Archive for the ‘New Politics’ Category

Desincrustada da sociedade, a tal economia de mercado, que tende para o equilíbrio desde que o Estado não estorve, criou na América do Norte e na Europa esta interessante circunstância: “(…) excess debt has created a situation in which everyone is trying to spend less than their income. Since this is collectively impossible — my spending is your income, and your spending is my income — the result is a persistently depressed economy (…)”.

E agora?

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Ferguson illustration

The biggest question in any debt crisis is whether a credible path back to solvency can be found. For Greece, this now seems very unlikely. The same is true, to a lesser extent, for Ireland and Portugal. This raises three further questions. First, how big is any required restructuring? Second, who should bear the cost? Finally, is restructuring enough? If the answer to the last question is No, then one has to ask whether the currency union will last in its current form.

On the first of these questions, an analysis by Citigroup provides a negative answer. According to this analysis, by 2014 the ratio of gross debt to gross domestic product will have risen to 180 per cent in Greece, 145 per cent in Ireland and 135 per cent in Portugal. In none of these cases will the debt ratio start moving downwards over this horizon. Spain looks far better, with a debt ratio at about 90 per cent of GDP in 2014, though its path, too, will not have turned down. (See chart.)

The assumptions behind these forecasts are: a cumulative fiscal tightening between 2011 and 2014, inclusive, of 10.8 per cent of GDP in Greece, 8.3 per cent in Portugal, 7.3 per cent in Ireland and 5.7 per cent in Spain; interest cost of new funding rising from close to 5 per cent to 5.6 per cent in 2014 for Greece, Portugal and Ireland (determined by a weighted average of rates from the International Monetary Fund and the European Financial Stability Fund) and higher rates for Spain, since the latter will rely on the market; and, finally, privatisations and bail-outs. The analysis also assumes that a percentage point of fiscal tightening would lower growth by half as much.

Assume that these countries could borrow affordably in private markets at a gross debt ratio of 80 per cent of GDP. Assume, too, that European governments ensure that the IMF takes no losses. Then, the reduction in value of the rest of the debt would need to be as much as 65 per cent of GDP for Greece, 50 per cent for Ireland and 45 per cent for Portugal. The total “haircut” would be €423bn: €224bn for Greece, €107bn for Ireland and €92bn for Portugal.

One can quibble over the figures: these may be too pessimistic. But, without a big restructuring, these countries are now most unlikely to be able to finance themselves in the market on bearable terms. That is also what markets are saying: spreads on 10-year bonds over yields on German Bunds are 1,340 basis points, or 13.4 percentage points for Greece, 875 basis points for Ireland and 818 basis points for Portugal. This is why they are all now in official programmes. Worryingly, spreads for Spain are also now uncomfortably high, at 240 basis points, while those for Italy have reached 190 points. The eurozone, in short, is confronting a frightening sovereign debt challenge, aggravated by the dependence of its banks on support from its states and of its states on finance from its banks.

Now turn to the second question: who should bear the losses? If all the haircuts were to fall on private creditors, their losses in 2014 would be 97 per cent of their holdings of Greek debt, 63 per cent of their Irish debt and 60 per cent of their Portuguese debt. Official creditors would, by then, have to bear a substantial part of the total losses. Since governments would also need to bail out some of the holders of the restructured debt, particularly the banks, the eurozone would be revealed as a “transfer union”. Note, moreover, that this would occur despite a big fiscal effort in the affected countries. But even that would be insufficient to reverse the unfavourable debt dynamics in the medium term, partly because GDP growth is likely to remain so weak.

Against this background, proposals for rollovers by the banks, whether or not deemed technically a default, are neither here nor there. Much more to the point would be debt buy-backs at levels close to current market prices, as discussed in last week’s statement on Greece of the Institute for International Finance, which brings together the biggest international banks. That would crystallise losses. So be it. Let reality be recognised. As the Financial Times has also argued this week, the case for offering a menu of options with partial guarantees, similar to those under the 1989 Brady plan for Latin American debt, is powerful.

The question is whether such voluntary debt reductions would be enough, particularly for Greece. The answer is No. Governments would also have to play a part, by either accepting losses on the face value of their loans or ensuring lower interest rates, as proposed by Jeff Sachs of Columbia University. These are just two ways of achieving a lower net present value of debt service.

The dangers of debt relief are great. But the chances of success with denial are close to zero. True, it is possible for an ever greater share of the debt to be assumed by governments, so bailing out private creditors. Yet, ultimately, the cost of the debt owed to official sources will have to be cut by lowering interest rates or reducing sums outstanding.

It is not a question of whether such adjustments will have to be made, but of when. The history of such crises strongly suggests that it should be done sooner rather than later. Only after debt is on a sustainable path is confidence likely to return. Allowing foolish lenders, incompetent regulators and sloppy policymakers to hide past mistakes is a bad excuse for endless delays.

The doubt, in truth, is not over whether relief on the present value of the debt service is required. The real questions are elsewhere. One is over how to manage a co-operative debt restructuring. The other is over competitiveness and the return to growth. Some point to the success of Latvia in managing its so-called internal devaluation. But its GDP is 23 per cent below its pre-crisis peak. That is a depression. Moreover, the more successful a country turns out to be in cutting its costs, the worse the debt burden becomes. Thus, debt restructuring is merely a necessary condition for an exit. It is unlikely, in all cases, to be enough. Some economies may just wither away.

Alternatively, politicians may pull their countries out of the eurozone regardless of short-run costs. It is far too early to assume this will be the outcome, though some already do. But if there is to be any chance of avoiding this outcome, realism is required. At some point, the present value of the cost of debt must be drastically lowered. This does not have to happen today. But it has to happen soon enough to give people hope. In its absence, failure is not just likely. It is close to a certainty.

Moment of truth for the eurozone, Financial TimesBy Martin Wolf.

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Sofrimento sem sentido

J. Bradford DeLong*

Por três vezes na minha vida, concluí que o meu entendimento do mundo estava substancialmente errado.

A primeira vez foi em 1994, na sequência da assinatura do Acordo de Comércio Livre da América do Norte (NAFTA), quando os fluxos financeiros para o México com vista à construção de fábricas que exportassem para o maior mercado consumidor do mundo se revelaram claramente inferiores aos fluxos de capitais com destino aos Estados Unidos da América em busca de um clima de investimento mais favorável. O resultado foi a crise do peso mexicano (que eu, enquanto Secretário Adjunto do Tesouro norte-americano, tive que ajudar a conter).

A segunda epifania surgiu no Outono/Inverno de 2008, quando se tornou claro que os grandes bancos não tinham controlo nem sobre a sua alavancagem nem sobre as suas carteiras de derivados, e que os bancos centrais de todo o mundo não tinham nem capacidade nem vontade de sustentar a procura agregada em face de uma crise financeira de grandes proporções.

O terceiro momento é agora. Enfrentamos actualmente uma contracção nominal da procura de 8% relativamente à tendência pré-recessão, não existem quaisquer sinais de pressões inflacionárias e as taxas de desemprego na região do Atlântico Norte excedem em pelo menos três pontos percentuais todas as estimativas credíveis do que possa ser uma taxa de desemprego sustentável. Ainda assim, e apesar da falta de atenção ao crescimento económico e ao desemprego implicarem normalmente derrotas nas eleições seguintes, os líderes políticos da Europa e dos Estados Unidos clamam pela adopção de políticas que reduzem, no curto prazo, os níveis de actividade económica e de emprego.

Estará a escapar-me aqui alguma coisa?

Julgava eu que as questões fundamentais da macroeconomia se encontravam resolvidas por volta de 1829. Por essa altura, já nem o próprio Jean-Baptiste Say acreditava na Lei de Say dos Ciclos Económicos. Say sabia muito bem que as situações de pânico financeiro e de excesso de procura por activos financeiros poderiam dar origem, no sector real da economia, a uma procura insuficiente para manter os níveis de produção e de emprego; e que embora a não aplicabilidade da Lei de Say no curto prazo pudesse ser temporária, isso teria, ainda assim, consequências altamente destrutivas.

Fazendo uso deste conhecimento, as perturbações do ciclo económico deverão ser corrigidas através de uma, ou mais, das três formas seguintes:

1. Primeiro que tudo, não deixar acontecer. Evitar o que quer que seja que possa dar origem a uma situação de escassez de activos financeiros ou de excesso de procura por esses mesmos activos – quer se trate do esvair de fluxos financeiros para o exterior no contexto do padrão-ouro; de um colapso da riqueza de longo prazo, tal como sucedeu aquando do rebentamento da bolha das empresas tecnológicas; ou de uma movimentação em massa em direcção a activos financeiros mais seguros, como em 2007/2008.

2. Se não for possível evitar o problema, então o governo deverá intervir e aumentar os níveis de consumo público de bens e serviços, de modo a manter o emprego nos seus níveis normais e a compensar a contracção da despesa privada.

3. Se não for possível evitar o problema, então o governo deverá criar e disponibilizar os activos financeiros que o sector privado quer deter, por forma a relançar a procura privada pelos bens e serviços produzidos em consequência da capacidade instalada.

Há um sem-número de subtilezas relativamente à adopção de cada uma destas opções políticas por parte dos governos. A tentativa de implementação de uma delas pode comprometer, ou interferir, com as tentativas de prossecução das restantes. Para além disso, no caso dos agentes económicos incorporarem a expectativa de tendências inflaccionárias nos seus cálculos e acções, pode suceder que nenhuma destas três curas se mostre eficaz. Porém, não é essa a situação em que nos encontramos.

Da mesma forma, se o grau de confiança na capacidade de um governo fazer face aos seus compromissos financeiros sofrer um abalo, a intervenção de um financiador externo de último recurso pode ser essencial para assegurar a eficácia tanto da primeira quanto da segunda cura. No entanto, actualmente também não é esse o caso entre as principais economias do Atlântico Norte.

E no entanto, de alguma forma, todas estas três curas deixaram de estar em cima da mesa. Não se vislumbra como provável a implementação de reformas em Wall Street e Canary Wharf que visem reduzir a probabilidade e gravidade de um qualquer pânico financeiro futuro, tal como não são prováveis quaisquer intervenções governamentais com vista a regular os fluxos de activos financeiros de elevado risco no interior do sistema bancário. Também não existe qualquer pressão política no sentido de alargar, ou mesmo prolongar, as anémicas medidas de estímulo que foram adoptadas.

Entretanto, o Banco Central Europeu está activamente à procura de formas de reduzir a sua oferta de activos financeiros ao sector privado e a Reserva Federal dos Estados Unidos encontra-se sob pressão para fazer exactamente o mesmo. Em ambos os casos, o argumento é que a adopção de políticas expansionistas adicionais poderá despoletar processos inflaccionistas.

Contudo, quando observamos a evolução dos índices de preços ou a forma como os mercados financeiros têm estado a reagir às estimativas e previsões anunciadas, não é possível observar quaisquer sinais de inflação. Por outro lado, se atentarmos na evolução das taxas de juro praticadas nos mercados de dívida pública das principais economias desta região, também não encontramos quaisquer indícios de risco de emergência de uma crise da dívida soberana entre estas economias.

Ainda assim, quando escutamos os discursos dos decisores políticos de ambos os lados do Atlântico, aquilo que se ouve é Presidentes e Primeiros-Ministros a dizer coisas como: “Assim como as famílias e as empresas tiveram que ser cautelosas a gastar, também o Governo tem agora que apertar o cinto”.

E é aqui que atingimos o limite dos meus horizontes mentais enquanto neoliberal, tecnocrata e economista mainstream e neoclássico. Neste momento, a economia global encontra-se no meio de uma convulsão de grandes proporções caracterizada pela insuficiência da procura e pelo elevado desemprego. Nós conhecemos as curas – e, contudo, parecemos determinados a infligir mais sofrimento ao paciente.

*Artigo de J. Bradford DeLong, ex-Secretário Adjunto do Tesouro norte-americano, é Professor de Economia em Berkeley na Universidade da Califórnia e Investigador Associado no National Bureau for Economic Research (EUA), publicado por http://www.bepress.com/ev/ em Março de 2011. Original aqui.

**Tradução de Sandra Paiva, Paulo Coimbra e Alexandre Abreu.

***Também publicado em Portugal Uncut.

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It is time to stop pretending that we are about to see a “grand bargain” for the eurozone in March. Last week, the political developments in Germany shifted dramatically in the wrong direction. The Bundesbank, the parliament, the small business community and influential academics have all come out openly against an extension of the various support mechanisms. German society as a whole is in open revolt against the eurozone.

The single most important event was the decision by the three coalition parties in the Bundestag to reject, categorically, bond purchases by the European stability mechanism. The ESM will be the permanent anti-crisis institution from 2013. The Bundesbank came to a similar conclusion in its monthly report. On Thursday, 189 German economists wrote a letter to a newspaper denouncing the ESM, calling for immediate bankruptcy proceedings of insolvent eurozone states. It is no longer just the constitutional court that puts a break on the process.

In last week’s column, I tried to explain the origins of that sentiment. Today, I will focus on the consequences. The best outcome, in my view, would be a failure of the current crisis resolution strategy, followed by a complete rebooting. The worst would be a never-ending stand-off, followed by a financial cardiac arrest. The most likely outcome is a very small compromise of the kind that resolves nothing.

The current bargaining revolves around four pillars: current crisis management; the ESM; a new stability pact with budgetary surveillance; and co-ordination of social and economic policies. Negotiations on the ESM’s funding have been going well, as have discussions on the stability pact. But there is no agreement on bond purchases, and no progress at all on current crisis management.

The least sturdy of the four pillars is policy co-ordination. Chancellor Angela Merkel insists on a German-inspired competitiveness pact as a quid pro quo for Germany’s readiness to provide credit guarantees. But how should other countries respond?

My answer is: reject it. I would recommend eurozone member states to veto the competitiveness pact, even if that jeopardises the entire package. If Germany cannot deliver its side of this quid pro quo, it is not clear to me why anybody would accept a loss of sovereignty – which is effectively what policy co-ordination would imply. The only reason to accept such a loss of sovereignty would be the prize of an ever closer economic union. But that would have to include a common eurozone bond at one point. Through bond purchases the ESM would eventually mutate into a European debt agency, the financial counterpart of an economic union. But if the ESM has its wings clipped from the outset, this will never happen.

There is also the problem inherent in the purely inter-governmental system of policy co-ordination that France and Germany are offering. In such a system, the large countries impose their will on the small. Just witness the arrogance with which Ms Merkel and French president Nicolas Sarkozy presented their six-point competitiveness pact at the last European Council.

But would the financial markets not panic at a failure to agree a deal? Quite possibly. But nobody should fool themselves into thinking that the reaction to a fudged deal would be better. It might come a little later, but it would come. And then you are in a much worse position. Once you get a bad deal in March, there is no way you can crawl back to the Bundestag for a top-up loan in May.

The reason we are in this pickle is, ironically, the lack of market pressure. With their enthusiasm about a deal, the financial markets might have killed it. Eurozone countries only act when under immediate pressure. Germany, for example, has a massive problem in its state-owned banking sector, but apart from a reluctant restructuring of WestLB, this is currently no policy priority. The Bundesbank tells everyone that it is not happy about transparency in stress tests, and there is no law in place to force recapitalisations. The relatively calm market situation also explains why 189 economists find the time to write a long letter, criticising what they clearly consider to be the resolution of someone else’s crisis. I am afraid that without a force majeure event, there will be no crisis resolution. A good example is the Spanish recapitalisation of the savings banks. The Spanish government would never have had the courage to force this without the fear of being next in line for a speculative attack.

The EU’s crisis resolution strategy is to draw attention away from the underlying causes of the crisis: that you cannot have nationally controlled and undercapitalised banking systems in a monetary union with structural current account imbalances. The difficult job is to translate this technical statement into a language understood by politicians and their constituents, and to do so without lying. This is not a fiscal crisis. It is not a crisis of the south. It is a crisis of the private sector and of undercapitalised banks. It is as much a German crisis as it is a Spanish crisis. This acknowledgement must be the starting point of any effective resolution system. A veto in March is thus a necessary first step in crisis resolution.

Wolfgang Münchau, February 27 2011, FT

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In this short RSA Animate, renowned philosopher Slavoj Zizek investigates the surprising ethical implications of charitable giving.

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Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

Op-Ed Columnist – The Third Depression – NYTimes.com.

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