....made me think of the current political situation and the anger of the tea-baggers:
"Americans, over invested in material toys and saddled with debt are bored, anguished and discontented and no longer capable of the heroism which rescued them from the terrifying poverty of the Great Depression. And underneath it all, building energies like gases in a corpse. When that explodes, I tremble to think what will be the result." John Steinbeck to his editor Pascal Covici, 1960.
Tuesday, 30 November 2010
Buiter on MCM
He may be the chief economist of Citigroup but that doesn’t mean he can’t speak his mind as his latest essay for the bank’s clients proves. In it, Buiter claims Ireland is insolvent, Portugal is quietly insolvent, Greece is de facto insolvent and Spain will be insolvent once the problems in its banking sector are recognised. At which point things get really interesting. Buiter predicts the ECB could be forced to buy Spanish government paper and fund its banking system by purchasing the debt from the European Financial Stability Facility if things get really bad.
From Buiter’s Sovereign Debt Crisis Update
Portugal and Greece:
After an Irish agreement with the EU/IMF, the market’s attention is likely to turn to Portugal’s sovereign, which at current levels of interest rates and growth rates, is less dramatically, but quietly, insolvent, in our view. We consider it likely that it will need to access the EFSF soon.
Greece is de facto insolvent, in our view, all the more so after the recent debt and deficit revisions. As long as Greece remains sufficiently compliant with the conditionality of its EU/IMF program, sovereign debt restructuring is likely to be postponed at least until mid-2013, when its EU/IMF programme expires. At that point, it likely will be transferred to the EFSF or its successor. Whether its debt will be restructured at that stage, including haircuts, will depend on factors beyond the sustainability of its debt.
Spain:
For now, the markets have put Spain in Italy’s sovereign risk class when, in our view, it should be closer to Portugal and Ireland once its banking sector problems are recognised. We argued before that the EFSF should be much larger (€2trn). Should Spain need assistance, it will stretch the resources of the EFSF, perhaps beyond its current limits. There may be some room to expand the size of the EFSF. But, in our view, once Spain needs assistance, the support of the ECB will be critical (by purchasing Spanish sovereign debt through its Securities Markets Program — SMP — and funding Spanish banks using Spanish sovereign debt or sovereign-guaranteed financial instruments as collateral or by making loans to or purchasing the debt of the EFSF, legally a limited liability company that could even be made an eligible counterparty of the Eurosystem for this purpose).
In the longer term, there may be a need for large-scale restructuring of the debt of the Spanish banking sector and possibly the sovereign. At longer horizons, high debt levels and political instability in Italy and Belgium may yet give rise to fundamentally warranted sovereign debt crises, while self-justifying crises are possible even in the near term, despite roughly balanced structural primary budgets.
And if you thought that the EU/IMF bailout marked the end of Ireland’s troubles, think again says Buiter:
Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.
From Buiter’s Sovereign Debt Crisis Update
Portugal and Greece:
After an Irish agreement with the EU/IMF, the market’s attention is likely to turn to Portugal’s sovereign, which at current levels of interest rates and growth rates, is less dramatically, but quietly, insolvent, in our view. We consider it likely that it will need to access the EFSF soon.
Greece is de facto insolvent, in our view, all the more so after the recent debt and deficit revisions. As long as Greece remains sufficiently compliant with the conditionality of its EU/IMF program, sovereign debt restructuring is likely to be postponed at least until mid-2013, when its EU/IMF programme expires. At that point, it likely will be transferred to the EFSF or its successor. Whether its debt will be restructured at that stage, including haircuts, will depend on factors beyond the sustainability of its debt.
Spain:
For now, the markets have put Spain in Italy’s sovereign risk class when, in our view, it should be closer to Portugal and Ireland once its banking sector problems are recognised. We argued before that the EFSF should be much larger (€2trn). Should Spain need assistance, it will stretch the resources of the EFSF, perhaps beyond its current limits. There may be some room to expand the size of the EFSF. But, in our view, once Spain needs assistance, the support of the ECB will be critical (by purchasing Spanish sovereign debt through its Securities Markets Program — SMP — and funding Spanish banks using Spanish sovereign debt or sovereign-guaranteed financial instruments as collateral or by making loans to or purchasing the debt of the EFSF, legally a limited liability company that could even be made an eligible counterparty of the Eurosystem for this purpose).
In the longer term, there may be a need for large-scale restructuring of the debt of the Spanish banking sector and possibly the sovereign. At longer horizons, high debt levels and political instability in Italy and Belgium may yet give rise to fundamentally warranted sovereign debt crises, while self-justifying crises are possible even in the near term, despite roughly balanced structural primary budgets.
And if you thought that the EU/IMF bailout marked the end of Ireland’s troubles, think again says Buiter:
Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.
FT Alphaville on the Merkel Crash Mechanism
BNP Paribas agrees, it’s the Merkel crash
Posted by Izabella Kaminska on Nov 30 11:15.
It was first highlighted by economist Paul de Grauwe.
But, dare we say, the so-called ‘Merkel crash’ is quickly becoming analyst consensus for what really triggered this latest European debt rout.
As BNP Paribas points out on Tuesday:
Yesterday did see EMU spreads widening further despite the release of a credible Irish rescue package. The reason for continued peripheral selling pressure may be related to the funding needs of banks as highlighted in the stability report of the BoP. It was last Tuesday when Germany showed a blueprint for the further regulation of the private bond market. Germany aims introducing this law in 2011 and would like to harmonise this law EU wide. The blue print suggested that next to creditors and debtors it would be the regulator to decide if and when there would be hair cuts or maturity lengthening on outstanding bonds announced. Hence, last Tuesday set the starting point for bank CDS’s moving sharply up as markets assumed that bonds which such kind of clause (regulator deciding) would be difficult to sell. Spanish banks will have come to the capital market in the first half of 2011 and will have to issue more bonds than the Spanish sovereign. The stability report of the BoP highlighting this problematic will keep investors concerned and the EUR offered.
And thus the European Stability Mechanism is transforms ever more officially into the European Instability Mechanism (EIM), alternatively to be known as Merkel’s Crash Mechanism (MCM).
Vorsprung durch mechanismen.
Posted by Izabella Kaminska on Nov 30 11:15.
It was first highlighted by economist Paul de Grauwe.
But, dare we say, the so-called ‘Merkel crash’ is quickly becoming analyst consensus for what really triggered this latest European debt rout.
As BNP Paribas points out on Tuesday:
Yesterday did see EMU spreads widening further despite the release of a credible Irish rescue package. The reason for continued peripheral selling pressure may be related to the funding needs of banks as highlighted in the stability report of the BoP. It was last Tuesday when Germany showed a blueprint for the further regulation of the private bond market. Germany aims introducing this law in 2011 and would like to harmonise this law EU wide. The blue print suggested that next to creditors and debtors it would be the regulator to decide if and when there would be hair cuts or maturity lengthening on outstanding bonds announced. Hence, last Tuesday set the starting point for bank CDS’s moving sharply up as markets assumed that bonds which such kind of clause (regulator deciding) would be difficult to sell. Spanish banks will have come to the capital market in the first half of 2011 and will have to issue more bonds than the Spanish sovereign. The stability report of the BoP highlighting this problematic will keep investors concerned and the EUR offered.
And thus the European Stability Mechanism is transforms ever more officially into the European Instability Mechanism (EIM), alternatively to be known as Merkel’s Crash Mechanism (MCM).
Vorsprung durch mechanismen.
Saturday, 20 November 2010
Michael Dirda on John Banville
Chekhov used to say that one had to be a god to distinguish between success and failure. While John Banville has won Britain’s major literary awards—the James Tait Black Memorial Prize for Doctor Copernicus in 1976 and the Guardian Fiction Prize for Kepler in 1981, as well as the real plum, the Man Booker for The Sea (2005)—and while he has been widely (and rightly) acclaimed for his linguistic inventiveness and artistic intelligence, his novels have tended to be more admired than loved. My impression from reading reviews and talking to readers is that his books, for all their virtuosity and precision, are seen by many as slightly forbidding and emotionally cold, their tone arch, their humor nastily black.
William Easterly on Foreign Aid for Scoundrels in the NYRB
....A more important political motive for aid is independent of cold wars or wars on terror. Aid agencies exist to give aid, so they must keep the money flowing. The department of an aid agency assigned to help a country may not get a budget next year if its officials don’t disburse to the country’s ruler this year; so they hand out funds no matter how autocratic he is.....
...The concept of development helps rationalize the position of autocrats by postulating an unstoppable transition toward a bright future. This is why donors call all poor countries “developing.” Once the donors started paying lip service to democracy, they could label undemocratic aid recipients as “democratizing.” Let’s call this the Gerund Defense for supporting dictators....
...The Gerund Defense has the attraction of being irrefutable. We don’t know the future, so we don’t know whether a particular event is a “setback” to “building institutions,” or whether the “building” is a myth. We could of course observe the actual trend in “democratizing”—but this has been discouraging in Ethiopia, where parties and politicians that seriously challenge the government risk prison. Donors could conceivably overlook anything, even the 1994 Rwanda genocide, as a temporary “setback” to an “innate tendency.” Such a view is not as easily dismissed as you might think.
...The concept of development helps rationalize the position of autocrats by postulating an unstoppable transition toward a bright future. This is why donors call all poor countries “developing.” Once the donors started paying lip service to democracy, they could label undemocratic aid recipients as “democratizing.” Let’s call this the Gerund Defense for supporting dictators....
...The Gerund Defense has the attraction of being irrefutable. We don’t know the future, so we don’t know whether a particular event is a “setback” to “building institutions,” or whether the “building” is a myth. We could of course observe the actual trend in “democratizing”—but this has been discouraging in Ethiopia, where parties and politicians that seriously challenge the government risk prison. Donors could conceivably overlook anything, even the 1994 Rwanda genocide, as a temporary “setback” to an “innate tendency.” Such a view is not as easily dismissed as you might think.
Giles Harvey on Saint Bob in the NYRB
As the Sixties wore on, however, Dylan grew increasingly frustrated with what he came to regard as the pious sloganeering and doctrinaire leftist politics of the folk milieu. (Such politicized folk music, Dylan said in one of the notorious semicoherent interviews he gave mid-decade, “is a bunch of fat people.”) As a result, his songs became stranger, more complex, less overtly concerned with the political happenings of the day. They no longer partitioned the country into moral factions, with arms dealers, corrupt politicians, Southern racists, and conventional bourgeois society on one side and the young, the poor, the downtrodden, and the guitar-and- harmonica-wielding troubadours on the other. They no longer asked—as Florence Reece’s pro-union protest song of the 1930s had done—”Which Side Are You On?” Instead, Dylan began writing a kind of visionary nonsense verse, in which the rough, ribald, lawless America of the country’s traditional folk music collided with a surreal ensemble of characters from history, literature, legend, the Bible, and many other places besides.....
.....Dylan has certainly made some astonishing records since then (1966), most notably The Basement Tapes, John Wesley Harding, and Blood on the Tracks (1975); but for years at a stretch—from 1971 to 1975, from 1978 to 1989—he went into creative tailspin, releasing album after album of generally insipid material......as the years went by, Dylan found himself trapped inside the aspic of his own legend.
.....Dylan has certainly made some astonishing records since then (1966), most notably The Basement Tapes, John Wesley Harding, and Blood on the Tracks (1975); but for years at a stretch—from 1971 to 1975, from 1978 to 1989—he went into creative tailspin, releasing album after album of generally insipid material......as the years went by, Dylan found himself trapped inside the aspic of his own legend.
Tuesday, 16 November 2010
Roubini on Eurozone sovereign debt restructuring mechanisms
First, consider that any holder of CDS protection would not be a creditor of a distressed sovereign unless he/she has an actual long position in the underlying bonds; holders of CDS protection don‘t vote in a debt restructuring process (i.e., an exchange offer) if their CDS protection is naked without any underlying actual exposure to the bond........
Since most likely an exchange offer under threat of default is considered—as it is by rating agencies that considered them as coercive thus triggering a selective default rating–as a credit event that triggers the CDS an holder of CDS protection would be paid regardless of whether he/she has underlying exposure to the bonds and regardless of whether he/she tries to sabotage the debt restructuring. In effect, the holder of CDS protection has no incentive to sabotage a restructuring because such a restructuring is by itself a credit event that triggers the CDS regardless of whether the restructuring is successful or not.........
In summary, a European SDRM is not necessary to achieve an orderly restructuring of public debts of eurozone members. Such restructuring can be achieved in an orderly manner any time via the traditional tool of exchange offers that have been successfully been used for emerging market sovereigns in distress. Thus, the current debate on a European SDRM is a total red herring: The reason why the EU has so far decided to provide financing to member states in distress is not the lack of a legal mechanism for an orderly restructuring; rather, it reflects concern about systemic contagion. But an orderly restructuring via exchange offers can significantly reduce such a risk while providing significant debt servicing relief to sovereign that are financially distressed via an orderly—if coercive—debt restructuring.
The current tragedy is that the European debate on a crisis resolution mechanism or SDRM has had perverse effects: .... the talk about a European SDRM has been the trigger of the recent blow-out of Irish spreads and created greater turmoil than order. Additionally, the confusing and contradictory remarks of EU officials and national leaders on when the restructuring mechanism will take effect and to which debts it will apply (new or old ones) has created greater uncertainty among investors. The reality is that, regardless of what the EU says or doesn‘t say, the probability of a coercive restructuring of the Greek or Irish debt is totally independent of whether a European SDRM will be created in 2013 or later and whether its terms would apply to new or old debt. The EU has zero effective power in deciding—via a new legal mechanism—whether Greece or any other EZ sovereign will restructure its debt and when.
Indeed, if Greece does not regain market access it will be forced to restructure its debts when the IMF/EU bailout program expires even if, as possible, the IMF or the EU were to decide to maintain its exposure to Greece upon expiration of that official support. In effect, if Greece doesn‘t regain its market access, its need to finance its new yearly deficits and to rollover private claims coming to maturity will force a debt restructuring. To prevent this, IMF/EU would have to not only extend their existing program but, on top of that, significantly increase its lending/financial commitments beyond the current €110 billion lending envelope since Greece will have large financing needs beyond 2012 given its ongoing fiscal deficit and need to rollover private claims coming to maturity.
This is why the recent statement by some European finance ministers asserting that the proposed debt restructuring mechanism will apply only to debts issued only after 2013—a statement which backpedaled away from previous pronouncements in order to calm spooked bond markets—is totally meaningless.....Moreover, the recent statement of a sub-set of EU finance ministers that haircuts will be imposed on new debts issued after 2013 not the old one is actually counter-productive and ensures that PIIGS in distress will lose market access rather than regain it over time: Why would any private creditor of a PIIGS want to purchase the newly issued debt of such a sovereign when such debt—rather than the old one—would be restructured? The whole logic of DIP financing is that new debts get seniority relative to old debts—that are already locked in—to ensure that new financing arrives to a sovereign under distress. The weird EU view that new debts—rather than old ones—would be subject to debt restructuring turns the basic principle of DIP financing on its head and ensures that market access will be lost even to distressed sovereigns that still have such access.
The constraints for an orderly debt restructurings are not legal–the lack of a formal crisis resolution mechanism; they are rather political: i.e., when will the EU agree that some of its member states are not just illiquid but near insolvent and thus in need of an orderly market based restructuring of their public debts that would provide debt relief while limiting the risk of a systemic contagion to the rest of the eurozone.
Since most likely an exchange offer under threat of default is considered—as it is by rating agencies that considered them as coercive thus triggering a selective default rating–as a credit event that triggers the CDS an holder of CDS protection would be paid regardless of whether he/she has underlying exposure to the bonds and regardless of whether he/she tries to sabotage the debt restructuring. In effect, the holder of CDS protection has no incentive to sabotage a restructuring because such a restructuring is by itself a credit event that triggers the CDS regardless of whether the restructuring is successful or not.........
In summary, a European SDRM is not necessary to achieve an orderly restructuring of public debts of eurozone members. Such restructuring can be achieved in an orderly manner any time via the traditional tool of exchange offers that have been successfully been used for emerging market sovereigns in distress. Thus, the current debate on a European SDRM is a total red herring: The reason why the EU has so far decided to provide financing to member states in distress is not the lack of a legal mechanism for an orderly restructuring; rather, it reflects concern about systemic contagion. But an orderly restructuring via exchange offers can significantly reduce such a risk while providing significant debt servicing relief to sovereign that are financially distressed via an orderly—if coercive—debt restructuring.
The current tragedy is that the European debate on a crisis resolution mechanism or SDRM has had perverse effects: .... the talk about a European SDRM has been the trigger of the recent blow-out of Irish spreads and created greater turmoil than order. Additionally, the confusing and contradictory remarks of EU officials and national leaders on when the restructuring mechanism will take effect and to which debts it will apply (new or old ones) has created greater uncertainty among investors. The reality is that, regardless of what the EU says or doesn‘t say, the probability of a coercive restructuring of the Greek or Irish debt is totally independent of whether a European SDRM will be created in 2013 or later and whether its terms would apply to new or old debt. The EU has zero effective power in deciding—via a new legal mechanism—whether Greece or any other EZ sovereign will restructure its debt and when.
Indeed, if Greece does not regain market access it will be forced to restructure its debts when the IMF/EU bailout program expires even if, as possible, the IMF or the EU were to decide to maintain its exposure to Greece upon expiration of that official support. In effect, if Greece doesn‘t regain its market access, its need to finance its new yearly deficits and to rollover private claims coming to maturity will force a debt restructuring. To prevent this, IMF/EU would have to not only extend their existing program but, on top of that, significantly increase its lending/financial commitments beyond the current €110 billion lending envelope since Greece will have large financing needs beyond 2012 given its ongoing fiscal deficit and need to rollover private claims coming to maturity.
This is why the recent statement by some European finance ministers asserting that the proposed debt restructuring mechanism will apply only to debts issued only after 2013—a statement which backpedaled away from previous pronouncements in order to calm spooked bond markets—is totally meaningless.....Moreover, the recent statement of a sub-set of EU finance ministers that haircuts will be imposed on new debts issued after 2013 not the old one is actually counter-productive and ensures that PIIGS in distress will lose market access rather than regain it over time: Why would any private creditor of a PIIGS want to purchase the newly issued debt of such a sovereign when such debt—rather than the old one—would be restructured? The whole logic of DIP financing is that new debts get seniority relative to old debts—that are already locked in—to ensure that new financing arrives to a sovereign under distress. The weird EU view that new debts—rather than old ones—would be subject to debt restructuring turns the basic principle of DIP financing on its head and ensures that market access will be lost even to distressed sovereigns that still have such access.
The constraints for an orderly debt restructurings are not legal–the lack of a formal crisis resolution mechanism; they are rather political: i.e., when will the EU agree that some of its member states are not just illiquid but near insolvent and thus in need of an orderly market based restructuring of their public debts that would provide debt relief while limiting the risk of a systemic contagion to the rest of the eurozone.
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