We still owe it to them, and blaming private companies will not do.

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Back in 2007, the Danish army withdrew from Iraq. The government originally tried to avoid accepting Iraqis who had worked for the Danes as refugees, despite the fact that they were in grave danger of reprisals. Eventually, after a protest campaign and a protest by senior army officers, the Danish government gave in. In the UK, this example was followed – the government tried to wriggle out of it, this blog among many other people protested as part of Dan Hardie‘s campaign, and eventually some action was taken.

History is repeating itself, as Le Monde reports. The story is paywalled, but the essential point is that the NATO deployment to Afghanistan will only shrink from here to 2015, the Danes will be off very soon, and again the government is trying to wriggle out of its obligations to Afghans who they relied on in a variety of roles and who are now faced with Taliban vengeance.

This time, though, the cowardice and moral abasement has reached a new low. The official argument is apparently that the interpreters (and others) were employed by a private company, and therefore it is nothing to do with Denmark! This is repellent. It is not just that a moral obligation exists, or that a norm of common decency is involved. This attempt to hide behind privatisation is undignified, dishonest, dishonourable. Everyone involved ought to be deeply ashamed.

Now I strongly suspect that history will repeat itself in the UK as well, and no doubt in the other European contributors to ISAF. So it is important to get angry early, in order to make an example to the others. To lead off, I will ask a question.

The story above refers to a supposed private company, says that it is a British company, and then names it as LSU or Labour Support Unit. But there is no such company registered in Britain. “Labour Support Unit”, in general, is a British military organisation, a staff attached to a large formation or garrison that is responsible for employing civilians.

So either Le Monde is confused, perhaps because “company” can be a business, a social group, or a military unit in English, or else the Danish government is bullshitting to its own public that it’s all the problem of the private sector, while hoping that the British government sorts out the problem and spends the money. This is a sorry, sordid business.

Of fish, flowers, AKs, offshore banking, and now horsemeat

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The horsemeat scandal has taken an unexpected, and possibly very significant, turn. So the Cyprus company controlled by Dutch meat merchant Jan Fasen, who was caught last year passing off South American horsemeat, and which is accused of doing the same with horses from Romania and the British Isles, turns out to have a single director, which is itself a company. (Fasen’s firm, if you haven’t heard, is named Draap, or the Dutch word for “horse” spelled backwards.)

This second company, Guardstand, also controls something called Ilex Ventures, which was used by…ahem…the international arms dealer Viktor Bout to buy some aeroplanes. Oh. Guardstand, for its part, is controlled by something called Trident Trust, which is a company-formation agent in Cyprus, which mostly serves Russian customers.

Now, it would probably be wrong to assume that Bout was behind the horsemeat racket or that some huger interest controlled both. It is probably more useful to look at this from a horizontal, functional perspective. Both Bout and the horsemeat guy made use of Cyprus’s role as a Russian-speaking offshore financial services centre with access to the eurozone.

There’s quite a lot more information at Reporting Project, which speaks to this point. The corporate structure is more complicated than the Guardian piece suggests. Draap’s sole shareholder is Hermes Guardian Ltd. in the British Virgin Islands, its sole director is Guardstand, and the company secretary is Trident Trust. Hermes Guardian is a shareholder in numerous other Cypriot companies, and one of its directors is the head of the Cypriot Fiduciary Association. And both Guardstand and Trident were also used during a half billion dollar acquisition of a steel mill in Donetsk.

All this originated because of the existence of a tax treaty between the Soviet Union and Cyprus. Russians and Russian money have been very obvious in Cyprus in the euro era.

It is often suggested that this treaty, like the similar one with Iceland, was intended by the Soviet side to help finance their intelligence agents in the West. If true, it’s possible that Bout would have been aware of it, having worked for the GRU (Soviet/Russian Military Intelligence) in Africa in the 1980s. As he used the Sharjah Airport free-trade zone as the trading and aviation centre of his business, he may have used Cyprus as the financial centre. These are the places where the rubber meets the road of globalisation, and they tend to build up a layer of secrets over time.

This immediately reminds me that his alleged financial manager, Richard Chichakli, has recently surrendered to Australian police after eight years on the run. He’s been extradited to the United States, where Bout is serving his sentence, still protesting to Russia Today that he only ever dealt in fish and flowers.

Now, for the other significant bit. Cyprus has a lot of the same economic problems as, say, Greece. Notably, its banks are in trouble and the sovereign may have to bail them out and the sovereign itself will end up bust, so on and so forth, we all know the story by now. One of the reasons the Cypriot sovereign is on the hook for quite so much money is that Cyprus has surprisingly big banks. Of course, they’re linked up to the rest of Europe via TARGET 2, so if the big depositors spook*, it’s an instant run on the bank.

Big depositors, you say? And who might they be? I think it is fair to say that nobody is particularly keen to bail out Viktor Bout or Horsemeat Guy. As a result, it’s politically very possible that the whole idea of a bail-in might get tested. And whether it does, and the exact terms, are increasingly linked to things like “how far into the maze the journalists get” and “whether Richard Chichakli starts singing in jail”.

And we may be going to see what happens when an offshore financial centre goes bust.

*surely the right word here…

Hungary’s Matolcsy Joins Japan’s Abe In Practicing The Ancient Art Of Verbal Intervention

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It’s amazing what you can achieve these days just by promising to do something. It’s also fascinating to watch just what a storm you can stir up.

Last July Mario Draghi surprised markets when he  vowed to do anything – whatever it would take – to save the Euro. He didn’t go into details, he didn’t really need to. He simply informed his audience that whatever he did it would be enough. What I suppose no one – not even Mr Draghi himself –  imagined at the time was that doing precisely nothing would turn out to be sufficient. Yet since that time that is just what has happened, he has done nothing, nothing whatsoever – no bonds have been purchased and no country has even asked for aid. So to date this verbal style intervention has been exactly what he said it would be, enough. Continue reading →

Point Counterpoint in the Italian Campaign

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Let’s forget about the Pope’s retirement, OK? Not that it doesn’t have huge implications for the theology of the Church and the role of future tenants of St. Peter’s see, but none of that is an electoral matter. And please, let’s pay no further attention to the antics of Silvio Berlusconi, that bad little boy who wants all our attention, all the time. Just ignore him. Let’s notice instead where the Italian electoral campaign is really happening, where it has always been happening, and where in the aftermath of next Sunday’s vote all the political action will be concentrated. Let’s look at the wonderful triangulation between Pier Luigi Bersani, Nichi Vendola, and Mario Monti.

For background, recall that Bersani and Vendola both came of age in the old Italian Communist Party, both participated in the Rifondazione movement in the ’90s, and both retain a fondness for working people and the venerable culture of the Left that comes with that territory. When Bersani was consolidating his hold on the big-tent Democratic Party a half-decade ago, Vendola still held on to his Left purism, enough so, some say, that he helped bring down Romano Prodi’s center-leaning government in 2008. Since then his SEL (Left Ecologist Freedom) Party has governed Puglia with a red/green slant, but has embraced as well the business growth and market logic that have made Puglia a rare success story in Italy’s Mezzogiorno.

What does any of this have to do with the technocratic Monti, the former EU Commissioner, professor at an elite business school, unelected premier in the ‘government of the professors’ that made Italy take its austerity medicine for the last year? Well, all parties declare a grudging mutual respect, and indeed Bersani’s PD was a solid if reluctant pillar of Monti’s reformist government until Berlusconi chose to kick out the props and make it fall. More to the point right now, though Bersani still polls well ahead in the race for the lower house, and thus the premiership, his alliance seems unlikely to pick up enough seats in the regionally skewed Senate to control it. He can’t govern without it. SEL’s seats won’t do it–he’ll need the centrist senators controlled by Monti. Which may explain that grudging but persistent respect.

Meanwhile day after day Vendola and Monti go at each other, like rival siblings competing for the attentions of a fond but slightly absent-minded father. Except of course for a few things: Bersani’s aloofness is anything but accidental, Monti HATES being bracketed with a leftist politican, and the differences they are flourishing are the essential policy questions that will determine Italy’s future. Such as:

  • On Monday Monti declared he could sit in the same government with Vendola as long as it was ‘reformist’; Vendola quickly noted that for Monti ‘reform’ means rolling back workers’ rights, while for his part those rights are the cornerstone of any reform.
  • Vendola has consistently deplored the benefit reductions Monti has imposed at the behest of the ECB, referring yesterday to his austerity measures as the “same old conservative ideology.” Bersani meanwhile lamented Monti’s “lack of gratitude” for the support his government received from Bersani’s Democrats.
And so forth. What is playing out is a classic competition between management strategies, as Vendola advocates for activist stimulus and Monti calls on Italians to tighten their belts for one more round. Bersani meanwhile tries to walk a fine line he calls “austerity with justice,” whatever that turns out to mean. But as Hollande waffles along the same line, and Merkel prepares to defend her mercantilist fundamentalism this fall, Italy–for all its woes, still the Eurozone’s 3rd biggest economy–will be helping to arbitrate the larger EU’s path through this intractable crisis. And it is Vendola and Monti who are waging that struggle day by day.
Sadly, American readers are at risk to miss the whole show. Rachel Donadio, the Times’s estimable Rome correspondent, managed to write a whole story about the election last Friday without mentioning Vendola’s name. But that’s OK–as I noted at the time she wrote a similar article a month ago that lovingly catalogued Berlusconi’s clown acts but failed to even mention Bersani, the clear front-runner. With the EU leadership openly campaigning for Monti, along with David Axelrod (hired by Monti’s campaign) and maybe President Obama himself (Gianluca Luzi in today’s Repubblica calls the President’s support for continued reform “a sort of endorsement for Monti”), one might almost suspect an aversion to the ex-Communists of the center-left. But like ’em or not, they are poised to take over Italy’s government, though on what terms is precisely the contested terrain of this election.

 

Japan’s Looming Singularity

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by Claus Vistesen and Edward Hugh

According to Wikipedia, in complex analysis an essential singularity of a function is a “severe” singularity near which the function exhibits extreme behavior. The category essential singularity is a “left-over” or default group of singularities that are especially unmanageable: by definition they fit into neither of the other two categories of singularity that may be dealt with in some manner – removable singularities and poles.

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No need to panic, a lot of analysts tell us, since far from being on the verge of some earth shattering event Japan  has invented the economic equivalent of a mechanical perpetual motion machine. Or as Nobel economist Paul Krugman put it recently, “while there is much shaking of heads about Japanese debt, the ill-effects if any of that debt are by no means obvious”. Maybe there is just one word missing here – yet. Continue reading →

Irish bank debt deal breaks deposit taboo

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Never has so much joy emanated from a statement by a Central Bank governor that he “notes” something, but so it is with the unwinding of the Irish Central Bank’s Emergency Liquidity Assistance to Anglo Irish Bank and the consequent refinancing arrangements, as not vetoed by the ECB (hence the importance of that noticing by Mario Draghi). But amid the clear improvement in Ireland’s fiscal sustainability, one aspect of the deal has not yet gotten much attention: it almost certainly imposes a haircut on some bank depositors.

Continue reading →

All the things Olli said

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It’s probably a good sign for the influence of the European Parliament that remarks made to it by a European Commissioner can cause a row. So it is with Economic and Monetary Affairs Commissioner Olli Rehn who presented a narrative of Italy’s flirtation with bond market shutdown during October and November 2011 that seemed too favourably disposed to the arrival of Mario Monti as the game-changer — in the context of an election featuring the same set of personalities now:

[the inaction on fiscal policy] led to a drying out of lending which suffocated economic growth and led to a political dead-end in Italy and the formation of the new government of Mario Monti, which then later on was able to stabilize the situation,” Rehn told the European Parliament on Tuesday. “This is clearly an example of the confidence effect in play.”

In what amounts to a contrite statement by Brussels standards, Rehn’s spokesman later clarified:

Neither Vice-President Rehn nor the European Commission comment on issues in the context of a national election campaign, in Italy, or any other Member State. Vice-President Rehn is responsible for fiscal and economic surveillance within the European Commission and his recounting in the European Parliament this morning of the events of the autumn of 2011 should be seen in this context.

and then outlines a set of dates which shows that the Commission at the time was reacting both to an enhanced reform proposal of the Berlusconi government plus additional elements added by Monti as its attitude to the country improved over the course of November.

It’s nonetheless tough to erase the impression that the EU establishment was much happier with Monti as PM; he was after all, one of their own. But the Eurogroup statement of 25 November 2011 which was the welcome to the new government warrants a 2nd look:

On his visit to Rome on 25 November, Vice President Rehn welcomed the economic programme of the new Government and its broad based support in the Parliament. He emphasized that “the priorities set by Prime Minister Monti are the right ones and I fully endorse them: step-up fiscal consolidation, adopt bold measures to re-launch growth, and ensure social fairness.” And he added: “Italy needs a comprehensive and wide-ranging package of reforms to kick-start growth again and offer its young people the perspective of more but also better jobs. I underline – and this is particularly relevant in this country – this is not only about fiscal consolidation but also, and I even say first and foremost, about economic reforms that can lift the potential for growth and jobs. The strong mandate for reform and the shared sense of urgency will certainly help in this regard.” 

Given the widespread view that Monti delivered much more on the austerity part of his intent than the growth part, Rehn’s opening standard for the new government nicely makes clear the jobs and growth part was not just something that Monti’s critics grafted on to his assessment later. If Rehn provided a fuller evaluation of Monti’s government to the European Parliament yesterday, using his own standard of 14 months ago, there might not be as much of a row.

Did you hear about the guy who wasn’t an economist? He was right…

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Gordon Brown makes one of his rare post-prime ministerial appearances, arguing for globally coordinated economic policy, and especially, more stimulus. Here’s something I hadn’t heard of:

Prior to the G20 in the autumn of 2010, the Korean government, to its great credit, floated a compromise way forward. They proposed that each major economy set limits for its current account surpluses or deficits (China and, for example, Germany a surplus of no more than 4 percent; America a deficit of no more than 4 percent). Privately, China indicated its willingness to engage. U.S. Treasury Secretary Tim Geithner signaled public support for the plan. But after an unfortunate series of misunderstandings the Korean plan was stillborn…

German conservatives may have been thinking they’d passed the worst. After a long, long string of lost elections at the provincial level, they finished the year looking strong in the polls. And then they lost Niedersachsen to an SPD-Green coalition. Although the FDP falls out of government with them, it also got an unexpectedly good result.

Italian economist Luigi Zingales says Italy’s biggest problem is its ruling class. I’ve said as much – southern Europeans don’t actually work fewer hours than Germans, so surely management needs to bear some responsibility for dreadful productivity? I don’t speak Italian but I suspect I may not agree with his solutions.

Housing is the business cycle.

A prominent critic of austerity turns out to be pretending to be an economist. You can tell the real ones because their policy advice just sounds like they’re faking it.

Greece will not be asked for any more cuts for six months.

Central European Links

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Here’s a depressing but interesting story. More and more Jews are moving to Vienna, which sounds rather hopeful…except that they’re coming from Hungary, to get away from anti-Semitism and people like piece o’work Zsolt Bayer.

Jonathan Freedland, meanwhile, asks his American friends to stop worrying about pogroms in London and to worry more about Hungarian and Polish politicians they find politically congenial.

You’d be surprised how often my fellow British Jews are required to disabuse U.S. friends of such delusions. One leading communal professional recalls a London meeting with an American counterpart, the latter first insisting on a tearful embrace: “You’re going through what my grandmother went through in Russia, with the pogroms,” he sniffed.

Nobody in the UK appears to have noticed that our aerospace/defence national champion is involved in a massive corruption scandal in Austria. A neat use of the radial graph visualisation explains exactly how BAE’s money was distributed around the Austrian political class to help sell Eurofighters.

Remember when the accession states were the happy hunting grounds of the libertarian blogger? Only too well. Slovakia’s prime minister thinks the privatisations were a terrible mistake and the flat tax was a sacred cow that had to die. Further, being a small and highly open economy/a branch of VW-Audi is less fun than it used to be.

And a Bulgarian politician is the target of a fake assassination attempt.

Europe’s capital strike, Central European edition

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Even if Monti seems to have succeeded in dragging the spreads closer together, there are plenty of problems around the European economy. Bloomberg reports on central and eastern Europe’s economies in search of a growth model. So far, some of them chose export-led growth and integration into (basically) German automotive supply chains, and others had a credit and property boom.

Well, it’s pretty easy to work out which was the better idea, but the problem is that with demand (especially for cars) across Europe in the toilet, the export plan isn’t looking too great either. Worse, some of the exporters are seeing their exchange rates rising fast. Poland, which is the paradigm case of an EU accession state that specialised in exporting into the German automotive supply chain, saw its currency rise 9.4% in 2012.

Diversifying trading partners away from the euro region should also “help at the margins,” Ulgen [HSBC chief economist for the region] wrote, adding that Poland and the Czech Republic have already managed to increase trade with countries from the former Soviet Union. Polish exports to the Commonwealth of Independent States rose 21 percent in the first nine months of last year and Czech exports increased 42 percent, according to HSBC.

While fiscal stimulus is not an option, there’s also further room for monetary easing in Poland and Hungary, while the Czech Republic, with the policy rate near zero, may need to resort to currency intervention, Ulgen wrote.

The problem here is that the plan is now, apparently, “export to countries that are poorer than we are”. This being Bloomberg we get a ritual reminder that “labor and pension rules” must change. But the Czechs’ GDP per capita at purchasing power parity is 123% of Russia’s.

The Austrian central bank governor, Ewald Nowotny, is apparently a leader in this effort and if anyone ought to be batting for Central Europe it’s the Austrians. However, out of the three banks who have cut their lending in the region the most, two of them are Erste and Raffeisen.

The problem is not trivial. McKinsey estimates that private investment in Europe has fallen by €354bn since 2007, while the corporate sector has about €450bn in cash on its balance sheet. Being who they are, it’s all about “regulatory barriers” and such. But look at this chart.

What on earth are European governments doing contributing to the problem here?