Martin Wolf, of the Financial Times, is right, austerity is not enough. And the BIS would be one-sided to focus only on the requirements for austerity in deficit countries, while forgeting the need for adjustment in the surplus countries. Because inflation and other economic conditions ARE divergent, we need at least TWO sets of measures, prescriptions for deficit countries AND prescriptions for surplus countries.
Yes, highly leveraged countries are running large structural budget AND external deficits, which have to be reduced through local efforts as soon as possible. In the case of smaller Eurozone countries, domestic adjustments are soon exhausted and most of the offsetting adjustments must occur in their balance of payments and in their foreign trading partners and foreign creditors.
Thus, it must be emphasized that it is impossible to eliminate structural domestic deficits without big shifts in the external balances. But the necessary external rebalancing is more or less blocked, in one case by China’s undervalued currency and in other cases by the inability to devalue or restrict imports within the Eurozone, given the Single Currency and the Single Market.
Deficit countries can and must eliminate their structural domestic deficits, but this is only a necessary, not a suficient condition for the adjustments to occur.
Clearly, fiscal and external rebalancing must always be two sides of a coin. And it is impossible, ultimatley, for this external adjustment to occur without big changes in the surplus economies, meaning that the surplus emerging and advanced economies have to spend more abroad and to reduce their external surpluses.
Finally, external adjustments are much more difficult, if not impossible, within in the Eurozone, which may justify the pessimistic bias of many European analysts. Without FX, trade and monetary policies, Eurozone countries must find new tools to overcome structural and apparently unresponsive private and external sector imbalances.
Though, in fact, the external adjustments are already well underway. Both Greece and Portugal report reductions of 20-25% of their Current Account deficts thus far in 2011.
With an appropriate mix of policies, larger exports and lower imports of goods and services will help to compensate and facilitate fiscal adjustment and lower private consumption.
Of course, even with a much improved Current Account balance, any debtor country would need extra help to work out external Debt/GDP levels of 150-170%.
Over to you, creditors.
Mariana Abrantes de Sousa, economista
PPP Lusofonia, Lisboa 29-June-2011
SEE FT Alphaville , FT, BIS
Of banks, Central Banks and Moral Hazard in the Eurozone Debt Crisis
Midgets can't guarantee intra-Eurozone CAB adjustments
Portugal Current Account improves
Mais juízo orçamental não depende de mais juízes (More budget control does not require more controllers)
Not like a virgin - bilateral responsability for trade deficits
Of banks, Central Banks and Moral Hazard in the Eurozone Debt Crisis
Midgets can't guarantee intra-Eurozone CAB adjustments
Portugal Current Account improves
Mais juízo orçamental não depende de mais juízes (More budget control does not require more controllers)
Not like a virgin - bilateral responsability for trade deficits
Poland, which has just taken over the six-month presidency of the European Union, suggested on Saturday that too much emphasis had been put on austerity and too little on growth in Greece.
ResponderEliminarPer Kurowski is right about imprudent bank regulators outsourcing their job to rating agencies, which have no capital at stake beyond their reputations.
ResponderEliminarThe current excessive debt crisis reflects a series of regulatory failures, especially among the prudential regulators in the surplus/creditor countries, which their taxpayers may have to pay for, because their "big banks are too big to fail.
http://subprimeregulations.blogspot.com/2011/05/our-crazy-bank-regulations-explained-in.html
There is no safe way out of our current predicaments… whatever the solutions they require a lot of risk-taking. Unfortunately our bank-regulators, for no particular good reason at all, placed an arbitrary regulatory tax on the risk-taking of our main financial agents, the banks, and that is why they abandoned the “risky” small businesses and entrepreneurs and drowned themselves in “risk-free” sovereigns and triple-A rated borrowers.
ResponderEliminarhttp://bit.ly/10K4TI
Yes, the Cook ratio, later known as Basel I, promoted so-called "risk-free" sovereign lending which required zero capital.
ResponderEliminarBanks were strongly influenced to do this "lending by numbers" and started gaming the solvency requirements with all sorts of hybrid quasi-capital instruments. Prior to that, banks had to justify their capital and leverage ratios to the market on the basis of the asset quality and risk management performance.
Like the Cook ratio, the Maastricht criteria were heavily gamed. Witness the galloping de-budgeting of state-owned enterprises and PPP/PFI contracts, not to mention "financial engineering" a la Goldman Sachs in Greece.
Combine the mis-cues of Basel and Maastricht rules with the absence of external account stabilizers within the Eurozone, and you have the current debt bomb.
Clear as day.
At least in hindsight.
Not all hindsight though!
ResponderEliminarNovember 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world”
March 2003 in a published letter to the Financial Times I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”
October 2004 in a formal written statement delivered as an Executive Director of the World Bank I warned “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”
Per, you obviously deserve a much bigger audience!
ResponderEliminarBut no one likes to hear inconveniente truths!
One story which should be required reading in business is
Ibsen's play "An Enemy of the People"
The analysis of the impact of Basel III fails to consider that the cost of imprudent regulation in the lending country is usually shifted to the borrowing countries, and thus appears low if you focus on same-country analysis. That's why the "cost of a crisis is far greater in emerging markets" which have less bargaining power to defend their terms of trade.
ResponderEliminarBig (US) banks: under-capitalized, overexposed, opaque ...
ResponderEliminarhttp://www.ritholtz.com/blog/2011/08/big-banks-under-capitalized-overexposed-opaque/
O "dinheiro aparecia sempre" no pós-25 de Abril para pagar as "conquistas irreversíveis" porque a economia crescia e os credores emprestavam.
ResponderEliminarAgora os credores disseram chega.
Mais que irreversíveis, as conquistas têm que ser sustentáveis e não há conquistas sustentáveis com o dinheiro dos outros.
Mariana Abrantes
Bank regulators are like terrorists, when promoting excessive risk-adverseness in the Western World’s banks http://bit.ly/qyAB8N
ResponderEliminar... more austerity, which will depress the economy even further in the short run...
ResponderEliminarIt really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.