Sunday, March 31, 2013


Given that it's a slow Easter Sunday there is good reading in the New York Times today. Among the interesting articles are two where it takes some time to learn the key fact that explains everything else in the story, and in both cases, the determining facts are not presented as such. So, as a reader service, we present them here.

First, the disastrous Alex Rodriguez contract extension with the New York Yankees was brokered by ... Goldman Sachs bankers.

And in the context of the difficulties that Egypt has in ensuring availability of food and fuel, the government's side of the story is explained by someone from ... "The Ministry of Supply."

Saturday, March 30, 2013

Money can't buy you trust

IMF experts have issued a paper setting out some issues with the advice that the IMF has given about labour market adjustment in bailout countries. It's important to note that it's a discussion paper and does not represent an official view of the IMF. Among the items considered in the paper is the wage bargaining institutions in a country and how to play into wage adjustment. Ireland is mentioned --

(p9) The second issue is whether trust can be improved over time or whether low-trust countries are condemned to endure poorly functioning labor markets. The evidence is mixed. Differences in trust across countries are large and long lasting. But increases in trust do happen. It appears to have been the case in Ireland, where the measure of trust has substantially increased since the mid-1980s (although, interestingly, it has decreased somewhat since the beginning of the crisis) ... (p16) Clearly the best way for periphery countries to achieve wage reductions is by common assent, such as through a national tripartite agreement among social partners. The problem, in general, is that workers may not believe that a wage cut is needed. Even if they do, they have to be willing to trust that price declines will follow. The commitment on the part of firms to cut prices if costs decrease is hard to verify and thus hard to enforce. The IMF recommended such agreements, informally or formally, in a number of euro area countries, but they were difficult to achieve or did not take place. In Ireland, despite a tradition of tripartite agreements from the 1980s on, discussions turned contentious when conditions turned sour. The government undertook unilateral actions on pay and pension cuts before an agreement with unions was reached again in 2010.

In other words, Ireland's once-vaunted social partnership (which was always mainly an agreement between the government and public sector unions) worked well at the very start and continued to work when there were more goodies to be handed out. Once times got rough, the fantasy held by some that we had graduated to Scandinavian social democracy evaporated. The unions came back to the table (in the form of the Croke Park Agreement) not to facilitate any national wage adjustment but to negotiate worse terms for new public sector workers than incumbents. Other parts of the IMF paper discuss the undesirable aspects of dual labor markets. 

Monday, March 25, 2013

Magic Money

Reuters --

"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck. "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," he said.

How does a bank recapitalize itself separately from its owners, i.e. its shareholders?

Sunday, March 24, 2013

They made us an offer we couldn't refuse

One of the lessons learned from the Irish financial crisis was surely that it was risky to be a partitioned island in the Eurozone with a big financial sector. You would think that is a lesson along the lines of America deciding that the lesson of Vietnam was to not get involved in another war in Vietnam, but Cyprus managed to prove that even small samples can have more than one element.

Anyway, most of the Ireland-Cyprus comparisons in the run-up to the bailout has focused on the similar in forcing mechanism of the European Central Bank messages to the governments, namely that the ECB would withdraw its support (or its facilitation)  to each country's banking systems unless they came to terms on a bailout deal with the EU and the IMF.

There's another similarity. The current standoff with Cyprus is partly due to the EU-IMF requirement that Cyprus come up with about a third of the money from domestic resources, which by the logic of the situation means a partial appropriation of deposits. It's lost in all the plaudits that Ireland now gets but it likewise was required to put up its own money as part of its 2010 bailout. Here's the IMF's Dominique Strauss-Kahn describing the deal:

A financing package of €85 billion (about US$113 billion) will support Ireland’s effort to get its economy back on track. Of this, the European Union and bilateral European lenders have pledged a total of €45.0 billion (about US$60 billion). The Irish authorities have decided to contribute €17.5 billion to this effort from the nation’s cash reserves and other liquid assets.

Then finance minister Brian Lenihan was even more effusive about the nation's own contribution --

Furthermore, the State is in the happy position of being able to contribute €17.5 billion towards the €85 billion from its own resources, including the National Pension Reserve Fund. It can do this without prejudicing the commitments in the four year plan to use funds from the NPRF for projects such as the water metering programme and retrofitting. This use of the NPRF has provoked the most bewildering criticism of all from parties who, having for years fundamentally disagreed with the very existence of the Fund, have now become its most ardent protectors. And on this point the arguments make absolutely no sense. Why would we borrow expensively to invest in our banks when we have money in a cash deposit earning a low rate of interest? And how on earth can we ask tax payers in other countries to contribute to a financial support package while we hold a sovereign wealth fund? We have a large problem with our banks which has forced us to seek this external assistance. In these circumstances, it is surely appropriate that our cash reserves should be deployed to help solve that problem.

What's not clear is exactly how much choice Ireland had in the matter. Was, like Cyprus, Ireland told that finding a substantial chunk of own-funding was a condition of its bailout? And if so, why was the choice made that it could be from the pot that was pre-funding future pensions, as opposed to, say, haircutting large depositors or, God forbid, senior unsecured bondholders in busted banks? It's just another of the lingering mysteries of the Irish economic crisis.

Thursday, March 21, 2013

Ireland needs oil

Reuters quoting a Fitch Ratings report --

Fitch's approach to rating banks' regulatory Tier 2 capital qualifying securities in the six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) contrasts with the approach more commonly used in EMEA (Europe Middle East Africa), where potential extraordinary sovereign support is excluded from the ratings ...  in most countries it is Fitch's view that sovereign support, while possible, cannot be sufficiently relied upon to flow through to bank hybrids and subordinated securities. ... However, Fitch's criteria recognise that in certain jurisdictions (such as the GCC) the likelihood of sovereign support remains sufficiently strong, at least for some issuers, for Fitch to continue to factor sovereign support into ratings of securities with gone-concern loss absorption features.

There is that crazy and still unexplained feature of Ireland's notorious 2008 bank guarantee (later revoked) which included subordinated bank bonds in the guarantee. Now a ratings company sees it as a luxury only available to oil exporters.

That Scottish referendum slogan in full

Because there's never been a better time to be a small country with a big financial sector.

Wednesday, March 20, 2013

House of Commons moves with the times

Leader of the Opposition Ed Miliband's finale in his response to George Osborne's budget speech --

Today, the Chancellor joined Twitter. He could have got it all into 140 characters: “Growth down. Borrowing up. Families hit. And millionaires laughing all the way to the bank. #downgradedChancellor.”

Tuesday, March 19, 2013

Fold up your show

Fouad Ajami's Iraq 10-year retrospective in the Wall Street Journal --

Two weeks ago, Stuart W. Bowen Jr., the special inspector general for Iraq reconstruction, issued his final report, called "Learning from Iraq." The report was methodical and detailed, interspersed with the testimonies of American and Iraqi officials. One testimony, by an Iraqi technocrat, the acting minister of interior, Adnan al-Asadi, offered a compelling image: "With all the money the U.S. has spent, you can go into any city in Iraq and you can't find one building or project built by the U.S. government. You can fly in a helicopter around Baghdad or other cities, but you can't point a finger at a single project that was built and completed by the United States." It was no fault of the soldiers who fought this war, or of the leaders who launched it, that their successors lacked the patience to stick around Iraq and safekeep what had been gained at an incalculable cost in blood and treasure.

The full context for that quote from Adnan al-Asadi (page 14)--

The Minister cited three examples of project failure, including two buildings he tracked as acting minister: the Baghdad Police Academy and an oice building constructed in the International Zone for processing weapons licenses. The roof at the processing facility leaked when it rained, requiring another contractor to install a new roof, doubling the structure’s cost. At the police academy, raw sewage leaked through ceilings, requiring replacement of all pipes and ceilings. SIGIR’s inspection of the Baghdad Police Academy substantiates Minister al-Asadi’s complaint. In the third example, the Minister highlighted a shortfall that directly affected his work: a contract to provide the MOI with computer servers and software. He was told by U.S. officials that the already-paid-for materials were sitting at the U.S. Embassy, even though the project was ostensibly complete. The greatest example of poor U.S.-Iraqi coordination was the development of the multibillion-dollar Police Development Program in 2011, which carried overhead costs of around 80%. Minister alAsadi publicly decried the program, declaring that Iraq did not need it. After spending over a billion dollars and wasting about $200 million, the United States downsized the program by 90% to it GOI desires.

It's quite a challenge to read that list of complaints and figure out exactly what it has to do with Barack Obama deciding he wanted no further part of George Bush's war in Iraq.

Sunday, March 17, 2013

Moral Hazard

On the 10th anniversary of the final ultimatum from George Bush to Saddam Hussein, one member of that March 2003 coalition of the willing always escapes scrutiny: Jose Manuel Barroso, then PM of Portugal (shown above about the pre-war Azores summit) and one year later up to today, President of the European Commission. If you're never called to account for past bad decisions, you'll keep making them.

The Oligarch Protection Levy

The chart shows the outcomes (vertical axis) for depositors in banks in Cyprus based on size of deposit (horizontal axis). We've done the story just up to 250,000 euro but everything is linear beyond that. The green line on the top is what would happen if these were solvent banks -- everyone gets their money back one for one. The blue line is what happens under the levy -- there's a slight kink at 100,000 euro since the levy is higher above this point. The red line is what would happen if the banks were put into insolvency, since they are insolvent by virtue of having invested in Greek government bonds.

Key point about insolvency: any depositor under 100,000 gets all their money back through deposit insurance. We've assumed that depositors over 100,000 recover half of the amount over 100,000 from the carcass of the busted bank. The gap between the blue line and the red line is how much the big money depositors gain from paying a percentage levy rather than seeking to recover from a dead bank. 

Saturday, March 16, 2013

Her Big Gulp brings all the boys to the yard

Sarah Palin at the Conservative Political Action Conference. A vaudeville act. In quick succession, a double-entendre about her boobs, a slurp from a 32 ounce sugar drink, and hootin' and hollerin' about beer.

King of Comedy

At the Conservative Political Action Conference (CPAC) near Washington DC, Fox News contributor Steve Crowder entertains the crowd between the speeches of Sarah Palin and Phylis Schlafly with a routine about the new Pope's thoughts on Joe Biden and Nancy Pelosi. If something similar happened at a liberal event, Fox News would get an extended cycle of outrage from it.

Public Service

Here's the Senator Ted Cruz video clip that forms the basis for the Gail Collins New York Times column today.

Friday, March 15, 2013

All economists can retire

Herman Van Rompuy says that the EU leaders have it all figured out --

On the question "where does growth come from", the answer was: confidence, credit and competitiveness.

Paul Krugman will love that first of Herman's 3 Cs.

UPDATE: it seems that Van Rompuy got the 3 Cs from a slightly more nuanced presentation of Mario Draghi.

Thursday, March 14, 2013

At least it's not in Cyrillic alphabet

From the European Council meeting in Brussels round table photos, Croatian Prime Minister Zoran Milanovic seems befuddled by the sight of the Irish presidency official poemFilleadh ar an gCathair (return to the city), by Ailbhe Ni Ghearbhuigh.

Photo: Council of the European Union.

Ireland more important than new Pope

Wall Street Journal Washington Wire blog --

Here’s one invitation that’s harder to get than a seat at a state dinner: President Barack Obama invited House Speaker John Boehner (R., Ohio) to travel with Vice President Joe Biden to Rome to watch the Roman Catholic Church install its first pope from the Americas in its 2,000-year history. Too bad he’s busy. Mr. Boehner, who like Mr. Biden is Catholic, declined the invitation Thursday to join the delegation for the investiture next week of Argentina’s Cardinal Jorge Mario Bergoglio as Pope Francis. “I am grateful for the invitation to attend the papal investiture in Rome with Vice President Biden, and would like to be able to join the trip,” Mr. Boehner said in a written statement Thursday. “Unfortunately, my duties in the House next week – including hosting President Obama and the Prime Minister of Ireland at the Capitol on Tuesday, and the debate on the budget – make that impossible.”

Wednesday, March 13, 2013

They should call him Pope Leo

Argentina beats Milan 2 days in a row. Lionel Messi and Jorge Mario Bergoglio.

Tuesday, March 12, 2013

There he goes again

National Review's The Corner useful roundup of Charles Krauthammer on Fox News --

Krauthammer also postulated that the “mercurial” Karzai is “unstable.”

Previous diagnoses of mental instability by Dr Krauthammer -- Florida primary voters, Democrats, Howard Dean, and Al Gore.

Not very hidden agenda

Paul Ryan, member of the US House of Representatives for Wisconsin, takes to the pages of the Wall Street Journal to pitch the House Republican budget, apparently oblivious to the fact that Paul Ryan, Mitt Romney's running mate, took the same budget to the electorate last year --

First, energy. America has the world's largest natural-gas, oil and coal reserves—enough natural gas to meet the country's needs for 90 years. Yet the administration is buying up land to prevent further development. Our budget opens these lands to development, so families will have affordable energy. It approves the Keystone XL pipeline, which will create 20,000 direct jobs—and 118,000 indirect jobs. Our budget puts the country on the path to North American energy independence.

Thus, item number 1 in his budget is land zoning and a pipeline approval i.e. nothing to do with the expenditure and revenue trends which he used to motivate the need for such a budget. Also, the use of the term "North American" in that energy independence clause is deliberate. Even under his giveaways to oil companies, he needs to assume Canadian oil as part of the picture to claim no imports from Those People.

Offer not applicable in Ireland

Sorry for repeating the title but here we have Monday's New York Times --

The European Central Bank’s recent decision to let Ireland liquidate the successor bank to Anglo Irish in a way that wiped out remaining bondholders was in the same vein [as Dutch wipe out of SNS Reaal subordinated bondholders]. That move was flagged in advance, though, and the amount lost by investors was negligible compared to the SNS takeover.

There's a risk that people reading statements of ECB officials and the business pages could get the impression that Ireland was tough on bank bondholders.

It wasn't.

Friday, March 08, 2013

Offer not applicable in Ireland

European Central Bank President Mario Draghi at the monthly news conference --

And the ECB has, on other occasions (besides Dutch bank SNS Reaal), maintained that the bailing-in of creditors is an effective way to support capital positions. So, for the ECB, a bail-in is a good thing, by and large, provided it does not affect financial stability. In all these issues, you have to find an equilibrium between, on the one hand, debt sustainability and not using taxpayers’ money (i.e. bailing people in) and, on the other hand, financial stability.

In 2010, the ECB did not support allowing Ireland to bail in bondholders in busted banks. He did leave himself the out of "financial stability."

Wednesday, March 06, 2013

Not enough troops

From the final report of the US Special Inspector General for Iraq Reconstruction (p31) --

Senator [John] McCain recounted how he was “stunned” when, during one of his many visits to Iraq, a general told him that project oversight of a contractor’s work was being conducted by drone aircraft.

The anecdote is presented as favourable to McCain since it shows his interest in post-invasion in Iraq, but it should also prompt a realization that McCain had wildly unrealistic notions of what could be achieved in Iraq.  Is his preferred alternative to drone supervision that there should have been even more soldiers not just to fight insurgents but to help supervise projects? And just how many more troops would that have been?

Sunday, March 03, 2013

Commedia dell'arte

The video is of German opposition leader Peer Steinbrück referring to Beppe Grillo and Silvio Berlusconi as "clowns", the latter with excess testosterone. The most elegant workaround this awkwardness in German-Italian relations comes from SPD party chief Sigmar Gabriel who tells the tabloid Bild --

Clown ist ja schließlich ein ehrbarer Beruf! 

Clown is after all an honourable profession!

This is his story

Senator Ted Cruz (R-TX) claims, at a Senate Judiciary Committee hearing on gun control, that he spent much of his adult life in law enforcement. He also implicitly blames law enforcement officers -- other than him -- for all instances of gun crime.

We was robbed

European Central Bank board member Benoît Cœuré, in a speech in New York City --

In the crisis, the ECB’s continued commitment to price stability and the integrity of the euro has been one of the few elements of certainty in a highly volatile and uncertain environment. This commitment to monetary stability is not only grounded in its economic merits but is also a cornerstone of the social contract. It protects poorer households from the dire effects of inflation on purchasing power. It ensures that no redistribution of wealth takes place that is unsanctioned by democratic processes, which is exactly what inflation does.

What democratic process in Ireland sanctioned the ECB's 2010 mandate to Ireland to continue paying in full senior unsecured debt in insolvent banks?

Friday, March 01, 2013

Thanks a lot Latvia

European Council President Herman Van Rompuy in a speech in London --

The eurozone is again a club with a queue – not at the exit, but at the entrance.