"...austerity does not deliver the rewards it is supposed to deliver," King said.
"The consequence is that you are left with countries that have zero growth, possibly recession and interest rates which are painfully high and that combination is unsustainable."
He said that the failure of austerity put fiscal transfer back to the top of the agenda. Germany has been vehemently opposed to direct fiscal transfers from the better performing northern euro zone to the struggling southern countries.
There is no abstract theory that can predict how people will react to an austerity program. We have no alternative but to look at the historical evidence. And the evidence of Guajardo and his co-authors does show that deliberate government decisions to adopt austerity programs have tended to be followed by hard times.
Policymakers cannot afford to wait decades for economists to figure out a definitive answer, which may never be found at all. But, judging by the evidence that we have, austerity programs in Europe and elsewhere appear likely to yield disappointing results.
By the end of my second term, we will have the first permanent base on the moon and it will be American
Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP.More recently the IMF director Olivier Blanchard likened fiscal consolidation to driving with the brakes on and
resulting inWith those brakes on, the recovery cannot be very strong,
decreased growth, leading to a dangerous downward spiral.and
If not contained, this downward spiral can lead to even worse outcomesIt may be of use to look back at what is meant by "Washington Consensus" - from its originator John Williamson
Where did the term "Washington Consensus" come from?
I think I dreamt it up.
In the original paper, you wrote that "left-wing believers" in Keynesian stimulus are "almost an extinct species." They certainly don't seem extinct today. Has Washington or the world tilted left?
The world has changed. We are now in a Keynesian situation, which we weren't in 1989.
If you had to identify one country that is implementing the Washington Consensus and benefiting from it, which would it be?
I think Chile has implemented that type of policy over the years, in a very non-dogmatic way since the return of democracy.
When I read the latest news from the IMF early this morning I sent out a tweet saying that it was the height of hypocrisy for the IMF now to be trying to reclaim the high ground in the current economic debate by lecturing nations about the dangers of fiscal austerity. The IMF will always be part of the problem rather than the solution. They are consistently the architects of misinformation and bully national governments on the basis of that misinformation only to come back 3 months later and say “gee whiz”, look how bad things become. Currently the IMF is pleading for more funds. If I was a national government contributing to this bullying, incompetent organisation I would immediately cancel the cheque and, instead, spend the money pursuing domestic growth for the benefit of the citizens is that rely on my decisions. The current position of the IMF represents the height of hypocrisy. That remains a constant as does the inaccuracy of their forecasts. Wrong models will generally produce terrible forecasts that have to be continually revised. In the case of the IMF, these errors are also systematically biased by the ideological nature of their approach to macroeconomics.
ALP Right told Gillard to sack Carr from Cabinet, ditch Jenkins as speaker and then dud Wilkie. In return they block Rudd challenge. Awful
Putting up Craig Thompson to defend pokies backdown was crazy. Maybe pokies industry will now donate to his credit card account.
On ABC News 24 from 10.25am for some sober analysis of Gillard treachery and cold disregard for problem gamblers.
Michael Short writes that we cant trust Gillard any more
Have just filed for Crikey with some detail on ALP's big Canberra pokies operation and the obvious conflicts given proposed huge handouts.
There is something going on in the community that some of our politicians, including the Prime Minister, seem to be missing, bunkered as they are in the battle for dominance of the current Parliament. So many people are seeking authenticity, a return to simplicity, meaning and community. It's there in the burgeoning not-for-profit sector, where as many as one in 12 people are employed. It's there in the vegie patches that are being planted in so many more back gardens. It's there in the outrage people feel about the treatment of asylum seekers. It's there in the explosion of writing and communication and creativity in what's known as social media, but is perhaps better described as open media. It's everywhere.
Economists now agree that markets were wrong in placing the same risk premium on Greek bonds as on German bondsand then apply that same logic to the present
today the same markets are also wrong in overestimating the risk that the periphery countries will default.And they have the evidence to prove it
The systematic mispricing of sovereign debt observed in the Eurozone also has the effect of giving the wrong incentives to policymakers. During the boom years, when financial markets were blind to the sovereign risks, no incentives were given to policymakers to reduce their debts, as the latter were priced so favourably. Since the start of the financial crisis financial markets driven by panic overpriced risks and gave incentives to policymakers to introduce excessive austerity programmes. This panic has now been transmitted to the European Commission that is urging Eurozone countries to intensify budgetary austerity programmes while the Eurozone is moving into a recession – an extraordinary repeat of the 1930s.
The three big credit rating agencies - Fitch, Moody's and Standard & Poor's - downgraded Greece in July after the debt swap plan was unveiled, assigning it "highly speculative" status and warning that losses for private creditors would imply a default.and
S&P said in July it would revise Greece's sovereign rating to "selective default" when any debt restructuring is implementedThe 50% discount is a loss to investors and the ratings agencies are viewing that loss as a consequence of a default. However, the International Swaps and Derivatives Association (ISDA) call the discount "voluntary" which therefore does not represent a credit event for credit default swap payment purposes according to its documents.
Banks that play this game call it “language arbitrage.” Anyone that bought sovereign credit protection on Greece after accepting ISDA “standard” documentation without modifying the language now finds that they are on the wrong side of an “arbitrage.” An arbitrage is a riskless money pump. In this case, it means that money has been pumped out of credit default protection buyers with no risk to their counterparties, the financial institutions that ostensibly sold them credit default protection on Greece.This strategy could create blowback
“If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market,” said Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in LondonGreek Prime Minister George Papandreou said that speculators were making billions on betting on the "default"
Papandreou likened this practice to buying insurance on a neighbor’s house and then burning it down to collect. Without naming names, he said some US banks that were bailed out during the financial crisis are using naked swaps to make “a fortune out of Greece’s misfortune.’’
Fully 71% of the businesspeople polled expected America’s competitiveness to decline over the next three years.The poll was conducted amongst nearly 10,000 Harvard Business School graduates over the US and 121 other countries and had some surprising outcomes
Intriguingly, the Harvard alumni were gloomy about where America is headed, rather than how it is now.So it is less about now and more about the future.
after a couple of decades in which asset managers floated along in ease and splendor, economics is now grinding down the business. The easy money is going away. Investment management is in the early stages of a historic transformation. Like most tectonic shifts, it probably will take years to fully develop.That transformation
came on the heels of three shocks: the 2008 financial crisis, the 2009 market panic and the 2010 “flash crash.”..It also followed an entire lost decade for the equity market.which has resulted in lower returns
Consider what it means for money managers to live in a deleveraging world. It may not be universally accepted yet, but in this new era, 4 percent is a good return. This will not justify paying 2 percent of assets as a management fee (to say nothing of 20 percent of returns as performance fees). A similar problem exists for mutual fund companies, most of which have high overhead, including managers who get seven-figure bonuses.and fewer funds
funds are flowing furiously toward the largest managers because people want the tried-and-true, lest they wind up trusting another Bernard Madoff...Of the total assets added by hedge funds in the first six months of 2011, more than 11 percent went to just one manager, Bridgewater Associates LP.Some managers, like Howard Marks from Oaktree Capital, have adopted an openly defensive position
What Cant We Do?Then Marks adroitly dangles the carrot;
The main thing we can't do is see the future, and particularly the macro future. That simple statement has serious ramifications. It means that a lot that we'd love to know is beyond us:
- we can't know what the economies of the world will do,
- we can't know whether markets will go up or down, and by how much and when,
- we can't know which market or sub market will do best, and
- we can't know which securities in a given market will be top performers.
And what does the fact that we don't know these things mean for our portfolio management? Simple: it means that we musn't act as if we can.
in 1999, sky high valuations and investor ardour positioned stocks for a 'lost decade." Today, low valuations and investor indifference just might mean they're poised to surprise on the upside.Sounds reasonable enough...
at the risk of oversimplifying, I see a long list of macro risks on one side of the scale, and low valuations and joyless investors on the other. prices are neither so high that we must be hyper-cautious nor so low as to call for aggressiveness. Thus I think that its time to balance the defense with offense, and to move forward, albeit with caution.
Hedge funds holding Greek bonds may resist the deal, seeking greater profit by getting paid in full, either by the Greek government or by triggering payouts from credit-default swaps. Winning support from banks seeking to limit their losses may be easier than including hedge funds and other speculators who bought securities at distressed levels. Vega Asset Management LLC resigned from the committee of Greek creditors negotiating the debt swap last month because the Madrid-based hedge fund refused to accept a net present value loss exceeding 50 percent, according to a Dec. 7 e-mail sent to other panel members, which was obtained by Bloomberg News.
Most of the bondholders are European banks, and as Fidler says, European banks are subject to “moral suasion” — having their arms twisted by their national governments — which is much more likely to affect their final decision than the official judgment of Dallara. Meanwhile, an increasing proportion of the bondholder base is made up of hedge funds, who certainly don’t care what Dallara thinks.
Landon Thomas reports that the two sides are getting closer to agreement; the sticking point seems to be the coupon on the new bonds, and the likely outcome, on that front, is likely to be just below 4%. No word on the governing law of the new bonds, though I suspect that Greece will go along with doing the market-friendly thing of issuing its new debt in London.
The reason why none of the negotiations really matter very much is, as Fidler says, that “if they don’t agree, the holdouts will have the ‘voluntary’ deal forced down their throats”. Greece is going to bolt collective action clauses onto its outstanding bonds — and use those clauses in what’s known as a “cram down”: the minority has to do whatever the majority wants.
Now with most collective action clauses, this would be non-trivial. Often these clauses require a large supermajority of bondholders to agree before the CAC is triggered — 85%, say. And they’re generally done on a bond-by-bond basis, making it much easier for a hedge fund to build up a blocking stake in one bond.
But Greece is in the very nice position of being able to craft its CACs now, rather than at the time the bonds were issued. As a result, it can set the CAC threshold very low, if it wants, and it can also draft them so that the percentage which matters is the percentage of all bonds tendered into the exchange, rather than the percentage of any individual bond.
All it needs to do then is have a quiet word with the technocrats at the EU, who have a very good idea how much moral suasion they can wield. Greece has a pretty good idea what the minimum take-up of any exchange offer is likely to be. And it just needs to set its CAC level at or just below that minimum take-up level.
Of course, the lower the CAC level, the more coercive the Greece exchange will be considered. If the CACs are set at 85%, the deal will be “voluntary”; if they’re set at 51%, it will be highly coercive. But either way, the deal will get done. And Greece has absolutely nothing to worry about with respect to hedge funds threatening to sue the country in the European Court of Human Rights. Good luck with that one, guys, you’re going to need it.
The only real risk for Greece, as I see it, is that its offer is so bad that less than 51% of bondholders tender into the exchange: you can’t set a CAC below 50%. But I doubt we’ll see that. Banks hate holding defaulted debt. Greece is going to offer them a choice, between holding defaulted debt and holding new instruments which are paying in a timely fashion. When push comes to shove, the banks are going to take the new instruments. Whether Charles Dallara likes it or not.
"Even if they reach an agreement there are going to be so many holdouts that then they’ll have a problem. They’ll either pay the holdouts and that becomes expensive, or if they don’t pay them you’ll have a series of defaults, because they’re going to stop paying them. Or the way to avoid the holdouts from being holdouts is then to change domestic legislation, to cram down the terms of the majority on the holdouts. But if that happens then the CDS will trigger and that becomes a credit event. So either way you’re going to get a credit event."
"The credit event can be two forms, either a form of default…another one is if there are holdouts and you don’t pay them and technically that’s a default on the bonds on which you don’t pay so there’s a series of defaults on which you don’t pay. Or three, if you change the terms of the bonds through legislation then that’s considered a credit event by ISDA by the event triggering the CDS. And one way or another you get a credit event. One extreme is a default, another one is CDS triggering."
It appeared that Greece had secured a deal to pay an interest rate of 3.1%, rising to 4.75%, on new 30-year bonds created from its outstanding €360bn (£300bn) debt burden. The effect would be for creditors to accept writedowns of up to 70% on many of their loans.
"By taking bank funding risk off the table for a couple of years in Europe, the ECB has significantly reduced the risk of a systemic banking crisis, which we were highly concerned about in 2H 2011."Read more: http://www.businessinsider.com/the-biggest-reason-everyones-still-underestimating-the-ecb-2012-1#ixzz1jvr3iIzG
“I’m convinced, and the IMF is also convinced, that the more pledges are made [to the rescue fund], the higher the volume of pledges made, the smaller the probability that a single euro of cash will have to be disbursed.”US treasury spokesman Alaimo was clear on the matter
"We have told our international partners that we have no intention to seek additional resources for the IMF,"The private sector was less diplomatic
Robert Prince, co-chief investment officer at Bridgewater, and his managers at the world's biggest hedge fund firm are preparing for at least a decade of slow growth and high unemployment for the big developed economies. Prince describes those economies—the US and Europe, in particular—as "zombies" and said they will remain that way until they work through their mountains of debt.
"What you have is a picture of broken economic systems that are operating on life support," Prince said. "We're in a secular deleveraging that will probably take 15 to 20 years to work through and we're just four years in."
You have to assign probability to something disorderly happening in the Eurozone and you have to assign some probability to disorderly default and even a break up of the Eurozone not in the next six to eight months, but certainly over the next two or three years. If that break up of the Eurozone were to occur, the systemic effects of it could be much bigger than the disorderly default of Lehman Brothers in the fall of 2008. This is because Lehman Brothers was a $600 billion problem while the public debt of Italy and Spain alone are a 3 trillion euros or about 4 trillion dollars. Therefore, if there was a disorderly default by Italy and or Spain that will be a shock that will be systematically more important than even the disorderly collapse of the Lehman Brothers. I am not predicting that to happen in the next six to eight months, but you have a set of countries in the Eurozone, Greece, Ireland, Portugal, Italy and Spain of which each one of them with different probability could have a possible restructuring of their private and public debt. And one of them with different probability could eventually exit the Eurozone. If a combination of these events were to occur, the systematic facts on the global economy will be absolutely as severe or actually more severe than what happened in 2008. I am not saying that it is going to happen with probability 1, but you have to consider this is an important tail-risk that has a meaningful probability that would have a systematic effect on the global economy over the next few years.
So far, markets have barely reacted to the news.
Plans to boost the capacity of the IMF have been fraught with rumors all day. Initially Bloomberg reported that the fund would attempt to raise $1 trillion. Enthusiasm faded after the initial number was cut in half.
The fact that this money will come from European sovereigns themselves severely diminishes the usefulness of the plan. While few expected that the U.S. would agree to provide more funding, this confirms that Europe will be expected to bail itself out, an effort troubled countries like Italy and Spain will have difficulty taking part in.
The news excited Jim Cramer, who tweeted: "IMF just proposes $1 trillion increase in lending.. That's what's needed, IMF stepping up to the table. Real heat!" and "This is the kind of thing that keeps happening whenever it gets dark out. IMF boost--now we know why $FXE strong...bonds strong"
At the very heart of the problem are two deeply flawed theories — first, that the obligation of management is to earn a return on the expectations of shareholders, however insanely high those expectations happen to be: and second, that stock-based compensation provides a useful motivation for management to take care of their company. They both sound good on the surface, but shareholders would be better off in the long-run if management felt the obligation to earn a fair, risk-adjusted return on the investment capital they were given and if their performance incentives were based on their company’s performance in the real game.
Mr Robb's representation of the growth is debt is easily explained, which makes his alarmist "analysis" all the more contemptible. The reporting of it, unquestioned, it just as extraordinary.
I'll explain it this way.
Think of two countries of similar size in terms of GDP.
In time Period 1, Country One has net debt of $2 billion. Country Two has net debt of $50 billion.
In time Period 2, Country One's net debt rises to $20 billion. Country Two's net debt rises to $150 billion.
The way someone like Mr Robb would mischievously present these numbers is that Country One's net debt has risen by a whopping 900%; Country Two's net debt has only risen by only 200%.
Hence, County One has had a massive blow out in debt compared to Country Two.
Hhhmmm.
You decide which country has the debt problem. Mr Robb can't.
They must implement credible medium-term plans to put their budgets on a sustainable footing, because taxpayers rightly expect governments to manage their money prudentlyPeter Martin says
heaven knows whyShane Oliver says
Fiscal austerity leads to economic deterioration and budget deficits blown out. It has the effect of worsening the economic outlookJoe Hockey said
She and her treasurer have presided over a massive blowout in Australia's debt and turned strong budget surpluses into record deficits. Voters won't forget pink batts, cash for clunkers, building the education revolution and $900 cheques to dead peopleDetails of the "blowout"..
The euro has become a currency on steroids. Its relentless nominal and real appreciation since the end of 2000 was briefly interrupted in the second half of 2008, but resumed with a vengeance during 2009. The strength of the currency is hurting the exporting and import-competing sectors of the Euro Area. Unemployment and excess capacity continue to risePaul Krugman June 2011
the euro is strong because German real interest rates are higher than US rates: the nominal 10-year rates are about the same, but the ECB is expected to be more hawkish on inflation than the Fed...
In July 2011 ECB raised interest rates again, as Business reports..So the euro is strong even as the euro system, the euro as a project, turns into a train wreck.
The eurozone debt crisis did not stop the European Central Bank raising interest rates for a second time this year on Thursday as it focused on the "day job" of fighting inflation.BBC November 2011
Europe is in the grip of tough austerity measures - some of the deepest public sector cuts for a generation.ECB Commissioner Barnier
The colossal debts and rock-bottom growth of eurozone "periphery" nations - especially Greece and Italy - have hammered market confidence. The interest rates (yields) on their sovereign bonds have soared, making it hard or even impossible for them to borrow in international markets.
The real crisis the Eurozone faces right now is a crisis of confidence. Our political unity and our determination and our ability to rectify what is wrong with the way the euro currency works and is run are being tested.Alan Kohler says its the last call for the ECB
We must not deny that the situation is serious. The economic recovery, which was well underway, has almost come to a halt.
It is hard to avoid the conclusion that the only way the eurozone crisis will be resolved is through massive debt monetisation by the ECB. It has become a little bit pregnant with the 1 per cent three-year loans; it will soon be time to go all the way.
Ratings do matter for the EA countries. S&P’s action is a harbinger of bad economic and political things to come, not lower rates.Wolfgang Munchau FT
The eurozone has fallen into a spiral of downgrades, falling economic output, rising debt and further downgrades. A recession has just started. Greece is now likely to default on most of its debts and may even have to leave the eurozone. When that happens, the spotlight will fall immediately on Portugal, and the next contagious round of downgrades will begin.Russell Flannery Forbes
Taiwan’s main newspapers were full of hope this morning for a stock rally today after the pro-business Nationalist Party’s triumph in the island’s presidential election on Saturday. Investors hoped that “post-election, there’d be one or two days of excitement,” said William Dong, head of Taiwan equities at UBS Securities in Taipei. “We didn’t even get that for one day.”Sam Ro Business Insider
Taiwan shares fell along with most in Asia today on new worries about debt problems in Europe and their impact on global growth.
S&P just downgraded the European Financial Stability Facility (aka the bailout fund) from AAA to AA+. The outlook is 'developing'.Marc Chandler Marc to market
Global equities are mostly lower. MSCI Asia-Pacific Index fell 1.2%, the largest in a month, led by financials. The re-election of Ma Ying-jeous in Taiwan was widely anticipated, but failed to bring relief to local shares which fell 1.1%. The Shanghai Composite fell 1.7%, the most in the region and now has given back almost 61.8% of the rally from Jan 6. China reports retail sales, investment and industrial production figures tomorrow.
"While S&P's assessments for each individual economy varied, there was one consistent thread in them all, and that was a judgement that there was an undue focus on fiscal austerity to the exclusion of growth-supportive measures. In essence, S&P was saying that the prevailing fiscal stance in these economies was making things worse rather than better. Interestingly enough, this also chimes with some recent but still incomplete IMF research that suggests that in the absence of growth, severe fiscal austerity programmes may elevate bond spreads rather than reduce them. It will be interesting to see how IMF policy towards the Eurozone evolves in the months ahead. Does it begin to take the same line as S&P?"
That takes us to known unknowns, and they are consequential.
It is unclear the extent to which the downgrades will alter the function of the international monetary system over time. It is also unclear how material the incremental headwinds blowing out of Europe will be for countries already facing internal fragilities.
It is unclear the extent to which the downgrades will materially impact the asset quality and capital adequacy of banks and other financial institutions. And there is little clarity on the range of reactions on the part of companies, depositors and households.
Over the next weeks, months and years, we will learn a lot more about the consequences of today's historical downgrades in Europe. What is clear at this stage is that the balance of risks is to the downside, for Europe and for the global economy.Dr. Mohamed El-Erian is CEO and co-CIO of PIMCO, the bond investment house. Link
In truth, there is no new information in the downgrades. Do not look to S&P for contrarian thinking: the rationale for demoting France and the rest is both cogent and unsurprising.Link
businesses, consumers, and investors have a strong incentive to wait and do little. The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.
It is our view that the currently experienced financial stress does not in the first instance result from fiscal mismanagement.In fact they argue that the problem is structural
the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU's core and the so-called "periphery."Austerity also gets a mention
we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.The re-rating will create further tensions, according to RBS economist Jacques Caillou
The market implications of the ratings review are worse than a whole downgrade of the region owing to the increased political wrangling, questions on the EFSF/ESM firewall and the fact that flight to quality still has somewhere to go...while the market impact of the downgrades is unlikely to be very significant in the short term, they serve as a stark reminder that the euro area sovereign crisis is here to stay...We continue to expect the crisis to deepen eventually leading to further widening in spreads across countries vis-à-vis Germany.
DAVID FRUM: It's Time We Republicans Finally Admitted That Paul Krugman Might Be RightFrum goes further
Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?It's well known that the Republicans are nuts, their biggest enemies being themselves.
