Wednesday, 29 February 2012

Has APPLE peaked?

With its share price exceeding US$540 up 4500% in 10 years, APPLE has joined a very exclusive club and presently is the most valuable commercial company in the world.

It has joined the Club of the few companies whose market value has at some point in time exceeded US$ 500 billion.   History shows that it is not only difficult to make it to the very restricted Club but it is even more difficult to stay there.  Apple is now worth more than Microsoft ( US$ 266 billion) and Google (US$ 159 billion) combined and you have to throw in Cisco ( US$ 109 billion) to get over Apple's current value.

Microsoft and Cisco were at one time worth more than US$ 500 million a piece but that was in the heady days of the tech bubble.   Microsoft in 2000 had exceeded US$ 600 billion which remains the record to beat.

ExxonMobil and General Electric are the other two ex-members of the elite Club. 

So what fate awaits Apple?  Will it like its predecessors find life difficult within the Club and retreat or has it more mileage to go?   In short has Apple peaked?

Despite its record valuation Apple is trading at a conservative 11 times price earnings compared to its expected 2012 earnings.   Most analysts remain bullish about Apple and still have a BUY or STRONG BUY rating.

Really it is a matter of judgement.   If you think that Apple can continue to innovate and turn out products which are a must buy through the compelling brand power even though they sell at a premium price compared to competitors, than Apple can keep soaring.    But if you think that this is a passing fad and eventually fundamentals will take over and consumers will no longer be willing to pay premium prices for the brand, than Apple's share price, along with its profitability, will come down as fast as it went up.

After all, unlike Google and Microsoft, Apple does not have the same monopolistic power which competitors cannot challenge over time.

Sunday, 26 February 2012

Over the edge

Article published  in The Malta Independent on Sunday on 26 February 2012
Lending money to Greece under the terms of the bailout scheme put together by the EU through the new €130 billion scheme is like throwing money down the drain. Why? Simply because the arrangement offered to Greece is not redemption out of its debt problems. It is more like a stay of execution.

Greece is living the harrowing experience of someone who has just woken up from a 10-year long dream only to realise that it was a lie; that the high standard of living their politicians induced them into was debt-financed; that once credit is no longer available, they cannot keep up with the bills which keep coming.
Even though the bailout makes provision for a sizeable “voluntary” debt reduction, Greece would still be left with high debts impossible to service. Even in the best of the optimistic hypothesis of the bailout plan, Greece would still be nursing debt to GDP ratios in excess of 120 per cent by 2020.

For a country to pull itself from such high level of debts it will have to meet at least one of the following three conditions:

  • They are in command of a reserve currency which carries the trust of most investors throughout the world (e.g. like the US and the US dollar)
  • The debt is mostly internal and there is strong home bias among local investors (e.g. as is the case in Malta).
  • The debt has been used for productive and infrastructure investment which can be expected to generate strong economic growth (certainly not the case of Greece, where most debt has been used for consumption).
Greece meets none of these conditions. As its economy continues to be crushed by austerity meant to bring down internal costs and restore international competitiveness, the debt burden, even at the reduced absolute levels, will be heavier on a relative basis.

Obviously, if the Greeks were to accept the austerity as a necessary programme to save their country, much in the way as in Ireland and Portugal, the economy would probably hit bottom and start growing again in the medium term.

But economic growth demands investment, real productive investment, and investors – both domestic and foreign – will stay away from Greece, no matter how cost-competitive it may become, if the population does not accept the austerity as a necessary evil and investors continue to see the awful scenes of strikes and violence which have become the regular fare on Syntagma Square.

I don’t blame the Greeks for protesting. I would probably be protesting too, if I were going through what they are going through: protesting against the politicians who promised heaven and drove their country to hell.

But, most of all, I would be protesting about why these same politicians are still in cabinet, obstructing the technical Prime Minister who, as in Italy, needs to deliver the necessary bitter medicine without being vote dependant.

I would be protesting that Greek politicians are insisting on fresh elections in such dire conditions which could well force the democratic process to elect to power extremists and demagogues rather than capable statesmen that can redeem the country.

I would be protesting about not being offered a referendum to choose between two stark alternatives: either a long term austerity programme to stay within the eurozone and the EU, to be executed by a technical government as in Italy with tenure of several years, or refusing austerity, defaulting on debts, pulling out of the euro and probably out of the EU, seeing the country’s banking system collapse, blocking Greece out of the capital markets for several years and then, after such a sharp shock possibly producing anarchy conditions, to start building up again from scratch.
Given this stark choice,

I am sure that a large majority of Greeks would have embraced the EU austerity route and, rather than continue protesting in Syntagma Square, they would roll up their sleeves to liberalise their economy, fight corruption, elect technically savvy politicians who can bring to book tax evaders and the past perpetrators of corruption, and change the country from a consumption-oriented society of moaners who believe that someone owes them a living, to an export-oriented machine.

It is possible to save Greece, but only if the austerity of the bailout package is accompanied in equal measure by growth initiatives. Apart from the general acceptance of the country through a democratic referendum, such growth strategies would require a great show of solidarity from the core countries, especially Germany, who have been making an economic feast out the Greece’s largesse and economic troubles.

Germany has become like Ptolemy’s theory of the universe – that the earth was at its centre. The euro has become a Ptolemaic system, with Germany at its centre. As the HSBC Group chief economist Stephen King wrote this week:

“[this Ptolemaic system] requires economic adjustment by others to protect the interests of German taxpayers and voters. It is more important, apparently, that the southern European nations reduce their current account deficits than that the northern nations reduce their surpluses.
This Ptolemaic system needs to be replaced. This is not an issue concerning Greece alone… It is about the need for adjustment by those who appear to be in a strong financial position…. encouraging domestic demand to grow more quickly; allowing its real exchange rate to rise with a more tolerant approach to inflation; ensuring that its current account surplus is invested… in factories in southern Europe and welcoming migrants from southern Europe as they try to escape unemployment.”
If Germany does not take such growth initiatives, then sooner or later it will have to choose between leaving the euro itself or seeing the euro system blow up altogether.

Before there is a coordinated programme on these lines, twinning growth with austerity measures and spreading the burden of adjustments on surplus countries as much as on deficit countries, any money that Malta may lend to the bailout funds is gravely at risk of non-recovery. I know parliament has already approved such bailouts, and it may be difficult to stay as the odd one out, but this is our hard-earned money and Malta – as a recent entrant to the euro – has neither benefited from nor contributed to the problems of Greece the way the original core countries have. They should carry the burden of adjustment rather than spread it around unfairly to include the newcomers.

And in a local context, the bail out of Air Malta is becoming more and more like an expensive Greek tragedy. If the restructuring makes Air Malta incapable of performing its functions as a national airline, opening routes and taking a long-term view in its operating strategies for the protection of the tourism industry, if Air Malta has to be stripped off its productive assets like valuable airport slots, then the obvious question to ask before continuing to sink more money into it is whether we need an Air Malta which cannot deliver what it was set up for.

Between them, Greece and Air Malta could push us over the edge.

Thursday, 23 February 2012

Air Malta's restucturing is looking like Greece's

As the EU continues to issue signals of doubts and disapprovals about the feasibility of Air Malta's restructuring plans which the government has asked it to approve ( without actually publishing or informing the Opposition about what sort of restructuring is actually being proposed) the more this exercise is assuming the characteristics of an expensive Greek -style fudge which will not deliver what is expected of it.

If as is reported Air Malta cannot continue to perform its strategic functions of a national airline, opening routes and taking a long term view for the protection of the tourism industry, if Air Malta is to be stripped off its productive assets like valuable airport slots, then the obvious question to ask is whether we need an Air Malta which cannot deliver what it was set up for.

Here is what I had written about Air Malta's restructuring almost one and a half years ago.   We have not achieved much since and God only knows how many millions have in the meantime continued to be burnt.



Can Air Malta Restructuring Fly?

28th November 2010

The Malta Independent on Sunday

Alfred Mifsud

There is one thing worse than allowing Air Malta to go bankrupt. It is Air Malta going bankrupt after it burns through a palliative loan of €52 million which taxpayers will be advancing it as a liquidity breathing space till the re-structuring plan is executed.

Our record for organising effective and timely restructuring of loss making state-owned commercial enterprises is awful. It took us more than 20 years to restructure our shipyards and only after burning through some one and a quarter billion (nine zeros!!) euro. In the case of the shipyards, the government adopted a death by a thousand cuts strategy to avoid the harsh reality of deep cuts needed to restructure quickly and effectively.

Air Malta cannot be allowed to go the shipyards route. Not only because EU competition rules won’t allow it, but mostly because resources are scarce and we have none to waste. Air Malta has to be a one shot thorough restructuring or not at all.

The government has appointed a steering committee to oversee the restructuring. What does ‘oversee’ mean? Does the committee have an executive role or is it just consultative? If it is purely consultative (as such steering committees normally are, given that governments cannot abdicate their responsibility towards taxpayers who would be funding the restructuring), what are the chances of all represented parties focusing on “where do we go from here” and “how do we get there” rather than getting bogged down in blame sharing of “how and who got us where we are?”

Not that we should not, when the time is right, indulge in a blame apportionment exercise to examine who is responsible for Air Malta’s ailments. Probably the best time for this would be at election time when workers and taxpayers will have both an opportunity to assess overall government performance in managing the economy, rather than just its record at Air Malta, as well as the possibility to take corrective action through their vote. But at present Air Malta is on fire and the priority is to put out the fire and rebuild on sound foundations rather than defensively guard one’s patch purely on the hypothesis that others are responsible for the sad state of affairs.

Don’t get me wrong. It is hard for workers who have been through one austerity round after another to stomach yet more cuts. But Air Malta cannot be saved with its current cost structures if it is to compete effectively with airlines with a lower cost base.

Just last month I was one of the last passengers descending an Air Malta flight which had just landed. A swarm of cleaners made their way up the plane to clean it and turn it around for its next leg. Air Malta cannot compete with such cost structures when competitors have their normal cabin crew clean the plane as part of their regular duties. Air Malta’s front cabin, reserved for the lucrative premium business travellers, is too small to afford such overheads.

Expecting taxpayers to fund a half-baked restructuring is just not on. If, as it was reported, Air Malta made losses even during the peak summer tourist season then the restructuring required is truly deep and raises grave doubt in my mind whether the government, steering committee, management or whoever is involved can deliver true change in the time available.

The steering committee could do worse than take a deep look at one of the most effective corporate restructurings carried out since the financial crisis. General Motors, which had been losing money in the best of times, was forced into bankruptcy by the evaporation of the market for new cars as soon as the financial crisis snapped in the fourth quarter of 2008. Last week it was back in action under a new corporate profitable structure gaining confidence from private investors as its shares were again floated on the US and Canadian exchanges.

The governments of the US and Canada bailed out GM on strict conditionality of true restructuring. Product lines were dropped, factories closed, agency and dealerships terminated, workforce slimmed down to levels permitting efficiency, work practices streamlined, bondholders and pension funds claims converted into equity positions in the new GM.

This was a painful exercise. Problems that are neglected for a long number of years never have easy solutions. But the alternative would have been even more painful as the collapse of GM would have transmitted problems down the supplier chain sending into bankruptcy a string of component suppliers on whose health other car manufacturing companies also depended. Small wonder that competitor FORD fully supported the government bailout of GM to safeguard the existence of component suppliers on which it also depended.

Blind believers in the free market, like competitor low cost airlines, will argue that they can fill the slack left by Air Malta. In so doing they would be talking their book. The death of a worthy competitor like Air Malta will give them pricing power to demand better terms from their customers or from government subsidies directly or through the NTOM budget. Much as we value low cost airlines’ contribution to our tourism sector, we cannot allow them to have the concentration of commercial power that would come their way through the demise of Air Malta.

This is a typical case where policy change is not sufficiently thought through all its consequences. The restructuring Air Malta that now has to be done under a crisis scenario should have been undertaken in calmer waters when the government changed its policies to permit the operation of low cost airlines. That was the time to ease off all burdens which were politically loaded on Air Malta when it was a quasi-monopoly operator; burdens like free tickets to VIPs, excess labour in overhead departments, inflexible work practices, and involvement in activities that are cheaper to outsource rather than provide internally.

Or is it that our Mediterranean temperament is not suitable for long term planning and we can only deliver under pressure of an impending crisis?

Whatever it is, the dice is set. We now have no choice other than effective and painful restructuring under pressure from an acute crisis. The alternative is even more painful well beyond Air Malta’s confines.

Burning through millions of euros without change to the final destination, which would sound the death knell for a national champion that made us proud in the 37 years of its existence, is simply unacceptable.

Wednesday, 22 February 2012

This breaks my heart!

These are the opening paragraphs from an article entitled MERKEL BETS AUSTERITY WILL RESULT IN RE-ELECTION featured in today's Der Spiegel International:

German voters value austerity. That, at least, is what Chancellor Angela Merkel is betting on as she embarks on a new package of savings measures aimed at balancing the budget in two years. She wants to show the rest of Europe how it's done -- and get re-elected in the process.
Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble believe German voters want a balanced budget.
Angela Merkel and her fellow conservative Finance Minister Wolfgang Schäuble like to play the role of teachers when dealing with their partners from the euro zone. There is hardly a European Council session in which the German chancellor doesn't preach the benefits of austerity ("solid budgets and growth are not mutually exclusive"), and hardly a meeting of finance ministers goes by without Schäuble pointing out that some countries still have homework to do when it comes to their national finances.

The admonitions.... have earned the two politicians a reputation for being patronising.
Just how healthy German finances are was revealed at the beginning of last week, in the form of an early-warning report by the European Commission. Germany was the only large country to be given an almost perfect grade.

And yet, if Merkel and Schäuble have their way, the country many in Europe already see as a model of sound budget management will become even more exemplary. "We cannot expect Greece and the other crisis-stricken countries  to accept more and more austerity measures, while nothing changes in Germany," says a close associate of the chancellor.

For a full view of the article here is the link:,1518,816464,00.html

Why does this breaks my heart?  Because it is a mixture of hypocrisy and economic fallacy.  It breaks my heart because it implies the Greeks are being put through a sausage machine without being offered any real light at the end of the endless austerity tunnel solely to render Merkel popular with her domestic base.

Even if Greece's debts were to be wiped clean Greece will still have a problem competing in the Euro monetary union.   To stand any chance of success Greece needs economic growth which has to be sourced by foreign demand.   This foreign demand has to come from the strong core countries of the EU, principally from Germany.   

So rather than leading  by fiscal prudence example this is the time for Germany to ease up, to stimulate its own internal demand to generate import demand so that the crisis stricken countries can channel the excess capacity resulting from lower internal consumption to export orders from core Europe.   This is the time for Germany to stimulate investments by its industries in the crisis stricken countries to strengthen their manufacturing base. 

If instead Germany moves in the opposite direction and in a show of sado-masochism imposes austerity on its own consumers in a crazy bid to balance the budget, then Germans fully deserves the criticism that they are out on a mission to re-occupy Greece and eventually other countries in distress.

It is easy to preach austerity from Germany, enjoying the highest level of employment and chronic balance of payments surpluses  as it is operating with a super -competitive currency at US$1.32 when on German PPP they can easily live with a rate of US$1.50.   Greece can only be competitive on a PPP basis if the Euro falls to USD0.90.

Can someone explain how German and Greece can stay in the monetary union if one can be competitive with a rate of USD 1.50 and the other needs a rate of USD 0.90 to be competitive??

The more they  fudge the more painful it will be for Greece,  and the more explosives are being packed in the Euro pressure cooker ensuring that when it eventually explodes it will hurt all, saints and sinners alike.  That's what breaks my heart.

Malta should be careful about funding such fudges which will clearly lead to nothing except pain and loss of time and money.

Tuesday, 21 February 2012

Greece Debt deal: A redemption or a stay of execution?

Greek PM and Finance Minister

The debt restructuring deal just announced for Greece is like sweet and sour sauce.

It is sweet for Greece because it wipes away one hundred billion from Greece's debt obligations.   What is sweet for Greece is sour for investors, banks,  pension funds and private investors.

But it is also sour for Greece because even in the best of hypothesis, in spite of all the austerity which is forcing many Greeks to barely managing to keep their body and soul together, the country will still be left with a very high debt to GDP ratio, expected to remain at 120% by 2020 and that is if all moves as planned.
Even at the reduced level it is highly doubtful whether the easier debt load is sustainable.   Few countries have successfully pulled themselves back from such high levels of debt unless they command one or more of these attributes:

  • They are in command of a reserve currency which commands the trust of most investors throughout the world ( e.g. like the US and the US dollar)

  • The debt is mostly internal and there is strong home bias among local investors ( e.g. as is the case in Malta).

  • The debt has been used for productive and infrastructure investment which can be expected to generate strong economic growth ( certainly not the case of Greece where most debt has been used for consumption).
Greece is undergoing a nightmare like a family whose father always kept his dependants in command of luxurious life style but have just found on his demise that their luxuries were all debt financed and the bills have started coming in.  Negotiating a forfeiture of 33% of the debts with creditors,  still leaves the family in shock and unsure whether it can shed off their luxurious lifestyle, sell the family silver and work hard enough to meet their reduced but still very stiff obligations.

Personally I think that is is no redemption for Greece.  It looks more like a stay of execution.

Redemption requires much more solidarity from Greece's EU family especially from the strong core countries like Germany France and the like.  Not solidarity in terms of more debt forgiveness; solidarity in terms of more economic and fiscal coordination so that the strong countries pump up their economies to permit Greece and other periphery countries in distress to channel their spare capacity from reduced domestic demand to exports to the strong EU countries.

Ultimately I fear that growth can only return to the periphery countries undergoing austerity programmes if the EURO devalues against the USD ( and other currencies) from its present 1.32 to a more realistic 1.15.   And this cannot happen as long as Germany remains in the Euro.   As I have been repeating German surpluses are a problem for the EU and Euro sustainability as much as the deficits of Greece and other periphery countries.

Germany and its friend can run away for some time from this reality,  but they cannot hide.

See brilliant article in today's FT by Stephen King Chief Economist HSBC which makes much the same arguments as above ( that Germany cannot continue to impose its discipline on everybody else)  in the following link:

What's the connection between Malta and Yemen?

Old flag of Yemen

Both countries are holding one race horse elections this week.

Today the Yemenis are voting to elect their new President after the 36 year tenure of President Saleh came to a bloody and tumultuous end.

The election is being contested by a sole candidate  Vice President Abdurabu Mansur Hadi, who took over when Saleh stepped down in November after months of protests.
See full report in this CNN link:

Next Saturday 25th February, in Malta we have the Prime Minister contesting a one horse race for the leadership of the PN, the party in government.

It is no real honour to be in the company of countries like Yemen, renowned for their terrorism credentials rather then their belief in true democracy.

Dr Gonzi may be well advised to cancel the election and convert it to a secret vote of confidence, as it should have been right from the start once he did not resign, at least temporarily, from his leadership post.

Monday, 20 February 2012

Who gets MFSA fines?

MFSA Building

On 15th June 2011 MFSA levied a penalty of EUR 347815 on Bank of Valletta and its subsidiary Valletta Fund Management relating to irregularities connected with the La Valette Multi Manager property Fund.

On 5th January 2012 the MFSA again fined Bank of Valletta Euro 175,174 in connection with breaches of the Investment Services rules related to sales of  perpetuals and other preferred securities issued by Lehman Bros, Royal Bank of Scotland, HBOS and others.
The latter penalty, unlike the previous one, has been appealed against by Bank of Valletta.

I will not enter the merits of the case concerned but on the other hand there is something not right in the way this whole business is being conducted.

The penalties raised are taken as normal revenue by the MFSA and the private investors who suffered the loss are informed by the MFSA that whilst investigations found in their favour there is nothing else the MFSA can do on their behalf.  It is left up to complaining investors to pursue negotiations with the licensed institution ( in this case Bank of Valletta).   If such negotiations lead nowhere the investors will have to start legal proceedings against the institution concerned or forgo their rights.

This is not right.

a.  The penalties levied should be put into a fund for the benefit of the injured investors.

b. The MFSA should not wash its hands off the matter and simply pockets the fine.  Where it finds for the investors it should be legally empowered to co-ordinate class action against the institution on behalf of the investors.    This will serve as an incentive for the guilty institution to settle amicably with the investors.

The present situation gives an incentive to MFSA to be lax in its supervision, and then enforce grievances against licence holders to swell its revenues through penalties from which the injured investors benefit nothing.  In fact from such instances only the MFSA seems to be benefiting.

Something is not right.

Wednesday, 15 February 2012

What are debt dynamics?

In justifying their decision to downgrade Malta to A3 from A2 and still maintain negative outlook, Moody's gave as their reason that Malta has poor debt dynamics compared to category A peers.   They made this point three times in the few paragraphs of explanation they gave for the downgrade.

What are debt dynamics?

When you are in debt, the question is not by how much, but whether your economic circumstances are favourable to paying off the loan. If one has a loan of EUR 10,000 but earns EUR 50,000 stably each year their debt dynamics are much better than someone who has a debt of EUR 5000 but only earns EUR 10000 each year in a stable and reliable manner.  

So what are Moody's telling us when they say that our sovereign debt dynamics are weak compared to peers?   In simple language they are telling us the following:

  • Government revenues has a recurrent  element of one-off transactions which cannot be relied upon consistently for the future.

  • Malta's growth is very much dependant on what is happening around us and if these circumstances, even through no fault of our own,  force us to little or no growth,  government debts will start rising faster than economic growth.

  • Government may have to absorb on its books a good part of the debt for which it is responsible through contingent guarantees in favour of banks who are lending to national corporations like Enemalta and Freeport,  only because government agrees to offer its guarantee cover.

  • Government is committed to substantial expenditure for social services which can only be sustainable in the context of strong economic growth.  Absent such growth, these expenditures will translate into into higher deficits and higher debts.

Basically we need strong economic growth to remain sustainable.  Moody's and their peers are not at all convinced that our growth projections are realistic especially considering what is happening around us.

It's hard to fault them for such reasoning. 

Our energies should be channelled to generating growth, to proving them wrong and to relate our experience that we do best when all around us is falling apart.   Last year we had the best performance of the tourism industry in spite of all the the instability around us, north and south.  In the seventies during the oil price shock we managed to attract a huge inflow of FDI  that  was searching for a lower cost base to remain competitive.   Such industries like Playmobil, Actavis, Baxter etc have their origins in such circumstances.   ST Thomson came during the second oil crisis of late seventies early eighties.

Growth needs investments and investments need stability.  If we can achieve stability when all around us is unstable so much the better.   But stability needs respect of democracy and if government cannot be sure of a majority in parliament it would be playing with fire in our debt dynamics if it persists purely to position itself better for re-election prospects.

As a nation we need to show Moody's and peers that we are a mature nation,  that we can raise to the challenges and we are at our best when things get rough.

Tuesday, 14 February 2012

Credit ratings and yet another downgrade! (2)

The Minister of Finance lashed out at Moody's and at the Leader of the Opposition - the first for downgrading Malta unjustly ( according to the Minister) and the second for gloating irresponsibly about such downgrade.

See this link:

He is wrong on both counts.

He should know that taking issue with rating agencies is as counter productive as protesting aggressively against a football referee's decision.   Moody's fully explained their decision  which is fully supported by fact and reason.  Here is how Moody's justified their decision.   I highlighted the reasons why Moody's have downgraded us more then others  and the Minister should perhaps have a frank discussion with his experts to compare Malta's debt dynamics  with that of its peers.  Presumably Moody's criticism of the debt dynamics include the hidden debt sitting outside the measured deficit and debt like loans to national corporations from the banking sector against government guarantee which sooner or later will probably, very probably, be converted from contingent to real liability.

Moody's downgrades Malta's government bond rating to A3 from A2, negative outlook

Moody's Investors Service has today downgraded Malta's government bond rating to A3 from A2. The outlook remains negative.
The key drivers of today's rating action on Malta are:
1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.
2.) Malta's relatively weak debt metrics compared with 'A' category peers and the country's reliance on the strength of the European economy, which will dampen its own growth prospects in the medium term and worsen its debt dynamics.
Moody's is maintaining a negative outlook on Malta's sovereign rating to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.
In a related rating action, Moody's has today also downgraded the foreign- and local-currency debt ratings of Malta Freeport Co. to A3 from A2 given its status as a government-guaranteed entity. The outlook remains negative in line with the sovereign rating.


As indicated in the introduction of this press release, a contributing factor underlying Moody's one-notch downgrade of Malta's government bond rating is the uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and over the resources that will be made available to deal with the crisis. Moreover, Europe's weak macroeconomic prospects complicate the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness. Moody's believes that these factors will continue to weigh on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions. In addition to constraining the creditworthiness of all European sovereigns, the fragile financial environment increases Malta's susceptibility to financial and macroeconomic shocks given the concerns identified below.
The fragile external environment is exacerbating a number of Malta's own challenges which continue to weigh negatively on the country's debt rating and constitute the second driver of Moody's downgrade. Malta's debt metrics are among the weaker of the 'A'-rated sovereigns. Growth prospects over the medium term also appear poorer for Malta than for its peers, given the country's dependence on tourism from the euro area as its main source of economic growth. This will hinder the narrowing of the fiscal imbalance. Lower business confidence and tighter credit conditions are likely to result in weak private-sector investment, and real output growth is likely to be significantly lower than the government's forecast of over 2%. The deteriorating growth prospects and the concomitant impact on already weak debt dynamics will further reduce government financial strength and expose it to more constrained, higher-cost funding conditions.

As to the Leader of the Opposition he did not gloat, but he expressed concern at government's handling of the economy.  What does the Minister expect?  A note of congratulations for a further downgrade and yet another negative outlook which means this is by no means the end of the road? 

Credit ratings and yet another downgrade!

What does it mean to say that Moody's have downgraded Malta from A2 to A3 with a negative outlook?

To put things in perspective I give hereunder a table of the investment grade rating for long term bonds by the three main rating agencies i.e Moody's, S & P and Fitch.:


S & P
High Grade
Upper Medium Grade
Lower Medium Grade
Non Investment Grade

So Malta's rating is now down from the 6th to the 7th step from the top ranking triple A and three steps away from losing its investment grade rating.

Somebody commanding an A3/A- rating is defined as:

a borrower that has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bond issuers in higher-rated categories

Considering that Malta was downgraded with several other Euro countries the negative implications are less serious than if it were downgraded on its own as it indicates that on a relative basis we have nor fared worse than peers. What annoys me is the negative outlook as it is a signal for more downgrades to come.

Monday, 13 February 2012

We the people

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquillity, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
The above is the preamble to the Constitution of the United States.

Today I put myself in the shoes of a middle class Greek citizen. A normal Joe Citizen , neither one from the oligarchies who thrived on political patronage and the ensuing corruption, nor one of those who turn democratic protest into distasteful violence and clashes with law and order forces. One from we the people.

Just think of me as Nikos with responsibility to put food on the family table but can’t see how can I do that. I lost my job, there is small prospect of finding decent work and can only work part-time at a reduced minimum wage in a job which degrades my skills. I have unavoidably fallen behind on my mortgage payments while the Bank is threatening to pull the plug on me.
It's hard time to be Greek these days.

It is no honour to form part of a race that defaults on its obligations, that needs its creditors to write off 70% of what we owe them and be patient for the remaining 30% which we will hope to repay only over 20 years. It is humiliating having foreign creditors dictating to us what we can and cannot do, and forcing us into austerity packages which is crushing our economy, just when we need investments and growth to give us some hope of a tiny light at the end of the tunnel.

I am angry at Greek politicians that promised us heaven and drove us to hell. Hell can't be much worse than what I am going through. But there is something which hurts more than the austerity pain, the insecurity and the humiliation we are going through. It is seeing the two classes of mischief who brought us to hell negotiating behind our back and serving us with round after round of austerity without offering any hope that this will lead to redemption; and all this without giving us any say on the matter.

It hurts to see politicians from the whole spectrum of Greece's political parties, the chief architects of our financial disaster, sitting in Cabinet, always at each other's throat, pretending they are defending our interest and preparing for early elections so they send the technical PM back to where he belongs and they can go back to their old political games. It hurts also to see EU leaders and bureaucrats putting pistol to our politicians’ brains and giving them cover for accepting something they would never accept except at gunpoint. These are the same EU leaders and bureaucrats who let Greece into the Euro knowing fully well we were not ready for it, knowing fully well the risks in blocking the safety valve of having one's own currency to compensate for the lack of competitiveness of the economy, and who turned time and time again more than a blind eye as our politicians cheated and lied their way through the Euro rules.

I know we are sitting between a rock and a hard place. I know that the alternative to the austerity rounds being served upon us is dirty default and probably exit from the Euro and possible also from the EU. This will change our savings, salaries and pensions into worthless drachmas and we will be in hell squared or cubed.

But I demand a choice. I demand to choose between the rock and the hard place.

I demand that the EU appreciates that they are partly responsible for the sad state we are in. I demand that they condition their bailout to Greece having a totally technocrat cabinet, to Greek politicians going to parliament to support the technocrat cabinet with the necessary legislative measures; that a medium term redemption plan is explained to the people so that we can have the opportunity to approve it in a referendum; that based on such referendum our politicians will have to support by legislative measures the plan which the people vote for.

If the people choose to burn in hell squared or cubed than at least it would be our choice. But believe me the Greeks are not the mobs you see on television attacking the police. The Greeks are like me suffering in silence and eagerly awaiting someone offering us a serious long term austerity plan which can be executed by serious technical people who can keep up our realistic hopes for light at the end of the dark tunnel as we go through excruciating pain of fiscal adjustment.

The EU must not trust the politicians that destroyed us to execute the austerity program. They will just ruin us.