What with Greece being the "cradle of democracy" and all that, I suppose we shouldn't be surprised that the results of Sunday's elections appeared so soon after the polls closed. By mid-evening, we not only knew the final result with a high degree of accuracy, we could also discern one of the most disturbing and portentous features of the voting: a clear split between the preferences of younger and older voters. Those above the age of 54 -- in effect, the baby boomers -- largely voted for pro-bailout parties such as New Democracy and the venerable PASOK; a clear majority of younger voters chose the anti-austerity parties, notably Syriza.
Is this just a case of older and wiser heads resigning themselves to a return of tough times, while the young delude themselves that Greece can restore prosperity by defying its creditors? If only that were so. The truth is much less simple and palatable than that. The generational divide in the Greek vote is something that we are very likely to see replicated all across Europe as the era of austerity rolls on.
Greece joined the EU as long ago as 1983, a time when the baby boomers there and elsewhere were just starting to move into more senior positions in politics and business. Greece's public debt/GDP ratio at the time was near 20%. Three decades of self-indulgence by the baby boomers -- retirement at 50 for workers in "hazardous" professions, unfunded public sector pensions, 14 months pay for 12 months work, an extravagantly unaffordable Olympic Games, and so on -- have multiplied that ratio eightfold. In the meantime, the economy has become increasingly "hollowed out" and dependent on one sector: tourism.
Now the years of Greece living wildly beyond its means are over, regardless of this weekend's election results. The baby boomers, on whose watch all the debts were run up, voted to try to keep the creditors happy for a bit longer, but the young people who will actually have to pay back the debt seemingly beg to differ, preferring to take their chances with the untried (and slightly wacky) folks at Syriza. It's hard to be surprised: how would you feel if you were told you had to cut back on your own meals in order to pay your granny's whisky bills?
This is not just a Greek phenomenon. Spain has a youth unemployment rate nigh on 50%: how do you suppose an austerity referendum would turn out there? Ditto Portugal. In Ireland, the response to austerity on the part of the young is a tried-and-tested one: they're leaving the country in growing numbers. All across the developed world* -- the US and Canada not excepted -- the blank checks written by the baby boomers are starting to be presented for payment, and the young people who are expected to honour them are getting restless. Add in the demographic element -- Western countries have not been having children at anything like the "replacement rate" -- and you have a recipe for a slow-burning and intractable crisis. Have a nice day.
* We do things better in the UK, though, right? Well, read this cautionary tale.
Monday, 18 June 2012
Saturday, 16 June 2012
Pushing on a string
In coordinated announcements after the markets closed on Thursday, Chancellor George Osborne and Bank of England Governor Sir Mervyn King unveiled new measures to get the UK economy moving again. The centrepiece is a plan for the Bank to make £80 billion in new funding to the banking system, on condition that the cheap money is used to increase lending.
Wondering who will benefit from that? Well, let's look to the markets for a clue. In Friday's trading session, the overall FTSE eked out a 0.2% gain -- but shares in Royal Bank of Scotland surged 7.9%, while Lloyds TSB shares rose 5.2% and Barclays, 4.2%. Economists and pundits have been quick to pour cold water on the likely effectiveness of the scheme, and the banks have said all along that the reason lending has been growing so slowly is not that they are unwilling to lend, but that businesses and homebuyers are reluctant to borrow. Labour Shadow Chancellor Ed Balls's reaction seems about right: "If business is not investing and creating jobs and if our economy is not growing, that's the fundamental problem, and I've said consistently for two years that you can't do this simply by throwing money at the banks."
Of course, none of that will stop the banks from scooping up the lolly. If you see the lights on late in the City and at Canary Wharf this weekend, that'll be teams of accountants trying to figure out how to assign the new funding to loans they were going to make anyway.
Wondering who will benefit from that? Well, let's look to the markets for a clue. In Friday's trading session, the overall FTSE eked out a 0.2% gain -- but shares in Royal Bank of Scotland surged 7.9%, while Lloyds TSB shares rose 5.2% and Barclays, 4.2%. Economists and pundits have been quick to pour cold water on the likely effectiveness of the scheme, and the banks have said all along that the reason lending has been growing so slowly is not that they are unwilling to lend, but that businesses and homebuyers are reluctant to borrow. Labour Shadow Chancellor Ed Balls's reaction seems about right: "If business is not investing and creating jobs and if our economy is not growing, that's the fundamental problem, and I've said consistently for two years that you can't do this simply by throwing money at the banks."
Of course, none of that will stop the banks from scooping up the lolly. If you see the lights on late in the City and at Canary Wharf this weekend, that'll be teams of accountants trying to figure out how to assign the new funding to loans they were going to make anyway.
Thursday, 14 June 2012
A tragedy of errors
It probably doesn't make any difference at this stage, but it's important to remind ourselves that critics who say that the Euro was "flawed from the outset" or "doomed to fail" don't know what they are talking about. The technocrats who designed the single currency knew perfectly well that the currency bloc would only survive if the key economic fundamentals of the participating countries were more or less in alignment. To ensure this, they devised a series of tests, generally known as the Maastricht criteria, to monitor and enforce the so-called "convergence" process.
There were three separate criteria, relating to inflation, exchange rate stability and budgetary performance. The rules set by the technocrats were so strict that, not long before the Euro was due to come into existence, only one would-be member met all three criteria: Luxembourg! So the politicians, fatefully, got themselves involved. It was decreed that actual compliance with the Maastricht criteria would not be a sine qua non for membership, as long as a country was deemed to be heading in the right direction. Even on this basis, the experts warned that Italy was not ready for membership, but as it was one of the original six members of the old EEC, and as excluding it would have been politically unthinkable, it was admitted alongside its more compliant neighbours.
Once that decision was taken, the floodgates of Euro admission were well and truly open, with little regard to the underlying condition of the economies of the candidate countries, as measured by the Maastricht criteria. The most egregious example is, of course, Greece, which secured admission to the single currency through bare-faced mendacity about its true fiscal situation (ably assisted by its friends at Goldman Sachs).
Briefly stated, it was not the Euro's architects that set the currency on a dangerous course, but the politicians, through their reliance on expediency and deal-making rather than sound principles. That pattern of political grandstanding and fudging continues to this day, and largely explains why a tricky but manageable crisis has been allowed to career towards the brink of disaster.
Consider last weekend's bailout of Spanish banks, for example. Instead of finding a way to solve the problem directly by recapitalising the institutions themselves, the EU deemed it necessary to lend the money to the Spanish government as an intermediary. Spain's debt-to-GDP ratio, which was not excessively high before the bailout, suddenly rocketed. Moreover, since the EU's loans are deemed to rank above those of other creditors, it immediately became riskier and more expensive for Spain to raise money in the markets. The result? Ratings agencies are falling over themselves to downgrade all things Hispanic, and today the country's 10-year bond yield hit 7%, the level at which (at least in the minds of lazy journalists) a bailout of the country itself will soon be inevitable.
And there's more. Even though the bailout funds were loaned directly to the Spanish government, the EU did not impose a new austerity package as part of the deal. On one level this is fair enough: Spain's government has already imposed stringent controls on public spending. However, it sends a very odd message to Ireland, which had to swallow very tough EU-mandated measures when it needed a bank bailout. More significantly, it may well reinforce the anti-austerity-but-still-in-the Euro position of the Syriza party in Greece, ahead of this weekend's elections.
Most bizarre of all, the bailout loans to Spain are the several responsibility of the other Eurozone members, in proportion to their share in the region's GDP. This puts Italy on the hook for about 20% of the bailout (of up to 100 billion Euros). It will be receiving 3% interest from Spain -- on money that it must itself borrow at rates of 6% (and rising). Little surprise, then, that Italy is being tagged as the next domino to fall.
It's hard to think of any recent decision, by any government anywhere, that threw off unintended, adverse consequences in so many directions at once.
The EU's biggest error, of course, is its bullish insistence that austerity is the only way out of the crisis. Everyone but Angela Merkel now seems to realise that what's urgently needed is growth. Word to the Chancellor: the ratings agencies and the bond vigilantes are going to squawk whatever you and your fellow leaders do. It's long past time to ignore them, and just do the right thing.
There were three separate criteria, relating to inflation, exchange rate stability and budgetary performance. The rules set by the technocrats were so strict that, not long before the Euro was due to come into existence, only one would-be member met all three criteria: Luxembourg! So the politicians, fatefully, got themselves involved. It was decreed that actual compliance with the Maastricht criteria would not be a sine qua non for membership, as long as a country was deemed to be heading in the right direction. Even on this basis, the experts warned that Italy was not ready for membership, but as it was one of the original six members of the old EEC, and as excluding it would have been politically unthinkable, it was admitted alongside its more compliant neighbours.
Once that decision was taken, the floodgates of Euro admission were well and truly open, with little regard to the underlying condition of the economies of the candidate countries, as measured by the Maastricht criteria. The most egregious example is, of course, Greece, which secured admission to the single currency through bare-faced mendacity about its true fiscal situation (ably assisted by its friends at Goldman Sachs).
Briefly stated, it was not the Euro's architects that set the currency on a dangerous course, but the politicians, through their reliance on expediency and deal-making rather than sound principles. That pattern of political grandstanding and fudging continues to this day, and largely explains why a tricky but manageable crisis has been allowed to career towards the brink of disaster.
Consider last weekend's bailout of Spanish banks, for example. Instead of finding a way to solve the problem directly by recapitalising the institutions themselves, the EU deemed it necessary to lend the money to the Spanish government as an intermediary. Spain's debt-to-GDP ratio, which was not excessively high before the bailout, suddenly rocketed. Moreover, since the EU's loans are deemed to rank above those of other creditors, it immediately became riskier and more expensive for Spain to raise money in the markets. The result? Ratings agencies are falling over themselves to downgrade all things Hispanic, and today the country's 10-year bond yield hit 7%, the level at which (at least in the minds of lazy journalists) a bailout of the country itself will soon be inevitable.
And there's more. Even though the bailout funds were loaned directly to the Spanish government, the EU did not impose a new austerity package as part of the deal. On one level this is fair enough: Spain's government has already imposed stringent controls on public spending. However, it sends a very odd message to Ireland, which had to swallow very tough EU-mandated measures when it needed a bank bailout. More significantly, it may well reinforce the anti-austerity-but-still-in-the Euro position of the Syriza party in Greece, ahead of this weekend's elections.
Most bizarre of all, the bailout loans to Spain are the several responsibility of the other Eurozone members, in proportion to their share in the region's GDP. This puts Italy on the hook for about 20% of the bailout (of up to 100 billion Euros). It will be receiving 3% interest from Spain -- on money that it must itself borrow at rates of 6% (and rising). Little surprise, then, that Italy is being tagged as the next domino to fall.
It's hard to think of any recent decision, by any government anywhere, that threw off unintended, adverse consequences in so many directions at once.
The EU's biggest error, of course, is its bullish insistence that austerity is the only way out of the crisis. Everyone but Angela Merkel now seems to realise that what's urgently needed is growth. Word to the Chancellor: the ratings agencies and the bond vigilantes are going to squawk whatever you and your fellow leaders do. It's long past time to ignore them, and just do the right thing.
Tuesday, 12 June 2012
Do the sheep get to vote too?
The Government of the Falkland Islands has announced that it will hold a referendum on its "political status" in 2013, in a bid to scupper Argentina's long-standing claim to sovereignty over the islands. David Cameron has been quick to say that the UK government will support the result of the vote, which suggests he has an inkling of how it's going to turn out.
And why wouldn't he? If you take several thousand people of British extraction and plunk them down on a piece of uninhabited territory, and then spend millions of pounds (and hundreds of lives) in defending them, how would you expect them to vote?
A Kim Jong-Il style 99.9% result is inevitable but will prove absolutely nothing. Argentina knows perfectly well that the islanders consider themselves British. Buenos Aires's claim to the territory is based on its geographical position. It's not a strong claim; the islands have never been occupied by Argentines, and even their "Argentine" name, las Malvinas, is a reference to the French fishermen from St Malo who landed there centuries ago. The referendum will solve nothing, unless the aim is to rile not just Argentina but most of Latin America as well.
And why wouldn't he? If you take several thousand people of British extraction and plunk them down on a piece of uninhabited territory, and then spend millions of pounds (and hundreds of lives) in defending them, how would you expect them to vote?
A Kim Jong-Il style 99.9% result is inevitable but will prove absolutely nothing. Argentina knows perfectly well that the islanders consider themselves British. Buenos Aires's claim to the territory is based on its geographical position. It's not a strong claim; the islands have never been occupied by Argentines, and even their "Argentine" name, las Malvinas, is a reference to the French fishermen from St Malo who landed there centuries ago. The referendum will solve nothing, unless the aim is to rile not just Argentina but most of Latin America as well.
Sunday, 10 June 2012
No comment necessary
The Government is to call for an end to what it describes as
an "it's not my fault" culture of excuses, which has allowed 120,000
"troubled families" to avoid taking responsibility for their own
lives. (Independent on Sunday, 10 June)
“Our recovery, already facing powerful headwinds from high
oil prices and the debt burden left behind by the boom years - is being killed
off by the crisis on our doorstep.” -- George Osborne
The economy is already in a double dip recession. Mr
Osborne’s blunt rhetoric suggests he places the blame for the economy’s failure
to grow squarely on the shoulders of countries - particularly Germany - which
have so far dragged their feet over the eurozone crisis. (Sunday Telegraph, 10
June)
Friday, 8 June 2012
Vulture culture
Isn't capitalism wonderful?
So-called "vulture capitalists" are reported to be flocking to Madrid, looking to pick up "distressed assets" from beleaguered banks for as little as 20 cents on the Euro. The term "vulture capitalists" is evocative enough, but in truth doesn't quite convey how this particular group of worthies makes its living. In nature, carrion birds wait patiently for their victims to die before descending to eviscerate them. In modern markets, by contrast, the vultures play an active part in killing the victim, using techniques such as naked short selling, before pouncing on the corpse -- sorry, the "distressed assets".
At one level this looks quite acceptable, if a bit Darwinian. One group of capitalists, the Spanish banks in the current example, have got themselves into trouble through a series of bad decisions, so now another group of capitalists, the vultures, turns up to grab choice assets at knockdown prices. 'Twas ever thus. The problem is, this is not just a bloodsport among consenting adults. There's a whole lot of collateral damage along the way. We're not just talking here about "distressed assets", a phrase that evokes visions of fainting virgins in a Restoration drama. There are also distressed people whose lives, fortunes and dreams are getting put through the shredder, and distressed nations facing lost years and even decades to get back to the living standards they so recently took for granted.
When the writedown of Greek debt was agreed a few months ago, vulture capitalists who had snapped up bonds at distressed prices refused to go along with the restructuring, gambling that the Greek government would not take the risk of a court action that could have torpedoed the whole deal. They were right: Greece had no choice but to pay them out at full value. In any other context that would be called blackmail, but in the bond business, it's just canny investing. The hundreds of millions that Greece paid to keep the vultures at bay could have been used to boost the economy or at least to keep the deficit in check. The fact that the Greek rescue package may now be on the brink of falling apart is at least in part due to the vultures -- and you can rest assured that they're circling again, waiting for their next feed.
Isn't capitalism wonderful?
So-called "vulture capitalists" are reported to be flocking to Madrid, looking to pick up "distressed assets" from beleaguered banks for as little as 20 cents on the Euro. The term "vulture capitalists" is evocative enough, but in truth doesn't quite convey how this particular group of worthies makes its living. In nature, carrion birds wait patiently for their victims to die before descending to eviscerate them. In modern markets, by contrast, the vultures play an active part in killing the victim, using techniques such as naked short selling, before pouncing on the corpse -- sorry, the "distressed assets".
At one level this looks quite acceptable, if a bit Darwinian. One group of capitalists, the Spanish banks in the current example, have got themselves into trouble through a series of bad decisions, so now another group of capitalists, the vultures, turns up to grab choice assets at knockdown prices. 'Twas ever thus. The problem is, this is not just a bloodsport among consenting adults. There's a whole lot of collateral damage along the way. We're not just talking here about "distressed assets", a phrase that evokes visions of fainting virgins in a Restoration drama. There are also distressed people whose lives, fortunes and dreams are getting put through the shredder, and distressed nations facing lost years and even decades to get back to the living standards they so recently took for granted.
When the writedown of Greek debt was agreed a few months ago, vulture capitalists who had snapped up bonds at distressed prices refused to go along with the restructuring, gambling that the Greek government would not take the risk of a court action that could have torpedoed the whole deal. They were right: Greece had no choice but to pay them out at full value. In any other context that would be called blackmail, but in the bond business, it's just canny investing. The hundreds of millions that Greece paid to keep the vultures at bay could have been used to boost the economy or at least to keep the deficit in check. The fact that the Greek rescue package may now be on the brink of falling apart is at least in part due to the vultures -- and you can rest assured that they're circling again, waiting for their next feed.
Isn't capitalism wonderful?
Wednesday, 6 June 2012
Will they call them "Osbonds"?
According to The Guardian, Chancellor George Osborne has asked the Treasury to come up with a scheme to encourage individual savers to invest in a new type of bond that would be used to finance infrastructure development. The government may agree to "take the first loss" on any deals that go bad, in order to keep the level of risk to individual savers at an acceptable level, and may offer tax breaks similar to those on the existing ISA (individual savings account) scheme.
The fact that this idea is under consideration probably means that hopes of getting pension funds to step up to the plate for infrastructure financing are fading. Indeed, the latest data suggest that these funds have been stepping back from the sector, in the UK and elsewhere. Getting individual savers involved seems like a decent alternative, although the setup and administrative costs could be very high.
But aren't the banks going to scream blue murder? The existing National Savings & Investment (NS&I) programme, which used to provide investors with a variety of risk-free ways of lending money to the government, has been under sustained assault from the commercial banks ever since the financial crisis, because it had the temerity to offer rates higher than those that the banks themselves saw fit to pay. The government -- i.e. George Osborne -- has bowed to the pressure from the banks and forced NS&I to withdraw much of its product range.
"Osbonds" may be even more inimical to the banks' interests. Not only will they compete for individual deposits, potentially boosting the banks' funding costs; they will also make it harder for banks to compete for the financing of infrastructure projects, which are generally a low-risk, long-term asset that's very nice to tuck away on the balance sheet.
Boosting infrastructure investment is such an obvious way of getting the economy moving that Osborne should ignore the cries of woe from the banks. But when it comes to the crunch, will he actually dare to do that?
The fact that this idea is under consideration probably means that hopes of getting pension funds to step up to the plate for infrastructure financing are fading. Indeed, the latest data suggest that these funds have been stepping back from the sector, in the UK and elsewhere. Getting individual savers involved seems like a decent alternative, although the setup and administrative costs could be very high.
But aren't the banks going to scream blue murder? The existing National Savings & Investment (NS&I) programme, which used to provide investors with a variety of risk-free ways of lending money to the government, has been under sustained assault from the commercial banks ever since the financial crisis, because it had the temerity to offer rates higher than those that the banks themselves saw fit to pay. The government -- i.e. George Osborne -- has bowed to the pressure from the banks and forced NS&I to withdraw much of its product range.
"Osbonds" may be even more inimical to the banks' interests. Not only will they compete for individual deposits, potentially boosting the banks' funding costs; they will also make it harder for banks to compete for the financing of infrastructure projects, which are generally a low-risk, long-term asset that's very nice to tuck away on the balance sheet.
Boosting infrastructure investment is such an obvious way of getting the economy moving that Osborne should ignore the cries of woe from the banks. But when it comes to the crunch, will he actually dare to do that?
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