December 14, 2017

Today’s Economist: How the World Bank Makes Doing Business Easier

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The World Bank is not known as a very pro-market place. It’s a big organization with a great deal of expertise at putting together top-down development projects. If the government of a relatively poor country wants a dam, a set of roads or a port, the World Bank is the place to apply for assistance. The bank also does important work helping some of the world’s poorest people, and this is a focus of the new president, Dr. Jim Yong Kim (I endorsed his appointment during the contentious discussion that followed).

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At the same time, the World Bank has some pockets of activity that are very helpful to private-sector activity and entrepreneurs, particularly in many of the more troubled economies. One of the most important efforts, the Doing Business indicators, has been under severe pressure of late. The latest indications are that the World Bank will keep these indicators in operation, but there is still a chance that World Bank management will cave in on important details to pressure from influential quarters, including China.

The Doing Business indicators measure what is involved in setting up and running a relatively small business in 185 economies around the world. There are also subnational reports available for some places, for example Italy in 2012-13.

Starting a Business,” one of the indicators, by its own description:

measures the procedures, time and cost for a small to medium-size limited liability company to start up and operate formally. To make the data comparable across 185 economies, Doing Business uses a standardized business that is 100 percent domestically owned, has start-up capital equivalent to 10 times income per capita, engages in general industrial or commercial activities and employs between 10 and 50 people within the first month of operations.

This may sound rather dry or overly specialized, but in fact this approach is highly revealing. The indicators draw on expert opinion; the methodology is based on a suite of top-notch research papers.

These data are highly informative, indicating where there are barriers to business creation and development. The cross-country comparisons are not sufficient for making big policy moves; more country-specific context is always needed to assess exactly what changes are needed and how to make them effective. But the World Bank’s Doing Business database is a very useful dashboard that indicates issues that need more attention from any policy maker who would like to make it easier to do business in his or her country.

Such details are extremely annoying or even threatening to three distinct categories of people: some high-level administrators in the World Bank, people who run cozy business cartels and officials who do not like transparency of any kind.

Some top World Bank administrators oppose the Doing Business indicators because these measures shine too much light onto exactly what is happening in particular countries. It is much easier to concoct country-by-country measures, preferably with a methodology that is not straightforward for others to replicate.

Local business oligarchs are, as you might suppose, rather unenthusiastic about the entry of new companies. They are happy when local officials, with whom they typically have a good relationship, help erect barriers to entry through creating needless red tape. Using the government to keep down the competition is a viable strategy in many parts of the world.

And officials in many countries really do not like transparency. Why draw attention to your regulations when these are not best practices? The Doing Business indicators are particularly helpful when used to compare cities or other localities within a country. Why should the red tape in one city be so much higher than in the city just up the highway? You can see why this sort of well-informed metric would not make officials happy.

A number of countries have expressed forcefully dissatisfaction with the indicators in their current form. China is the most notable critic, but some other governments are also not happy with this type of transparency.

As a result of this pressure, Dr. Kim set up an independent review panel for the indicators. Initial indications were that this review would recommend against continuing with Doing Business – and that Dr. Kim would go along with this view.

Along with some colleagues, I wrote to World Bank management urging them not to undermine the Doing Business indicators. Support for our position from across the political spectrum has been strong, at least within the United States. Michael Klein, a former vice president at the World Bank, deserves special mention for his efforts at organizing informed opinion in the United States and in many other places.

Indications last week from Dr. Kim are that the Doing Business indicators will continue, at least formally without big changes. It remains to be seen whether the quality of the indicators is compromised – for example, some countries would like to take out the detailed tax information.

International organizations sometimes think they can play games of this nature because no one is watching or no one understands the details – or what is really at stake. In this case World Bank management should be aware that outside experts are watching carefully and waiting patiently for the next moves.

The best way forward is to develop further measures that capture additional important features of regulatory reality. Better design of economic policy is easier when stronger benchmarking tools are available. The World Bank should continue to produce the Doing Business data as currently constituted and encourage ideas for useful new indicators.

Article source: http://economix.blogs.nytimes.com/2013/06/13/world-bank-on-verge-of-making-a-good-decision/?partner=rss&emc=rss

Today’s Economist: Simon Johnson: The Myth of a Perfect Orderly Liquidation Authority for Big Banks

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

On Tuesday, with some fanfare, the Bipartisan Policy Center in Washington rolled out a report, “Too Big to Fail: The Path to a Solution.” Focused on how to “resolve” big financial companies — a technical term for the details of handling the failure of such institutions — the report is elegantly written and nicely laid out. You can either read the very short version, the short version or the long version of the same material. Unfortunately, in all three the authors fail to persuade that the problem of too-big-to-fail is fixed or can be brought under control if only we follow their recommendations.

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Their argument has three elements. First, big financial companies can be resolved either in bankruptcy or, more likely, through using the orderly liquidation authority, or O.L.A., created by the Dodd-Frank Act of 2010. Second, the key to making O.L.A. workable is sufficient “loss-absorbing” long-term debt and equity at the holding-company level. Third, the implication is that most or all of the big banks already have sufficient “loss-absorbing” debt and equity at the holding company level to make this work.

As a result, the authors contend, we (or perhaps financial-sector executives) are in luck — no significant structural changes, like simplification or reductions in scale, are needed at megabanks.

All three parts of this argument are unconvincing — and the bottom-line policy implication, “do little, be happy,” is downright dangerous.

The first point about the workings of bankruptcy and O.L.A. may sound good on paper but is simply not plausible in the real world. We are talking about huge, complex and opaque companies — typically including hundreds of thousands of employees across more than 100 different countries, with 2,000-plus legal entities. Even well-informed investors cannot figure out where the risks really lie — and the recent London Whale experience at JPMorgan Chase raises questions about whether officials or even company managements have much more of a clue.

The exercise of having large bank holding companies draw up “living wills” to show how their failures could be handled under normal bankruptcy procedures (part of the Title I requirements under Dodd-Frank) is widely regarded as having yielded little or nothing of value. There will be a do-over later this year, but I have yet to find a well-informed person — in either the private sector or government — who is optimistic about the outcome.

In addition, the United States authorities have so far failed to designate a single nonbank as systemically important — and thus subject to additional prudential requirements (a technical term, meaning closer scrutiny and supervision), including preparation of a living will. The authors show no awareness of the painful lessons from A.I.G., Lehman Brothers and the run on money funds in September 2008. None of those entities were banks (a specific legal and regulatory term), but this report seems oblivious to the implications.

If the market questions, and it does, whether the Federal Deposit Insurance Corporation could handle the failure of a single big bank holding company (already subject to close supervision, in principle), what are the chances of persuading anyone that a significant nonbank financial institution could be resolved in an orderly fashion?

To be fair, the authors of the Bipartisan Policy Center report would like to modify the bankruptcy code — adding a new Chapter 14 (an idea that originated with the Hoover Institution). But why should the financial sector, or anyone else, get special treatment? If we are going to use bankruptcy when companies fail — and this would be my strong preference, if I thought it could be done without destroying the world economy — surely there should be one set of rules for everyone.

Once you establish special treatment and break with precedents, the entire legal process becomes murky, unpredictable and likely to spread more fear than confidence in the outcomes.

Of course, megabanks and other systemically important financial companies cannot go through bankruptcy today without generating the risk of a broader economic collapse — again, one lesson from the fall of 2008. An obvious response would be to induce these companies to change the structure, scale and nature of their activities in order that their failure could be handled by bankruptcy. This is precisely the intent of Title I in Dodd-Frank.

The authors of this report, however, prefer instead to rely on the orderly liquidation authority, including the proposed “single point of entry” for bank-holding companies. In the current version of this plan, the F.D.I.C. would take over a failing institution and force recapitalization at the holding-company level through wiping out equity holders and converting long-term subordinated debt owed by the holding company into equity, while allowing operating subsidiaries to continue in business and to pay their liabilities in full.

I fully support the F.D.I.C. in its attempt to build a workable O.L.A., and there are presumably situations in which this set of tools could help. (I’m a member of the F.D.I.C.’s Systemic Resolution Advisory Committee, but the views here are mine alone.)

But I have not heard any of the relevant responsible officials express the kind of frothy optimism for O.L.A. that bubbles through in this report.

The authors do cite a recent speech by Mary Miller, under secretary for domestic finance at the Treasury Department, in which she says that too-big-to-fail is substantially fixed by the O.L.A. and other measures. But, as John Parsons and I pointed out at the time, her speech is deeply flawed at many levels and absolutely does not represent the public views of the F.D.I.C. or the Federal Reserve.

Regarding whether she provides a realistic assessment of O.L.A., Ms. Miller’s language actually confuses liquidation — the closing of a company and the winding down of its activities — with resolution (see Page 6 of her speech). I pointed out this problem two weeks ago to the Treasury Department; unfortunately, it has made no discernible attempt to tighten the wording or issue any kind of clarification.

The second point in the Bipartisan Policy Center report’s argument completely misses the key systemic issues, including the basic mechanics of how global crises spread.

The authors do mention the issues of global resolution — handling a financial failure across borders — but only to dismiss the thorny realities as trivial. As for the report’s recommendations, regarding global resolution these amount to exhorting the F.D.I.C. to get foreign countries to cooperate (good luck) and to threatening to bring Congress back in to legislate cross-border cooperation (a legislative and diplomatic impossibility).

The authors are top experts (legal and financial), so surely they have been following the news from Europe, including a series of botched bank rescues, the debacle in Cyprus and now a row at the highest political levels about whether to protect uninsured depositors more or less than bondholders. Not surprisingly, the split is between countries where such depositors have more sway (e.g., France and Spain) and those where bondholders have a stronger voice (e.g., Britain and Denmark). Who will get what kind of support — or be forced to swallow a bail-in (i.e., take losses) in a potential crisis?

It is impossible to say with any accuracy.

Writing in The Financial Times on Monday, Wolfgang Schäuble, Germany’s finance minister, made it clear that we are a long way from having an integrated bank resolution regime in Europe. In a crisis, it’s every finance minister and central banker for himself.

This matters a great deal because, as the Federal Reserve governor Jeremy Stein pointed out in a recent speech, the costs of financial stress are felt not just when there is an outright failure but also when financial institutions suffer losses and come under pressure. In terms of macroeconomic impact, “near collapse” can be almost as damaging as actual failure, particularly amid great uncertainty about who will bear what kind of loss.

And this leads to perhaps the greatest deficiency in this report: a complete failure to discuss the importance of who holds the quasi-mythical “loss-absorbing debt” at the holding company level. If such debt is held by highly leveraged institutions, with or without obvious systemic importance themselves, then a sharp fall in the value of this debt (leading up to the forced conversion into equity) can help spread a crisis far and wide.

The same problem exists for money-market funds, which remain highly susceptible to runs. Would it be stabilizing or destabilizing if a large amount of this debt were held across borders?

And who will be allowed to insure this debt, through credit default swaps or in some other complicated way using derivatives? If Goldman Sachs insures any kind of bail-in liabilities of JPMorgan Chase (or another megabank), that should make us very worried.

Third, all roads lead to equity capital, in a way that the authors of this report fail to appreciate fully.

If the big banks really had sufficient equity to absorb likely losses, we would be discussing equity levels close to those proposed in legislation by Senators Sherrod Brown, Democrat of Ohio, and David Vitter, Republican of Louisiana. (I wrote in more detail last month on Bloomberg View about Brown-Vitter and its impact so far.)

But the Bipartisan Policy Center report takes the view that such levels of equity funding (relative to total assets) are a bad idea. The wording here seems close to that in a recent document issued by Davis Polk Wardwell, a law firm (not surprising, as one of the authors of the center’s report is a senior person at that firm). Both Davis Polk and this report are completely wrong on equity — a point that I made in this blog recently (including the misinterpretation of the pivotal new book by Anat Admati and Martin Hellwig).

At least implicitly, the report is putting great weight on long-term subordinated debt at the holding company level. How much is there?

Moody’s, the rating agency, issued a report on this question in March (“Reassessing Systemic Support in U.S. Bank Ratings – an Update and F.A.Q.”). There is more than one way to do the relevant calculations, but Moody’s entirely plausible methodology suggests that total capital subject to a bail-in (equity plus the right kind of debt at the holding company level) is 4 or 5 percent of total assets for some of our biggest banking conglomerates (see Exhibit 3 in that report).

I’m comparing bail-in capital with total assets, not risk-weighted assets – as the risk weights are wrong in every crisis. However, I would caution that Moody’s does not adjust these debt numbers according to whether they are held by bail-in creditors – i.e., entities on which the F.D.I.C. would actually be willing to impose losses.

Next, we should expect megabanks and their representatives to whine that reasonable levels of bail-in capital (e.g., 20 to 30 percent of total assets; see Pages 7 and 8 of this letter to the Fed by Sheila Bair, Professor Admati, Richard Herring and me) — and a conservative definition of bail-in creditors — will crater the real economy. We hear this assertion every time financial reforms are discussed. For example, the financial consulting firm Oliver Wyman (which is also involved in the Bipartisan Policy Center report) made this point on the Volcker Rule; see my assessment).

The Bipartisan Policy Center report depicts a pair of mythical beasts — the perfect orderly liquidation authority and its partner, the bail-in creditor. More broadly, this appears to be part of a concerted effort by megabanks and their allies to convince you, and the Board of Governors of the Federal Reserve, that the existence of these beasts will hold all other evils at bay.

Such mythical beasts do not exist in the real world.

Article source: http://economix.blogs.nytimes.com/2013/05/16/the-myth-of-a-perfect-orderly-liquidation-authority-for-big-banks/?partner=rss&emc=rss

Greece Makes Progress in Opening Restricted Professions

ATHENS — Greece has opened up 247 of its 343 “closed professions” — occupations ranging from notary to taxi driver — where access had been subject to a maze of restrictions, government officials said Thursday.

The officials said the deregulated job market offered greater opportunities to the country’s job seekers as new figures showed the unemployment rate edging even higher.

“Of the 343 professions, 72 percent have been fully liberalized,” Finance Minister Yannis Stournaras said during a joint news conference with Costis Hatzidakis, the development minister. Other fields, including law, engineering and architecture, were “being gradually opened up,” he added.

The progress in breaking open restricted-access occupations, something Greece’s foreign creditors have been demanding for the past three years, “is of extreme significance for those who don’t have work and who will now have better access to the job market,” Mr. Hatzidakis said.

His words came as the Greek national statistical service, Elstat, released figures showing that the unemployment rate reached 27 percent in February — up from 26.7 percent in January. The rate was 64.2 percent among Greeks 15 to 24, a record for Greece and the highest level in the euro zone.

A more effective crackdown on tax evasion and the liberalization of closed professions are the two key areas where Greek reforms are lagging, according to a report released earlier this week by the International Monetary Fund, which together with the European Union has extended two bailouts, worth €240 billion, or $315 billion, to Greece since 2010.

The I.M.F.’s report hailed efforts by the country to reduce its budget deficit and debt burden.

Euro zone finance ministers are to decide Monday on the release of a €4.2 billion tranche of aid for the first quarter of the year. Mr. Stournaras said Thursday that he would ask his European peers to approve the release of another installment, worth €3.3 billion, scheduled for the second quarter.

In an interview with state television earlier Thursday, Mr. Stournaras said he believed Greece would return to bond markets by the end of 2014 after bond yields on Wednesday dropped to their lowest levels since last year’s government debt restructuring.

Article source: http://www.nytimes.com/2013/05/10/business/global/greece-makes-progress-in-opening-restricted-professions.html?partner=rss&emc=rss

Today’s Economist: Simon Johnson: The Problem With Corporate Governance at JPMorgan Chase

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

Some proponents of the current American version of corporate capitalism contend that if there is a problem with the way our largest companies are run, shareholders will take care of it – by putting pressure on directors, sometimes voting them out. Shareholders are not supposed to replace chief executives directly but apply pressure to the board to improve oversight and produce management change when appropriate.

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In contrast, critics like to point out that owners – including small shareholders, pension funds and large mutual funds – seem unable to exercise even a modicum of control over many of today’s larger corporations, particularly the largest financial institutions.

The situation at JPMorgan Chase, in the run-up to its annual meeting on May 21, is an interesting test case with regard to two specific decisions: whether Jamie Dimon should continue to serve as both chief executive and chairman, and whether three members (David Cote, Ellen Futter and James Crown) of the risk committee of the board should be voted out.

Two proxy advisory firms – Glass, Lewis Company and Institutional Shareholder Services Inc. – have called for JPMorgan Chase shareholders to vote against the recommendations of management on both issues. Leading shareholders have apparently not yet made up their minds – and are being lobbied hard by supporters of Mr. Dimon to resist change. Mr. Dimon likes being chief executive and chairman and very much wants to keep things that way.

The interests of shareholders would be better served by following the advice of Glass Lewis and Institutional Shareholder Services. (Glass Lewis is also recommending that the three members of the board’s audit committee be replaced; I support that suggestion.)

Changing board governance is not a panacea at any company. An independent chairman can be an effective constraint on a chief executive, but many chairmen lack the stature or experience to play that role. And the risk committee of a big bank will always be constrained by the knowledge and ability of board members, very few of whom understand the risks in large financial institutions today. (There is a process of certifying that board members have relevant expertise; it is meaningless.)

Still, JPMorgan Chase undoubtedly has a serious problem from a shareholder perspective that needs to be addressed through strengthening board oversight.

Exhibit A in this discussion is the recent report by the Senate Permanent Subcommittee on Investigations, headed by Carl Levin, Democrat of Michigan, the chairman, and John McCain, Republican of Arizona, its ranking minority member, into the so-called London Whale trades that lost more than $6 billion. This report finds repeated failures in risk management at the highest levels within the company.

As Senator McCain put it (see the second statement):

JPMorgan executives ignored a series of alarms that went off as the bank’s Chief Investment Office breached one risk limit after another. Rather than ratchet back the risk, JPMorgan personnel challenged and re-engineered the risk controls to silence the alarms.

The report itself is more than 300 pages and the exhibits run around 500 pages (links to both documents are on the upper left on this page). For a concise statement of the core issues, I recommend this analysis by Bart Naylor of Public Citizen focusing on Exhibit 46 and explaining how JPMorgan Chase executives were gaming regulatory constraints to drive up their stock price (and presumably bonuses).

Specifically, the bank’s senior management changed how they calculated the risk of their positions so that they could reduce the amount of equity funding they needed. This allowed them to increase their leverage (borrowing relative to assets) as well as their risk – without this risk actually showing up in a report.

Mr. Dimon says he did not know this was going on, but even his denial is a concession that his management system completely broke down.

JPMorgan Chase’s policy, as stated to shareholders in its annual report, required risk limits to be taken seriously, with senior management responsible for signing off on high-level model changes. It is not unreasonable for shareholders to expect Mr. Dimon himself would take these risk limits seriously. And where was board oversight in this entire process?

For further detail, you can read the summary opening statement by Senator Levin (the first statement on the subcommittee’s Web page). Or try this somewhat more colorful and even emotional assessment by Matt Levine, a commentator who does not usually agree with people like Senator Levin, Mr. Naylor, and me that very large banks can pose serious danger to society (caution: Mr. Levine’s language is not suitable for family members too young to have a brokerage account).

Or, if you are a JPMorgan Chase shareholder, read the full report – or at least the executive summary. And wonder about whether a handful of traders and one inexperienced risk officer (with questionable authority) can effectively oversee a complex derivatives portfolio that grew tenfold over a period of months (with a notional value eventually in the trillions of dollars). How can a member of the board’s risk committee without financial services expertise possibly spot the risks and ensure management is keeping the bank out of trouble?

Senator McCain makes the link to the important broader policy issue on Page 3 in his opening statement:

This bank appears to have entertained – indeed, embraced – the idea that it was quote “too big to fail.” In fact, with regard to how it managed the derivatives that are the subject of today’s hearing, it seems to have developed a business model based on that notion.

Whether shareholders should be bothered by a firm’s being too big to fail is an interesting question. If this status purely confers a subsidy – in the form of taxpayer support when things go badly – then we should expect shareholders to be quite excited by the prospect.

Unfortunately for shareholders, the JPMorgan Chase case demonstrates that the distortion of incentives also means it is much harder to control what goes on at a large complex financial company. From 2000 through the end of 2012, the stock was down 15 percent; midsize banks have done much better over this time period. You can call this “too big to manage,” but it is more likely that executives and traders on the inside are doing well, so it is really outsiders (e.g., shareholders, as well as taxpayers) who are doing badly.

The London Whale losses did not bring down the company, but shareholders still have cause to want change. When planes almost collide at an airport, we do not say, “there was no actual accident, so that means the system works well.” Instead, our reaction is along the lines of, “What went wrong?” and “How can we prevent this from happening again?”

But at JPMorgan Chase, it is business as usual, despite reports of further regulatory investigations into other areas of the bank, including whether it helped manipulate interest rates and commodities prices and whether it was honest with shareholders and regulators about the London Whale big bets on derivatives.

What is likely to happen on or before May 21? Large shareholders will not want to rock the boat, and the prospect of continuing too-big-to-fail subsidies is too alluring. Mr. Dimon and his board will get another chance.

That will be good news for Mr. Dimon and his directors, but bad news for the rest of us, again. And JPMorgan Chase’s shareholders will likely not do so well, once more.

Article source: http://economix.blogs.nytimes.com/2013/05/09/the-problem-with-corporate-governance-at-jpmorgan-chase/?partner=rss&emc=rss

Euro Zone Officials Give Greece Additional $2.8 Billion in Loans

ATHENS — Euro zone officials on Monday approved the release of €2.8 billion in loans to Greece, the country’s Finance Ministry said, paving the way for the approval of an additional €6 billion installment of aid at a meeting of the currency union’s finance ministers in mid-May.

The Greek Parliament late Sunday approved a controversial plan to dismiss 15,000 civil servants by the end of next year as part of a new package of economic measures that the country must enforce in order to receive continued financing from the troika of foreign creditors: the International Monetary Fund, the European Central Bank and the European Commission.

The €2.8 billion, or $3.7 billion, approved Monday in Brussels was originally to have been disbursed in March but was delayed after negotiations between Greece and the troika stalled over the creditors’ demands for civil service cuts.

“There was a positive evaluation of the implementation of the Greek program and clear references to the decisiveness of the government in proceeding with reforms set out in the program,” the Greek Finance Ministry said.

The disbursement of the €6 billion installment of loans, in May, is dependent on the adoption of further measures by Athens, including an overhaul of the tax collection system.

The government’s latest measures passed into law in a vote held shortly before midnight on Sunday with 168 votes in the 300-seat House.

A last-minute amendment allowing the local authorities to hire young Greeks for less than the minimum wage of €586 a month fueled angry protests by the political opposition. But the inclusion of measures intended to ease some of the financial burden on homeowners, including a 15 percent reduction in a new property tax, clinched the support of lawmakers in the three-party ruling coalition.

Defending the bill, the finance minister, Yannis Stournaras, insisted that there was no choice but to implement the measures. “Greece is still cut off from the markets,” he told lawmakers, adding that the government’s chief aim was to achieve a primary surplus before seeking a further “drastic” reduction of its debt, which stood at 160 percent of gross domestic product at the end of last year.

His claims were derided by the opposition. “With blood, tears and looting, they will achieve surpluses like those achieved by Ceausescu in Romania and Pinochet in Chile,” said Alexis Tsipras, leader of the main leftist opposition party, Syriza, which wants Greece to revoke its agreement with the troika.

“Claim back your lives and your country that they are stealing,” he said as a few hundred people, mostly civil servants, staged a low-key protest outside Parliament.

The ruling coalition, led by Prime Minister Antonis Samaras, faces a difficult balancing act to reassure its foreign creditors and its long-suffering citizens, who have seen their incomes dwindle by a third and unemployment skyrocket to 27 percent in the past three years.

Article source: http://www.nytimes.com/2013/04/30/business/global/30iht-eugreece30.html?partner=rss&emc=rss

Britain Avoids Triple-Dip Recession

LONDON — Britain’s economy avoided entering an unprecedented — and politically damaging — third recession in five years, according to official estimates released Thursday.

During the first quarter of this year the country recorded an increase of three-tenths of a percent in gross domestic product, compared with the previous three-month period when it contracted by a similar amount, the Office for National Statistics said. Gross domestic product had been broadly flat over the last 18 months, the agency added.

The British economy managed some growth despite continued weakness in the construction sector, which shrank by 2.5 percent, and despite the cold weather early in the year that some analysts feared would hurt economic activity.

Though the estimates paint a picture of a flat economy, they are slightly better than most analysts expected and will be a relief for the chancellor of the Exchequer, George Osborne.

“Today’s figures are an encouraging sign the economy is healing,” Mr. Osborne said in a statement. “Despite a tough economic backdrop, we are making progress.”

A triple-dip recession would have raised more questions about his austerity policies at a time when bad economic news has been piling up.

Last week, the International Monetary Fund raised doubts about the fast pace of Mr. Osborne’s deficit-reduction strategy and Fitch became the second credit rating agency to downgrade Britain from its prized triple-A status. Employment figures, which had been one of the rare spots of good news for Mr. Osborne, also turned sour, with a jump of 70,000 in joblessness in the three months to the end of February.

Mr. Osborne has already had to slow his deficit reduction plans, and a triple dip would have increased political pressure on him to slow even further.

A recession is normally defined as two consecutive quarters of economic contraction. The British statistical agency said that prospect was averted mainly by an increase in output from service industries, which grew by 0.6 percent. Mining and quarrying increased by 3.2 percent; construction was down 2.5 percent.

The Office for National Statistics said snowfall and cold weather in the early part of the year “appears to have had a limited impact on G.D.P. growth.”

“The strongest evidence was that it reduced retail output in January and March 2013 but boosted demand for electricity and gas in February and March, which increased output in the energy supply industries,” it said.

Nawaz Ali, a market analyst covering Britain for Western Union Business Solutions, said the “surprising and bullish outcome from today’s G.D.P. data has sent the pound soaring in currency markets this morning.”

“Doubts about the British economy’s performance over the coming quarters will remain,” he added. “However, the positive figures end the triple-dip threat and will certainly ease pressure on the Bank of England to shift course on quantitative easing, which has been a big worry for currency investors.”

Though it makes little difference economically whether or not the threshold was crossed, headlines referring to recession could have a psychological impact on consumers, making them even less willing to spend.

Across Europe the debate is growing about the wisdom of tough austerity policies and whether they are trapping economies in a cycle of stagnant growth, reduced tax receipts and higher debt.

In Britain the opposition Labour Party has been calling on the coalition government of Conservatives and Liberal Democrats to change course. Ahead of the announcement of the data, Chris Leslie, a Labour member of Parliament who is its spokesman on the economy, argued that even a small increase in growth would be insufficient.

“Growth of just 0.3 percent would simply mean the economy is back to where it was six months ago,” he said in a statement. “This isn’t good enough. After nearly three years of flat-lining we need to see decisive evidence that a strong and sustained recovery is finally under way.”

Article source: http://www.nytimes.com/2013/04/26/business/global/britain-avoids-triple-dip-recession.html?partner=rss&emc=rss

Cyprus Bailout Wins Easy Approval From Germany

Wolfgang Schäuble, Germany’s finance minister, warned lawmakers ahead of the vote that despite its tiny size, Cyprus could still endanger the broader economy of the European Union if its troubles were ignored.

“We must prevent that the problems in Cyprus become problems for other countries,” Mr. Schäuble said. He added that if Cyprus were allowed to go bankrupt, there was a “significant risk” of contagion to Greece and other vulnerable countries in the euro zone.

As expected, a clear majority of 487 out of 602 lawmakers casting ballots voted in favor of the package, which includes €9 billion, or $11.7 billion, in contributions from European Union members. The International Monetary Fund is to contribute an additional €1 billion.

German law requires parliamentary approval of all financial assistance the country extends to other European Union members.

In a separate vote, the German lawmakers also approved seven-year extensions on loans previously granted to Ireland and Portugal.

Germans were further rattled by news last week that Cyprus would need to raise €13 billion — nearly twice the amount the government initially estimated only a month ago — to keep its debt and deficit from spinning out of control and to meet the terms of the bailout. German taxpayers worry they will be called upon to come up with even more money to aid Cyprus.

Germany had insisted in the bailout negotiations that Cyprus reduce the size of its banking industry, that the European contribution be limited in scope and that depositors and investors in Cypriot banks be forced to share the burden. On Thursday Mr. Schäuble underlined that the European contribution would not be expanded, or made directly available to the struggling Cypriot banks.

Compared with most of its European Union partners, Germany continues to achieve economic growth, even if it has been only slight lately. Officials in Berlin said this week that the export-driven economy and the country’s solid public finances would enable Germany to achieve a budget surplus in 2016 — a sharp contrast to the deficits projected for weaker members in the euro zone. Even by next year, Germany expects to have a balanced budget, according to the annual stability program it plans to submit to the European Commission.

On Thursday, Moody’s maintained Germany’s triple-A credit rating, praising its “advanced, diversified and highly competitive economy and its track record of stability-oriented macroeconomic policies.”

Many Germans have grown weary of providing financial support to their fellow Europeans. A report last week by the European Central Bank suggesting that some of the weaker countries have higher wealth per household than Germany stoked public anger, which Mr. Schäuble sought to ease on Thursday.

“In our country, where we do not feel the euro crisis is our daily life, we have to remember that the people in Ireland, Portugal, Spain and Greece are living through a difficult time,” he said. “There are no viable shortcuts on this path, but for those affected it is difficult.”

Article source: http://www.nytimes.com/2013/04/19/business/global/german-lawmakers-back-cyprus-bailout.html?partner=rss&emc=rss

Economix Blog: With Debt Study’s Errors Confirmed, Debate on Conclusion Goes On

The Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff have acknowledged that their groundbreaking 2010 study “Growth in a Time of Debt” includes statistical errors that significantly alter its results.

Three economists at the University of Massachusetts, Amherst, uncovered those errors in a bombshell paper released this week, which has prompted a huge debate in the economics blogosphere and resonated with policy makers gathered in Washington for the spring meetings of the World Bank and the International Monetary Fund. (The paper is all the talk in Foggy Bottom.)

In an e-mailed statement, Professors Reinhart and Rogoff admit their mistakes but argue that they do not change the ultimate lessons of the paper, originally published in The American Economic Review. “We are grateful to Herndon et al. for the careful attention to our original ‘Growth in a Time of Debt’ AER paper and for pointing out an important correction,” they write. “We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.”

Both the University of Massachusetts and the Harvard authors now find that countries whose debt loads are 90 percent or more of their annual economic output tend to experience slower growth than countries whose debt loads are lighter — though the effect is much smaller than previously thought.

The debate now centers on how to interpret those muddier results — and how the incorrect results influenced public policy in the post-crisis years.

The debate over interpreting the new results has centered on the thorny question of causation. Does low growth cause high debts, or do high debts cause low growth? Can the Reinhart-Rogoff data set shine any light on that question? For their part, Professors Reinhart and Rogoff do not make a causal case in their paper, though they have in subsequent public comments.

For more on this question, read Jared Bernstein, a former Obama administration economist, and Dean Baker of the left-of-center Center for Economic and Policy Research, as well as Tyler Cowen, Justin Fox and Mark Thoma.

A broader question is how influential studies like Reinhart-Rogoff were in persuading countries to adopt austerity budgeting. My sense is that for deeply indebted countries with no way to finance themselves on the international markets — Greece being the central example — the answer is that it had little to no influence.

That is because by 2010, when the Reinhart-Rogoff paper came out, Europe had already committed to austerity. Powerful policy makers including Angela Merkel and Wolfgang Schäuble of Germany as well as Jean-Claude Trichet of the European Central Bank saw fiscal consolidation as necessary, full stop. That meant countries like Greece were boxed into it.

The International Monetary Fund might have preferred a slower pace of fiscal adjustment, and in the past six months or so it has admitted that it greatly underestimated the impact that austerity budgets would have on weak economies. But in an interview, Olivier Blanchard, the fund’s chief economist, said that even if it had better understood the damage that budget cuts might cause, it probably would not have meant different policy agreements. The problem was that nobody wanted to put up any more money for countries like Greece.

“One of the unpleasant aspects of what happened is that we kept revising forecasts of growth in the euro periphery down,” he said. “Part of it, though not all of it, is due to the fact that we just underestimated the effect of fiscal consolidation.

“I don’t like to be wrong systematically,” Mr. Blanchard continued. “But if we had better forecasts, would we have had very different programs? I suspect the honest truth is that, because of financing constraints, probably only at the margin.”

A better question is what effect studies like Reinhart-Rogoff might have had in countries that elected to start the process of fiscal consolidation without much pressure from the bond markets or other external financiers.

Britain and the United States are the big question marks there. The Cameron government in Britain — over the protestations of the opposition party and the monetary fund and other groups — has slashed the country’s budget. But it still has not met its own deficit-reduction targets, because the economy has remained mired in recession and automatic spending on social programs has increased. The country still could reverse course and engage in an effort to improve growth rather than an effort to hold down its debts. But thus far it has chosen not to.

The United States has also embarked on a campaign of deficit reduction, though a more modest one. Thus far, the Obama administration and Congress have raised taxes on the wealthiest Americans and agreed to trillions in budget cuts. With the aggressive actions taken by the Federal Reserve, the economy has continued to grow — which will greatly aid the country’s fiscal situation in the long run. How important were academics like Professors Reinhart and Rogoff to that process? My sense is not very, as well, even if policy makers pushing for deficit reduction cited them.

Article source: http://economix.blogs.nytimes.com/2013/04/17/with-debt-studys-errors-confirmed-debate-on-conclusion-goes-on/?partner=rss&emc=rss

I.M.F. Director Urges Banks to Retain Loose Money Policy

Global growth is likely to remain tepid this year and central banks should keep their easy monetary policies in place, the head of the International Monetary Fund said on Wednesday.

“Thanks to the actions of policy makers, the economic world no longer looks quite as dangerous as it did six months ago,” Christine Lagarde, the I.M.F. managing director, told the Economic Club of New York.

While there were signs that financial conditions were improving, Ms. Lagarde said those changes were not translating into improvements in the real economy.

“In present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative,” Ms. Lagarde said.

“We know that inflation expectations are well anchored today, giving central banks greater leeway to support growth,” she added.

She said a three-speed recovery was under way, led by fast-growing emerging economies, followed by countries like the United States that are on the mend, and with the euro zone and Japan trailing.

In January, the I.M.F. trimmed its 2013 forecast for global growth to 3.5 percent from 3.6 percent, and projected a 4.1 percent expansion in 2014. It said the world economy grew 3.2 percent in 2012.

Ms. Lagarde said the exceptionally loose monetary policies of central banks in advanced economies was a concern for emerging economies, which fear a sudden reversal of the large capital flows that have flooded their economies in recent years as investors have sought higher yields.

“Right now, these risks appear under control,” Ms. Lagarde said, but she urged emerging economies to increase their defenses to deal with possible repercussions when the Federal Reserve and other central banks start to cut back their monetary stimulus.

Article source: http://www.nytimes.com/2013/04/11/business/imf-director-urges-banks-to-retain-loose-money-policy.html?partner=rss&emc=rss

Political Economy: Quitting the Euro Wouldn’t Be a Good Choice for Cyprus

But it would be foolish to forget about Cyprus. Despite the $13 billion bailout, the small Mediterranean island is edging toward a euro exit. Quitting the single currency would devastate wealth, fuel inflation, lead to default and leave Cyprus friendless in a troubled neighborhood. Even so, the longer capital controls continue, the louder will grow the voices that call for bringing back the Cypriot pound.

The president, Nicos Anastasiades, is against Cyprus’s leaving the euro. But the main opposition, the Communist Party, wants to pull out. A smaller opposition group wants to stay in the euro but kick out the so-called troika of creditors — the European Commission, the European Central Bank and the International Monetary Fund. The country’s influential archbishop is also critical of the troika.

The president can hold the line for now. After all, he has just been elected and the Constitution gives him huge power. What is more, there are strong arguments for staying inside the single currency — not the least of which is that otherwise, Cyprus would lose the €10 billion (or nearly 60 percent of its gross domestic product) in bailout money.

If Nicosia brought back the Cypriot pound, it would plummet in value. Nobody knows how much, but economists guess it might be as much as 50 percent. Cypriots are complaining about the large losses suffered by big depositors at their two largest banks, Bank of Cyprus and Laiki. Such a devaluation would savage the wealth of all other depositors.

Meanwhile, devaluation would fuel inflation. Cyprus is a small, open economy. All the oil is imported. More than 80 percent of the textiles, chemicals, electronics, machinery and automotive vehicles are imported, too, according to Alexander Apostolides, a lecturer in economics at the European University Cyprus.

Cyprus also relies on low-cost immigrant labor in its agricultural and tourism industries. After a devaluation, their cost in local currency would rise. All this would mean the erosion of any gain in competitiveness.

The island’s economy would suffer a further shock because it is running a current account deficit of about 5 percent of G.D.P. Given that Cyprus has minimal hard currency reserves, this deficit would have to vanish overnight. Imports would slump. But so would domestic production, given its reliance on imports.

In such a scenario, Nicosia would not be able to avoid defaulting on its debts. Following a 50 percent devaluation, these would be double their current value when expressed in local currency. The debts come in two forms: the government’s own €15 billion in borrowings; and the central bank’s €10 billion in emergency liquidity assistance to the banks.

Default might seem to be an attractive option because Nicosia would suddenly shrug off a vast debt load. But it would not be that simple. The government would face many lawsuits. And if the central bank defaulted on its provision of the emergency assistance, the E.C.B. would take the hit. The euro zone would not be happy and would, at a minimum, insist on some sort of staged repayment plan.

Cyprus could, of course, refuse to pay point blank. But it is not Argentina. Its small size makes it vulnerable to being pushed around. If it tried to play hardball with its euro zone partners, it would probably find them playing hardball with it. They might even find a way to kick Cyprus out of the European Union.

Exit from the Union would be another blow for Cyprus. Its best trading opportunities are within the Union. Most of the rest of the neighborhood — like Syria and Egypt — is not in great shape. And Turkey is out of bounds until and unless some way can be found to resolve the dispute between Nicosia and Ankara over the latter’s occupation of the northern part of the island.

Cyprus would also struggle to exploit its offshore natural gas reserves if it quit the European Union. Turkey, which is already trying to stop that development, would find it easier, if Nicosia were friendless.

Apart from all this, the country would have to decide how to run monetary policy.

A responsible government would want to contain inflation by either linking the Cypriot pound to another currency, like the British pound, or running a tight but independent monetary policy. In either case, Nicosia would have to keep interest rates high and curb its budget deficit. Given its small foreign exchange reserves, it might also need to maintain capital controls.

Such an austerity program would be worse than that demanded by the troika. It would then be hard to avoid the temptation to print money. But that way lies hyperinflation.

So quitting the euro would not be a good choice. But staying is not a great one either. G.D.P. could plunge about 20 percent over the next two years, according to the latest guesses. And the longer capital controls are in place, the more the Cypriot people will feel they are not in the single currency zone anyway — as a euro in Cyprus is not equal to one in the rest of the world.

The troika should help lift the controls as soon as possible. Otherwise, Cyprus may well quit the euro and, small though it is, that could destabilize the zone.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/04/08/business/global/quitting-the-euro-wouldnt-be-a-good-choice-for-cyprus.html?partner=rss&emc=rss