indian success of crisis management in late 2008 is tightly linked to India’s success on the great conflicts over appointments in 2008. Reading Vaidy’s article made me go back into September and October 2008 on this blog to see what I was thinking and writing at the time:

On 25 September, I did a lunch talk on the crisis at DEA.
On 29th September evening, murmurs about difficulties at ICICI Bank erupted after the Indian market closing time. I remember how, late in the night of the 29th, I watched the ICICI ADR trade in the US, saw nothing big happening, did some Merton model calculations, and thought we were okay. The next morning, I wrote this blog post on ICICI Bank.
This was the first day of the 3rd Research Meeting of the NIPFP DEA Research Program. Those present will remember how the crisis made for a dramatic backdrop for the inaugural session and indeed the entire conference.
On 6 October I started seeing the liquidity crisis coming together.
On 10 October, I wrote about the remarkable collapse in the money market which had come about. From 13 October onwards, I started doing a series of Crisis Watch posts.
From 10 October onwards, Jahangir Aziz, Ila Patnaik and I started writing a paper on what was going wrong and what should be done. Our paper was emailed out on 14th, we did a meeting at NIPFP to discuss it on 18th, and finalised it on 20th.
On 26th October, I wrote about the short selling question.

When I look back, I feel that (of all people) the NIPFP Macro/Finance Group should have quickly and clearly understood the
linkages between multinationals and the money market, and how the collapse of the money market in London in late September would surely matter greatly to India. We had the building blocks: We truly get India’s high de facto integration into global finance,
and we truly get the rise of Indian multinationals as a game changer. But we weren’t cool enough to connect these pieces and make
the consequent inferences to a surprising conclusion. We only woke up when it was obvious that the Indian money market had
collapsed.

When I look back, the really hard thing at that time was the `fog of war’ which envelops economic policy thinking. In the best of times, the Indian statistical system is weak, and at a time like that, the data was hopelessly out of date. We’re being penny wise + pound foolish in ignoring the informational foundations of the economy, without which policy makers are forced to fly blind. We do this by tolerating an awful statistical system, and by preventing the financial markets which produce vital information.

There was a lot of drama and loud opinions, but it was very hard to figure out what was actually going on. I was also quite concerned
about Indian CEOs crying wolf in order to get money from the government, given the long history of Indian CEOs not knowing how to
make an honest living. So I was biased in favour of ignoring the cries at first.

Is There a Crisis of Capitalist Democracy?

Winton Bates — Fri, 25 Jun 2010 18:18:51 +0000

Richard Posner’s recent book, ‘The Crisis of Capitalist Democracy’, is mainly about the global financial crisis, how it came about in the US, the lessons that the author thinks we should have learned from it and what governments should do to prevent similar crises in future. According to this distinguished author the crisis came about because of lax regulation; we have learned from it that the financial system is inherently fragile and that Keynes is still relevant; and the way to avoid similar crises in future is to introduce regulatory reform in the financial sector.

To be fair, Posner condemns some of the knee jerk responses of governments introducing tighter financial regulation and acknowledges that he is not entirely happy with his own suggestions for regulatory reform. He views the only ambitious proposal that he discussed sympathetically – the separation of commercial banking from other forms of financial intermediation – as ‘fraught with problems’ (p.362).

It is arguable that the global financial crisis was a crisis of capitalism. A milder financial crisis might still have occurred if central banks had not previously acted in ways that led major financial institutions to expect that they would be bailed out if their excessive risk-taking resulted in major losses. It is even possible to entertain the idea (as I did here) that the financial crisis has highlighted a fundamental problem in that laws governing the financial system currently permit financial intermediaries to make promises that they can’t always keep. But why view this economic crisis as a crisis of democracy?

The title of the book arises from Posner’s view that while the American political system can react promptly and effectively to an emergency, it ‘tends to be ineffectual’ in dealing with longer term challenges:

‘The financial collapse and the ensuing depression (as I insist we must call it) have both underscored and amplified grave problems of American public finance that will not yield to the populist solutions that command political and public support. The problems include the enormous public debt created by the decline of tax revenues in the depression, the enormous expenses incurred by government in fighting the depression, and the boost the depression has given to expanding the government’s role in the economy. These developments, interacting with a seeming inability of government to cut existing spending programs (however foolish), to insist that costly new programs be funded, to limit the growth of entitlement programs, or to raise taxes, constitute the crisis of American-style capitalist democracy’ (p.387-8).

Unfortunately, the quoted passage appears in the final paragraph in the book rather than the introduction. There is not much discussion in this book about this supposed weakness of the US democratic system. The author implies that it is largely a problem of political culture. Republicans favour low taxes but they have been reluctant to reduce government spending. Democrats favour high levels of government spending but they have been reluctant to raise taxes. As a result:

‘From the standpoint of economic policy we have only one party, and it is the party of profligacy’ (p.384).

As a person living in a democratic country in which a large part of the electorate has come to equate responsible economic management with budget surpluses and minimal public debt (to the dismay of some left wing economists who would like to see more public sector investment) I find it difficult to take seriously the idea that the current political culture in the United States involves a crisis of capitalist democracy. I am confident that before too long Americans will insist that their governments balance their books in order to avoid the problems currently being experienced in Greece and other European countries.

However, the picture might look a lot different from within the US. Before a change in political culture can occur in the US it will be necessary for a lot more Americans to become concerned about the future implications of current fiscal policies. Richard Posner claims that he has no idea how to solve the problem of America’s political culture (p.385) but I think he is contributing to the solution by merely raising awareness of the problem.

Q&A on Asian Economies and their Place in the World

Claus Vistesen — Wed, 10 Feb 2010 16:42:45 +0000

The good folks at Icfai University Press and specifically the editor of the magazine The Analyst have queried me to answer some question on the Asian economies and their ascend to the top position (or not) of the global economy and what this means. They have shipped me some questions, given me a deadline and below I provide some answers in Q&A format. Enjoy!

Question: History reveals that every international crisis leaves a lasting mark on the world, once the crisis is over and the difficulties it brought have been encountered, things tend to change. Similarly, do you think that the current global economic crisis must lead to a fundamental reassessment of how power and influence is expressed through the world?

I belive that the current financial crisis have accentuated what we already knew and what has been present in the data and the discourse for some time. Specifically I am talking about the idea that big emerging markets such as India, Brazil, China, Indonesia, Chile, Turkey etc have slowly but steadily taken over as the global powerhouses in terms of economic growth and thus it is also natural that they are gunning for more political and institutional power. When it comes to financial crises in particular the latest batch of proposals from the Obama administration to regulate the financial industry is another and more micro oriented theme which is a recurring event in the context of economic crises. Crises are often, in this way, catalysts for abrupt discrete changes in the economic and political environment.

Ultimately then I think that this fundamental reassessment of power and influence in the world (both politically and economically) have not been initiated by this crisis but it may be reinforced.

Question: As the Great Depression paved the way to World War II and to a new world order, how far the present crisis produce grave repercussions on the global economic order?

This intimately depends on how you define world order naturally. If I have to point towards the most enduring change which appears to have come on the back on this crisis it is the attitude to debt and long term sustainability of public finances. Those of us who have been interested in demographics and its effect on macroeconomic processes have long been waiting for (and predicting) the inflection point where the mismatch between expensive welfare systems and the increasingly broken demographic structure as as result of persistently below replacement fertility. In this way, the ability to take on debt today as a liability for the future and despite the theatricals on sovereign spreads and CDS on Greek and Spanish government debt, are in fact fundamentally driven by long term liability problems. For an excellent excursion into this topic in the context of Australia/New Zealand and beyond I warmly recommend this one by John Hempton.

Extrapolating to the idea of a new economic order this brings us into a fundamental dilemma. With every part of the national identity overlevered [1] and in need to rebuild their balance sheet most economies are looking to the last part of the identity to make up for the shortfall of savings; the external balance. The problem is that not everyone can export excess savings (i.e. run a current account surplus) at the same time. In my opinion this is where the big new emerging economies come in and despite by personal skepticism towards China pulling the world anywhere it remains obvious that those who can reasonably be expected to run sustainable net external borrowing positions (i.e. current account deficits) are exactly those economies mentioned above who are about to ascend as the new drivers of economic growth. If they don’t, it is not easy to see where the growth is going to come from.

Question: The world financial crisis has been a defining moment in the ascension of emerging economies onto the international economic stage. Please comment.

Not really. In my opinion this goes back to the idea of decoupling from the US economy and how, before the crisis, many observers had their hopes pinned on the Eurozone (and the Euro) as well as Japan (and the JPY) to take over the baton from the US economy in steering forward global demand. In the context of Bretton Woods II this seemed a turkey shoot of an argument. Just de-peg from the US dollar and re-peg to the Euro and it is all engines go. Obviously, this was always going to be a mirage and essentially a smoke screen puffed up by those who have a fundamental desire to see the US economy fail and cave in on itself. So, why this detour in answering the question above?

Well, quite simply, the world “decoupled” for the US and indeed the advanced (G7) economies a long time ago.

From 1980 to 2008 the share of total world GDP made up by G7 economies declined from 51.33% to 42% and the corresponding figure for newly industrialised Asian economies rose from 7.17% to 21% and according to IMF this trend is set to continue. This is the real decoupling and it represents a major structural change in the global economy which goes far beyond the current financial and economic turmoil. Whether there will be anything particularly defining about the role of emerging economies as a result of the financial crisis is too early to say. A sovereing default in Greece or elsewhere in the Eurozone should increasingly make investors aware that global risk is not primarily present in emerging markets but actually right at the heart of the G7 and OECD edifice. Perhaps this will be a definining moment, but the general ascend of big emerging economies to the center of the world stage is not a product of the current turmoil.

Question: To what extent will emerging economies remain the drivers of global economic growth in 2010?

To a very large extent I would argue. In 2010 the IMF estimates (in their October 2009 Outlook) that the world economy will resume growing at an annual rate of 3.1% after having contracted by -1.06% in 2009. Breaking this up on the major advanced economies (G7) and developing and emerging economies the IMF estimates that the former will grow by 1.7% and the latter by 5.1% in 2010. Yet this difference does not tell the whole story. Consider then the fact that measured in US dollars (current prices) the share of world GDP made up by the G7 as well as the emerging and developing economies was 53.8% and 30.7% respectively. Yet still, and out of a total estimated value of 2010 world GDP growth at trn 3.267 USD the G7 is expected to contribute to this with only trn 1135 USD while emerging and developing economies are expected to contribute with trn 1674 USD.

More generally, this is a tendency we should expect to continue. Consequently and while global GDP forecasts into 2014 are quite fickle, forecasts by the IMF has the current price value of total world output (in USD) rising from trn 60.429 USD in 2010 to trn 74.660 USD in 2014. Out of these trn 14.165 USD, the G7 and the emerging and developed world are expected to contribute with trn 4886 USD and trn 7871 USD respectively.

In this way and I hope that my readers will forgive me the excessive arithemetic; if we take the IMF’s forecast to heart, emerging markets are definitely going to be the main drivers of global headline GDP growth in 2010 and beyond.

Question: As the evolving international order is going to be Asia centered and polycentric for a variety of reasons. Do you think that India is ready to play a larger role to ensure stability, security and peace in the world?

I sure hope so. A lot of the future stake of the global economy is pinned on India, China, Brazil, etc to develop and evolve both politically and economically. India already plays a very big role in the global economy, but is somewhat dwarfed (in terms of attention at least) by China. However, I believe this will change. Despite some well described and severe issues with a growing gender gap (which is also an issue in China) India is set to enjoy a much more stable and slow demographic transition into old age than China who will age very quickly due to its one child policy.

In this sense I forsee that India will slowly but surely take over from China as the big global emerging economy powerhouse. However, and beyond the obvious political responsibility this entails it also comes with an economic ditto. Thus, one of the biggest problems with China is that she will never be able to run a respectable external deficit that would resolve and alleviate global macroeconomic imbalances. A deliberate mercantilist policy and the effects of the one child policy which strips the economy of the capacity to suck up its own (let alone foreign) savings are two crucial factors here. In my opinion we have one shot to correct these global imbalance and much will hinge upon India (and the rest of the emerging pack) here. Specifically, India must ensure that the demographic transition is kept in check from below as well as, currently, from above. By this I mean that Indian must ensure that it does not fall into a fertility trap with total fertility rates lingering below 1.5 children per woman. Secondly, India should shy away from mercantilist policy. Standard economic theory tells us that external borrowing is not an ill if matched by a sound and long term oriented investment policy as well as capacity in the economy proxied by a large share of young to mature workers out of the total population.

Especially the argument on preventing fertility to fall too far and too rapidly is quite politically incorret at the current juncture with climate and overpopulation (still) dominating the discourse. However, it is crucial in my opinion that we are able to differentiate the debate to look at both sides of this coin. Otherwise, India and the rest of us will regre it.

—

[1] – (investments, consumption and the government)

Understanding the Crisis

Ajay Shah — Fri, 08 Jan 2010 20:20:06 +0000

As the months are going by, we’re slowly building a better picture of what went wrong and why. If you want to only spend two hours on figuring out the financial crisis, then listen to this interview with Charles Calomiris, and read this interview with Raghuram Rajan.

An Overview of Unconventional Monetary Policies

Claus Vistesen — Fri, 27 Nov 2009 16:12:42 +0000

The excellent research edifice at the Bank of International Settlements have conjured up one of those papers which needed to be written (by Claudio Borio and Piti Disyatat) on the back of the myriad of different monetary policy responses we have observed in the contex of the economic crisis. The abstract and conclusion look as follows;

(my emphasis throughout)

The recent global financial crisis has led central banks to rely heavily on “unconventional” monetary policies. This alternative approach to policy has generated much discussion and a heated and at times confusing debate. The debate has been complicated by the use of different definitions and conflicting views of the mechanisms at work. This paper sets out a framework for classifying and thinking about such policies, highlighting how they can be viewed within the overall context of monetary policy implementation. The framework clarifies the differences among the various forms of unconventional monetary policy, provides a systematic characterisation of the wide range of central bank responses to the crisis, helps to underscore the channels of transmission, and identifies some of the main policy challenges. In the process, the paper also addresses a number of contentious analytical issues, notably the role of bank reserves and their inflationary consequences.

(…)

In the wake of the current financial crisis, monetary policy will probably never be the same again. Central banks have been forced to review their implementation frameworks and to try out policies that, only a few years back, were not on their radar screens. They have been operating in unchartered waters, outside their “comfort zone”. In the process, unconventional monetary policies have become the focus of much discussion and heated debate. In this paper, we have provided a unified framework to think about and classify unconventional monetary policies, considered the analytical issues they raise, with particular reference to the transmission mechanism, and briefly assessed some of the key policy challenges.
We have stressed several analytical points.

First, unconventional monetary policies fall under the broader category of balance sheet policy, whereby the central bank uses its balance sheet to affect asset prices and financial conditions beyond the short-term interest rate. Thus, they are not unconventional in their essence, with foreign exchange intervention being a very familiar form of such policies.

Second, balance sheet policies can be decoupled from interest rate policies. This reflects the fact that the level of the short-term interest rate can be set independently of the amount of bank reserves in the system. Third, the main channel through which balance sheet policy operates is by altering the composition of private sector balance sheets, exchanging claims that are imperfect substitutes for each other. By altering the risk profile of private portfolios, such as through the purchase of less liquid or risky assets or by being prepared to lend at more attractive terms than the markets, the central bank can reduce yields and ease financing constraints.

Fourth, because of this, in our view the outsized role often attributed to banks’ excess reserves in discussions of balance sheet policy is not warranted. Since excess reserves are very close substitutes with short-term claims on the central bank or the government, what the central bank buys and the credit it extends are more important than how these operations are financed. Finally, balance sheet policy should be the considered in the broader context of the consolidated public sector balance sheet. Importantly, central banks have a monopoly over interest rate policy, but not over balance sheet policy.

While we have not examined in depth the effectiveness of balance sheet policies, it would be hard to deny that they have helped to stabilise conditions and cushion the fall in aggregate demand. There is evidence that central bank purchases of government bonds have lowered their yields, although they seem to be subject to “diminishing returns”, once the surprise factor wears off. And policies targeting interbank markets or private sector securities have been successful in narrowing risk spreads and supporting borrowing activity there.

At the same time, balance sheet policies raise a number of challenges for central banks. As central banks move away from the simplicity and well-rehearsed routine of interest rate policy, they face much trickier calibration and communication issues. As they substitute for private sector intermediation, they may favour some borrowers over others, tilting the level playing field, and could risk making the private sector unduly dependent on public support. As they purchase government debt, they come under pressure to coordinate with the public sector debt management operations. And as their balance sheets expand and they take on more financial risks, central banks risk seeing their operational independence and anti-inflation credentials come under threat in the longer term. As a result, questions about coordination, operational independence and division of responsibilities with the government loom large. These costs suggest that unconventional monetary policies should best be seen as special tools for special circumstances. The costs also point to the need for appropriate governance arrangements, designed to limit the risk that the central bank anti-inflation priorities are undermined in the medium term. And they put a premium on early exits, as soon as economic conditions permit.

I have only scanned the paper and thus not really given it the attention it probably deserves, but one of the things I found most interesting, (especially in the light of the my recent inquiry into the matter with respect to the ECB), is that while I agree that exit strategies is first and foremost a communication exercise they will also become a concrete operational challenge.

More generally, the discussion on the transmission channel from unconventional monetary policy as split into two between the signalling channel and the broad portfolio channel (operational/market channel) is interesting and provides a good framework through which to understand the current initiatives by monetary policy makers. The paper also pulls out the classic, as it were, about how the Fed and the ECB differs in their response because the former has focused extensively on the non-bank sector (asset backed securities and government bonds) whereas the latter has mainly focused on the the banking sector (i.e. through fixed-rate full-allotment refinancing operations with maturities of up to 12 months).

Again, it is difficult to argue with the underlying argument here in the sense that it is clearly borne out in the data. The problem with the ECB, as I have argued before, is the extent to which banking finance is indirectly funding the purchase of government bonds and thus what happens to sovereign spreads in the Eurozone when the refinancing offers taper off into 2010. That is a subject for a different entry. For now, I leave you with this instructive paper from the BIS; it is well worth a look.