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.

Costs of Negative Interest Rates

James McAndrews of the Federal Reserve Bank of New York doubts the merits of negative interest rates. He lists the following types of complications:

  1. Avoidance
  2. Legal and operational frictions
  3. Economic frictions
  4. Pass-through to market rates, and retail v. wholesale
  5. Effects of negative rates on the health of financial intermediaries
  6. Signal of deflation
  7. Public acceptance

Macroeconomic Policy

In a Vox column, Olivier Blanchard distills ten takeaways from an IMF conference on “Rethinking Macro Policy. Progress or Confusion?’” He lists them under the following headings:

  1. What will be the ‘new normal’?
  2. What the new normal will be matters a lot for policy design
  3. Can we hope to limit systemic financial risk?
  4. Should monetary policy go back to its old ways?
  5. Instrument rules
  6. Macroprudential tools or financial regulation
  7. Should central banks keep their independence?
  8. Little progress on the design of fiscal policy
  9. The complex effects of capital flows
  10. How much can the international monetary system be improved?

The Wisdom of the Crowds: Medicine

The internet helps to reduce information frictions. In finance (see here). All over the place. And in medicine: For patients who seek a more reliable diagnosis, Crowdmed offers access to thousands of “medical detectives,” professional and otherwise. Here is how it works:

  1. Complete our online patient questionnaire and upload your medical information, all of which can be done anonymously.
  2. Decide how long you want your case to be online and how you wish to reward the volunteers who help solve it.
  3. CrowdMed’s patented prediction market technology then collects and filters diagnostic and solution suggestions from the Medical Detectives who participate in your case.
  4. You can invite our entire community to help, or limit participation to our top case solvers.
  5. At the end of this process, you’ll receive a detailed report containing the best suggestions to discuss with your doctor.
  6. Payment is a snap, and if CrowdMed results aren’t accurate you get your money back.