From Gazzetta dello Sport’s Serie A scores page on Sunday evening.
Author Archives: P O Neill
Unlocked handcuffs
The above figure, from a fascinating new IMF Working Paper* on sovereign debt restructuring, shows the breakdown of recent EU country public bond issuance by the governing law of the bond contract. Economics has various concepts of the usefulness of tying one’s hands to gain credibility, such as for example by committing to a single currency following a history of high inflation and devaluations. So perhaps the most interesting thing about this chart is that it shows despite the presumed sanctity of sovereign bonds above all other forms of debt, European countries have generally not chained themselves to the (external) mast in terms of governing law. Most countries issue government debt under their own law, meaning that changing the terms of the debt could be accomplished legislatively at any time. This is in contrast to commercial bonds: note that one of Ireland’s rationale’s for servicing unsecured debt in insolvent banks was that the bonds were issued under English law.
Now, as the chart shows, it’s not always true that European Union countries issue public bonds governed by domestic law. If there’s a rough trend in the data, it’s for small and mostly non-Eurozone countries to issue under English law, perhaps in search of the credibility or good signal of such a framework. But for the rest of them, its sovereign debt and we’re not even supposed to discuss default and they’ve pinky-promised that they’ll pay it back. But legally, they could rewrite the terms in the morning.
*Sovereign Debt Restructurings 1950 – 2010: Literature Survey, Data, and Stylized Facts. Das, Papaioannou, & Trebesch, IMF WP 12/203, 2012.
No unsecured funding please, we’re French
The IMF Article IV report for the UK is as one would expect an interesting and data-packed read. But its messages were well-flagged in the concluding statement after the actual visit, and as the BBC’s Stephanie Flanders notes, the weight of its messages come more from the source than the content, which accords closely with the many critics of the Coalition austerity. So one has to look elsewhere for eye-openers in the report, to which we submit the above figure in Box 1, which shows US money market funding exposures to European banking systems. Note their almost complete disengagement from France over 8 months in 2011, a much sharper withdrawal than any other country (they were already out of the high debt countries before then) and on a scale that looks like Lehman proportions.
How was this done without a huge recession in France? Mostly by overseas asset dumps by French banks, but still, this looks like an impressive feat of balance sheet management given its scale. “Headwinds” is a popular phrase, but here there are in real life. Nicolas Sarkozy might wonder about his electoral outcomes had the country bank’s not been navigating these headwinds last year.
It’s sunk costs all the way down
Important Wall Street Journal article reporting that the ECB has changed its position on whether senior unsecured bondholders in insolvent banks can be bailed in:
The ECB’s new stance can also be explained by the different scenarios, including the existence of a bank-restructuring framework for Spain that didn’t exist for Ireland, and the fact that the Irish government, unlike Spain’s, guaranteed much of its banks’ debts.
But a chief reason [finance] ministers decided not to make more privileged bondholders take losses was the Irish precedent, two people said. Dublin has had to pump more than €60 billion, equivalent to around 40% of its annual gross domestic product, into several struggling lenders, forcing it to request a €67.5 billion bailout from other European countries and the International Monetary Fund in 2010.
Forcing senior creditors to take losses in Spain would have raised more questions in Ireland about why taxpayers were forced by the EU to take on the huge burden of repaying high-ranked bondholders.
So: Ireland’s critical error was to protect legacy bondholders who were completely stuck (the money was long since lent), but now that Ireland made that error, we can’t let Spain come up with a better policy because then there would be questions about Ireland.
ECB board member: Euro-bashing is Anglophone overload
Germany’s man at the ECB, Jörg Asmussen, in a speech about monetary policy communication today:
For the euro area and the ECB, the situation is even more peculiar, because the influential “commentariat” comes predominantly from outside the euro area. The big English-language newspapers, the news agencies and wire services that shape opinions in the economic and financial sphere on the Continent are all writing from outside the euro area. There is, of course, nothing wrong with friendly outside advice. And I certainly do not wish to come across as whining and complaining.
But it simply remains a fact: the analysis, discourse and policy prescriptions that are propagated come from the outside. Maybe inevitably, they come with a certain disinterested detachment. As if the outside “spectators” are not affected by what is happening.
And they come with a dangerously narrow and exclusive perspective on the economics of the monetary union. But if the profound political commitment of Eurozone countries to the historical project of “ever closer union” is neglected, the assessment remains superficial and partial. And the suggested policy responses may be biased or naïve.
Why does it matter? Because the discourse influences some of the most important financial markets for the Eurozone. If expectations that have been built up are not fulfilled, if alleged certainties do not materialise, if actions from politicians or central bankers are not forthcoming as anticipated by the “market consensus”, the reaction can be grave: volatility, contagion, all the way to complete market dysfunction. The systemic impact can be major, driving financial institutions, as well as sovereign borrowers into real difficulties.
It doesn’t take much extrapolation of what he says to envisage that at least in the ECB’s mind, there is a SPECTRE-like entity of cackling pundits consisting of Paul Krugman, Martin Wolf, Simon Johnson and others, though who exactly has the white cat sitting in their lap as they press “Publish” is not specified. More substantively. there is a strange symmetry between this view and the pre-crisis gloating of the European Commission that the single currency’s American critics had been all wrong.
Lowballing German growth
The latest IMF annual surveillance report for Germany has been released. Within the constraints of the structure of these documents — by the time they are published, they reflect consensus views — it is quite interesting. The most striking thing, at least for those who don’t follow the German real economy closely, is the estimate of the economy’s potential growth rate: 1.25%. Which, by the way, it is expected to reach by the end of 2012. Nor is any prospect of this changing seen:
Moreover, with the aging of the population, the shrinking of the labor force would adversely affect potential growth over the longer term. In addition, productivity growth in the services sector unrelated to manufacturing, which provides some 60 percent of private employment and about 70 percent of value added, was about a quarter of that in goods production during 2000-07. Investment has also lagged and has contributed to external imbalances despite healthy corporate balance sheet positions.
With this perspective comes a host of conclusions that are not promising for the Eurozone as a whole: with growth about to hit potential, there’s not much room for fiscal stimulus, because even if Germany wanted to stimulate an overheated economy, the ECB would react accordingly by tightening monetary policy. So there’s a lot riding on that 1.25 percent projection.
Potential growth is roughly comprised of labour force growth and productivity growth and it seems odd that an economy of Germany’s dynamism can only eke out such a low number for these combined elements. More concretely, the IMF report notes elsewhere that (1) Germany is picking up increased migration as a result of the Eurozone crisis and (2) there has been a massive current account switch from outward capital flows to inward flows, again as a result of the crisis. In other words, Germany is going to have more workers, and it will invest more. Which sounds like the ingredients of higher potential growth — and thus more room for expansionary fiscal policy and at least accommodative monetary policy.
Thus the irony: the Eurozone crisis is having side effects that undermine the economic rationale for Germany not doing more to help ease the Eurozone crisis. Why could these effects not be incorporated into the growth discussion?
ECB decides now is not the time for complexity
Strangely timed ECB announcement —
The Governing Council of the European Central Bank (ECB) has decided to discontinue the preparations for the Collateral Central Bank Management (CCBM2) project in its current form. In the project detailing phase, a number of challenges in the field of harmonisation were identified and the Eurosystem has decided to address these issues first before proceeding further with a common technical platform. The existing Correspondent Central Banking Model (CCBM) for cross-border collateral management remains in place.
Tracking back through the link trail, it seems that CCBM2 is a project that has existed since 2007, and was being jointly led by the Central Banks of Belgium and the Netherlands. It was focused on unifying the platforms for handling of cross-border collateral posted with the national central banks. Now while the functions of CCBM2 embraces some hot-button issues such as collateral and Target2 balances, this all appears to be a sensible decision that an IT-heavy project was dragging on, getting more complicated than first envisaged, and probably diverting time from other more important tasks. But with the fevered speculation out there about this weekend, did this seem like a good day to bury bad news that could instead be the wrong day to be telling people that the Eurosystem collateral management system has a few holes in it that won’t be fixed for a while?
Encumbered sovereigns
The ECB’s Financial Stability Review for June 2012 is an interesting read. There’s a wealth of data and risk analyses. And one strange blind spot. Chapter III has a discussion of the market conditions for the issuance of senior unsecured bank debt. This market is at a trickle, which shows that whatever the reason the ECB has for insisting Ireland service legacy debt of this type in insolvent banks, it’s not to keep the current market open. Anyway, the chapter contains an extended box on the problem — as the review sees it — of rising asset encumbrance.
The “May the road rise with you” theory of fiscal correction
Germany’s Man at the ECB, Jörg Asmussen, popped up in Riga yesterday at a conference on the theme of the lessons of the Baltic adjustment over the last 5 years for other European countries. His message: it was better to take a huge hit to GDP up front:
IMF signals nervousness about Eurozone exposures
Yesterday, with most of the world already in weekend mode, the IMF website carried a link to an item entitled Fiscal Safeguards. There is no explanatory text with the link. Going into the very brief main document is slightly more informative: