Thursday, 28 March 2013

Resurrection for the Euro (2)

In the run up to Easter last year I wrote an article which remains topical and worth a re-read as we face another Easter.

RESURRECTION FOR THE EURO - 08 April 2012

The situation did not get any better since then.  Two more countries have had to be bailed out bringing the Euro members in the sick bay to five.   And presently we are seeing scenes on the streets of Nicosia which practically mean that Cyprus is a Euro area member only in name.

How can a Euro area member be considered a full paying member of the Club if a Euro in Cyprus in not the same as a Euro in Germany, Finland or Netherlands?  How can an EU member, let alone a Euro area member, be forced to impose restrictions on movement of capital, and restrictions on bank deposit withdrawal.

Hopefully this is only for a short period and life will return to some sense of normality in Cyprus pretty soon.  Economically Cyprus will undergo a crushing economic contraction over the next few years as its financial services industry gets wiped away and it will have to recreate growth in other sectors, most notably by re-energising its tourism potential and developing its freshly discovered natural gas resources.

As always there is a silver lining.    Probably the scene is being set for a favourable scenario to make another attempt for the reunification of Cyprus based on the Annan plan which the Greek Cypriots rejected in 2004 prior to their EU membership.

Cyprus' has dire need to exploit its natural gas resources to rebuild its economy following the financial disaster suffered.  This basically guarantees that a fresh vote would now produce a strong approval on both sides of the green line.

So many thing have changed since 2004.   Suffice it to say that in 2004 Greece as a Euro area member could easily borrow 10 year money at 4% whereas Turkey as a backward emerging economy would have had to pay double digit rate.   Things have turned on their head.  Turkey can now borrow at 4% and Greece cannot borrow at any price and has to depend on the EU for bailouts.  Indeed Greece not only crushed their own economy but caused collateral damage to protege Cyprus, bankrupting its banking system and causing shocking distress to Cyprus economy.

The Euro system needs a resurrection.  In its present structure it will collapse sooner rather than later.   Such resurrection cannot be engineered before the next German Chancellor puts the elections behind him or her.   But after that the Euro can only be saved and avoid the dismal scenes we saw today on the streets of Nicosia if:

  • a Euro area banking union with common supervision and a cross border Euro-wide deposit insurance scheme is implemented
  • we start moving to a structure that controls more effectively the fiscal policies and borrowing commitments of separate Euro area sovereigns, possibly creating a central debt agency which issues Euro bonds on collective responsibility and re-lends to the individual sovereigns subject to appropriate conditionality and cost margins to reflect their fiscal prudence or lack of it.
For the time being we enjoy the Easter religious resurrection and with some good reason.  Whilst on the streets of Nicosia the situation is shameful and pitiful, on Wall Street and the streets of other main Exchanges stock markets are peaking to new highs.  They have full faith that after the German elections the EU will do whatever it takes to resurrect the Euro.

Happy Easter!!



Wednesday, 27 March 2013

And now what?

Jean Claude Juncker
immediately missed
as head of the Euro group
So Cyprus has been bailed-out.   It joins the ranks of Greece, Ireland, Portugal and Spain who have already been bailed out.

Each country has had a different bailout model.  


Greece has had its bailout conditional on a 70% haircut on most of its external sovereign debt.


Ireland has had to force losses on the holders of subordinated debts of its banks and in case of Anglo Irish Bank also of its senior debt holders.


Spain has used its weight to arrange for the bailout to go straight to recapitalisation of its banks in distress without passing through the sovereign.  It has thus avoided increasing the public debt to capitalise its distressed bank which would have put further strain on its fiscal position.


Cyprus would much have wished a similar treatment  as Spain whereby the recapitalisation of its banks would have been effected directly by the ESM.    But either because the Cyprus banks were in deeper state of insolvency ( mainly caused by the losses they suffered through the Greek sovereign debt haircut and by the losses incurred by Cyprus banks largish operations in Greece where the economy is trapped in a never ending recession) or because Cyprus was too small to offer negotiating resistance such approach was refused.


Not only that but the Cyprus bailout established new precedent where for the first time substantial losses were forced on uninsured but ordinary deposits sending a message that bank deposits in Europe were no longer to be considered safe.


The inexperience of  New Euro Group chief Jeroen Dijsselbloem fanned market uncertainty with contradictory statements about the Cyprus rescue and angered colleagues with his glib negotiating style. This never would have happened under his predecessor, say his critics. He is over his head in this new job and must be taught to speak less and with caution.   He could have easily explained that Cyprus presented a unique set of circumstances which required an exceptional bailout approach involving uninsured deposits.  Instead he put his foot in concrete when he is reported to have said that the Cyprus approach could be a template model for any future bailout involving recapitalisation of banks in distress.   He later tried to backtrack on his words but it is difficult to put toothpaste back in the tube.


But the question remains : and now what?   Out of 17 Euro countries, 5 have been bailed out and are in the sick bay.   Two others are in serious condition as Slovenia and Italy may be heading in the bailout direction.


Are we solving any problem by forcing extreme austerity on countries seeking bailout as the EU tries to force harsh internal devaluation to Germanise them and make them export competitive again?   Can we do so by wasting idle resources in the form of lost growth and high youth unemployment which risks becoming chronic and irreversible?


What nobody seems to be asking are these simple questions:



  • Is it logical to expect that so disparate countries as Greece and Germany be locked in the same monetary union?
  • Can external competitiveness for countries in distress be regained merely through never ending rounds of austerity?
  • Should not surplus countries also be taking corrective measures to bring back macro-economic equilibrium among Euro member states?

The present bailout pattern is unsustainable.   As more members join the sick bay the members outside will become fewer and less able or willing to carry the load.


We are adopting a Versailles method when we really need a Marshall Plan method.


Anyone who thinks that the German taxpayer is being short changed by having to finance the bailouts of countries in distress should take a cold shower and look reality in the face.


Germans haven't just paid for the crisis, they profited from it.  The savings in interest payments, which Germany have enjoyed since the beginning of the crisis, amounted to €10 billion last year alone. Plus there are the interest payments from debtor nations. The reality of the euro crisis is this: The poor of Athens are paying the rich in Germany.


And above all Germany is benefitting from export led economic growth as the Euro crisis is keep the Euro value on the foreign exchange market much softer than would have been the case if under similar conditions Germany's currency was still the Deutsche Mark.


The Euro crisis is in fact a party for the Germans.   But they cannot expect it to last long.   They have been warned.   Italian elections have given the biggest share of the popular vote to anti democratic Beppe Grillo who is speaking much the same language as Mussolini used to speak to erode trust in politicians and pave the way for the scrapping of democracy.


Such experiments failed in the past, and they will fail in the future. Europeans will not allow it. As Germans keep cheering on their Chancellor, they should mark the words of former Euro Group chief Jean Claude Juncker: 



"Anyone who believes that the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error. The demons haven't been banished; they are merely sleeping."
Whoever is the next German Chancellor, he/she must switch from Versailles to Marshall Plan mode or otherwise what was gained in six decades since the origins of the EU will be washed down the drain.


Monday, 25 March 2013

Bringing sense to Cyprus

Published in The Malta Independent on Ssunday 24 03 2012

So I don’t have to write an apology for getting my prediction about the outcome of the elections wrong. In my last article I wrote:

 “I just cannot imagine that the polls will be proved materially wrong by the final result.”
And they were not. Anyone who doubted the final outcome of the elections was probably living on another planet. Anyone who did not expect a wide margin just did not have their finger on the pulse.

That is now water under the bridge. No sooner had he been sworn in as Finance Minister, Minister Scicluna must have had his baptism of fire attending one of the most tumultuous euro finance ministers meetings at which the Cyprus bailout was discussed and agreed to.

I say “agreed to” with reservation, as while it was agreed to by the Cyprus delegation at the meeting, the package was then roundly rejected by the Cypriot Parliament.

Cyprus is getting it awfully wrong and it is behaving irresponsibly and in a matter that could prejudice not only its own interests but also possibly, although unlikely, the interests of other countries who, like it, are having to go through fiscal sanitisation demanded by bailout arrangements.

Firstly, let everyone realise that when a country requests a bailout it does so because it is in a tight spot and has no real alternative left but to seek one. The only alternative would be to exit the euro, but the consequences of this could be far more socially painful than actually working through the bailout. As they say, the euro is like the Hotel California: you can check out (i.e. break the rules for some time) but you can never leave.

Cyprus made three bad mistakes in its negotiations with the EU and has been very badly served by its political leaders. Firstly, it failed to flag out the collateral damage it would suffer as a result of the bailout conditions imposed on Greece. That was the point at which Cyprus should have put on the table the predicament that would befall its banking system through the haircut on Greek sovereign debt imposed as part of the Greece rescue package. It should have demanded instant redress as part of the Greece package.

Its second grave mistake was to take the package agreed with the EU last Saturday to be voted upon by its own parliament, when it was clear that it would be rejected. Rejecting a bailout without having a realistic alternative is never wise and Cyprus should have re-opened immediate negotiations with the eurozone to tweak the package enough to gain parliamentary approval.

The third biggest mistake Cyprus made this week was that, after rejection of the bailout plan by its parliament, rather than entering into immediate negotiations with the Euro Group, it wasted precious time and political goodwill negotiating a financial salvage package with Russia. Even if Russia had been prepared to talk seriously about such a financial rescue plan – which clearly it was not, unless Cyprus was prepared to put its sovereign soul on the negotiating table – Cyprus needed the ECB liquidity lifeline even more than it needed the bailout. So seeking the elusive Russian rescue and ignoring the ECB lifeline forced the ECB to rightfully issue a unique and stern warning that unless an EU bailout was agreed to over this weekend, it would shut the liquidity lifeline and force the collapse of the main Cypriot banks.

The Cypriots have over-played their hand and ignored the following facts of life:

· EU countries cannot easily justify a bank rescue for Cyprus, the main beneficiaries of which would be Russian depositors, many of whom have funds of dubious origin.
 
· Germany has an election this autumn and Chancellor Merkel is under severe domestic pressure to be tough in granting such bailouts, which are exposing German taxpayers to substantial credit risk.
 
· Cyprus is small enough to risk collapse without causing contagion and so it was a good opportunity to send a clear message to other countries to urge them keep their fiscal houses in order so that bailout requests become the exception, not the rule.
 
· There is no way it can be in the interests of Cyprus to take on its own shoulders the financial burden to bail out all depositors, given that the banking sector in Cyprus is eight times larger than the country’s GDP. So a haircut on depositors was an inevitable ingredient in the bailout package, but the burden of this should be spread over the bigger depositors. ‘Insured’ deposits of up to €100,000 should have been protected and exempted from the haircut.
 
· The Cypriot offshore banking business model is broken beyond repair and cannot be protected. Plundering pension funds and selling potential gas assets while in distress to save a broken model cannot be a sober solution.

It is to be hoped that realism will return to the negotiating table this weekend, with the Euro Group and Cyprus will agreeing to a modified package that protects insured depositors but transfers the burden onto the larger depositors. For those interested in what shape and form such a revised package could take, they can access my blog (as hereunder) where this week I posted several pieces on the morass of the Cypriot banking sector and the Cyprus situation in general.

Closer to home, we should be thankful that our main banks have remained a domestic affair (unlike the Cypriot banks, which established substantial operations through subsidiaries in Greece that now have to be sold under the hammer) and that their operations are fully and very comfortably financed by stable domestic deposits. Our native banks have never raised wholesale lines of credit to expand their balance sheet by taking activities beyond our shores and very justifiably command the full trust of Maltese savers.

I do not, however, understand why our banking regulators – rather than protecting what has served us well and what has saved us – have adopted a liberal attitude to licensing foreign investors, often private equity and hedge funds, as full service banks when their business model is based on limiting their activities to pure domestic deposit taking under the protection of the deposit insurance scheme.

Rather than deploying the deposits raised in our own economy, such banks often leverage them in order to finance overseas operations that are either speculative or meant to ‘abuse’ the subsidies that the ECB is having to allow real banks in distress, by providing cheap and plentiful liquidity whilst they undergo a de-leveraging exercise to their balance sheets. Why we should offer deposit protection (which is mainly funded by the truly domestic banks that offer a full banking service) to such foreign institutions with unsound banking business models, escapes me.

I have been the lonely voice protesting about this situation for several years. At least this week, probably awakened by the happenings in Cyprus, other economists and financial operators have expressed similar concerns. It is never too late.

This leads me to a wider reflection on our regulatory set-up. When financial regulation was hived-off from the Central Bank to the MFSA, in line with similar trends at the time, the main argument was to protect the full independence of monetary policy operators from conflicts of interest in case regulators had to rescue this or that bank. Never mind that by so doing we were creating another conflict of interest within the MFSA, with it serving as both the regulator and supervisor – as well as the promoter – of our financial services industry.

The crisis of 2008 showed that, when push came to shove and we were faced with across-the-board systemic risks, only central banks could provide the necessary liquidity to save the system, and not the regulator, who created the problem in the first place by adopting light touch regulatory and supervisory system. Internationally, authorities are reversing the process and the trend is for regulation to migrate back to the central bank. Rather than create complicated hybrid systems, which cannot work when truly needed, we should seriously consider calling a spade a spade and move financial regulation and supervision back to where it should have always been.

Thursday, 21 March 2013

A fair and real solution for Cyprus

I have seen few things in my life where serious issues have been as badly mishandled as the Cyprus rescue plan.

I write this in a desparate effort that some realism is allowed to creep into the situation and a fair solution is found over next weekend before the whole situation gets damaged beyond the point of no return.

I am not suggesting that there is a painless or simple solution to  the Cyprus problem but that there is a solution which is market based and fair without establishing very damaging precedents.

Let's establish the facts first:

  1.  Cyprus banks are insolvent and need urgent recapitalisation.
  2. As in case of Spain, the State of Cyprus cannot provide such recapitalisation without prejudicing its own ability to remain solvent.
  3. The EU has a legal obligation to offer a bailout to Cyprus especially considering that the major source of the problems in Cyprus stems from the problems in Greece, where the EU states, especially those that allowed Greece to join the Euro unfit and unprepared, cannot shed off their share of the blame.
  4. Russia cannot be a true source of a solution for Cyprus given that Cyprus beyond the immediate bailout funds, depends on the ECB continuing to act as a lender of last resort for its (hopefully re-sanitised) banking system.
  5. As in case of Greece the problem of Cyprus is so large compared to the country's GDP that the bailout has to be linked to some form of haircut to be carried and shouldered by investors outside Cyprus who have interest through their investments in Cyprus.   Whereas in case of Greece this was represented by the foreign investors holding Greek sovereign bonds in their portfolios,  in case of Cyprus this is represented by foreign deposits held with Cypriot banks.

Here is the framework of what I think should form a fair and effective solution to the Cyprus bailout programme:

  • The EUR 10 billion offered by the EU should be extended directly to Cyprus banks not through the Cyprus sovereign so as to keep the government debt of the country manageable.  This has been accepted in case of Spain and should be offered as well to Cyprus.
  • The EUR 10 billion should be used to form a new publicly owned bank by the government of Cyprus ( the ESM may take preference shares with special rights including conversion into ordinary equity).
  • Existing insolvent Cyprus banks should be declared as such, have their banking licence withdrawn and operations frozen for proper liquidation.
  • Deposit of up to EUR 100,000 ( insured deposits) should be transferred to the new bank and remain free for instant withdrawal in accordance with their original terms.  The new bank will have the comfort of support of liquidity as necessary from the ECB.
  • All assets of insolvent banks are to be 'sold' to the new bank for value equivalent to the insured deposit liabilities taken over by the new bank .
  • An agreement by the new bank  and the insolvent banks is to include a provision that the new bank will dispose or manage the assets taken over from the insolvent banks and over a five year period there should be established their realised or carried value in the books of the new bank.  Any profits thus resulting from realisation or carrying of such transferred assets should be shared with the liquidators of the old insolvent banks for the benefit of the creditors of such banks.
  • The creditors of the insolvent banks outside the guaranteed deposits taken over by the new bank will have their priority rights respected, irrespective of their nationality, and they will be entitled for recovery from the proceeds that might flow from the sale of assets arrangement made with the new bank.   Priority should respect that uninsured depositors have the first claim, then the secured creditors, then the unsecured creditors ( including bondholders), then subordinated bondholders and finally shareholders.
The benefits of such plan are:

  1. There is no prejudice or discrimination  to depositors/creditors rights on the basis of nationality.
  2. It does not load the Cyprus sovereign with unserviceable public debt.
  3. It restarts the Cyprus banking system on a fair and feasible footing.
  4. It respects international law and business practice.
  5. It still spreads the burden on depositors but with full respect to the insured deposit scheme regulations.
  6. It can be implemented over one weekend and be fully in business by Tuesday.
  7. Bad assets taken over from existing banks will get a better realisation value if disposed of over a five year term.
  8. When things gets stabilised the ESM will sell the equity in the new bank in agreement with the Cyprus government and hopefully will stand a fair chance of getting a fair return on its investment and thus avoid spreading the pain on other member states contributing to the ESM.

Monday, 18 March 2013

Cyprus: collateral damage with a sugar coating

Depositors who showed trust in Cyprus banks and kept their savings there have become collateral damage in the bailout that Cyprus has had to seek from the EU in order to re-capitalise its banks following losses they incurred on their exposure to Greece.

The choice was between a bailout of EUR 17 billion which would have put too heavy a debt burden on Cyprus government to carry, or force a bail in on bank depositors thus reducing the bailout financial requirement to a more manageable EUR 10 billion.

In opting for the latter the EU has crossed the Rubicon.   In all bailouts so far bank depositors were safeguarded.   So why did it need to be different for Cyprus?

Simply because many depositors in Cyprus banks are non-residents, mostly Russian tax exiles who exported their capital out of Russia to what they thought was a sunnier and safer place.   So by bailing in depositors a good part of the financial rescue burden, estimated to the tune of some four billion Euro,  has been spread onto non-resident depositors.

But in the process Cyprus resident depositors are having to suffer too.  No distinction could be made of depositors based on nationality or residence.   So while the country as a whole is advantaged by involving a depositor bail in, the population per se is worse off....... unless one proves the counter factual that without a depositor bail in, the whole burden would have fallen totally on the shoulder of Cypriot resident through higher taxation.   The counterfactual is always hard to prove.

What's for sure is that whereas taxation could have been made progressive, shielding the most vulnerable of society from its adverse impact, the depositors bail in  is regressive,  or may be not progressive enough.

I think it is unfair and highly prejudicial to include insured deposits up to EUR 100,000 in the bail in.   These deposits are either insured or not insured and if they can be made  to suffer tax on capital at will, then the insurance protection is quite worthless.

The capital markets are all negative this morning, but nothing too drastic so far.  It seems that the argument that this measure is specifically to cater for the unique situation of Cyprus is being accepted without giving rise to contagion risks.

Fingers crossed.

Sunday, 17 March 2013

Making a mess rather than a model of Cyprus bailout



Early morning last Saturday the EU finance ministers agreed on a Euro 10 billion  bailout package for Cyprus.

The bail-out package includes very onerous conditions on Cyprus, most relevant of which are a 6.75% tax imposed on all deposits up to Euro 100,000 and a tax of 9.9% on deposits exceeding one hundred thousand.

The purpose was to reduce the size of the bailout from the original request of Euro 17 billion and to capture within the burden sharing net the large volume of non-resident deposits, mostly Russian, included in Cyprus bank balance sheets.

In so doing the EU has set a precedent which might unnerve holders of deposits with the banking system of other countries in distress, most notably Greece, Ireland, Spain and Portugal.   One might also include Italy that has not asked for bailouts but whose banking structures are fragile given the large quantity of sovereign debt they carry on their balance sheets.

The EU ministers have been emphatic that these measures are tailor-made for the specific situation in Cyprus where the banking sector is 800% of the country's GDP, mainly as a result of influx of Russian hot money, and that the same recipe will not apply to other countries who are already undergoing restructuring under other EU programmes.

However this is like asking people not to think of a white horse, and it has to be seen whether the markets in other countries will be unnerved by this precedent next week.

To understand the precarious situation that Cyprus has found itself in, one can draw parallels with the situation in Iceland where even there the banking sector had grown unstably large to eight times the country's GDP.    Russian money flooding into Cyprus banking system had to be placed somewhere.   Cyprus economy was too small to find a productive place for such huge inflows.   Given their cultural links with Greece, the main Cypriot banks stacked their balance sheet with Greek government debt and also built in substantial exposure to the economy of Greece when they opened full banking subsidiaries on the Greek mainland.

When Greece had to force substantial private sector write-offs on holders of their sovereign debts, Cypriot banks lost heavily and further losses were accumulated on their Greek operations as Greece experiences what seems like a never-ending recession with features of a depression.

Putting such austerity conditions on the Cypriot population, apart from other fiscal tax increases, is unfair.   It breaks the assumption that banks in the EU are safe places and that any losses would be suffered by shareholders and debt-holders but depositors would be the last to take any hit and should be safeguarded to the fullest extent possible to preserve confidence in the European banking system.

After all the losses of Cypriot banks mostly stem from the private sector involvement write-off of some 70% of the nominal holding of Greek sovereign debt.  Given that private holders of such debt were given several assurances that no EU government would be allowed to default on its debt, one can understand that the Cyprus population is being forced to carry a bigger share of the burden than they deserve.   I cannot help feeling that the Cypriot population is caught in the cross-fire between the EU and Russia, as the EU seeks to force Russian depositors to share the burden, but cannot isolate the Cypriot population from such punitive measures.

The question  is whether the EU is a Union or not.   There are better ways to carry this burden sharing.

Cyprus bank  bailout should not go through its government at all.  Rescue funds should flow directly from its source to Cypriot banks to serve as a model for a safer European banking structure, one that breaks the pernicious link between bust banks and bankrupt governments.   Each bank should be dealt on its own merits but as a condition for capital injection shareholders and bondholders should be wiped out, more cautious bank management installed, but depositors should have been protected up to a much higher limit than the insured value of hundred thousand Euro.

And funding of such bank recapitalisation should not be a burden on other countries.   The ECB should have the necessary authority and wisdom to monetise such capital injections through the ESM, a process that can be fully reversed when the economy heals and the banks as recapitalised switch from zombie banks to real banks contributing to economic growth and returning good value to its shareholders.

The Cypriot saga should also serve as a warning for Malta.    Our banks do not have the same problems as those of Cyprus.   Our main banks are domestic affairs with no exposure to foreign operations.

The balance sheet totals of our main four domestic banks ( BoV, HSBC, Lombard and APS)  is just 203% of our GDP compared to 800% in Cyprus.   Private sector debt with these four banks is just 116% of GDP and is very well structured with impairment losses of just 0.44%.

What Malta needs to be careful with is the foreign banks who do foreign operations and whose performance has little impact on the domestic economy.  The risk with such organisations is mostly reputational.

But extra care is needed with deposit type banks that have sprung up out of nowhere these last few years who are only interested in raising local deposits to invest overseas and help themselves to the deposit protection insurance guarantee.   These banks are a grave risk to the Maltese banking system and should never have been allowed to operate with a full banking licence if they restrict their function to mere deposit taking.

For me this shows that the regulatory function of the local financial structure needs to be reconsidered.  In line with international trends the regulatory and supervisory function should migrate back to its origin within the central bank and the remaining functions of the MFSA, including the Registry of Companies, should become a division of Malta Enterprise to promote financial services with the full co-operation of Finance Malta.    The Regulatory and Promotional functions sit uncomfortably within one organisation as presently.






Friday, 15 March 2013

A summit with sense

The choice is between
a German Europe
and a
 European Germany
The EU summit just ended in Brussels, the first one attended by freshly elected Prime Minister Muscat, has been smooth and positive unlike many recent summits where strong disagreements led to disharmony or dirty compromises.   

The last summit which involved agreement on the EU Budget 2014 - 2020 was acrimonious and the Budget deal agreed does nothing to push EU competitiveness in the world forward, nor does it contribute to more social cohesiveness.  It is with good reason that the European Parliament is refusing to endorse such Budget.

It would be an exaggeration to suggest that the positiveness had anything to do with Muscat's presence.  But it is refreshing that finally European leaders seem to be moving along the trend started since President Hollande was elected to the French Presidency last May, that austerity alone is counter-productive.

Rather then austerity I would rather term the needed sacrifices as restructuring of sectors which have lost competitiveness coupled with investment in areas targeted to produce economic growth and employment.

It is refreshing as well that the EU leaders have agreed to a  summit next May focusing on Europe's energy policy.  Declaration that all Europe should be connected to the European grid and gas network by 2016 would indicate a possibility to accelerate the gas pipeline linkage with the continent with EU aid and this would solve transportation problems or reduce its cost.   It might even be possible to reduce the gas storage requirements.

Allowing more fiscal flexibility to countries that are successfully restructuring makes sense as long as these countries continue working towards recovery of fiscal sanity by the joint effect of economic growth and economic restructuring.   Rigid applications of fiscal calendars are often  counter-productive as they only lead to higher unemployment and waste of resources needed to generate growth.

What I still need to be convinced of is whether the German block countries ( Germany, Austria, Netherlands, Finland and others) are finally accepting that they have a social and moral obligation to speed up the restructuring process by taking steps to reduce their surpluses and generate higher internal demand which would translate in imports of goods and services from restructuring countries.

In the end the healing process for Europe's economic problems cannot be based on the Germanisation of the whole continent.  It is much more productive, effective and in line with the objective of an 'ever closer Europe' to have Germany ( and its allies in the German economic block) properly Europeanised.




Monday, 11 March 2013

Spot on

These are quotes from my article published last Sunday in the Malta Independent on Sunday and on this blog before the election result was known:


Polls by their own nature are indicative and when a third of the population refuses to participate,  polls should be taken with an even bigger dose of caution.    But if their consistency is taken in conjunction with other circumstantial evidence then I just cannot imagine that the polls will be proved materially wrong by the final result.
And again:

Taking the consistency of the polls and the various pieces of circumstantial evidence gives me confidence enough to predict that Joseph Muscat will be Malta’s next prime minister and with a margin that gives him a comfortable working majority.  If Labour can’t win this time, then when?
Some writers do look facts in the face and have the courage them to state them when others are too cautious to put themselves out on a limb.   There are others who cannot accept reality and continue insulting the people rather than respect their sovereignty.




Sunday, 10 March 2013

The government we deserve (2)




This article was published in The Malta Independent on Sunday 10th March 2013
 
Writing an opinion column when the election is still in progress, knowing it will be read when the election result is out, is tricky.   I could play it safe and write something sterile and non-committal.   Who would want to read that?
 
searched what I had written before in similar situations.   Writing in this column on 9th March 2013 ( almost 10 years ago to the day) I commented as follows on the EU referendum result before it was known:

My major pre-occupation …….. is more on the possibility that both camps will declare themselves as the winners and we could have two large crowd masses celebrating within walking distance of each other, what ought to be a mutually exclusive victory.

That was spot-on.    On 9th March 2008 (almost five years ago to the day) I commented as follows in this same column:

My best judgement remains that the balance remains inclined towards voting out the PN, which is not quite the same as voting Labour in though this finesse may be lost on many.

Not quite spot-on but given the narrow difference involved in the final result it was well within the statistical margin of error.

Where do we stand this time after a never ending campaign which if one goes by the official and unofficial polls, has changed pretty little and has left the odds well in favour of Labour, in a dimension outside the margin of error? 
Let me make it clear that I am not privy to any information which is not in public domain and that these comments are purely personal conclusions based on experienced observations of things as they evolve over time.

Polls by their own nature are indicative and when a third of the population refuses to participate,  polls should be taken with an even bigger dose of caution.    But if their consistency is taken in conjunction with other circumstantial evidence then I just cannot imagine that the polls will be proved materially wrong by the final result.

What circumstantial evidence?    Firstly  that in 1996 with Fenech Adami just finishing two consecutive terms and Alfred Sant presenting himself for the first elections as Leader of the Labour Party, the electorate gave Labour a sizeable victory.  Compare that to the present situation where the fatigue of the outgoing Gonzi government after three consecutive terms is much bigger than it was in 1996 and after a third legislature mired by internal feuding, corruption allegations and vintage arrogance. 
 
As a matter of course the Maltese electorate tends to vote for alternation every decade, a typical course of the democratic cycle.   The Mintoff rebellion forced denial of that trend in 1998.    Labour forced the electorate to keep it out of power in 2003 over the EU issue and Sant did it again in 2008 by clinging on to leadership against conventional wisdom that new policies require new leadership. 

This time the reversion to mean principle should apply.   There were no higher order issues in this election which could have forced the electorate’s hand from operating in the normal course of things.

Another piece of circumstantial evidence to be taken into the consideration is that the election campaign has been won hands down by Labour.  Labour’s campaign was a model lesson in integrated marketing delivering a consistent positive message with the various channels reinforcing each other.   On the other hand it is evident that the PN campaign was upset by the change in the PL Deputy Leadership  whereby Louis Grech became the right hand man for Joseph Muscat.   Whilst Labour hit the ground running on 7th January,  the PN were totally lost in the first three weeks of the campaign by the double blow of Louis Grech’s appointment and the detailed and creditable energy plan that Labour launched in the third day of the campaign.    The PN were forced to put the last billboard as their first one, use sterile clich├ęs for their campaign, launch their electoral programme in one single shot which omitted to include any proposals for improved measures of governance, and issue costings of their programme which are completely detached from reality.

One tends to get the impression that PN changed their direction of the campaign at least twice in its course.    Like a football team that changes its coach too often in the course of the season, the end result is often not what is wished for.  So we have seen the PN’s campaign  switching violently from neutral to strongly negative and back to positive.  We have had logos disappear mid-stream,  billboards on specific measures issued out of sync with their announcement,  and we have seen at least four different interpretations given to a crucial pledge for recovery of costs incurred for free medicine that goes out of stock.

In the direct debates between the Leaders and the Deputy Leaders the PN failed to score any knock out blows. If anything in the one best organised by The Times,  Dr Gonzi scored quite a few own goals.   Admitting not being familiar with Labour’s manifesto is political suicide.  Refusing outright to consider resignation in case of electoral defeat projected lack of emotional intelligence in knowing when it’s time to go.  It reinforced the perception of arrogance and clinging to power whatever it takes; a perception that had been building up throughout 2012 as the Gonzi’s government limped on without parliamentary majority even though the national interest would have been served better by early elections.

Another piece of circumstantial evidence which corroborates the swing away from the PN,  is Labour’s parading various well known former PN supporters and executives who not only fell out with their traditional party but extrovertly switched to Labour and felt proud to shout about it in TV debates, public conferences and billboard messages.    The PN could not find a single inverse replica and had to rely on a disgruntled Club barman who switched allegiance after he was shot out by Labour on suspicions of substance abuse inside the Club.

The last piece fell into place in the final mass meeting.    Having President Fenech Adami address the  Granaries mass meeting points to desperate measures in the face of desperate circumstances.   Dr Gonzi had committed a grave mistake earlier in the campaign when he chose to reserve judgement on the performance of current President George Abela because his son criticised the PN government at a Labour meeting.   Dr Abela enjoys high public esteem and support rating, making him the most effective republican president.  Reserving judgement on his performance is an insult to the general acclamation of the Maltese nation.   Inviting President Fenech Adami to address a political party meeting breaking the tradition that presidents continue to respect the position of their title ( and benefits) by avoiding direct involvement in party politics, shows further disdain to the wishes of the majority.

Taking the consistency of the polls and the various pieces of circumstantial evidence gives me confidence enough to predict that Joseph Muscat will be Malta’s next prime minister and with a margin that gives him a comfortable working majority.  If Labour can’t win this time, then when?
Can I be awfully wrong?   Of course I can.  Things happen.   In that case my next article would be an apology and an explanation in the strong tradition of famous economists who excel in explaining tomorrow why their predictions of yesterday did not materialise.

At this stage what is important that everyone respects the sovereignty of the electorate.   Every country gets the government it deserves and the people are always right.   Whether by a single vote or by several thousands the will of the majority has to prevail in full respect of democratic principles and the rights of minorities.   In democracy there are no losers, there is only alternation where the losers of today are the winners of tomorrow.   Every defeat contains the seed for the next success just as every success has the recipe for its eventual defeat.

My final appeal is to political leaders to lead by example.   If the result is close let’s call it a photo finish and keep celebrations corked until the result is clear and final.   But if the result is not close it is absolutely important for the loser to make early concession as much as it is important for the winner to demand its supporters to celebrate without offending, and that after Monday’s post-election qausi-holiday, life returns to normal on Tuesday.

Thursday, 7 March 2013

Ten reasons why this time it's Labour

  • Because alternation is the essence of democracy.

  • Because like the third term Labour Government of 1981-1987, the third term PN government of 2008 - 2013 got too comfortable in power and helped themselves to the public jam jar (  EUR 500 a week pay rise behind our backs) and at the very least are politically responsible for massive corruption happening under their nose.

  • Because a 4th consecutive term would be a license to more executive comfort, disdain and corruption.

  • Because the PN have suffocated the business environment and household's purchasing power through cruel utility tariffs, missing several opportunities to switch to gas and protect our pockets and the environment.

  • Because the PN government has practically doubled the national debt in 10 years from EUR 2565 million as at end 2002 to EUR 4850 million ( estimate) end 2012.  We can't keep doubling our national debt every decade especially if we have no commensurate improvement in our infrastructure to show for it.

  • Because Joseph Muscat has managed to transform Labour in less than five years from a timid, defensive, inward looking negative organisation to a bubbly and positive movement.  If he can do the same for Malta we can really leverage our potential and get maximum mileage for taxpayers funds.

  • Because Labour came out with an energy policy which has left its critics breathless and confused.

  • Because Labour has committed itself to pass good corporate governance laws such as the Whistle blowers Act, law re political party funding and law removing prescription for political corruption offences, as a priority and before major executive decisions start being taken.   The PN did not find time to pass such essential leglisation in their 25 year tenure.

  • Because the Labour team has an interesting mix of experienced and fresh talent including some prominent candidates like Emanuel Mallia, Edward Scicluna and Konrad Mizzi who are only joining politics now after a successful career in the private sector.

  • Because in the end it is a simple choice between "Malta tal-klikka biss" and "Malta taghna lkoll"

Tuesday, 5 March 2013

Joseph with a billboard monopoly

If Joseph's back and front billboard is the best the PN could come up with in the closing days of this campaign then really they are already toast.

It confirms what I have stated before, that the PN were over-confident and disdainful towards Labour and never in their wildest dream they have configured that the PL was capable of making such an effective campaign which is a text book model of effective integrated marketing.

They were caught so much off-guard even though they had the advantage of blowing the whistle that they had to start with the billboard of Gonzi and Simon looking up, as if watching the festa fireworks, which normally they would have been scheduled to finish the campaign with.

Result is now they have nothing to wind up this campaign with except silly negative billboards  depicting Joseph as if he were a drug dealer.   No one can take them seriously anymore.

Result is that in the closing days of the campaign Joseph has a monopoly on billboards, front and back included, and Gonzi is nowhere to be seen.   

They chose a long campaign purposely to asphyxiate Labour.  Instead they are breathless themselves whilst Labour is marching on like a seasoned long distance runner.

They must be still arguing which is the best tag line to use for the closing message:
  • Futur fis-sod
  • Xoghol*Sahha*Edukazzjoni
  • Qabza ohra ta' kwalita'
Labour have no such problem as they have been consistently promoting:

  • Malta taghna lkoll


Monday, 4 March 2013

He can't help putting his foot in concrete

Dear Deputy Leader Dr. Simon Busuttil has done it again.   See what he told us in this morning press conference:

Busuttil Press Conference 04 03 2013 - The Times

If they truly have the
country's interest at heart
they should preserve long standing
consensus on financial services
He is reported as follows:

Dr Busuttil cited Spain, Portugal, Cyprus and France as examples, arguing that economic growth and unemployment figures had risen since leftist Francois Hollande took over from conservative Nicolas Sarkozy almost one year ago in France
If unemployment has risen in France since President Hollande took over last summer much worse happened in Spain since Rajoy from the right took over from socialist Zapatero.   And in Italy unemployment is exploding and I don't think that Simon would consider Monti or Berlusconi from the left.

It is obvious that Simon has lost it and he is lost for arguments to scare off PN voters from switching to Labour.

It is despicable that Simon continues to argue that under a PL government Malta would crash into a financial wall and would be forced to seek a bailout from the EU.   Even if this were remotely true, as a prospective Leader of the Opposition he should be careful not to say anything that could destroy people's confidence in their government  which is indispensable for the successful management of the public debt profile.

But Simon ought to know this is not true.  Simon ought to know that the PN government has practically doubled our national debt in the last 10 years and that they are leaving a legacy of Public Debt close to 90% of GDP, Enemalta's debt included.

Yet because the private sector in Malta is over-liquid and the government has never had the need to depend on foreign investors to raise whatever it needed to borrow, we have not experienced what other countries with even lower debt to GDP ratio ( e.g Spain) have experienced.

Credit goes to the people and to our banks who always operated conservative lending policies avoiding speculative asset bubbles.  It should not go to the government that borrowed so much that it has debt going out of its nose and ears.

We have survived well and enjoy macro-economic stability only because the thrift culture of our private sector and households is bigger than the fiscal irresponsibility of the government.   We did fairly well in spite of not because of government.

As I have been repeating:

"Poplu bil-ghaqal jixraqlu gvern bil-ghaqal".

Sunday, 3 March 2013

No place for Merkel

Angela Merkel and David Cameron at the EU summit
Merkel and Cameron
both seem bent on destroying the EU

Unlike elections campaign in France, Greece, Italy and Cyprus,  German Chancellor Angela Merkel hardly received a mention in Malta's election campaign.

In the first weeks of the election Prime Minister Gonzi made reference to the fact that Chancellor Merkel stated that Malta should be considered as a standard bearer for countries on how to handle the crisis.   The comment was soon lost in the wash.

As an economist with grave concern about the future of the Euro and the single monetary system, the collapse of which could have serious consequences not only on its members but on the whole world economy, I feel that post-election Malta should work hard to form a Southern Europe pressure Group to bring the German block to become aware of the basic fact that their efforts to Germanise (economically speaking ) the whole Europe will in the end backfire with grave political consequences.

While elections in Cyprus and Greece delivered results as desired by Merkel & co, mostly due the fact that these countries really had no choice as they depended on EU bailout to avoid economic implosion, in France and now in Italy the electorate has decided to defy Merkel and vote against her liking.

In France they have elected a socialist who has still to deliver on his promise to force Merkel to switch from austerity to growth in order to pilot Europe out of this never ending recession.   In Italy the electorate delivered a stalemate which in the end has delivered a veto to two comedians, Berlusconi and Grillo, who enjoy making fun of Merkel and her ultra conservative policies.

Unlike many commenatators, I think the Italians have voted very intelligently.   They could not endorse Monti and the PD who seemed willing to toe the Merkel line when in fact the country needs to couple reform with growth not with austerity.    At least in delivering the message to Merkel the Italians have produced a stalemate through the involvement of two clowns; much better than opting for some extreme solution of the right or left which could threaten the democratic foundations of the country.

A new Maltese government must, in conjunction with others, bring pressure to bear for the EU to bring about successful economic restructuring by economic growth policies based on fair burden sharing where the surplus countries have to adjust as much as the deficit countries.  This is indispensable to restore a healthy equilibrium  as a sound platform for economic growth that benefits all.

Here is an extract in the conclusion of my Thesis on HOW TO SAVE THE EURO which is available on the top line pages of this blog:

The alternative to Germany's refusing a Marshall Plan approach in devising solutions to the Euro crisis is that Europe will suffer the same consequences of the 1930's and 1940's that followed the Versailles Treaty of 1918.  Obstinacy to enforce austerity through Versailles methods could prejudice all that the EU stands for.  Six decades of peace and prosperity could be washed down the drain due to lack of visionary leadership to turn a crisis into an opportunity for further European integration.  Current leaderhip style using the crisis to appear macho in the eyes of domestic audience , risks fuelling the extremes of nationalism.
Joseph Muscat has his work cut out for him where Lawrence Gonzi has failed, presumably because he was not even concious of the risks in the direction that the EU is heading to.   Democracies rarely survive never ending recessions.