Avoiding Armageddon

26^th September 2008
The Malta Independent - Friday Wisdom

The guide indicated to us the spot where the Jews believe there will be Armageddon the promised site for the last Judgement at the end of the world. I never thought that soon after my return to the office I would find the world financial system on the brink of its own Armageddon.

I apologise to my readers that this week again I feel compelled to write about the financial turmoil that has rendered the financial markets practically dysfunctional. It might be tempting to think that it should be of no concern to us if banks in America run into trouble because they have made bad loans and irresponsible investments in the US property markets which were in a speculative bubble that has burst.

This is wrong and it should concern us because our well-being, the value of our assets, the security of our jobs and the strength of our own financial institutions depend on it. This is an inter-connected world and if problems in the US send more Lehman type banks to the wall the loss of confidence would grow so much that the international financial system would seize up altogether.

This would mean that credit would stop, the plumbing of the world financial system gets jammed and good corporations will have to go to the wall with their bankers, jobs would be lost and the world would fall into a depression, not merely a recession, which would bring memories of the 1930s. This scenario would wreak havoc in government finances with falling revenues and growing expenditures which could well force governments to do the unthinkable and cut back on social programmes.

So the current financial turmoil is everybody’s concern no matter how unpalatable reading about it may be.

We are witnessing a classic failure of the free market. We are living strange days where in the motherland of capitalism, legislators, at the symbolic gunpoint of an Armageddon alternative pointed to their brains, are being asked to appropriate the astronomical sum of seven hundred billion dollars so that the executive can use this money to clean up the financial system from its bad loans and unblock the credit plumbing in the hope that we are still in time to avoid a deep recession if not a depression.

How much taxpayers would recover from this huge crisis appropriation is anybody’s guess. I heard views that if this bold measure of last resort succeeds the taxpayer could make a windfall by re-selling assets into an orderly market after having bought them from troubled banks at a deep discount. Others argue that it is difficult to estimate the correct value of these troubled assets and the government could well be overpaying and involving taxpayers in substantial losses purely to save the fat cats on Wall Street.

Why is capitalism not being allowed to work as it supposed to work and let the market sort things out choosing the wheat from the chaff and cleaning the system through normal mechanisms as is the professed religion of free capitalism? Why in this case the god of the market is not being trusted?

The simple answer is that banks are a special species indispensable for the proper working of the economy and cannot be allowed to fail as loss making businesses normally do. If banks are allowed to default in a systemic failure as we are presently witnessing, there will be too many innocent victims who pay too high a price in the form of lost jobs, devalued savings and general impoverishment. And most of these victims are the general mainstream of voters who would fault the politicians both if they use taxpayers’ funds to save the fat cats and much more if they let the market to wipe out the banks and much else along with them.

We have built an economic system built on credit. Economic growth depends on credit both to finance the necessary investments in productive assets as well as to stimulate consumption. Without abundant supply of credit consumer demand would fall in tandem with their standard of living and producers will curtail investment, cutting back production and discharging labour causing a downward spiral where unemployment feeds insecurity, fall in consumption and more unemployment.

Banks are the main medium for the supply of credit and hence why their good health is indispensable for orderly economic growth. And in acknowledgement of their importance not just for their own fortunes but, more importantly, for the good health of the overall economy, financial markets are supposed to be strictly regulated.

It is obvious that in the US regulation has not kept pace with developments in the financial markets and it had become ineffective to the point where regulators, particularly their prime cheer-leader the former Federal Reserve chairman Alan Greenspan, often professed their blind faith in the financial system to regulate itself. Regulated banks abandoned their traditional deposit intermediation role which requires abundant supply of capital, and developed risky investment banking activities generating smart alternative revenues from origination and distribution of very complex financial products wrapped in financial derivatives. Greenspan used to eulogise this distribution of risk beyond the traditional regulated markets saying that it made the system more resilient to external shocks.

Time has proved otherwise. When the shock came, thankfully for Greenspan not under his watch, the opacity of who was carrying this risk made the system more fragile with banks unwilling to lend freely to their counter-parts due to lack of transparency as to who was carrying the risk resulting from the housing shock.

The regulators were also caught napping at the wheel when they allowed traditional banking credit intermediation to be performed by hedge funds and private equity funds which operate largely unregulated with high leverage at the fringes of the financial system.

This over-confidence of regulators, whose fractionalised structured allowed too many cracks to be exploited by those who wanted to avoid regulation to take more risks than can be justified in such crucially important sectors, is by far the main reason why we are where we are today. It is incomprehensible how regulators could tolerate, even condone, crazy executive compensation policies adopted by regulated institutions to reward those who were taking excessive risks which produce a stream of paper profits for a few years which profits are then completely wiped out in a short time when the risks turn sours.

The regulators are as much at fault as greedy bankers. They probably don’t deserve to be bailed out. But there will be too many innocent victims if they are not. For the sake of the latter, including the poorest in the world, let’s hope that US legislators will swallow their pride and approve the bailout before they leave on their campaign trail next week. Being part of the world we depend on it too. But that is only a crisis averting solution. A more permanent solution depends on re-inventing a more effective system of regulation through transparency.

Mishandling the Shipyards` Privitisation

21^st September 2008
The Malta Independent - Friday Wisdom

As time unfolds it becomes ever clearer that the shipyards problem is being mishandled.

Most, yours truly included, have agreed that the best way forward for the shipyards is privatisation. Some dissenting voices have suggested that there could be an alternative solution through the formation of a workers’ co-operative to manage the shipyards, but I think we have been there before and it did not work out. Success in the management of an enterprise needs a dose of efficiency, which is hard to come by when there exists conflict of interest between the role of workers and management. The new management that takes over the yard has to risk its own capital to ensure success and a co-operative will find it hard to do so. It would inevitably revert to State support to keep it on its feet.

What I am in total disagreement with is the way the government is going about privatising the shipyards. The government has, by irresponsible choice motivated by political convenience, boxed itself in a corner of an EU deadline for State subsidies that have to end this year. It only started working on privatisation well after the election. Successful privatisations need time, careful planning and meticulous execution. For political convenience, the government denied itself sufficient time and is consequently fudging.

Firstly it makes no sense to offer early retirement schemes in an enterprise about to be privatised. This process could destroy one of the most important resources for the eventual success of the privatised organisation. Apart from wasting taxpayers’ funds, early retirement schemes ensure that the best workers leave to find alternative jobs whereas the least productive stay on making commercial turnaround that much more difficult. This will be factored into the privatisation bidding price so the government is not only forking out money for early retirement schemes but also actually structuring a discounted price in the bidding offers.

Secondly, the government must have known that EU rules are what they are and will not permit State subsidies after end December 2008. So unless privatisation is wrapped up within three months, leaving little room for proper negotiations to ensure that we get a fair price for our assets, the EU will object to writing-off loans given to the shipyards without their being put into liquidation.

There was clearly a more logical way forward. If the shipyards in their present format could not operate without subsidies after 2008, they should have been put into liquidation, discharging all employees. The government could have passed an emergency law delegating the management of shipyards to a temporary council of administration to keep it operating while the privatisation process is going on. During this period, discharged workers should have been attached to retraining schemes to upgrade their skills and imbue them with a commercial culture, so missing at the shipyards, keeping their salary conditions during such retraining period. During the privatisation process the council of administration could source in from the re-training pool workers as necessary for execution of work in hand.

Meantime, the process of privatisation would have proceeded without unrealistic time constraints and bidders would be clearly notified that whereas no imposition on employment of former shipyards employees was being imposed, such employment would be one of the criteria on which bids would be adjudicated. But it has to be acknowledged that it is counterproductive to load unwieldy employment conditions on bidders as this would either scare away serious bidders or be discounted in the bidding price.

This approach would have been completely within EU rules and would have saved millions of euro being paid in wasteful early retirement bonuses, which funds would have been better invested in retraining of employees to enrich their prospect of finding new employment with the new shipyard or elsewhere. It would also have attracted richer and better bids from serious investors who can see scope for re-inventing the shipyards if they can employ the workforce needed, cleansed of the old bad culture that made the shipyards the financial disaster they in fact are.

The Prime Minister re-assured us that the government would not accept any offers for the shipyards, which does not do justice to the value due to the Maltese taxpayers. It is easy to say that, but Mr Prime Minister where is your plan B?

If the best human resources are being incentivised to leave and if no proper offers will be received, what is the government going to do? Clearly, bidders know the government has no fallback position and will be in a weak position to negotiate fair terms with interested bidders.

Jean Claude Juncker, the Prime Minister of Luxembourg, once said that politicians know what needs to done to solve their country’s problems but they don’t know how to get re-elected if they do it. How true! The government should not have given positive reassurances to the nation in general and shipyards’ employees in particular before the election, which reassurances now show were based on hot air and pious hopes rather than concrete reality. Concrete reality would have demanded the privatisation process to be started well before the election in order to execute a diligent and transparent privatisation in good time before the expiry of the no-subsidies deadline at the end of this year.

Political convenience however necessitated that such problems are only taken after the election even if the nation’s interest are prejudiced by allowing unduly tight schedules to meet deadlines. Clearly getting re-elected was more important than tackling the shipyards’ problem with punctuality and correctness.

As we celebrate 44 years of independence today, may the Lord bless this country with true leaders to guide us forward, leaders whose priority is to do what needs to be done rather to organise expensive fudges which preserve expensively their prospect of retaining power.

Thank God for Our Boring Banks

19^th September 2008
The Malta Independent - Friday Wisdom

When developments on Wall Street become headline news on Main Street then something spectacular must be going on in the financial markets. And indeed it was dismally spectacular this week seeing a 158-year-old US investment bank file for bankruptcy. Lehman Brothers was the fourth largest US investment bank and with the developments of this week it means that three of the largest five US investment banks have disappeared in six months.

Bear Stearns and Merrill Lynch had to be sold for a song to much larger universal banks whereas Lehman filed for bankruptcy. The remaining two investment banks, the largest of the five, Morgan Stanley and Goldman Sachs, are in much better financial shape but still their business model is broken and their future as a standalone investment bank is gravely in doubt.

What has caused this dramatic transformation of investment banks from riches to rags? This time last year these banks were overflowing with hubris, paying their executives multimillion dollar bonuses and presenting themselves to investors as infallible money printing machines.

I should firstly explain what investment banks are and how they differ from the traditional banks which we are used to over here. Investment banks are not deposit taking retail banks. They do not run any sizeable branch network offering retail products to small clients and collecting funds through cheap deposits in order to fund their investment and lending activities. That is the function of traditional commercial banks like our own HSBC, BoV, APS and Lombard.

Investment banks fund themselves by large wholesale deposits from large corporate and high net worth clients and particularly by borrowing from other banks on the inter-bank market. Investment banks use this funding in order to finance their own trading activities, in the process leveraging up their balance sheets by borrowing on the strength of their brand and credit rating much more than is normally prudent.

Furthermore as investment banks have their roots in merchant banking they also have substantial expertise in money broking and merger and acquisition advisory services which requires top of the range human expertise and network connection, but very little capital as it is basically a commission business without having to carry any assets on balance sheet.

So what has gone wrong? As always the problems were sowed gradually over the years but they erupted with unexpected violence over the last 12 months. I categorise the problems into four inter-connected sections: Lax regulation, over lax monetary policy, management hubris and financial over-leverage

Following the great depression of the 1920s, central banks were created to regulate financial markets and to act as lender of last resort to keep order when occasionally the market suffers from lack of confidence by depositors or investors. It started from very rigid regulation which was gradually eased particularly in the late 1980s and 1990s believing that the free market and aggressive competition would force the market to regulate itself.

We were wrong. Bankers are subject to the same greed and short-termism as anybody else and clearly rather than regulate themselves they over-indulged in quick-buck type of trading activities without giving much attention whether the complex financial instruments they created could stand up to the test of time in the long term.

This lax regulation was compounded by the over-lax monetary policy in the period 2001-2005 following the burst of the tech bubble and the 9/11 events which threatened the throw the whole economy into recession. To mitigate a deep recession, central banks cut interest rates to historically low levels and kept them low for an overly long time. Cheap money is an invitation to borrow extravagantly and investment banks did just that and over leveraged their balance sheet to blow up their trading activities and make easy money by generating and selling complex products mostly linked to US real estate. US property was itself inflating a price bubble as a result of easy low cost mortgage availability.

All this could only happen if bank management betrayed their traditional values and replaced it with hubris of a kind yet unseen. Traditional normally paid bank executives were looked down upon and disdained by the new million dollar Ph. D. yuppies who thought they can make sure profit by accurately projecting asset prices through complicated mathematical models.

Internally banks had to manage culture clashes between the dull old-fashioned bankers and the new bubbly million dollar mathematical gurus. Management hubris leaned in favour of the new kids on the block not least because if the latter get millions of dollars in bonuses their bosses would get even more, sometimes much more. Traditional banking moral values were forgotten too easily and too quickly.

As a result senior management allowed their balance sheets to be hijacked by the new yuppie vultures who leveraged it beyond all limits of prudence, with the tacit complicity of regulators who were sleeping at the wheel and rating agencies who were too ready to accommodate for a fee, basing themselves on fake re-assurances that complicated risk control models and systems compensated for the excess risks of over-leverage. Nobody seemed to care too much that risk control systems which work well when liquidity and confidence are in abundant supply, tend to go haywire when liquidity and confidence join hands and hibernate concurrently as they normally do.

What is happening now is that the markets are presenting their bills for past excesses. The markets will only clear when they hit bottom and hopefully these events get us nearer to the bottom. Hopefully we will learn enough from this to ensure that firstly we invigorate regulation acknowledging that financial institutions are too important to be allowed to make fools of themselves. Complex derivative products are to be abolished and what is allowed has to be simple enough to be easily understood by whoever is invited to buy them.

Secondly monetary policy has to be re-tuned to become responsible not only for retail price inflation but also for asset price inflation in order to avoid skipping from one financial bubble to another.

Thirdly bank management have to regain the humility to become dull again and to be paid normal executive salaries.

And lastly regulators have to ensure that banks and financial institutions are not allowed to over-leverage and that capital adequacy have to be generous and not minimalist in approach.

Thankfully although our own banks and insurance companies are being hit by market instability and by the dubious accounting rule of forcing them to mark to market even investments they are capable of holding till maturity, our institutions are still the dull traditional value-rich institutions capable of weathering this storm, with distress measured by how much less profits they make rather than how much losses they will tot up.

Thank God for our boring banks. Thank God for their strong capital. Thank God for our thrift culture which permits our main bank to issue 10-year subordinated bonds at a rate they would have to pay for 12 month money on the inter-bank market. Thank God for our over-liquid markets permitting our banks to carry long term mortgages on their books funded by plentiful deposits.

   

Walking Alone

12^th September 2008
The Malta Independent - Friday Wisdom

As my hair gets thinner and whiter it is happening to me more often that I find myself walking alone. It is not a good sign when my strong belief in something seems to the shared by practically no one else as I should think it unlikely that I be right and all others wrong. But in the end I cannot just change a strong opinion just to follow the crowd.

The mainstream opinion is always right in the short-term and the way out maverick opinion only gets vindicated, if at all, in the long-term. In US politics presently mavericks are the talk of the town on the republican side.

John McCain won his nomination against all odds purely because the party could brand him as a maverick compared to the unpopular Bush. The choice of Sarah Palin as a McCain’s running mate reward her maverick views for whistles blowing cosy relationship with oil companies in Alaska, so much so that at the republican convention of 2004 Palin sat all alone and was considered as an outcast.

Mavericks in Malta are far less appreciated. Take the shipyards agreement where the government and the General Workers Union agreed to bridge their differences basically by increasing the early retirement package from e9 million to e58 million. The government is happy that its old habits of solving problems by writing a taxpayers’ cheque has worked again and can now proceed to privatise the yard to favour close interests that somehow fall within the network that feeds it to gain and retain political power. The network now expects payback through opportunities to continue extending its economic power.

The GWU is happy that in the face of inevitability of privatisation it could show that it did a good job to secure an improved offer for its members. The general public seems quite happy that confrontation was avoided and seems unperturbed that so much of publicly owned assets get channelled to so few, most of them getting cash piles purely to continue rendering the same work for a different employer.

I am not happy because I am a maverick taxpayer who cannot stand seeing our tax money spent so irresponsibly and inequitably. What hurts even more is the knowledge that this deal was brokered by the representative of private employers who would fight tooth and nail to avoid having similar generous redundancy and pension schemes extended to private employers. It is easy to be cavalier with other people’s money!

Let time be the best judge. This is what I had written about the last restructuring exercise of the shipyards in 2003 which indeed should have been the last. “Just another expensive patch up?”, I had opined on 2 November 2003:

“Taken in a wider macro-economic view this agreement is likely to be just another expensive patch-up. It also raises serious doubts about government’s true resolve to address the issues which have been left festering uselessly for so long and which have burnt up so many scarce resources. Rather than wasted these resources should have applied to achieve real re-structuring that has always been promised but never delivered.

Look at it from the taxpayers’ view. Nine hundred employees are being lifted off the books. Assuming that these are surplus idol labour I would reckon that these were costing the shipyards some Lm7 million to maintain. The remaining 1,700 workers will remain employed with the organisation that is to succeed Malta Drydocks and Malta Shipbuilding. If on average we have been subsidising the shipyards to the tune of Lm15 million p.a. (more in recent due to the financing of early retirement schemes) what assurances have been built into the agreement that efficiency gains of at least Lm8 million have to be included. Where are these coming from? Or is it just the saving in financial charges on the amount of debt that is being written–off? Saved finance charges on written-off debt of Lm320 million could amount to some Lm20 million that added to the Lm7 million saved wages for the 900 workers being lifted-off the books, will render the company profitable without delivering a single impulse of increased productivity?

And yet only increased productivity can deliver our shipyards to a state of commercial sustainability. If notwithstanding EU rules and all, the slimmed down organisation does not generate a sharp increase in productivity than we are just wiping-off one slate clean to start writing up another one. Productivity improvements comes from investments, flexibility of the workforce, and management obsession with control on timely deliverables on the agreed quality levels and within budget. It takes management systems which track and reward efficiency and discipline defaulters. Are the work culture and work practices so much embedded within the shipyards ready for this change?

Tax-payers will still have to foot the bill of the Lm27 million “saved” expenses which although no longer on Drydocks’ successor books are still on the taxpayers’ back. The wages element of the savings could be mitigated through the operation of early redundancy schemes. But on a macro-economic basis these schemes are a very expensive method of delivering the necessary labour mobility and flexibility and on a social basis they are an absolute heresy.

Early retirement schemes, especially if operated on a voluntary basis, tend to attract the most able-bodied of the work-force who are more likely to find alternative employment given the skills they possess. They are attracted to the idea of cashing a lump sum of money for a change in the work environment. This could leave the organisation with the least productive layer of employees which will make the achievement of productivity gains within the successor organisation so much harder if not neigh impossible.

On a social level what sense does it make to give such lump sums to those who have no real problem to find alternative employment rather than use such funding to train the whole workforce to gain new skills. It is this multi-skilling which best guarantees efficient job mobility and flexibility. A trained worker is both productive within the organisation and can easily find alternative employment outside it.

And taking it further in a wider context what social sense does it make for the State to offer generous early retirement schemes to employees in para-statal organisations and leave relatively unprotected employees in the private sector whose only protection in case of redundancy is a maximum of 12 weeks notice? Are Maltese working in the private sector an under-privileged lot? Are they taxed any less than their brothers, sisters and friends in the public sector?”

Unfortunately I was only too right and I am afraid I will be right again that the taxpayer is once again being short-changed. It takes courage and fortitude to stand alone dissenting when all around you are applauding. Time will be the best judge as it has been for my dear friend John Borg Bartolo who passed away on 4 September 2008.

John was a maverick who stood up against all odds to protest the forced takeover of private shareholders in Mid-Med Bank following the majority acquisition by HSBC. When it was even difficult to find a lawyer to take our case John stood tall till final settlement was achieved which protected minority shareholders interests, from which protection they gained handsomely. These shareholders should remember John in their prayers. May God give him eternal peace in a better world where there is only one truth for mavericks as much as for mainstreamers.

 

COLA Revisited

7^th September 2008

The Malta Independent on Sunday

This week the two main central banks in Europe both decided to leave their key interest rates unchanged, in spite of accumulating evidence that both the euro area and especially the UK are seeing their economies gathering speed in their slide into recession territory.

This accelerating deterioration in the macroeconomic environment of both the euro area and the UK is reflected in their respective rates of exchange which following substantial gains against the US dollar are seeing the trend reversing. The euro, which had come within a whisker of US$1.60 for every euro as recently as mid-July 2008, has retracted to around US$1.42 at the time of writing. An 11 per cent drop in the short space of seven weeks is well beyond the norm, even in the volatile foreign exchange market. Sterling also lost 12 per cent against the dollar in the same seven weeks and is down 16 per cent against the dollar from its high point last November at US$2.10 for every pound sterling.

The message being delivered by these wild foreign exchange movements is that the market believes that the US economy is just about hitting bottom and can be expected to start growing again pretty soon, which would force the US Federal Reserve Bank to start increasing interest rates. On the contrary, the economies of the euro zone and the UK have to slow down much further and their respective central banks will have to cut interest rates as soon as the economy starts sending signals that it is running out of steam with rising unemployment and falling inflation resulting from the retraction in price of energy and commodities. The prospect of higher interest rates and economic growth in the US and lower interest rate and recession in UK and euro zone is the prime mover of the wild foreign exchange movements we are witnessing.

The obvious question is why, in the face of this unmistakeable trend, have the European Central Bank (ECB) and the Bank of England (BoE) not cut interest rates even now in order to accelerate the rate of exchange adjustment and place a cushion to protect against the pain of a hard landing of their economies.

The simple answer that the current level of inflation is too high to allow space for monetary loosening is too simplistic. Monetary loosening will at best impact on the real economy with a time lag of between six to 12 months. Consequently, central banks making their current interest rate decisions have to take account of what inflation will be six months to 12 months down the road rather than where current inflation stands. With oil prices falling from a high of US$147 per barrel in mid-July to about US$106 at present and commodities prices plummeting across the board, there is pretty little doubt that headline inflation will witness a dramatic decline over the next six to 12 months.

What central banks are less confident about is how core inflation will behave over the same period. Core inflation is headline inflation after it is stripped of the energy and food components. Core inflation is meant to measure how much the price movements in energy and food (which are largely imported and cannot be influenced by domestic monetary policy) are being transmitted across the whole economy through second and third round transmissions as producers pass on increases in energy and commodity costs through increased prices for manufactured products and services.

With the UK economy materially dependant on real estate/construction and financial services, there exists a more clear-cut case about the risk of recession in the UK and why the GBP sterling has lost so much value since last November. BoE is clearly more disposed to contemplate interest rate cuts than the ECB. While members of the BoE monetary policy council expose divergent opinions, ECB members seem to speak with a unified hawkish voice, shooting down any suggestions to contemplate interest rate cuts and, if anything, indicating that they can consider further interest rate increases following the quarter point increase delivered last July.

To justify its hawkish stand in the face of accumulating evidence of a euro area-wide economic slowdown, Jean C. Trichet (president of the ECB) insisted that a tight monetary policy was needed to ensure that inflation expectations remain in line with the ECB objective of having inflation below but close to two per cent. Institutional arrangements of wage indexation in the euro zone are still in existence, which make it far easier than it is in the US or UK, for headline inflation to be transmitted to second round price increases that would affect the entire economy. Trichet made an appeal for such institutional automatic inflation wage adjustments to be abolished.

The clear implication is that such mechanisms are keeping the ECB from lowering interest rates. This means that automatic inflation wage adjustments come with a considerable cost to macro economic growth and higher mortgage interest rates. In simple language, he is warning the unions that their resistance to dismantle such mechanisms will cost more than they gain. The automatic wage increases will slowdown the economy, thus reducing opportunities for overtime and better employment and, as most workers are homeowners with a mortgage, whatever wage increases they get are more than neutralised by higher mortgage payments.

Because of our COLA mechanism, Malta is one of the countries Trichet was addressing and in so doing he made similar recommendations proposed recently by the IMF. Modesty apart, I have been making such suggestions for several years, firmly believing that the COLA mechanism introduced in 1990 has outlived the usefulness of its purpose.

We are not the worst offenders as our system is one of partial indexation; other countries like Cyprus have a more dangerous system of full indexation. The government scoffed at the IMF’s suggestions and seems reluctant to take on the ECB’s advice, arguing that the partial nature of our system limits the damage and procures industrial stability.

Frankly, I believe that pressure for dismantling the COLA mechanism should come from the unions. In the long run their workers are getting nothing but are endangering the stability of employing organisations in the process. If a COLA is given in the next budget of e3.50 which after tax at say 15 per cent reduces to about e3 per week, it does not go far enough to pay for a mortgage of say e100,000 on which COLA is keeping interest rates one per cent higher than they should be, costing e1000 p.a. equivalent to e19 per week.

Lower interest rates will protect better the value of workers’ residence and financial investments and, above all, will make employing organisations more competitive, stimulating investments and creating new employment opportunities that pay better wages and salaries. It would also allow unions to negotiate wage increases at one point only, i.e. in collective agreements, and remove the perception that the COLA is being provided by government. This will help ensure that wage increases are related to productivity gains in the respective employing organisation. To protect non-unionised employees, COLA could be replaced by annual legally enforced increases to the national minimum wage.

It is time for COLA to be revisited and the time to do it is now. What is not done in the first years of a legislature becomes almost impossible to address in later years!

Obama made me Proud

5^th September 2008

The Malta Independent - Friday Wisdom

Let me start with a small commemoration and leave Obama for the end. Today is the 10th anniversary of that infamous election which terminated early the life of the last Labour government. It was one of the saddest days of my life even though as things turned out there were hidden blessings. As Labour desperately tries to climb out of the deep hole it dug itself into over the last 10 years, let true Labourites never forget those responsible for landing the party in the pitiful state it is still in since its collapse 10 years ago.

The budget figures published for the first seven months of 2008 make it unlikely that come the end of the year government can hit the projected deficit of e68 million. It has become almost routine for actual results to under perform substantially in an election either due to over-expenditure in the bid to get re-elected and/or through overly optimistic budgetary assumptions to put artificial cosmetics on government performance and make it look better than it actually is when it seeks the electorate’s judgement.

Up to July 2008 the deficit was e283 million or 36 per cent more than last year. In the last five months of last year the budget deficit was shrunk by e99 million. If the same experience is repeated (the last five months are more revenue rich than the first seven months due to the structure of provisional tax payments by commercial organisations) this year the deficit will finish at e184 million which is 2.7 times more than projected. The only way government can close this gap is by postponing payments for capital expenditure which still carries an unspent budget for the year of nearly e200 million. And this assumes that government can keep within its recurrent expenditure budget which seems unlikely given unbudgeted subsidies incurred. To stay within the recurrent expenditure budget it has to cut the outlay by seven per cent over the same expenditure for the same last five months of last year.

It looks probable that the projected budget for 2008 will be missed by a mile and this will set us, fiscal discipline speaking, two years back rather than one step forward. Tax cuts in the first budget and balanced budget by 2010 may have to wait.

To finish on a lighter note I felt proud of being Maltese upon hearing Obama’s acceptance speech of the presidential nomination at the Democratic convention in Denver last week. Proud because Obama’s vision of a kinder, gentler and more caring America are things which in this tiny resource-less state we have grown used to up to the point of taking them too much for granted.

Read these quotes from his speech and you will understand what I mean:

“This country is more decent than one where a woman in Ohio, on the brink of retirement, finds herself one illness away from disaster after a lifetime of work”.

“We are more compassionate than a government that lets veterans sleep on our streets, families slide into poverty, and sits on its hands while a major American city drowns”.

“Out of work? Tough luck. You’re on your own. No health care? The market will fix it. You’re on your own. Born in poverty? Pull yourself up by your own bootstraps – even if you don’t have boots. You’re on your own”.

“We (should) measure the strength of our economy not by the number of billionaires we have or the profits of the Fortune 500 but by whether someone with a good idea can take a risk and start a new business, or whether the waitress who lives on tips can take a day off and look after a sick kid without losing her job – an economy that honours the dignity of work”.

“We will keep our promise to every young American – if you commit to serving your community or our country, we will make sure you can afford a college education”.

“Now is the time to finally keep the promise of affordable, accessible health care for every single American”.

“Now is the time to help families with paid sick days and better family leave, because nobody in America should have to choose between keeping their job and caring for a sick child or ailing parent”.

“Now is the time to keep the promise of equal pay for an equal day’s work, because I want my daughters to have the exact same opportunities as your sons”.

“The change we need does not come from Washington. Change comes to Washington. Change happens because (you) demand it”.

We are not rich, certainly have no natural resources to speak of, we spend in election years as if there is no tomorrow, and we have an imperfect democracy where business and special interest lobbies pro one party and obstruct the other. But we have a caring society the type of which the world super power may only now have the courage to mandate the new kid on the block to bring it to modern levels of social solidarity. I felt proud to be Maltese even though so far, I have been a donor not a receiver in our social solidarity experience.

I pay homage to the one above all who had the foresight to found our social structures and this irrespective of the finger in the pie he had in the debacle of ten years ago.