Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro.
By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".
The medium-term outlook (for Ukraine) is sensitive to both external developments and policy responses. A benign external environment, featuring even higher steel prices and additional FDI, could produce growth in excess of 7 percent, but inflation could prove hard to control under a peg. Under an adverse external outlook, by contrast, the peg could lead to external sustainability problems. IMF 2006 Article IV Consultation Staff Report (February 2007)
Ukraine’s economy is in trouble, there is no doubt about it. The cost of protecting debt against a sovereign default by Ukraine’s government soared to a record on Friday, following the arrival of the twin storm of both political and financial uncertaintly. On the one hand the country was thrown into something of a political crisis after Ukraine president Viktor Yushchenko announced (only to have his authority to do so subsequently challenged by his perpetual rival Julia Tymoshenko) that he was going to call what would be the country’s third parliamentary elections in as many years in just the very moment the central bank found itself forced to step in and take control of the country’s sixth-largest bank following a run on deposits and a rout on the stock market while, on the other, the country’s currency – the hyrvnia – went for a nose-dive. With the benefit of hindsight the IMF forecast cited in the paragraph above has turned out to extremely prescient. During the “benign external environment stage” Ukraine’s economic growth has, indeed, been substantial, steel prices have been high, and FDI flows (especially into the banking sector) strong. As a result – and as more or less forseen, inflation went through the roof. Now we have entered the “adverse external environment” stage, with steel prices falling while bank and other external finance flows reverse direction. The sustainability issues have now become evident, and the coming days are going to be critical. Continue reading →
“We do not have a federal budget, so the idea that we could do the same as what is done on the other side of the Atlantic doesn’t fit with the political structure of Europe,â€
Jean-Claude Trichet, commenting last week on the Eupean “summit” in Paris last Saturday
“If you concentrate on California or Florida, it is not at all like Massachusetts or Alaska……It is the same in our case and we have to make a judgment what is good for the full body of the 320 million people” in the euro area.”
Jean Claude Trichet in an interview with Ireland’s RTE radio last July, following the controversial decision to raise ECB interest rates to 4.25%
“Europe gives up on a joint rescue plan against the crisis,” since the EU “lacks the necessary institutions to respond as the United States has done”.
Spain’s El Pais yesterday (Sunday 5 October)
For Europe, this is more than just a banking crisis. Unlike in the US, it could develop into a monetary regime crisis. A systemic banking crisis is one of those few conceivable shocks with the potential to destroy Europe’s monetary union. The enthusiasm for creating a single currency was unfortunately never matched by an equal enthusiasm to provide the correspondingly effective institutions to handle financial crises. Most of the time, it does not matter. But it matters now. For that reason alone, the case for a European rescue plan is overwhelming.
Wolfgang Munchau, The Financial Times, Monday 6 October 2008
The euro experienced its biggest one-day drop against the yen in seven years this morning as the deepening credit crisis prompted European governments to pledge bailouts for troubled banks while stopping short of giving any concrete programme of coordinated action. The 15-nation currency declined to a 14-month low against the dollar – hitting $1.3598 at 8:52 a.m. in London – and to its weakest in two years versus the yen after European leaders meeting this weekend avoided announcing any plan that would be equivalent to the U.S.’s $700 billion bailout. And the reason for the euro’s fall is clear, the ability of the eurozone countries to apply a concerted startegy to address the problems in the banking and financial system has been called into question, and nowhere is the huge gap between the currency’s ambition and its political architecture so evident as it is in the above two quotes from Jean Claude Trichet. When push comes to shove, the US Treasury, as we have seen last week, does not concentrate on the needs of Florida or Massachusetts, but on those of the entire United States, and who, may we ask is in a position to concentrate at this point on the financing needs of the whole 15 member eurozone-area, since trying to manage economies which are one organic whole by splitting them analytically into monetary and fiscal entitites simply isn’t going to work, and it never was. Let me expain. Continue reading →
Well the action in Russia this week has moved on slightly, and the damage has started to spread from pressure on the domestic stock market (accompanied by capital flight) to the real economy – via a very rapid tightening in credit conditions for Russian domestic users. We are also seeing a rapid slowdown in Russian manufacturing industry as internal demand slows while the inflation-driven decline in cost competitiveness continues to make imported products (where available) an attractive alternative to the home produced variant.
Emerging-market bonds have been generally falling this week as the U.S. Senate’s approval of a $700 billion bank rescue package did little to revive demand for riskier debt, and Russia has, unsurprisingly, been among the worst affected. The extra yield investors demand to own developing-nation bonds rather than U.S. Treasuries rose 8 basis points yestreday to 4.14 percentage points after widening 12 basis points on Wednesday, according to the JPMorgan Chase EMBI+ index. At the same time the MSCI Emerging Markets Index of stocks fell 0.3 percent to 783.79, its lowest point in four days. While such data readouts do not of course exclusively define the outlook for the Russian economy, they do give us a good indication of the context within which economic activity occurs, and they also give us a very clear measure of the current level of global risk sentiment whose influence, as we will see below, lies right at the heart of the immediate shock that is hitting Russian households and businesses. Continue reading →
“Happy families are all alike; every unhappy family is unhappy in its own way”
Tolstoy
President Dmitry Medvedev’s recent decision to inject $20 billion into Russia’s flagging stock markets – which were down nearly 50% from last May at the time – together with the $60 billion odd dollars of support injected into its groggy banking system have served to draw attention to the fact that it hasn’t only been “over thereâ€, on the other side of the Atlantic, that the financial turmoil has been busy raging. This simple point was further emphasized, if need there was for it, by the fact that both the Russian bourses – the MICEX and the ruble denominated RTS – were only working on a “now you see me now you don’t” basis for the best part of a week in mid September. Stealing an idea from Tolstoy’s Anna Karenina, might we not say that every financial boom is (boringly) the same, while every financial crisis is different in its own special (and intriguing) way. What just happened in Russia merely serves to prove Tolstoy’s point. Continue reading →
Well some times I agree with Wolfgang Munchau, and sometimes I don’t. This is one of the occasions when I do, especially the following passage which can be found in his Financial Times op-ed this morning:
“Some degree of competitive adjustment is probably needed but the huge scale of the shock that is unfolding in Spain will almost certainly require a macroeconomic response that Spain cannot deliver on its own……….So what actions would be needed? In the very short run, a transfer mechanism to provide help for countries in severe distress. Of course, any transfers would have to come with IMF-style conditions attached.”
Basically this is broadly in line with what I was suggesting in my RGE Europe EconMonitor piece – What Is The Risk Of A Serious Melt-Down In The Spanish Economy? – last Friday. Essentially the ECB has now gone about as far as it can, and the EU Commission in some yet to be determined way needs to play the role of the US Treasury (we lack the appropriate architecture at this point, but still), and inject cash – rather a lot of it. This is an EU problem and not simply a Spanish one since the source of the bubble lies very clearly in earlier monetary policy over at the ECB (or in deficiencies in the way in which the “one size fits all policy has been administered, see in particular “How to prick local housing bubbles in a monetary union: regulation and countercyclical taxes” by Alan Ahearne , Juan Delgado and Jakob von Weizsäcker – also on RGE last Friday).
It appears the Spanish cabinet is now divided between one group – lead by Industry Minister Miguel Sebastian – who favours intervention to rescue ailing builders – and another – lead by Economy Minister Pedro Solbes – who do not favour intervention.
My view is that a substantial, but as of yet indeterminate quantity of money (possibly in the region of 300 – 500 billion euros) needs to be injected urgently into the Spanish banking system, either directly (by buying cedulas hipotecarias outright) or indirectly by buying up and closing down builders as part of a “restructuring programme”, and this needs to be done by the EU equivalent of the US Treasury (whatever we decide that that actually is) and not by the ECB. Thus I am neither with Sebastian (who would, I suspect like to save the builders) or with Solbes. Of course, as Munchau indicates, any such intervention would need to come with all manner of conditions attached (a restructuring of the whole Spanish mortgage situation, to put the banks back on a sound footing, being just one of these), and this would mean that the Spanish government would to some considerable extent lose control of its own internal affairs. But this possibility was already implicit in the creation of the eurozone in the first place, so I suppose you could say that one day or another this situation had to arise. And now it has. So let’s get on with things and take some decisions.
You can find the relevant part of Munchau’s editorial below the fold. Continue reading →
“Look, Doctor, he’s just faking……. Even now in the hour of his death he has to trick us.”
The opening sentence: ‘There’s a long silence, and then I say …’ indicates the three functions of this book. It is an attempt to find a self through utterance, after a lifetime of non-communication; this was prompted by the wish to break a writer’s block and involves a search for a discursive mode in the psychoanalytic situation, the so-called ‘talking cure’ in which one participant often remains silent.
Ronnie Fraser
Upon reading Carlos Fuentes’s novel La muerte de Artemio Cruz (1962) for the first time, many readers find themselves confused, frustrated, and even lost, due to its complex narrative structure.
Kathleen Cunniffe
‘As far as I am concerned, this is … the most complex crisis we’ve ever seen due to the number of factors in play’
Spanish Economy Minister Pedro Solbes speaking last week to Spanish radio station Punto Radio
Quod erat demonstrandum as far as I’m concerned on that account (and if you don’t agree with me please feel free to go over and post whatever comment you like). No, here I am speaking to those people – and especially Spanish people and other South Europeans who may understand all this much more than North European will do – who recognise that there is a problem, and a big one down here in the eurozone’s fourth economy (who the hell just blew that hole in the side of the ship!), and who are trying like I am to understand how we got here, and how we seem to be so incapable of reacting and rising to the challenge of the moment.
Now If this seems like a rant, I assure you it really isn’t meant to be one. It is simply an expression of frustration at the kind of blind trust in fate that seems to grip all of those I see around me at the moment (“they must know really what is going on, mustn’t they”). As an Italian reader to my Italy blog said after another rant-type comment, “I love Italy, I really do. If I didn’t, I would not waste my time on this.” Well, I am Catalan. I couldn’t exactly say – keeping a straight face – that I *love* Spain, but what happens to Spain does matter to me, and as my Italian commenter friend said, I wouldn’t be writing all this if it didn’t.
The Death of Artemio Cruz is an everyday story of love and lust in Mexico, a tale, as they would say down in that part of the world of “chingones y chingados “. Now it is widely accepted among critics of the Fuentes’ novel that our hero Artemio serves as the personification of a whole country, and what I wish to do in my “reincarnation” of the character of Artemio Cruz in the form of Jose Luis Rodriguez Zapatero – the president locked “a cal y canto” behind the tightly closed doors of his Montcloa palace (blindado contra la realidad would be the expression that came to mind, rather like Aznar cruising round in his limousine, obsessed by ETA while quietly neglecting the real and present threat of Islamic Fundamentalist Terrorism) – is raise the issue about what it is exactly in Spanish culture which leads to flight and denial as the first reaction to any impending unpleasant event. I mean it wasn’t as if this was the first time. There is no need to mention I think what happened after 11 March and then there was that nasty little incident of the Prestige Oil Tanker – during which the tanker was quietly towed out to sea in the vain hope it would reach Portuguese waters before the problem became too evident – oil sir, I see no oil. What was it we said then? Oh yes, nunca máis!
Well the problem seems to be a perennial one, and it’s high time it was addressed.
The Death of Artemio Cruz is a novel where the broad sweep of 20th century Mexican history is viewed through the prism of one man’s life. Cruz starts out as an idealistic young soldier fighting in a Mexican Revolution which is dedicated to the redistribution of land and an attempt to give the peasants a decent life. By 1919, the successful revolution has deteriorated into a series of confusing and bloody skirmishes between rival rebel factions that never truly end until 1942. There, but for the grace of god, go all of us.
I learnt in sociology class that the south of Europe is a collective society and the north individualistic, but I think it’s the opposite!
Young Portuguese economist friend of mine who currently works in London
“The truly annoying Italian habit of only taking care of one’s own clan will deter any meaningful resistance to a country downsize.” Italian Commenter on my blog
Now the start of the novel finds an elderly Artemio lying awake on his deathbed, gripped by repeated spasms of excruciating pain, and terrified to open his eyes for fear of what it is he might get to see if he does. After years of debauchery and loose living (shade’s of Oscar Wilde’s Dorian Gray here) the thing which seems to frighten him the most is the possibility he might get to take a look at himself in a mirror. Of course, there are comparisons and comparisons here. Spain’s economy is far from moribund, nor is it in its death throes. But Spaniards are suffering, and the process of adjustment is painful, and if something isn’t done soon the problem might well get a hell of a lot worse.
Of course it’s easy to criticise here, since the problems Zapatero is reluctant to look too closely at are serious ones, and worse still, it isn’t at all clear that anyone really knows what to do about them at this point. But why the hell doesn’t the man come out of what looks to everyone else to be a “dream”?
Will The Last One To Close Please Turn Out The Lights, I Can’t Find The Switch
Meanwhile we learn from Jose Luis Malo de Molina, director general at the Bank of Spain (speaking at a recent conference in Valencia) that the number of new homes which will be completed in Spain in 2008 will beat all previous records (I said this was a system which was slow to react), simply piling one more house after another in order to add to that glut of newly completed homes that is already idly languishing and casting its long shadow over the Spanish property market. Muñoz’s explanation for this phenomenon is simply that “the real estate sector can’t turn around quickly, it works in the medium and long term, so this year the properties started at the end of 2005 and beginning of 2006 will be completed, which means the number of new properties on the market will hit an all time high.†As I say, “just in time” may be an idea that has entered the heads of the more agile companies like the textile consortium Inditex, but most of Spain is a very, very long way from being able to offer an agile response. On the anecdotal front, a friend of mine recently went to visit family homes in the North West of Spain. In Vigo he spoke to the owner of a brick factory, and in Leon someone who had a quarry. In both cases production was continuing (there is simply no on/off switch here) but the inventory already had piled up to the extent of being now prepared to satisfy normal requirements for the whole of 2009 (in both cases), and of course, in 2009 requirements will not be normal, since housing starts in 2008 have collapsed to a forecast of below 200,000 (down from 600,000 plus in 2007).
Fuentes devotes two entire pages of his novel to such phrases, all of them derivatives of chingar – the word that – according to Octavio Paz in El laberinto de la soledad – best defines all Mexicans. I will not descend here to making my own listing of the various Spanish derivations of “joder” (nor even make the most obvious allusion to that ubiquitous warcry of the Cacique, que se……), but the similarity is indeed striking, even if the modern Spaniard treats his status of “jodido” in a rather more self-mocking and ironic fashion than the Mexican does – as best depicted recently by the dignified rout of the Spanish Tercio rabble at the hands of those ever so elegant French Hussars in the wonderful closing scene of DÃaz Yanes’s Alatriste.
On the operating table, the surgeons open Artemio Cruz up only to find that his disease is too advanced for them to help. He has gangrene and a perforation, eaten away from the inside. He dies on the operating table.
So I will close this post as I commenced it, with yet another reference to the magical world of Latin American literature. This time my reference will be to Jose Luis Borges, who – in a rather original and creative allusion to what is known as the prisoners dilemma – tells us the story of two villainous rascals, eternal rivals, who – under sentence of death – are offered one last wager: rather than forlornly accepting their fate (cap cot) and acceding to a conventional execution they can go gloriously, by agreeing to have their throats slit, not one by one but simultaneously, just to see who is able to run the farthest after the first cut. Immortality, rather than fame, in an instant.
Now I mention this rather gory since tale I can readily anticipate the feelings many will have on reading my proposals to cauterize the immediate wound and stop the now impending haemorage of blood – I am at the end of the day arguing that it is necessary to inject money – and I do mean rather a lot of money – into a banking and construction system which many will want to argue is largely responsible for Spain’s present distress (you know, the chingones and the chingados). Indeed, having made a good deal of money out of the operation, many will feel that these are the very people who should now be forced to don that sackcloth and ashes costume which so behoves them (actually the way things stand they are much more likely to find themselves reduced to a sporting a loincloth, but still). I understand why many ordinary Spanish people may have such feeling, but I do think this is a time for cool heads, and that what is most needed here is an extreme dose of pragmatism coupled with a lot of emotional intelligence. There is no point in agreeing to have your own throat slit just to see people you don’t like have their’s slit first.
The Spanish representative was busy trying to allay fears that European banks have become over-dependent on European Central Bank liquidity injections and in particular trying to deny that the Spanish banks are gearing their operations to take advantage of the extra help which has been made available.(In other words while the good Rodolfo was dando-nos a todos verguenza ajena, González-Páramo was simply doing his job, and dando la cara for Spain).
If González-Páramo was having to work hard to keep the Spanish end up, this was in part a result of the growing concern being expressed that Spanish banks are creating ever riskier collateral to swap with the ECB, much riskier collateral than the central bank ever envisaged. The fear is that the ECB has already accumulated too much risky collateral, and that the funding is being used to far to great an extent to keep “business as usual” going, rather than as bridge finance to enable a sizeable restructuring of the Spanish economy (which was, I think, the original intent). Just such a view was expressed earlier this month by Yves Mersch, Luxembourg’s central bank governor – who, like González-Páramo, sits on the ECB’s governing council – when he indicated that the type of collateral now being accepted by the ECB was “a matter of high concernâ€.
Since the global financial market crisis erupted last year, Spanish finance houses have been able to fall back on the ECB’s liquidity operations, available to a large number of banks on the basis of a broad range of collateral, including some mortgage-backed securities. Residential construction and public works were responsible, at the height of the boom, for an incredible 18% of Spain’s GDP and for 13% of total employment. All this now has to change, and is the major macroeconomic restructuring which will be the end product of the financial crisis. In the future Spain will be able to depend a lot less on household borrowing and consumer consumption to drive growth, and will now need to depend to a considerable extent on exports. That is the sea change which is (or should be) underway.
But I will not dwell further on all this here, since my intention is only a short post, and one intended to make a very simple point: our horizons about what really interests us, and what is really important to us is actually pretty restricted. For all the hard work being put in at the ECB to influence inflation expectations, they haven’t it seems to me been able to even generate sufficient interest in Spain that the proverbial man or woman in the street knows the name of the person taking the important decisions (to some extent) on their behalf.
For those of you who have the appetite to dig a little deeper into what is actually happening to the Spanish (yawn) banking system, I will simply refer you to the much longer post I have on the topic on my Spanish economy blog. And for those of you who could just as easily live without going further, well as they say, dance on, and what better way to while away your time doing that than by taking dancing lessons at the hands of Spain’s very own – and why not, let’s be honest, one and only -Rodolfo Chiquilicuatre.
Meanwhile, watch out London, watch out Frankfurt, here comes the Spanish banking armada!
Does anyone happen to know offhand the “official” dollar rate of the Ukrainian currency, the Hryvnia? I am asking this question since clearly over at the central bank they are having difficulty deciding at the moment, since – like the legendary character Hydra – they seem to be speaking with two “heads” at the same time, and the only question I can ask is: would the real representative of the Ukraine central bank please stand up!
This issue unfortunately is neither a small nor a comic one, since Ukraine is currently running a 30% plus annual inflation rate, and letting the currency rise against the dollar is one of the few serious anti inflation policies anyone has on the table at the present time.
Essentially the story to date is that the Ukraine central bank had been keeping the “official rate” for the national currency – the Hryvnia – at 5.05 to the dollar (within a broader target band of 4.95-5.25) since August 2005 – although traders have generally been saying that the bank effectively stopped intervening around February-March. However during the last 24 hours the “official rate” has become a highly contested issue, with one part of the bank’s monetary policy structure suggesting that the official rate has now been revalued to 4.85 to the dollar, while another part is denying this and maintains the rate is still 5.05. Basically one part of the structure is challenging the right of another to take decisions.
Of course the reaction of the financial markets to this state of affairs is not that hard to predict (at least in the immediate term), and Ukraine’s hryvnia fell the most against the dollar in a single day in over eight years yesterday, falling 4.01 percent on the day to trade as low as 4.7875 per dollar by 6:04 p.m. in Kiev, down from 4.5550 late Wednesday, making it the worst performer among the 178 global currencies being tracked by Bloomberg yesterday. Continue reading →
Slovakia today won EU approval to adopt the euro on Jan. 1 2009, thus becoming the 16th member of the European single currency zone. The EU Commission announced today on its Web site that Slovakia had reduced both the fiscal deficit and inflation sufficiently to qualify. At the same time the Commission announced that they were terminating the excess deficit procedure, a move which is a mandatory to joining the euro region.
EU finance ministers must now endorse the commission’s recommendation in July. Not everybody is entirely convinced it seems, and the European Central Bank still has “considerable concerns” about the sustainability of the inflation path, according to a report published by the bank today in Frankfurt. I share many of these concerns – as I have already explained at great length in this post here.
Even in Slovakia itself people retain their own reservations as according to a survey conducted by the Slovak Statistical Office between March 1-7 some 72 percent of respondents had a negative attitude towards the proposed change due to the perception that – in a way which is similar to what happened in countries like Spain and Greece after adoption – prices may well rise faster than anticipated and household budgets become strained.
However I do think that today is really not the time to pursue these concerns, since at this point they would smack more of sour grapes than of anything else. I would really simply like to take this opportunity to congratulate Slovakia on all the hard work they have put in to preparing their membership bid, and wish them every success in the introduction of what now looks like it is soon set to become their new currency.
“To ensure that the adoption of the euro is a success, Slovakia must pursue its efforts to maintain a low-inflation environment, be more ambitious with regard to budgetary consolidation and strengthen its competitiveness position,” EU Monetary Affairs Commissioner Joaquin Almunia
Of course eyes well beyond Slovakia will now be watching the month by month movements in the Slovak CPI, since should the more optimistic expectations on the future inflation path not be fulfilled, then this will only make further applications from other EU10 countries – Bulgaria, Latvia, Lithuania, the Czech Republic, Estonia, Romania, Poland and Hungary – much more difficult in the future.
What really strikes me about the slowdown we are currently seeing in the eurozone economies is not so much what we are seeing, but how we are seeing (or if you like interpreting) it. The core of the issue is to be found – as is ever the case – in the details. And first and foremost among these details is the way in which inflation is so obviously crimping any attempt on the part of the ECB to use conventional monetary policy (namely lowering interest rates) to help the ailing Spanish (see here) and Italian (see here) economies. As a result the Sabre rattling continues in Frankfurt and the euro continues to move onwards and upwards, touching an all time high of $1.6019 yesterday (for a fuller exploration of some of the issues which arise here, see Claus Vistesen’s recent The ECB – One Play-Book, One Page, One Purpose post).
It also doesn’t seem to me to be without some significance that what sent the euro off upwards again yesterday was a comment from French Central Bank Governor Christian Noyer.
“Our big problem is to ensure that inflation returns below 2 per cent next year,†Christian Noyer told French radio. “If needed, we will move interest rates.â€
