Tuesday, 30 April 2013

Economic growth is everybody's business

Read this from The Times on line today:

"The Nationalist Party said it could not participate in the Action Committee for Economic Growth.
The PN said its parliamentary group had discussed the invitation, made to former finance minister Tonio Fenech but it could not accept because Mr Fenech would have been expected to act as a consultant to the government. This went against the constitutional role of the Opposition in a parliamentary democracy.
 The PN said it was committed to contributing constructively for Malta's constitutional, economic, social, and cultural development, as was already shown in the Budget debate."
It is strange that the PN parliamentary group has decided  this when the leadership election is due next week.   For prudence sake one would have expected them to allow the elected leader to have the final say on such matter rather than have his hands tied before he is elected.

Are the PN saying that the Opposition has no duty to assist government achieve economic growth?   Yet they declare their wish to contribute constructively for economic development.    It seems contradictory.

Long term policies for economic growth are very much the business of the party in Opposition.   As an alternative government they should wish to influence the economic scenario they would one day find when the wheels of democratic alternation places the responsibility of governing back on their shoulders.

Economic growth requires productive investments.   And even the best and most calibrated investments will take several years to analyse, plan and execute and several more years after that to start delivering the expected returns.

If PL in opposition had adopted the same reasoning when the PN in government wanted its co-operation to develop the financial services industry on the basis of consensus, we would not have the successes registered to date in this sector.

The government is there to govern for the term of the legislature.  The Opposition is there to constructively oppose and watch over the government.   But this should not stop government and opposition working together especially on policies which span several legislatures and where consistency is needed especially in the eyes of foreign investors who demand stability of policies irrespective of which party is in charge from time to time to execute them.

I still remember when in the heat of the summer of 1998 in my role as Chairman of Mid-Med Bank we were working with HSBC on the IPO on international marketsof the then Maltacom .   The instability of Mintoff voting against the Labour government in parliament started undoing the good work we had done in the roadshows with foreign investors.

I organised a conference call with such investors and invited Mr John Dalli, then the main opposition spokesman for  the economy and finance, to re-assure investors that if there a change of government the IPO terms would be honoured.    John Dalli did not think twice accepting and helped us save the IPO from failure.

The country's interest should come above those of any political party.  Economic growth is everybody's business.

Tuesday, 23 April 2013

Both wrong

Der Spiegel today reported a spat between the EU Commission President Jose' Manuel Barroso and the German Foreign Minister Guido Westerwelle on whether growth or austerity is the right solution for Europe's never ending economic problems and drifting recession.

File:José Manuel Barroso MEDEF 2.jpg
Barroso maintained that:
  • Austerity has reached its limits
  • Time for growth
  • Even if right a policy needs political and social support
  • In practice austerity is crushing growth
  • Economic growth is needed to bring sick members back to health
  • So the solution is allowing more time for deficit members to correct their fiscal imbalance
Westerwelle maintained:
  • Europe must insist on budgetary consolidation
  • Fiscal laxity will increase unemployment not solve it
  • Growth cannot be purchased with new debts
  • Growth and consolidation are two sides of the same coin so in spite all evidence to the contrary we should continue hoping that austerity in the end will deliver growth
embracing his boss
Barroso is wrong not so much in the diagnosis but in the prescription.   Whereas there is no doubt that only growth policies can solve EU's economies problems allowing more time for deficit countries to correct their fiscal policies will, on its own, merely extend their problems and increase their accumulation of debt.    What is the sense of bailing out five EU economies but then leaving them eternally in the sick bay?   The purpose of a bailout should be to bring the sick patient back to health not merely to save them from death and keep them on eternal life support.   Democracies cannot withstand extended rounds of austerity measures.   Without growth, economic restructing is too painful for democracies to persist as long as it takes.

Westerwelle is wrong becasue all empirical economic evidence shows that austerity does not deliver growth.   See how the UK expirement with austerity is failing even though they still have control over their rate of exchange policy which Euro countries in distress have not.

So what needs to be done?

The reality is that deficit countries need more than just more time to work their way back to economic health.  They need a true act of soildarity from the German bloc.  Rather than prescribe mere austerity Germany et al need to launch a huge reflation of their own economies through tax cuts and transfer of purchasing power to their population so as to create export demand for the goods and services of EU's economies in distress.

It just does not make sense for Germany to run a budget surplus at this stage of the economic cycle.   Germany should be running an increasing deficit to assist the economic adjustment of countries swallowing austerity through economic restructuring.

It takes two to tango.   Succesful EU wide growth needs action both from surplus countries to stimulate their internal demand as much as from deficit countries to render their economies more competitive through painful internal devaluation so as to make the most of the demand generated by the surplus countries' reflation.

If Germany is going to stick rigidly prescribing austerity to others without doing their necessary part by reflating their economy, the EU and the Euro are doomed.   And the biggest loser would be Germany as they are presently enjoying the best benefits from the monetary union.

Monday, 22 April 2013

Facing reality

I have long been arguing that our universal free entitlement to public health care is unsustainable.

My latest contribution in this vein is dated nearly a year ago can be accessed through this link:

modern-titanics-5-sustainability of free health care services

A change of government does not change basic facts.  And the fact is that economic managers can control the price of a commodity or they can control its quantity but they cannot control both.  In this case the commodity is public health care services and the price has been controlled by putting it as zero, free of charge, to all members of society irrespective of their status and needs.   As a consequence governments can never provide enough resources to meet the demand at price level zero and unavoidably rationing creeps in, through over-crowding, long queues and waiting time to access to such 'free' services.

One could make the same argument about free education but the reality there is different.   Whilst the entry in the education life cycle is reducing due to low birth rates, the entry level in the critical age of health care needs is exploding exponentially as baby boomers go on pension and pensioners enjoy longevity which demands more resources and expensive interventions which were not demanded when longevity was lower.

It is therefore not without reason that the Ministries complaining most about the state of the handover from their predecessors are those related to health care, including our hospitals, health centres and care of the elderly.     Unpaid private suppliers whose claims were not budgeted for, chronic shortage of resources in our hospitals and other similar complaints cannot be resolved by trying to micro-manage the Emergency Department by elected politicians.  Unfortunately such micro management could complicate rather than resolve problems as political pressure being what it is,  patients from the Minister's district will receive preference over others, even those more deserving.

The political corpse must respect our intelligence.  Irrespective of political commitments made such commitments have not been made for ever and if we have to change anything in future we must start sensibilising public opinion as of now.   We must admit  that at some point in future, if we are going to protect our fiscal sanity, we must take hard decisions to keep our health care system sustainable and only free to those that cannot afford to pay.   In the formula there must be a new way of doing business at our state hospitals and elderly homes where management efficiency will produce more with less.

Even if changes will go through in the next legislature the work for such changes has to start now.

Sunday, 21 April 2013

Varied musings

This article was published in The Malta Independent on Sunday- 21st April 2013

The President’s speech

A lot of smoke has been raised about the partisan nature of the speech that the President read at the opening of Parliament. What is all the fuss about?
It is a tradition that on such occasion the President reads a speech written or approved by the Prime Minister that outlines the key points of the election manifesto approved by the electorate. There is nothing more partisan than an election manifesto, so there should be little surprise that the President’s speech on such occasion has, by its very nature, to be somewhat partisan.
When there is a continuation of the same party in government, usually no issue arises. When there is a change of the party in government, this could create some discomfort for the President who would have been appointed by the previous government but has to read the speech prepared by the new administration which, of necessity, is critical of the previous one.
But this in no way renders the President partisan. Everyone knows that the President is reading an address prepared for him not by him. The Queen in the UK has been doing it for over 60 years and it is widely accepted as part of the democratic tradition. Nobody infers that the Queen is partisan. Acting President Pawlu Xuereb, at the opening of Parliament in 1987, had to read a speech very hostile to the previous Labour administration of which Xuereb was a key component. Nobody interpreted the speech as if Xuereb was repudiating his political credo. No fuss was made about it.
I find it odd that the President himself has expressed the view that this tradition should be abolished and the speech should be read by the Prime Minister himself. I disagree. Tradition counts, and should not be thrown out of the window because the current incumbent of the Presidency feels uncomfortable. What should have made the President and all his predecessors uncomfortable was President Emeritus Fenech Adami addressing a political meeting on the eve of the last election. That indeed was an act of disrespect to the Presidency.

Lady Thatcher

Any person who forces the world to turn his or her name into a noun with an ‘ism’ ending must be someone really special.
Lord Keynes left us Keynesism; Marx left us Marxism; Buddha left us Buddhism. So what should we make of the fact that Baroness Thatcher left us with Thatcherism?
Thatcherism arouses very conflicting emotions to people on opposite side of the political philosophy spectrum. For conservatives, Thatcherism is the re-assertion of market rule over too much government intervention that was creating excessive socialism and economic rigidities. This had led to the ‘winter of discontent’ in Britain in 1979, when cold weather and indiscriminate strikes, led by discredited Arthur Scargill who created far too many problems for Labour Prime Minister James Callaghan, had brought life to a miserable halt before Thatcher won her first election in May 1979.
For the liberals, Thatcherism destroyed the social fabric of modern societies, brought about great disparities of wealth and income and contributed in no small measure to the banking crisis that hit us in 2008 and is still haunting us.
The truth – as always – is somewhere in the middle. In 1979, Britain needed Margaret Thatcher. The unions in Britain were abusing their power and ordering strikes as a first order rather than as a last resort. Labour was too docile to stand up to this abuse of power and the country needed an iron lady who was prepared to go through strikes, come hell or high water, until the extreme union leadership was discredited and removed.
As with most human beings who register a sequence of successes, there comes a time when the person’s determination and strong character morphs from a catalyst for positive change to undiluted arrogance. When this happens, the person stops analysing and taking objective decisions and gradually turns subjective, deciding on the basis that this is right because I say so.
This is what happened to Margaret Thatcher. After substantial successes between 1979 and 1984, the tandem of re-elected leaders on both sides of the Atlantic – Reagan and Thatcher – pushed their economic credo beyond the limits of prudence. Their strong belief in the markets’ unconditional ability to allocate resources fairly and effectively, their misplaced belief that financial markets can effectively self-regulate, their false belief that government is always the problem and never the solution, sowed the seeds of the financial crisis that blew up long after these leaders had retired.
Thatcher never lost an election. She had to resign as Prime Minister when her cabinet revolted and could not take her viciousness anymore, especially when she practically started insulting those who opposed her decision to impose a highly regressive and unpopular poll tax.
Thatcher is a textbook example how an overstay in power can convert the ablest of leaders into arrogant and ineffective specie.

National Debt

A lot of debate goes on about what constitutes a prudent level of national debt compared to a country’s GDP. The euro entry criteria indicated this to be 60 per cent but, following the financial crisis, 90 per cent has become an accepted norm.
Frankly, taken in isolation, the percentage of debt to GDP is of little relevance. Such level of debt has to be considered alongside other factors which are equally important. These include:
a.  The overall state of the economy (developed or developing).
b. The service costs of such debt (a low interest burden makes higher debt more sustainable).
c.  Whether the debt is external or internal.
d. Whether it is in home or foreign currency.
e. The debt’s term structure (ie whether the debt has to be rolled over frequently or is due in the long term).
f. The level of indebtedness of the private sector.
g. The productivity of the assets financed by the debt.
h. The resilience of the country’s economy generally, especially in the face of external shocks.
This explains why Spain and Ireland have grave fiscal problems despite their relative low level of national debt to GDP before the crisis, whereas Japan needed no bailouts despite a debt to GDP of 250 per cent.
In this context, Malta’s current level of national debt is not worrying. What is worrying is the speed with which it has grown over the last decade. This speed must be reduced. Malta’s nominal economic growth must start exceeding the rate growth of its national debt to ensure that it stays sustainable.

Tuesday, 16 April 2013

Because we make things

When Angela Merkel was quizzed about the resilience of the German economy she curtly replied : "because we still make things".

This delivered the message that Germans did not allow their economy to become unbalanced towards the service industry and Germany still boasts of a strong manufacturing base.

This should be a clear message for an ex-Minister who once wanted to wager that within a decade Malta' economy would become totally service oriented and we will have no manufacturing base.   It is utterly important to keep our economy well diversified and for manufacturing to remain an important component thereof.  The Cyprus debacle is a clear eye-opener in this respect.

The question is how does the German economy manage to keep itself competitive in spite of its high cost base?

Basically it is all a matter of the efficiency and proficiency of their labour.   Although the average hourly cost of a German labour  is Euro 37 compared to  Euro 25 in the US,  Germany remains a sizzling export machine, where only the competitive survive.

Edward Luce ( FT - April 15, 2013 - 'Why is the US looking to Germany for answers') goes a long way to provide an answer to this mystery.

Germany channels roughly half of all high school students into vocational education stream from age 16.  More than 40% of Germans start as apprentices.  By comparison only 0.3% of Americans do so.   The result is the Germans are very much work ready when they leave high school, whereas Americans are very much behind producing school leavers with skills that are not in demand by the employment market.

Hear this! According to Luce, 15% of taxi drivers in the US have a degree, 25% of sales clerks are graduates and 5% of janitors have a bachelor degree.   Considering that College education in the US costs a bomb and graduates have to nurse student loans for a long time after they finish their studies, it is unbelievable that there is so much mismatch between the skills taught at Universities and skills demanded by the market.

In the US only the top students who proceed to PhD's and post grads enjoy rising incomes on the basis of their education and often they do dramatically so.

In spite of more than 7% unemployment in the US there are 3.5 million unfilled vacancies, jobs waiting to find employees with skills that are not being turned out by the education system.  

The biggest attraction for foreign investors are not fiscal incentives or tax breaks.  It is availability of trained and efficient human resources.  Siemens in Germany graduates 10,000 apprentices per annum in mechatronics - a hybrid of mechanical engineering and computer science.

In today's The Times a jointly co-authored Opinion by leaders from the University and The Chamber of Commerce stress the importance of co-operation between both organisations.   Indeed!   But we must work harder for more to be done even at the level of MCAST.   A good vocational course often gives students a better passport to employability than a first degree if this is considered by the student as the end of the educational journey.

Malta must continue making things as well.

Wednesday, 10 April 2013

Thatcher's legacy

Any person who forces the world to turn their name into a noun with an "ism" ending must be someone really special.

Lord Keynes left us Keynesism. Marx left us Marxism. Buddha left us Buddhism.

So what should we make of the fact that Baroness Thatcher left us with Thatcherism?

margaret-thatcherThatcherism brings very conflicting emotions to people on opposite side of the political philosophy spectrum.   For conservatives Thatcherism is the re-assertion of market rule over too much government intervention that was creating excessive socialism and economic rigidities.  This had led to the winter of discontent in Britain in 1979 when cold weather and indiscriminate strikes, led by discredited Arthur Scargill who created far too many problems for Labour Prime Minister James Callaghan, brought life a miserable halt before Thatcher won her first election in May 1979.

For the liberals Thatcherism destroyed the social fabric of modern societies, brought about great disparities of wealth and incomes and contributed in no small measure to the banking crisis that hit us in 2008 and is still haunting us.

The truth as always is somewhere in the middle.   In 1979 Britain needed Margaret Thatcher.   The unions in Britain were abusing their strength ordering strikes as a first order rather than as a last resort.   Labour was too docile to stand up to this abuse of power and the country needed an iron lady that was prepared to go through strikes come hell or high water until the extreme union leadership was discredited and removed.

As most human beings who register a sequence of successes there comes a time when the person's determination and strong character morphs from a catalyst for positive change to undiluted arrogance.   When this happens the person stops analysing and taking objective decisions and gradually turns subjective, deciding on the basis this is right because I say so.

This happened to Margaret Thatcher too.   After substantial successes between 1979 and 1984, the tandem of re-elected leaders on both sides of the Atlantic, Reagan and Thatcher, pushed their economic credo beyond the limits of prudence.  Their strong belief in the markets' unconditional ability to allocate resources fairly and effectively, their misplaced belief that financial markets can effectively self-regulate, their false belief that government is always the problem and never the solution, sowed the seeds of the financial crisis that blew up long after these leaders had retired.

Thatcher never lost an election.   She had to resign as Prime Minister when her cabinet revolted and could not take her viciousness anymore especially when she practically started insulting those who opposed her decision to impose a highly regressive and unpopular poll tax.

Thatcher is a text book example how an overstay in power can convert the ablest of leaders into arrogant and ineffective specie.

Tuesday, 9 April 2013

Fiscal slippage and the Euro after Cyprus

This article was published in The Malta Independent  on Sunday - 7th April 2013

The new Labour government’s commitment to adopt the Budget as presented by the previous administration on 28 November is strong and unshakeable.

However, when the actual deficit figures for 2012 were published by the NSO on Maundy Thursday – as everyone was focused on church visits, Good Friday processions and Easter figolli – it was a shock even to the most untrusting economic observers and must have prompted the new Finance Minister to engage in some head scratching.

The 2012 deficit that the former administration had estimated just 33 days before the year end at €180 million has, in fact, come in at more than twice that, at €362 million. From 2.7 per cent of GDP, it exploded to 5.4 per cent. Years of the patient nursing down of our debt-to-GDP ratio below three per cent in terms of the euro rules were blown away, as normally happens in an election year.

When the Budget is debated in parliament, I hope the former Minister of Finance will provide some sort of explanation as to why his estimates went so wildly wrong when he was merely projecting forward 33 days. The suspicion that the budget figures was ab initio unrealistic grows stronger, as one does not genuinely make such gross errors. The Minister was strongly motivated politically to present a rosy picture when reading the Budget for 2013 in Parliament on 28 November, not only because he knew this would be the last Budget before the election but also because, in that same week, he was contesting (unsuccessfully, as it turned out) for the post of PN Deputy Leader.

Yours truly had signalled that the projected 2012 figures appeared overly optimistic, taking into consideration the last published figures for the nine months to September 2012 and the normal income flows in the last quarter of the fiscal year (see my opinion of 2 December entitled A budget for the others). But ending up so widely out went beyond my worst expectations.

The new Minister has to choose between honouring the political commitment to adopt the Budget presented by his predecessor – even though the starting point has changed adversely in a very material way – or taking a responsible but unpopular decision to re-model the budget based on the realities as now known. He has a choice between showing the consistency of changing one’s mind in the face of changing circumstances or carrying on regardless because political commitment must be honoured, even if circumstances change.

Whatever is decided, when he re-presents the budget tomorrow, the Minister must come up with a credible plan to explain how the budget deficit is to be reined in again below three per cent of GDP so that at least our public debt will grow at a slower rate than nominal economic growth in order to break the upward spiral of debt to GDP ratio. We cannot afford to give foreign observers the impression that we have lost control of our budgetary discipline, as this may ignite self-fulfilling unsavoury prophecies.

Meanwhile, Cyprus has been bailed-out – joining the ranks of Greece, Ireland, Portugal and Spain in the bailout sick ward of the euro hospital.

The Cyprus bailout established a new precedent in that, for the first time, substantial losses were forced on uninsured but ordinary deposits, thus sending a message that uninsured bank deposits in Europe were no longer to be considered safe.

But the question remains: ‘and now what?’ Of the 17 euro countries, five have been bailed out and are in the sick bay. Two others are in a 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 such 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 have not just paid for the crisis, they have profited from it. The savings in interest payments that Germany has enjoyed since the beginning of the crisis amounted to €10 billion last year alone. In addition, 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 benefiting from export-led economic growth as the euro crisis is keeping the currency’s value on the foreign exchange market much softer than would have been the case if, under similar conditions, Germany’s currency was still the Deutschemark.

The euro crisis has so far been a party for the Germans. But it will not last. They have been warned. Italian elections have given the biggest share of the popular vote to comedian BeppeGrillo 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.”

Regardless of who is the next German Chancellor, he or she must switch from Versailles to Marshall Plan mode, or what has been gained in six decades since the beginnings of the EU will be washed down the drain.

Saturday, 6 April 2013

Time for Europe to embrace monetary change

The ECB in Frankfurt
needs to be less German

These past few weeks history has been written regarding bank regulation, bank supervision and monetary policy.

The events in Cyprus has delivered the following lessons that are being noted, considered and will have to be adopted:

  1. Banking is a risky business and therefore licensed banks need better capital ratios.   Steps in this direction have already been decided through Basel III and the EU Capital Requirements Directive IV.  But bank capital alone is not enough.  Other capital buffers are needed.
  2. Banks should not rely exclusively on deposits for their funding.   They should move part of such deposits to provide the required capital buffers in the form of senior and subordinated bonds that are not insured and that can be converted into equity in case of crisis so that the taxpayer is never again put on the hook to save banks in distress.
  3. Regulation must provide for clear pecking order for the protection of liabilities on banks' balance sheet.  Maximum protection has to be given to insured deposits, uninsured deposits have to rank ahead of senior bonds and bonds than have to rank in line with the seniority or subordination level awarded to them.   Banks obviously have to pay a higher rate to liability holders as the risk increases so that uninsured deposits must henceforth attract better rates than insured deposits.
  4. Europe must move faster to restore confidence in its banking systems to create a Banking Union and a Euro area wide Deposit Insurance Scheme.
On the front of monetary policy we have seen a Damascene conversion by the Bank of Japan (BoJ).  Following the change of government in Tokyo, BoJ has moved from a conservative to a vastly aggressive monetary policy.   Japan joins the US Federal Reserve and The Bank England in adopting aggressive monetary accommodation, technically known as Quantitative Easing  (QE).  This is basically artificial creation of money to make up for the fact that money is circulating much more slowly than before and banks are not lending money to expand the monetary base.

The Financial Times defined BoJ action as all but scattering cash from a truck which is a derivative to the symbol of throwing money from a helicopter associated with the Federal Reserve Chairman Ben Bernanke.

Can the Euro Area governments, especially Germany, continue  to deny the ECB from responding to Europe's economic crisis with similar QE and other monetary measures?     Can we be happy with saving countries from economic death through bailouts but keeping them eternally in the sick bay as we are not offering proper medicine to restore them to health?   Saving someone from death is not the same as making them healthy again.

I would argue that in the absence of the necessary structures to take common fiscal measures to stimulate pan-Euro area economic growth, Europe needs more monetary accommodation than other countries, not less.

If institutional arrangements deny the ECB a clear mandate to adopt monetary easing because the ECB is tasked only with an anti-inflation mandate and bears no responsibility for economic growth and other social objectives, then Europe must do something to understand that monetary policy cannot be divorced from other economic realities.      I would not interpret the ECB mandate so narrowly.   The ECB has responsibility for price stabilisation both to avoid inflation as much as to avoid a depression.  If inflation falls below the 2% target the ECB has already the mandate to adopt whatever measures are needed, including QE, to restore price stability.

The ECB should also be facilitated to depart from the 2% inflation target when other economic objectives are not being met.     Who would not prefer 3% inflation and unemployment at 5% rather than 2% inflation and 10% unemployment?    Who can put a price in political and monetary terms to the whole generation of young unemployed in Spain, Greece, Cyprus et al?   This represents utter waste of resources.

Restoring Euro countries in distress to sustainable economic health and growth is conditional on their banking system being sufficiently restructured and recapitalised so that their banks can start executing properly their function to transmit to the market the interest rate policy decisions taken by the ECB.   Reducing interest rates alone will not be enough firstly because interest rates are already low and a quarter percent here or there won't make a difference, and secondly because borrowers in countries in distress are having to pay much higher rates on their banking facilities, if they find such borrowing facilities at all.

The obsession to continue financing the recapitalisation of such banks through the fiscal account either of the sovereign concerned ( that would already be in distress and could thus be prejudicing its own sanity to save its banks) or through contributions or commitments by other sovereigns through the ESM must end.   The ESM can be given a banking licence and be fully monetised by the ECB to break the vicious link between the governments and the banks that is working to reciprocally pull down both below the water line.

Insolvent banks that have lost their capital and their deposits must be resolved with creditors suffering the consequences in line with a clear prioritisation mechanism where shareholders and subordinated debt holders get wiped out before senior debt is converted to equity and uninsured deposits be converted to blocked senior debt as necessary to avoid erosion of the deposit base.    But banks that are merely insufficiently capitalised must be capitalised by  ECB monetisation through the ESM to render them effective again and efficient in transmitting throughout the Euro area the monetary and interest rate decisions taken by the ECB council.

Otherwise what do we need an ECB for?  Who needs a fire engine without water in its bowser?

Finally a word for those who are still dreaming about  compensation for the former shareholders of the National Bank of Malta.   Cyprus has just provided the clearest living day example that when a bank is insolvent not only the shareholders get wiped out but if necessary all other creditors including uninsured deposits.    The National Bank in December 1973 was insolvent to the point that it had lost all its capital.   It was restructured and re-capitalised and brought back to health under a new legal structure through Bank of Valletta.   Depositors were spared.   Shareholders are risk takers, they take the plum when the going is good they lose it all when their management they appoint misbehaves.  Period.

Tuesday, 2 April 2013

Ex-Fin. Min. capacity to err knows no limits

He should look us straight
in the eye and explain
On the 28th November 2012 the former Minister of Finance Mr Tonio Fenech presented the Budget for 2013 in parliament even though he knew that government had no parliamentary majority to get it approved.

There were 33 days left till the end of the the year.  Surely one must assume that government had a clear indication of what its financial position was when the budget was being read and could be fairly accurate in budgeting a mere 33 days forward.

So when the Minister projected that the Central Government deficit for the whole of 2012 will be  €180 million equivalent to 2.65% of the GDP, which reduces further to 2.3% of GDP when adjusted to include in the deficit calculation elements of extended government,  it was accepted by most..... but not by all.

I for one did not accept it.    The figure did not make sense with the published deficit for the 9 months to September 2012 and the normal flows in the last quarter of the year.

I made the point extensively in an article found of this blog,  specifically:

A Budget for the others - 02 12 2012

where I said:

The published deficit for the first nine months of 2012 is €282 million but, according to the figures given in parliament, by the end of December this deficit will be reduced to €180 million. So the Minister is planning that the last quarter of 2012 will prove cash positive to the tune of €102 million compared to cash negative €31 million last year and cash positive €3 million in 2010.
Don’t look for any explanations in the budget speech as there are none, even though the minister found all the time to explain much less relevant items. What I can say is that the actual figure for the deficit of 2012 will only be announced late in March and by that time we could be in the post-election period.

The numbers do not add up - 29.11.2012

The end, like the ides, of March have come and now we have the official central government deficit for 2012.   NSO released them on 28 03 2012, and guess what?

Rather than the projected deficit of  €180 million the deficit came out as € 362 million, more than double the amount projected in the Budget?

How can anyone calling himself Minister of Finance and professional accountant make an error of this size?    You just don't!   This was not error.  It was a deliberate attempt to mislead and give a totally unrealistic picture of government's financial position in a desperate attempt to turn around  government's fortunes at the polls.

The former Minister of Finance has an obligation  to explain why he erred so grossly.   And if he made such a gross miscalculation when just projecting 33 days forward,  what confidence can we have that the other figures in the budget for the whole 2013 are realistic?

Zilch I would say.