Monday, 26 December 2011

Gonzi's dilemma for the New Year

There are two good reasons why the Prime Minister should consider early elections.   There is one strong reason why he should not.

The elections have to be held, if in practical terms of the months of July and August are excluded, by June 2013 in 18 months time.
The PN is not new to holding early elections.  In 1992 they were  held in February whilst government could have lasted till October.  In 1996  in October when the latest permitted date was July of the following year.   In 2003 elections were held in April when they could have waited till January of 2004.   And in 2008 they went for it in March when they could have waited till August.   Always a few months early, maximum 9 months, but never as early as 15 months, if as rumoured the election will be held in March alongside the local councils' election.

Franco Debono threat to vote against government and wipe away the government's mandate through parliament is not the only reason why Gonzi may be forced, against his will, to go for elections earlier than planned.   The other reason is the complicating situation in Europe's economy which could darken the economic environment to make it unappetising to consider elections being held when due, i.e. in spring of 2013

My best bet before the Franco Debono debacle was that the Prime Minister was keeping his options open to hold the elections next Autumn without having to present the Budget for 2013.    If the economic situation worsens the over-optimism inbuilt in the 2012 Budget would be exposed and the Budget for 2013 would form an unsuitable platform for re-election.

The Franco Debono disloyalty to the party whip could now force the Prime Minister's hand.

Yet there is one extremely valid reason why Dr Gonzi should hold out and muddle through to stick to his plans without putting Franco Debono in the equation.   It is that there is greater chance of losing the elections if held early because of Franco Debono than if he holds out for elections when due trusting his luck that the Euro crisis will blow over and the economy will permit a further gold tinted budget before going for elections in 2013.

My best bet is that the Prime Minister and the PN will now use a mixture of charm and threats to contain Franco Debono's misdemeanours.  

Who knows may be Franco Debono may even find himself a place at the Cabinet table next to Minister Mifsud Bonnici.  Or may be the government may freeze its legislative programme and continue governing with minimal parliamentary involvement till next Autumn.

Friday, 23 December 2011

Outgoing ECB executive calls on the ECB to wake up to its responsibilities

Bini Smaghi is no Grinch

I thought it would never happen.   I thought that at the ECB they were all Grinch interpreting monetary policy in the narrow German point of view irrespective of the economic scenario around them.

I have been arguing for months in favour of the ECB using its resources to put out the fire burning in peripheral economies whilst they undergo serious painful austerity inspired restructuring.  I have consistently argued that the ECB was the only pan -EU institution with the tools and capacity to match the market speed and stop the evident slide into an EU depression.  I thought nobody was listening in Frankfurt as they continue to sing from the strict Bundesbank monetary policy hymn sheet.
But now it seems that someone with weight at the ECB is listening.   Lorenzo Bini Smaghi, the outgoing member of the ECB executive has let it out.   In an interview in today's Financial Times he urged the ECB to take bold action.  Read this comment by the FT:

One lesson Mr Bini Smaghi has learnt is that eurozone policy makers cannot opt out of taking bold decisions. “Some of these decisions may not be optimal and may be criticised, especially with the benefit of hindsight. But not deciding, or postponing decisions, is not an option and leads to worse outcomes.” Nor, he says, should decision makers “hide behind lawyers to avoid taking action”.

It is a carefully-chosen remark. Germany’s Bundesbank and Mr Stark, a former Bundesbank vice-president, oppose any significant expansion of the ECB's government bond-buying. 

No they are not all Grinch at the ECB and it is evident that with Mario Draghi's taking over at the helm, the ECB will do what needs to be done to avoid a depression.

My Christmas got better already!

Thursday, 22 December 2011

Why Germany should show solidarity with distressed Euro countries and not just at Christmas


There is a strong case for Germany and other surplus countries to rise above the egoistic narrow view of the situation and explain to their electorates that not only it is in their own interest to save the Euro but that they also have a moral duty to support the deficit countries to overcome their problems.  

This has to involve a fair burden sharing arrangement which is in the long term interest of the surplus countries as an indispensable step to save the Euro. Collapse of the Euro will be highly detrimental to the economies of surplus countries, apart from other political, social and possibly even security considerations.

Surplus countries have an obligation to burden share the adjustment process of the weak countries, for  following reasons: 
  • The weakness of some members of the Euro, in particular Greece, Italy, Spain and Portugal, was known in advance  so strong members share some of the responsibility for admitting into the Euro Club members who were clearly not ready for the commitment.
  • Germany and France were the first countries to openly breach the Euro rules in 2003 and they demanded impunity, indeed demanded and obtained weakening of the rules, setting a bad example for the weak countries and weakening the ability of the European Commission to impose discipline on offenders.   If you cannot throw the book at Germany why should you be able to throw the book at Greece?
  • When Greece was clearly floundering on fiscal good housekeeping and anyone with eyes to see should have suspected that Greece statistical submissions were, politely put, inaccurate, most countries simply looked the other way and pretended not to notice.
  • All Euro members allowed the markets to imply that whatever is stated in black and white in the agreements ultimately there is a sense of inbuilt solidarity among Euro members and no Euro country would be allowed to default.   In particular Mr Jean Claude Trichet when President of the ECB gave many verbal assurances that no Euro country will default on its debts.
  • Strong countries made a feast out of the problems of weak countries.   Greece’s balance of payments deficits are the surpluses of Germany.    A UBS research paper shows that the benefit being enjoyed by the surplus countries is so large that it is much cheaper for the surplus countries to help the deficit countries to overcome their difficulties through responsible burden sharing than it would be if the Euro blows up.
  • The crisis itself has been as much an economic bonus for surplus countries as much as it has been an economic distress of the deficit countries.    The crisis has weakened the Euro against other major currencies making core surplus countries, whose economy is export oriented beyond the borders of the EU, even more competitive than it would have been if there were no crisis.
  • The crisis has also been a bonus for surplus countries in that their borrowing cost have reduced just as the borrowing costs of deficit countries have shot up.  The crisis has triggered investors to take risks off their portfolios and seek capital security in preference to yield.
Germany and France cannot solve the Euro crisis by forcing austerity measures on others while they enjoy all the benefits of the crisis.  They must stop being the grinch!!

Sunday, 18 December 2011

Footnote my Foot, and Other Matters

Article published on 18 December 2011
in The Malta Independent on Sunday

In my last contribution two weeks ago, I asked various questions about Enemalta’s financial sustainability. As expected, my questions were ignored by whoever has the responsibility to provide the information and the transparency demanded. The dire conclusion is that the information demanded is too bitter to enter the public domain and our caring authorities stay mum to protect us, fearing that we lesser mortals cannot handle the truth.

Still, some information leaks through different channels and the Report by the Auditor General on the Public Accounts 2010 published this week shed some information on Enemalta’s poisonous habit of borrowing commercially to finance its operations and capex against government guarantees and letters of comfort.

Enemalta’s borrowings covered by such government guarantees and letters of comfort increased during 2010 by €131 million, reaching a mind boggling figure of €580 million at the end of 2010.

This represents the bulk of the overall increase amounting to €143 million in the total of such loans which at the end of last year totalled €1037 million of which 56 per cent relate to the above-mentioned exposure of Enemalta.

The increase in Enemalta’s borrowings during 2010 amount to 2.13per cent of the GDP, so the reported 2010 government deficit of 3.6 per cent of the GDP should in reality be written up to at least 5.73 per cent to include Enemalta’s borrowing. The reported debt to GDP ratio of 69 per cent should increase by at least 9.4 per cent to 78.4 per cent of the GDP if Enemalta’s debt is added to the national debt.

Why is Enemalta’s debt not captured by EU’s statistics as forming part of the national debt, as is done in the case of the debts of other publicly owned corporations like for example The Foundation for Tomorrow’s Schools or the Housing Authority?

This is a statistical quirk in that Enemalta is considered a commercial enterprise generating its own revenues and should in theory be able to service and pay back its own debts. Theory and practice however live on different planets. Enemalta is a financial mess, has not made a profit for many years and the only way Enemalta could be profitable is if it raises further its utility rates to levels which are clearly unsustainable, politically and socially. Enemalta will never be able to repay these loans from its own cash flows and, as happened in the case of the shipyards, the government will eventually have to honour its guarantees and the contingent obligations will eventually become real hard cash payments of taxpayers’ money.

The Auditor General makes the following footnote to the government’s guarantees obligations:

“The above EUR 1,036,945,249 Letters of Comfort and Bank Guarantees may translate into dues by Government should the Companies call upon Government to make good for their debts.”

Footnote my foot! This should be headlines. Mr Auditor General, you have the responsibility to form an opinion and inform us about the likelihood of these contingent obligations turning into real claims. We are not talking peanuts here. We are talking about commitments amounting to 17 per cent of the GDP. And we are seeing some financial manoeuvring which demands elucidation.

In the bad old days, Enemalta used to subsidise its electricity generation losses by profits from its petroleum division. In the modern hi-tech days government taxes away the surplus from petroleum through excise duty and VAT, which thus become normal revenue in the Consolidated Fund (Budget), but the losses on electricity division and capex are financed by guaranteed bank loans. This is financial foolery that postpones reality but does not avoid it. Instead of a posterity fund our children will inherit debts for their posterity.

* * *

Gozo Bishop Mario Grech is concerned about the increasing demand for childcare facilities by young mothers who wish to proceed with their career. Presumably, the Bishop finds socially objectionable the EU funded campaign for family work sharing responsibilities to ensure that married women can return to work as quickly as possible after motherhood so that society does not lose the benefit from the investment made in their education.

Let’s just say that Bishop Grech belongs to the age when families used to work in their fields and used to make children by the dozen, the more the better for more help to till the soil.

* * *

The EU summit was yet again another unworkable fudge.

The more I read about it the more I am convinced that Chancellor Merkel and the Germans in general are abusing their economic power by forcing the whole of Europe to become German. What’s wrong with that, one may ask, if the whole Europe could be as economically strong as Germany?

What’s wrong is that it is just utopia. Germany is economically strong because locked in a monetary union at a very competitive exchange rate compared to their efficient export machine, the things which are depressing the peripheral countries who enjoyed the joie de vivre in very typical non-German way of life, are the very same things that are pushing the German economy forward in an artificial unsustainable manner.

The scope of a fiscal union could be validated if all countries in the fiscal union were to start from a level platform. But countries are starting from extremely disparate situations and fiscal union cannot work unless all existent debt is pooled and becomes everyone’s responsibility through refinancing of Eurobonds. But the Germans don’t want that. Their Constitution would not even allow it.

The Germans want to continue enjoying the gains and want to shift all the pain on the countries already in distress.

This won’t work. Sooner rather than later, countries undergoing round after round of austerity in an attempt to create internal devaluation as a route to recover their competitiveness, will find it hard to stay the course. Technical governments by their nature have limited longevity and it is not in the interest of democracy for such technical governments to become a permanent fixture. Democracy will, in the end, have to be a bottom up exercise and, as turkeys never vote for Christmas, democracy will, in the end, elect demagogues who promise to challenge Brussels (read the Germans) rather than force more bitter medicine down the throat of electorates already finding it hard to keep a roof over their head and put food on their family table.

We cannot solve the crisis unless the solution contains a high dose of economic growth that will make the adjustment process more bearable. And the only countries with financial capacity to generate growth are Germany and its peers who can still borrow on the markets at absurdly cheap rates even for long-term money. Unless Germany loosens its fiscal screws to create external demand for countries on the periphery as they undergo tough austerity adjustment crushing their domestic demand, Europe will simply stall and fall into a crushing depression.

And what exactly has our government agreed to regarding the grand plan for a fiscal union? I am all in favour of more effective discipline to ensure that Euro members’ borrowings stay within the agreed parameters. Experience has shown that there is substantial implied joint obligation regarding the debts of individual member states. So it is fair that once implicitly responsible borrowings are approved by a central authority a priori.

However, if we are agreeing to a fiscal union which restricts how we tax and spend, not just on how and how much we borrow, then we would be committing political suicide and I would rather we join Cameron than Merkel.

* * *

I wish you all a peaceful Christmas. Don’t forget that many recession-crushed citizens in Europe will not be having a merry Christmas unless they go all philosophical and appreciate that the best things in life are free.

Saturday, 17 December 2011

What's so special about an SPV (Special Purpose Vehicle)?

Read this extract from an article I had written in 2005. You will see that what I had said is now coming to fruition with the difference that instead of selling Castille to use the proceeds to reduce the national debt we are using the funds to build a new parliament at City Gate.

What so special about an SPV is that it is financial engineering meant not to add value, but to create a deception by calling national debt byanother name and keeping it out of statistical measurement. Such manouvres brought the financial ciris of 2008. Enjoy!

Selling Castille


19th August 2005

The Malta Independent - Friday Wisdom
Alfred Mifsud

“Securitisation”, which gives a respectable label to old-fashioned “cooking the books”.

Read the following extracts from the 2006-2102 pre-budget document attractively stamped all over with “A Better Quality of Life” branding.

“Government is looking at the possibility of moving forward the idea of securitisation of property. This entails the formation of a public company owning government property with an invitation to the public to invest in it leaving its management in private hands. The aim is to commercially exploit to the full a major government asset without the need to sell that asset but rather to create an investment vehicle open to the public.”

This might look like a complicated financial structure but in reality it is quite simple. Through cool securitisation, the government could sell Castille to a government-owned public company which raises bonds from public subscription to pay the funds to the government.

The government will then lease back Castille from the public company to give it cash flows to pay interest to bond holders and agree either to buy back the property at the end of the loan or to roll over the lease for a further period if the public financing vehicle rolls over the maturing bonds into new bonds.

Suppose Castille is thus valued at Lm50 million and is sold at this price to a government-owned company called Castille Wonder Land plc (CAWLA). CAWLA would raise 15 year bonds at, say, five per cent for Lm50 million to pay the government for the acquisition of Castille. The government will pay CAWLA rent/lease of Lm3 million a year, which enables CAWLA to pay annual interest of Lm2.5 million and keep an annual half-a-million reserve for other running expenses.

The government applies the Lm50 million to pay off outstanding public debt and somehow has to invent revenue enhancements (taxes) to cover the annual lease outgoings of Lm3 million without increasing the deficit. After 15 years the whole deal is reversed or renewed, depending on the rate of interest and the state of public financing prevailing at the time.

“Government will present to parliament a Securitisation Act to make possible the conversion of receivables and other assets to securities that can be traded in the capital markets”

This quote from the same document extends the above concept not only to property but also to receivables. So the government could sell its annual receivables (eg annual profits from the Central Bank) in order to obtain an immediate lump sum to reduce outstanding public debt and come within the Maastricht criteria.

I get the impression that government is focusing on this fourth hi-tech way to solve the public debt problem through securitisation of public assets and revenue flows rather than on delivering a durable real solution to the problem.

The let’s pretend game continues. It could give the impression of solving or reducing our over-blown public debt problem. Whether it delivers a better quality of life is another matter.

Thursday, 15 December 2011

Europe needs a firewall to stabilise markets

John Paulson

If European leaders want to have a practical solution on how to stabilise the market so that the Euro adjustment process can carry on without having the Euro house on fire and simply muddle through from one crisis meeting to another, they should read John Paulson's contribution in the Financial Times of today ( link hereunder).

If the EU leaders have a will to save the Euro,  the solution awaits them.

John Paulson is the investment guru who predicted the housing problems in the US in 2008 and by shorting the markets he made bundles of billions for himself and his investors.  Not everyone lost money in the financial crisis.   Some people who look at fundamentals and can separate the noise from the song,  made a name for themselves and riches for many lives to come.  John Paulson would be at the head to that star list.

Wednesday, 14 December 2011

My worst fears

Auditor General Report for 2010 confirms my worst fears
NAO 2010 Report

 Followers of my writings know that I have been critical of the worrisome amount of hidden national debt in the form of commercial bank  loans to public corporations or publicly controlled enterprises that are covered by government guarantee or letters of comfort.

A full breakdown of such loans is only published in the Auditor General Annual Report   The Report for 2010 was published today and here are details of how much better or worse the situation has developed in 2010 compared to 2009.
 Have a look:

 EUR millions -2009
EUR millions 2010
EUR millions Increase/(Decrease)
Water Services
Malta Freeport
Malta Industrial Parks
Malta Maritime/Transport
Malta Property Managem.

 None of these exposures are included in the national debt or deficit figures.   The argument is that all these Corporations generate their own revenue flows and should in theory be in a position to generate revenues sufficiently to meet their debt obligations without recourse to the guarantee provided by government.
Reality is different.  Anyone who believes that Enemalta and Water Services can repay their loans by raising utility rates or generating internal efficiencies probably also believes in Father Christmas.  Well it’s the season!!   But after Christmas the debts will not go away and government will remain responsible under its  guarantees.

NAO  in fact add a footnote that
Letters of Comfort and Bank Guarantees may translate into dues by Government should the companies call upon the Government to make good for their debts.   

A very important footnote which deserves some headlines before it is too late.

Hero or Hillybilly?

George - one of the few
who predicted the
financial crisis

George Magnus, Senior Economic Adviser to UBS, is one of the few economists who gave strong warning signals as early as February 2007 of the financial and liquidity crisis which hit in 2008.   If only the Bank he advises adopted his views in their investment strategies!!

Whatever George  ( he likes to be called by the first name!) says should be taken very very seriously.

This is an extract from his letter published yesterday in the Financial Times about UK's dissent on the proposed EU Treaty change.

"What the European summit agreed to do was to seal a permanent and pro-cyclical austerity zone from Portugal to Greece and from Finland to Italy.   Leaders have done this because they have misdiagnosed the causes of the sovereign debt and banking crisis, and have therefore ended up with a flawed agenda and inappropriate tools.

The narrative is lifted straight out of the 1930's.  The crisis will escalate further in 2012 as the European contracts, sovereign solvency becomes increasingly elusive, and distrust pervades European financial markets.

The UK’s position only seems catastrophic if Europe took a giant leap forward to a successful fiscal union enshrined in treaty change, backed up by a timetable for joint liability European bonds, and sustained by a credible growth agenda.

What happened was a loose and inadequate agreement to cope with a future crisis, and a continent-wide austerity zone that will make the current crisis a lot worse next year. At the very least, we should reserve judgement as to whether the UK prime minister’s conduct has made him a hillbilly or, even if not for the right reasons, a hero."

I see great probability that Cameron will be proved a hero even though he took the right decision for the wrong reasons.   Fiscal policy has to be anti-cyclical not pro-cyclical.   It's elementary and the fact the Germany is forcing everyone to dump Keynes economic thinking is scandalous and will eventually prove disastrous.

It is like calling the fire services telling them your house is on fire and instead of sending the fire-engine they send a fire-prevention consultant to re-design your house.

Monday, 12 December 2011

Where is growth coming from?

Where is Growth coming from?

The more I read about  the supposedly grand agreement reached at the EU summit (minus the UK) last week the more I get convinced that this is yet another unworkable fudge.

The more I read about it the more I get convinced that Chancellor Merkel and the Germans in general are abusing their economic power by forcing the whole Europe to become German.    What's wrong with that, one may ask, if the whole Europe could be as economically strong as Germany?

What's wrong is that it is just utopia.   Germany is economically strong because locked in a monetary union at a very competitive exchange rate compared to their efficient export machine,  the things which are depressing the peripheral countries who enjoyed the 'joie de vivre' in very typical non-German way of life, are the very same things that are pushing the German economy forward in an artificial unsustainable manner.

The scope of a fiscal union could be validated if all countries in the fiscal union were to start from a level platform.    But countries are starting from extremely disparate situations and fiscal union cannot work unless all existent debt is pooled and becomes everyone's responsibility through refinancing of Eurobonds.   But the Germans don't want that.  Their constitution would not even allow it.

The Germans want to continue enjoying the gains without undertaking the pain and want to shift all the pain on the countries already in distress.  

This won't work.  Sooner rather than later, countries undergoing round after round of austerity  in an attempt to create internal devaluation as a route to recover their competitiveness, will find it hard to stay the course.   Technical governments by their nature have limited longevity and it is not in the interest of democracy for such technical governments to become a permanent fixture.   Democracy will in the end has to be a bottom up exercise and as turkeys never vote for Christmas democracy will in the end elect demagogues who promise to challenge Brussels ( read the Germans) rather than force more bitter medicine down the throat of electorates already finding it hard to keep a roof on their head and put food on their family table.

So if fiscal union does not mean the pooling of all debts which become everyone's responsibility ( and in that case are we ready for that or shall we be next to follow Cameron?) fiscal union offers no solution to the current crisis.

We cannot solve the crisis unless the solution contains a high dose of economic growth which will make the adjustment process more bearable.   And the only countries with financial capacity to generate growth are Germany and its peers who can still borrow on the markets at absurdly cheap rates even for long term money.    Unless Germany loosens its fiscal screws to create external demand for countries in the periphery as they undergo tough austerity adjustment crushing their domestic demand,  Europe will simply stall and fall into a crushing depression.

Madame Merkel, we can all become Germans if the Germany becomes a bit more Mediterranean.

Mr Draghi we appreciate we should pay more attention to what the ECB does rather than what it says but as the guardians of the Euro ( it is your signature on the notes not that of Merkozy) the problem is not inflation.  The problem is standing on the abyss of depression and your monetary policy has to reflect that,  even as you continue to pay lip service to the virtues of strict monetarism.

President Sarkozy, acting as poodle to Madame Merkel reminds many of Petaine.  You surely don't want that to be your legacy.   You should not allow the Germans to use France's credentials to extend and exploit more the unfair advantage they are getting inside the monetary union.   So unless the Germans adopt strong policies to stimulate their internal demand, may be you should suggest that the Germans should exit the Euro so as to live with an exchange rate that reflects their strength.

Madame Merkel, President Sarkozy, Mr Draghi, where is economic growth coming from?

Saturday, 10 December 2011

Draghi is now the king of Europe

The EU summit just ended took important decisions aimed to restore confidence of the financial markets in the Eurozone. But it is doubtful whether they go far enough to restore the degree of confidence needed so that Eurozone countries can roll over some 250 billion Euro of debts maturing in the firrst quarter (Q1) of 2012. To manage the instability that such financing may cause, the smoothening intervention of the ECB will be crucial.

Mario Draghi -King of Euro(pe)

On Thursday the ECB took decisions that in their immediate impact are more effective than the council decisions taken on Friday. Lowering interests to a record 1% and extending cheap unlimited credit for up to 3 years to Eurozone banks suffering liquidity stress, provide effective measures to avoid a banking crisis as banks restore their capital following losses suffered from the Greek debt write-down.

There seems to be a silent pact between the ECB and the EU council, or may be between Draghi and Merkozy. Provided the EU tightens fiscal discipline on structural deficits the ECB will loosen monetary policy to keep the economy afloat in the restructuring process.

Also the fact that the ECB continues to resist aggressive bond buying of sovereign debt means
that the countries in distress cannot and should not rely on easy ECB funding which could
soften their resolve to stick to their austerity reform program. The ECB can point to
Berlusconi to expose the consequences for those who don't deliver on their promises.

So Draghi is for the next few months or probably for most of 2012 the king of Europe. He has
the power,through the ECB council, to save or sink countries with massive borrowing programs.

Those who ease off their reforms will be punished through high yields on their debt as the ECB
sits on it's hands. Those who persist and deliver will be rewarded by lower yields through
ECB intervention and market confidence.

As to the decisions by the EU Council the broad agreements announced so far do not constitute
a common fiscal policy but more effective fiscal discipline about which Malta should be in

Fiscal union would involve harmonised tax rates and spending limits which would detract
sovereignty and which Malta should resist. The devil will be in the details so it would be
wise for government and opposition to consult widely to adopt a common front in the national

What is disappointingly missing from the agreements is any commitment from the strong core EU
countries like Germany that can borrow long-term funds at absurdly low rates on the markets,
to compensate the fiscal tightening of the countries in distress by fiscal loosening on
their side. There can be no economic growth if all adopt fiscal tightening and without
economic growth there is just no future.

Germany should do more than try to make all the the others look like Germany! They can do
with a Mediterranean dimension themselves. Meeting half way is always less painful!

Wednesday, 7 December 2011

Eurozone crisis - PM says treaty change should be last resort

I do not agree that treaty change should be the last resort.   I would say it is no resort whatsoever.

The problem is far too urgent to await the machinations of a treaty change which is a long winded process involving ratification by 27 parliaments and in some cases national referendum.

To give an idea of how urgent the situation is I quote from a report issued by Larry Hathaway an economist at UBS when asked about the best investments in a Euro breakup scenario:

"I suppose there might be some assets worthy of consideration - precious metals for example.  But other metals would make wise investments, too.   Among them tinned goods and small calibre weapons.

Break-up runs the risk of becoming one wretched scenario.  Sadly, however, it can't be ruled out, just as it would have been improper to rule out the horrors of the first half of the 20th century before they happened.

But it is very hard to see break-up as a solution.  Let's hope Europe's politicians and policymakers agree and take action this week to fix what is broken before it all really breaks up"

What is needed is not a new Treaty.  What is needed is firm action within what is already allowed within existent treaties, namely:

  •  Strict control over how much Euro members can borrow without creation of anything like a fiscal union which would also control what they tax and spend.   Taxing and spending should remain national prerogatives but borrowing must be preapproved by a Central agency as borrowing by an individual country, implicitly or explicitly, becomes everyone's responsibility.

  • Coordination of fiscal policies so that whilst countries in distress enforce austerity to bring their finances in order, countries that can borrow at extraordinarily cheap rates (like Germany) loosen their fiscal policies to create internal demand and support export growth for countries undergoing internal austerity.
Somebody has to explain to Chancellor Merkel and President Sarkozy that according to the logic of the greatest economist of all times, Lord Keynes, if every euro country adopts a common fiscal policy targetting balanced budget through austerity, we will be caught in the paradox of thrift which will lead the whole area into a depression.

A true solution requires no treaty change.  A true solution requires strong countries showing solidarity with countries in distress, whilst countries in distress proving their determination ( as Greece and Italy are clearly doing through their techincians' governments) to stay on the road to fiscal salvation whatever it takes so that the integrity of the Euro can be protected and safeguarded.

With such assurances the European Central Bank will be comfortable with adopting a more active role in its function as a lender of last resort in the knowledge that this will not impair its inflation fighting credentials but will enhance its price stability credentials by avoiding a depression.

The alternative is too horrendous to even contemplate

Monday, 5 December 2011

Leading by example

Mario Monti

The interim Italian government of technicians of Prime Minister Mario Monti lacks democratic credentials in that it was not elected through the normal democratic process.   However it enjoys the backing of the majority of Italians who see it as a necessary  act to clean up the mess left behind by those who were democratically elected.
Why would such a non-elected government enjoy such support even though it is clearly minded to administer tough austerity and painful measures which would normally lead to protests rather than acceptance?

It is simply because the Monti  government is perceived as a selfless attempt to do what is right for the country and not what makes sense to the private interest of politicians which unfortunately was the hallmark of the Berlusconi government that brought the country economically to its knees.

Monti has renounced to his Prime Ministerial and Ministerial remuneration.    Welfare Minister Elsa Fornero broke into tears when announcing austerity sacrifices, even though she is trying to remedy faults committed by others and personally carries no blame for the situation the country finds itself in.  Watch this video:

Lesson for Maltese politicians:  Lead by example.    If you demand sacrifices from people wear the austerity clothes yourselves before demanding them from others.  

Unfortunately we are experiencing the opposite ' follow what I say not what I do' syndrome.

Sunday, 4 December 2011

Please Explain!

This article is published in The Malta Independent on Sunday 04.12.2011

Immediately Joseph Muscat made an explicit promise that Labour would reduce utility rates if elected, two things became instantly obvious.   He was going to be bombarded from all sides to explain how this was going to be financed in the context of a tight fiscal position and that he would not be in a position to provide such explanations. We do not even know what the financial situation of Enemalta Corporation  is today let alone what it would be in spring / summer of 2013.      Enemalta has not published its annual report since 2008 and this is a gross act of reckless corporate governance disorder which is totally unacceptable outside banana republics.
 There is no living creature who can forecast with any degree of reliability what would be the cost of energy procurement in 18 months’ time when Labour may gain a mandate to form a government for the next legislature.   Nor can anyone have any advance knowledge of what sort of commitments Labour would find for energy procurement i.e. whether or not  it would inherit hedges covering future energy prices and the foreign exchange value of the US dollar.
Enemalta Power Station
These things make me foam from the mouth.  In front of me I have a bill issued by the Registry of Companies (MFSA) on a small property company levying a fine of Euro 786  for delay in filing the Accounts of 2009 and 2008.    You cannot argue with such fines.   You pay it or pay the consequences even through totally innocent companies enjoying common directors with the culprit company.   
The government that boasts of helping small businesses levies atrocious fines bordering on extortion for minor administrative misdemeanours but then sets distasteful examples through gross misdemeanours in a very major public corporation with total nonchalance and impunity.
So it should be clear to all objective observers that Labour’s commitment to reduce utility bills is a policy decision not a commercial business plan.    Like any government Labour would have its priorities for allocation of resources.  It seems that Labour has come to the conclusion that economic growth is being hampered by the sharp increases in utility bills experienced during this legislature and as economic growth is the only thing that in the end can deliver the bacon, Labour has taken a conscious policy decision to allocate resources in such a way as to remove the barrier to economic growth presented by high utility bills.
Now one can agree or disagree with such a policy but one cannot expect such a policy to be like a commercial business plan showing that on its own  it would have no direct negative impact on the fiscal position.
When we come nearer to the elections and when through the passage of time there will hopefully be reduced uncertainty on the state of play that an elected government would inherit, than I would expect that both major parties append a financial schedule to their electoral manifesto explaining how the whole manifesto measures, rather than just a single measure, would be financed.    We would really be setting new levels in political governance standards!!
There are other things however which require an explanation here and now from the government regarding the present financial situation of Enemalta Corporation, which could have a very heavy bearing on the fiscal position of general government.   And as it has become fashionable to make questions in bundles of 10 here is  a pack of ‘here and now’ 10 questions which require an immediate answer and explanation from the current administration that has still 18 months of executive term ahead of it.  So here we go:
1.       Why has Enemalta failed to publish its annual report and audited financial statements for both 2009 and 2010?

2.       How much is the current outstanding borrowing of Enemalta?

3.       Of this borrowing how much is covered by  government guarantees,  letters of comfort or some other similar arrangement which commits the government to stand behind the Corporation to ensure it meets its obligations.

4.       What other borrowings are scheduled for Enemalta to finance its capital expenditure and how will this be financed?  Will there be more guarantee commitments from the Government?

5.       Has government given any commitment to the EU and or to lenders that it will raise utility rates and/or fuel prices to render Enemalta commercially viable at the same time that it has promised no further increases in utility rates for 2012 to the domestic audience?

6.       From where will Enemalta meet its obligations to lenders if it has been a loss making operation and has to finance huge capex?  

7.       If Enemalta has no prospects to repay its loans from its operating cash flow is it not clear that sooner or later the contingent liabilities of government through guarantees or letters of comfort will have to be converted into hard cash outlays to be financed through the Consolidated Fund as has been the sorry experience of the Shipyards?

8.       What hedging policies  government and / or Enemalta are planning for 2012 which will be inherited by a new administration in 2013?

9.       If oil prices were to increase by 25%; 50%; or 100% from their current spot rates will government keep its pledge not to increase rates in 2012 and if so how will the losses be financed?

10.   Is Enemalta bankrupt?  This question ties up to the first one as the last published financial statements of Enemalta for 2008 show capital and reserves of just 69 million down from 173 million in 2007.   May be the delay in publishing the 2009 and 2010 Financial Statements  has much to do with the fact that auditors cannot sign that Enemalta is a going concern,  as it is, at least technically, bankrupt.

I am not holding my breath awaiting official answers.   But anyone who has ideas or answers to these questions can find debating space in my newly launched blog which is tightly moderated for true logical debate rather than mere political shouting games.

Friday, 2 December 2011

No rubber stamp

Expect pressure from EU sources for agreement on two issues cooked by Chancellor Merkel and President Sarkozy (Merkozy) who are making it a tasteless habit of making separate agreements which they then expect other EU members simply to rubber stamp.
Olli Rehn, Finland
Comm. Olli Rehn
Economic and Monetary Affairs
Michel Barnier, France
Comm. Michel Barnier
 Internal Market and Services
They will 'invite' us to agree the introduction of a financial transaction tax (Tobin Tax) and will 'suggest' that Europe, the EU and the Euro cannot survive without the introduction of a common fiscal policy possibly including a central treasury as the twin head for the existent common monetary policy for Euro members.

Malta should stand firm on both counts.  Agreement to these two measures would be tantamount to giving up some of the strategic advantages we have built for ourselves in the financial sector.

It is in our interest for the EU to strengthen its policies and institutions but this must not mean that the big countries simply impose their model on smaller countries with very different economic realities.

There is nothing intrinsically bad about the idea of a Tobin Tax.   But if this not introduced on a global basis there is a grave risk that we lose our competitive edge to other financial centres that do not introduce it.

Co-ordination of fiscal policies within a monetary union makes sense and after all this was the scope of the Stability and Growth Pact enshrined in the Maastricht Treaty which the Germans and the French were the first to break with impunity setting a bad example for the rest.     But a common fiscal policy or a common treasury would take away competitive advantages that a small peripheral country like Malta needs to survive and prosper.

We should insist on EU and Euro countries retaining their autonomy regarding fiscal policy but agree to more discipline on borrowing.  Countries should retain their autonomy to adopt their tax and spend policies.   Borrowings should however be subject to more rigorous scrutiny.   This is only fair as borrowing implicitly tends to become a shared responsibility as the experience of Greece, Ireland Portugal has already shown.

This would be in the same spirit enshrined in the Maastricht Treaty and tighter rules on borrowing, including prior approval and scrutiny of national budgets, would require no laborious treaty changes.

We should send a clear signal to the EU that our parliament is no rubber stamp and that financial matters are by tradition passed through parliament by unanimous approval so government needs the opposition on board to agree to material changes.