Archive for the 'Uncategorized' Category

adverse efsf

October 24, 2011

There is a widespread view that the EU will attempt to lever up the EFSF capital to achieve an insurance capacity of EUR2-3tr, by turning it into the equity tranche of a sovereign CDO. Others put forward a TARP-like structure which will buy back bad sovereign debt.

A Special Purpose Vehicle (SPV) will be the financial entity that will implement this endeavour, where whatever is left of the initial EUR440bn EFSF money will serve as the capital. This is certaily a big number, which is bound to catch the headlines and trigger a stock market rally. But is there any meat on this bone?

How do you value that crap?

Although yet unknown, the bond buy-back structure will be probably similar to the TARP model which was implemented in the US to help banks offload their ‘misunderstood’ assets. The idea behind TARP was that the market for CDOs and other morgage backed instruments just dissappeared overnight. For that reason, if banks were to sell these assets they would receive very little, even though foreclosures at the time were not justifying such a severe price cut.

In order to implement the TARP, a price discovery mechanism was needed to gauge what a fair value would have been. An ‘inverse auction’ was put into place, where the holders of the assets posted the prices at which they were prepared to sell, and the lowest prices were filled first until capacity was reached. Therefore selling institutions had an incentive to post a low price to get rid of their assets, and losses were written down. To fill in the holes these sales punched in their capital, banks issued preferred shares that were bought by the same programme. A total of USD700bn were earmarked for this programme, of which about two-thirds were actually used.

How would that work in the context of the EFSF? Here Greek, Portugese and Irish bonds appear to be eligible at the moment, while Spanish and Italian bonds could become eligible in the future (if eligibility is defined as being bailed out). Banks that hold periphery bonds will post a selling price, and the cheapest ones would be filled first. One does not know yet the exact mechanics, but it is safe to assume that Greek bonds will be the first ones to go. Obviously, the current market price serves as a lower bound, but if enough banks try to get rid of the bonds, then the price might not be too far away.

The main driver behind the TARP was that households were not defaulting on their mortgages at a rate that would justify the market prices, and that if these ‘misunderstood’ securities were kept for a while then the market would resume and reasonable price levels would be restored. The current situation is markedly different: the problems facing Greece (and other periphery countries) are not due to the lack of liquidity but lack of solvency. The low price of Greek debt is not unreasonable if one considers the fundamentls, and is in fact supported by the implicit or expected haircuts described in the various PSIs. If these PSIs were gone, the price of Greek debt would be arguable even lower. Pumping liquidity in the secondary market would do little good to the banks involved, and no good to the Greek state.

The related recapitalisation would be welcome though. Banks gain some immunity against sovereign default if the bonds are off their balance sheets. This also takes the burden to recapitalise the banking sector off the sovereign, but causes a moral hazard issue which invalidates the whole idea.

Survival of the fastest

As it stands the EUR440bn are not sufficient to provide a decent backstop. Already nearly half of the money has been spent, but let’s say that there is another EUR250bn left in the fund, and the liabilities of the larger periphery countries easily exceed that. An argument is to use the magic of leverage to turn these EUR250bn into EUR2tr or even more. I think that this argument is flawed, if one considers the incentives of the countries involved.

The size of the Greek default is constantly being debated in the financial press over the lat few weeks. The initial PSI of 21% has grown into a PSI+ of 50-60%, with some commentators advocating levels of 90-100%. There is a valid argument that the costs of recapitalising the Greek banking sector do not go away. Every Euro that a Greek bank loses through a haircut is a Euro that Greece has to borrow in order to recapitalise the bank. This means that the true impact of a 50% haircut might be actually less than the 21% that was originally proposed.

In the TARP world the default of a household was disconnected from the profit or loss that the MBS realised. But in the EFSF case this does not hold: if Portugal defaults then the Portugese state will need funds to recapitalise Portugese banks; if the EUR250bn have run dry because Greece and Ireland have already tapped the fund, then Portugal will be left exposed. It matters little that EUR2tr were insured, if the equity tranche is wiped out. The incentive for Portugal is to default before everyone else, just to make sure that her banks take advantage of the EFSF rescue funds.

The size of the default is now subject to adverse selection too. If Portugal need not worry about the impact of a default on her own banking system, then she might opt for a much larger haircut. As her banks are recapitalised externally, why not give them a helping hand?

Obviously moral hazard becomes an even more important issue for Spain and Italy, where the money involved would be stretched in the better of scenarios. If they want to have any chance of protecting their financial system, then they have to rush to the EFSF gates early in the day.

What this leverage will create, as the crisis deteriorates, is the equivalent of a good old bank run. A leveraged institution might not have enough capital, and everyone eligible rushes to get the most out of it. It also resembles the good old CDO: if CDOs underestimated tail dependence and systemic correlations, European politicians are making sure that a cluster of sovereign defaults will happen in the EU sooner rather than later.

As if there is not enough contagion as it is…


modesty please

October 11, 2011

Everyone has a solution to offer these days. A few days ago I stumbled upon Mr Yiannis Varoufakis, a Greek academic who promises aν elixir of health for the frail and failing Europe which he calls the ‘modest proposal’. It appears that Mr Varoufakis has a not-that-modest PR machine, spreading the word that the man is speaking but nobody is listening. As his name started popping up here and there, I decided to take a closer look to what he proposes (other versions can be found here, co-authored with S. Holland, a UK Labour MP of the 80s).

After reading through the document I emerged with the following bullet points:

  1. We should shuffle debt all over the place and change its name. Then it is not called debt anymore. And if we hide much of this debt in one place, then the markets might not notice that it’s missing.
  2. If we give large quantities of cash to hugely indebted nations at very low rates, then these nations can get by.
  3. Various transnational European institutions have been created over the years to serve specific goals. We should retrospectively redefine what these goals are, in order for them to pump money around freely.

Democracy deficit

Overall, as a holder of a mauve passport, I found the theme that permeates the document very disturbing. In the opening paragraph the authors rightly claim that ‘[the future] of European democracy is endangered’, but I found the proposal offensive to my sense of what democracy is.

The people of Europe have been growing increasingly uneasy towards European bureaucrats, long before the crisis took hold of the headlines. Mr Varoufakis’ proposal illustrates the paternalistic attitude of the Europhile, who believes that treaties have been the outcome of a lesser process that can be bypassed by the bevevolent bureaucrat.

A monetary union was established and not a fiscal one; this was not an oversight, but a conscious decision of the engaging parties. Even at inception, the architects acknowledged that further policy instruments -that is fiscal tools- were politically impossible. As Romano Prodi wrote in the FT in December 2001

I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

Is this the crisis that the European elite was waiting for?

The document proposes to create a mechanism that might adhere to the letter of the treaties but not their spirit, and thus create something that looks like a de facto fiscal union. There might not be direct fiscal transfers, because European institutions that are funded by the member states will act as intemediaries and become fiscal stabilisers for weaker nations. Or because, as the proposal advocates, the European Central Bank (ECB) will issue Eurobonds that will finance weaker states but will be guaranteed by the stronger ones. These transfers might not be direct, but they are trensfers nonetheless; and transfers go against the spirit of the treaties as they stand.

It comes to no surprise that the authors need legalistic tricks to avoid new treaties: they must acknowledge that if the people of Germany, Austria or Finland were offered their menu, they would certainly say no. They bluntly point out that the ECB is permitted to buy tranches of debt rather than bonds, because ‘[when the treaty was signed] no one had considered that there could be the need for one’ (perhaps nobody knew what a tranche was at the time). The authors acknowledge that the treaties of Maastricht and Lisbon demand that ‘each member-state [is] wholly liable for its debts’, but they attempt to find a way to bypass this obvious spirit of the treaty.

The proposal might envisage a more federalistic Europe, even something in the lines of the United States of Europe. I share the same views. But what they propose is openly against the spirit of Europe as it is now, and nearly certainly against the will of the people as it is currently expressed. Their proposal is, to my eyes, grossly undemocratic and a recipe for alienating further the citizens of Europe.

Debt is not debt

According to the proposal the ECB takes over part of each country’s debt, with face value equal to 60% of its GDP. Each country pays a standard rate to the ECB, and services its debt normally. The ECB will finance the purchase of this tranche by issuing bonds. The authors claim that this does not constitute a fiscal transfer; they go even further and claim that it pretty much does not even constitute debt as far as Maastricht is concerned. These are very dubious claims.

To me this sounds similar to one of the haircut arrangements that the IIF proposed, which are under revision at the moment. Essentially a portion of the principal of each bond is guaranteed by the ECB. If the country is Maastricht compliant and her debt is less than 60% of the GDP, then 100% of the principal is guaranteed. If the debt is 120% of the GDP, then 50% of the principal is guaranteed.

What will be the interest that countries will have to pay to the ECB? If the rate is higher than the one that they can achieve on their own, then there is an implicit transfer of the opportunity costs. The authors might prefer to call it something else, but it is what it is. If countries can opt out, then the tranche structure will not be viable since it will be predominately toxic.

This rate will depend, in turn, on what will happen in the event of default. Will the ECB be forced to print Euros to accommodate for the losses? Or will the ECB shareholders raise capital and pay the creditors? How will this affect the current mandate of the ECB to focus on inflation? The proposal does not spell out the details, but this is where the devil lies hidden.

Why debt is no longer debt is something I cannot comprehend. Aren’t the sovereigns liable to anyone for this face value? If they are, then in my book this is debt. And, risking a guess, this will be the view of the average European.

Access to cheap money was one of the drivers that propelled the debt of countries like Greece; the modest proposal seems to offer much more of the same as the remedy, but with someone else footing the bill. Belief in securitization increased the systemic impact of the initial shock; the modest proposal advocates the ECB becoming the AIG of the Eurozone.

Institution upgrades

The modest proposal also upgrades European institutions like the European Investment Bank and the European Investment Fund (EIB&F). At the moment entersises, especially small and medium ones, have trouble getting access to finance, and these institutions should be taking over banks as vendors of capital.

At the moment both institutions have a completely different mandate, with EIB&F engaging into small or medium scale project that support accesion countries, promote environmental communities, or guarantee equity for SMEs. Importantly, there is a typical 50-50 split of the costs between EIB&F and the host country.

The proposal wants to scale up these institutions and rewrite their mandate. It assumes that because they managed niche projects, they have the financing capacity and the knowhow to operate as an investment bank for the Eurozone. As Europeans get dissillusioned with the Euro project, the authors want an even more centralised distributor of funds with unelected officials determining the financing across the board.

More fundamantally, these institutions are not Eurozone owned. Countries like the UK or Sweden have a large share in both of them. The modest proposal is implicitly asking for non-Eurozone countries to guarantee ‘surplus recycling’. Forgive me, but I will not be putting any money on that happening.

Not modest at all

The modest proposal is not modest as all. In its heart lie proposals that point towards a federal Europe. Unfortunately, this path has not been been ratified by the members, and there is no appetite for further integration amongst the citizens.

The sophistries that are employed to bypass the current state of Europe, as it is engraved in her treaties, are dangerous. The people of Europe are realising that the major deficit in Europe now is democracy, and are increasingly vocal against the paternalism that originates in Brussels. Personally, I might be a firm proponent of closer integration, but I have to accept that at the moment there are more issues that divide rather than unite us. And this proposal makes clear to me why this is the case.

Beyond that, I find the claims that the modest proposal entails no fiscal transfers or sovereign guarantees wrong. You can repackage debt exposure in as many layers of European institutions as you like, but ultimately the shareholders of these institutions are the European sovereigns. The described approach is conceptually not far from the repackaging of dodgy debt in credit securities, and we all now know that such risks just refuse to go away.

I am a commited Europhile myself, and I look upon the idea of the Kantian cosmopolitan, just like the next man. But I can still believe that this process must complete itself naturally and smoothly; shoving the federalistic medicine down people’s throat will only make them vomit.

floating shorts

January 26, 2010

The markets have pounded Greece heavily last week, both in the equity and the debt front. There is widespread concern on the ability and comittment of the new government to service the country’s debt. Social unrest is evident. Greece also stands acused that, for years, statistics produced by her agencies were flawed at least.

Unlike statistics that are subject to interpretation, creative public accounting or outright reporting fraud, I take a look at the debt Greece issued over the last few years. These amounts are unambiguous, and any patterns that change over the years can give useful insights. To this end, I collected all information on Greek bonds and bills that Bloomberg records from 1993. As debt before 2001 was issued in old dracmae as well as an assortment of different currencies (ranging from pessetas to yen), I focus on the data after 2001. I expect Bloomberg to keep a representative, if not complete, sample.

Hopefully the data can shed some light on any policy changes that relate to the structure of debt. Also, the historical issues can serve as a yardstick to assess the magnitude of new bond or bill issues. One of the key years is 2004: this is the year of the overly expensive Olympic games, and also the year when the “socialist-technocrat” government of Costas Simitis was ousted, with a “conservative-liberal” government of Konstantinos Karamanlis taking their place in power.

In the attached tables you can find 105 short term Bills issues and 88 longer term bond issues. Number 23 in this list is the infamous structured bond that was in the center of the scandal that rocked the country, involving hedge funds, Greek state-run pension funds and JP Morgan.

The table below gives my summary, year-by-year:

2009 14,560 60,589 7.25 18.30%
2008 1,788 35,736 6.66 15.67%
2007 1,364 46,527 18.50 0.60%
2006 1,804 24,562 7.11 11.11%
2005 2,072 40,416 13.40 14.56%
2004 2,273 32,526 7.81 13.37%
2003 1,702 33,004 9.94 1.00%
2002 1,471 31,713 10.36 2.21%
2001 1,178 10,041 8.21 4.86%

Treasury Bills are issued many times in a year, offer no coupons, and have maturities of 13 weeks (~3 months), 26 weeks (~6 months) or 52 weeks (~1 year). Bonds offer coupons payable every six months that can be fixed or floating, and have maturities that range from 2 to 50 years.

One immediate observation is the spike of T-Bills issued in 2009, which is an order of magnitude larger than the typical amount of the previous decade. Presumably this is an attempt to accommodate the appetite of the lenders (or lack of it) to long-term commitments. It also indicates severe cashflow or liquidity problems on the part of the borrower (in the same way one goes to loan sharks for a few weeks until the benefits’ check comes through). And this trend looks likely to continue, if January auctions are an indication (EUR1.6bn and EUR1.2bn borrowed this January, compared to a total of EUR2.55bn last year).

Longer term borrowing has also increased substantially, standing now at about six times what is was 10 years ago, and two times the 2004 levels. But there are some details here worth mentioning: up to 2004, nearly all debt had maturity up to ten years, with the exception of only EUR18bn issued for longer maturities. After 2004, there appears to be an attempt to spread the debt across maturities, a policy that ended abruptly in late 2008. From this point on, most of the debt is very short, with the typical maturity being 5 years. And the new bonds issued this month will also have a 5 year maturity. Investors don’t seem to like putting their money on Greece for the long run.

Another interesting policy shift that happened in 2004 was an increase of floating debt. Up to this point practically all bonds offered fixed coupons, while at the moment about 20% pay interest which is linked to an external index, like the Euribor or some other combination of interest rates. A notable exception is 2007, which follows the scandal of the structured bond (yes, I know that correlation does not mean causation…) The last issue of 2009 pays 2.5% above Euribor; the new EUR8bn 5-year January issue will pay a premium of an extra 3.5% (for comparison, in January 2009 Greece borrowed EUR12.5bn, at 5.50% fixed coupon rate). This means that any interest rate rises in the next years will be increasingly painful for the Greek government, since interest payments for these new bonds will also increase.

These observations indicate investors that are only prepared to lend short-term, demand substantial premiums to do so, and do not want to bear any risk of future interest rate moves. These inverstors are nervous, and nervous investors can pull their money from the table if the going gets tough. Had Greece been able to borrow long-term and at fixed rates, she would not have to worry about investors getting itchy and pulling their money.

And all this matters. The Greek government keeps repeating that it is “they” and not “the markets” that determine their policy, but reality is different. As the figure above shows (borrowed from this FT article), Greece is heavily dependent on foreign investors, as they are holding about 30% of issued debt. As Greece takes her place as a central node in a potential systemic crisis, the probability of foreign banks that try to get out first increases. And this is an event that sets the domino off. The Greek government is desperately trying to front-run this eventuality, trying to expand the debtors’ base by promising bonds in USD and JPY.

The finger will remain on the trigger until investors decide to move away from short term government debt into long term fixed-rate issues. Only then will Greece have the space needed to produce a meaningful strategy that will put her house in order. It is chicken and egg once again…

should i stay or should i go

January 13, 2010

go: Desmond Lachman: Why Greece will have to leave the eurozone.

stay: Willem Buiter: Sovereign default in the eurozone and the breakup of the eurozone: Sloppy Thinking 101 (article is one year old, but the essence remains the same).

Lachman is with the American Enterprise Institute for Public Policy Research (AEI), a neo-conservative think tank that provided the framework of G. W. Bush’s policies.

Buiter is the chief economist of Citigroup, a major bank that was bailed out by the Fed in November 2008.

the small print

January 11, 2010

It appears that the IMF will send a team to Greece in order to offer ‘technical assistance’. I am as clueless as you are on what ‘technical assistance’ actually means, but everyone in Greece is forcefully repeating that it does not mean ‘money’.

Greek bond description

I noticed the small print in the screenshot above, which describes a bond issued by Greece which is denominated in Yen (and is held mostly by a Japanese syndicate)

If issuer loses IMF membership or use of IMF funds, majority of hldrs (sic) may request issuer to call

I was not sure how to interpret that statement. Does it mean that using IMF funds constitutes an event of default, or that losing the potential use of IMF funds is actually the default event? If the former is the case, the Greek government is right to steer clear of any note with the IMF stamp on it. But I suspect it means the former, which is rather unlikely as even Zimbabwe remains an IMF member to date.

who’s the daddy now

December 12, 2009

CDS spreads: Greece v Turkey

CDS spreads: Western Europe

The downgrade is not as significant this year, but will be of paramount issue in 12 months, as Greek bonds will not fulfill the requirements for collateral with the ECB. The Greek government says that this will not be an issue, presumably meaning that in a year’s time the rating will be back to the ‘A’ group. But how likely is that to happen?

Standard and Poor’s publish an
annual study on defaults and transitions, which could be used to shed some light. This is based on the historical experience, and I would think that the current conditions are significantly worse than the historical average, so I would personally penalize the figures downwards.

SP say that there is a 13% chance that a BBB+ country moves to A- or above within a year (table 14). This is a historical average figure, and as I mentioned before, could well overestimate the chances of Greece getting back on the As. Much of the sample is from the booming 90s, and assuming the same dynamics today will be misleading.

Incidentally, these probabilities would have been double (table 6), if Greece were out of the Euro zone, as a currency devaluation would have been an option. But this is perhaps academic, as Greece might have had defaulted many years ago if it were not for the security that the Euro offered investors.

Perhaps more crucially, the above statistics include countries that pass through BBB+ on their way up, as well as countries that are on their way down. It is important then to see what is the historical experience of countries that bounced back (table 8). From 141 downgrades, 57 were followed by another (or more) downgrade within two years, 36 remained the same, while only 7 bounced back.

I read this as evidence that the chances of a rebound in such a short space is slim. The Minister appears to have a different opinion.

The following article gives more details. Further down is the interview of Papaconstantinou with the CNN.

Wire: BLOOMBERG News (BN) Date: Dec 9 2009 10:07:10

Greece Downgrades May Hinder Banks Seeking ECB Loans
(Update1) (Adds bond spread widening further, in seventh paragraph.)

By Jana Randow and Frances Robinson

Dec. 9 (Bloomberg) — Greek government bonds may not be eligible as collateral at the European Central Bank if the ECB reverts to pre-crisis rules in 2011, making it more difficult for Greece to borrow money. The credit rating on Greece’s government bonds was yesterday cut by Fitch Ratings to BBB+ and the two other major ratings companies are threatening to follow suit. The ECB currently accepts bonds rated BBB- as collateral for loans after relaxing its rules in response to the financial crisis last year. At the end of 2010, it is due to revert to the old rules, under which A- is the minimum required rating.

“The banks are currently able to pledge bonds issued by their government as collateral at the ECB,” said Ben May, an economist at Capital Economics Ltd. in London. “This will no longer be an option come the end of next year if the other rating agencies follow Fitch’s lead.”

Standard & Poor’s on Dec. 7 put its A- rating on watch for a possible downgrade, signaling it may be reduced within two months. Moody’s Investors Service lowered its outlook on Greece’s A1 rating to “negative” on Oct. 29. Greek stocks and government bonds tumbled yesterday on mounting concern the nation may struggle to meet its debt commitments as public finances deteriorate.

The government raised its 2009 budget-deficit estimate to 12.7 percent of gross domestic product after Oct. 4 elections, three times higher than an earlier forecast and more than four times the 3 percent allowed under the European Union’s Stability and Growth Pact.

‘Stronger Commitment’

“The Greek government will need to demonstrate a stronger commitment to consolidating the fiscal position,” said Laurent Bilke, an economist at Nomura in London. “The Greek economy is already paying a high price given that spreads have widened leading to a high cost of borrowing, and this would get worse.”

The spread between the Greek and German 10-year benchmark bonds widened to 246 basis points today from 130 basis points on Oct. 5. That compares to 25 basis points for Finnish 10-year bonds. Credit-default swaps on five-year government bonds rose to 191 basis points on Dec. 7 from 124 on Oct. 5. That’s the highest in the euro region, followed by Ireland at 153 basis points.

“There’s certainly an element of panic and hysteria,” said Peter Dixon, an economist at Commerzbank AG in London. “The ECB will bend over backwards to ensure that one of the countries within its orbit doesn’t default. There will be a lot of arm-twisting and deals done behind the scenes should it come to it.”

ECB Meeting

ECB Vice President Lucas Papademos met with Greek Prime Minister George Papandreou and Finance Minister George Papaconstantinou last month to discuss the risks facing the Greek economy.

Greece, the lowest-rated country in the euro region, is struggling to shore up its finances amid a year-long recession. The European Commission expects the economy to contract 1.1 percent this year and 0.3 percent next year, before growing 0.7 percent in 2011.

“The government is proceeding with a plan,” Papaconstantinou told reporters in Athens yesterday. “We will do all that’s needed to bring the deficit down in the medium-term. We will submit a supplementary budget if needed.” Greece is committed to a “fair” fiscal consolidation, he said.

Greece has about 700 billion euros of debt outstanding, of which 47 billion is currently used as collateral at the ECB, according to Royal Bank of Scotland Group Plc. If banks were no longer able to use their country’s bonds to refinance at the ECB, demand for them would wane and the government’s borrowing costs would increase further.

“Greece is very unlikely to lose eligibility at the ECB next year as it would need to be downgraded below investment grade over that period,” Jacques Cailloux at RBS in London said in a research note. “In the more medium term, and perhaps from January 2011, the situation could become much more difficult if the ECB was to revert to its pre-crisis collateral policy.”

Here is the interview George Papaconstantinou, Greek Minister of Finance, gave to the CNN:

Wire: VOXANT – Spanish CNN (VOS) Date: Dec 9 2009 6:37:36

Date: December 8, 2009 Time: 14:00:00
Guest: George Papaconstantinou, David Blanchflower, Giovanni Bisignani, Neil Bentley, David Arkless
High: Greece’s sovereign debt has been hit with a downgrade by Fitch.

RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Tonight, an alpha economy no more, Greek stocks take a battering. The country’s credit rating is cut. We speak to Greece’s finance minister.


Good evening. Greece, tonight, becomes the latest country to be battered by the markets, following a downgrade of its sovereign debt. The main stock market in Athens fell more than 6 percent. And that is after some marking falls on Monday.

The decline all happened after the Fitch ratings agency cut Greece’s credit rating to triple B, plus. That is also with a negative outlook. It is the first time in a decade that Greece has been given a below A grade on its debt.

And there could be further falls to come. Another top ratings agency, Standard & Poor’s, has warned it may lower the country’s credit rating because of the ballooning government debt.

The core issue, of course, is whether or not Greece is able to avoid a default on its sovereign debt and in doing so, whether it might have to seek further financial help, whether from the IMF, the ECB or other Euro institutions.

On the line now, Greece’s finance minister, George Papaconstantinou, joining me now.

And Minister, tonight, in Athens, you are facing a full scale financial crisis, aren’t you?

GEORGE PAPACONSTANTINOU, FINANCE MINISTER, GREECE: Good afternoon. We are facing a difficult situation. No, no -absolutely nothing to say about that. At the same time we are a new government that is putting together very quickly a number of initiatives and measures to reassure the markets and our European partners that we are serious about reducing the extremely high deficit that we have, unfortunately, inherited from the previous government.

Remember, we are a government which is in office for 50 days. We started from a very difficult point. And we are doing and we are committed to whatever it takes to make sure that we get the economy back on track.

QUEST: OK, I suppose, I understand that after just 50 days, it is just about impossible to answer many of these questions. But straightforwardly, is it likely that you are going to default on debt, or have to seek further financing, either from the IMF or the ECB, or from other institutions?

PAPACONSTANTINOU: No, the straightforward answer is absolutely not. And this is for the following reasons, what you are seeing at the moment is the rating downgrades basically reflect the lack to credibility that we have seen in the past. We are building that credibility back with a new budget that has been tabled to parliament, which cuts the deficit by 3.6 percentage points, half of which comes from permanent measures, both on the expenditure, and on the revenue side.

We are in the process of a major overhaul of the tax system and expenditure review, which will reduce expenditures throughout the –

QUEST: Right.

PAPACONSTANTINOU: -public sector. So, there is movement on all reform fronts. And I think this will reassure the markets.

QUEST: But realistically to cut the budget deficit by 3 percent in an economy that is already suffering from recession, that is going to have a depressing effect, which could send you double dip, straight back down again.

PAPACONSTANTINOU: It depends what kind of expenditures you are cutting. We are cutting operational expenditures. We are cutting consumption expenditure, whether public sector -we are not cutting back public investment, which we need, in order to keep growing as an economy and not sink deeper into recession.

We are cutting down on waste, we are cutting down on things which are not needed. And unfortunately the last few years we have had a lot of that.

QUEST: Don’t you face a serious problem next year in that some of the debt that is now graded, triple B, or anything less than A, is not valid for you being used as collateral to the ECB, for further liquidity. And many people suggest that is going to be a problem for you, Minister, next year.

PAPACONSTANTINOU: Yes, once the ECB tightens the eligibility criteria, at the same time 2010 will be a year where we will be needing to borrow less than we did in 2009. For the moment we are borrowing at a higher price, but there is not lack of liquidity in the markets. But it is a difficult situation. There is no question about that. And the fact that we move with the kind of reforms which are necessary to reassure the markets, the easier it will be to borrow next year.

QUEST: Minister, finally, the situation tonight, in Athens seems to be, you know, you may well have it under control and you may have a plan to move forward, but whether it is the markets, or whether it is the Greek people, there is going to be some very turbulent times for you in the weeks and months ahead.

PAPACONSTANTINOU: Well, let’s put things in perspective, shall we? The stock market fell 7 percent last week, after Dubai. It then rebounded by 7 percent the next day. So, a daily change in the market index doesn’t say as much as the faith that investors have that there is investment opportunities in this country, that we are moving forward, that we are actually addressing structural problems that we have had for a very long time. And that we are putting an order in our public finances.

QUEST: Minister, many thanks indeed for joining us. We appreciate it. Thank you for coming on QUEST MEANS BUSINESS.


copenhagen —don’t get caught out

December 12, 2009

The circus is finally in town… do I really *have* to pick which fence to sit on?
Unfortunately some things are just too complex to put in sound bites, and proof by repetition does not constitute proof…

What is the ‘null hypothesis’ anyway?

Climate: consensus v sceptics

Click on image to view (source

Is Greece just a bigot state, or a racist state too?

October 29, 2009

The US State Department released a new report on religious freedom in Greece. The religious intolerance exhibited by the Greek orthodox church is well known, but this report demonstrates that the state is also sinking to the same depths.

Another element that is perhaps new, is the apparent racism of the state, illustrated in the Plevris case. We read in the report that

The Greek Helsinki Monitor and the Central Board of Jewish Communities brought charges against the newspaper Eleftheros Kosmos and former Popular Orthodox Rally (LAOS) party candidate Kostas Plevris for racism and anti-Semitism. On December 4, 2007, Eleftheros Kosmos was acquitted, but the court convicted Plevris and sentenced him to a 14-month suspended sentence for inciting hatred and racial violence through his book The Jews–The Whole Truth. The book denied the Holocaust took place and called Jewish people “mortal enemies” and “subhuman.” Plevris appealed his sentence, and on March 27, 2009, an appeals court declared him innocent of all charges, concluding that the accused “did not aim at the Jews because of their racial and ethnic origin but, primarily, because of their pursuits [in seeking] world domination [and] the methods they use in order to fulfill their conspiratorial activity.”

The rational behind the acquittal buffles me. Does the Greek state say via her court that Jews pursue world domination using questionable methods? Is the Greek state still living in the 1930s, subscribing to canards that have been long debunked as hoaxes? And what does that “primarily” mean?

The LA.O.S. party (an acronym for Popular Orthodox Rally) that K. Plevris was standing for recorded fresh highs in the recent general election, with 5.63% of the vote. K. Plevris was not standing this time, but his son did, and was elected Member of Parliament in the district of Athens.

The bizzare world of economists

October 17, 2009

Q: Why shouldn’t you wear a motocycle helmet?
A: Because I am an organ donor.

One of the main arguments for enforcing by law the use of motorcycle helmets (and safety belts) is that there are “negative externalities” associated with accidents: it is the society that will bear the medical costs, the loss of productivity, the waste of education, or the higher insurance premiums.

And typically negative externalities are either criminalised or taxed (to the extent where the tax equals the social costs, a Pigovian tax).

Now in this research paper the authors find that helmet laws have a significant impact on the size of the organ donor pool, and therefore there is a “positive externality” present as well, as (on average) three helmetless dead motorcyclists save one individual on a transplant waiting list.

Which, in the world of economics, means that we should be either directly subsidising helmetless riding, or we should offer income tax deductions, to the extend of the third of a life that we would potentially save. Of course conditional on the rider becoming an organ donor.

education is a liability

February 9, 2009
Education versus wages in finance

Education versus wages in finance

This very interesting graph is taken from this paper, which exhibits the path of wages and the level of education in the financial sector.

It is often quoted that this sector has been recently draining the most qualified university leavers, lured by the exceptionally high salaries. It appears, though, that this is not a new phenomenon, and that we are not far from the levels experienced in the 1930s.

And we all know what happened in the 1930s… Can I therefore conjecture that severe endogenous financial crises are positively correlated with the education level of the financial industry?