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Gene Ellis

The Economist explains: How countries calculate their GDP | The Economist - 0 views

www.economist.com/...economist-explains-26

shared by Gene Ellis on 25 Apr 14 - No Cached
  • How countries calculate their GDP
  • Simon Kuznets, a Russian emigrant to America, is credited with creating the first true GDP estimate, for delivery to America’s Congress in 1934
  • Output can be measured in three (theoretically equivalent) ways: by adding up all the money spent each year, by adding up all the money earned each year, or by adding up all the value added each year. Some economies, including Britain, combine all three methods into a single GDP figure, whereas others, like America, produce different statistics for each.
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  • merica’s Bureau of Economic Analysis draws data from surveys of manufacturers, builders and retailers, as well as from trade and financial flows, among other sources. These data are used to estimate the components of GDP, such as total investment and net exports
  • Real, or inflation-adjusted, GDP is needed to compare figures across time periods, while GDP per person is best for understanding how individual incomes are evolving.
Gene Ellis

"Which Eurobonds?" by Jeffrey Frankel | Project Syndicate - 0 views

www.project-syndicate.org/...which-eurobonds-

jeffrey project syndicate

shared by Gene Ellis on 16 Jun 12 - No Cached
  • Any solution to the eurozone crisis must meet a short-run objective and a long-run goal. Unfortunately, the two tend to conflict.Illustration by Paul LachineCommentsView/Create comment on this paragraphThe short-run objective is to return Greece, Portugal, and other troubled countries to a sustainable debt path (that is, a declining debt/GDP ratio). Austerity has raised debt/GDP ratios, but a debt write-down or bigger bailouts would undermine the long-term goal of minimizing the risk of similar debt crises in the future.CommentsView/Create comment on this paragraph
  • it is hard to commit today to practice fiscal rectitude tomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable.
  • The introduction of Eurobonds – joint, aggregate eurozone liabilities – could be part of the solution, if designed properly. There is certainly demand for them in China and other major emerging countries, which are desperate for an alternative to low-yielding US government securities.
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  • But Germany remains opposed on moral-hazard grounds: a joint guarantee of Eurozone members’ liabilities would strengthen individual national governments’ incentive to spend beyond their means.
  • The German Council of Economic Experts has proposed a European Redemption Fund (ERF). The plan would convert into de facto 25-year Eurobonds the existing sovereign debt of member countries in excess of 60% of GDP, the threshold specified by the Maastricht criteria and the SGP.
  • But this seems upside down.
  • it offers absolution precisely on the 60%-of-GDP margin where countries will have the most trouble resisting temptation.
  • the main explanation for the absence of US moral hazard is that the right precedent was set in 1841, when the federal government let eight states and the Territory of Florida default.
  • Ever since 1841, the market requires that US states running up questionable levels of debt pay an interest-rate premium to compensate for the default risk.
  • Had the ECB operated from the outset under a rule prohibiting it from accepting SGP-noncompliant countries’ debt as collateral, the entire eurozone sovereign-debt problem might have been avoided.
  • the expansion in the US took place at the federal level, where spending today amounts to 24% of GDP, compared to just 1.2% of GDP for the European Union budget.
  • The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds” proposed two years ago by Jacques Delpla and Jakob von Weizsäcker. Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receive eurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status.
  • The point is that the enforcement mechanism would be truly automatic: market interest rates would provide the discipline that bureaucrats in Brussels cannot.
  • Of course, the eurozone cannot establish a blue-bond regime without first solving the problems of debt overhang and troubled banks. Otherwise, the plan itself would be destabilizing, because almost all countries would immediately be in the red.
  • But one thing seems clear. German taxpayers, whose longstanding suspicion of profligate Mediterranean euro members has been vindicated, will not be happy when asked to pay still more for the cause of European integration. At a minimum, they will need some credible reason to believe that 20 years of false assurances have come to an end – that this is the last bailout.
Gene Ellis

Statistics in Africa: Making Africa count | The Economist - 0 views

www.economist.com/...statistics-africa

GDP accounting Nigeria Ghana

shared by Gene Ellis on 09 Jan 14 - No Cached
  • IN 2013 Nigeria’s GDP could increase by 40%, which would be impressive even by Africa’s recent bouncy growth standards. The rise will come not from a surge in economic activity but because the country is rejigging the way it calculates its accounts.
  • But the new figures may owe as much to political calculation as to hard-nosed statisticians
  • Nigeria’s real GDP is based on 1990 prices. It plans to update them to ones from 2008. Ghana did the same in 2010, revising its base year from 1996 to 2006. Its GDP shot up by 60%, propelling it overnight from being a poor to middle-income country, defined by the IMF as having a GDP per person of at least $1,026 a year.
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  • In 2005 its government brought in fertiliser subsidies. It reported a maize crop of 3.4m tonnes in 2006-7, up from 2.6m tonnes the year before. The aid lobby said this justified the subsidies and the budget support which enables them to be paid for.
  • But figures released in 2010, disputed by Malawi’s ministry of agriculture, suggest that the harvest was only 2.1m tonnes. If maize production had risen as much as claimed, Malawians should have have had a surplus of maize and prices should have dropped. That did not happen, says Mr Jerven.
Gene Ellis

A glance at military spending in NATO's European members | Fox News - 0 views

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shared by Gene Ellis on 05 Feb 15 - No Cached
  • A glance at military spending in NATO's European members
  • 2.4 percent of GDP, British military spending exceeded $60 billion in 2013 — the highest of all European NATO members
  • 1.9 percent last year, according to NATO statistics.
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  • about 1.3 percent of GDP is devoted to the military.
  • Poland's President Bronislaw Komorowski announced Tuesday that Poland would raise that figure to 2 percent as "a very tangible, very clear engagement" in the alliance
  • 1.2 percent of its GDP on the military
  • 1.3 percent of its GDP on the military.
  • Germany is reducing the size of its army, which is expected to slightly trim military spending in coming years.
  • inancially challenged Spain's defense budget has shrunk from 1.2 percent of GDP in 2009 to 0.9 percent, NATO statistics show.
Gene Ellis

Happy 2013? | vox - 0 views

www.voxeu.org/happy-2013

shared by Gene Ellis on 26 Jan 13 - No Cached
  • Hopefully the following ten observations are less controversial in 2013 than in previous years.
  • As long known by elementary textbook readers, austerity policies have contractionary effects.
  • Debt reduction is a very long process; we're talking about decades,
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  • The debt-to-GDP ratio is best reduced through sustained nominal GDP growth.
  • Besides, having been there, no one really wants to unleash inflation anymore. That leaves us with real GDP growth as a necessary condition for bringing the debt-to-GDP down painlessly.
  • But in today’s world voters are angry at everything that is called Europe and will not back a fiscal union.
  • The crisis has delivered a surprising degree of wage flexibility and labour mobility.
  • This means that the need for dissolving the euro back into national currencies at almost any cost has evaporated.
  • Sustained real growth should be the number one priority.
  • In most Eurozone countries, structural reforms are as needed now as they were before the crisis.
  • Banks are at the heart of a diabolic loop: bank holdings of their national public debts (Brunnermeier et al., 2011).
  • Massive forbearance has allowed many banks to not fully account for the losses that they incurred in 2007-8.
  • For that reason, they deleverage, which leads to a credit crunch, which slows growth down.
  • The ECB is the lender of last resort both to banks and to governments.
  • This involves massive moral hazard.
  • The long-hoped-for awakening of the ECB has produced several miracles, especially a major relaxation of market anguish.
  • Austerity policies must stop, now.
  • Growth will not return unless bank lending is adequately available.
  • The ECB may act as lender in last resort to banks and governments, but who will bear the residual costs?
  • The only remaining option is public debt restructuring, a purging of the legacy.
  • This will lead to bank failures. This means that debt reductions must be deep enough to make it possible for governments to then borrow, to shift to expansionary fiscal policies and to bail out the banks that they destroyed in the first place, in effect undoing the diabolic loop.
  • Who will lend? Even the best-crafted bank restructuring will not allow an immediate recovery of market access. The ECB is the only institution in the world that can help out.
  • There is no easy option for the Eurozone after three years of deep mismanagement. Governments will not accept drastic action unless forced to. This means that we need another round of crisis worsening.
  • Gene Ellis on 26 Jan 13
     
    Good article by Wyplosz on ten observations and five consequences of Euro policy. 4 Jan 2013
Gene Ellis

Greece's Bogus Debt Deal by Ashoka Mody - Project Syndicate - 0 views

www.project-syndicate.org/...-sovereign-debt-by-ashoka-mody

greece debt deal project syndicate

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  • The economist Larry Summers has invoked the analogy of the Vietnam War to describe European decision-making. “At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory.”
  • Instead of driblets of relief, a sizeable package, composed of two elements, is the way forward.
  • A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2%.
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  • The second element of the debt-relief package would be more innovative: If Greece’s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised. A formula for this could be linked to the debt/GDP ratio
  • Why bother? Because the very premise of the current deal and the expectations it sets out are wrong. First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% to 124% is fanciful. Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt will then be “sustainable” is absurd.
  • Make no mistake: policymakers’ track record on forecasting Greek economic performance during the crisis has been an embarrassment. In May 2010, the International Monetary Fund projected – presumably in concurrence with its European partners – that Greece’s annual GDP growth would exceed 1% in 2012. Instead, the Greek economy will shrink by 6%. The unemployment rate, expected to peak this year at 15%, is now above 25% – and is still rising. The debt/GDP ratio was expected to top out at 150%; absent the substantial write-down of privately held debt, which was deemed unnecessary, the ratio would have been close to 250%.CommentsView/Create comment on this paragraphIn September 2010, four months after the official Greek bailout was put in place, the IMF issued a pamphlet asserting that “default in today’s advanced economies is unnecessary, undesirable, and unlikely.” The conclusion was that official financing would carry Greece past its short-term liquidity problems. Calls for immediate debt restructuring went unheeded. Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt was substantially restructured.CommentsView/Create comment on this paragraphSuch were the errors committed over short time horizons.
  • And, again, even if Greece somehow did achieve the 124% milestone, its debt would still not be sustainable.
  • Staying the course, as Summers warns, will lead only to “needless suffering” before that course inevitably collapses, bringing Greece – and much else –­ crashing down.
Gene Ellis

PrudentBear - 0 views

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GEP com nytimes nytimes com global europe GDP crisis syndicate euro

shared by Gene Ellis on 09 Jul 12 - No Cached
  • German exporters were major beneficiaries of this growth. German banks and financial institutions helped finance the growth.
  • Exports have provided the majority of Germany’s growth in recent years. Germany is heavily reliant on a narrowly based industrial sector, focused on investment goods—automobiles, industrial machinery, chemicals, electronics and medical devices. These sectors make up a quarter of its GDP and the bulk of exports.
  • Germany’s service sector is weak with lower productivity than comparable countries. While it argues that Greece should deregulate professions, many professions in Germany remain highly regulated. Trades and professions are regulated by complex technical rules and standards rooted in the medieval guild systems. Foreign entrants frequently find these rules difficult and expensive to navigate.
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  • Despite the international standing of Deutsche Bank, Germany’s banking system is fragile. Several German banks required government support during the financial crisis. Highly fragmented (in part due to heavy government involvement) and with low profitability, German banks, especially the German Länder (state) owned Landsbanks, face problems. They have large exposures to European sovereign debt, real estate and structured securities.
  • Prior to 2005, the Landesbanken were able to borrow cheaply, relying on the guarantee of the state governments. The EU ruled these guarantees amounted to subsidies. Before the abolition of the guarantees, the Landesbanks issued large amounts of state-guaranteed loans which mature by December 2015.
  • While it insists on other countries reducing public debt, German debt levels are high—around 81% of GDP. The Bundesbank, Germany’s central bank, has stated that public debt levels will remain above 60% (the level stipulated by European treaties) for many years.
  • Germany’s greatest vulnerability is its financial exposures from the current crisis. German exposure to Europe, especially the troubled peripheral economies, is large.
  • German banks had exposures of around US$500 billion to the debt issues of peripheral nations. While the levels have been reduced, it remains substantial, especially when direct exposures to banks in these countries and indirect exposures via the global financial system are considered. The reduction in risk held by private banks has been offset by the increase in exposure of the German state, which assumed some of this exposure.
  • For example, the exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy is euro 918 billion as of April 2012. This exposure is also rising rapidly, especially driven by capital flight out of these countries.
  • Germany is now caught in a trap. Irrespective of the resolution of the debt crisis, Germany will suffer significant losses on its exposure – it will be the biggest loser.
  • Once the artificial boom ends, voters will discover they were betrayed by Germany’s pro-European political elite. There will be an electoral revolt and, as in the rest of Europe, a strong challenge from radical political forces with unpredictable consequences.
  • In late May 2012, French President Francois Hollande provided a curious argument in support of eurozone bonds: “Is it acceptable that some sovereigns can borrow at 6% and others at zero in the same monetary union?”
  • Political will for integration
  • In the peripheral economies, continued withdrawal of deposits from national banks (a rational choice given currency and confiscation risk) may necessitate either a Europe wide deposit guarantee system or further funding of banks.
  • A credible deposit insurance scheme would have to cover household deposits (say up to euro 100,000), which is around 72% of all deposits, in the peripheral countries. This would entail an insurance scheme for around euro 1.3 trillion of deposits.
  • Given that the Spanish Economy Ministry reports that euro 184 billion in loans to developers are “problematic,” the additional recapitalization needs of Spain’s banks may be as high as euro 200-300 billion in additional funds (20-30% of GDP)
  • A Greek default would result in losses to Germany of up to around euro 90 billion. Germany’s potential losses increase rapidly as more countries default or leave the eurozone.
  • Austerity or default will force many European economies into recession for a prolonged period. German exports will be affected given Europe is around 60% of its market, including around 40% within the eurozone. In case of a break-up of the euro, estimates of German growth range from -1% to below -10%. It is worth remembering that the German economy fell in size by around 5% in 2008, the worst result since the Second World War, mainly on the back of declining exports.
  • For example, Greece owes about euro 400 billion to private bondholders but increasingly to public bodies, such as the IMF and ECB, mainly due to the bailouts. If Greece walks away as some political parties have threatened, then the fallout for the lenders, such as Germany, are potentially calamitous.
  • But the largest single direct German exposure is the Bundesbank’s over euro 700 billion current exposure under the TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) to other central banks in the Eurozone.
  • by Satyajit Das
Gene Ellis

The euro crisis: Debtors' prison | The Economist - 0 views

www.economist.com/...n-more-government-debt-debtors

shared by Gene Ellis on 29 Oct 13 - No Cached
  • But the reforms often fail to work. The Spanish law is intended to promote restructuring of viable firms but in practice most insolvencies end in liquidation after lengthy court proceedings.
  • High household debt helps explain why the Netherlands, along with Italy and Spain, remained in recession in the second quarter of 2013 even as the euro area in general embarked on recovery. Dutch GDP this year will be 2% lower than in 2011 and more than 3% below its previous peak, in 2008.
  • it illustrates the malign effect of high debt when house prices fall
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  • One aim of the exercise is to identify the bad debts that are fouling up euro-zone banks and preventing the flow of new credit. This is important because parts of the single-currency area are crippled not just by public borrowing but by private debt, most of which is sitting on banking books.
  • High private debt is more detrimental to growth than high public debt, according to recent research by the IMF.
  • The malign effect of high private debt becomes apparent in the busts that follow credit-driven booms. Households that have borrowed too much in relation to their income trim their spending, the main component of GDP. Overleveraged firms avoid investing and concentrate on shrinking their balance-sheets by paying off loans. As bad debts erode their capital, banks become more reluctant to lend. These adverse trends reinforce each other, increasing the overall drag on growth.
  • Other balance-sheet indicators also suggest that Italian business is in a bad way. For example, 30% of corporate debt is owed by firms whose pre-tax earnings are less than the interest payments they have to make. That share of frail companies is even higher in Spain and Portugal (40% and nearly 50% respectively).
  • Little progress has been made to lighten the private-debt burden since the crisis began. Though it eased in Spain from 227% of GDP in 2009 to 215% in 2012, it rose over the same period in Cyprus, Ireland and Portugal. In Britain, by contrast, private debt fell from 207% of GDP in 2009 to 190% in 2012 thanks to improvements by both households and firms.
  • There is an inherent contradiction between the need for debtor countries in the euro zone to regain competitiveness through lower prices and at the same time to ease excessive debt with a dose of inflation.
  • Firms that have overborrowed are reluctant to embark on new ventures, and banks are in any case reluctant to lend because their balance-sheets are peppered with bad debts. This unhappy state of affairs prevails throughout southern Europe though its precise causes vary.
Gene Ellis

Nato defence spending falls despite promises to reverse cuts - BBC News - 0 views

www.bbc.co.uk/world-31619553

defence spending

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  • Nato defence spending falls despite promises to reverse cuts
  • Europe's failure to pay its way in Nato is seriously worrying the US, which already provides 75% of all Nato defence expenditure (the US spends 3.8% of its GDP on defence).
  • Without any of its own maritime patrol aircraft, the UK recently had to request the help of Nato allies to search for suspected Russian submarines off the west coast of Scotland. In Germany there have been reports of serious malfunctions in military equipment.
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  • These figures are in line with earlier research carried out by the Royal United Services Institute which projected that UK defence spending could fall to about 1.7% of GDP by the end of the decade.
  • Nato has already set a target that member states should each spend a minimum of 2% of their national income or GDP on defence.
  • Contrast that with Russia's defence spending, which is rising from 3.4% of its GDP this year to 4.2% next year ($81bn or £52.2bn). Russia is also stepping up its military activity. A separate report by Ian Brzezinski for the Atlantic Council says there is also an "exercise gap" between Russia and Nato. Since 2013 Russia has conducted at least six military exercises involving 65,000-160,000 troops.
Gene Ellis

The Economist explains: How Nigeria's economy grew by 89% overnight | The Economist - 0 views

www.economist.com/...economist-explains-2

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  • A snapshot of Nigeria’s economy in 1990 gave little or no weight to fast-growing parts of the economy such as mobile telephony or the movie industry. At the time the state-owned telephone company had a few hundred thousand customers. Today the country has 120m mobile-phone subscriptions. On the old 1990 figures, the telecoms sector was less than 1% of GDP; it is now almost 9% of GDP. Motion pictures had not shown up at all in the old figures, but the industry’s size is now put at 1.4% of GDP.
  • The oil industry’s share of GDP is now put at just 14%, compared with 33% according to the old figures.
  • Manufacturing is much larger than previously thought. Services are booming.
Gene Ellis

Aluminum and Icelandic GDP | Askja Energy - The Independent Icelandic Energy Portal - 1 views

askjaenergy.org/...aluminum-and-icelandic-gdp

shared by Gene Ellis on 25 Apr 14 - No Cached
  • Aluminum and Icelandic GDP
  • The aluminum sector now consumes almost 75 per cent of electricity generated in Iceland. When taking this part of the Icelandic energy industry into account, the total contribution of the aluminum industry to the Icelandic GDP is somewhat larger than the direct contribution, and the total contribution can be said to be 5.4-6.3 per cent annually (on average in the period 2007-2010). In 2010 this number was approximately 7.7-8.6 per cent.
  • n her thesis, Ms. Ragnarsdóttir explains how aluminum production first began in Iceland in the year 1969, with an output of barely 11 thousand tons annually. In the early 1990s the rate of production grew rapidly and today it is around 820 thousand tons annually. Two of the largest hydroelectric power stations in Iceland were constructed mainly to serve the aluminium industry.
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  • 4,000 jobs
  • Today, the aluminum products have approximately a 40 percent  share in the total export of goods from Iceland (which is more or less the same proportion as that of fish products).
Gene Ellis

Some thoughts on German politics and the saver's tax in Cyprus | Credit Writedowns - 0 views

www.creditwritedowns.com/...-the-savers-tax-in-cyprus.html

shared by Gene Ellis on 18 Mar 13 - No Cached
  • Now, the large 82.8% German government debt to GDP ratio is a source of shame for many because Germany was a driving force in enshrining the 60% government debt to GDP hurdle into the Maastricht Treaty that set out terms for the euro zone.
  • Moreover, the interest rate policy of the ECB, geared as it was to the slow growth core, produced negative real interest rates and credit bubbles in Spain and Ireland during the last decade. German banks piled in to those countries as prospects domestically stagnated.
  • “The average German worker feels like a cash cow being sucked dry by a quick succession of reforms and bailouts that take money out of her pocket. First it was for reunification, then for European integration, then to right the economy, then to bail out German banks, and finally to bail out the European periphery. Fatigue has set in.”
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  • The bottom line is that none of the major political parties in Germany are going to vote for bailouts for other euro zone countries unless massive strings are attached, since these bailouts are political losers.
  • The anti-bailout part of the FDP platform is the one part of their rhetoric which could successfully take them over the 5% hurdle. The FDP’s complicity in using German taxpayer money to bail out the so-called profligate periphery is a one-way ticket out of Parliament.
  • “First, the Greek reports come via statements made by Michael Fuchs, CDU deputy Bundestag head and a senior member of German Chancellor Angela Merkel’s party. Fuchs warned earlier today that Germany would veto further aid to Greece if the country has not met the conditions of its previous bailouts.
  • “Second, all along Germany has indicated that it is resistant to increasing funding of the ESM and EFSF bailout facilities. This presents a problem in the case of Spain and Italy because of the size of those economies.
  • Willem Buiter, Chief Economist at Citigroup, has been most vocal in predicting that these facilities will be inadequate when Spain and Italy hit the wall and that more extreme measures will have to be taken.
  • The basic dilemma here is that almost all of the eurozone governments including Germany carry high debt burdens in excess of the Maastricht Treaty. For example, Germany has been in breach of Maastricht Treaty in 8 of 10 years since 2002, has been over the Maastricht 60% hurdle in each of those ten years, and now carries a debt to GDP burden above 80%.
  • The long and short of it was that the Germans had reached the end of their ability to support bailouts.
  • All evidence is that this levy has created panic in Cyprus. After all, what is the use of having a deposit guarantee if government can arbitrarily circumvent it to impose losses on your deposits anyway?
  • One can't just blame Cyprus for this fiasco. The ECB, EC and European Union finance ministers signed off on the insured deposit grab too]
  • My view? It was inevitable that we would be in crisis again. The austerity world view of crisis resolution is completely at odds with the capacity of the euro zone’s institutional architecture to handle a crisis.
Gene Ellis

Martin Feldstein: The Euro Zone's Double Failure - WSJ.com - 0 views

online.wsj.com/...3893404577098252697593684.html

shared by Gene Ellis on 31 May 12 - No Cached
  • but that they don't constitute an official EU treaty and therefore cannot be enforced by the commission and other EU institutions.
  • Italy has a good shot at persuading investors that it has a favorable long-term budget outlook. Its fiscal deficit is now less than 4% of GDP.
  • If the new government can now enact changes in labor rules and investment incentives that raise GDP growth to a 2% annual rate, Italy's ratio of debt to GDP could fall to 60% in less than 15 years.
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  • Greece cannot hope to get its deficit under control fast enough to stabilize its debt and attract private lenders. Instead of remaining a permanent ward of Germany and the IMF, Greece should default on its debt, leave the euro zone, and return to a more competitive drachma.
  • But he should also make it clear that lending against private collateral should not be used by commercial banks to free up funds to purchase newly issued government bonds
  • As Italy shows its determination and its ability to reduce future deficits, it should be welcomed back to the capital markets.
Gene Ellis

The Greek Austerity Myth by Daniel Gros - Project Syndicate - 0 views

www.project-syndicate.org/...ty-myth-by-daniel-gros-2015-02

shared by Gene Ellis on 15 Feb 15 - No Cached
  • The Greek Austerity Myth
  • Greece actually spends less on debt service than Italy or Ireland, both of which have much lower (gross) debt-to-GDP ratios. With payments on Greece's official foreign debt amounting to only 1.5% of GDP, debt service is not the country's problem.
  • The new Greek government's argument that this is an unreasonable target fails to withstand scrutiny. After all, when faced with excessively high debt, other European countries – including Belgium (from 1995), Ireland (from 1991), and Norway (from 1999) – maintained similar surpluses for at least ten years each, typically in the aftermath of a financial crisis.
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  • To be sure, one can reasonably argue that austerity in the eurozone has been excessive, and that fiscal deficits should have been much larger to sustain demand. But only governments with access to market finance can use expansionary fiscal policy to boost demand.
  • Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity.
  • Of course, Greece is not the first country to request emergency financing to delay budget cuts, and then complain that the cuts are excessive once the worst is over. This typically happens when the government runs a primary surplus. When the government can finance its current spending through taxes – and might even be able to increase expenditure, if it does not have to pay interest – the temptation to renege on debt intensifies.
  • The practical problem for Greece now is not the sustainability of a debt that matures in 20-30 years and carries very low interest rates; the real issue is the few payments to the IMF and the ECB that fall due this year – payments that the new government has promised to make.
Gene Ellis

Emerging Europe's Deleveraging Dilemma by Erik Berglof and Božidar Đelić - Pr... - 0 views

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emerging europe dilemma erik project syndicate eli

shared by Gene Ellis on 01 Jan 13 - No Cached
  • Expansion was, for lack of other options, financed largely through short-term loans.
  • since the onset of the global financial crisis, eurozone-based banks’ subsidiaries in emerging Europe have been reducing their exposure to the region. In 2009-2010, the European Bank Coordination Initiative – known informally as the “Vienna Initiative” – helped to avert a systemic crisis in developing Europe by stopping foreign-owned parent banks from staging a catastrophic stampede to the exits.CommentsView/Create comment on this paragraphBut, in the second half of 2011, the eurozone-based parent banks that dominate emerging Europe’s banking sector came under renewed pressure to deleverage. Many are now radically changing their business models to reduce risk.
  • Over the last year, funding corresponding to 4% of the region’s GDP – and, in some countries, as much as 15% of GDP – has been withdrawn. Bank subsidiaries will increasingly have to finance local lending with local deposits and other local funding.
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  • excessive and chaotic deleveraging by lenders to emerging Europe – and the ensuing credit crunch – would destabilize this economically and institutionally fragile region.
  • View/Create comment on this paragraphFor Tigar, deleveraging has meant that banks that had pursued its business only a couple of years ago have suddenly cut lending – even though the company never missed a debt payment. Previous loans came due, while cash-flow needs grew. Despite its good operating margins, growing markets, and prime international clients, the company experienced a drop in liquidity, requiring serious balance-sheet restructuring.
  • Furthermore, collateral – especially real-estate assets – will continue to be downgraded.
  • Indeed, several Western financial groups are considering partial or complete exits from the region – without any clear strategic replacement in sight.
Gene Ellis

Europe in Depression? by Federico Fubini - Project Syndicate - 0 views

www.project-syndicate.org/...he-eurozone-by-federico-fubini

shared by Gene Ellis on 23 Apr 13 - No Cached
  • For Italy, Europe’s fourth-largest economy, the current slump is proving to be deeper than the one 80 years ago. Meanwhile, huge savings and potential demand for consumer and capital goods remain locked up next door.
  • The second exception is France. Over the last year, France’s external deficit deteriorated further, from a 2.4% to 3.5% of GDP. France now faces zero or negative growth in 2013, and seems to have reached the point at which it must reverse course on competitiveness or risk more trouble ahead.
  • How did this happen? As Kemal Derviş has pointed out, the cumulated current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland, and Germany is now around $500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000’s, when the G-7 (including Germany) regularly scolded the Chinese for fueling global imbalances.
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  • For example, in November 2011, interest rates on Italian sovereign bonds were around 8% all along the curve, even as the government faced refinancing needs totaling nearly 30% of GDP over the following year. Because debt monetization was not an option, austerity had to ensue at that point, regardless of what Merkel – or anyone else – had to say.
  • Southern countries, still largely in denial, should accept the need for deeper, competiveness-enhancing reforms. Germany and its allies, for their part, should accept that running high external surpluses is damaging the eurozone and themselves, and that it is time for them to put part of their huge excess savings to work to support growth.
Gene Ellis

Why the Baltic states are no model - FT.com - 0 views

www.ft.com/...c7-11e2-80f9-00144feabdc0.html

shared by Gene Ellis on 04 May 13 - No Cached
  • Olivier Blanchard, the IMF’s economic counsellor, stated last June that “many, including me, believed that keeping the peg was likely to be a recipe for disaster, for a long and painful adjustment at best, or more likely, the eventual abandonment of the peg when failure became obvious.” He has been proved wrong.
  • According to the IMF, Latvia tightened its cyclically adjusted general government deficit by 5.3 per cent of potential GDP between 2008 and 2012,
  • But Greece’s tightening was 15 per cent of potential GDP between 2009 and 2012.
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  • These huge recessions do matter. For Latvia, the cumulative loss from 2008 to 2012 adds up to 77 per cent of the country’s pre-crisis annual output. On the same basis, the loss was 44 per cent for Lithuania and 43 per cent for Estonia.
  • In brief, Latvia, worst-hit of the Baltic countries, suffered one of the biggest depressions in history. It is recovering. But it has not yet fully recovered. Are its policies a model for others? In a word, no.
  • These states have four huge advantages
  • First, according to Eurostat, Latvian labour costs per hour, in 2012, were a quarter of those of the eurozone as whole, 30 per cent of those in Spain and half those of Portugal.
  • Second, these are very small and open economies
  • Its trade partners hardly notice Latvia’s adjustment. But they would notice a comparably large Italian one.
  • Third, foreign-owned banks play a central role in these economies. For the eurozone, this is the alternative to a banking union: let banks with fiscally strong host governments take over the weaker financial systems.
  • inally, the Baltic states have embraced their European destiny as an alternative to falling back into Russia’s orbit.
Gene Ellis

Five lessons from the Spanish cajas debacle for a new euro-wide supervisor | vox - 0 views

www.voxeu.org/...bacle-new-euro-wide-supervisor

lessons spanish debacle supervisor vox

shared by Gene Ellis on 23 Oct 12 - No Cached
  • just the three most problematic Spanish cajas (Bankia, CatalunyaCaixa and Novagalicia) have had capital deficits (to be covered partly or fully by the taxpayer) of €54 billion – over 5% of Spanish GDP, a larger amount than what Spain will have to request from the European rescue funds.
  • Already the first entity that was intervened (CCM) as far back as March 2009, showed that the real NPL levels post intervention (17.6%) were more than twice as large as the reported ones. This should have been the point for the Banco de España to get ahead of the curve by ordering an audit of the whole sector
  • There is no intimation by anyone of outright corruption in the Banco de España supervisory role, and given the professionalism of the institution it is unlikely that there was any.
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  • not surprisingly, Banco de España supervisors had little interest in discovering that Spain’s vaunted regulator had in fact missed the largest financial crisis in the history of the country
  • Unfortunately, often supervisors in charge of the failing entity in the years of the debt run up were the ones charged with uncovering the problems.
  • Spain was the leader in the introduction of a dynamic provision – a provisioning tool that forces banks to increase provisions without reference to any specific loan. The intention of this tool was twofold: to mitigate the bad times, and to cool the booms in the good times (Holmstrom and Tirole 1997). Dynamic provisions were endorsed as part of the Basel III standards in December 2010, in part on the strength of Spain’s experience. And indeed the existing evidence (Jiménez et al. 2012) shows that the tool worked as intended, dampening the credit boom and softening somewhat the credit crunch. However, it is clear by now that their level was not nearly enough, as their size – 3% of GDP at their highest point (2004) – was simply not of a magnitude commensurate with the credit losses.
  • Without the provisions, the reality of the cajas' accounts would have become much faster a concern, and would have imposed itself on the regulator
  • Had the Banco de España ordered an audit of the system after uncovering numerous irregularities in CCM, it would have not been able to deal with the capital shortfalls uncovered as there was no appropriate resolution regime in Spain at the time
  • governance played a critical role in the development of the Spanish crisis. In the Spanish case, the supervisor, confronted with powerful and well connected ex-politicians decided to look the other way in the face of obvious building trouble.
  • More systematic evidence of the role played by these governance issues is provided in a 2009 paper (Cuñat and Garicano 2009b) where we showed that cajas with chief executives who had no previous banking experience (!), no graduate education, and were politically connected did substantially worse in the run up to the crisis (granting more real estate developer loan, up to half of the entire loan book in some instances) and during the crisis (with higher NPLs).
  • Even more important was the role of these political connections in diluting the role of the supervisor after the crisis started, in what was meant to be the crisis resolution stage but which was in fact a crisis cover up stage.
  • What are the takeaways
  • I would suggest five.
  • Second, career concerns of supervisors are crucial.
  • Third, dynamic provisioning is a good idea, but the supervisor must be mindful it may delay decision making in problem cases
  • Fifth, supervision and an appropriately tough resolution regime must go hand in hand.
Gene Ellis

Let Greece take a eurozone 'holiday' - FT.com - 0 views

www.ft.com/...30-11df-953f-00144feab49a.html

shared by Gene Ellis on 30 May 12 - No Cached
  • If Greece still had its own currency, it could, in parallel, devalue the drachma to reduce imports and raise exports, cutting the 15 per cent of GDP trade deficit. The level of Greek GDP and employment might then actually increase if the rise in exports and decline in imports added more to domestic employment and output than was lost through raising taxes and cutting government spending. But since Greece no longer has its own currency, it is not free to follow this strategy.
  • Bank balances and obligations would remain in euros. Wages and prices would be set in drachma.
  • Gene Ellis on 30 May 12
     
    Excellent FT piece by Martin Feldstein
Gene Ellis

The tragedy of Argentina: A century of decline | The Economist - 0 views

www.economist.com/...hat-went-wrong-century-decline

shared by Gene Ellis on 19 Feb 14 - No Cached
  • The tragedy of Argentina A century of decline
  • In the 43 years leading up to 1914, GDP had grown at an annual rate of 6%, the fastest recorded in the world.
  • The country ranked among the ten richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy.
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  • Its income per head was 92% of the average of 16 rich economies
  • Its income per head is now 43% of those same 16 rich economies; it trails Chile and Uruguay in its own back yard.
  • The election of 1989 marked the first time in more than 60 years that a civilian president had handed power to an elected successor.
  • the repeated recessions of the 1970s and 1980s, the hyperinflation of 1989-90, the economic crisis of 2001 and now the possibility of another crisis to come.
  • But three deep-lying explanations help to illuminate the country’s diminishment. Firstly, Argentina may have been rich 100 years ago but it was not modern. That made adjustment hard when external shocks hit. The second theory stresses the role of trade policy. Third, when it needed to change, Argentina lacked the institutions to create successful policies.
  • Railways transformed the economics of agriculture and refrigerated shipping made it possible to export meat on an unprecedented scale: between 1900 and 1916 Argentine exports of frozen beef rose from 26,000 tonnes to 411,000 tonnes a year. But Argentina mainly consumed technology from abroad rather than inventing its own.
  • External shocks duly materialised, which leads to the second theory for Argentine decline: trade policy.
  • Argentina raised import tariffs from an average of 16.7% in 1930 to 28.7% in 1933. Reliance on Britain, another country in decline, backfired as Argentina’s favoured export market signed preferential deals with Commonwealth countries.
  • an existing policy of import substitution deepened; the share of trade as a percentage of GDP continued to fall.
  • High food prices meant big profits for farmers but empty stomachs for ordinary Argentines. Open borders increased farmers’ takings but sharpened competition from abroad for domestic industry.
  • “One-third of the country—the commodities industry, engineers and regional industries like wine and tourism—is ready to compete,” says Sergio Berensztein, a political analyst. “Two-thirds are not.”
  • Property rights are insecure
  • Statistics cannot be trusted: Argentina was due this week to unveil new inflation data in a bid to avoid censure from the IMF for its wildly undercooked previous estimates.
  • hort-termism is embedded in the system
  • “We have spent 50 years thinking about maintaining government spending, not about investing to grow,” says Fernando de la Rúa, a former president who resigned during the 2001 crisis.
  • The country’s Vaca Muerta (“Dead Cow”) shale-oil and gasfield is estimated to be the world’s third-largest. If Argentina can attract foreign capital, the money could start flowing within a decade.
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