International Political Economy Zone: Credit Crisis

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Trump Antagonizing Turkey is a Really Bad Idea

♠ Posted by Emmanuel in Credit Crisis,Middle East,Security at 8/10/2018 05:51:00 PM

Perhaps someone should tell Trump of US bases in Turkey prosecuting the War on Terror.

Here we go again: some months ago, Saudi Arabia, the United Arab Emirates, Bahrain and Egypt embargoed Qatar over its alleged support for terrorism. Qatar, after all, has comparatively cordial relations with the likes of Hamas and Hezbollah. There's also the matter of state-funded broadcaster Al Jazeera continuously blasting Qatar's neighbors over authoritarian rule when Qatar just happens to be an, er, absolute monarchy. What right did the network have to criticize the likes of Saudi and the Emirates?

Enter Trump. Ever so vainglorious, he suggested that the embargo against Qatar was a good idea, and that he encouraged leaders of some of these countries to isolate Qatar besides. Whether the ignoramus was aware that thousands of American troops "fighting terrorism" were stationed in Qatar or not, Trump had to backtrack on his Qatar-bashing a few days later:

But Qatar is also home to the Al Udeid Air Base, which hosts more than 10,000 American servicemen. The air base is the main regional center for air missions against ISIS.

Trump mentioned the base in a May 21 speech in Saudi Arabia, calling Qatar a "crucial strategic partner," but MSNBC reported Thursday that a source close to the President suggested that Trump was perhaps unaware that there were American troops stationed in the oil-rich nation.

"I think it is fair to say that if there is a crisis this would be the first time he was briefed on exactly where our bases are in the region," Nicole Wallace said.

At present, global financial markets for stocks, bonds and currencies are being roiled by Trump fighting Turkey over the release of some evangelical minister jailed over what appears to be a trumped-up charge. Adding fuel to the fire, he's just announced forthcoming additional tariffs on Turkish steel and aluminum. What started the entire imbroglio were negotiations that broke off over the release of one Andrew Brunson, the pastor detained in Turkey. Likely to please his base of evangelical voters who overlook his enormous and ever-growing portfolio of seven deadly sins, Trump probably calculates that destroying the world's 19th most populous country is a small price to pay for a few more votes come election time Stateside. "Stick it to the "Mooslems"!" is probably the Trumpian rallying cry of them moment.

But, there's also the small, neglected detail that Turkey is a key part of the Western security equation in that part of the world:

It is unlikely that the United States and Turkey will resolve their differences anytime soon. But given Turkey’s geostrategic location—in the backyard of Russia, and bordering Iraq, Iran, and Syria—the United States has an interest in maintaining the relationship. Turkey, meanwhile, does not need to add to its economic woes. The hope, at this point, is that as both Erdogan and Trump play to their bases, they’ll refrain from actions that would be hard to walk back from without embarrassment to either leader’s large ego. Despite the shifts of recent decades, the United States and Turkey still need each other. And the temporary political benefits domestically probably don’t outweigh that.

While it is indeed true that Turkey under Erdogan is moving away from democracy and towards authoritarianism, so is the United States under Trump. Still, it's inadvisable that the American blowhard offend the Turkish blowhard enough as to blow up the postwar security arrangement underpinning NATO. That is, NATO has sought Turkey as a moderating force with regard to Muslims participating in regional security arrangements to counterbalance accusations of religious prejudice. Not that Erdogan is reserved in fanning such insinuations:

President Erdogan described the sanctions on his ministerial colleagues as a “Zionist Evangelist plot” and vowed to retaliate in kind by imposing sanctions on the American counterparts of the Turkish ministers.

Pro-government Turkish newspapers are baying for United States troops to be kicked out of Incirlik, a Turkish air base used in the fight against Islamic State militants and other critical missions, but the Turkish government has not moved in that direction yet.

Insofar as Trump's USA is really punishing Turkey without much enthusiasm from other NATO allies, this brouhaha may be another case of him blowing up long-established relations for the sake of (perceived domestic) electoral gains. But, who would NATO turn to if Turkey boots the US bases out of the country? Where would the Yanks go then? The answers aren't clear, and you do hope Trump is apprised of this potential complication should he continue to punish Turkey over perceived personal slights.

Deutsche Bank & the Ballad of the Bumbling Germans

♠ Posted by Emmanuel in Credit Crisis,Europe,Financial Services at 9/28/2016 04:33:00 PM

You know, Deutsche Bank was really well-respected once upon a time.

I am old enough to remember a time when the now-infamous Deutsche Bank had one of the highest credit ratings of European banks. But that was before the turn of the millennium--a long, long time ago in a political economy far, far away. What happened between then and now? The curse of (global) ambition, that's what. Just as American giants like Citigroup and European ones like HSBC thought that harnessing economies of scale represented the way of future, Deutsche too embarked on a multi-country expansion into different product lines. Today, of course, the era of the global universal bank dream is well and truly over:

Other global banks are also rethinking their models. Barclays Plc is looking to sell down its business in Africa and has stopped trading stocks in Asia. Royal Bank of Scotland Group Plc, once Europe’s largest lender, has abandoned almost all foreign operations, retreating to its home market in the U.K., and is getting out of most capital-markets businesses. Deutsche Bank AG wants to sell a German consumer bank it bought in 2010 and is cutting back bond trading.

The question remains: OK, if major banks had already begun the process of retrenching--especially post-global financial crisis--then why is Deutsche Bank especially in trouble? Simply, its leadership still harbored delusions of globe-spanning grandeur as late as 2014:

It was the defining bet of Anshu Jain’s reign at Deutsche Bank. In 2014, as most European banks were retrenching in the face of slackening markets and tightening regulation, the German lender’s then co-chief executive took the opposite course.

Two weeks after Barclays — Deutsche’s European arch-rival — capitulated to market pressure and slashed its debt trading business, Deutsche launched a plan to raise €8bn in capital. The move was, in part, designed to give Germany’s biggest bank the firepower to win market share as its rivals faltered, and to position it as the last remaining European challenger to the US titans on Wall Street. Deutsche, Mr Jain said at the time, would be the “only truly universal bank based in Europe”.

That bet failed: markets remained slack and regulation kept tightening. Two years on, Mr Jain and Jürgen Fitschen, with whom he shared the top job, have stepped down. Deutsche’s investment bank has lost its top three ranking. The group’s capital position is under scrutiny. And Mr Jain’s successor, the former UBS banker John Cryan, has embarked on a painful curtailing of Deutsche’s global ambitions.

Mr Cryan faces a formidable task. Deutsche’s markets business, which accounts for a third of its revenues, is struggling to cope with a world of lower trading volumes, tougher capital requirements and increasing US dominance. Its retail bank in Germany, where margins were always thin, is suffering under Europe’s rock-bottom interest rates. Total costs are stubbornly high and the bank is grappling with legal challenges that could cost it billions of euros. Last year, Deutsche — a pillar of Germany’s postwar economic strength, and a cog in global capital markets — made a €6.8bn loss amid a host of fines and writedowns. Analysts predict an €860m loss this year.

Today's Deutsche thus has a wafer-thin capital cushion and several unprofitable lines of business. This amidst all sorts of "legacy" costs emanating from its past activities. While the $14B fine proposed by US Department of Justice for Deutsche's past mortgage security-related indiscretions will likely be reduced, even a fine half of that would severely strain the bank's resources.

The bank's troubles are putting German leaders in a pickle. Having insisted to other countries that they should not bail out their troubled lenders come hell or high water during recent years, Chancellor Angela Merkel and Finance Minister Wolfgang Schauble would rightly be accused of being hypocrites if they came to Deutsche Bank's rescue. That said, the pan-European effects of its demise would be huge and likely hurt other Europeans too:

A few years into the eurozone crisis, Chancellor Merkel and her finance minister, Wolfgang Schäuble, led a charge against state-sponsored bank bailouts. Instead, they championed new European rules, now in force, that compel creditors—mainly bondholders and, in some cases, depositors—in troubled banks to chip in before the government steps in.

“State aid won’t happen,” Thomas Oppermann, floor leader of the ruling Social Democrats, told reporters on Tuesday. “It’s now, first of all, up to the bank to solve the problems.” Still, few analysts expect that Deutsche Bank could be left to fail or be forced into a bail-in. The risk, many say, would spread far beyond Germany. Deutsche is a large and highly networked bank on a continent replete with fragile lenders and economically hamstrung after years of low growth.

It's a no-win situation for Germany. I think its leadership will lean on the US to lessen the fine or even defer a portion of it, but the reputational damage is already done. Germans have a reputation for competence and efficiency, but modern-day Deutsche Bank is strictly Amateur Nite. To paraphrase Pink Floyd, encumbered forever by desire and ambition, this is the sad end for a hunger left unsatisfied.

New Venezuelan FinMin: Inflation Doesn't Exist

♠ Posted by Emmanuel in Credit Crisis,Energy,Latin America at 1/26/2016 01:30:00 AM

Guerra economica and ever after.

The late Venezuelan President Hugo Chavez was once described as a "Narcissist-Leninist" by a number of economic commentators. As we've subsequently learned, self-ingratiating policies for the alleged benefit of the global workingman worked a lot better when oil was at $100/barrel instead of less than a third of that. In the latter situation which Chavez's successors find themselves, the scope for the Venezuelans spreading their largesse from oil revenues is greatly diminished since, well, the country is now faced with empty coffers selling the stuff at below cost for months on end.

Enter Venezuela's new finance minister, Luis Salas. It's not a good start that he's not an economist by training but a sociologist, but it only gets more interesting. Recently, he declared that inflation does not exist:

Venezuela's new economy czar Luis Salas is tasked with controlling what is believed to be the world's highest rate of inflation, but comes to the job with an unusual perspective: that inflation does not really exist.

President Nicolas Maduro on Wednesday tapped the 39-year-old sociologist as vice president for the economy amid soaring consumer prices and chronic product shortages, signaling a move toward orthodox socialism in the OPEC nation struggling under low oil prices.

Essays written by Salas describe scarcity and spiraling prices as the result of exploitation by businesses rather than government policy, offering an academic underpinning to the "economic war" explanation that Maduro uses to describe the current malaise of recession, runaway prices and widespread product shortages.

"Inflation does not exist in real life," he wrote in a 2015 pamphlet called "22 Keys to Understanding the Economic War." "When a person goes to a shop and finds that prices have gone up, they are not in the presence of 'inflation.'"

Salas has argued against the idea that excessive printing of money causes inflation - an almost universally accepted tenet of macroeconomics. He insists prices rise primarily because corporations seek excessive profit margins.

He also goes on a tired rather than proffer any explanation of how to deal with inflation (which you wouldn't have to deal with to begin with if it didn't exist):

Salas' numerous online essays are written in flowing academic prose featuring caustic turns-of-phrase such as "speculative-parasite-vulture capital" or "global war of the planetary plutocracy."

Few offer specific policy proposals. One list of ideas for economic policies for 2016 published on Salas' blog includes a recommendation that economic policy should be "coherent" and "should not be passive but rather active and on the offensive."

Going back to the father of socialism, did Marx also deny the existence of inflation? Actually, no. From Das Kapital:

If the paper money is in excess, if there is more of it than represents the amount of gold coins of like denomination which could actually be current, it will (apart from the danger of falling into general disrepute) represent only that quantity of gold, which, in accordance with the laws of circulation of commodities, is really required and is alone capable of being represented by paper. If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one-quarter of an ounce. The effect is the same as if an alteration had taken place in the function of gold as a standard of prices. The values previously expressed by the price ’1 will now be expressed by the price £2.

Why is it that today's socialists deny Marx's insights? If anything, this guy is even worse than Chavez--a "Fantasist-Leninist" [!] I'll stick with "inflation is always and everywhere a monetary phenomenon" which sounds rather more likely than "inflation doesn't exist."

Gold & Euros: Is Russia's Central Banker Really That Dumb?

♠ Posted by Emmanuel in Credit Crisis,Europe,Russia at 7/31/2015 01:30:00 AM

For everything there is a season, a time for every activity under heaven - Ecclesiastes 3:1.

If you had loaded up on gold and euros during, say, the pre-global financial crisis time frame, I suppose you'd have done well as both increased significantly in value. China's voracious demand buoyed gold and the euro as well as the commodity supercycle approached its peak. However, in the run-up to a Federal Reserve rate hike--the first in a long time since rates were slashed to zero during the aforementioned financial crisis--you'd be a fool to go long on gold and euros. Unfortunately for Russia, that's exactly what its central bank governor Elvira Nabuillina has done:

Bank of Russia Governor Elvira Nabiullina picked the wrong time to load up on gold and the euro. The miscalculation means Russia is now down $200 million in its quest to raise international reserves, an effort it suspended Tuesday amid a rout in the ruble, after it spent about $10 billion on foreign currency since mid-May.

What the 51-year-old central banker was up against is this year’s slide of 9.5 percent in the euro against the dollar and gold’s 8.4 percent tumble in 2015. Both declines hurt because Russian reserves last year contained more euros than dollars for the first time since 2008 and its bullion hoard has tripled since 2005.

“It’s very strange for me that no one has yet put a question to the central bank over the results of its reserves management,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail.

Losev, in a democracy in name only, no one dares question the actions of Putin acolytes like Nabiullina.

Ravaged by a crash in oil prices and almost $90 billion in interventions to rescue the ruble last year, Russia’s reserves were at $358.3 billion on July 24, down almost 30 percent from last year’s peak. The central bank shifted to a free-floating exchange rate ahead of schedule in November as Putin said the country won’t “mindlessly burn up” reserves to defend its currency.

However, Leonid Bershidsky suggests that Russia's actions are not as stupid as they may seem if these actions are seen from a political rather than an economic lens:

The dramatic drop in the price of gold makes Russia look like a classic sucker: As the price went down, it expanded its gold reserves. The Russian central bank is getting punished for betting on gold rather than U.S. assets as the Cold War seemed to restart last year. But it's not that simple -- the gold that Russia's buying is domestically produced and paid for with devalued rubles...

One reason Russia's otherwise highly competent central bankers did this was political. Last year, after the Crimea invasion, the fear of Western financial sanctions made them dump U.S. treasuries, reducing holdings to $86 billion in December from $126.2 billion in February, and seek a safe haven in neutral, albeit unfashionable gold. It bought 171 metric tons, or 5.5 million ounces, in 2014.

The gold lobby has been particularly strong in pushing their cause wit h the central bank:

The reason for this strange behavior lies in the dependency of Russia's gold industry on central bank purchases. Last year, according to the Moscow-based Gold Mining Union, Russia became the world's second-biggest producer of the precious metal, extracting 288 tons. Producers are not allowed to export their output directly. Instead, they have to sell it to banks, which are authorized to deal with foreign buyers and the Russian central bank.

Last year, European banks bought 76 tons -- they have long-standing trading arrangements with state-owned Russian banks, the biggest buyers on the domestic market -- but the central bank dwarfed that, snapping up 59 percent of all output.

At the end of February, the Gold Mining Union, worried that its members' biggest customer was showing no interest, wrote a letter to the central bank, asking it to expand purchases by 30 percent this year compared with 2014 as compensation for sharply increased interest rates (the key rate had gone up to 17 percent in December to prop up the free-falling ruble) and to balance the domestic market. In response, deputy governor Dmitri Tulin promised to keep buying but said the central bank "considers it impossible to replace all domestic market buyers including domestic industries."

So, there may be an element of the central bank being held hostage by special interests, i.e., the gold lobby. That said, Bershidsky's version does not fully explain why the Russians have swapped large amounts of dollar- for (depreciating) euro-denominated assets. I think it's partly both behind Russia loading up on assets of diminishing value: special interests making themselves known and plain old wishful thinking.

Besides, I do not fully understand why Russia would consider holding euros rather than dollars "safer" from a security standpoint when the Europeans have been as keen on hitting Russia with sanctions as the Americans. Go figure.

Be Merkel: D-I-Y Austerity Measures on Greece

♠ Posted by Emmanuel in Credit Crisis,Europe at 7/17/2015 12:47:00 PM

Austerity may cause the Greek speaker of parliament to literally lose the shirt off her back according to this site.

From MarketWatch we receive word of the "Random Austerity Measure Generator" that spits out additional, somewhat amusing, austerity measures for various hapless EU peripheral economies. But seriously, there is certainly a worthwhile debate to be had about the economic consequences of these Eurozone slackers being subject to austerity measures. There is even a reasonable case for removing Germany from the Eurozone to improve the competitiveness of the ne'er-do-wells. That said, constant mediocrity inevitably has its price, which is mostly German-imposed austerity here.

Once more, if you were sensible enough to begin with, you would not put yourself in this position--at the mercy of more prosperous Eurozone economies that treat you with utter contempt. That you are also made a laughingstock only adds insult to injury.

Grecian Style [sic]: The ECB Haircut Guide

♠ Posted by Emmanuel in Credit Crisis,Europe at 7/11/2015 01:30:00 AM

From Patrick Chovanec, it's the barbershop special for Greece. I doubt whether its creditors will reduce the amount of debt they're owed by Greece this time around, but it's likely inevitable if they decide to keep the country in the Eurozone. That is, a reduction or haircut on the face value of Greece's debts can hardly be avoided. At the moment it looks like "extend and pretend" that Greece will be able to pay. Until the day of reckoning comes, enjoy the stylistic decisions that have to be made before then...

Death Wish 6: Tsipras, Greek Financial Suicide Co-Pilot

♠ Posted by Emmanuel in Credit Crisis,Europe,Socialism at 6/30/2015 01:30:00 AM

Hitch a ride with the infantile Tsipras.

Andreas Lubitz, the suicidal Germanwings co-pilot who crashed an Airbus A320 into the French Alps, has understandably gone down in infamy for his actions. Suicide is bad enough from the perspective of any number of major world religions, but taking another 149 lives with you is much, much worse. I was reminded of the Lubitz episode when Greece's amateur-grade pinko of a "leader," Alexis Tsipras, engaged in financial suicide that took the entire Greek nation to an unknown, likely morbid, fate.

You see, like Lubitz practicing how to plunge a jetliner to its grave, Tsipras had premeditated financial suicide, taking 11 million people along for the ride to oblivion. Readers of my generation should be familiar with the Charles Bronson action franchise Death Wish that ran from the 1970s to the 1990s. Let's just say the latter sequels were not any good...but Death Wish 6: Tsipras, Greek Financial Suicide Co-Pilot would be the worst of the lot. In this 2015 remake, Tsipras plunges the Eurozone into turmoil out of his Narcissist-Leninist convictions to speed the demise of capitalism.

What evidence do I offer that Tsipras' suicide act--pretending a referendum was a "democratic" choice even it was to be held after financial lifelines are cut--was premeditated? I offer you two things. First, Greek negotiators thought they were talking in good faith with the nation's creditors when Tsipras pulled a "gotcha" on everyone--including them:

No one was more surprised by Greek Prime Minister Alexis Tsipras’s call for a referendum than his team of negotiators in Brussels. Shortly before midnight on Friday in the Belgian capital, the Greeks and representatives of the European Union and International Monetary Fund, tucked away in the EU Commission’s Charlemagne building, learned via Twitter that their efforts were in vain, according to an EU official. It was the first they’d heard about it. They soon left the room, their attempts to thrash out a compromise in tatters.

Second, Tsipras ignored his so-called "finance minister," self-styled erratic Marxist Yanis Varoufakis, over imposing capital controls on the Greek people. Said Varoufakis:

Capital controls within a monetary union are a contradiction in terms. The Greek government opposes the very concept.

Yeah, whatever. The upshot is that Tsipras had no intention of concluding an agreement with Greece's creditors anyway--the Greek negotiators were props. Even the leftist agitator Varoufakis was only there for show. While we don't know when Tsipras became convinced of his death wish any more than Lubitz did, that he had one is certain.

Reading the concluding text of the Communist Manifesto, Tsipras' methods are perfectly understandable in hindsight as he attempts to make the ruling classes tremble. He may not singlehandedly destroy the Eurozone, but he certainly will try his darndest to do so even if he damns the whole Greek nation to oblivion:

The Communists turn their attention chiefly to Germany, because that country is on the eve of a bourgeois revolution that is bound to be carried out under more advanced conditions of European civilisation, and with a much more developed proletariat, than that of England was in the seventeenth, and of France in the eighteenth century, and because the bourgeois revolution in Germany will be but the prelude to an immediately following proletarian revolution.

In short, the Communists [e.g., Syriza--ed.] everywhere support every revolutionary movement against the existing social and political order of things. In all these movements they bring to the front, as the leading question in each, the property question, no matter what its degree of development at the time. Finally, they labour everywhere for the union and agreement of the democratic parties of all countries.

The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win [my emphasis].

Proletariat of all countries, unite, and all that.

UPDATE 1: I obviously agree with Chris Giles of the FT that Tsipras is getting what he deserves.

UPDATE 2: Here is a more sympathetic view of Tsipras despite costing Greece billions with his antics.

I [Heart] Comedy: Russia 'Rescuing' Greece; Other Idiocies

♠ Posted by Emmanuel in Credit Crisis,Europe,Russia at 6/19/2015 02:44:00 PM

"Psst...Tsipras! I've got you covered if you really want to finish off Greece."

I am utterly entertained by the idea that Russia can help bail out Greece. True, the so-called Greek "socialist" government full of Burberry scarf-wearing and Paris Match magazine-hogging amateurs threaten Western European powers by cottoning up to Vladimir Putin. Still, the idea of Greece becoming a Russian satellite is definitely among the more amusing Syriza rants including asking for WWII reparations from Germany and styling the IMF as a criminal organization. (Remind me to try that last one on people I borrow money from in the future.)

Let's start off with Foreign Policy and its usual sort of unsubstantiated sensationalism about Russia coming to the rescue of Greece:

So far, Russia has largely stayed out of the European financial crisis. But the Greek conundrum provides a tasty incentive to dive in. If Moscow does, it would transform a five-year economic crisis into a geopolitical one. “You don’t want Europe to have to deal with Greece, who is a member of NATO, all of the sudden cozying up to Russia,” Sebastian Mallaby, a senior fellow for international economics at the Council on Foreign Relations said Thursday.

Ahead of the Friday meeting, Russian Deputy Prime Minister Arkady Dvorkovich said he “cannot comment on specific decisions” when asked if Moscow would rescue Athens.

The reliably yellow Daily Telegraph loves reheating this sort of Cold War nonsense:

A communist Greek revolution today may seem a laughable idea. Just as with the Baltic, we like to imagine that the West’s ideological victory in the land of tavernas and so many British summer holidays is irreversible. But it is not. Earlier this year Russia signed an agreement with Cyprus to give Russian naval vessels access to Cypriot ports. On the beaches of Greece’s islands this year you will hear Russian everywhere. The West’s sphere of influence cannot be taken for granted, neither in Greece nor the Balkan peninsular which it caps. We must not be complacent.

But, back to the real world. Fantasy-loving hacks aside, let's take a look at some hard numbers. Even with upgraded forecasts, the one-trick Russian economy--dependent as it is on energy exports--will shrink a lot this year and barely grown next:

The World Bank has raised its GDP growth forecasts for Russia "to reflect a further stabilization of global oil prices". It lifted its forecast for 2015 to a contraction of 2.7 per cent, up from the contraction of 3.8 per cent it predicted in April. In addition, it has bumped up its growth forecast for 2016 to 0.7 per cent from the decline of 0.3 per cent it forecast a month ago.

Oil prices have stabilised and recovered slightly this year after plummeting in the second half of 2014. The rouble has followed a similar trajectory, falling hard in the second half of 2014 as oil prices dropped and the west imposed sanctions on the Russian economy for its role in the conflict in Ukraine, before the currency staged a recovery in the first half of this year.

Greece's total public debt amounts to some EUR 305 billion, of which it owes Europe's crisis fighters EUR 195 B in emergency funding incurred since 2010. If Greece were truly "going socialist," they would of course choose to repudiate all its debts to European lenders post-crisis or, at the very least, give them a major haircut. You must be joking if the Greeks are counting on the Russians to pay the hated Western Europeans back.

So, the real question then is whether Greece becoming a Russian satellite would compensate for it being subjected to the same sorts of economic sanctions that Russia now faces as a result of debt repudiation or unilaterally erasing between, say, half to two-thirds of its debts. Actually, trade with Russia is around 5% of Greece's total trade--most of which are energy and raw materials. Unless Greece can import a wide range of everyday products from Russia, alienating Western Europe won't solve matters. That Russia itself isn't importing a whole lot of useful things right now it can re-export to Greece doesn't bode well for Greece following the de-globalization route.

Bottom line: Sure Greece and Russia can get together to thumb their noses at the West, but it's an empty gesture. Nobody doubts that Russia is worse off now after going rogue, and Greece is more than welcome to follow its example. But, if it thinks Russia can "replace" the EU as a major sponsor, think again. Russia doesn't have a wide range of goods to sell to Greece. Nor would Russia spend any considerable amount of money bailing out Greece to benefit Western powers who are its ultimate foes.

As the saying goes, how can Russia help Greece when it can't even help itself?

Why Greece Can't "Wawrinka" Its Creditors

♠ Posted by Emmanuel in Credit Crisis,Europe,Sports at 6/11/2015 01:30:00 AM

Greece has no equivalent to Wawrinka's "Shorts of Doom."

Over the weekend, I watched the 2015 men's final at the French Open pitting world #1 Novak Djokovic [Serbia] against world #8 Stan "The Man" Wawrinka [Suisse]. Like everyone else, I expected the Serbian great to trounce Wawrinka, but the latter had other things in mind. Looking ever-so-ridiculous in pink boxer shorts pictured above, Wawrinka's incredible serve and pinpoint backhand nevertheless gave the world's best player a lesson in grand slam tennis he will not soon forget. The prospect of losing a French Open for the third time--this time to some dork wearing pyjamas--seems to have had driven Djokovic beyond the edge of sanity. First he smashed his racket to smithereens. Next he cried like a baby during the awarding ceremony.

I am not sure whether the crazy shorts were intended, but they seem to have thrown Djokovic off his game. Since being elected, the Syriza faux-socialists have tried to "Wawrinka" their creditors not only by dressing funny but also acting funny. What kind of self-respecting commie pinko appears in a lifestyle spread in the tabloid Paris Match? More seriously, how can you expect to please your creditors by making no changes whatsoever to the patronage-heavy Greek institutional infrastructure? Increasingly, I am with those calling for Greece to finally enjoy the fruits of their seemingly desired bankruptcy. Grant them their death wish. From Francesco Giavazzi at Bocconi:

Europeans, too, have made mistakes. Since Athens joined the monetary union, we have lent Greece €400bn, 1.7 times the country’s gross domestic product in 2013. It is time for a reality check: they will never be repaid. And it is an illusion to imagine, as the Finns sometimes do, that we could receive compensation in kind by acquiring a few Greek islands. The age when the British empire would do that is, luckily, over. Bygones are bygones. The sooner we accept this and forget those loans the better.

If the Greeks do not want to modernise, we should accept it. By a large majority, they have voted for a government that, six months after the election, remains vastly popular. Its popularity with the electorate signals a wish to remain a nation with a per-capita income half that of Ireland, less than that of Slovenia. In a few years it will be overtaken by Chile. I only hope that no one in Athens dreams that debt forgiveness and Grexit offer an alternative path to growth.

Without economic and social reforms, Greece will remain a relatively poor country. But it is not for the rest of Europe to impose reforms on Greece. It should merely make crystal clear that without serious reforms, new official loans are over. The only way for Athens to borrow will be to convince the markets that it will pay its own bills. No more EU guarantees, explicit or otherwise.

The difference is that while Wawrinka was crazy like a fox--feigning lunacy to disguise a well-thought game plan to put one over a formidable opponent--Greece's leaders are plain crazy. Sure, Greece does the "crazy" bit real good with talk of German WWII reparations and other ideas from cloud cuckoo land. However, it certainly isn't "like a fox" with no plan other than to bite the hand that feeds. And therein lies the rub: to implement the "Wawrinka" strategy, you have got to have game. Greece's Syriza leaders have one trick, which is to keep saying how the EU will implode if Greece isn't accommodated, all the while backtracking on all sorts of commitments to reform a backward, dilapidated and uncompetitive country. Greece cannot put one over the troika; it has no game, nor any semblance of an overarching strategy. Unlike Wawrinka and his sartorial commentary, Greece's Stupid European Tricks increasingly throw no one off.

It's time to put Greece out of its misery already. Let it default and go back to the the drachma. The world has wasted enough time on these fools.

PS: You too can try to "Wawrinka" others by purchasing his Yonex shorts. Attention Greek leaders: isn't capitalism grand this way?

Yanis Varoufakis: Rise of the Econocomedian

♠ Posted by Emmanuel in Credit Crisis,Europe at 4/28/2015 01:30:00 AM

The real Varoufakis needs to work on the pectoral definition, though.

I have previously commented on the sartorial bankruptcy of Greece's leaders to complement their financial bankruptcy. Apparently, though, Finance Minister Yanis Varoufakis sets new standards in these respects. At the end of last week, the funkily-attired and attitudinally-challenged civil servant got a severe dressing down from his EU peers over his seemingly autistic approach to negotiations. As a "game theorist," he should have recognized the game the EU is playing since it holds all the cards: It's called Now I've Got You, You SOB -

When Yanis Varoufakis warned his fellow euro-area finance chiefs of the dangers of pushing his government in Athens too far, Peter Kazimir snapped. Kazimir, Slovakia’s finance minister, launched a volley of criticism at his Greek counterpart, releasing months of pent-up frustrations among the group at the political novice. They’d had enough of what they called the economics professor’s lecturing style and his failure to make good on his pledges.

The others at the April 24 gathering in Riga, Latvia, took their cue from Kazimir -- they called Varoufakis a time waster and said he would never get a deal if he persisted with such tactics. The criticism continued after the meeting: eight participants broke decorum to describe what happened behind closed doors. A spokesman for Varoufakis declined to respond to their descriptions.

“All the ministers told him: this can’t go on,” Spain’s Luis de Guindos said the following day. “The feeling among the 18 was exactly the same. There was no kind of divergence.” The others who provided an account of the meeting in interviews asked not to be named, citing the privacy of the talks.

What irks admittedly rather faceless and colorless EU finance ministers is the same as what irks me: Varoufakis appears profoundly uninterested in interacting with his peers and addressing their concerns in a meaningful way instead of making endless Communist Manifesto-inspired tweets. He seems absorbed by his emergent cult of personality and stroking his ego at the expense of the plight of ordinary Greeks.

As a result, even the leader of the tie-forsaking neo-Marxist contingent, Greek Prime Minister Alexis Tsipras, has sidelined the bald-headed Narcissist-Leninist who probably fantasizes that he's The Rock, or at least Vin Diesel:

Greece’s outspoken finance minister Yanis Varoufakis has been sidelined after three months of fruitless talks with international creditors to unlock €7.2bn in bailout funds, heartening investors and sparking a rally on the Athens stock market. Eurozone officials said they were encouraged by the move by Alexis Tsipras, Greece’s prime minister, to overhaul his bailout negotiating team in the wake of an acrimonious meeting of eurozone finance ministers in Riga last week.

The shake-up comes as Athens faces questions over whether it can meet this month’s wage and pension bill of nearly €2bn as well as a €750m loan repayment due to the International Monetary Fund on May 12. The Athens stock market rose nearly 4.4 per cent on the news and borrowing costs on Greece’s July 2017 bonds were down almost 4 percentage points from Friday’s close to 21 per cent. Yields on Greece’s benchmark 10-year bonds were down a full percentage point at 11.4 per cent.

His comic antics wouldn't be so intolerable if it weren't for what's at stake for Greece, the Eurozone, and the world economy. Ah, well, I guess Varoufakis' fifteen minutes of fame have run out. Perhaps unwilling to return to the boring old life of a college teacher, there are other career paths beckoning as suggested by this self-styled "socialist" who wears Burberry scarves. Stand-up comedy seems to be a natural thing for him since he's certainly not cut out to be a Eurocrat of any sort. What a joke.

How many eurozone finance ministers does it take to make Varoufakis wear a tie?

5/4 UPDATE: No less than Mohamed El-Erian begs to differ:

Varoufakis was a breath of fresh air in this protracted and exhausting Greek economic drama, which involves alarming human costs in terms of unemployment, poverty and lost opportunities. Backed by considerable economic logic and a desire to do better, he pressed for more realism in the policy conditions demanded by Greece’s creditors. And he never tired of reminding people that Greece's recovery wasn't that country's responsibility alone.

The Sartorial Bankruptcy of Greece's Socialist Leaders

♠ Posted by Emmanuel in Credit Crisis,Europe at 2/16/2015 01:30:00 AM

"Tsipras, you dress as crappily as you 'govern'"

Ah, the tieless Greek leaders. Aside from their unreasonable demands--how can Greece stay afloat rehiring several thousands of laid off government workers basically pushing paper and not much more--the Syriza party flunkies also strike me as sartorially inept. The problem is that these flunkies are neither here nor there with their outfitting choices. If they really wanted to convey an air of rebellion against the EU establishment, then they wouldn't bother to wear business suits with dress pants and jackets. How defiant does not wearing a tie make you, after all? If I really wanted to show Western Europeans my retro-Communist leanings, why I'd show up at EU gatherings wearing an ushanka like Carlos the Jackal. Or a Nehru jacket with a bolo tie and clown shoes. Anyway...

What Greek voters might not have expected was the first big reaction to Tsipras's maverick streak would be all about his sartorial choices. As soon as the 40-year-old was sworn in as prime minister, people began asking one question over and over again. Where is his tie?

It didn't go unnoticed. When Martin Schulz, head of the European parliament, met with the Greek leader last week, reporters saw him apparently making a comment on the lack of tie to Tsipras. According to the Associated Press, French finance minister Michel Sapin also made some kind of similar gesture when he met the new Greek leader.

Their excuse is that they are no part of the "political class" (whatever that means):

There's no codified protocol for attire during meetings like these: European leaders are simply more used to seeing their peers wearing ties. But given that the entire Greek government can be seen without ties at points, it looks as if the ministers are trying to convey a deliberate political message.

So what lies behind the new Greek political classes rejection of ties? At first, Tsipras told reporters that he may never wear a tie, a comment that played into finance minister Yanis Varoufakis's idea that Greece's new leaders were "reluctant" politicians who simply want to fix Greece's problems: They were average guys, not of the political class.

This is of course nonsense. Just as you wouldn't show up at a formal wedding wearing bermuda shorts and a tank top, you must look the part when meeting with Eurocrats. Not wearing a tie is a sign of flippancy, and even more so when the persons you're talking to are your creditors to the tune of hundreds of billions of euros. The halfway step of wearing business suits without ties doesn't cut it at all--you might as well show up in ponchos and Megadeth T-shirts.

Finance Minister Varoufakis looks even more ridiculous.

Tspiras (and company): you think it's "cool" not to wear a tie, but really, you end up looking like a bunch of dorks way out of your league. The promise to wear a tie when Greece's situation is resolved is hilarious: given the extent of its problems, it will take more than a generation to sort out its situation. Being unfit to be in the EU--economically or sartorially--is the Greek meta-narrative since the country got into the EMU under false pretenses to begin with.

Friends, Comrades: the Venezuela-ization of Greece

♠ Posted by Emmanuel in Credit Crisis,Europe at 2/05/2015 01:30:00 AM

They do [bank] run run, they do run run.

Recalling the statement that Argentina was becoming Venezuela and Venezuela was becoming Zimbabwe, here's my international spin: Greece too is becoming Venezuela, while Argentina is becoming North Korea. Like the Kirchners' Argentina or the Chavistas in Venezuela, the new socialism in Greece is taking its toll. But before we get to that, here's your daily dose of Venezuelan conspiracy theory lunacy. It shows the severity of the situation there when the source is the left-leaning Think Progress that ice cream parlors and crossword puzzles are now being tarred as American conspiracies to overthrow the government:

As Venezuela’s economy has flailed, government officials have cast blame on ice cream shops and crossword puzzles for what they allege is a conspiracy to topple the administration by crippling the economy. Venezuelan President Nicolas Maduro said on Sunday that the owners of a chain of pharmacies were “conspiring” to “annoy the Venezuelan people” by artificially creating long lines at their registers. The did cut back employees, but that may well have more to do with a shrinking economy than a conspiracy to irritate their customers.

Last month, the country’s tourism minister refuted the claim that the closure of a shop that sold more than 800 flavors of ice cream could be blamed on a lack of milk. “It’s false,” he said, adding that the owner staged the closure with the media “as part of the low-intensity war against the present government.” Crossword puzzles have also earned conspiratorial glances from the government. In March, Venezuela’s information minister said that puzzles in a regional paper were used to encrypt messages to stoke revolt against the government.

Not to be outdone, the new Greek government is making plenty of outre statements itself. Witness its scary finance minister, a self-styled "libertarian Marxist." For some reason unfathomable to them, the international community is spooked by the neo-Communist stylings of Syriza. They're supposedly ruling out asking for Russian aid, but Chinese aid may be on. In the meantime, Greeks are taking all their euros out of the banks in fear of sequestration. That is, the newly-installed Communists may freeze all accounts or even turn euros into the new drachma or whatever currency they will have after leaving the EMU.

So, regular folks are coming up with all sorts of creative places to shove wads of cash where the socialists (hopefully) will not find them as withdrawals continue apace:

Georgios Karavelas drives a taxi in Athens and for the past month has been a silent witness to what ordinary Greeks are doing with their cash. One passenger, he said, told someone on his mobile phone that he’d withdrawn 25,000 euros from the bank, taken it home, worked loose a tile in the bathroom and stashed the money there. Another took the cash to his village and buried it in the garden. Yet another fashioned a small safe box in the air-conditioning unit on his balcony. “I can’t fault these people,” said Karavelas, 37. “They were obviously people who had worked hard for their money, with families and jobs, not oligarchs.”

Withdrawals from Greek banks may have exceeded 15 billion euros ($17.2 billion) in the run-up to the elections that catapulted Alexis Tsipras and his anti-austerity Syriza party to power, including at least 11 billion euros in January, according to four bankers citing preliminary data. Tensions between the new government, which won on a platform of debt relief, and Greece’s creditors, including Germany, may keep up the pressure.

“Talks with the creditors is going to be a protracted process so you can’t rule out more pressure on deposits,” said Wolfango Piccoli, managing director at Teneo Intelligence in London. “There is plenty of uncertainty and that can make depositors nervous again.”
Greece’s bailout program ends on Feb. 28 and failure to come to an agreement with the troika of lenders from the European Commission, International Monetary Fund and European Central Bank could leave the country without funding to repay billions of euros in debt due in the coming months. Germany is prepared to wait until April or May, when Greece hits a cash crunch to strengthen its bargaining position, a person familiar with the matter said.

The smart money's already left the Greek banks, which are teetering on the edge of solvency as a result of a "bank marathon," not a bank run:

“The story of the Greek deposits is not one of a bank run but a bank marathon,” said Andreas Koutras, a partner at In Touch Capital Markets Ltd. in London. “The smart money is long gone and there are few accounts with more than 100,000 [euros]. The true barometer of fear is the amount of hard cash that is withdrawn, not how much is transferred outside Greece. This has gone up the past two months...”

In Dec. 2009, the outstanding balance of deposits in banks was 237.5 billion euros, compared with 160.3 billion euros at the end of 2014, the latest figure from the central bank. The figure plummeted to 150.6 billion euros at the end of June 2012 on fears Greece would leave the euro. In May and June that year, 15 billion euros in deposits fled the country’s banks, central bank data shows.

From Caracas to Athens, I believe these folks have forgotten the reasons the Iron Curtain collapsed in the first place: socialism sounds great on paper, but in practice it's rather horrid and brings out the worst in people. Apparently, this phenomenon may need to be re-learned every quarter century or so. I am not necessarily a fan of the EU ministers, but I think the new Greek leadership has a very weak bargaining chip in threatening to leave the EMU since the German powers-that-be have decided this may be a legitimate course of action at this point. It would save them from sinking further money into a seemingly lost cause. Besides, the wrath of Greece's citizenry would be upon Syriza for taking such a drastic course of action. After all, so many people wouldn't be hoarding euros unless they had value and worse could come like the return of the drachma.

Stay tuned.

UPDATE: The cash spigot, AKA Emergency Liquidity Assistance--ELA in which Greek sovereigns could be exchanged for euros at a relatively low cost by local banks--has been turned off. While the European powers-that-be are showing who's boss, it raises the chances for an extreme Greek reaction like leaving the EMU.

Race Over: Why Venezuela Should Default

♠ Posted by Emmanuel in Cheneynomics,Credit Crisis,Energy,Latin America at 10/17/2014 01:30:00 AM

Supposedly paying Lotus $40m/year for a non-competitive drive is only the start of Venezuela's folly.

Amidst the wider economic turbulence worldwide, among the very first to get hit are energy exporters with very high production costs for obvious reasons. Dependence on energy revenues amidst an oil rout ensures that state coffers are being depleted--especially when your breakeven price is high. The poster child for national mismanagement--dwindling production, inefficient technology, and politicization of oil funds is, of course, Venezuela's state-owned oil companny PDVSA which features all these things and worse. For a supposedly socialist nation, the ultimate bourgeois folly is sponsoring F1 driver Pastor Maldonaldo at the enfeebled Lotus which currently lies 8th of 11 in the constructors standings. In the pit paddock, ol' Pastor has a reputation for being a nutter, and the leader who bankrolls him is no different.

Economists Carmen Reinhart and Ken Rogoff wading into the fray has sparked another round of debate on Venezuela's fate. Their colleague, Venezuela-born Harvard economist Ricardo Hausmann--he of "deficits don't matter since dark matter makes US deficit disappear" infamy--actually seems to offer a less fantastical analysis of his home country. Apparently, deficits seem to matter in Venezuela, or he was at least chastened by the global financial crisis that came after his "dark matter" flight of fancy. Don't ask me to explain; it's a Venezuelan thang. Anyway, here are Hausmann's colleagues coming to his defense:

It is unclear whether Maduro, who called for Venezuela’s authorities to take unspecified “action” against Hausmann and Santos (both Venezuelan citizens), was more offended by the suggestion that his government should default on external debt, or by the authors’ list of all the other ways it has already defaulted. These include the government’s $3.5 billion unpaid bill for pharmaceutical imports, payment arrears of more than $2 billion for food, and nearly $4 billion owed to airline companies. Oil production has more than halved since 1997, in no small part because the state-owned oil company has repeatedly defaulted on suppliers and joint-venture partners.

Predicting a Venezuelan default in the near future and actually encouraging this course of action has not endeared Hausmann to the bus driver taking Venezuela down the highway to hell, Nicolas Maduro:

The suggestion that the country stop servicing its bonds comes a month after Harvard colleagues Ricardo Hausmann and Miguel Angel Santos wrote that Venezuela should consider defaulting given that it was piling up arrears to importers. Venezuela owes about $21 billion to domestic companies and airlines, according to Caracas-based consultancy Ecoanalitica...

“People are beginning to see that a sensible strategy for the government is to default,” Joaquin Almeyra, a Miami-based bond trader at Bulltick Capital Markets, said in an e-mailed response to questions. “And oil below $90 complicates things.”

If you like financial adventure, buy some Venezuelan sovereign debt:

Venezuelan debt is the riskiest in the world, yielding 16.07 percentage points more than Treasuries, according to data compiled by JPMorgan Chase & Co. The cost to insure the country’s bonds against default with credit-default swaps is also the highest for any government globally. “Given that the government is defaulting in numerous ways on its domestic residents already, the historical cross-country probability of an external default is close to” 100 percent, Reinhart and Rogoff wrote in their article.

What is Maduro's retort to Hausmann? His predictably feeble-minded response is to dub the Harvard economist a financial "hit man" after a really bad conspiracy theory book. But alas, the day of reckoning is nigh since crammed into the end of 2015 is a logjam of payment dates that should deliver Venezuela to the gates of insolvency:

President Nicolas Maduro dubbed Hausmann a “financial hit man” and “outlaw” and instructed the attorney general and public prosecutor to take “actions” against the Venezuelan-born professor for seeking to destabilize the country...

There is little risk of an immediate default in Venezuela, Sebastian Briozzo, director of sovereign ratings at Standard and Poor’s, said today in an interview at Bloomberg headquarters in New York. Last month, the ratings company lowered Venezuela’s credit rating to CCC+, which implies at least a 50 percent chance of default over the next two years.

“Once we get closer to the end of next year, the situation could become more difficult,” Briozzo said. The government is prioritizing debt payments because it needs foreign investment to expand oil production, he said.

I do not quite understand the logic of the leftist nutter Maduro. Why is he out to attract foreign investment from foreigners in hopes of boosting production? Can't the great socialist people of Venezuela be inspired by the great Simon Bolivar to sort the matter out for themselves instead of relying on the capitalist imperialists? Moreover, if he really wanted to stick it to these dumb foreigners who think they know better, he should screw them over ASAP by paying them nothing, nada, zip, zilch, Argentina style.

Viva la revolucion! Viva Nicolas Maduro! Viva Pastor Maldonaldo too while we're at it! If nothing else, a guy who recklessly drives into other cars week in and week out is nothing if not an excellent representative for Venezuela's crash wreck of an economy.

Crackpot Argentine Conspiracy Theory of the Day

♠ Posted by Emmanuel in Credit Crisis,Latin America at 10/08/2014 01:30:00 AM

Argentina needs divine intervention right about now.

I am a true connoisseur of the Latin loonie left; the crazier the better. Devaluation, hyperinflation, you name it and I'm morbidly fascinated with the depths of economic mismanagement they can achieve. I relish Peronesque cults of personality, over-the-top socialist rhetoric, and retro-Stalinesque efforts to control the commanding heights of the economy. The prize statement on the state of the Latin left revival as far as I'm concerned is this one: "Brazil is becoming Argentina, Argentina is becoming Venezuela, and Venezuela is becoming Zimbabwe." Yesterday, we talked about how fiction has become an everyday thing in Venezuela. Today, let us turn to Argentina.

The usual scapegoat for Latin economic mismanagement is the United States. Whenever in doubt, blame America. While I do believe that the US sticks its nose into the business of Latin American countries, it doesn't necessarily do so more than it does elsewhere. What's more, it defies belief that all your problems can be put down to someone else and none to yourself.. However, this recent outburst must top them all in terms of vanity: Argentine President Cristina Kirchner suggests the US is out to topple her government by killing her:

Argentina's President Cristina Kirchner charged in an emotional address that domestic and US interests were pushing to topple her government, and could even kill her.Domestic business interests "are trying to bring down the government, with international (US) help," she said.

Kirchner said that on her recent visit to Pope Francis -- a fellow Argentine whose help she has sought in Argentina's ongoing debt default row -- police warned her about supposed plots against her by Islamic State activists. "So, if something happens to me, don't look to the Mideast, look north" to the United States, Kirchner said at Government House.

But wait, it gets better:

Just hours after the US embassy here warned its citizens to take extra safety precautions in Argentina, an aggravated Kirchner said "when you see what has been coming out of diplomatic offices, they had better not come in here and try to sell some tall tale about ISIS trying to track me down so they can kill me."

The president said local soybean producers unhappy with prices, other exporters and car company executives, all were involved since they would benefit from a devaluation of the peso, which is being pushed lower by her government's selective default.

This woman needs help. Her far-fetched explanation goes like this: commercial interests which stand to benefit from a weaker Argentine peso--soybean producers and carmakers among them--are conspiring with the US government to remove her by all means necessary to hasten the process of devaluation. If I were truly interested in devaluation, I'd quite frankly wish she'd stay put to further mismanage Argentina into another quagmire.

In the end, there is no better way to destroy a currency than that, and Kirchner seems to be doing a pretty damn good job of it IMHO. Anyone wants to be their next central bank governor?

Stimulus+: Give People, Not Banks, Wads of Cash

♠ Posted by Emmanuel in Credit Crisis at 9/03/2014 01:30:00 AM

Let them eat cash? Mark Blyth elaborates

Once more demonstrating how little understood us IPE scholars are, Yahoo! has an otherwise interesting feature on Scottish "economist" (shouldn't he go by "political economist"?) Mark Blyth talking about his ultimate stimulus plan. The gist of it goes like this: so the US has enacted unprecedented levels of monetary easing and stimulus spending to help the country recover. However, the financial system which intermediates in the process of cash reaching citizens' hands remains most unreliable. So, why not use stimulus more directly by giving it to them and not the unreliable, untrustworthy banks?

In the accompanying video, Mark Blyth, professor of International Political Economy at Brown University, talks about his idea. He says while quantitative easing -- or mass asset purchases -- have cost basically $2.8 trillion dollars so far, if you divide that by the taxpaying population it would come to about $56,000 per household. "Imagine if that had just been given to households," he asks.

"So why not just give them a fraction of that directly, rather than trying to force all of that money through the banking sector altering asset prices, causing asset bubbles and distortions, and hoping that some of it causes real growth," he adds.

What about the consequences, like inflation, as some critics argue would occur? Check out the video to see how he responds.

Unfortunately Yahoo! doesn't have an embed feature so you'll have to visit its site through the link above. (The full article is here.)

How Big is "Too Big to Fail," Exactly?

♠ Posted by Emmanuel in Credit Crisis,IMF at 5/18/2014 12:30:00 AM

Like any other international organization, the IMF portrays itself as a technocratic institution instead of a political one. In other words, they would like others to see themselves as economic experts offering solutions instead of as pawns in someone else's political machinations. There is, however, a fairly large literature on how the IMF lending is steered by American interests--see Thomas Oatley, Strom Thacker and James Vreeland among others. Apropos for the season, we got another reminder of IMF politicization as Managing Director Christine Lagarde bailed out on being the commencement speaker at Smith College after students protested the institution she represents.

For reasons I can no longer remember, I was put on the mailing list of the IMF. A recent message pointed me in the direction of a new staff publication (by Luc Laeven, Lev Ratnovski, and Hui Tong) concerning another contentious yet highly topical question: when exactly does a financial institution cross the threshold of becoming "too big to fail"? As the image taken above suggests, the largest of them have become even larger, although they have tapred off somewhat post-global financial crisis. There are undoubtedly policy implications for this question given the sheer size of money center banks in the US, UK or Switzerland. Or, even the various Landesbanks in Germany. Just think: if an IMF report said there was a threshold for becoming too big to fail (TBTF), you would expect all sorts of news reports touting the idea that big banks should be cut down to a certain size. Political pandemonium would ensue in any number of financial centers.

To be honest, I was hoping for such a TBTF threshold being identified. Instead we get a neither-here-nor-there answer. In other words, it's a Larry Summers response ("it depends") instead of a Nicolas Nassim Taleb one ("shrink 'em pronto). Anyway, to the paper's conclusion:

This paper contributes to the debate on the optimal size and scope of banks. It shows that large banks, on average, create more individual and systemic risk than smaller banks. The risks of large banks are especially high when they have insufficient capital, unstable funding, engage more in market-based activities, or are organizationally complex. This, taken together with the evidence from the literature that the size of banks is at least in part driven by too big-to-fail subsidies and empire-building incentives, suggests that today’s large banks might be too large from a social welfare perspective.

However, the literature also does not dismiss the case for the economies of scale in large banks (even though, in our reading of the literature, these economies are likely to be modest). As a result, “optimal” bank size is highly uncertain, and regulations that restrict outright bank size may be imprecise and difficult to implement. Optimal regulation of large banks should combine micro- and macro-prudential perspectives, and its tools may include capital surcharges on large banks (as in Basel III) and measures to reduce banks’ involvement in market-based activities and organizational complexity.

Again, it's exactly the contours of the Summers vs. Taleb debate, with the IMF (surprise!) coming down on the side of the arch-neoliberal Summers:

Summers told Taleb that he was for more capital, more liquidity, living wills for banks and procedures to wind them down. “What are you for?” he challenged. “I’m for punishment,” Taleb replied.

At any rate, the IMF conclusion is highly nuanced: It's not that banks are too big per se that they become too big to fail. Rather, it's when poorly governed banks reach a certain size that they are more of a systemic risk. At one end of the continuum, then, the IMF acknowledges that some banks have indeed become TBTF. At the other end, it also suggests that there is a "minimum economic size" below which banks become unable to adequately deal with risk since they have trouble surviving risk events of medium intensity. Instead of TBTF, call this "too small to succeed" (TSTS). In statistics-speak, it would have been nice to have been given point estimates--say, a certain bank constituting x percent of all deposits in the home country--for when a bank was TSTS on the low end or TBTF on the high end. In the absence of those, a confidence interval could have served a similar purpose.

Instead we get a cop-out calling for better regulation combined with an "I dunno" on optimal bank size. It's the same sort of bland prescription for "better education" you keep hearing in policy circles without quantifying how improvements in human capital will boost economic performance. Besides, for what reason is an international organization that prides itself on technocratic precision unwilling to venture that far? Re-read the first paragraph, and do not tell me the IMF is not playing politics once more in this example lest it get caught in a political maelstrom of its own making.
-------------------------------

BTW: I have been linking to the IMF Direct blog since it came into existence and they have their own blog post there on this very topic. However, IMF Direct does not recognize this blog or any other political economy blog in its blogroll for that matter, seemingly reinforcing the economistic conceit that they are beyond the fray of politics--again, a technocratic pose. To complete its PR work--and I'd say the IMF does more of it in the blogosphere than the World Bank--the IMF should engage with its critics, especially those coming from more of a political economy perspective instead of an economics one. Having at least 83 posts on the IMF going by my cloud tag--more if you include Bretton Woods institutions--I doubt you'll find any (non-IMF) economics blogs that cover the institution in nearly as much depth from IMF reform to lending to Pakistan. Are you game enough, IMF Direct?

UPDATE: Recall that, of course, IMF Managing Director Christine Lagarde is a political science, not an economics, major.

A Guide to Venezuela's Now Four-Tiered FX Rates

♠ Posted by Emmanuel in Credit Crisis,Latin America,Socialism at 2/14/2014 03:54:00 PM

Just count 'em! How many bolivars do you need to exchange for 1 USD? Here's the handy-dandy IPE Zone guide for understanding the economic wasteland that is modern day Venezuela:

6.3 bolivars - official rate for "preferential" goods (read: largely for show; few can avail of it save for the well-connected).

11.36 bolivars - rate at the last weekly auction held for greenbacks known as "Sicad" (read: still not everyone can get into this auction).

??? bolivars - rate to be set at yet another round of auctions just announced that commentators dub 'Sicad 2.' Expectations are for the rate to be rather higher since only the Venezuelan government espouses that it has greenbacks left on an appreciable scale:

Maduro, who said that the new system would be known as “Sicad 2,” has blamed inflation and shortages on an “economic war” waged by the “parasitic bourgeoisie.” He gave businesses until Feb. 10 to cut prices to “fair” levels and reduce their profit margins to a maximum of 30 percent.

Venezuela will release $42.5 billion of foreign currency to the economy this year, including $11.4 billion through auctions in the Sicad system, as it tries to ameliorate dollar shortages that are causing irregular supply of imported goods ranging from shaving blades to milk. Maduro said yesterday that the country has sufficient foreign currency to meet its needs.

“There will be four exchange rates,” Asdrubal Oliveros, director of Caracas-based consultancy Ecoanalitica, said in a telephone interview. “When I hear Maduro say that Sicad 2 will be directed by the state, it makes me think that they are not going to let the rate float and that it will be at a weaker rate than Sicad 1, maybe around 25 bolivars per dollar.”

86.92 bolivars - black market rate quoted (read: for the unlucky punters who fall into our category, which is everyone else.

Call me a lousy "parasitic bourgeoisie" even if I have no intention of holding bolivars, but why do I think 86.92 bolivars to the dollar is the only FX rate not plucked here from economic fantasyland? While we may be entertained by the utter folly of this four-tiered FX rate system, save a prayer for the people of Venezuela who are suffering considerable hardships from ruinous economic mismanagement.

Can [Mexico, Turkey] Withstand EM Selloff?

♠ Posted by Emmanuel in Credit Crisis,Latin America at 1/24/2014 07:26:00 PM

OK, here's the quick version of What's Going On in the World Economy. Despite the US jokeonomy failing to revive from comatose to, say, zombified as witnessed by the labor force participation rate falling with no end in sight, the rumor is that the Fed will further slow down its purchases of US Treasuries. In turn, expectations of higher interest rates Stateside is causing a selloff in emerging markets as investors repatriate their funds.

Who, then, is macho enough to weather this Made In America @&^*storm? Argentina is putting the pedal to the metal on the highway to hell, but it was headed in that general direction anyway. Hence the emerging markets' latest battle cry to all those who care to listen: Developing countries are not all alike! We're not Argentina! Or so they say from Davos, Switzerland.

Among those protesting most loudly there is Turkey, most likely because many commentators have lumped it with the "developing economies likely to falter" category. And so the lira goes...but not as far as the Argentinean peso, officials claim:

Turkey's Deputy Prime Minister Ali Babacan said the lira's tumble on Friday was a "re-pricing process" due to recent political turmoil as well as the U.S. Federal Reserve's plan to gradually withdraw stimulus.

"What's happening in Turkey mostly is a re-pricing process. Not only just because of the Fed's tapering but also the recent political events have triggered some market volatility," he told a panel at the World Economic Forum in Davos. Turkey's lira tumbled to new lows on Friday and investors doubted its central bank's ability to stem the rout as Prime Minister Tayyip Erdogan seeks to defuse a corruption scandal and stem a challenge to his power.

As an import-dependent economy with a quickly depreciating currency, I am unfortunately wary of Turkey's situation. OTOH, similar protestations about economic health are being made by Mexico:

The current volatility in currency markets will have some effect on Mexico, but without major disruption, Mexican Finance Minister Luis Videgaray said in an interview with Reuters Television. "Mexico is an emerging market, so all volatility is going to have some effect, but Mexico is well-positioned to weather the currency storm," Videgaray told Reuters TV on the sidelines of a gathering of business and political elites in this Swiss mountain resort...

Looking ahead, emerging markets are expected to face a volatile 2014 as the U.S. Federal Reserve scales back its stimulus programme. "We expected this year to be a volatile year for EM as the Fed tapers," he said, adding that volatility "will happen throughout the year as tapering goes on." The minister said Mexico's currency, the peso, was currently quite liquid. Should that change, Mexico would consider intervening, he said. "I don't see any problems of liquidity in the market for the Mexican peso," he said. "We would intervene to provide liquidity in the market, but this is not the case now; the peso is quite liquid now."

Mexico has better macroeconomic fundamentals to withstand the EM selloff. Most importantly, it has a healthier balance of payments than Turkey, which has a gaping current account deficit it is (unsuccessfully) trying to belittle. Mexico will take its lumps, but I expect it to fare well among the EMs.