Whatever it takes!

In spite of 20 saving-the-Euro EU summits held these last three years ( since the Greek problem surfaced) the Euro monetary system is still very much in danger of blowing itself out of existence.

Basically to put it in simple language it is unsustainable that countries like Germany at the virtuous extreme and Greece at the vicious extreme, with fifteen other nations in between sharing the same currency but moving at very different economic speeds, can keep within a monetary union that denies the exchange rate adjustment to render competitive those who have lost it, and to render less competitive those who have become super-competitive.

Last Thursday with the Euro edging too closely towards the abyss ( best reflected by the high rates that Spain and Italy are being forced to pay for their borrowing whilst Germany can borrow at zero real cost) ECB President Mario Draghi has declared in plain and simple language that the ECB will do whatever it takes to save the Euro.

Mr Draghi assertive pronouncement was temporarily discredited by its main constituent member the German Central Bank who expressed itself against any monetary initiatives to help Spain and Italy arguing that this would take away the political pressure for these countries to reform their economies.

However before the day was out a joint statement by the German Chancellor Merkel and the French President Hollande basically backed Draghi and said they also are prepared to do politically whatever it takes to save the Euro.   Again over the weekend Mrs Merkel made a similar joint statement this time in tandem with the Italian Premier Monti.

Something has changed and the mood on the markets has turned distinctly positive since Draghi's statement.    What appears to have changed is that Mrs Merkel appears to have decided to overrule the German Central Bank's objections and sent a signal to the ECB governing council that they can proceed with extraordinary measures to bring down the rate of borrowing for Spain and Italy.

This is a welcome political initiative.   There is no way in the world that Spain and Italy can continue with their economic reform programme if the savings from their austerity measures are lost in paying higher interest on debt servicing.   Democracy will not tolerate several rounds of austerity measures without delivery of results showing there is light at the end of the tunnel, and serial rounds of austerity which lead to depression rather than growth will inevitably lead to the democratic election of extreme forces of the right or left with little or no respect for the democratic rule of law.  It happened in Germany in 1933 and there is no reason to think that a different result will be obtained this time if the same methodology is adopted.

But it is necessary to define what the various actor ought to mean when they say ' whatever it takes'.

For the ECB whatever it takes ought to mean using whatever unorthodox monetary measures are necessary to stabilise the markets through large scale monetisation.   Unfortunately this is a taboo for most inflation sensitive central bankers in general and the Deutsche Bundesbank in particular given the hyperinflation Germany went through in the first half of the 20th century.   But now the problem is not inflation.  Now the problem is prolonged recession risking a depression and a large dose of monetisation is needed to keep prices stable from downside risks.   If such measures are successful and instead of having 2% inflation we would have say 4% inflation it will not be the end of the world either.   The world has handled successfully much higher inflation in the past and a somewhat higher dose of inflation will work wonders to ease the burden of debt that had to be created following the financial crisis of 2008.

But whatever extraordinary measures the ECB can take, from direct bond buying of Italian and Spanish bonds, to lending to the European Monetary Stability Fund to do so following it being licensed as a bank, from easy long term loans to banks to enable them to buy their governments' securities to further reduction of across the board interest rates, none of these measures could be considered as a permanent solution to the Euro crisis.   At best these measures if successful would gain precious time for the politicians to do their part of the 'whatever it takes'.

And frankly this political 'whatever it takes' is fraught with all the problems of having 17 or 27 countries agreeing on a common course of action.   What is the ideal 'political whatever it takes'?

That will be in my next contribution later on this week.

Protecting human rights and dignity

This article was published in The Malta Independent on Sunday 29^th July 2012

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My last contribution in this series asked who will be protecting the ordinary taxpayer in the negotiations going on between government and representatives of the ex-National Bank of Malta (NBM) shareholders who are demanding compensation for what, in their view, was abusive dispossession without compensation of their holdings leading to nationalisation of the business and the setting up of Bank of Valletta.

I expressed disagreement with any out of court settlement on the eve of elections which smells like one for the road favouring friends at the expense of the general taxpayers.

Unsurprisingly this brought vitriolic reaction by the representative of the ex-NBM shareholder who seem already counting their fortune as they attempt  to exploit a vote sensitive government without a majority in parliament that will be forced to seek a new mandate sooner than it had planned and wished.

Jeremy Cassar Torregiani (JCT) insists that anyone who disagrees with his view of the world must be both a liar and short of integrity.   He asks who will be protecting their ( ex-NBM shareholders) human rights and dignity.

In any democracy it is the third branch, the courts, that has the function to protect citizens from abuse by the executive and legislative branches.  So the answer to JCT’s question is simple.  The courts will protect your human rights and dignity.  The same courts that the ex-NBM shareholders are attempting to short circuit, using pressure on government to settle out of court without as yet having given any proof that there is a real case for compensation.   And I must stress the onus of proof lies on who is making the claim for compensation.

JCT called me a liar because I am attempting to plant division between ex-NBM shareholders and the general corps of taxpayers arguing that as the former are also taxpayers they are one and the same thing.   This is like saying that because some Maltese are six feet tall than all Maltese are six feet tall.  It is like saying that anybody who chips in the usual fifty cents in the offering tray at Sunday mass has  right to loot the full tally collected because he has contributed to it.

I do not mean to repeat myself but I must re-iterate that the only instances where compensation could be considered as fairly due are:

·         Either that the run on the bank was instigated by government with malicious intent.

·         Or that the Central Bank failed its duty in refusing to provide lender of last resort facilities

Nothing said by JCT and Anthony R Curmi (ARC -  more  later) goes anywhere near offering any convincing proof in respect of either hypothesis.

There is one point raised by JCT which further proves how dangerous it would be to have this matter settled in any way except through proper Court proceedings.  Whereas so far JCT had said that the then Governor of the Central Bank of Malta had given the NBM Vice –President a verbal warning to ‘put your house in order as it will happen’ in his  latest JCT adds a bit more.  He now claims that the then Central Bank Governor added “that he knew for a fact Mintoff had his eyes on the bank and to prepare for the attack as best he could”.

Only the Court can decide the veracity of these claims by receiving dispositions under oath from the then Governor of the Central Bank to see exactly what he said and to whom.  What JCT is saying is a detto del detto del detto  three stages removed  from the supposed originator.    But it seems illogical to have such warning said in the same breath as another warning to ‘put your house in order’.   To put a house in order it must be out of order and the Central Bank was well in the know as to whether the NBM’s house was in order or not.   Excluding the ex-NBM shareholders there seems to be general agreement that the NBM house was not in order and this is corroborated by the then Governor of the Central and by ARC ( and many others who were involved in the establishment of Bank of Valletta on professional basis ) who also wrote in reply, but this time using laudable language in my regard ( for which I thank him).

But when all is said and done, even ARC’s contribution does nothing to proof either hypothesis which could make a case for compensation.  Statements  like ‘ it was common knowledge that, in certain quarters, the word was going round urging NBM depositors to withdraw their funds’ is too vague to be any proof that government was behind these ‘certain quarters’.   The fact that Mintoff had appeared on TV appealing for depositors to calm down,  if anything proves that the run on NBM had begun before Mintoff made such TV appearance and that Mintoff tried to calm the situation rather than to manufacture the run as he is now being accused.   That he did not succeed cannot be taken against him.

ARC’s argument that the taxpayers through an out of Court settlement would be in the same position as after the Court decides in favour of the plaintiffs is inverse logic.   There is no assurance that the Court would decide for the plaintiff and even if the Court were to so decide then at least taxpayers would know that they are paying for what is properly due.  Damages paid to Mintoff regarding Delimara were in fact paid after a proper court decision and not through some amicable back scratching agreement.

ARC also takes it against me because I said that an out of court settlement would be unjust to ex-shareholders.   ARC mistakenly understood that I was referring to shareholders of Bank of Valletta.   I was in fact referring the ex-shareholders of the NBM who repeatedly stated that they are in this mostly for the honour rather than for the money.  An out of court settlement however cannot fix the honour.  That can only come from an independent court decision.   An out of court settlement can only fix the money and will leave both ex-shareholders and the general taxpayers with a bitter taste of justice undone.   But possibly the ex-NBM do not mean what they say and in fact they are in this for the money much more than for the honour.

But what I find particularly objectionable is the argument that because government has had good return on its investment in Bank of Valletta the taxpayer should not object to an out of court settlement to appease the ex-NBM shareholders.   By the same argument  we  would be entitled to make a claim for part of the losses of our shipyards from the H.M. Admiralty, Bailey and Swan Hunter.  Some hope!

Unfortunately they seem not to appreciate what is the role of shareholders in a business venture.  What JCT and ARC are proposing is socialisation of losses and privatisation of profits.  They are sanctifying moral hazard.

And strange that government on one hand seems inclined to usurp the role of our courts to straighten  purported injustices ostensibly committed forty years ago, on the other hand commits new injustices like the case of expropriation of land at Marsa with compensation based on its agricultural value to have such land dressed up with a MEPA permit within a week and instead of using it for public purposes which underlies such expropriation, issues it for commercial development by the private sector.   Rather than address purported injustices which are being examined by the courts, government efforts would be better employed avoiding new injustices.

My visit to the NYSE

So that you know why I have not been updating regularly