Why You Need Devaluation – An Open Letter To The People Of Estonia

Posted on by

The macroeconomic data coming out of Estonia in recent weeks are truly shocking even in the context of the ten percent annual drop in GDP for 2009 that most observers are now forecasting. Perhaps the most evocative number of all is not the 27% year on year drop in industrial output registered in January, but the announcement this week that Estonia’s registered unemployment rate rose to a record 7.4 percent during the first week in March, with a total of 47,774 job-seekers registering with the unemployment offices, up 3,019 in a week. Of course, for many outsiders these are not large numbers, but then Estonia is not a large country. Still this was the highest number since the Labor Market Board started disemminating data in 1993 (although not as measured by Eurostat, which uses a different methodology). The level was up from 7.1 percent at the end of February and 6 percent in January, although the important thing is not the volume of unemployment, but the rate of its increase.

At the same time it is estimated that nearly 250,000 Estonians are currently living in homes whose market value is insufficient to cover the outstanding mortgage loans which their owners have taken out, making “exposure risk” a growing problem for the country’s banks. During the boom, house sale transactions were commonly financed with a 90% loan to value (LtV) ratio. This is a very dubious practice at the best of time, but in the face of a sharp fall in both house values and wages it becomes well nigh disastrous. Continue reading →

Here Hare Here

Posted on by

To the National Theatre for David Hare’s one-man show on Berlin. I wasn’t at all sure what to expect, but I didn’t expect this. Quite simply, it was embarrassingly, exasperatingly awful.

Hare, in person, is a fan of the southern English amateur/eccentric shtick. He makes much play of not knowing his way around despite having regularly visited Berlin, as he tells us with monotonous regularity, since the early 1970s. Couldn’t he get a map? Or learn some German? But it’s crucial to the amateur/eccentric thing that your put-on ignorance isn’t read to affect your status. In fact, it wouldn’t work if it didn’t sit over a vast pool of arrogance and self-satisfaction; pretending to be a buffoon is a luxury for those who don’t have to worry about being believed.

Self-satisfaction. Yes, there is a lot of this. We hear a hell of a lot about his brilliant friends, that some of them are French government ministers, that he gets free tickets to the Berlin Philharmonic. He works through a repertoire of annoying gestures under his Michael Heseltine hairdo. And so much about buying property. Yes, now. Yes, from a well-known Marxist. But it wouldn’t be so bad, if it wasn’t for the content.

Berlin was the centre of the confrontations of the 20th century. Hitler, then Stalin. Wall. Wall gone. Nobody wants to talk about it – imagine! The RAF bombed it a lot. The Nazis had several million Jews murdered. There are lots of new buildings, and some of them are not to his taste. But now it’s full of young Europeans who appear to be having fun. People tend to leave home and go there and find ways of life that their parents don’t understand (how does this differ from, say, San Francisco or Bombay?) The bastards.

Gripping stuff, eh. There was worse, though – a succession of tiresome jokes about pompous and patriotic Frenchmen, bureaucratic Germans, ignorant Brits, some truly weird politics, and some observations about Berlin scenes that were factually impossible. We got a lot of stuff about Tempelhof airport without hearing that he can’t always fly there, as he claims, because it’s been shut for three months. The Theater am Schiffbauerdamm is apparently a huge domineering building, rather like the Comedie Francaise, and it stands opposite a giant shopping mall.

None of these statements are true; I’ve been there, although like Hare I’ve never been to a play there. I don’t know if the comparison with the Comedie Francaise is valid. The theatre, for what it’s worth, is not at all huge and is situated discreetly behind trees. Am Schiffbauerdamm is a quiet river embankment – the name means “On the Shipbuilders’ River Embankment” which ought to be a clue, but then, Hare’s German is atrocious – with some nice restaurants, but which faces towards the huge railway viaduct that carries both the great east-west main lines and the S-Bahn through the city centre. (Hey, look at the overhead imagery.) In fact, the railway station the theatre looks across to (Friedrichstraße) was once the major crossing point between West and East Berlin, and far from a shopping mall, part of the station was once the border-control checkpoint known as the Hall of Tears (Tränenhalle).

Hare goes for a walk down what he refers to as the Ost-West Achse in the Tiergarten. Well, it’s been called the Straße des 17 Juni since 1953, which is quite important. When he comes to discuss the building of the wall, he attacks Prime Minister Harold MacMillan for not “calling for insurrection in the East”. The street name should have set him sensible. There was an insurrection in the East, on the 17th of June, 1953, when the workers of East Germany rebelled against what called itself the Socialist Nation of Workers and Peasants, the police vanished, the Party network vanished, and Walter Ulbricht’s government called the Red Army and the KGB in to save themselves. The rebels were crushed under the T-34 tracks, in some places literally. After that, and the Hungarian revolution of 1956, the CIA dreams of “rollback” (very popular with Joe McCarthy) were definitively consigned to the archive. After the Bay of Pigs in 1961, this extended beyond Europe.

What could MacMillan have achieved with this calling-for? Quite a few East German policemen and soldiers deserted rather than build the wall, but they had plenty more. The ones who did didn’t need any speeches on the radio, and one wonders if speeches would have moved the others. As Carlo Levi said about southern Italy under Mussolini, all that came from Rome were speeches on the radio, and the only thing MacMillan could have offered would have been speeches on the radio.

He could probably have got more people locked up or shot, in the best-case scenario. In the worst case, well – this was 1961, when worst-case scenarios were worse. During the Cuban crisis a year later, MacMillan and his defence secretary Peter Thorneycroft kept the leaders of RAF Bomber Command on a short leash, refusing to let them disperse the V-Bomber force for security because this would be an unmistakably provocative gesture, on bases several flying hours closer to Moscow than those of Strategic Air Command.

Hare is a long-time unilateral nuclear disarmer and pacifist. Does he really believe that what the international scene of 1961 needed was more provocation of a superpower by a major nuclear power? What on earth is he on about?

There is a broader issue here; the phrase “to call for” repels me more and more. Its function is to get you out of responsibility for your opinions. I didn’t want war – I merely called for solidarity with the US in fighting terrorism. It also acts as a way of escaping the healthy discipline of detail. It is telling that it is fashionable with the neoconservatives, the Decents, and the hard left all at once – all the retailers of the goods dream-hungry youth demand, according to Leszek Kolakowski.

I call for action on Darfur! But I say nothing of the mountainous problems of projecting force into the roadless and railless interior of western Sudan, nothing of whose infantry are to actually go and get killed there, nothing of who exactly they are meant to kill or threaten effectively to kill, or for what aims. I just called for. Let’s decommission this phrase, like a worn-out nuclear power station – switch it off gracefully, sever the lines and fill the damn thing with concrete, and watch it carefully for a hundred years to see nothing leaks out.

For a slightly more constructive critique, my partner suggested Hare retitle the show as being “Meditations on Flight No…” where the number is the BA flight from London to Tegel. She’s right – everything about it that wasn’t obvious, trivial, or simply wrong was more interesting as an account of international art-bureaucrat culture than of Berlin, or London.

It’s Official, The Hungarian Banking System Is Sound

Posted on by

It all started as an idle conversation in the loo. The next thing The National Bank of Hungary (NBH) and the Hungary’s Financial Supervisory Authority (PSZÁF) had to come out in public to declare that they were closely monitoring the status of the financial system, adding that from what they could see from their monitoring the Hungarian banking system is sound, and depositors’ money safe.

The problem was not the loose talk in the lavatory (at the Hungarian Banking Association apparently) but the fact that that august body then sent out a letter, warning its members about the existence of “groundless rumours” that banks were planning to freeze deposits on 13 March. Possibly this is the quickest way to start a run on bank deposits known to humankind. Continue reading →

The IMF apologizes on Gordon’s behalf

Posted on by

As mystery continues to surround the identity of the person in the charge of the UK economy since 1997, the IMF has come up with a carefully phrased admission that it got the UK and US economies wrong in its assessments over the last few years.  What they politely don’t say is that, had they come up with any assessments less positive than they did, the respective Treasuries would have talked them out of it. 

Continue reading →

Are Austria’s Banks More At Risk Than Their Italian Counterparts?

Posted on by

“For Austria, the actual crisis is yet to come. The decline of the eastern European economy will hit Austria in 2009″.
Peter Eigner, Professor of economic history at the University of Vienna”

The yield difference, or spread, between 10-year Austrian securities and benchmark German bunds has been rising substantially of late, and hit 137 points on Feb. 18, the widest yet recorded (see chart below). At the same time Austria now has a higher default risk than those Mediterranean “laggards” Italy, Portugal and Spain, at least according to credit-default swap prices as quoted by CMA Datavision. Austrian swaps were trading at 253.3 basis points on March 3, compared with 17.5 points 12 months ago. That means it costs 253,300 euros a year to protect 10 million euros from default for five years.

Continue reading →

And quiet falls the dram

Posted on by

It hasn’t attracted much attention, but little Armenia just gave up on supporting its currency, the dram, and allowed it to float free. The dram promptly fell by 20%, leading to price hikes and a brief wave of panic buying and hoarding.

This is sort of a non-story at an international level, because (1) Armenia is tiny, (2) so many Eastern European currencies have been dropping that another one comes as no surprise, and (3) unlike some other places, Armenia’s economy is not actually imploding. The currency adjustment was probably long overdue, and the subsequent panic is already slacking off. Armenia’s economic numbers show a recession, but a relatively mild one; to oversimplify, the relative backwardness and isolation of Armenia’s economy and financial system are serving to buffer it from the worst of the crisis.

From an Armenian perspective, of course, this is huge news. And more interesting than it looks; there’s a plausible case to be made that the Central Bank allowed the dram to stay overvalued for much too long in order for some well-connected local players to get very rich. The opposition is advancing this case as loudly as they can. Since the government dominates all the TV news and most of the radio, magazines and newspapers, that’s not very loudly. And this is the same government that gunned down a bunch of peaceful protesters just over a year ago. So, the odds of any political fallout from the devaluation are pretty long.

Still… offered as another data point.

Bring On The Quantitative Easing, And Bring It On Now (Wonkish)!

Posted on by

by Claus Vistesen and Edward Hugh

Most sports coaches – irrespective of whether they work in soccer, baseball, rugby or even American football – have playbooks; small books or pads filled with notes, decision rules and strategies for each and every possible situation they can envision. Of course, in some cases the playbooks are mental rather than physical, but every good coach lives and dies by his ability to adapt and react to new and changing situations and in order to do this effectively what he needs above all is a good playbook.

So what has all this waffle about football, baseball and whatever got to do with the ECB and how it should respond to the Eurozone’s “fluid and evolving” economic and financial crisis? Well, the point surely would be that whatever playbook the ECB works with (and it is sometimes pretty hard to see clearly which one it actually is) they do not seem to have included a section on what to do when interest rates finally hit the zero bound (not this month evidently, but maybe, or possibly the one after….as Bank President Trichet said after today’s decision to reduce the rate to 1.5%: “We didn’t decide ex-ante that this was the lowest point that we could attain” ). Nor do the ECB seem to have a page which explicitly handles the currently fashionable state of the art set of tools known collectively as quantitative easing. And this omission may, as the zero bound looms and outright deflation threatens, turn out to be a rather large and unfortunate one. The question is, what exactly are we going to do if (or even when) the Eurozone as a whole enters a deflationary rather than a disinflationary dynamic, and even more importantly, what happens if price movements fall into deflation mode and stay there? Continue reading →

They all want to meet him

Posted on by

An interesting wrinkle for those who care about summitry: Barack Obama’s visit to Europe in April will include Prague for what is being billed as the annual EU-USA summit.  Normally this includes just the Commission, the USA, and the Council Presidency which of course is the Czech Republic at the moment.   Last year’s summit was in Slovenia in June so they seem a little ahead of schedule.  But more importantly, it won’t be just the 3 leaders —

After consulting the European Commission and the U.S. administration of President Barack Obama, Mirek Topolánek will invite the highest representatives of all 27 EU Member States to the EU-USA Summit.

Thus it’s going to be a big show, but presumably at the expense of getting much done with 28 heads of state/government and the Commission in attendance.  It will get in a lot of “grip and grin” handshake photos for Barack Obama.  Is this the format that the Obama team wanted to make worthwhile a visit to a “small” state?

A good/bad time to stop having babies

Posted on by

Here follows a bit of demographic speculation. It’s guesswork right now, but we’ll know in a year or two if I’m right.

Interesting Fact #1: birthrates tend to drop during recessions, and the drop tends to correlate with both the severity of the recession and the speed of its onset. The current recession is looking to be a bad one, and it happened pretty quickly, so we can reasonably expect a sharp drop in birth rates. I say “expect” because it hasn’t happened yet — human biology being what it is, we won’t see the first effects until nine months after most people became aware of the recession. This summer, more or less.

— Makes sense, right? Babies are expensive; more to the point, babies limit your options. They make it harder to move to a different city, change careers, stop working for a while. When times are hard and uncertain, babies become a luxury. For individuals and families, a recession is a good time to put childbearing on hold.

However…

Interesting Fact #2: all across Communist Eastern Europe, birth rates declined slowly through the 1970s and ’80s… and then crashed after 1990, dropping to very low levels and staying there through most of the decade. In some countries they bounced back a bit, in others not, but in almost all cases there’s a big “birth gap” from about 1991 until at least 1997, and often later. This is in contrast to, say, Germany or Italy or Greece, where birthrates declined more smoothly.

Put these two facts together, and there’s a problem. Continue reading →

Is Romania Already Entering Recession?

Posted on by

I don’t have a chart for this post, or anything of the kind, and the reason will become obvious in a minute. Romanian economic growth, the fastest in the European Union in the third quarter of 2008, slowed dramatically in the last quarter, coming in at an annual rate of 2.9 percent, the slowest in more than three years, and down (dramatically) from a revised 9.2 percent in the July-September period, according to data out today from the Bucharest-based National Statistics Institute.

The point is, we have no idea at all of what the quarter on quarter rate of change is, since the data provided by the Romanian Statistics Office is among the worst in the EU, and more comparable to China than an EU state in this regard. We simply do not know at this point what is happening to the Romanian economy, at least in the sort of detail that matters. Not everyone is so happy to stay in complete ignorance however, and analysts at Raiffeisen Bank did do some calculating of their own. In a research note published on 27 February, they estimate likely fourth quarter growth at 3.5% and put this provisional number through their calculating machines. On this basis they come out with the incredible result that, on a seasonally adjusted basis, the Romanian economy may well have contracted by between 2 and 3 percent from one quarter to the next. This is a very large number, and implies the economy has entered tailspin, especially when we remember that the final result was 2.9 percent year on year (ie below the 3.5 percent number they were working with).

The statistical office will release the GDP figures for Q4 2008 on 4 March. The GDP growth rate in Q4 2008 should be substantially below the levels in the previous quarters. Although GDP expanded by 9.1% yoy in Q3 2008, it may expand by just 3.5% yoy in Q4 2008 (in spite of the still large positive contribution from the agriculture). This is because the final months of 2008 were marked by a rapid deceleration of activity in all sectors of the economy (industry, construction, retail sales). In Q4 2008, industry plunged by 10.4% yoy, while the growth rate in the construction industry stood at 16.8% yoy, down from 28.5% yoy in Q3 2008. Also, the growth rate of retail sales decelerated only to 4.3% yoy in Q4 2008, from 17.4% yoy in Q3 2008. According to our estimations, the rapid deceleration in the annual GDP growth rate reflects a contraction in real GDP in Q4 2008 by 2-3% from Q3 2008 (based on seasonally adjusted data).

Going on the data we do have consumption shrank 2.8 percent year on year, while financial activity fell 1.5 percent. Agricultural output, on the other hand, was up 18.2 percent, sustaining growth to some extent. The statistics institute said it will provide a more detailed breakdown of economic growth on March 19, but since Eurostat reports provide no harmonised Romanian GDP data in their quarterly reports, I am not optimistic.

“I am worried,” Finance Minister Gheorghe Pogea told reporters in Bucharest today. “These are the initial effects of the crisis manifesting itself in Romania. I am thinking about how to compensate for this, to re-launch the economy. The amplitude of the slowdown is big.”

Romania’s prior growth was based on a lending bubble. This has now burst. Private lending growth slowed to an annual 34 percent in January, down from over 63 percent in June as overdue debt payments more than tripled. Exports, which comprise almost a third of Romania’s gross domestic product, fell an annual 17 percent in December. So Romania’s economy is being hit on two fronts, exports are hit by economic contractions among its customers, while the credit crunch has put a sharp brake on domestic consumption.

Since it is more or less certain that the Romanian economy contracted in the last quarter of 2008, and since it is more or less impossible that we see an expansion in the first quarter of this year, I would conclude that the Romanian economy has now entered recession.