A Plan for Greece

In the FT, Willem Buiter proposes a 5 point plan for a way out of the Greek debt crisis:

  • Greece effectively regains sovereignty and can do whatever it pleases, with some exceptions, see below.
  • Greek debt held by the ECB is bought by the ESM: The ESM extends long-term, low-interest financing to Greece which Greece uses to repay the ECB debt. “Since most of Greece’s other sovereign liabilities have long maturities and deferred interest payments, payments to creditors would fall sharply.”
  • No further financing by the IMF, the ESM or other official sources is extended to Greece.
  • The ECB does no longer accept any Greek government debt paper as collateral or for purchase.
  • Commercial banks in Greece are recapitalized or restructured using funds from the Hellenic Financial Stability Fund and other sources. The ECB bars Greek banks from accepting any Greek government debt paper.

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.

Simplify Your Life

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

  • possessions; time commitments; goals; negative thoughts; debt; words; artificial ingredients; screen time; connections to the world; and multi-tasking

while Slow Your Home offers 21 mostly rather down to earth suggestions:

  • Perform a clutter bust; practice gratitude; rearrange your living room; add some life with indoor plants; keep your dining table surface clear; use the “good” tableware and glasses; create white space; prepare yourself for the morning; find storage for your kitchen appliances; create secondary storage for pantry items; meal plan!; make your bed each and every day; start an exit drawer; start a donate box; check your mindset; get your finances in order; be accountable by recording your simplifying efforts; declutter your wardrobe; daily meditation; start with acceptance; and unplug.

Zen habits suggests 72 steps but helpfully boils the list down to 2 points:

  • Identify what’s most important to you; and eliminate everything else.

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:

  1. Eliminating clutter: Decide what stuff is unnecessary; do quick cleans; do big cleans every season; shrink your wardrobe; stop buying new things you don’t need; downsize (have a small but comfortable home and learn to live with less); create white space; and make your bed every day.
  2. Getting organized: Plan what you can, or embrace your inner chaos; split household chores evenly; streamline your finances; find a place for each thing; prepare quick meals; and simplify your parenting.
  3. Simplifying Your Relationships: Identify bad relationships and end them; make the effort to spend time with people you like; learn to tell people “no;” spend more time alone; and spend less time on social networking.
  4. Slowing Down: Put your phone away; stop reading self-improvement manuals, books, and blogs; work from a manageable to-do list; declutter your digital packrattery; do one thing at a time; leave your work at work; and meditate for 15 minutes each day.

mindbodygreen offers the most concise advice suggesting five simplifying steps:

  • Evaluate your relationships and those that are draining you; disconnect—fully—for one hour a day (at least); sweep every corner of your home; get really, really quiet; and shred your “To Do” list, and make an “I Want” list.

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:

  1. Simplifying stuff: Desk; office; apartment; remembering things.
  2. Personal finance: Relax, be optimistic; fewer things, more money; no debt; courage; wealth is in the eye of the beholder.
  3. Time: Focus; less than perfect; say “no”; slow down; hide.
  4. Health: Happiness; flow; fitness; food; sleep.
  5. People: Networking; parents; death; no envy; don’t judge.
  6. Relationship: Talk; no drama; work-life; sex; plan for old age.
  7. Self: Your objective; strengths; no bad conscience; enneagram.
  8. The book’s new edition also features spirituality: Spiritual place; pray; empower routine work; engage your soul.

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.)

Why Do Sovereigns Repay External Debt?

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.

IMF Research and Greece

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

  • large scale debt relief, resulting in a debt quota of 50%,
  • a scale down of the banking system, and
  • a primary surplus quota of 0.5% over the coming years.

Olivier Blanchard, IMF chief economist, disagrees.

Top Bank Executives Sell Shares

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 European Court of Justice’s Verdict on OMT

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.

 

The IMF on Greece vs. the Creditors

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”?

Consistent CAPE Ratios

In a letter to the editor of The Economist, Jeremy Siegel points out that the earnings series underlying Robert Shiller’s CAPE model has changed over the years. He argues that

  • mark-to-market accounting implied increased volatility of reported earnings, in particular during the great recession;
  • this leads to an overstatement of the CAPE ratio and underprediction of stock returns.
  • “The Shiller CAPE ratio remains the best tool for predicting long-term real stock returns. When a time-consistent series of corporate earnings, such as those published in the national income accounts are used instead of GAAP earnings, not only does the predictive power of the CAPE ratio improve, but the current stockmarket does not appear nearly as overvalued.”

A StarCapital note on another in/consistency issue.

Greece Benefited from Troika Support

In a Vox column, Jeremy Bulow and Ken Rogoff argue that perceptions of Greek net debt repayments over the last years are wrong.

[C]ontrary to widespread popular opinion, the net flow of funds (new loans and subsidies minus repayments) went from the Troika to Greece from 2010 to mid-2014, with a modest flow in the other direction after Greece stalled on its structural reforms.

They also make some other points:

  • Cash withdrawals, non-performing loans and capital losses in the wake of the 2012 Greek government debt default hurt the Greek banking system.
  • Mistrust of the Greek government by European partners and Greek citizens slowed down the recovery.
  • Greece has incentives to avoid a default on its official loans since default might trigger lower EU subsidies; the loss of other benefits of EU membership; less ELA funding and other forms of financing at below market rates. (Harris Dellas and I have argued the same in our paper Credibility for Sale.)
  • As Greece approached the point of being a net payer its bargaining stance hardened.

Secession of Territory

The constitutions of 23 countries specify how territories may secede, according to Constitute. Here is the clause from the Liechtenstein constitution:

Individual communes have the right to secede from the State. A decision to initiate the secession procedure shall be taken by a majority of the citizens residing there who are entitled to vote. Secession shall be regulated by a law or, as the case may be, a treaty. In the latter event, a second ballot shall be held in the commune after the negotiations have been completed.

Rethinking Inflation Targeting

In a Project Syndicate post, Axel Weber argues that inflation targeting needs to be rethought.

Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money. Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that. Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard. … intermediate targets … could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices. … Short-term consumer-price stability does not guarantee economic, financial, or monetary stability.

America’s World-Wide Justice System

The Economist critically reports about the US legal system’s international reach. The article identifies several reasons for the activity of American prosecutors:

  • The US feels entitled to run down anybody who directly or indirectly uses services of the US banking system “or plans an illegal scheme on its soil.”
  • Persons may also be charged on the basis of violations of the “Racketeer Influenced and Corrupt Organisations Act” or the “Travel Act.” The latter stipulates that it is illegal to use “any facility in interstate commerce to carry out an illegal activity.”
  • Plea-bargaining is common, in contrast to Europe. This helps to build cases bottom up.
  • While European justice systems emphasize “comity”—not interfering with other countries’ legal affairs unless war crimes are concerned—this is not the case in the US.

In another article, The Economist reports about the US Treasury’s

powers to act against those who facilitate financial crime, anywhere in the world, by labelling them a “primary money-laundering concern”

based on section 311 of America’s “Patriot Act” of 2001. The report suggests that the section is used as a political instrument and that double standards apply. Moreover,

[i]t is an administrative procedure, not a judicial one. Only the Treasury knows how much evidence it has, and how reliable it is.

Greece Delays Payment of First IMF Tranche

Kerin Hope and Peter Spiegel report in the FT that Greece will delay payment of the first tranche of June payments it owes to the IMF:

Following a rarely used procedure permitted under IMF rules, the Greek government intends to bundle all the payments it owes in June totalling €1.5bn and transfer it at the end of the month.