Milton Friedman On Government

An educational video providing material for thought. The bright professor Milton Friedman in an interview about taxation, government intervention and many more.

Same Treatment In The Two Sides Of The Atlantic

As expected, a last minute deal could not be a bold deal or one that would “fix” the problem. It just gives a breather, until the problem comes back to us again. The techniques to approach serious problems are extremely identical in the two sides of the Atlantic!: Push the can down the road. It is impossible for the human phycology to do the optimal; to stand above the short term goals and pressures. This is a universal law. Washington did exactly what Brussels did, given the battle they found themselves into. No supremacy of the New World was demonstrated in handling the same problem and this “plan” is not a fix, the same way that the recent deal in Europe is not a fix.

Greek Rescue Increases Its Debt

Yes you read it right! Increases, not decreases the Greek debt. After the dust went away and the parties from the recent summit are over, people started to analyze the so called “deal” about the Greek debt.

Here are three articles that argue that the Greek plan is no solution. Charles Forelle from the WSJ and Hugo Dixon from Reuters explain why the Greek debt will increase and not decrease as a consequence of the “deal”. Also, Wolfgang Munchau of FT argues why the Eurozone crisis is not over and why a 50% reduction on the Greek debt was necessary.

Some Good News: U.S. Plan To Overhaul Its Finances

From the WSJ:

WASHINGTON—A surprise jolt of bipartisan support emerged Tuesday for a $3.7 trillion deficit-reduction plan that had been in development for months, though it was thought to be dead just several weeks ago.

Roughly half of the Senate's 100 members sat through an hour-long briefing on the plan, which was designed by a group of lawmakers known as the "Gang of Six" and would cut spending, overhaul entitlement programs such as Medicare, rework the tax code, and make significant changes to Social Security.

…

The plan does not include an increase in the $14.29 trillion federal borrowing limit. But several senators, including Sens. Susan Collins (R., Maine) and John Kerry (D., Mass.), said they hoped it could be considered as part of a package to raise the debt ceiling before Aug. 2, to avoid a government default.

…

A key question remains whether the plan might receive any support in the House, where Republicans have strongly resisted any new proposal that could bring in new taxes. The gang's plan would bring in $1 trillion in new tax revenue over 10 years by narrowing several tax breaks. But Mr. Conrad said it would also lower tax rates and end the alternative minimum tax. He said the combination of tax changes would be viewed by budget experts as a $1.5 trillion tax cut.

…

The $3.7 trillion deficit-reduction plan would come from roughly 74% spending cuts and 26% new taxes, Mr. Conrad said.

…

Central parts of the plan would:

• Impose immediate spending cuts and caps that reduce the deficit by $500 billion over 10 years.

• Make changes to Social Security to make the program solvent over 75 years.

• Direct key congressional committees to find specific levels of deficit-reduction within their areas of jurisdiction. If the committees fail, then a group of senators—five Democrats and five Republicans—will be able to confer and offer their own a deficit-reduction plan as a replacement.

The full article can be found here.

Note On “Selective Default” and Greece

Given that the category “Selective Default” (SD) exists only in the terminology of Standard and Poors, if Greece defaults in some of its obligations, what are the other rating agencies going to call it?

According to their definitions this event will be called “Default” (D), and it does not matter if it happens in some or all of the sovereign entity’s debt. This is the definition of default we all know and we all teach. If there is a failure to pay an obligation, this is recorded as Default. This is what also every each one of us faces if we miss a payment of our credit card or of any other obligation we have. It is recorded in our credit record as a Default event and we lose points.

I am amazed, for one more time, by the discussion that is taking place in Greece the last few days, regarding the meaning of the term “Selective Default”. As always, in Greece they want to convince us that black is white. Of course we all understand why they do this; they need to calm and confuse the public, by playing with the words, because it is hard to sell the unfair measures they take, when, even though they do take them, they also have to default.

It was always clear, even before 2009, that Greece would need to default, sooner or later, on all or part of its debt. Anyone who was/is objective could call it. For this reason the current soap opera we see in the news every night is not interesting at all.

Selective Default Definition

First, note that the term “Selective Default” (SD) exists only in S&P’s terminology. The other houses have no corresponding term and they only consider “Default” (D). According to the Bankers Almanac, S&P defines Selective Default as:

“An obligor rated 'SD' (Selective Default) or 'D' has failed to pay one or more of its financial obligations (rated or unrated) when it became due. A 'D' rating is assigned when Standard & Poor's believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they become due. An 'SD' rating is assigned when Standard & Poor's believes that the obligor has selectively defaulted on a specific issue or class of obligations but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. Please see Standard & Poor's issue credit ratings for a more detailed description of the effects of a default on specific issues or classes of obligations.”

Links to the published definitions of credit rating classifications can be found here and here.

Top Greek Bond Holders

Barclays Capital compiled a list of the top holders of Greek debt, revealing who is going potentially to face the biggest problems in the event of default or selective default that is currently under discussion.

To see a description of the top 20 institutions shown in the above list look here.

The conclusions from Barclay’s study are:

“In our previous research on the holders of Greek debt (see for example Euro Themes: Implications of Greece restructuring for banks and CDS, 3 June) we highlighted that these holdings are actually quite concentrated (with the top 30 holders accounting for 70%+ of the total). In this report, we update these numbers and show the details of the biggest holdings on a name-by-name basis. The vast majority of the information comes from disclosures by the companies themselves (for private sector holders, mainly banks and insurance companies), or some official data (for public sector holdings or loans data). In fact, there are only a few holdings that are not up to date as of Q4 10 or Q1 11 or that we have had to estimate (eg, the ECB SMP holdings or some of the central banks holdings, although admittedly, these are probably among the biggest holders). We would also highlight that this data/information has been in the public domain for some time, and so should not be a particular surprise to financial markets, rating agencies and commentators.

The high concentration of holdings, and the type of institutions involved, suggests that some kind of voluntary rollover/Vienna initiative might have more take-up than one might expect at first glance. Having a participation of €25bn in such an initiative (as has been mentioned in the press) over the coming three years seems plausible, in our view.

Certainly, the Greek holders would have a natural incentive to roll over their debt. The Greek pension and social security funds (managed by the Bank of Greece) would clearly be in that case, although it may not have much debt maturing in the coming years. Greek banks are likely to have a mix of maturities in their portfolios, but we would think that probably more than a third of it is maturing in the coming years. One concern on the banks side has been the ECB stance that it would not accept Greek collateral anymore if any private sector involvement was not fully voluntary and/or would trigger a default, and that Greek banks would therefore have to reduce their holdings. We believe one potential way around this would be for the ECB to announce some kind of medium-term ‘addicted banks facility’ that would cover Greek, Irish and some Portuguese banks. This is something the ECB has been mulling for some time, and is linked somewhat to the decision on full allotment in open market operations. Such a facility could provide more security in terms of availability of ECB funding on a medium term to these banks (which will provide or have already provided medium-term liquidity and deleveraging plans to the ECB), and be more flexible in terms of the collateral it accepts than the ‘single list’ that the ECB is using for OMOs (whether or not rolled over debt is considered in default or not seems to vary depending on the rating agency). Such a separate facility would obviously come at a price, in terms of bigger haircuts and potentially a premium interest rate which may be linked to the regular OMOs (which may, or may not, at the same time, revert to variable rate tenders for 3m maturities; the ECB is likely to keep full allotment on the weekly MRO for longer in any case). Over the past few weeks, a number of statements and signs suggest that the ECB might be nearing a decision on this, something which could possibly be announced in September or even earlier (the decision might be precipitated by the downgrade by S&P of Greece and Greek banks to CCC recently). Independently, though, it could be that there would still be the problem of financing of Greek bonds by non Greek holders, if the ECB were to exclude GGBs from its single collateral list (unlikely if there is a simple rollover).

In any event, any additional NPV loss inflicted on Greek banks would require further recapitalisation of these institutions. Under the original EU IMF programme, EUR10bn has been ear-marked for bank recapitalisation. Given the weaker macroeconomic performance and more rapid increase in NPLs than anticipated under the programme, any additional NPV losses associated with public debt rollover at below market rates will require almost a onefor-one capital increase in the context of a new EU/IMF programme.

Rating agencies have been mixed on whether a roll over would constitute a default, a selective default or have limited influence. The bar, though, seems to be quite high for it not to constitute a default on their criteria.

The exact way to involve the private sector and/or do bond rollovers is clearly what the Eurogroup will be focusing on in the coming weeks: this is obviously something that, if done, needs to be done correctly and not rushed through, as a large number of unintended consequences could have a dramatic impact on financial markets. In this regard, we believe different views between Germany and other EU countries on burden sharing by bondholders are likely to be resolved in the coming days, with Germany possibly moving towards the voluntary roll-over proposed by other EU members (and that the ECB appears to support), most likely one based on the principles of the Vienna Initiative.”

Unbelievable Maneuvers

Unbelievable events take place in Greece. As if Greece is hosting a competition on “Amateurship”. This is the softest characterization one can give in the events that took place yesterday, where the prime minister, George Papandreou, first accepted to resign in order to form an Ecumenical Government under the directorship of some person that the two biggest parties would agree upon and then, after pressure from his party, he took it back! Is anybody now either in Greece or elsewhere that sees seriously Mr. Papandreou as the person in charge in Greece? When the prime minister hints on leaving he either leaves or makes elections. There is no other path because now he has no credibility. How can he face the European prime ministers if days before he suggested/accepted to leave the office? How will be credible in negotiations?

The government accuses the opposition for leaking this proposal to the press before it was final and that this damaged the whole deal. Who cares? Who cares who leaked it to the press? What matters is how to save Greece, not the prime minister’s image. What matters is to unite and work as best and fast as possible. After all, now that it is leaked, and also that he did not go ahead with this, which would have made him look better in the eyes of the people since he would have put first the interest of Greece and not egos, does he look better? Unbelievable maneuvers!

Gkikas Hardouvelis Comments On Greece

Economist Gkikas Hardouvelis, Professor of Finance at the University of Peiraius, and Chief Economist at Eurobank, comments on the current situation in Greece.

Professor Morici’s Commentary on Greece’s Debt Problems

A great commentary for the simple reason that it is clear and spelled out completely. One of the best perhaps lines is that “Politicians are like children in a candy story," he says. "They don't worry about the cavities they will receive or the money their parents will have to pay filling those cavities. They just want their candy now."

Two More Videos of Vasileios Markezinis

Βασίλειος Μαρκεζίνης: «Μία Νέα Εξωτερική Πολιτική για την Ελλάδα».

Ο κ. Βασίλης Μαρκεζίνης στις “Ανιχνεύσεις"

Vasileios Markezinis: The Greek Crisis

An important Greek academic and thinker talks about the Greek crisis. He has given a lot of lectures and interviews about economic and political issues that are related to Greece.

Β. Μαρκεζίνης: Η Ελλάδα της κρίσης: Το παρόν και το μέλλον.

Martin Jacques: Understanding China

Important Economists Talk About Greece

Typical Scientific Peer Review

A typical outcome of a referee report.

Video On Greece’s Economic Hardships

Disclaimer: A video is posted to start us thinking about issues, not because the views of the speakers are (necessarily) adopted by me.

Trillion Dollar Bet

This is a very educational documentary about the development of finance as a science – especially what has to do with derivatives pricing – and a very famous application of it, the creation of the LTCM fund and what brought it down. Events that were repeated after 10 years in 2008. The documentary is in Youtube in 5 pieces.

Part 1, Part 2, Part 3, Part 4, Part 5.

The transcript of the movie can be found here.

Change Of View: Greek Economists Find Haircut of 50% Optimal

Leading Greek economists who – rightly so – argued in favor of reform measures back in August 2010, now suggest that a haircut of 50% and restructuring on the remaining debt is the optimal way for the Greek government to go (see here). This is a clear sign on how much unhappy the same academics have been about the way the government has implemented these reforms. The reforms have had no result so far, and this is because no reforms have been implemented. They, therefore realize that we are now are in a much worse point, and our solution now is to cut 50% of the debt and to restructure the rest of it!

At the same time, in Greece, the government and the public do not even want to hear about (just) restructuring. Another example of the many denials of the Greek society of the inevitable? We’ll see. At least now, they will not be able to claim that all the Cassandras  who are coming up with doom scenarios are foreign individuals with private interests in the default of Greece. They should – lets hope they will not find other conspiracy theories – be able to accept that the poor Greek – I emphasize this – academics have no other interest than that of the Greek recovering. Do the politicians have the same interests? This is the question.

Views on Greece’s Reforms

Bellow is a piece of the FT article “Greece: Hard to hold the line”

….

Mr Papaconstantinou, the finance minister, argues against underestimating “the willingness of the government to push forward”, pointing out that it still enjoys broad public support. But behind the scenes, Greek business leaders and eurozone policymakers worry that he is not in control of events. “Nobody is managing the government,” says one business executive. “The troika sets constraints and ministers try to get around the constraints. It is 100 per cent a leadership issue.” Another jokes: “The best thing that could happen would be to put the administration of Greece in the hands of Brussels or Berlin.”

There are some bright spots. The Greek tourist industry expects a good season, with the country benefiting from unrest in north Africa and the Middle East. Goods exports, largely of agricultural products, have staged a recovery although they still account for less than 8 per cent of GDP.

Evidence is scant, however, of an economic turnround that would turn international sentiment in Greece’s favour. For every example of progress, there is at least one tale of setbacks.

An early step forward was the opening up of the road freight industry – in the face of protests by militant truckers, who blocked roads and suspended food and fuel deliveries. But the government yielded to the pharmacists’ lobby, which has kept its guaranteed 35 per cent profit margin on prescription drugs. In tourism, cruise tour operators hoped for deregulation measures that would encourage holidays starting and ending in Greek ports, thus boosting local hotel and restaurant revenues. Instead, they have faced increased bureaucracy – including a requirement that they sign annual contracts with the state on the frequency and duration of calls at Greek ports – an obstacle not faced elsewhere in the Mediterranean. “Greece is losing income and the law needs to be amended,” says Michael Nomikos, Greek representative of Royal Caribbean International, the world’s second largest cruise operator.

Athens has failed noticeably to liberalise its energy sector – adding to costs faced by industry and leaving one of Europe’s sunniest countries behind in solar technology. Investors complain that gaps remain in a new framework investment law. “The only way out is to encourage private investment, foreign direct investment and export-oriented growth,” says Nikolaos Karamouzis, deputy chief executive of EFG Eurobank.

. . .

The risk is of a vicious circle. Until economic uncertainty over Greece’s future abates, there is little incentive for the investment needed to boost long-term growth. Dangers are rising rapidly.

The longer Greece is unable to tap global financial markets, the more the country’s banks will have to rein back their domestic lending – adding to a credit crunch that is already crippling the economy. “We are the victims of a state that has lost international credibility,” says Mr Karamouzis. Greek banks are dependent on the ECB for liquidity – currently borrowing about €90bn in short-term loans. But the ECB wants to exert maximum leverage on Athens to speed up reforms and could cut its liquidity lifelines if not satisfied.

Athens had hoped to return to financial markets next year, when according to current plans it will need to raise €25bn-€30bn. With yields on its two-year bonds recently at record highs of 25 per cent, that timetable is almost certainly unsustainable. But a fresh bail-out would be hard to stomach especially for taxpayers in fiscally prudent northern European countries such as Germany and Finland.

Unsurprisingly, financial markets have started to believe a debt restructuring is inevitable. It is a scenario that the IMF and European authorities remain determined to resist. The ECB has warned of possible apocalyptic consequences on the country’s banking system and beyond. Jürgen Stark, an ECB executive board member, has said the 2008 collapse of Lehman Brothers on Wall Street could be put “in the shade” by a Greek default. Last month the finance ministry asked Athens prosecutors to investigate rumours of a restructuring – a move that strengthened the impression of a government under siege.

…

When – or if – Athens says public finances are back under control, will anyone believe it?

The country’s crisis erupted in late 2009 after the newly elected Socialist government of George Papandreou revealed the public sector deficit that year would be three times higher than previously forecast. But Athens was already a serial statistical offender. Based on revised budget deficit data, Greece would not have met the criterion of 3 per cent of gross domestic product set for membership of the eurozone, which it joined in 2001.

Since August last year Andreas Georgiou, head of the Hellenic Statistical Authority, has been in charge of sorting out the mess. For 21 years, he worked at the International Monetary Fund in Washington. His return to Greece meant a hefty salary cut but he “wanted to provide help at a difficult time for Greece”, he says in a rare interview.

One solution – throwing money at the problem – was not an option. With public spending being slashed, Mr Georgiou faced a hiring freeze. His staff, based mostly in an office block in a rundown suburb of Athens with views of concrete roadways rather than the Aegean, have faced pay cuts.

Instead, Mr Georgiou has focused staff on areas such as statistics on government finances. Backed by experts from other European Union countries, another priority has been to change Greek-style informal working practices. Mr Georgiou has strengthened, for instance, the crucial process of validating data – going back to original sources to check their reliability and cross-checking with other information. “All these things are new, they did not exist before,” he says.

However, he says, “the most fundamental change that moved everything forward” was the granting of his unit’s independence – bringing the country into line with standard European practice. Previously, it was a secretariat within the finance ministry.

“Of course, there has been pressure ... but my approach has been to continue to do my work according to the rules. My aim is to keep our work independent and produce credible data according to the appropriate standards.” Greece, he adds, “cannot afford any grey areas”.

His efforts have already brought results. In October last year, Eurostat, the European Union’s statistical office, dropped its warnings about the reliability of Greek data on public sector finances.

“For anyone to say there will never be any revisions would be very suspect,” Mr Georgiou says. “But I expect that any future revisions to our data will be within the normal margins you would see in other European countries.”

Greece’s Deficit At 10.5%, Wider Than Expected

From the WSJ:

Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly higher than forecast by either the Greek government or European Union authorities, the EU's official statistics agency, Eurostat, said.

The new deficit figure will add further pressure on Greece to cut its deficit this year to meet targets set under a rescue program overseen by the EU and the International Monetary Fund. The European Commission, the EU's executive arm, said in February that it expected Greece's deficit to be 9.6% of GDP in 2010 and 7.6% by the end of this year.

Eurostat also revised Greece's 2008 budget deficit to 9.8% of GDP from 9.4%. Greece's total government debt was 142.8% of GDP at the end of 2010, the highest level in the EU, the agency said.

Read the whole article here.