Odd Man Out
-Edward Hugh (Don’t Shoot the Messenger)
The latest EU summit on the future of the Eurozone may well turn out to have been the exception that proves the rule, since after two years of debt crisis and an ongoing stream of similar high level events we have become accustomed to being handed results which manifestly fall well short of ex ante expectations. Now at last we finally have one where the outcome has actually exceeded them, and by some distance. Does anyone else have the feeling that this wasn’t what was planned for?
Yet no matter how positively or cynically we perceive what just happened, the fact of the matter is that this latest summit has produced results which, while possibly not being complete game changers, do in fact constitute a significant advance, in particular towards that long promised banking and fiscal union.
Allowing the ESM to in principle fund Spain’s bank recapitalisation was an important decision, possibly a landmark one. Now at least a part of the costs of the Euro experiment’s first decade will be shared by all those participating. This shift in approach also serves to underline the fact that this crisis is not only about irresponsible fiscal policy. It is also about inadequate monetary policy and its aftereffects. Paying the costs of faulty decisions which were taken collectively should not only fall on the shoulders of a few. This is something I have been arguing for since 2007, so I can’t not be pleased by this step.
The consequence is that the entire Euro Area will now stand behind Spain’s banks, as will Germany as part of the Euro Area, and indeed all countries in the monetary union are now about to become part-owners of at least some of Spain’s banks. Markets will also be reassured by this outcome, since now it doesn’t really matter if the recent Oliver Wyman and Roland Berger reports gave a full and adequate reflection of the full mid-term recapitalisation needs of Spain’s banks – if more money is needed more money will now be found. In this context it is not unreasonable to think that the Euro Area partners could eventually end up with a majority equity stake in the entire Spanish banking system, we will see. The good news is that whatever the final damage, there is now enough cement available to fill the hole, and we can stop playing around with polyfiller.
Beyond Spain, the decision will also have implications for Ireland and possibly Slovenia (which also needs a bank recap). And in Ireland Deputy Prime Minister Eamon Gilmore is surely right, it will be a gamechanger, since Ireland’s huge burden of sovereign debt will now be significantly reduced as the equity holding is transferred to the ESM.
From the Spanish point of view the counterparty here is that the government will now need to accept permanent European supervision of Spain’s banks. The Bank of Spain is effectively about to become a local office of a European bank regulation system. Having seen what we have seen since 2006 this outcome can only be welcomed.
Also, I suspect that all of Spain’s banks may well now be forced to take some additional capital from the bailout money (i.e. including the big three) in a way which would mirror what happened in the US. The money could possibly be injected in the form of CoCos (or contingent convertibles). Those that can pay such hybrids back in a yet-to-be-specified time period will be able to do so, with no loss of prestige, and those that can’t will become, at least partly, European owned. Thus the earlier practice of using public money to recapitalise failing banks (CAM, Unim) and then providing them with an asset protection scheme as an enticer to facilitate the deal with an eventual buyer, normally a Spanish commercial bank and for the princely sum of one euro, is now over. This is not surprising, since it is a practice EU Commissioner Joaquin Almunia had been complaining strongly about in recent days.
A good deal has been made of the “concession” accepted in not treating this capital injection as super senior, but really this is not as big a move as it seems, since this status would normally only apply to loans made directly to a sovereign, and is not attributed to bank equity which can be eviscerated as additional capital is injected in the future. And even in the case of bond buying, such status was always questionable. The IMF, it will be noted neither owns banks nor buys sovereign bonds, it lends money to sovereigns and they do this.
The second chapter in this week’s Brussels pact seems to imply that both Spain & Italy are now set for a more general EU rescue, via bond buying from the ESM/ECB or whatever. The language may be veiled to ease the sensitivities about the process on either end of the deal – i.e. to help both Monti in Italy, and Angela Merkel in Berlin – but still, as the Spanish politician Rosa Diez put it to Mariano Rajoy in the Spanish parliament recently, “don’t worry, say it with me, es un RES-CA-TE”.
While details are in short supply, in principle there will not need to be new conditions, since the existing EU framework should already be sufficiently strong in terms of the excess deficit procedure and the instruments associated with it. Naturally, with Spain’s 2012 deficit now apparently spiraling upwards and out of control, there inevitably will be more measures, with or without formal conditionality.
The interesting issue again is what will happen to the three countries with prior bailouts. Ireland, as I have noted, will doubtlessly need its agreement rewritten, and Greece is just itching to get the tipex out to change chunks of its most recent MOU. Which leaves Portugal, who will surely seek more flexibility in the light of the new “relaxed” atmosphere.
The big outstanding issue is still growth, a topic which was almost relegated to the sidelines given the extent of the other decisions. Economies in both Spain and Italy are sinking deeper and deeper into recession, and the 120 billion euro all Europe programme will hardly be sufficient to turn this situation around. Indeed in the case of all the rescued countries the same issue remains – where is the growth going to come from? So while the summit outcome is certainly an example of yet another significant step forward, it is also a case of “oh so many rivers still left to cross”.
The Scourge of ‘Dependence Corruption’
-Ed Dolan (Ed Dolan’s Econ Blog)
As a holder of degree from Yale, it should pain me when so many interesting books keep coming out of Harvard, but here we go again. I’ve just finished reading What Money Can’t Buy by Harvard philosopher and political theorist Michael Sandel (see my post today). Next on my reading list will be another Harvard product, Republic, Lost: How Money Corrupts Congress–and a Plan to Stop It, by Lawrence Lessig.
True, I haven’t read the book yet, but here is what makes me want to. Corruption is a key barrier to prosperity throughout the world, but traditional measures, like the Corruption Perceptions Index from Transparency International, are too narrowly focused. They look mainly at what Lessig calls “venal corruption,” that is, use of one’s public office to obtain cash for personal use. Venal corruption is bad, of course, and it is good that the United States has less of it than many other countries. TI’s index puts the United States in a respectable 24th place, compared with a first for New Zealand, 143 for Russia, and dead last, 182, for Somalia.
That’s all well and good, but it ignores what Lessig sees as the number one problem threatening America’s long term prosperity—what he calls “dependence corruption,” the corruption arising from Congressional dependence on the money of lobbyists to finance political campaigns.
The Supreme Court’s decision this week to uphold the Affordable Care Act is going to set the stage for a battle of lobbying on an unprecedented scale. Big Health Care got a lot of what it wanted in the Affordable Care Act—an expansion of coverage constrained by very few cost controls. Having lost their court case, Republicans now promise to move the battle to Congress with “repeal and replace.” But replace with what? Big Health Care will certainly not want Congress to replace the Affordable Care Act with something that reduces the role of government. More than half of its revenue already comes from government-financed health care. I am expecting some ingenious attempts to craft something that can be sold as a reduction in the role of government while in fact accelerating the steady increase in the share of health care costs in both the federal budget and U.S. GDP.
Does Lessig have any workable ideas for stopping the tidal wave of dependence corruption? I don’t know yet, but I hope so. I’ll post some comments when I’ve read his book.
Hat tip to @Tokyo_Tom for bringing Lessig’s book to my attention
Merkel Gets the Full Monti
-Emre Deliveli (The Kapalı Çarşı: Emre Deliveli’s blog on the Turkish economy)
And Monti just got the Spanish fluJ…
My latest Hürriyet Daily News column is not really as original as usual (except the title, but I’m sure someone has thought of it as well), as it is probably the most popular topic of Friday and the weekend.
I begin by explaining why markets reacted so strongly to the Eurozone Leaders Summit agreement. I then summarize what was decided upon before briefly discussing the merits and shortfalls of the measures.
My only real contribution is probably the Bugow-Rogoff critique. Although I have seen others make a point similar to that of the paper, the only other person I’ve seen mention the actual paper is my blog’s host Nouriel Roubini, in a tweet on Friday.
I make some additional points, as well as hyperlink to a few articles I found interesting, at my latest blog post.