Doing over the creditors, Greek style

As Greece’s situation has gone in recent days from bad to worse to worser to even-worserer-than-that, I’ve seen a lot of claims that the European authorities treated Greece’s private creditors too generously back in 2010-2012. My natural tendency was to accept those claims, partly because I wasn’t paying close attention to Greece back then, and partly because creditors have a long history of getting off lightly in these situations.

Let me explain for a moment. The fate of creditors is important in financial disasters, and usually under-examined. People talk about the bailouts of banks and insurers in the 2008 crisis, but it was typically their creditors rather than the institutions and their shareholders that got most of the benefit of those US interventions. Goldman Sachs and Societe Generale, for instance, seem to have won most from the huge AIG bailout, due to regulators’ fears that they would collapse and take the entire world financial system with them. By the time the rescue was done, Goldman Sachs and Societe Generale and their shareholders and management escaped with remarkably little penalty, and Goldman Sachs today is not a charred, smoking corpse but a live colossus of world finance.

That’s a problem. If you really want to avoid moral hazard, you want to make sure in these situations that the creditors get royally ****ed over, in a way that will forever remind the next generation of creditors not to be so ****ing stupid as to lend to organisations like AIG that are taking a bunch of dumb ****ing risks. That will make it more expensive for dumb ****s to borrow money, which is a good thing. But in the process of trying to prevent collapses from taking the whole financial system with them, the regulators often end up saving the creditors.

My view, for what it’s worth, is that regulators save the private creditors far too often. But it’s easy to say this from my comfortable viewpoint. When you have a weekend to make a decision that might end up destroying a piece of the world financial system and ruining a lot of ordinary people’s lives, there is a certain pressure to err on the side of caution.

So when I heard the likes of Steve Randy Waldman saying Greece’s private creditors had gotten off lightly, I assumed he was right.

But it turns out, maybe not.

So far I’ve found only one study of the 2010-2012 Greek bailout’s effects on private creditors whose authors seem really powerfully qualified to make judgements. That study is the 2013 paper “The Greek Debt Restructuring: An Autopsy“, by Jeromin Zettelmeyer, Christoph Trebesch and Mitu Gulati. Trebesch, who wrote an AEJ paper called, irresistably, “The Price of Haircuts”, also maintains a terrific Haircut Dataset of 187 government debt restructurings. 

And this study says Greece’s private creditors got done over pretty good. Indeed, the authors calculate that the 2010-2012 Greek bailout established a new world record for creditor losses.

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Against decentralisation: why crowded is good

From time to time you hear the argument that Australia would be a much better place if only we could actively “decentralise” population. The argument is we should encourage people out of our big cities – notably Sydney and Melbourne – and into smaller cities, like Wollongong and Ballarat. In pursuit of this, various governments over the years have tried to move departments out to regional cities. The Victorian government under John Brumby even ran an advertising campaign in Melbourne encouraging people to move out and resettle in regional Victoria.

This sort of argument has often been based on the idea that these regional areas have lots of existing infrastructure that we can exploit at little cost. It has been encouraged by talk of the “Death of Distance” and “The Flat World” – the idea that globalisation and modern telecommunications are making location obsolete, so you might as well live in the countryside. It’s particularly popular wherever there are plenty of marginal regional electorates.

And this argument seem to be spreading. So here’s the case against spending government resources to actively encourage decentralisation.

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Three perspectives on the coming Grexit

The Greek referendum and the hype leading up to it have gone exactly according to my script of 8 days ago, where I predicted a resounding ‘no’ vote and a Grexit to stop the bank-run, with the other European politicians too offended and belittled by Tsipras and Varoufakis to organise another bailout.

The Grexit is now very likely, so likely in fact that Varoufakis’ friend Jaques Delors is writing open letters to European newspapers to implore the rest of Europe not to let Greece go!

To get a good view of what has happened in the last 15 years and what is going to happen in the coming months, let us take the perspectives of three fictitious people: that of an informed Greek businessman, that of an informed Dutch politician, and that of an American commentator.

The Greek business man, February 2015

Syriza has just had its moment with a landslide victory in the elections, getting the population to believe that the Eurozone countries will indefinitely support their pensions and welfare, and allow Greece to not reform in any meaningful way. Party time!

The election after-party was great, with lots of Ouzo and olives, but I know it can’t last. The other Europeans might have seemed gullible to the extreme so far, but even they will not want to be to be hung out to dry in the media like saps, month after month. At some point, the EU countries will stop lending money to anything Greek and ask to be paid back something, whether that is a government, a bank, or a business. How to plan for this, what to do?

Let’s think about what I stand to lose if the Greek government starts issuing that awful Drachma again, worth a fraction of the current Euros.

Firstly, my bank accounts in Greece will halve in value, if not worse. So I am going to take out all the money from my deposits and park it in Northern European banks, or Northern European treasury bills. Moreover, I will give my uncle, the bank manager, a call so as to invite him for dinner and discuss the possibility of taking out a long-term loan with his bank, Euros I will then also park in Northern Europe. When the Drachma is re-introduced, we both know his bank will be in terrible trouble as it simply will not have the Euros to pay depositors what they are owed, but he and I will be doing very well indeed as our loans will be converted into Drachmas whilst our assets are still in Euros in Northern Europe. I am going to get rich from this!!!

Secondly, once the Drachma comes back, my holiday resort will have Greek workers paid in Drachmas and foreign guests who want to pay in Euros. That should work just fine and, since I know my workers will then be paid a lot less, I can start to withhold their pay in the months just before the reintroduction of the Drachmas. I will then pay them later in fewer Euros or perhaps not at all if the mess is big enough and I manage to go bankrupt for the fourth time this decade. All the assets are in my 2-year old son’s name anyway, so I should be able to get away with that trick again. By the same token, I can make a deal with my old school-mate who is now a tax auditor so as to delay paying my taxes until just after the reintroduction of the Drachma.

Thirdly, I am going to have to think about all that German beer I stock for the tourists and thus have to pay for in Euros. There has got to be a way I can use the coming Grexit to have my beer and not pay at all. They don’t trust me at all over there in Germany, which means they insist I pay beforehand, but perhaps I can wriggle out of that if I have to for a few months. Oh, I know what to do: I am going to set up a post-office business in the Netherlands via which I then buy lots of beer with credit, which I then transport to my resort. Those post-office businesses provide a means for American companies to hide from their tax authorities, so why shouldn’t I set one up to defraud a German beer company? By the time they find out what has happened and have traced things back to me, all the intermediary companies will be bankrupt anyway and I will have that beer but no need to pay for it.

Now, what other opportunities will open themselves up? Continue reading

Syriza: the latest disaster for the left

I don’t have much time to offer anything very considered but want to just say how bemused I am at the carryings on of Syriza. The whole sorry business has been horrible to watch with creditors showing no interest in their own self-interest let alone a little enlightenment in their self-interest. But the Syriza Government? I was and remain a huge fan of how coherent and compelling Varoufakis was in articulating his case – of Syriza’s arrival as some kind of circuit breaker that might rescue Europe from itself as it rescued Greece from Europe.

But to negotiate properly, to negotiate as a broke borrower, you have to be able to show how you’re going to make your loan the creditor’s problem – not just your own. That requires a Plan A – in which the creditors and the borrower negotiate some mutually satisfactory settlement and this needs to be done with a Plan B clearly in view in which the creditors lose their shirts – and the borrower recovers.

I’ve always been kind of surprised at Syriza’s commitment to the Euro. Not that it wouldn’t be saying that it would strongly prefer an outcome in which the Euro remains its sole currency, but that that is all contingent on satisfactory negotiation. And to negotiate credibly in that situation one needs a clear Plan B. Perhaps it might make sense to conceal the plan for a while. But here we are at the end game and there’s no Plan B.

The referendum is a bizarre plebiscite on . . . well no-one really knows what it’s about. The Greek people get to vote on whether they will agree to the Troika’s terms. Those terms are not current. They’ve been withdrawn. Now they’ll probably be back on the table if they Greek’s vote ‘Yes’. But if they vote that way – presumably Syriza’s days are numbered – if it doesn’t resign immediately. And if they vote “No”. Well it’s completely unclear what that means other than that the Greek populace are where they were when they elected Syriza which is to say that they don’t want to pay their government’s debts. Well so what? The German populace want them to pay those debts. So where does that get us?

If BHP Billiton owes NAB a billion dollars, it’s not a very compelling result if a plebiscite of its shareholders say they’d rather not repay the loan. So we have Plan A which is that the Europeans offer Greece a deal that they won’t offer them, and Plan A with a tantrum, which is to say that the Greeks come back to the negotiating table saying “you know how we said we really don’t want to repay the loans. Well we really really don’t want to repay the loans. What do you say now?”

And the thing is that this seems of a piece with the left in so many instances – utterly lacking in the courage of what they claim are their convictions.

Why is a Grexit now likely?

Greece owes the IMF 1.6 billion euro that it doesn’t have but is supposed to pay by tomorrow. Unless the ECB lends it to the Greeks, effectively converting the IMF debt into an ECB debt, Greece is bankrupt tomorrow. In months to come, much bigger debt repayments are scheduled to the ECB-IMF in tranches of 4 billion, and Greece won’t have that money either as its economy is still contracting.

Greece didn’t have the money to pay off the previous debts in the last 5 years either though, and that just lead to more debts in return for symbolic reforms that weren’t implemented.

Why not muddle through then and let the Northern European politicians present a pretend-reform package to their population as a victory? And why would bankruptcy force a Grexit, given that there is no official mechanism to force any country out of the Euro, once it is in?

What is forcing it is the combination of the referendum on the symbolic reforms, together with the bank-run on the Greek banks that has this morning lead to capital controls. Let me explain how the two force a Grexit. Continue reading

Citizenship-stripping and the Constitution

TONY ABBOTT CITIZENSHIP PRESSERThe chorus of public concern over the constitutionality of the Abbott government’s citizenship-stripping proposal is growing.  Malcolm Turnbull has again been emboldened to break ranks with his Prime Minister while denying he is doing any such thing.

It will be ironically appropriate if the citizenship-stripping issue ends up derailing Abbott’s plans to revive his ailing leadership in the wake of the failed spill motion against him earlier this year. Abbott’s strategy ever since he achieved Liberal Party leadership in late 2009 has been squarely based on racist dog whistling and inflaming national security paranoia.

The fact that citizenship isn’t even mentioned in Australia’s Constitution flows in part from similar racist sentiments among our Founding Fathers. They couldn’t work out a plausible way to define Australian citizenship without conferring it on Chinese, Japanese and Pacific Island migrants not to mention Aborigines. As South Australian delegate James Howe put it: “the cry throughout Australia will be that our first duty is to ourselves, and that we should… make Australia a home for Australians and the British race alone.”[1] No sly Abbott/Howard-style dog whistling in those days; our forefathers were openly and proudly racist.

The solution our Founding Fathers came up with was to avoid mentioning citizenship in the Constitution, but give the new Commonwealth Parliament wide-ranging powers to make laws with respect to immigration and “aliens”.  The new Parliament proceeded to enact the White Australia policy.

This deliberate constitutional silence is one reason why it isn’t certain whether the Abbott government could now validly legislate to confer the power to strip citizenship on a Minister rather than a court.

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Wealth distribution in Australia

Net Wealth

Source: OECD. More here.

Wealth distribution is typically more unequal than income distribution – as inequality is cumulatively causative to some extent. I was alerted to the relatively equitable distribution of housing wealth by a recent Henry Ergas column which contains the amazing statement that there is ”very little difference in the housing wealth holdings of the bottom and middle-income quintiles for those aged 65 and over” which Henry defends in response to an email of mine to him seeking clarification that the words mean what I think they mean. They do. He says it’s true and I have no reason to doubt him. If so it’s an achievement we should celebrate and the way our cities are going it’s likely to be becoming less and less true with time. Be that as it may it corroborates the diagram above. Look at the US and Australia when comparing average and median wealth – chalk and cheese.

Sadly I would expect our better performance – close to or at best in world if you like your inequality in moderation – to fade, not just because of our cities but also because of our savings policies. Who was it that set up a flat tax on what is now $2 trillion of super savings? That would be the ALP and the union movement.

The HALE Index Q1 (Jan to Mar). 2015

Summary of the March Quarter

HALE Q1 2015

Above: NNI, GDP and HALE ($ bil) from Jun 2005 to the present (Q1 20015). The changes during the most recent quarter are contained inside the two vertical red lines at the right hand margin of the figure.

The HALE has recorded a reduction in wellbeing for the first part of 2015. In the March quarter it contracted by 0.4% which is against the long-term rising trend.[1] This is despite GDP recording above average growth this quarter. However, NNI was weaker than long-term trend as a result of continuing terms of trade declines.

The primary cause of the contraction in the HALE, despite the strong GDP performance, is the large reduction in human capital. This was driven by the significant skills atrophy produce by the rise in long-term unemployment. This quarter, long-term unemployment (LTU) experienced its largest ever jump, pushing it to its highest recorded level. The quarterly increase in LTU was so high; that it outweighed substantial increases in human capital from improving workforce qualifications that characterise most quarters.

  • GDP growth was above average (0.9%). Income (NNI) increased by significantly less, improving by just 0.2%, with the difference largely due to the continuing decline in the terms of trade.
  • Human Capital contracted this quarter by $1.3 bil (0.85%), reversing the continued growth it recorded in 2014. This was driven by increased skills atrophy.
  • Skills atrophy (the loss of skills from sustained unemployment) cost the HALE $3.9 bil more this quarter than last quarter. This is due to the substantial increase in the number of long term unemployed. This quarter, a record 51,000 additional people were considered unemployed for more than 52 weeks (an increase of 32%). This is significantly larger than quarterly changes over the last three years, where long-term unemployment tends to increase by just 2,400 people (which is equivalent to an average quarterly increase of just 2.4%).[2]
  • Adult Formal Education (AFE) continues to support Human capital as greater proportions of the adult population attain higher levels of education.[3] It is estimated that this quarter, an additional 63,000 people obtained post school qualifications. The value of AFE increased by $2.6 bil (3.4%) over the quarter, but this was not large enough to offset the decline in human capital caused by skills atrophy.
  • The weakness in the labour market, apparent in the rise in unemployment and underemployment, is also negatively impacting wellbeing through a reduction in Work Satisfaction.[4] This reduced wellbeing by a further $0.2 bill (2.1%) this quarter. The lion’s share of this is due to the rising unemployment level. The non-economic costs of unemployment experienced a significant deterioration this quarter, worsening by $0.26 bil (10.9%). This is due to a rise in unemployment which peaked in January at 6.8%, which constituted a decade long high. Recent improvements in unemployment however, are expected to at least partially reverse this in the next quarter. Although underemployment improved slightly this quarter, it remains high by historical standards and continues to detract from wellbeing.
  • The extent to which Health reduced non-economic wellbeing grew by $0.4 bil (3.8%). This is due to costs of mental illness and obesity growing by a greater amount than other indicators of health that continue to slowly improve.

[1] This quarter the HALE contracted by $1.29bil. This is $3.1bil below the quarterly trend for the HALE.

[2] The February figure from the ABS puts one person in 60 who is either in work or looking for work as someone who has been unemployed for 52 weeks or more. In February 2013 the ratio was one in 95 and in February 2009 the ratio was one in 124.

[3] In the HALE, the AFE contribution to human capital is measured by estimating the proportion of the population between 20 and 64 years of age who have attained a post-school qualification (Certificate III level or above). The recent growth in AFE is driven by both population increase and increased attainment of qualifications. We estimate that close to 60% of 20-64 year-olds will now have a cert III qualification or higher. This compares favourably to the results from a decade ago where only 47% of 20-64 year olds obtained post school qualifications.

[4] Work Satisfaction (previously referred to as “Job Satisfaction”) is an index in the HALE which examines the wellbeing impact of unemployment, underemployment and overwork over and above direct effects on earnings.