This week I gained three
new insights. One, courtesy of the Economist, was that the one
in four Americans underwater on their mortgages simply cannot move to
where the new jobs are being created (& that the unprecedented extension
of unemployment benefits also reduces labour mobility, since,
with some money coming in, people also have less reason to leave their
traditional surroundings). Credit for the second goes to CIBC World
Markets’ Avery Shenfeld for pointing out that, despite similar-sized
budget deficits relative to GDP, Britain is in a much better position
than Greece; for most of its debt is held by locals & it has control
over its currency, so it has the option of dealing with any excessive
debt problem by the age-old means of printing money & currency devaluation,
an option not open to Greece which no longer has a currency of its own
& most of whose debt is owed to foreigners.
The third resulted from my passing a currency exchange shop & noticing
separate quotes for “England” & “Scotland”; thanks
to one of you I know that this is to an antiquated arrangement in Scotland
(& Northern Ireland) whereby some banks still issue their own notes,
thereby picking up an estimated £100MM/year in seigniorage that otherwise
would have been gone to the Bank of England.
A week or so ago, former
New York Mayor & Republican Presidential hopeful Rudy Giuliani was
on Larry King Live. In the aftermath of the recent Times Square bombing
attempt, he advocated vastly increasing the number of security cameras
on New York city streets as a preventative measure (& Mayor Bloomberg
has since gone to London for a first-hand look at how that city has
been blanketed with them). This is nonsense & unbecoming a member
of a party that claims to target ‘smaller government’. Security
cameras have been proven very useful in ex post facto helping to reconstruct
what happened, & identifying bad guys. And they are useful in problem
prevention in low volume traffic situations (such as air traffic control
& after hours hallway monitoring in commercial buildings. But there
is absolutely no evidence that they ‘add value’ when used on a massive
scale in high traffic areas on an ex ante basis; for the people monitoring
them sooner or later become jaded and/or start suffering from ‘information
overload’. In fact, while quite a number of potential terrorist incidents
have been prevented in recent years on both sides of the Atlantic,
in every single case that has been the result of traditional intelligence/police
work & not in a single case of the use of surveillance cameras.
So using them at a saturation level, as Giuliani advocated, is not only
labour-intensive & costly, and an efficiency killer, but also not
a very good use of public funds. The most cost effective & comprehensive
anti-terrorism defence mechanism still is the kind of public engagement
displayed in Times Square by the middle-aged black street vendor of
T-shirts.
The UN asked Canada to
supply a general officer to head up its hard-pressed, & not particularly
effective, peace-keeping force in Darfur (that likely would benefit
from some better leadership than it has had to date). The irony
in the Harper government’s answer, “No Thank You”, is that, while
Canada’s participation in the Afghanistan campaign has stretched the
Canadian Army’s rank & file to, or beyond, its limits, the same
is not true for its pool of officers of general rank. For, while the
number of the former would barely be enough for a unit of division strength,
& not enough to provide the number of “boots on the ground”
there on an ongoing six-months’ rotation basis that it has been providing,
it has significant ‘excess capacity’ at the general officer level,
with enough of such upper echelon personnel for a unit 3x or 4x divisional
strength.
Attached are a review
of the British coalition government agreement & some further thoughts
on the Greek situation. Both started out life in this section, but simply
took up too much space (but were deserving of it). So, I relegated them
to the back as free-standing pieces.
-o-o-o-o-o-o-o-o-o-
GLEANINGS VERSION
II
No. 360 - May 13th,
2010
ROOT CANAL POLITICS
(NYT, Thomas L. Friedman)
· The link between
the UK election, the Greek meltdown & our Tea Part movement is this.
Our parents were a builder generation whose sacrifices & investments
laid the foundation for the abundance we enjoy. But my ‘Baby Boomer’
generation has been a “Grasshopper Generation ... that has eaten through
all that abundance like hungry locusts.” On both sides of the Atlantic
it was raised to believe that conservatives could cut taxes without
cutting services & liberals expand services without raising taxes
by printing money & deluding people into believing that borrowing
money from China (in then case of the US) or Germany & France
(for the EU Johnie-come-latelies), or against rising home
values, created wealth.
· Greece became
the GM of countries, using the easy money & subsidies associated
with EU membership not to become more competitive, but more corrupt,
less willing to collect (& pay) taxes & less competitive;
thus anyone in “hazardous” jobs, incl. hairdressers, could retire
at full pension at age 50 for women & 55 for men. And in Britain,
where 25% of the government’s budget is now funded by borrowed money,
everyone over age 60 gets an annual allowance to help pay their heating
bills & rides local public transportation for free.
· These two are
the poster children for the wrenching post-Tooth Fairy politics that
will force the Baby Boomers to accept cuts to their pensions & benefits
if they want their children (& grandchildren) are to have
jobs & not be saddled with impossible debts. According to
the Economist’s editor-in-chief Britain’s election may have been
the first ‘based on pain’ although, while all leaders warned “cuts
are coming”, none were honest about how deep these would have to be
: according to the Financial Times “The next government will have
to cut public sector pay, freeze benefits, slash jobs, abolish a range
of welfare entitlements and take the ax to programs such as school buildings
and road maintenance.”
· So after 65 years
of Tooth Fairy politics that was all about giving voters things, we
now face an era of Root Canal politics that will be all about taking
things away from them & of hopefully
a ‘Regeneration Generation’ that will launch society on a path more
financially & ecologically sustainable than that followed by the
locust-like Boomer Generation.
Nevertheless in the
entire 600+ word column he mentions the word ecology just once while
it is a key aspect of the locust generation phenomenon. And neither
does he mention another hallmark thereof, the growing income chasm in
the Anglo-Saxon world & elsewhere between the very rich & the
not-so- rich, and between both of them & the poor. For further insights
on the grasshopper generation phenomenon, consult Aesop’s 2700 year-old
fable of the Ant & the Cricket.
CONSUMER BORROWING
RISES IN MARCH (AP, Martin Crutsinger)
· It was up US$1.85BN
(0.8% MoM) while a US$3.85BN drop had been expected. After growing 3.2%
in January (the first month it did so in almost a year) & declining
3% in February, total consumer borrowing at the end of March stood at
US$2.45TR, down 3.4% YoY, due to consumers limiting their borrowing
to repair their battered balance sheets.
The jump in March
was due to a 3.9% rise in non-revolving credit (incl. auto loans)
that more than offset the 18th consecutive
monthly decline in revolving credit (by 4.5%).
PENTAGON URGES
DECREASE IN SPENDING ON TROOPS (WP, Graig Whitlock)
· Expecting future
funding to be less freely available than it has been since 2001,
it is agitating for more money for new weapons & for maintaining
existing military equipment, while Congress has been so focused for
almost a decade on improving life for the troops & their families
that it often mandated higher pay raises than the Administration &
the Pentagon asked for. So now many in the military are better paid
than their private sector peers & health care costs have risen to
the point that , according to Defense Secretary Gates, “they are killing
us” (accounting for almost 10% of the Pentagon’s base budget
- i.e. ex-Iraq & Afghanistan). Since 2002 military compensation
has risen 42% vs. 32% in the private sector (although at the outset
it was 13% lower). And this is not the Pentagon’s only financial challenge
: last February it had to cancel (but has since reinstated) a tuition-for-spouses
scheme when applications hit US$2+BN, over 30x the amount it had earmarked
for it.
One fringe benefit
of the higher pay scales has been a higher retention rate; thus 60%
of Navy spouses now want their mates to make it their career (i.e. stay
in 20 years), 3x the number only five years ago (although the economic
situation since then likely also has been a factor).
FTC SHOULD TARGET
SHOULD TARGET WALL STREET, NOT APPLE
(CSM, Robert Reich)
· It is threatening
to charge Apple with abuse of its economic power but not the big banks
on Wall Street with their huge, & growing, economic & political
muscle. And our future well-being depends more on people like
Steve Jobs (Apple ‘s CEO) who invent useful things than on investment
bankers who create financial products that get the economy in trouble.
Apple’s supposed sin was to tell software developers that, for maintenance-of-quality
reasons, they can only use Apple programming tools in developing applications
for iPhones & iPads’. So what? Other firms & many, many individuals
are innovating like crazy, and if, as a result, Apple finds this decision
cutting into its business, it will change its mind.
· Apple is only
the world’s No. 3 smart phone supplier, with a 16% market share while
the largest four US banks have assets of > US7TR, half the size of
the US economy, & are so big that a bad call by one of them could
take the rest of us down. But trhe agency is not really at fault; for
the Federal Trade Commission Act explicitly excludes banks from its
mandate to stop “unfair methods of competition” anywhere in the
economy.
· The only way to
ensure no bank is too big to fail is to ensure thatn no bank is too
big. So Sen. Sherrod Brown (D.-Ohio) & Sen. Ted Kaufman (D.-Del.)
have introduced an amendment to the draft bill winding its way through
the Senate, & being watered down as it does, that the big
banks should be broken up (& a growing number of House members are
about to follow their lead).
Reich was Clinton’s
diminutive (due to a genetic condition) Secretary of Labor between 1993
& 1997. He currently teaches public policy at UC (Berkeley), and
at various times prior to that graduated from Dartmouth Summa cum Laude,
was a Rhodes scholar, taught at Harvard & was a member of President-elect
Obama’s Economic Transition Advisory Board.
With that academic background it’s amazing that he
compares the size of the big banks’ asset base to that of US GDP;
for the former is a “stock”-, & the latter a
“flow”-, number.
PROSECUTOR ASKS
IF BANKS DUPED RATING AGENCIES (NYT, Louise Story)
· New York Attorney-General,
Arthur M. Cuomo, has launched an investigation of eight top tier
banks (Goldman, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche
Bank, Crédit Agricole & Merrill Lynch) to decide if they may have
provided misleading information to rating agencies so as to inflate
the ratings of certain mortgage-backed
securities. He is also interested in the recruiting of rating agency
employees by banks to have them use the knowledge gained, & the
personal contacts made, at their former
place of employment to create mortgage deals that would get better
ratings than they deserved, and particularly in the case of a former
Fitch employee, Shin Yukawa, whom Goldman recruited in 2005 with helpp
of a million-dollar pay package, and who later was involved in the structuring
of the Abacus 2007-AC1 deal that is at the heart of the SEC’s recent
case against Goldman.
Once the rating agencies
had a hard & fast rule that a subsidiary’s rating couldn’t exceed
the parent’s. This was watered down in the
late 80's after less-than-prime credit worthiness financial entities,
like Merrill Lynch, found themselves at a competitive disadvantage in
swap counterpart transactions. So, due to Merrill’s lobbying, &
that of others in a similar situations, the rating agencies became less
dogmatic & devised numerical/quantitative standards for rating
‘stand-alone’ financial entities that those who know how the system
worked could get around by exploiting loop holes (not unlike the early
days of multiple choice exams when markers used overlays on answer sheets
: as long as the marks on the one coincided with those on the other,
nobody cared.
U.S. JOB LOSSES
LOOM WITH YUAN REVALUATION (Bloomberg)
· The London-based
Centre for Economic Policy Research says a 10% revaluation would cut
the bilateral US-China trade deficit by half from its present US$227BN
at a cost of 424,000 US jobs & lower wages in US export industries
that depend on supply chains from China.
This isn’t what
Congress & the hoi polloi have been made to believe. And as Boone
Pickens recently told Congress : “In January 2010 our trade deficit
... was $37.3 billion - $27.5 billion of that went overseas to import
oil.”
G-20 INVITATION
LIST GROWS (CBCNews)
· The next G-20
Summit will be held in Toronto on June 26th & 27th,
following a G-8 meeting in Huntsville, Ont., 200 kms North of that city.
Prime Minister Harper will act as host & Canada as the meetings’
organizer. He has now extended invitations to attend the G-20 meeting
to the leaders of Ethiopia, Malawi, Netherlands, Spain & Vietnam
[Netherlands & Spain often attend, though formally represented by
the EU, Malawi is currently head of the AU (African Union) & Vietnam
of ASEAN (Association of East Asian Nations)].
· G-20 consists
of the EU &19 countries (Australia, Argentina, Brazil, Canada, China,
France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi
Arabia, South Africa, South Korea, Turkey, the UK & the US); between
them the 46 countries involved account for 90% of global GDP, 80% of
world trade & two-thirds of the world’s population.
Once upon a time the
G-5 (the US, UK, France, Germany & Japan) was a useful place for
the then major world leaders to meet occasionally to compare notes because
of its intimacy, relative homogeneity & the overlapping interests
of the members of the group. Then in the late 80's it was expanded to
a G-7 by including Canada & Italy, and later, after the demise of
the Soviet Union, to a G-8 by including Russia. A decade or so ago the
G-20 was created to give wider representation to other nations of substance
and last year it was announced that the G-20 would replace the G-8 as
the major economic council of the world’s leading nations. But the
same thing has happened to the G-whatever complex as happened to the
EU : expansion entailed a progressive watering down of the commonality-of-interest
factor that made the earlier gatherings so useful & increasingly
turned it from a consultative cum consensus-building- into an
adversarial forum, and into a ‘photo-op’ for domestic political
purposes. That being the case, gatherings like the annual Davos Economic
Forum may in the future well become more useful mechanisms for international
economic consultation & cooperation, and policy development, because
its organizers are selective in whom they invite each year & because
it features a public-private sector interface, rather than just politicians
posturing & officials reinforcing each other’s prejudices.
CHINA’S INDUSTRIAL
POLICY A BIGGER CONCERN THAN YUAN
(WP, John Pomfret)
· Senior US executives
representing the American Chamber of Commerce in Beijing are in Washington
this week to set politicians straight on what their policies vis a vis
Beijing ought to be. While the President, the Administration & Congress
have focused on forcing the yuan higher in the hope of reducing the
bilateral trade deficit, boosting US exports & creating more American
jobs, their message is that while it would make sense for China to stop
subsidizing exports & making imports of raw materials more costly
with an inappropriate exchange rate, believing that America would benefit
from such a move is just “plain silly”. For America has long been
importing most of the stuff it now gets from China and, if China were
to be priced out of the market, it will just continue importing it ...
from others.
· They think Washington
should instead focus on China’s evolving industrial policy which,
they say, in the long run will do more damage to the US than a low yuan
rate. They quote new regulations that prevent state agencies
from buying products from Western firms, new standards for telecom &
other firms that do the same & new rules requiring Western companies
to give up technological secrets in exchange for a piece of the Chinese
market.
· One member of
the delegation noted “The Chinese government is more than happy to
keep the focus on the currency because it’s not the real problem ...
The real problem is China’s industrial policy and our inability to
deal with it”, and its leader, Christian Merck, that “For years
the Chinese government promised there would be a gradual opening of
the market to foreign companies ... (while) now in a range of
areas, there is increasing protectionism” and that Western businessmen
arguing that an open market, not protectionism, will benefit China most
in the long run,are handicapped by the fact that “the prestige of
the Western economic model is at its lowest ebb.”
America’s views
of what is right & wrong commercially has long been warped by an
approach to intellectual property rights enshrined in its patent
system that, once someone has invented, written composed or otherwise
produced something, he or she is entitled to the exclusive financial
benefits thereof for a long time thereafter, if not forever. Unfortunately
for the modern day US ‘Wall Street’ system, since time immemorial
the ‘Mainstreet’ system in the Western world has differentiated
between “hard” & “soft” property, between the property rights
entailed in land, buildings & machinery, and those in ideas. And
this concept still large prevails in the financial system where the
intellectual property right life span of a new idea or product is measured
in nanoseconds, one reason why it has been so, albeit sometimes devastatingly,
innovative. As to their observation about the pressure to surrender
technological secrets, following is aan excerpt from an article in the
May 1st Economist, entitled
“Lights & Action” about China’s electric power industry (that
hopefully will find its way into the next Special Edition) :
“When foreign suppliers are permitted (sic), they are usually required
to transfer technology to local firms. China’s massive expansion of
nuclear power provides a good example. Over the next ten years the authorities
plan to spend a trillion-odd yuan (US$150 billion or so) to increase
its capacity ninefold ... Naturally, China hopes to acquire lots of
nuclear know-how along the way. Half the content of a unit of the Lingao
plant, in Guandong, where construction began in 2005 and is due to be
completed at the end of this year, will be made at home; in the next
unit, to be completed next year, the share of local content will be
70%. By 2020, China’s goal is to build advanced reactors by itself,
and to export its prowess abroad.”
WHY THE GREEKS
ARE ANGRY (msnbc.com, Nick Malkoutzis)
· The conditions
for the EU/IMF bailout are harsh. Public sector salaries must be slashed
15%-20%, & public service employment downsized. Closed professions,
e.g. lawyers & cab drivers, must be liberalized, and employees made
easier & cheaper to let go. Fuel taxes must be raised to a painful
level on top of a VAT that was already boosted from 19% to 25%.
Pensions must be cut & retirement ages raised.
· Greeks are angry
because for years they were encouraged to live beyond their means (accelerated,
since its joined the EU in 2001, by cheap credit), and now face the
unpalatable prospect of having to service the resultant debt from reduced
incomes. But what angers them most is their belief that politicians,
rather than building a strong economy for the 21st century,
lined the pockets of their families & friends, and tolerated rampant
corruption (bribery payments supposedly equal 12% of GDP) & massive
tax evasion (at an annual loss to the Treasury of 30BN Euros - US$38BN,
i.e. 10% of GDP). And with half of the 3MM trade unionists in the country
“inactive” & union leadership seldom consulting members before
calling strikes, it is not always clear to what extent its decisions
really reflect the will & the interests of the union’s rank &
file.
A rationalization
of its public sector staffing & remuneration levels was long overdue;
for the 1+MM public sector workers among its 11MM people have been called
the “most visibly inefficient sector” of the country’s economy
(in part due to its ‘limited horizontal mobility’, with many workers
spending their entire career working in the same office). But one Greek
paper said the bailout plan is “a slow death contract” & one
analyst that “If it turns out that the economy is not able to withstand
the measures, if growth falls much more than forecast, there would be
social unrest, forcing the government to consider alternative moves
in its asset-liability management ... This may include restructuring.”
And it is disingenuous, to say the least, for Greek voters to complain
about being “encouraged” to borrow more
than they could afford & about the quality of politicians they themselves
elected, & could have chosen not to re-elect. They, like the buyers
of sub-prime asset-backed paper, or
‘investors’ in Madoff’s Ponzi scheme, want to blame someone other
than the idiot they see in the mirror every morning for their predicament
& for having believed in the Easter Bunny & the free lunch.
But in that respect they are not unique; for it is engrained in human
nature & symptomatic of an era in the developed world in which people
have been brainwashed into believing that taking responsibility for
one’s actions is quaintly old-fashioned.
STRAWS IN THE WIND
· The Deputy Director
of the China State Council’s Development and Research Centre said
recently that the government needs to slow down economic growth to less
than a 10% annual rate if it is to avoid overheating.
By comparison, First
Quarter growth raced ahead at a 11.9% annual rate.
-o-o-o-o-o-o-o-o-o-o-o-
THE BRITISH CONSERVATIVES/LIBERAL
DEMOCRAT COALITION AGREEMENT
The six page coalition
agreement makes interesting reading. Following are some key bits :
· deficit reduction
and continuing to ensure economic recovery is most urgent - begging
the question as to which of the two will win out if they were to conflict;
· the emphasis
in deficit reduction will be on less spending rather than higher taxes
- empirical evidence suggests this is the more effective way
of balancing the books;
· some of the
“£6BN in cuts to non-front line services can be used to support jobs”
- at which point they cease to be savings;
· funding for
the NHS should increase in real terms in each year of the Parliament
- laudable but not compatible with serious deficit reduction;
· an independent
commission will review the long-term affordability of pensions while
protecting accrued rights - even a moderately astute person could
do the former in minutes &, as to the latter,
“accrued rights’ are not just part of the problem but
the problem;
· the personal
allowance for income tax should be increased - this would be
hugely costly in potential tax revenue terms & thus a huge
‘boat anchor’ for deficit reduction;
· detailed proposals
for robust action to tackle unacceptable bonuses in the financial sector
- why limit it to the financial sector?
· an independent
commission to investigate the complex issue of separating retail ands
investment banking in a sustainable way - this ain’t compex
at all, it just takes guts, perseverance & a willingness to stand
up to enormous pressures from one’s peers;
· five year fixed
term parliaments with the next election to be held on the first Thursday
of May 2015 subject to a caveat that this won’t apply if 55% of the
House votes for dissolution - the latter all but neuters the
former - all it does is to move power from the Prime Minister to Parliament
(which may not be such a bad idea). On the other hand, Britain
already has a system for dumping no-longer-wanted Prime Ministers that
is dead-easy in the case of the Conservatives & only marginally
less so for Labour;
· a Referendum
Bill on electoral reform to permit an Alternative vote and fewer over-sized
constituencies, with both parties committing themselves to vote for
such a bill in the House without prejudice to the position they might
take during the subsequent referendum campaign -
i.e. no PR for Commons’
elections - see immediately below;
· an Upper House
wholly, or mainly, elected by PR. In the interim Lords’
appointments will be made with a view to having the Upper House reflect
the share of the vote secured by the political parties in the last general
election - i.e short-term it will be
“stacked” & longer term there will be a two-chamber legislature
similar to that of the US;
· no further
transfer of souvereignty or powers to the EU during the life of this
Parliament, and an amendment to the 1972 European Communities Act to
require a referendum on any future transfers -
no surprise here;
· no joining
of , or preparation to join, the Eurozone during the life of this Parliament
- see immediately above;
· a provision
for a national planning statement with specific agreement on a Liberal
Democrat spokesman speaking against it & Liberal Democrat MP’s
abstaining from the vote, and
“clarity that this will not be regarded as an issue of confidence”
- this gives the Liberal Democrats a license to be as obstreperous
as they chose to be when the time comes & the Conservatives one
to advance its own agenda without having to dance around whatever its
coalition ‘partner’ may, or may not, want.
-o-o-o-o-o-o-o-
THE GREEK CONUNDRUM
While on May 6th
French Prime Minister François Fillon told the press that the Greek
bailout would “defeat and put an end to speculation which has been
unleashed against this country” (i.e. Greece) & that there was
no reason for markets to take aim at Spain & Portugal, after that
day’s events on the NYSE, that further sullied America’s once seemingly
unique financial reputation, President Sarkozy said the next day that,
before the market opened on May 10th, there had to be a financial
defence plan in place to protect the Euro, saying that “The Euro is
an essential element of Europe. We cannot leave it to speculators ...
We will not let others undo what generations have created.”
(generations? - the Euro has been in existence for barely a decade).
And the outcome was a
nearly US$1TR financial backstop proposal that its promoters hoped would
have a “shock & awe” effect, & critics call a “nuclear
option”, and that addresses symptoms, not the underlying disease.
In the end the central bank swap network which was set up in conjunction
with it (with the Fed extracting its pound of flesh by making any central
bank swap counterparties pay a 100 bps premium on any drawdowns)
is likely to do more good than the EU initiative; for, without a swap
arrangement to that can swiftly & efficiently ‘recycle’ speculators
funds, the EU package would have been like the clapping of one hand.
The Greek bailout, down
the road & with the benefit of hindsight, will likely prove to have
been a colossal mistake by policy decision makers unable to see the
forest for the trees. For it addresses a liquidity cum market confidence
problem whereas Greece has a solvency problem. And the bailout
idea is based on an assumption that, given enough time & enoiugh
drastic belt-tightening, Greece can “grow its way out of its problems”
(the same logic that in days long past prompted the doctors to “bleed”
patients, thereby sometimes hastening their demise) : the risk is that
‘drastic belt-tightening’ risks an implosion of the Greek economy,
causing social unrest which would negatively impact on its ability to
service its debt, never mind pay it back.
The common wisdom is
that Greece defaulting would do irreparable harm to the Eurozone concept,
Greece’s reputation, & capital markets. All three ideas are questionable.
The Greek situation is a symptom of a potentially fatal flaw in the
Eurozone concept in its present form that will do irreparable
harm unless addressed & addressed promptly, namely that it can have
a one-size-fits-all monetary policy without, if not a one-size-fits-all
fiscal policy, then at least a much greater coordination of national
fiscal policies than currently exists (as one former Canadian diplomat
with European experience put it ‘It now has a choice between further
integrating or disintegrating”). In addition, bailing out Greece
risks, if not encourages, the evolution of a ‘moral hazard’ mindset
among both borrowing governments & lending entities, & thus,
almost as surely as night follows day, increases the odds of yet another,
much, bigger crisis down the road. As to Greece’s reputation, investors
cheerfully ignored its track record of having been in default on its
foreign indebtedness as often as not for nigh on two centuries. And
defaulting buys a country breathing room, provided its current revenues
are equal to, or with some modest fiscal adjustments can made to equal,
its operating budget (i.e. ex-debt service obligations); and a country’s
capital market reputation is irrelevant if it doesn’t need to borrow
In fact, this was the route taken in the 80's by Brazil & early
in this decade by Argentina to remain financially & politically
viable domestically. Both are now members in good standing
of the G-20, with neither of them much, if any, the worse for at one
point having told foreign investors they could bloody well wait for
their money (in fact, nine years after doing so Argentina still hasn’t
come to an agreement with all of its creditors as to the size of the
‘haircut’ they would accept). And Brazil now has an investment-grade
credit rating. As to capital markets, history has shown time & again
that, once fundamentals have sorted themselves out, capital markets
are more interested in what they think will happen tomorrow than in
what happened yesteryear.
The real risk in the
short run for the EU is that in bailing out Greece, i,e, ensuring that
its lenders will get back one hundred cents on the dollar, it will whet
their appetite to play the same game elsewhere (just as making Bear
Stearns’ creditors “whole” contributed to the subsequent crisis
at Lehman Brothers) & that over the medium term economic implosion-driven
social unrest will prompt a flood of hundreds of thousands of Greek
workers into the rest of the EU in search of work and/or cause a
real fiscal crisis in Greece and/or cause the Greek government to
fail to meet the conditionalities of the EU/IMF bailout, any, or all,
of which would lead to a need to restructure under pressure, with however,
the public-, rather than the private-, sector having to “take the
hit.”
Finally, the bailout
plan defies the laws of nature. Any ‘dumb peasant’ knows that the
solution to a horse being overloaded is not to lighten the load &
make it carry it longer hours and/or have it make more trips in compensation.
For all this achieves is to have the poor thing spend the same amount
of, or more, energy while giving him less time to feed & rest up.
What it really needs is a day of rest, & a lighter load.
Ditto for Greece, what it really needs is an internationally-supervised
debt moratorium (which would also help to discourage moral hazard behaviour
by making lenders’ cash flow less predictable & reducing
their ‘security of capital’, both of which they abhor).
