Germany tramples on... Spain ( and others ) trampled on.

Spanish leaders should stop smiling and
stand up to unreasonable German demands

Germany's audacity and cheek in the way they are handling the Euro crisis, knows no limits.

How can Spain with a 25% unemployment be forced to undertake further rounds of austerity cutting God only knows how many billions from government expenditure purely because Germany insists on it?    What happened to Keynesian economics and the spirit of solidarity on which the EU is founded?

Let's put things into perspective.  Spain is  no Greece both in so far as size but particularly regarding their record for budgetary discipline.     Before the financial crisis Spain fiscal accounts were healthy and its debt to GDP ratio is low, even lower than Germany's.

So why are Spain in the financial mess they are in?

One of the main reasons for this is that the low interest rate policy that the ECB had to operate since inception to help Germany integrate the East following the fall of the Berlin Wall was not suitable for Spain's bubbly economic performance.

Low interest rates forced Spain ( and Ireland) to operate an unbalanced economic model where construction and property development became the motor of economic growth fuelled by cheap and plentiful supply of bank credit.    This kept fiscal revenues high and comfortable but it exposed the private sector to high leverage and the banking sector to concentration of risk to the real estate sector.   In short a property bubble was created in Spain fuelled by the ECB's low interest policy to assist German integration.

While Spanish governments are not blameless and could and should have taken precautionary measures to avoid the bubble buildup and re-balance their economies, the ECB and the German governments it used to serve are not blameless either.

So what sense of solidarity is there if German continues to make a feast from the crisis ( having the lowest unemployment rate and high economic growth) whilst placing the full burden of adjustment on countries like Spain, already suffering from a crushing economic contraction?

Spain is being pushed into a crippling debt trap as the more austerity gets imposed on it, the higher the unemployment, the lower tax revenues ( unemployed do not pay taxes remember?) and the higher the social payments that get triggered.

I am disgusted that after resisting the increase in the bailout fund firewall for so long, Germany has suddenly and gracefully agreed to increase it to some eight hundred million.

Why the change of heart?   Simply because the alternatives that offer a real solution, not merely a temporary solution through more bailouts, would be much more painful to Germany.

Europe does not need more bailouts.   Bailouts simply buy time, probably the time needed by Merkel until she gets her re-election wrapped up in 2013.   Europe needs economic growth.   Such growth has to come from additional export demand for countries that are in crisis so that the idle resources caused by the contraction of internal consumption get used in production for exports.

But exports can only materialise if two things happen:

a. Germany and surplus countries of the North adopt a much looser fiscal policy putting money in the hands of their consumers to boost consumpion and demands for imports.

b. The Euro falls from it current 1.33 to the USD to at least 1.15 near to the 1.18 it started from in 1999.

But Germany is obstructing these two conditions from happening.   It continues to adopt tight fiscal policies on the basis of leading by example policies when the exact reverse is needed.    And for as long as Germany remains part of the Euro system, the Euro cannot fall to where it needs to fall.

Germany could easily live with a Euro rate of 1.60 to the USD.    Most of the remaining countries in the Euro area can only be competitive with a rate of around 1.15 and extreme cases like Greece need even a lower rate.

Solutions through bailouts are a waste of time and money.  Malta, and its leaders, are not serving their citizens' interests by participating in such bailouts.   We will have to lick our wounds in future because we have let the Germans adopt and impose policies that serve their own interest not the interest of the whole Community.

Europe needs economic growth and this can only come if Germany makes a 180 degrees change to their domestic fiscal policies or at the extreme temporarily exit the Euro at the original joining rate of DM 1.95 and plan to rejoin at a realistic rate which reflects its current level of productivity and competitiveness somewhere around DM 1.50 per Euro.

Anything else is just papering over the cracks.

GO stressed

_______________________________________ This Article was published in The Malta Independent on Sunday on 25 March 2012 GO shareholders are stressed The small shareholders in GO plc, formerly Maltacom, have good reason to feel stressed. They are at the receiving end of two colossal mistakes made by the former owners (the government) and the present owners (Dubai Tecom) which have not only seen the market value of their shares as quoted on the Malta Stock Exchange plummet to record lows, but for the first time since its initial public offering (IPO), Maltacom has withheld its dividend. It’s a pity that the association for small shareholders that I set up, with others, in 1999 to defend the interests of the small shareholders in Mid-Med Bank from a forced and bargain takeover by HSBC did not find enough support, after the Mid-Med battle ha been won, to survive as a permanent guardian to defend the interests of small shareholders in publicly-quoted companies. Such a permanent guardian is needed by small shareholders to defend them from the inefficiencies of the management of the companies in which they hold shares, and from unfair privatisation terms and the financial nonchalance of the majority owners that compromise the interest of the small shareholders. GO was partly privatised in 1998 with an IPO price of Lm0.90 cents, equivalent to €2.10 per share. In the aftermath the GO share price had at one time reached a peak of about €7.50; it is currently less than €0.80 cents, i.e. 38 per cent of the IPO price and less than 11 per cent of its all-time high. By any measure, the private shareholders in GO plc were badly let down by the government when, in 2006, it sold its residual 70 per cent holding, and by the Dubai investors who recklessly invested an imprudent amount of GO’s resources in a doomed Greek venture. The profits that GO makes from local operations, with all the economies and efficiency gains extracted from the workforce, have been more than lost in this reckless Greek venture, the losses from which are weighing down GO’s share price and denying the private shareholders the dividend to which they have grown accustomed. The first let down in 2006 was when the government sold its 70 per cent to Dubai’s Tecom without a prior distribution as dividends of the cash hoard that what was then Maltacom had on its books and without first selling the valuable immovable property at Qawra and again distributing the profits realised therefrom to the shareholders before the final privatisation act. By failing to do this, the government not only denied itself a substantial dividend on its 70 per cent holding but prejudiced the interests of the minority shareholders, leaving such assets at the disposal of a new management which is proving itself disgracefully incapable of giving a strategic sense of direction to the company and is taking grossly miscalculated investment decisions that are threatening its very existence and financial stability. I am not being wise after the event. Here is what wrote in 2006, shortly after the sale to the Dubai owners (Judging Maltacom, TMIS, 26 May 2006): “The argument that the price of Lm1.55 per share is at a slight premium to international valuation of similar companies based on profitability criteria indicates that no premium was included in the price to take into account the substantial assets that are not essential to the company’s profitability. The most obvious candidate here is the substantial liquidity of Maltacom including substantial cash balances and receivables. Should not these have been distributed to present shareholders before the share transfer was concluded at a price that was not arrived by asset valuation but by discounting future profitability? Should other assets, not essential for the company’s core business, including some valuable real estate, have been sold before the privatisation and profits therefrom distributed before executing the share transfer?” I was personally involved in the first IPO for 30 per cent of Maltacom in 1998, and when the professional valuation was presented to us by two international banks that were helping in the privatisation process (HSBC and BNP), I asked what element of the valuation consisted of the real estate owned by the Company. The answer was that the valuation was based on future profitability and revenues, not on asset values. Consequently, we agreed to ease off from the balance sheet of Maltacom before the IPO the real estate the company owned at St Julian’s, which was not considered core to the company’s operations. Through that decision, the land on which Pender Gardens and The Exchange are now being developed and which, up to 1999, belonged to Maltacom (including Mercury House) was carved out of it before the IPO and the government could obtain real and full value when it was subsequently sold to the present developers of Pender Gardens. The same treatment was not reserved for Maltacom’s land at Qawra, as this was held on a short emphyteusis and would have reverted to government in a matter of a few years. Strangely, the government subsequently decided to deny itself such a reversion through conversion of the title to freehold for a premium that in no way reflects the asset value involved. But this is nothing compared to the oppression that the small shareholders are suffering from the misguided investment that the new owners induced GO to make in a Greek media company. In 2011, GO incurred a charge to its Profit & Loss account of €62 million and this follows a similar loss on the same investment of €29 million reported in 2010. A whopping loss of €91 million on such investment in just the last two financial years! A similar charge of €9 million was incurred in 2009 and €13 million in 2008. These are real numbers – total losses of €113 million on a Greek investment that has nothing to do with the purpose for which the local investors bought their shares in Maltacom amount to 140 per cent of the consideration the Government pocketed from the first IPO representing the sale of 30 per cent of the then Maltacom. Here is what I wrote on this subject in 2009 (Go Greek TMI, 27 March.2009): “Passive investors knew next to nothing on this large Greek exposure by their company and some even expressed surprise as they maintain that they invested in GO’s local operations and were at best hesitant about seeing their company take such significant stakes in overseas ventures. Frankly I think that one of the reasons the market is punishing GO’s shareholders more than the index is that the company is not working as actively as it should to keep its investors informed enough to enable them to understand more deeply the strategy it is following under its new ownership. With deep pocket majority owners who have no interest in cashing out their investment, the market price of their shares may not be of great interest to them. But for the small investor the share price is important. Even if the Greek investment were to be merely neutral and just provide recovery of the losses booked in 2008, the share price of GO deserves to be in another planet from where it is presently languishing. Given the significant size of the Greek foray, GO’s management has a duty to explain to small investors what their expectations from this investment are, as this information could well change the Greek investment from a discount force to a premium force on the company’s share price. In due course, GO should also consider placing such overseas forays in one holding “international” subsidiary and list it separately so that investors who consider such overseas ventures too risky for their liking will have an opportunity to exit such risk without having to exit their investment in GO’s domestic operations.” Nothing can change the fact that the small investors in Maltacom/GO have been short-changed twice since the full privatisation of 2006.

GO has gone ....Greek

GONE GREEK

The pain of the private shareholders of GO plc is getting unbearable.   Go was privatised in 1998 with an IPO price of Lm0.90 cents equivalent to Eur 2.10 per share.   In the after market the GO share price had at one time reached a peak of about EUR 7.50

Current GO's share price is less than Eur0.80 cents i.e. 38% of the IPO price and less than 11% of its all time high price.

By all means the private shareholders in GO plc have been badly let down by the Government when it sold its 70% holding to the Dubai investors and by the Dubai investors who recklessly invested an imprudent amount of GO's resources in a doomed Greek venture.

The profits that GO makes from local operations, with all the economies and efficiency gains extracted from the workforce, has been more than lost in this reckless Greek venture whose losses are weighing down on GO's share price and denying the private shareholders from the dividend that they had grown accustomed to.

Am I being wise after the event?  Certainly not.

On 26th May 2006, shortly after the full privatisation of the then Maltacom I had written as hereunder in the Malta Independent on Sunday (Judging Maltacom - TMIS 26.05.2006)

The argument that the price of Lm1.55 per share is at a slight premium to international valuation of similar companies based on profitability criteria, indicates that no premium was included in the price to take into account the substantial assets that are not essential to the company’s profitability.   


The most obvious candidate here is the substantial liquidity of Maltacom including substantial cash balances and receivables. Should not these have been distributed to present shareholders before the share transfer was concluded at a price that was not arrived by asset valuation but by discounting future profitability? Should other assets, not essential for the company’s core business, including some valuable real estate, have been sold before the privatisation and profits there from distributed before executing the share transfer?

Then when GO's management embarked on their Greek venture I had written an article which is worth reproducing hereunder as it gave ample and timely warning about the situation that GO minority shareholders find themselves in today.

What a pity that after so successfully defending the minority shareholders of Mid-Med Bank from forced takeover by HSBC  in 1997, the Association I had founded with others to defend small shareholders did not find the necessary support to remain active as a permanent safeguard against abuse of the small shareholders.
_____________________________________________________________________________

GO Greek

27^th March 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Normally I would not comment on the financial results and individual share performance of any public company quoted on the Malta Stock Exchange. On the rare occasions where I comment on local financial investments, I tend to restrict myself to the general market rather than focus on any particular company.

The financial results announced by GO plc last week merit an exception. Rarely have I seen a set of financial statements where what you see, at least at first glance, is not what you get; where you really have to make many mental adjustments to pass objective judgement on the company’s performance and still you are left gasping for more information to form a reliable opinion on the company’s future prospects.

If you start with the bottom line it is easy to get shocked. GO switched from a profit before tax of E28 million in 2007, to a loss, yes a loss, of e1 million last year. How can a company which returned steady profits in the region of e30 million each year before full blown liberalisation took effect, switch so suddenly from a substantial profit to a loss situation?

Further analysis shows that a series of one-off items are making first glance results extremely misrepresentative of the underlying performance from normal operations. 2007 results were flattered by a one-off credit of e9.6 million from a VAT case decided for the company. On the contrary 2008 results are penalised by an exceptional charge of e12.9 million related to pension obligations resulting from a court case decided against the company. These two items on their own explain e22.5 million of the e28.9 million variance between the bottom line results of 2008 compared to 2007.

2008 results are also penalised by another non-ordinary operational charge of e15.5 million related to booked losses on an investment which GO is making in a Greek operator licensed for fixed line, internet and media services. GO’s directors’ report issued with the financial statements emphasised that such losses were in line with expectations as the Greek investment is still maturing and consequently the impression one gains is that this should be a one-off charge. Indeed the directors’ report prompts an assumption that such losses should not only be reversed, but translate into positive new sources of profits in subsequent years as the Greek investee company reaches maturity.

Adjusting for these one-off charges it results that the Malta underlying business operations of GO improved by 14.6 per cent from e23.3 million in 2007 to e26.7 million in 2008. This is no mean feat considering that in 2008 the Company had to contend with EU price restrictions on mobile roaming charges, had to continue to register continued decline in its legacy fixed line services, and had to fight increasing competition in broadband and media services.

How then can one justify the dim view being taken by the market in marking down so heavily the value of the company’s share price? Last week the share price of GO closed at e1.40 which is 20 per cent down year-to-date following a 44 per cent loss last year, much worse than the overall index performance on both measures. At e1.40 the price is 33 per cent below the first IPO price of 1998 (at e2.10), 61 per cent below the privatisation price when government’s 60 per cent stake was sold to current majority owners, and 82 per cent below its all time high price.

Given that the company will soon achieve more room to manoeuvre additional cost cuts as the three year no-forced-redundancy provision expires, the share price should reflect the improving and potential core operational performance of the company, unless one of two things is happening.

Either investors are judging the book by its cover rather than by its contents in which case GO is failing in making its case properly in the eyes of investors and in keeping them properly informed of its strategy and its successes; or the investors are voting down the company’s foray in the Greek market, considering it a serious deflection from its core business, a risky investment exposing the company to further losses in future years and jeopardising recovery of the huge loan of e89 million which GO made to its overseas investment company.

This investment is nearly 50 per cent of the entire equity base of the company after distribution of proposed dividends from past reserves (there were no profits to distribute in 2008 so the proposed distribution of e12 million dividends will erode past reserves) and has not only drained away the comfortable cash resources of the company but has forced the company to leverage its balance to finance such investment through an external loan of e50 million.

I made informal contacts with some active investors in GO, investors who vote to elect directors on the board of the company, to enquire how much they were aware of GO’s Greek foray. The feedback I got from different sources was that the directors elected by the minority shareholders were as enthusiastic as the directors of the majority about this overseas investment and that there is still full confidence that this will turn out to be a very important investment for GO’s future profitability. I was further assured that the majority shareholders made no pressure on their local offshoot to undertake this investment and that the investment was made with the unanimous approval of the board.

On the other hand passive investors knew next to nothing on this large Greek exposure by their company and some even expressed surprise as they maintain that they invested in GO’s local operations and were at best hesitant about seeing their company take such significant stakes in overseas ventures.

Frankly I think that one of the reasons the market is punishing GO’s shareholders more than the index is that the company is not working as actively as it should to keep its investors informed enough to enable them to understand more deeply the strategy it is following under its new ownership. With deep pocket majority owners who have no interest in cashing out their investment, the market price of their shares may not be of great interest to them. But for the small investor the share price is important.

Even if the Greek investment were to be merely neutral and just provide recovery of the losses booked in 2008, the share price of GO deserves to be in another planet from where it is presently languishing.

Given the significant size of the Greek foray, GO’s management has a duty to explain to small investors what their expectations from this investment are, as this information could well change the Greek investment from a discount force to a premium force on the company’s share price. In due course GO should also consider placing such overseas forays in one holding “international” subsidiary and list it separately so that investors who consider such overseas ventures too risky for their liking will have an opportunity to exit such risk without having to exit their investment in GO’s domestic operations.

Unintended consequences

Caritas proposal for a sharp increase in the minimum wage in order to extract people out of poverty, or out of the risk of poverty,  suffers from the law of unintended consequences.    This law states that certain measures if taken could have unintended consequences so that the end result would be the opposite of that intended.

I very much think that if Caritas suggestion is adopted the people on minimum wage could well be dragged down further into poverty rather than extracted out of it.


Caritas proposal overlooks two basic realities:

• Our workers today are competing with workers in countries where wages are much lower than ours.

• Workers on minimum wage are most probably unskilled and a raise in minimum wage would probably out-price them out of the labour market with very limited prospects for finding a new job if they lose the one they currently have.

The objective to pull people out of poverty would be more effectively achieved if tackled from the fiscal and social security side.  The living wage concept is interesting in the sense that people not earning enough to live above the poverty line should receive social payments rather than pay taxes, through some sort of  positive taxation.

This would keep their current minimum wage competitive and reduce the risk of losing their job.  

For such innovation to remain fiscally sustainable the country would have to rethink its social policy and render social services mostly means tested rather than universal.    Therefore a reliable means testing mechanism would be required and this would necessitate a total rehash of our fiscal system to reduce direct tax rates and shift the burden to indirect taxation.

Furthermore those who would be entitled to a living wage supplement to their normal wage would have to be helped to improve their skills and employability  by attending evening training courses.   This to ensure that we do not create a culture of dependency rather than a culture of innovation.

Surely the living wage concept needs to be explored further.  Solutions with grave risks of  unintended consequences should be avoided.

God and Goldman

It happened again!   Somebody mentioned God and Goldman in the same sentence.

Lloyd Blankfein, the CEO of Goldman Sachs, in parrying criticism about Goldman's role in the financial crisis where it made a bundle by taking a big short on the US housing market at a time when it was selling housing exposed securites to its clients ( i.e. it was betting against the very products it was selling to its clients) had said:

"Goldman was doing God's work"

Now Michael Bloomberg, the Mayor of New York, a billionaire and  ex-investment banker himself and founder of Bloomberg - the world biggest financial news organisation - has come out defending Blankfein saying;



Lloyd Blankfien
CEO Goldman Sachs



"(Blankfein) is trying to lead the firm at a time when God couldn't lead it without being criticised"

This followed the much publicised resignation last week of a senior executive of Goldman Sachs who wrote a piece in the New York Times explaining why he was walking out on Goldman Sachs after 12 years because:

"Blankfein was presiding over a toxic culture in which bankers were ripping off clients and referring to them as 'muppets'.

God has handled successfully many things much more complicated than managing Goldman Sachs, even though He never claimed to be an Investment Banker and His profession on earth was a preacher and the son of a poor carpenter. 

But because it is Blankfein that is leading Goldman and because he is NOT doing God's work, Blankfein has been making the wrong choice in putting Goldman in a long term conflict with the interest of their clients.

Goldman have to choose whether to make their core business serving clients through their undoubted financial expertise or to run the most profitable proprietary trading desk making profits by exploiting clients.  God would make any easy choice if He were managing Goldman.

PN suffered ‘electoral meltdown’ - Busuttil

The Nationalist Party’s dismal result at this weekend’s local council elections has been described by the Prime Minister’s “special delegate” as “nothing short of an electoral meltdown”.

We must regain people’s trust. Otherwise, we are doomed.

“I take this to be an ultimatum. Unless we get it right in the next 12 months, we are heading for a certain electoral defeat,” MEP Simon Busuttil said yesterday.
____________________________________________________________________

Let me offer a friendly piece of advice to the Special Delegate.    Rather than waste your time trying to salvage what is well beyond repair, it is better to bring forward the day after through early elections, and start preparing for sanitising the Party from the corruption and arrogance which 25 years of nearly uninterrupted executive power unavoidably accumulates.    It will take at least two legislatures in oppositon to perform a proper sanitisation.   The period from 1996 - 1998 was too short.  It was a time-out rather than a full scale rehab.

Why two legislatures?   Because during the first one the PN would be in denial arguing that this is just a temporary blip to prove that democratic alternation of power still works and that the electorate would soon realise their mistake and revote the PN in power at the first opportunity. It takes a 2nd electoral defeat for real changes to sink through.    I have seen it all happening at first hand on Labour's side of fence between 1987 and 1996.

So do Malta and the PN a big favour.  Save your energies to where they can really make a difference.

A dockyard in the making

This article was published in The Malta Independent on Sunday 11^th March 2012

“Economic growth can only be sustained if energy prices are at the very least reasonable.  Even though oil prices are surging, I cannot in any responsible manner hit the economy with higher tariffs.  It would drain the economy by hurting productivity”

Guess who said this?    The obvious answer is Dr Joseph Muscat the PL leader who has been criticising the high utility tariffs and promised to reduce them if elected.   The PN has been saying that this is a cheap electoral pledge that can never be realised and have been demanding the PL to explain how it would finance such reduction in tariffs, which would mean less income for Enemalta at a time when energy cost inputs are on the rise.

If you think that this quote was uttered by the PL Leader you are wrong.   It has been incredibly said by none other than Minister Tonio Fenech, responsible for our finance, economy and for Enemalta’s health in a Damascene conversion from the government oft repeated policy that energy tariff must be flexible to reflect oil price movements and that they must cover not only the basic operational costs but also a generous dose of investment recovery.

What brought about this sudden change of heart is not difficult to guess.   With general elections looming on the horizon, possibly before summer arrives, social priorities take precedence over hard economic choices.  This is a repeat performance of what was done in the run up to the March 2008 elections.   Utility tariffs even then were kept steady in the face of escalating oil prices, but only until June 2008 when suddenly economic realities took over and the new policy of forcing market prices on utility rates was introduced with the shock and awe that still causes family budgetary concerns especially to lower and middle income households.

It is evident to one and all that the government has no solutions for Enemalta’s financial predicament which was again underlined by Moody’s downgrading of its credit status to deep junk territory explaining that they were constrained to do so in the face of government’s inability to put Enemalta’s viability on sound footings.    The suggestion that Enemalta could be saved by simply transferring some EUR 25 million of operational expenses to central government, and this at a time when central government has been ordered by the EU to shave off some EUR 40 million from its own operational expenses from what was planned in the 2012 Budget approved by parliament, shows that government has run out of ideas, or may be that its ideas are not suitable for implementation in pre-election mode.

Those who follow my column know that I have been warning about the financial time bomb accumulating on Enemalta’s books for several years.   Unfortunately nobody seemed interested in my warnings.  Not the government who simply prefers to keep the problem hidden away in Enemalta’s Financial Statements that get published with a considerable time lag ( the latest available refer to 2009 which were only published in December 2011 and which do not tally with the figures for government guaranteed borrowings as had been reported in the Auditor General Report on Public Accounts for 2009); not the media who keep parroting public deficit and debt figures quoted by official sources and neglect the deficit and debt accumulating in the books of Public Corporations, chief of which Enemalta, that can only be repaid when eventually government is forced to take them over to honour its guarantees.    Enemalta is a dockyard in the making.   Its debt will fall on taxpayers just as government had to pay the dockyard loans with local banks that it had guaranteed.  These are still suspended in The Treasury Clearance Fund accounting and being amortised over several years through an pro-rated annual charge to the Budget (Consolidated Fund).   Even worse than the dockyard I would say, as the figures are scarier, now reportedly exceeding EUR 800 million, including commitments in hand.

So what solutions for Enemalta?   The Minister said that 70% of Enemalta’s costs are fuel related and that “still leaves 30% to be controlled...tariffs cannot be burdened with the cost of operating inefficiencies”.   Forgive me but are we in 2012?   Has this government  not been in power for nearly interrupted 25 years?    So a quarter century is not long enough to address the operational inefficiencies at Enemalta and if not, how much time is enough?

To me it seems more like lack of political will than a question of time.    Enemalta is undergoing the same macabre treatment of death by a thousand cuts which was applied to our shipyards.

The other solution seems to be debt refinancing on a long term basis (twenty five years I heard) by creating an SPV ( special purpose vehicle) which takes over the debt from Enemalta, with the government obviously remaining responsible through its guarantees.   Restructuring and refinancing are clearly necessary, but unless a Greek style haircut is including in the exercise ( which obviously it will not be included as we are not Greece and have to be careful not to assume that such haircuts are manna from heaven) the debt obligations will remain whichever pocket we place them in.   So the SPV solution is more apparent than real and we should be wary of anybody who proposes such financial engineering as a real solution.   It is the sort of financial engineering which rendered Greek statistics  capable of suggesting  the country was ready for Euro membership when the hidden reality was totally different.  A country can run away from reality for some time but it can never hide and as in Greece when reality catches up it would be painful, horribly painful to the country and to its creditors (which in our case is ourselves as most of our debts are internally financed).

So short of real solutions the Minister falls back to his favour line argument “What are Labour proposing we do?”.    This is the wrong question as at least it should be “what are Labour proposing to do when they are in government?”.   Strange that it seems that the Minister, having run out of implementable ideas, is seeking advice from the Opposition about what he should do!!

I have no idea what Labour would do when in government in order to address the very serious situation at Enemalta.   Certainly it would have to honour its pledge to reduce the burden of tariffs.  It would have to proceed with refinancing Enemalta’s debt on a long term basis though the need to create SPV’s for this purpose escapes me.    But for addressing the real problem I have no idea what Labour would do.    But I have a very clear idea of what needs to be done to address Enemalta’s problems.

There is no magic solution and restoring Enemalta to financial health and long term sustainability is a long term process not an instant solution.   Shifting deficits and debts from one pocket to another offers a mirage not a real solution.  Hard choices have to be made.  Avoiding them further would mean bigger disaster down the road.   So the following measures, in a dosed mixture, are unavoidable:

a.       Restructure Enemalta for maximum operational efficiency with Key Performance Indicators based on international standards.

b.      Having relieved itself of operational inefficiencies charge tariffs which make it commercially viable and capable of servicing its debts and investment needs.

c.       Government to adopt a social and industrial policy to subsidise Enemalta’s commercial tariffs to make then socially acceptable and to keep our industries competitive.

d.      Social subsidies are to be tailored to cover normal consumption and excess consumption to be charged at or above normal commercial rates.  Otherwise subsidies will stimulate consumption whereas the objective is to economise on it.

e.      Announce a plan for the gradual removal of such subsidies over a five year term to give families and industries  time to make subsidised investments  in energy efficiency.

f.        Finance such subsidies by raising excise duties on fuel at the pump to bring them up to European averages.

g.       Forget crazy investment like offshore windfarms which can never be cost  justified and consider newer technologies including the feasibility of town gas infrastructure as gas is cheaper, cleaner and more economic in transmission losses.

Failure to act would mean that Enemalta is heading for the dockyard scrap heap.   Or is the ultimate plan to hand over by default  a natural monopoly to the private sector?

Golden rule has no Midas touch

Government wants the 'golden rule' entrenched in the Constitution - so says an article in The Times today.

I disagree with this for two very strong reasons.   Firstly because I am extremely cautious about any changes to the Constitution and I am adamantly against any change which is entrenched requiring two-thirds parliamentary majority vote for any future changes thereto.  Secondly because, economically speaking,  this golden rule that budgets must be balanced on a permanent basis is a heresy and certainly it has no Midas touch.
Let's discuss these points one by one.

Avoid changes to the Constitution

This knack of talking liberally about changes to the Constitution as if it were just another law, is irresponsible.   The Constitution is the mother of all laws and as the Board of Directors of a Company has no power to change the Memorandum & Articles of their Company ( that power belongs to the shareholders) Parliament should be very cautious of taking a liberal attitude to constitutional changes.  If anything such changes should be referred to the shareholders of the Constitution, the Maltese nation, for their approval through a specific referendum.

And attempts to make constitutional changes entrenched and subject to two-thirds majority smacks of arrogant claims of prescience about future conditions that should continue to be unconditionally constrained by the constitutional changes that are proposed to be entrenched.    No one has such prescience  and those who claim it are dangerous people and should not be trusted in our kitchens let alone in parliament.

No Midas touch

I already wrote about this in my article "euro fiscal pact: right measure at the wrong time".  See link.

http://alfred-mifsud.blogspot.com/2012/02/euro-fiscal-pact-right-measure-at-wrong.html

As a small country with an open economy there is much to be gained by adopting virtuous fiscal policy avoiding chronic fiscal deficits.   A small country like ours depends for its economic development much more on the demand existing in our export markets than on our own internal demand and therefore there are strong demand leakages which make fiscal policy as an economic tool not very effective.  But adopting such policy for large countries across the whole EU is economically brutal and socially explosive.

No sooner had the countries signed up for the fiscal pact at the last EU summit, which was discussing the need for stimulating economic growth, the Spanish Conservative Prime Minister was quoted as saying that Spain, with an unemployment rate of 25%, cannot possibly stick to the budget reduction targets and would be requesting the EU to adopt a more flexible approach.  He expressed the sensible view that forcing austerity on an economy already in recession could crush it and shrink it, rendering the fiscal reduction objective less and less likely.

There are two clear reasons why on an EU basis the Golden Rule is economic fallacy:

Firstly fiscal policy has to be seen in context of the overall economy and particularly the Balance of Payments position.  If a country like Germany has a fiscal deficit but a strong Balance of Payments surplus the fiscal deficit is very tolerable as it is an internal affair and could be addressed relatively easily by tax adjustments on a strong private sector ( as evidenced by the balance of payment surplus).   However even a fiscal surplus in the context of a large balance of payments deficits could not be tight enough.   Spain and Ireland were fiscally in surplus before the financial crisis of 2008.  Both however had a hugely leveraged private sector as was evidenced by chronic balance of payments deficits; when the property bubble in both countries burst, the fiscal surplus quickly switched to a chronic deficit.  No Golden Rule could have avoided that.

Secondly demand management in the true Keynesian sense remains an important economic policy tool for the larger economies.   Countries need not have a permanently balanced budget.  When the economy slips into recession a switch to responsible deficit fiscal policies makes sense.  In true Keynesian scriptures the budget should be balanced over the economic cycle not in each and every year during the cycle.   Otherwise we can just as well elect robots to manage our economies.

The Golden Rule should be adopted with great caution and should allow room for flexibility when needed and should certainly not be entrenched in the constitution.   Otherwise we will be spending our time exploring how to cheat it by creating SPV's to stay within the word but not within the spirit of the Golden Rule.   We are doing that already now , let alone if we strap our selves with the misnomered Golden Rule.

Answer given, questions raised.

How many times have you heard the PN spokespersons demanding Dr Joseph Muscat to state how he is going to finance the promised cuts in utility rates, when and if Labour is elected to government?

Now I can assure you that the PN's questions are not motivated by a genuine desire to know how it can be done.  They know better than anyone that it can be done if one makes it one's priority.

Their motivations are to place a banana skin under Dr Muscat's feet hoping that any explanation he may be prompted to give will show that one particular sector will be squeezed to finance such additonal expenditure and therefore offering a possibility for the PN to scare away votes Labour may have gained in that particular sector.

But if one really and genuinely wants to know how such utility rates reductions can be financed, the answer can be found in the main article on the front page of today's  The Malta Independent on Sunday titled:

How Malta could save €577 million a year: stamp out all tax evasion http://www.independent.com.mt/news.asp?newsitemid=140759 The PN have been in government for 25 years and whilst the initial Fenech Adami administrations made good progress in addressing tax evasion by reducing the marginal rate of personal taxation from 65% to 35% and by introducing VAT which helped to build a better audit trail of commercial activities, the Gonzi administration has stagnated on this front.   Indeed one can say that it regressed as it took measures which weakened the VAT's audit trail.   So if one wants to know how utility rates can be reduced without an increase in tax rates and without introducing new taxes the simple answer is to enforce existent tax laws to bring evaders to book.    This must be a comprehensive exercise including stiffening of penalties and reduction of marginal tax rates so that the taxes on income, whether earned or unearned, whether current or capital gains, will unified under one low rate.   But on the same subject questions should now be raised on the Gonzi government and the Minister of Finance in  particular. 'Energy tariffs to remain unchanged' is the title of an article in today's Sunday Times by Minister Tonio Fenech. http://www.timesofmalta.com/articles/view/20120304/opinion/Energy-tariffs-to-remain-unchanged.409549 So the question which the PN had long been asking Joseph Muscat rightly boomerangs back on Minister Fenech.   With oil price in the US$120 region, with Enemalta bleeding losses right, left and centre,  with government announcing it is taking on its books Euro 25 million expenses to relieve Enemalta commercial losses, and with Government having to reduce expenditure by Euro 40 million by order of the EU, how will the increased cost in energy procurement be financed? This is a question for the here and now and not a hypotetical question for when and if Labiour is in government when no one knows what the energy procurement costs would then be. The electorate had faced a similar situation pre-2008 elections.   The answer they discovered was that post-election the utility rates, which were kept steady pre-election as the oil price was reaching record levels,  were allowed to shoot up through the roof.  History repeating itself?  What's new under the sun?

Enemalta's chickens are coming home

Minister Tonio Fenech seems like the chambermaid trying to lay out a double bed with a single bed sheet.   She pulls the sheet to the right and exposes the left side.  She then pulls the sheet to the left and the right side gets uncovered.  She would ask a colleague to pull the sheet from both sides trying to extend its width and risk tearing it right down the middle.

When S & P downgraded Enemalta from BB to B+, which is deep down in the lower tier of the junk bond territory, the Minister seemed panicky and called a press conference to explain that Enemalta's plan to refinance its current and planned borrowing of EUR 800 million had met technical difficulties and this contributed to the downgrade.  As a palliative he announced that government would be taking over on its own books obligations costing Enemalta EUR 25 million to help improve its profitability.
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Now this is simply moving debts from one pocket to the other.  Enemalta is wholly owned by the Maltese taxpayers and whether the expenses are booked by Central Government or by Enemalta as a Corporation, it makes little difference.

If problems could be solved the way the Minister thinks than we can convert Enemalta into a government department and ipso facto Enemalta's  debt would be added to the national debt and it would gain the same rating as the sovereign.  But ( and there is always a but) the resultant increase in public debt would then lead to the downgrade of the sovereign.   So whichever way you pull the sheet one side remains exposed.

Government has played this trick before.  By neutralising the profits that Enemalta used to make from its petroleum division ( by imposing VAT and excise duties to increase its revenues) Enemalta could no longer use such profits to subsidise its loss making Electricity Division.   Electricity generation in Malta can never be profitable, given the lack of economies of scale,  unless unsocial consumer utility rates are charged.

The obvious solution is to raise excise duties on fuel sold at the pump and reduce excise duties on fuel used for electricity generation.   Switching expenditure to central government is like playing hide and seek when central government has just been given the order by the EU to cut recurrent expenditure, including social votes, by Eur 40 million.

Enemalta's chickens are coming home to roost.