A recent IMF draft debt sustainability analysis for Greece, written just before the recent turmoil, foresaw that Greece (or its creditors) needs additional 50 billion Euro plus bailout money, as well as maturity extensions or another haircut. Now it needs more of that.
Peter Spiegel comments in the FT.
Saturday, 27 June 2015 and earlier:
Sunday, 28 June:
Monday–Tuesday, 29–30 June:
Wednesday, 1 July:
Note: This post has been updated repeatedly.
Charles Ferguson’s movie Inside Job portrays as
Economics and economists are considered part of the problem rather than the solution. While the movie
it is silent about the fact that Rajan is one of the most prominent economists.
The BIS has published its annual report and warns that the “unthinkable threatens to become routine.” In the press release the Bank argues that
[a]ddressing these deficiencies calls for “a triple rebalancing in national and international policy frameworks”, towards policies that pay greater attention to the medium term, to financial factors and to the costly interplay of domestic-focused decisions. … An essential element of this rebalancing is to rely less on demand management policies and more on structural ones, so as to abandon the debt-fuelled growth model that has acted as a political and social substitute for productivity-enhancing reforms.
In a Credit Writedowns blog post, Frederick Sheehan collected quotes that relate to the European debt crisis (he writes that Dennis Gartman first compiled the list). Some highlights:
“For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil.”
– Jean-Claude Trichet, President, European Central Bank, January 2008
“Spain is not Greece”
– Elena Salgado, Spanish Finance Minister, February 2010
“Portugal is not Greece”
– The Economist, 22 April 2010
“Ireland is not in Greek territory”
– Brian Lenihan, Irish Finance Minister
“Greece is not Ireland”
– George Papandreou, Greek Finance Minister, 22 November 2010
“Spain is neither Ireland nor Portugal”
– Elena Salgado, Spanish Finance Minister, 16 November 2010
“Neither Spain nor Portugal is Ireland”
– Angel Gurria, Secretary-General, OECD, 18 November 2010
“Spain is not Uganda”
– Mariano Rajoy, Spanish Prime Minister, 9 June 2010
“Italy is not Spain”
– Ed Parker, Managing Director, Fitch, 12 June 2012
“When it becomes serious, you have to lie.”
– Jean-Claude Juncker, President, Euro Group, April 2011
“The worst is now over—the situation is stabilizing.”
– Mario Draghi, President, European Central Bank, March 2012
“Uganda does not want to be Spain”
– Asuman Kiyingi, Uganda’s Foreign Minister, 13 June 2012
Marc Champion comments in Ekathimerini that the planned referendum question in Greece disguises the relevant trade-offs.
Not once in his address on the referendum did Tsipras mention the common currency. When the Associated Press asked Syriza cabinet minister Panagiotis Lafazanis whether the nirvana of reconstruction and progress he described as following from a “no” vote to the bailout would involve leaving the euro, he said: “It is you [the media] who pose this dilemma.”
In an online book published by the Institute of Economic Affairs, Nima Sanandaji argues not only that the Scandinavian success story predates the welfare state but also that the welfare state actually undermined the success story. From the book’s summary:
Many analyses of Scandinavian countries conflate correlation with causality. It is very clear that many of the desirable features of Scandinavian societies, such as low income inequality, low levels of poverty and high levels of economic growth, predated the development of the welfare state. It is equally clear that high levels of trust also predated the era of
high government spending and taxation. All these indicators began to deteriorate after the expansion of the Scandinavian welfare states and the increase in taxes necessary to fund it.
Robert Shiller’s CAPE data.
A study published in The Lancet argues that
[t]he transition to non-fatal outcomes as the dominant source of burden of disease is occurring rapidly outside of sub-Saharan Africa.
The Economist summarizes the findings as follows:
… back pain causes the greatest burden in rich countries with ageing populations. Depression often tops the list in poorer, younger ones. Anaemia heads it in some destitute or war-torn states, where food shortages are common. Conversely, in some sedentary and prosperous parts of the Middle East diabetes is of most concern.
In a recent NBER working paper (“Discounting Pension Liabilities: Funding Versus Value”), Jeffrey Brown and George Pennacchi discuss the appropriate choice of discount factor to discount pension liabilities. They conclude that it depends.
… if the objective is to measure pension under- or over- funding, a default-free discount rate should always be used, even if the liabilities are themselves not default-free. If, instead, the objective is to determine the market value of pension benefits, then it is appropriate that discount rates incorporate default risk.
… the use of a default-free discount rate is informative to participants who want to know how much money the plan would need to be assured that the plan will be able to pay promised benefits. This would also be a relevant measure if the plan wished to offload its liabilities to an insurance company that intends to make good on the future benefit payments.
… there are also cases for which the market value of the liability is important. Current or potential plan participants might want to know the market value of pension liabilities (rather than the promised value) when they are making decisions about the value of pension benefits…
… the market value of the liability can have odd properties as a system of funding measurement: specifically, the size of the total (funded plus unfunded) liability can vary with the degree of funding, and that funding levels asymptotically approach 100 percent as assets approach zero.
Brown and George Pennacchi also discuss how the appropriate discount rate may be measured and how cost-of-living adjustments may be accounted for.
In a recent Vox blog post, Zoltan Jakab and Michael Kumhof argue that macroeconomic models where banks intermediate loanable funds get it seriously wrong.
In the intermediation of loanable funds model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers … [but in reality] [t]he key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor.
This difference has important implications. Compared to intermediation of loanable funds models, money creation models predict larger and faster changes in bank lending and real activity; pro- or acyclical rather than countercyclical bank leverage; and quantity rationing of credit after contractionary shocks. New loans in loanable funds model are accompanied by additional savings and thus, higher production or lower consumption. In money creation models, in contrast, they simply reflect an expansion of banks’ balance sheets that is only checked by profitability and solvency consideration. Moreover, “the availability of central bank reserves does not constitute a limit to lending and deposit creation. This … has been repeatedly stated in publications of the world’s leading central banks.”
A large part of [money creation banks’] response [to a contractionary shock], consistent with the data for many economies, is … in the form of quantity rationing rather than changes in spreads. … In the intermediation of loanable funds model leverage increases on impact because immediate net worth losses dominate the gradual decrease in loans. In the money creation model leverage remains constant (and for smaller shocks it drops significantly), because the rapid decrease in lending matches (and for smaller shocks more than matches) the change in net worth. … As for the effects on the real economy, the contraction in GDP in the money creation model is more than twice as large as in the intermediation of loanable funds model, as investment drops more strongly than in the intermediation of loanable funds model, and consumption decreases, while it increases in the intermediation of loanable funds model.
An excellent conference on sovereign debt issues was held at the University of Zurich’s UBS International Center of Economics in Society. The program. My discussion of Mark Aguiar and Manuel Amador’s paper “Take the Short Route …”
Hans-Werner Sinn has published a special issue of CESifo Forum entitled “The Greek Tragedy.” Here is the abstract:
By the end of March 2015, Greece had already received a total of 325 billion euros in rescue credit from the measures instituted by the EU, the IMF and the ECB, and yet its unemployment has soared to more than double the rate of five years ago, when the fiscal rescue operations started. The reason is that Greece is suffering from a bout of Dutch Disease. The more money that flows in, the lower the incentives to roll back the excessive price increases of the early years of the euro, and the lower the disposition to set off on the stony path to restoring the country’s competitiveness.
Contrary to assertions, the Greek population has also benefited from the rescue credit. Calculated from the onset of the crisis, in net terms one-third of the public credit has contributed to financing the Greek current account deficit, one-third to paying off private foreign debt, and one-third to capital flight by Greek people. Furthermore, the country has profited greatly from the lowering of interest rates on its foreign debt, an advantage that translated into around 50 billion euros between 2008 and 2014. In 2014, overall Greek private and public consumption amounted to almost 114% of net national income.
Greek banks have received some 80 billion euros in ELA credit from the Greek central bank in the past few months. ELA credit, which can be blocked only by a two-thirds majority in the ECB Council, exceeds by far the recoverable assets of the Greek central bank in case commercial banks go bankrupt and the collateral pledged by the banks loses its value. Thanks to ELA, the private capital fleeing to other countries has been replenished with public credit from the international community. This credit has strengthened Greece’s negotiating position with the international community by increasing the other euro countries’ potential losses in the case of Grexit. This could explain why the Greek government has played for time in the current negotiations.
If it should come to a Grexit, it would be crucial to introduce as quickly as possible a new legal tender, in order for all price tags, as well as rent, credit and wage contracts to be redenominated and devalued simultaneously, restoring the competitiveness of the Greek economy. A creeping transition to a new currency by way of state-backed promissory notes (IOUs) that are not legal tender could buttress the solvency of the Greek government, but it would not solve the competitiveness problem. Econometric studies have shown that an economic upturn can make itself felt in as little as one or two years after a devaluation and a haircut on outstanding foreign debt have been carried out.
In the FT, Willem Buiter proposes a 5 point plan for a way out of the Greek debt crisis:
The plan would require additional European taxpayer money for the ECB-ESM debt swap and the bank recapitalization. It would isolate the Greek banks from the mayhem triggered by government default.
Update: 7 July 2015
A related proposal by Willem Buiter and Ebrahim Rahbari.
Self-help manuals are for the rest of us what the airport bookstore bestseller on the latest management fad is for businessmen. They promise novel perspectives on fundamental questions but typically leave the reader disappointed. Past the enticing introductory chapter with interesting examples, the novel perspectives all too often reduce to new semantics without substantive value added. But then, there might be exceptions.
To “simplify one’s life” is a prominent search term on the web and the topic of many websites, blog posts and books. If popular search engines identify the most relevant contributions then a handful of top ranked sites should contain most of the pertinent information. So here is a selection of top ranked sites and their suggestions for simplifying one’s life.
becomingminimalist lists 10 most important things to simplify, namely
while Slow Your Home offers 21 mostly rather down to earth suggestions:
Zen habits suggests 72 steps but helpfully boils the list down to 2 points:
The blog also recommends Elaine St. James and her book Simplify Your Life.
Other sites proceed more systematically and for that very reason, strike me as more convincing. wikiHow devotes a chapter to simplifying one’s life and lists four “methods” and corresponding actions:
mindbodygreen offers the most concise advice suggesting five simplifying steps:
The international bestseller How to Simplify Your Life: Seven Practical Steps to Letting Go of Your Burdens and Living a Happier Life thoroughly covers the topic—from clearing off one’s desk to cleaning up one’s life. It proceeds in seven steps:
Now go and simplify or stay messy at your own peril.
More sites: Think simple now. The Art of Simple. Simple Chic. (See also minimalism, DAISY.)
Websites with information about the “Lex Monetae” principle:
The Economist reports about a new book by Dag Detter and Stefan Fölster, “The Public Wealth of Nations.” The authors argue that public assets should be managed through holding companies with professional managers and no direct government intervention.
The book’s website.
In a Vox blog post (that complements another post on Greece), Jeremy Bulow and Ken Rogoff review the academic discussion on a long-standing question—why sovereigns repay their external debt.
Bulow and Rogoff distinguish between
[t]he ‘reputation approach’ pioneered by Eaton and Gersovitz (1981) which builds on Hellwig (1977);
and the ‘direct punishments’ bargaining-theoretic approach of Bulow and Rogoff (1988b, 1989a) which in turn builds on Cohen and Sachs (1986).
They argue that the latter approach—attributing enforceable rights in foreign country courts to creditors—better explains observed outcomes.
[The] direct punishment/bargaining approach lends itself very naturally to incorporating moral hazard; …
reputation models suggest [counter factually] that the governing law of the debt is irrelevant;
[i]n standard reputation for repayment models, write-downs are decided unilaterally—creditors’ particular concerns do not really matter; …
[t]he interests and welfare of unrelated third parties does not matter in standard reputation models; …
[r]eputational debtors borrow in bad times and re-pay in good times, for purposes of income smoothing; [d]efaults, if they are to take place, occur in good times … In reality, many countries borrow as much as they can whenever they can. … Debt crises occur when countries do badly and creditors decide they want to reduce their loan exposure. To some extent, this issue can be addressed by assuming that income shocks are permanent and not transitory, but it remains difficult to rationalise country borrowing only on the threat of lost consumption smoothing. …
[c]reditor identity doesn’t matter; …
[u]nder … general assumptions, the existence of [the option to put savings abroad] leads to the unravelling of any purely reputational equilibrium.
Bulow and Rogoff add that
[a]nother important issue … is that in practice, sovereign debt renegotiations focus very much on the flow of repayments, and much less on how the stock of debt evolves. This is precisely because all sides realise that any future promises can be renegotiated.
Scott Sumner reviews the case and concludes that Iceland did embrace “austerity.”
Several articles in the Journal of Economic Perspectives review the bailouts of General Motors, Chrysler, AIG, Fannie Mae and Freddy Mac as well as TARP during the 2007–2009 period. The US taxpayer was lucky; but not all objectives have been met.
Ashoka Mody argues in an Econbrowser blog post that recent IMF research should guide a Greek deal. According to Mody this research shows that debt overhang is very costly; “austerity” can be self defeating; and structural reforms generate uncertain payoffs. He therefore recommends
Olivier Blanchard, IMF chief economist, disagrees.
Tom Braithwaite reports in the FT that it is no longer unheard of for top bank executives to sell shares of the institutions they manage—shares they presumably received to improve incentives. To the contrary. Some executives even sold at surprisingly low prices:
Some have done so beneath “book value”, a measure of how much of a company would be left for shareholders if it were liquidated. Companies trading at this level are either undervalued by the market or overstating the value of their assets.
The court ruled (full text) that
[t]his programme for the purchase of government bonds on secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of Member States. …
The Court finds that the OMT programme, in view of its objectives and the instruments provided for achieving them, falls within monetary policy and therefore within the powers of the ESCB. …
The Court also states that the OMT programme does not infringe the principle of proportionality. …
The Court states that this prohibition does not prevent the ESCB from adopting a programme such as the OMT programme and implementing it under conditions which do not result in the ESCB’s intervention having an effect equivalent to that of a direct purchase of government bonds from the public authorities and bodies of the Member States.
Claire Jones reports in the FT.
It is now up to the German Bundesverfassungsgericht to consider the ruling. The German court’s previous considerations can be found here.
An iMFdirect blog post by Olivier Blanchard outlines the IMF’s perspective on the standoff between Greece and her official creditors. According to Blanchard, last week’s offer extended to Greece is realistic. On the part of the Greek government, it requires
truly credible measures to reach the lower target budget surplus … [and] … commitment to the more limited set of reforms.
On the part of the creditors, it requires
significant additional financing, and … debt relief sufficient to maintain debt sustainability. … debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.
Blanchard also explains why the IMF deems pension cuts unavoidable:
Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners.
Blanchard recalls the 2012 agreement between Greece and her creditors:
Greece was to generate enough of a primary surplus to limit its indebtedness. It also agreed to a number of reforms which should lead to higher growth. In consideration, and subject to Greek implementation of the program, European creditors were to provide the needed financing, and provide debt relief if debt exceeded 120% by the end of the decade.
How will European governments, parliaments and taxpayers interpret the proviso “In consideration, and subject to Greek implementation of the program”?
The German Federal Office for Building and Regional Planning has produced a map of population growth in Europe by municipality during the period 2001–2011: