Why I am not posting anymore

Since my appointment as Deputy Governor of the Central Bank of Malta as of 5th May 2015 - I thought it prudent not express opinions as liberally as I used to do before the appointment.

I thank followers for their interest and support and am keeping all past writings on line for reference purposes as a library for my writings.

I do realise that some of the old posts transported from my website www.alfredmifsud.com are not what they should look like and I will try to continue refining their appearance as soon as possible

Alfred Mifsud
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LKY - political legacy

The announcement of the death of 91 year old Founding Father of Singapore Lee Kuan Yew came just as I was reading the narrated auto-biography of Fidel Castro.

And I mused that there are so many commonalities between the two poltical stalwarts as much as there are differences.

But one commonality stands above all else: their determination to fight corruption and make it a central policy creed of whatever they wanted to achieve.

The moral is that you can be a dictator or a democrat, you can believe in closed or open economies,  but as long as you truly fight corruption and show your people that you are not doing it for self-interest but for what you really believe in,  than people will stand beside you through thick and thin.

Obviously LKW had more poltical vision than FC and allowed his country to compete effectively in the globalisation process without forcing his subjects to live in a state of permanent revolution.

For that LKW has received plaudits from most world leaders quite untypical of when a founding father of a state as small as Singapore passes away.

There was a time when Singapore and Malta looked at each other as a benchmark but corruption got in the way of Malta's development and Singapore sprinted ahead of us.   So much ground to recover!

Time for European leaders to shape up to the challenge

The challenge I refer to is how to keep the Euro monetary system together and how to make it sustainable for the longer term.

It is in everybody's interest that this is achieved, as the consequences of failure are just too great:

• If any member is forced to leave the Euro the markets will certainly start challenging the Euro longevity and will start considering it as a loose fixed exchange regime rather than as indissoluble monetary union.  The question of who comes next will unavoidably force the market to test the hypothesis.
• If the Euro monetary union dissolves the sustainability of the EU will also be challenged.
• From dissolution all members would suffer.  
• Debtor nations will suffer default, blockage out of the international capital markets for a long time, and sharp devaluation of the domestic currency which will be large and will hurt mostly the fixed income earners who are least able to carry the burden.
• Creditor nations will see their home currencies appreciate forcing instant loss of competitiveness just at a time when European demand will shrink making it a strong double blow.
• Countries in distress will have to introduce strict capital controls and adopt beggar thy neighbour policies which will fly in the face of all that the EU stands for and would threaten the achievements of the last half century.
• Countries in distress will seek help from wherever they can get it, including the devil if one exists.  Russia and China would be most pleased to oblige if in the process they can weaken European Unity and weaken the security arrangements which tie the European continent with the West.

So firstly European leaders, especially those in core countries which are in a Creditor position, are failing in making no effort to explain to their electorates the severe consequences of risking a Euro dissolution.

They are also failing in not raising the sensitivity of their electorates to the huge benefits that they are having from the Euro crisis.   Just consider that Germany, whose debt to GDP is well over the 60% Maastricht limit, is now paying negligible interest rates  on debt as it gets renewed and this week the German Bund - 5 years slipped into negative territory i.e. lenders are paying the German Government for the privilege of lending it money.

Also Germany is running a 7% of GDP surplus on its Balance of Payments which would not have been possible without the Euro monetary union as the Deutsche Mark would have appreciated to self-correct such disequilibrium.  This huge surplus is keeping the German economy humming with export orders.

So all in all, if the Creditor country leaders were to make their electorates aware and sensitive to these huge benefits, then the need to restore equilibrium inside the Euro monetary system by dual action from the deficit a much as from the surplus side would be much more evident and acceptable.

It is in everybody's interest that Debtor nations apart from helping themselves, which is a pre-requisite, are given help so as to make their economy grow sustainably.   Restructuring in the absence of economic growth is well neigh impossible.  Without economic growth Debtor nations will default, hurting themselves and their Creditors, and bring the Euro monetary system to a premature demise.

The Euro members must learn from The Marshall Plan not from the Versailles Treaty.

They all have to do more

In order to resolve the Euro problem ( I would not call it Greece problem as the issues involved are much wider than Greece) everyone involved has to do more.




Greece needs to:

• commit itself unequivocally to repayment of their loan obligations.
• commit itself to restructure its economy and especially to prop up its tax compliance and collection mechanism and to stamp out corruption which is stifling economic growth.
• commit itself to taking business friendly measures to attract FDI.  This has to include privatisations already agreed upon even if they are delayed to ensure that the best possible return is obtained.
• commit itself to taking measures to dismantle monopolies and to make its economy more flexible, in particular its labour market which cannot continue to protect those who have jobs at the expense of those who are unemployed and blocked out of the labour market.
• commit itself to a reasonable ( even if reduced from what was committed to earlier) primary balance on its budget and in its balance of payments.

Creditor nations have to realise that:

• Any union without an element of solidarity is not a union at all and will eventually destroy itself.
• Problems of debtor nations have to be addressed through real economic restructuring but in the context of growth rather than blind austerity.
• Where austerity is needed it should be spread in a socially acceptable manner rather than being carried disproportionately by the bottom layers of society.
• Restoration of equilibrium needs action also from the surplus side not just from the deficit side.

European Union should take the initiative for:

• The European Stability Mechanism ( ESM) taking a primary role in resolving the problems between debtor and creditor nations, in particular:

1. The Troika ( EU, IMF and ECB) should be replaced entirely by the ESM who will keep the IMF only in a consultative role.
2. All debts of countries under bailouts held bilaterally by EU countries and by the ECB should be transferred at original cost to the ESM who will fund this by issuing cheap long term bonds which will be bought by the ECB instead of their QE program ( which could create more problems than it solves).
3. All debts of debtors nations with debts exceeding 100% of their GDP should be converted into long term contingent GDP coupon bonds - where the interest rate is variable to the GDP - whilst the capital remains intact and repayable in equal annual instalments after an initial moratorium of say 10 years.
4. Countries with structural Balance of Payments surpluses ( e.g. Germany who are consistently running 7% GDP  BoP surplus and evidently taking extreme advantage of the weakness of the Euro currency caused by problem countries) should pay a fixed percentage of their BoP surplus as non-refundable contribution to the ESM.
5. The ESM will use the contributions received as in 4. above in order to reward problem countries with an element of debt foregiveness if they reach benchmarks proving their economic recovery - thus rewarding sacrifice as results will start to show.

Expecting debtor nations to resolve their problems without a burden sharing arrangement is the best way to ensure that the Euro has no future.

Greek exposure and resolution

How are Euro area countries exposed to a Greece default
		EFSF guaranteed exposure to Greece	Bilateral loans	Max. Loss on ECB exposure	In % of GDP
		EUR bn	EUR bn	EUR bn#
Germany		41.3	14.2	55.5	2.0%
France		31.0	11.2	42.2	2.0%
Italy		27.3	9.7	37.0	2.4%
Spain		18.1	7.0	25.1	2.4%
Netherlands		8.7	3.2	11.9	1.8%
Belgium		5.3	2.0	7.3	1.9%
Austria		4.2	1.6	5.8	1.8%
Portugal		*	1.4	1.4	0.8%
Finland		2.7	1.0	3.7	1.8%
Ireland		*	0.9	0.9	0.5%
Slovakia		1.5	**	1.5	2.0%
Slovenia		0.7	0.3	1.0	2.6%
Estonia		0.4	**	0.4	2.1%
Luxembourg		0.4	0.2	0.6	1.2%
Cyprus		*	0.1	0.1	0.8%
Malta		0.1	0.1	0.2	2.0%
Total		141.7	52.7	194.4	2.0%
*	exempted as under bailout
**	exempted by special arrangement
#	share of losses suffered by the ECB
Source: UBS,IMF, Bloomberg February 2015 _______________________________________________________________________ Malta stands to be hit by about 2% of GDP in case of a Greek default.   This is more than much richer Luxembourg, Netherlands, Belgium, Austria and Finland and much more than Cyprus, Ireland and Portugal who were exempted due to their being under balilout assistance themselves. Now one can understand why it  is in our interest that a fair compromise is reached with Greece which however does not involve any haircut or write-down. This can be done.  How? Let us list the points that everybody seems to agree upon, or at least should agree upon, and around which some sort of compromise could possibly be built: Greece needs to restructure their economy and make it competitive and sustainable not so much for the benefit of their creditors but mostly for their own sake. There is no future in playing the desperate role of bringing the roof on all if Greece is not allowed to continue living beyond their means. Greece cannot sustain a debt of 175% of GDP and some sort debt easing is absolutely necessary as a quid pro quo for Greece doing what really needs to be done to restructure their economy. Euro countries and Euro institutions that lent money to Greece cannot and should not take a loss on their loans to Greece. This seems like squaring a circle but in fact it can be done with some flexibility and creativity and not only for Greece but for all countries for a portion of their debt which exceeds 100% of their GDP: All direct bilateral loans and the bonds held by the ECB are to be refinanced at original cost by the ESM ESM is to finance this by issuing zero coupon long term bonds which will be acquired by ECB through their QE operations. Better to focus QE on such measure rather than buy bonds of countries who do not need any Central Bank buying their bond ( e.g. Germany and Malta) The refinanced bilateral loans to the extent that they reflect excess of debt to GDP over 100% are to be converted into long term contingent coupon bonds with coupon linked to GDP performance. Such contingent coupon bonds are to carry warrants that in case of non-respect of warranty conditions the bonds will become repayable on demand. As further incentive, linkages are to be made where the higher the contingent coupon payable ( reflecting success in economic restructuring leading to economic growth) the more investment is to be allocated to Greece under the Juncker Plan and its successors or extensions. Euro countries with strategic surplus in their Balance of Payments are to be compelled to pay non-refundable contributions to a contingency fund within the ESM to build a reserve against possible loan losses. This is in recognition that surplus members are gaining advantage through their Euro membership which they would not have gained if they had maintained their national currency. There is space for a good and sustainable compromise after the parties get tired playing their dangerous games of chicken.

Two games of chicken: Ukraine and Greece

In addition to the game of chicken being played regarding Greece's debt restructuring and its future in the Euro monetary system, another one even more tragic is being played over Ukraine.


Let's analyse the two problems which are so serious that it is very improper to call them games as they both involve people's destiny and choices between life and death.

Let's start with Ukraine:

What Ukraine wants:

• To safeguard its territorial integrity and have safe borders with neighbours
• To live at peace with its neighbours including Russia
• To adopt a long term plan to integrate itself within the EU and with the West via NATO membership.

What Russia wants:

• To keep Ukraine within its sphere of influence
• To take full control over Crimea where it holds a strategic Russian military base
• To protect the interest of ethnic Russians in Eastern Ukraine
• To keep Ukraine out of NATO and the EU and keep it as a territorial buffer between Russia and NATO countries.

What the West wants:

• To extract Ukraine from Russian sphere of influence
• To safeguard Ukraine sovereignty and their ability to decide their own destiny
• To extend NATO to Russia's border

Obviously many of these objectives are conflicting and as a consequence Ukraine is gradually slipping into a proxy war between the West and Russia.  Russia is clearly supplying arms and resources to ethnic Russians in eastern Ukraine to help them overcome Kiev's determination to impose its sovereignty over the region.   The West is now considering supplying arms to Kiev to protect the integrity of their sovereign territory.  This inevitably causes escalation possibly leading to a full scale conflagration.

The West is escalating sanctions over Russia in the hope these would force Russia to scale back its hostility towards the Kiev government,  but sanctions normally do not work at all, and if they do, they take a long time.  On the contrary sanctions are helping Putin to maintain his popularity at home and cover at a lot of his faults by blaming sanctions by the West that  are depicted as Western tools in their bid to dominate Russia.

A possible compromise has to include the following:

• Ukraine's sovereignty has to be restored over all its territory including Crimea.
• Crimea is to be leased on a very long term basis to Russia as China had leased Hong Kong to UK
• Ukraine is to adopt a constitution that gives substantial political and economic autonomy to its Eastern Regions
• Constitution has to provide that any decision for Ukraine joining NATO has to be approved by a UN supervised referendum and in any case NATO will not breach the autonomy given to the Eastern regions.
•  Borders between Ukraine and Russia are to be supervised by UN international peace keeping force.

________________________________________________

And now to Greece.

What Greece wants:

• Renegotiation of all agreements which will involve substantial easing of Greece debt load 
• Respect for their fiscal autonomy 
• Restructuring with emphasis on economic growth rather than crushing internal demand
• Investments to promote increase in Greece economic capacity

What the EU wants:

• Respect of all agreements signed with previous Greek government including austerity measures and privatisations.
• Negotiation of renewal of the austerity package beyond February 2015 as Greece has no real possibility of otherwise financing themselves on the capital markets.   This may involve further conditionality.
• Greece to perform substantial economic restructuring needed particularly involving fiscal enforcement and tax collection.

These positions are obviously conflicting and if no compromise is found Greece will default on its debt leading to it being forced out of the Euro if not altogether out of the EU.   Neither Greece nor the EU want a forced exit out of the Euro which could have unquantifiable and severe unintended consequences which could be as big as Lehman's default in 2008.   In fact the risk of GREXIT ( Greece exit form the Euro) is the most effective, probably the only, negotiating tool that Greece has in conducting negotiations with the EU, Germany in particular.

So ultimately it seems we are heading towards an ominous game of dangerous brinkmanship.    It need not and should not be so. 

Let us list the points that everybody seems to agree upon, or at least should agree upon, and around which some sort of compromise could possibly be built:

• Greece needs to restructure their economy and make it competitive and sustainable not so much for the benefit of their creditors but mostly for their own sake.   There is no future in playing the desperate role of bringing the roof on all if Greece is not allowed to continue living their means.
• Greece cannot sustain a debt of 175% of GDP and some sort debt easing is absolutely necessary as a quid pro quo for Greece doing what really needs to be done to restructure their economy.
• Euro countries and Euro institutions that lent money to Greece cannot and should not take a loss on their loans to Greece.

This seems like squaring a circle but in fact it can be done with some flexibility and creativity and not only for Greece but for all countries for a portion of their debt which exceeds 100% of their GDP:

• All direct bilateral loans and the bonds held by the ECB are to be refinanced at original cost by the ESM
• ESM is to finance this by issuing zero coupon long term bonds which will be acquired by ECB through their QE operations.   Better to focus QE on such measure rather than buy bonds of countries who do not need any Central Bank buying their bond ( e.g. Germany and Malta)
• The refinanced bilateral loans to the extent that they reflect excess of debt to GDP over 100% are to be converted into long term contingent coupon bonds with coupon linked to GDP performance.   Such contingent coupon bonds are to carry warrants that in case of non-respect of warranty conditions the bonds will become repayable on demand.
• As further incentive, linkages are to be made where the higher the contingent coupon payable ( reflecting success in economic restructuring leading to economic growth) the more investment is to be allocated to Greece under the Juncker Plan and its successors or extensions.
• Euro countries with strategic surplus in their Balance of Payments are to be compelled to pay non-refundable contributions to a contingency fund within the ESM to build a reserve against possible loan losses.  This is in recognition that surplus members are gaining advantage through their Euro membership which they would not have gained if they had maintained their national currency.

There is space for a good and sustainable compromise after the parties get tired playing their  dangerous games of chicken.

Let the games begin

On 2nd January 2015 I posted an article titled:

Preparing for the Greemany  (Greece and Germany) high stakes game of chicken

post 02 01 2015 preparing-for-greemany-high-stakes-game

Following last Sunday's result of the election in Greece and the election of Syriza to  government with a strong electoral mandate to address the unending economic distress, through growth rather than austerity, it means now that the dangerous game of chicken can begin.

Both sides have spent the first week digging in their heels.    From the German side the message was repeatedly that Greece has to honour agreements signed with the Troika ( IMF, EU Commission and ECB) to restructure its economy as a precondition for any concessions to lighten up the debt burden.   From the Greek side  the government has made it clear that it means to be faithful to the electoral mandate and does not feel committed to the austerity accepted by previous governments which crushed the Greek economy and sent unemployment to levels so socially offencive levels that made Syriza an automatic desperate choice for the Greek electorate.

This game of chicken is a very dangerous one.   It could very well lead to dismantling of what has been achieved by the European Union in its six decades of existence.    Something must be done to find a compromise honourable to both sides, a compromise that can build on sound foundations to make the European project the choice of the people, a European project that leads to a union among its people rather than becoming  as presently, a source of division.

There are three main issues that must be addressed:

1. Economic restructuring is needed and Greece cannot go back to its old ways of high public sector employment and low private sector investment where debts do not matter and tax evasion and corruption is tolerated rather than fought.

2. No country can redeem itself properly if its debt to GDP levels exceed significantly the 110% level. Even at this level it is only sustainable in a context of low interest rates.  A higher interest rate context will make the sustainable level even smaller possibly not far off from the 60% level enshrined in the Maastricht Treaty.

3. Economic restructuring can only be successfully delivered in the context of economic growth rather than one of austerity.  Economic restructuring requires a high dose of productive investment to stimulate the process of creative destruction, the phasing out of uncompetitive operators at a time where investment delivers new opportunities for economic growth, for new jobs and for new opportunities.


Any compromise which is not based on this tripod will be defective, unsustainable and will probably solve problems temporarily whilst creating bigger ones for the future.

Within this framework let me map out how a sustainable and honourable compromise can be found if the players move away from the current deadly game of chicken.

a. Greece must honour in substance, if not in all its details, the agreements it has with its international creditors, mostly IMF, EU institutions and EU countries.   Greece must continue to deliver a primary surplus in its fiscal budget and a surplus in its balance of payments position.  If the new government in Greece prefers to achieve this aim through better enforcement of tax collection which permits financing of social measures to ease the pain for those who are carrying a disproportionate load of the restructuring burden, that is a decision which rests within the sovereignty of the Greek government.

b. Greece must pursue an economic model which allows more space to private investment both domestic and international.   Government should have no qualms of moving away from its role of operator and adopt a regulatory stance. Privatisation must be not ideologically challenged but if properly executed without a suspicion of corruption, can be a useful ingredient in the creative destruction and economic growth model,

c. Greece creditors, mostly EU institutions and EU governments, must release Greece from the debt trap it is currently captured in as a quid pro quo for Greece pursuing sensible economic policies as above outlined.     In spite of private sector debt write off in 2012 the size of Greece debt to GDP has continued to increase and has now reached 175%.  Clearly the austerity recipe has delivered the opposite results from those intended.

d. The debt of all Euro area countries (not just Greece) exceeding 100% - 110% of GDP should be taken over by the ESM (European Stability Mechanism) against full reimbursement to present creditors and such debt is to be swapped to contingent 50 years bonds with a front 10 year moratorium and without a fixed coupon rate.   The coupon rate is to be variable and  contingent to the level of GDP growth registered by the debtor nation so that the debt burden remains sustainable.

e.  ESM is to finance such funding through cheap loans provided by the ECB ( better than the 1 trillion QE which is much less effective) and through contributions that countries enjoying structural balance of payments surpluses are to be obliged to make to the ESM to provide a cushion for any potential losses on its contingent bonds.    This is an equitable recognition that those countries that are enjoying structural balance of payments surpluses are enjoying a disproportionate benefit from their Euro membership given that had they, like Switzerland, been still in command of their domestic currency they would have lost competitiveness through automatic revaluation of their currencies.

f. Deficit countries who participate in such sustainable economic restructuring and growth plans should receive priority in financing of productive infrastructure investment through the EFSI of the Juncker Plan which again could easily be financed through the ECB. Countries enjoying strong economic growth and chronic balance of payments  surpluses should allow countries in distress such priority access to EFSI funding.

Let the games begin.  Not the deadly game of chicken but the serious games leading to sustainable  restructuring of the EU economy, greater solidarity, and greater determination by countries in distress to close the gap between their distress and the economic fortunes of surplus countries locked up in the same currency union.

Greece is not the problem. The whole system is!

I am angry that Malta has built credit exposure versus Greece both bilaterally as well as through the EFSF and ESM not because I do not feel that somehow over-indebted Greece has to be bailed out in order to save the Euro, but because this burden should have been carried by the 11 original Euro area members that allowed Greece to join without having the proper credentials to do so.


I am angry because Malta's exposure did not go to save Greece, so much so that Greece is still in the soup with 175% debt to GDP which by all measures is unsustainable.  It went to save Greece's creditors  mostly banks from countries that were the beneficiaries of Greece's largess when its corrupt politicians went on unsustainable spending spree to line up the pockets of the oligarchs that sustained their political careers.

Malta joined the Euro in 2008 when Greece had been a member for 7 years.   We benefited absolutely nothing from Greece's largess.   The original Euro area members had 7 years selling the Mercedes, BMW's, Champagne, Chocolate and military equipment funded by Greece's growing debt which we were forced to co-finance.  Slovakia opted out of the bilateral financing to Greece and should have we.   Ireland, Portugal and the Baltic states, who joined after the EFSF was set up, have been given exemption from guaranteeing Greece's debt commitments through the EFSF.

What has been done cannot be undone and now we have to look forward.

Nobody should be surprised by the Syriza electoral victory with a mandate to renegotiate Greece's debt.   With unemployment at 26%, youth unemployment at 50%, GDP down 26% from the pre-crisis level and overall consumer spending down some 40% ( given that Greece was running a Balance of Payments deficit of 15% before the crisis but their Balance of Payments is now in surplus) Syriza had the only credible redemption plan i.e. that Greece cannot redeem its economy by further debt but by negotiating a substantial debt write-off with their creditors,   The false assumption that the Greeks will agree to run a large fiscal surplus for a generation to back pay money that creditor governments used to rescue their private lenders from their folly is a big delusion.

Yet Europe cannot afford to give Greece what it needs.   If such bilateral EU/Greece agreement were to be reached that would give a big boost to Eurosceptics in Spain France and Italy so that rather than solving a problem they would be creating bigger ones.

So Greece is not the problem.  It would be wrong for Europe to consider this problem strictly in terms of the blue and white horizontal striped flag.   The problem is the whole system and only a total holistic approach can deliver a sustainable long term solution.

Europe has two choices.     The easiest and the most politically convenient would be to call Syriza's bluff, refuse to negotiate anything substantial and use the debtors' prison approach to defy the democratic will of the Greek electorate and possible force Greece out the Eurozone where it will unavoidably default on its debt.   This will be very expensive to the creditor nations as they would in any case have to write off their debt or accept repayment in worthless Drachmas.  It would however send a strong signal to voters in France, Spain and Italy to be careful whom to vote for lest they finish in Greece's company out of the Euro.

This choice is also risky as it would defy the concept that the Euro is forever and will of itself create instability which could make the Euro dissolution a self-fulfilling prophecy.

The other choice is politically very difficult for the creditor nations but unavoidable if they mean to continue to enjoy the great benefits they are earnings from the Euro through the external competitiveness compared to what this what have been if they still had their Marks, Florins, Schillings or Francs.

Here the solution cannot be Greek focused.  It has to encompass all debtor nations whose debt to GDP exceeds 110%  ( as agreed by the eurozone ministers in 2012).    All this debt needs to be transferred to the EMS who will refund cost to the holders and the EMS will convert this debt into  notes bearing no interest but participating on a contingent basis on the GDP performance of debtor nation beyond the Euro average and with capital repayment spread over 50 years with a large front loaded moratorium.

How will the EMS finance this?    In part at least by including the principle that Euroarea countries who run a Balance of Payments surplus, so benefiting from the competitiveness generated by the Euro system, have to make defined contributions into the ESM fund for potential losses on their contingent exposure.

Obviously the debtor nations have to do their part too.  Any suggestion by Syriza that they go back to their old ways of hiring unnecessary employees into government service is a non-starter.   Debtor nations have to commit to run a moderate primary surplus by delivering their economy efficient by taking internal measures i.e. fight corruption, collect taxes as due, create the right environment for private investment and remove bureaucratic waste.

Greece and debtor nations need to do this for their own sake and not for the sake of their creditors.

The seeds of austerity reap a democratic whirlwind

Preliminary results from the elections in Greece indicate an landslide victory for Syriza who will be able to form a majority government without need to form any coalitions.

I had given persistent warnings that extreme austerity imposed on an economy in deep recession will eventually give demagogues who promise easy solutions to complex problems an unquestionable democratic mandate.

Tsipras is as yet an unknown Prime Ministerial quantity and it is bad to pre-judge him.   But Tsipras can only deliver what he promised if he forces onto Europe a programme of debt forgiveness or a rescheduling of Europe's credits to Greece which leads to the same effect of halving the  175% debt to  GDP load.

This will put creditor countries like Malta between a rock and a hard place.  If Tsipras fails to honour commitments already undertaken in the bailout programmes and Greece will be forced to exit the Euro, Greece will inevitably default on its debts.   If Tsipras succeeds to renegotiate better terms for Greece on its debt,  the creditors including Malta will incur a financial loss on their loan exposure to Greece.

Which brings me to the question I had asked in an article on this blog in November 2011.   Why has Malta agreed to participate in the Greece loan bailout when this load should have been carried by the members that had let Greece into the Euro in the first place?

2011/11/28 maltas-cross-efsf


Slovakia managed to stay out of it.   The Baltic countries that joined the Euro recently have not been obliged to carry their share of Greek credit.   So why had Malta agreed to take the risk of carrying Greece credit?.

I wish Syriza well.  Greece needs new leadership and I pray that Tsipras plays his cards well to stay in the Euro on terms which will truly permit the Greek economy to grow and shed off its unsustainable debt burden.    But the solidarity which Greece needs and deserves should be footed by those who were beneficiaries of Greece's misdemeanour's in the first place.

Time lags and hedges

Unable to find anything to criticise about Malta's economic performance the PN has launched its flavour of the month criticism based on fuel pump prices which have not yet reflected the sharp drop in the price of crude oil that has been registered internationally over the last 6 months.

This criticism is unfair and unprofessional, for these reasons:

1. Fuel prices at the pump only follow the crude oil price movements with a time lag even in the absence of any hedging.  Crude oil needs refining and the cost of refining does not go down simply because the price of crude oil has gone down.  On the contrary the cost of refining oil could well go up if the price drop of crude leads to higher consumption and refining bottlenecks. 
2. The cost of crude oil and the cost of refining are two important but not exclusive ingredients regarding the prices of fuel at the pump.   Energy and energy services are priced in USD and the rate of exchange between the EUR and the USD has dropped 16.5% from the 1.34 as at 1st August 2014 and last Friday's 1.12
3. Hedging is generally undertaken in order to give stability to prices at the pump.   Stability permits better planning and is more conducive to consumption and investment.    Government has committed since last budget to keep fuel prices stable until March 2015.  Obviously to give such a commitment government has hedged the price at which it procures its supplies. Hedging is not meant to speculate for making a profit/loss but is meant to provide stability.  This stability comes at a cost that when prices fall hedged prices would be higher than spot prices.

Should we stop hedging because for once price movements worked against us?   No absolutely not.   Hedging is important for stability.   And we should be happy that energy prices have dropped as this price drop will be reflected in the prices we hedge for the future.

So criticism that government is cheating anybody by keeping fuel prices steady is unfair and unprofessional.   Nobody has 20/20 advance vision and being wise after the event is a sport any donkey can practice.

Government is not in the business of speculating price movements in energy or foreign exchange.  It is in the business of getting the best deals in the context of stability.  And for this hedging remains an important tool even if for some short period of time it may prove uneconomic.

Crude oil price and EUR USD rate of Exchange since Aug 2014

Look at the price chart of crude oil and USD/EUR exchange rate since 1st August 2014 to date by clicking the above link..

Anybody who can prove that they anticipated that crude oil will drop 53% in 6 months and that the EUR will fall 16% against the dollar has a right to criticise the government hedging policy.  All the rest would be making donkey's wisdom of being wise after the event.

Quotable quotes

There are some quotable quotes in the today's Financial Times .

Alexis Tsipras, who will probably be the next Greece Prime Minister after next weekend's election says (in an Opinion piece titled 'Greece can balance its books without killing democracy'):

"Balancing the government's budget does not automatically require austerity.  A Syriza government will respect Greece's obligation, as a eurozone member, to maintain a balanced budget and will commit to quantitative targets.   However it is a fundamental matter of democracy that a newly elected government decides on its own how to achieve those goals."

"Austerity is not part of the European treaties; democracy and the principle of popular sovereignty are" 

"Our manifesto contains a set of fiscally balanced short term measures to mitigate the humanitarian crisis, restart the economy and get people back to work.  Unlike previous governments we will address factors within Greece........we will stand up to the tax-evading economic oligarchy" 

Martin Wolf in an opinion titled 'Bolder steps from Europe's central bankers' 

  "It seems that QE will be implemented (by the ECB) in the teeth of opposition.......from the German political establishment.   This raises questions about the sincerity of the latter's commitment to ECB independence"

"QE is going to horrify the burghers of Germany, but it must now happen..... everything is fine in Germany, but Germany is not the eurozone" 

And on the front page report there is is :

"To appease QE's German opponents, which includes the chancellor Angela Merkel herself,  Mr Draghi is expected to say that bonds bought will remain with the national central banks, so losses will not be spread among eurozone members. 

In Italy the finance ministry and the central bank have warned against watering down QE. " it's good the ECB is buying government debt but it would be a defeat for Draghi and a win for Merkel if the purchases were delegated to the central banks of each state" 

This potentially breaks the EU rules. It is as if it's accepted that the euro area's modus operandi is to clear things with Germany, and for the ECB to constrain its actions to what is best for Germany"