terça-feira, 31 de dezembro de 2013

segunda-feira, 30 de dezembro de 2013

Three big macro questions for 2014

As we enter 2014, the five-year bull market in developed market equities remains in full swing. Recently, I argued that equities now look overvalued, but not egregiously so, and that the future of the bull market could depend on when the level of global GDP started to bump up against supply side constraints, forcing a genuine tightening in global monetary conditions.

Today, this blog offers a year end assessment of three crucial issues that relate to this: the supply side in the US; China’s attempt to control its credit bubble; and the ECB’s belief that there is no deflation threat in the euro area. At least one of these questions is likely to be the defining macro issue of 2014 and beyond.

1. When will the Fed start to worry about supply constraints in the US?

Until now, the main worry in the US has been that demand would be inadequate to generate an acceptable rate of GDP growth, given the 1.5 per cent of GDP tightening in American fiscal policy in 2013. But now this seems to be changing. The US fiscal stance will tighten by only 0.4 per cent of GDP this year, and GDP growth is widely expected to exceed 3 percent, well above the current CBO estimate of about 2 per cent for the growth in potential output.

Many economists are suggesting that potential output, or “supply”, has been at least temporarily depressed by the effects of the recession, via early retirement of unemployed workers, and low levels of capital spending. In fact, the distinction between the aggregate demand (AD) and supply (AS) sides of the economy has become increasingly confused.

This development has dismayed Keynesian economists like Paul Krugman, who argue that it is still critical to retain a clear analytic distinction between the AD and AS curves. Most economists of my generation, trained during the stagflationary 1970s, strongly agree with them on this point. Paul’s camp also believes that, in the long run, supply potential will prove to be a very long way above the present level of GDP.

The CBO estimates that potential GDP is about 6 percent above the actual level of output. This of course implies that the Fed could afford to delay the initial rise in short rates well beyond the 2015 timescale that the vast majority of FOMC participants now deem likely. The very low and falling rates of inflation in the developed world certainly support this.

But the suspicion that labour force participation, and therefore supply potential, may have been permanently damaged by the recession is gaining ground in some unexpected parts of the Fed, and the unemployment rate is likely to fall below the 6.5 percent threshold well before the end of 2014 (see Tim Duy’s terrific blog on this here)

This is the nub of the matter: will Janet Yellen’s Fed want to delay the initial rate rise beyond the end of 2015, and will they be willing to fight the financial markets whenever the latter try to price in earlier rate hikes, as they did in summer 2013? I believe the answer to both these questions is “yes”, but there could be several skirmishes on this front before 2014 is over. Indeed, the first may be happening already.
2. Will China bring excess credit growth under control?

Everyone now agrees that the long run growth rate in China has fallen from the heady days when it exceeded 10 per cent per annum, but there are two very different views about where it is headed next. The optimistic version, exemplified by John Ross’ widely respected blog, is that China has been right to focus on capital investment for several decades, and that this will remain a successful strategy. John points out that, in order to hit the official target of doubling real GDP between 2010 and 2020, growth in the rest of this decade can average as little as 6.9 per cent per annum, which he believes is comfortably within reach, while the economy is simultaneously rebalanced towards consumption. This would constitute a very soft landing from the credit bubble.

The pessimistic view is well represented by Michael Pettis’ writing, which has been warning for several years that the re-entry from the credit bubble would involve a prolonged period of growth in the 5 per cent region at best. Repeated attempts by the authorities to rein in credit growth have had to be relaxed in order to maintain GDP growth at an acceptable rate, suggesting that there is a conflict between the authorities’ objective to allow the market to set interest rates, and the parallel objective to control the credit bubble without a hard landing.

As I argued recently, there is so far no sign that credit growth has dropped below the rate of nominal GDP growth, and the bubble-like increases in housing and land prices are still accelerating. The optimistic camp on China’s GDP has been more right than wrong so far, and a prolonged soft landing still seems to be the best bet, given China’s unique characteristics. But the longer it takes to bring credit under control, the greater the chance of a much harder landing.

3. Will the ECB confront the zero lower bound?

Whether it should be described as secular stagnation or Japanification, the euro area remains mired in a condition of sluggish growth and sub-target inflation that will be worsened by the latest bout of strength in the exchange rate. Mario Draghi said this week that

We are not seeing any deflation at present… but we must take care that we don’t have inflation stuck permanently below one percent and thereby slip into the danger zone.

This does not seem fully consistent with the ECB’s inflation target of “below but close to 2 per cent”. Meanwhile, the Bundesbank has just published a paper which confidently denies that there is any risk of deflation in the euro area, and says that declining unit labour costs in the troubled economies are actually to be welcomed as signs that the necessary internal rebalancing within the currency zone is taking place.

The markets will probably be inclined to accept this, as long as the euro area economy continues to recover. This seems likely in the context of stronger global growth.

But a further rise in the exchange rate could finally force the ECB to confront the zero lower bound on interest rates, as the Fed and others have done in recent years. Mr Draghi has repeatedly shown that he has the ability to navigate the tricky politics that would be involved here, but a pre-emptive strike now seems improbable. In fact, he might need a market crisis to concentrate some minds on the Governing Council.

So there we have the three great issues in global macro, any one of which could take centre stage in the year ahead. For what it is worth, China currently seems to me by far the most worrying.

Gavyn Davies

Fonte: FT

sexta-feira, 27 de dezembro de 2013

Latin America is turning a page

Editorial bem otimista do FT.

He is ubiquitous and disregards liberal ideals such as the sanctity of private property by dropping unannounced into private homes. He gives away goodies in a festive binge and is adored by many, who believe he has near-mythic powers. His most distinctive features, though, are that he dresses in red and sports a distinctive hat. His name, of course, is not Santa Claus (although it could be) but Hugo Chávez – the recently deceased Latin American populist whose hallmark was a red beret.
Venezuela’s socialist president was one of the greatest populists of all time. Like most populists, his ideology was eclectic, vague, nationalistic – and not to be taken too seriously. Nonetheless, Chávez was a figure worth taking very seriously indeed. That is why his death in March was the region’s main political event of the year. It marked the demise of a tub-thumping populist and, perhaps, even of Latin American populism itself.

To get a sense of this turning point, look back to the last millennium. Back in 1999, Chávez’s rise to power seemed to mark the beginning of a permanent political shift in the region. Latin America was emerging from the belt-tightening austerity of the 1990s, the so-called lost decade. Soon populist or leftist governments were popping up everywhere. By the mid-2000s, and financed by a swelling commodity price boom, the populist “pink tide” seemed unstoppable. Even Mexico almost succumbed. Now, Latin America is shifting back to the right. The lasting significance of Chávez’s death is that it accelerated the trend.
Venezuela’s obvious chaos, social division, high murder rates and near-bankruptcy mean the country is no longer a model for anywhere else, if it ever was. The waning commodity price boom is revealing the economic limits of other populist spendthrifts too. Lacking hard currency, even Argentina is mending fences with international investors and companies. Necessity, it seems, is also the mother of self-reinvention. And while growth in social democratic Brazil has stalled, Mexico is enacting the most important pro-business reforms of a generation. Meanwhile, the other liberal Pacific economies of Colombia, Chile and Peru are steaming ahead. Their investment-led performance is now exerting the region’s most powerful demonstration effect.
Technology has changed the populist game for good. Populism was a top-down affair practised by a near-authoritarian figure who claimed to embody the “will of the people”. Today it is social media that mobilises the populace – as seen in Brazil’s protests for better public services, or Chile’s street marches for cheaper education.
An end of populism does not mean the continent is about to embrace Chicago-style economics and political liberalism instead. Populism, after all, is not a disease, only a symptom of deeper problems, particularly inequality and poverty. Growth can help the latter, but often exacerbates the former. Chile, the region’s most successful economy, has just elected a centre-left president. It is also why the modest redistributive policies undertaken by governments over the past decade are important. Unlike Chávez’s populism, these helped to create a new “middle class”.
This, then, is the shape of the new Latin American politics. Its constituencies are diffuse, demanding and increasingly middle class. Meeting their aspirations will require traits rarely associated with Latin America, such as good governance and civic inclusion. Are the region’s reformist governments up to it? An open question: the challenge is to beat back inequality without ceding power to demagogues. At least the appeal of populists such as Chávez is over. That is progress – if not for Venezuela, now suffering his legacy – and cause for cheer.

Fonte: FT

quinta-feira, 26 de dezembro de 2013

Mohamed El-Erian: Fed wins battle of the exit – for now

With equity markets reacting enthusiastically to the Fed’s historic policy change announced last week, many have rushed to declare victory. Whether in asserting investor comfort with the policy regime shift or in declaring the definitive end of dependence on quantitative easing (“QE”), they believe that the markets’ short-term reaction can indeed be extrapolated into the longer-term.
Compare this with what we have been hearing from central banks. Reactions there have been quite muted. Humility may well be a factor, especially given that three prior attempts to “exit” earlier versions of QE regimes had to be abandoned. But there may well be more at play. Central bankers have good reason to be more cautious about declaring victory at this stage. And the rest of us would be well advised to ask why.
As widely reported last week, Fed policy makers decided to reduce – or “taper” – the purchases of securities. The first step, to be implemented in January, lowers the monthly market intervention from $85bn to $75bn by cutting equally both mortgage and Treasury purchases. Moreover, Ben Bernanke, outgoing Fed Chairman, signalled that – assuming there are no major economic surprises – we should expect the Fed to consistently reduce its purchases throughout 2014. So much so that, if all develops according to plan, the Fed could well terminate QE3 by the end of the coming year.
Unlike between May and June when the mere mention of the word “taper” severely disrupted markets, the Fed’s announcement this time did not stop just at taking away a measure that is widely believed to have significantly bolstered asset prices and, to a lesser extent, helped the real economy too. Our central bankers adopted compensating measures by providing greater assurances that policy interest rates would remain floored for quite a while. They have also hinted at additional measures should interest rates behave erratically – such as cutting the interest that the Fed pays banks on excess reserves.
Equities and other risk assets have soared in reaction to the news. After all, investors now have a clear road map for Fed policies, thus reducing a component of the uncertainty premium. Moreover, it is highly reassuring that the Fed remains committed to supporting the economy through the “asset channel.” And all this is taking place in the context of an improving economy as evidenced by the strong employment report and the upward revision in GDP growth.
While most Fed officials will welcome the markets’ favourable reaction – and especially so after the May-June shock – I suspect that they are much more cautious. Indeed, there are four reasons why such caution is understandable.
First, the impact of Fed policy remains overly dependent on using artificially-high asset prices to alter household and company economic behaviour. Other transmission mechanisms, including the credit channel and the deployment of cash in real economic investments, remain muted. Accordingly, concerns about financial soundness will persist until the Fed witnesses improving economic fundamentals that validate artificially-elevated asset prices.
Second, the Fed is entering a more uncertain policy phase due to its ongoing instrument pivot – namely, less reliance on a direct measure (monthly purchases) and greater reliance on an indirect one (impacting behaviour through forward policy signals). Issues regarding the degree of effectiveness and control could well come to the fore. Just witness the recent sharp upward moves in the 5-year US Treasury yields, along with other intermediate maturities.
Third, those at the Fed who follow closely market positioning will probably recognise that equity markets are currently in the grips of very favourable technicals; and, judging from history, such technicals can lead to price overshoots whose reversal can be quite disruptive.
Finally, the Fed is not the only central bank that has been active in maintaining economic and financial tranquility and, to this end, continuously bolstering asset prices; and it is not the only institution that has been forced to rely on imperfect instruments to fulfil this task.
The European Central Bank and the Bank of Japan are in the same boat. And they, too, face tricky policy issues ahead, with success also ultimately dependent on the overall ability of their economies to overcome the trio of inadequate aggregate demand, insufficient supply responsiveness and residual debt overhangs.
After a couple of false starts, Fed officials have impressively won the first big battle in implementing a gradual orderly exit from QE3, a highly-experimental measure whose longer-term consequences are not fully known as yet. They are yet to win the war.

Mohamed El-Erian


terça-feira, 24 de dezembro de 2013

sexta-feira, 20 de dezembro de 2013

The Fed’s fudge is an ambiguous bequest to Yellen

At 1.40pm on Wednesday, US Federal Reserve officials locked the door on a room full of journalists, pulled the plug on the internet and announced that they would now distribute two statements: the usual one from the Federal Open Market Committee and an extra release from the markets desk of the New York Fed.
It prompted an ironic cheer and a smattering of applause around the room because the second statement could mean only one thing: the long-awaited, much-debated, market-shaking taper of the Fed’s $85bn-a-month in asset purchases had finally arrived. When the news went out 20 minutes later, markets cheered as well. The S&P 500 ended the day at a record closing high – a positive reaction that pretty much nobody had anticipated would greet lower monetary stimulus.
It was one of those seemingly dull and utilitarian Christmas presents, like a new briefcase, that turns out to make a big difference to your life. After more than six months of speculation, market gyrations and bad puns (a tapir, I now know, is a browsing mammal that looks like a pig with a long nose), the Fed had made its move. Traders can come back in January and think about something new. Relief from the tension is as good an explanation for the rally as anything.
The decision to taper purchases to $75bn a month means that Ben Bernanke, the Fed chairman, will depart in January having taken the first step back from aggressive monetary easing. It makes for an elegant ending to his eight years in office. While the direct effect of the taper is minimal – rates are still zero and $75bn is a lot of assets to buy every month – it marks the moment of “peak stimulus”, the point at which the Fed declares it no longer needs to do ever more to help the recovery.
But the taper does not mean the Fed can now sit back comfortably or that Mr Bernanke has left his successor, Janet Yellen, with an easy hand to play. The Fed has fudged its communications in a way that looks vulnerable to future shocks. That will be especially true if, as is quite likely, 2014 brings the first scare for a while about overly rapid growth.
Yesterday brought an upward revision in the annualised pace of US growth to 4.1 per cent for the third quarter of 2013. Most data on the fourth quarter suggest the underlying pace of growth has accelerated. With little drag from fiscal policy, households in a position to borrow again and better economic numbers around the world, the odds favour strong growth in the US next year.
The problem for the Fed is that a run of good news may lead markets to reject its forecast that interest rates will not rise until well into 2015, and only slowly after that. If market interest rates start to rise, that will slow the economy, and the Fed has weakened the communication tools it could use to push back.
For example, the Fed’s 6.5 per cent unemployment rate threshold, above which it will not raise interest rates, is now in effect defunct. Rather than lower that number, the Fed said it expects to keep rates low “well past the time that the unemployment rate declines below 6.5 per cent”, but a vague form of words such as this is much easier for markets to test and disregard than a concrete figure.
The Bank of England ran into similar trouble with its own 7 per cent threshold this week, when the unemployment rate suddenly fell to 7.4 per cent, prompting talk of rate rises. Thresholds have turned out to be very convincing – markets trust central banks when they set a number – but the flaws of the unemployment rate as a measure of economic health have undermined them in practice.
The path for asset purchases that Mr Bernanke laid out will also pose some problems if the Fed needs to respond to a stronger or weaker economy. Although the chairman insists the Fed’s bond-buying is not on a “preset course”, he says the basic plan is for a small taper at every meeting from now on, bringing purchases down to zero towards the end of next year. That is like getting into a car and programming a destination into the satnav. If the economy weakens, the Fed might stop for a sandwich along the way – so its course is not exactly preset. But nor is there much doubt about where it is going.
As with the softening of forward guidance, the effect of this is to make the Fed less intimidating, and so more vulnerable if markets test its desire to keep rates down. Before the taper, asset purchases were open-ended, so markets had to worry they would go on for ever. By contrast, “we’re going to delay the next taper for a month!” is not the kind of threat that traders will be scared to bet against.
It is likely, therefore, that at some point during her first year in office Ms Yellen will face a moment when market interest rates are higher than she wants or believes to be justified. If that moment arrives, it will have repercussions around the world, with a stronger dollar that sucks capital out of the most vulnerable emerging markets.
Ms Yellen will have to find a way to respond – and the Fed’s toolbox is not empty yet. She could toughen up its forward guidance again, perhaps setting a minimum level of inflation before rates can rise, or even going back to a calendar date. She could cut the interest paid on bank reserves. The Fed could even use asset purchases directly to target some market interest rates if they move too far out of line.
The economy is looking better and the taper has arrived, but this is not the end of excitement from the Fed, and may not be the end of actions to ease monetary policy. For Ms Yellen, new challenges await.

Robin Harding

Fonte: FT

quinta-feira, 19 de dezembro de 2013

Barry Eichengreen, Taper in a teapot: The Fed’s tweaking of monetary policy

The decision by the US Federal Reserve to reduce the rate of its securities purchases by $10bn a month is best dismissed as
a taper in a teapot. It is much sound and fury signalling little.
In effect, the Fed tightened current monetary policy almost indiscernibly, while at the same time using forward guidance – that is, this month’s statement by the Federal Open Market Committee – to indicate that future policy would remain loose for at least slightly longer than previously anticipated.
This was a sensible way of tweaking the time profile of monetary policy. The US economy has been doing a little better than expected of late, and therefore is now able to digest this slightly tighter policy.
At the same time, serious concerns remain about America’s medium-term economic prospects. There is uncertainty about whether the pace of recovery will continue to disappoint. There is the question of whether and when the alarming decline in labour force participation, which has created the appearance but not the reality of lower unemployment, will be reversed. Given these uncertainties, it is entirely appropriate for the Fed to signal that it may be even more supportive of the economy in the medium term.
But these changes are inconsequential by the standards of the dramatic and unprecedented developments in monetary policy that we have seen since the crisis of 2008; $10bn of monthly securities purchases are a drop in the bucket for a central bank with a $4tn balance sheet. Even if this $10bn reduction is the first in a series of steps in the same direction, it will take many months before the change has a discernible impact on the Fed’s financial statement.
Wall Street may have had trouble figuring this out on Wednesday afternoon, when the Fed’s statement seemingly threw the financial markets into a tizzy. But, having slept on it, stock traders should be able to recognise the Fed’s announcement for the non-event that it is.
The one consistent impact of the FOMC announcement was on the dollar exchange rate, which rose sharply against the yen and other currencies. This should not come as a surprise. Even a slightly tighter Fed policy now makes for a significantly stronger dollar, since monetary tightening will not only strengthen a currency but cause it to overshoot its new equilibrium value, other prices being slower to move. Thus, we should expect to see the dollar give back some of the ground it gained in coming days. The rise in the dollar will turn out to be another tempest in a teapot.
In contrast to the effect of Fed chairman Ben Bernanke’s “tapering talk” in May, which led to a very sharp emerging market correction, the FOMC announcement is unlikely to have much impact on these countries. For one thing, investors this time are better prepared. They may not have been certain that tapering was coming this week but neither were they as surprised as they were by Mr Bernanke’s earlier statements.
For another, emerging markets are better prepared. Their exchange rates and stock markets are not as overvalued as they were in May. Their financial markets are not as dependent on foreign money. They are, therefore, not as vulnerable to correcting downwards.
Finally, policy makers in emerging markets have already gone one round with the Fed. If they gained anything from their less than happy experience last summer, they at least learnt what kinds of response are more likely and less likely to reassure the markets.
The value of this week’s decision is mainly symbolic. It is a way for the Fed to signal to its detractors that it hears their criticisms of its unconventional monetary policies, and that it shares their desire to return to business as usual. The decision beats back some of the criticism to which the Fed is subject, and diminishes prospective threats to its independence. But, at the same time, the central bank has also signalled that it is not prepared to return to normal monetary policy until a normal economy has returned. As Hippocrates might have said, it has at least done no harm.

Barry Eichengreen is professor of economics and political science at the University of California, Berkeley

Fonte: FT

quarta-feira, 18 de dezembro de 2013

So far so good for the Fed

The Federal Reserve’s programme of quantitative easing, which it is now winding down, has been a momentous step into the unknown.
But some rules of central banking never change. As ever, the words that accompanied its announcement on monetary policy matter far more than the substance of the policy behind it.
Ben Bernanke has the symbolic gesture he wanted before he leaves: bond purchases will start to taper off next month, from $85bn per month to $75bn, but the announcement also minimised the market discomfort.
The Fed volunteered that “asset purchases are not on a preset course”. Future tapers, Mr Bernanke made clear, will depend on unemployment and inflation.
Mr Bernanke now says the current effective zero target Fed Funds rate will stay in force “at least until the unemployment rate reaches 6.5 per cent” – which the Fed’s governors do not expect to happen until the end of next year – and that it will “likely” be appropriate to keep rates at virtually zero “well past the time” that unemployment dips below 6.5 per cent.
So the Fed has sent the signal it wanted – that the era of open-ended easy money is coming to an end, but only while promising that rates will stay historically low long past next year.
As 10-year bond yields are roughly double the level from the low they hit in 2012, the Fed has already successfully engineered a moderate tightening, without scaring stock markets, which reacted well to the taper news. So far, then, so good.
Many challenges lie ahead. The tapering process could yet spark a crisis in emerging markets; if inflation falls, it may have to reverse course and keep making asset purchases; and if the “feather-bedding” has been overdone, the US stock market, already looking expensive, could “melt up” into a bubble.
But, for now, the Fed has managed the first stage of exiting QE as well as it could possibly have hoped.

John Authers

Fonte: FT

terça-feira, 17 de dezembro de 2013

segunda-feira, 16 de dezembro de 2013

Entrevista com Haruhiko Kuroda, head of the BoJ

For one and a half decades, the Bank of Japan insisted it was unable to end the country’s ongoing, albeit mild, deflation. The government of Shinzo Abe rejects this defeatism. It demonstrated that last January, with the joint declaration by the government and BoJ that the bank would pursue an inflation target of 2 per cent, the current norm for high-income countries.
Aspiration turned into action in April, after the appointment of Haruhiko Kuroda, a bank outsider who was critical of the BoJ’s orthodoxy, to be governor. Under his leadership the bank has acted with boldness, announcing its ambitious programme of “quantitative and qualitative easing” (QQE) in April. The aim is to deliver the 2 per cent inflation target “at the earliest possible time, with a time horizon of about two years”. The central bank also committed to doubling its holdings of Japanese government bonds (JGBs) over the succeeding two years and more than doubling the average maturity of those holdings to seven years.
So what progress has been made with the first of the “three arrows” of Abenomics? Interviewed at the BoJ , the governor gave firm answers, punctuated by his infectious laughter.
“I think I can say we are half way,” he says. “The latest statistics show that the inflation rate has reached 0.9 per cent. But there is still a long way to go.” He says the bank intends to achieve the 2 per cent inflation target and maintain it in a stable manner. “It’s no good just to touch on the 2 per cent and then go down to 1 per cent or less,” he says.
“We envisage basically three channels through which the quantitative and qualitative easing would affect the economy. The first is the massive amount of purchases of Japanese government bonds, which would suppress long-term interest rates over the entire yield curve. The second channel is a ‘portfolio rebalancing effect’. Banks, companies and households would shift their portfolios, now dominated by fixed income assets, towards riskier assets, including lending to the economy. The third channel is shifts in expectations.”
Is the exchange rate a part of portfolio rebalancing? Mr Kuroda agrees that it is, adding that “initially, the rise in inflation reflected a depreciated currency”. But this has changed. The “core-core inflation rate”, which excludes energy and food, already shows a 0.3 per cent increase.
“If we look at the hundreds of items of household expenditure, we can find that more than half the items show an increase in price,” he points out.
Already, he notes, the median forecast of the members of the nine-person monetary policy committee was that core inflation (which excludes food) would reach 1.9 per cent in fiscal year 2015 (April to March).
This has led to an upward shift in inflation expectations, which he notes have been “rising steadily but moderately. Many indicators show that expected inflation may be 1-1.5 per cent.”
Moreover, the output gap – a measure of excess capacity – is also falling. The BoJ thinks it might now be only 1-1.5 per cent of potential output. It also expects 1.5 per cent annual growth over the next two fiscal years. At this rate, the output gap would be closed within two years. This rapid growth would occur despite forthcoming increases in the consumption tax. “I think our monetary policy must have contributed to realising positive growth well above potential,” he says.
How is what the BoJ doing different from what other central banks are doing? Mr Kuroda responds by noting that the BoJ was the first to use quantitative easing, back in 2001. The difference between what it is doing now and its own past practice is that this time it is also extending maturities. So what the Bank calls QQE is much the same as what is called QE in the US and UK, albeit on an exceptional scale.
How far, one wonders, is the monetary policy committee Mr Kuroda largely inherited in agreement? Mr Kuroda says QQE was “adopted unanimously by the nine members. There may be some differences of nuance, difference of views, not about the channels through which monetary policy can affect the real economy but the extent. A few of them think that even in two years’ time, even with this QQE, consumer price inflation may not reach 2 per cent”.
The implication, then, is that the MPC should do even more. This leads to discussion of what happens after the second year of the new policy. “Our QQE is not time-constrained,” Mr Kuroda responds. “Our guidance is condition-based. So without any new kind of decision, the current QQE can continue until the 2 per cent inflation target is achieved and maintained in a stable manner.”
The policy will continue for as long as it is needed. Nor is it yet time to consider what the exit strategy would look like, although Mr Kuroda is confident it can be managed.
Is the BoJ considering any other policy instruments – negative interest rates on bank reserves, purchase of foreign assets, more purchases of assets other than Japanese government bonds, more precise forward guidance?
“At this stage, we are not thinking about any other policy tools since we are on track and we are likely to achieve the 2 per cent inflation target within the two-years time band.
“I can say that those potential instruments, they are possible, and at this stage I don’t want to exclude any one of them.” But, he adds, the purpose of the purchase of foreign bonds is presumably to lower the exchange rate. That is the prerogative of the government.
The BoJ will do “whatever it takes”, to cite Mario Draghi, president of the European Central Bank. So why do forecasters refuse to believe it will succeed? “That’s a good question,” he says, “because if you look at the forecasts made by market economists, you can find that as far as real economic growth is concerned, there is not much difference. But, on the inflation rate, here there are differences.
“The differences for this fiscal year and next are small.” But in fiscal year 2015, the bank expects to reach 1.9 per cent inflation, while market economists expect the rate to stay around
1 per cent. He suggests that the source of this difference might be that the bank thinks that “as the actual inflation rate rises from negative to 0.5 per cent, 1 per cent, 1.5 per cent, and so forth, inflation expectations will also rise gradually”. Market forecasters may doubt this.
Discussion turns to the governor’s support for a rise in the consumption tax from 5 per cent to 8 per cent, due in April. Is concern about “fiscal dominance” – the determination of monetary policy by out-of-control fiscal policies – the reason for his support?
“There is a clear division of labour between the central bank and the government,” he replies. “The central bank is in charge of monetary policy and the government is in charge of fiscal policy. We don’t want to be involved in fiscal policy.”
There are two kinds of risks. One is the tail risk of delaying fiscal consolidation too long and so suffering a loss of confidence in the public finances. “Long-term interest rates would shoot up in that event.” The other is the risk that premature fiscal consolidation would slow the desired economic reflation.
The probability of the first risk may be far lower than that of the second. But “if the second risk happens, the government, as well as the central bank, can do something to ameliorate the situation. If the first risk is realised – I would say it’s very low – then it’s almost impossible for the government and the central bank to do anything.”
Moreover, Mr Kuroda adds, he is in favour of the second stage of the increase in the consumption tax, to 10 per cent, due in October 2015, not just the first. Indeed, further tax increases will be needed: “There would be about 2 per cent of gross domestic product primary fiscal deficit, even in 2020. So 2 per cent of GDP equivalent fiscal deficit reduction is necessary.”
Japan’s high public debt (the International Monetary Fund forecasts gross debt at 244 per cent of GDP at the end of this year) is a well known risk. But what if the bank succeeds in destabilising expectations of deflation but fails to re-anchor them?
Mr Kuroda is not worried. “Raising the inflation rate as well as the inflation expectations from negative to 2 per cent, that is quite challenging. On the other hand, to stop inflation from rising beyond the 2 per cent target, that is less challenging.”
Yet rates of interest would then rise, perhaps sharply. So banks and other companies would stand to lose money. The Japanese government stands to pay more interest. Does he really think this would be easily manageable?
“Every year we have been making a stress test of the banking sector,” he says. “Even with a 300 basis point rise in interest rates across the yield curve, the financial system would not be damaged much.
“The government may have to pay more interest for new borrowing but the financial sector can also gain from higher interest rates of newly issued bonds. The Japanese banking sector has huge capital – enough capital.”
How about the government? If interest rates rose, because of a rising inflation rate or an improving economic situation, the government would gain through significantly increased tax revenue.
“Yes, if interest rates rose, that certainly would make the government pay significantly more interest,” he says. “So consolidating the fiscal position continues to be a challenge.”
Why is eliminating deflation so important? After all, the Japanese economy has not done badly. Between 2000 and 2012, Japan’s increase in real GDP per worker was the second-fastest in the G7 after the US. The working population is shrinking but monetary policy will not produce children. So why is Japan going through this upheaval, particularly since deflation was steady?
“Actually, deflation started around 1998,” he responds. “But it has been relatively mild. On average, a 0.5 per cent decline in prices year-on-year. Because prices are declining, people just tend to delay expenditures. So we have a continuous demand shortage and the gap has been filled by continuous fiscal stimulus.
“Second, holding cash became relatively profitable. So corporations accumulated cash. At this stage, they hold nearly 50 per cent of GDP in cash. And they don’t invest much. In the past 10 to 15 years they invested less than their cash flow in physical assets.”
Is the implication of this argument that the move from deflation to inflation is the most important structural policy? After all, Mr Kuroda’s answers are more structural than monetary.
Mr Kuroda disagrees: “I think the third arrow is still important. The government intends to raise the potential growth rate to 2 per cent.” That will not be achieved merely by eliminating deflation.
Yet does that not imply unrealistically high productivity growth for an advanced economy?
Again, the governor disagrees. “I don’t think it’s extremely difficult, although not so easy. How do you raise your potential growth rate? One way is to increase the quantity and quality of the labour force. The second is to raise labour productivity.”
One solution, he argues, is to help women stay in the labour force even when they become mothers. “There is also huge room for labour productivity increase, particularly in the services sector,” he says.
The discussion turned to wages: it would presumably be bad if inflation went to 2 per cent and nominal wages did not rise equally. That would be disastrous for Japan’s policy aims, not to mention the living standards of ordinary Japanese.
This does not worry Mr Kuroda. “In Japan, in the past 20, 30 years, including the 15-year deflationary period, if you look at wage increases and price increases you find very similar movements. That means that unless wages are rising, prices will not continue to rise, and unless prices are rising, wages will not rise.”
He adds that total compensation is rising as employment is showing “substantial improvement”.
As we leave, the governor stresses the unique challenge the bank confronts. “In the US, UK or other countries, inflation expectations are stably anchored around 2 per cent. But we are trying to raise inflationary expectations towards 2 per cent. The tools are quite similar. But the objective is a bit different.”
Mr Kuroda radiates determination to achieve this. It should soon become clear whether he is going to succeed.

Fonte: FT

sexta-feira, 13 de dezembro de 2013

Ian Buruma: Globalisation is turning the west against its elites

Anew alliance is being forged between Geert Wilders and Marine Le Pen to fight what the Dutch populist calls “this monster called Europe”. They make a striking pair, with their shared taste for dyed butter-blonde locks. Yet their parties – the Dutch Party for Freedom and the French National Front – differ in several respects.
Before he switched the focus of his vitriol to “Europe”, Mr Wilders built his platform on a defence of “Judeo-Christian European civilisation” against the Muslim peril. One peril of “Islamisation”, in his view, is the threat to gay rights. “Judeo-Christian” sits awkwardly with Ms Le Pen’s party, whose founder, her father, Jean-Marie Le Pen, once dismissed the Nazi gas chambers as a detail of history. Her party is not keen on gay rights.
But loathing of the European monster has bonded the two politicians in a common cause. The same sentiments are shared by many other European populists, from The Finns (formerly the True Finns) to the Flemish Block and the UK Independence party. Dire predictions have been made that a populist eurosceptic alliance will dominate the European parliament after elections next May.
This is unlikely, since the parties, some of which are more disreputable than others, are having trouble coming together. Nigel Farage, the Ukip leader, for example, wisely keeps his distance from his Dutch, French and Flemish confrères; he is worried by racism, be it against Jews or Muslims.
There is, of course, much to dislike about the EU. The so-called “democratic deficit” is real. The high-handed manner in which eurocrats push through sometimes quite misguided policies (the euro, to mention just one) has – rightly – put people’s backs up. And the European parliament is filled with obscure cranks, many of whom are of course from the parties that hate “Europe”.
But there is something more visceral about the populist aversion to the EU. People who suffer from these anxieties are often far removed from the consequences of what frightens them. Many Ukip voters in the English shires do not encounter many immigrants. “Europe” is little more than a demonic abstraction.
What the followers of the Pied Pipers of popular resentment really hate, perhaps more than Muslims and other aliens, is their own so-called liberal elite – the educated mandarins and commentators, the bien pensant writers and academics, the left-of-centre internationalists, the cosmopolitans and the eggheads. In short, the people whose superior airs make them feel inadequate.
The common idea is that the liberal-left elites are destroying our identities – ethnic, national and religious. It was the liberal elites that allowed immigrants to “swamp” our cities, legally or illegally. It was they who built pan-European institutions and the UN. Liberals created welfare states, which reward the lazy and allow foreigners to sponge off our taxes. In the US, liberals elected a black president. And some Tea Party enthusiasts sincerely believe that the UN is robbing the US of its sovereignty (because of the liberals, of course).
The world is shifting in ways that make many western citizens uncomfortable. Non-western powers are rising fast. The European sense of superiority is becoming harder to maintain. Non-white populations are growing in the west. In much of the US, white Christians of European origin no longer dominate politics.
It is also true that the ideals of the postwar elites, their hopes for social democracy, for international institutions, for European unity, are looking more and more threadbare. The crisis, and the reasonable fear that our children will be less well off than we are, has dealt a blow to those ideals and the educated class that did most to promote them.
But to blame the liberal elites is in one important respect to miss the point. For those elites are much less responsible for the destruction of customs and traditional communities than something quite different. Just as Thatcherite laisser faire economics did much to sweep away traditional institutions in Britain, the new neoliberal global economy is doing the same all over the world.
Industries now move swiftly from continent to continent. Metropolitan financial centres have become more influential than governments. And these neo-liberals are different in at least one vital respect to the old elites: whereas old lefties wanted the state to play a central role in society, the neoliberals have little time for any state intervention.
Many people benefit from globalisation. But many others feel left behind and marginalised. This is why they are so resentful. Exploiting this feeling is politically expedient and wins a lot of votes. But there is a contradiction in much contemporary populism. In the US, populists who hate Wall Street almost as much as the UN are sponsored by billionaires whose interests are far removed from those of their supporters. Supporters of Ukip want Britain to break away from Europe and become a western Singapore. This might be good for London, but would surely be a disaster for provincial England – where most Ukip voters live.
The politics of hatred never result in anything good. But preaching the old liberal shibboleths about internationalism, the richness of immigrants’ cultures and the horrors of racism are not enough. The borderless economy must become more equitable to temper growing inequalities and to shield the vulnerable from global market forces.
Neither Mr Wilders nor Ms Le Pen will achieve this. If the new elites in the global economy want to stave off the storm of destructive hatred, they had better come up with some ideas of their own on how to temper the market forces from which they have profited so well.

Ian Buruma latest book is ‘Year Zero: A History of 1945’. He teaches at Bard College in New York


quinta-feira, 12 de dezembro de 2013

Philip Stephens: Europe faces a bigger threat than German caution

The world must seem a confusing place if you are sitting in Angela Merkel’s chair. The chancellor has been under sustained international fire for the stellar performance of German companies in global markets. Now Ms Merkel’s critics are accusing her of beating a retreat from the economic reforms that have underpinned this success.
For the past several years, Germany has been berated as the villain of the single currency. Berlin, the popular (do I mean populist?) narrative has run, has refused to bail out the eurozone’s troubled periphery. It will not put its imprimatur on a new class of eurobonds. Germany’s hefty current account surplus has pushed Greece, Spain, Portugal and others into savage deflation. The strains on monetary union are not the fault of the weak economies but of Germany’s super-competitiveness.
There is quite a bit wrong with this argument. Greece’s problems have more to do with an absence of effective governance in Athens than with the fact that Mercedes and BMW produce really nice cars. The boom-to-bust housing markets in Spain and Ireland can be linked only tangentially to the technical skills of Germany’s machine tool industry. Italy is, well, Italy. France is still terrified of letting go of the past.
Germany could and should have done more to stimulate its domestic economy. Austerity is sometimes a necessary evil, but it should not become a religion. Ms Merkel’s habit of pushing each rescue operation to the wire added greatly to the costs of stabilising the single currency. More broadly, imbalances in the international system are better dealt with if creditor as well as debtor nations shoulder some of the burden.
That said, the impact of a more robust German economy would have been very marginal. A little extra growth in Germany would not materially have reduced the pain of fiscal and structural adjustment in the eurozone south. Even British politicians, who congratulate themselves for having stayed out of the euro, have had to share in the post-crash misery.
Now consider international reaction to the pact Ms Merkel’s ruling Christian Democrats have signed with the opposition Social Democrats. Assuming it has won the backing of SPD members – the result of a referendum of party activists is due this weekend – the accord is supposed to provide a policy compass for a grand coalition.
Germany’s most ardent admirers would be hard-pressed to describe the agreement as an inspiring document. The elements that have grabbed the headlines have a distinctly retro feel. At the insistence of the SPD, Germany is to get a minimum wage, the retirement age will be lowered for those longest in employment, older mothers will get better pensions and workers will keep their employment protection.
To the extent that these measures will have an identifiable impact – and the pact leaves the commitments more carefully hedged than media headlines have admitted – they are likely to loosen somewhat the fiscal reins and push up wages. In other words, they should increase domestic demand and make German industry a little less competitive than it might otherwise have been.
The package received predictably harsh reviews from the Bundesbank and German employers but Ms Merkel might have expected modest applause from an international audience that has called for a more expansionist policy. Not a bit of it.
The Economist caught the mood with an editorial haranguing Ms Merkel’s concessions to what it called the SPD’s “leftish agenda”. German productivity, the magazine scolded, had been rising less than half as fast of that of Spain. No European country had carried out fewer reforms than Germany in recent years. Berlin, it seemed to say, should embark on new reforms to reopen the competitiveness gap with other eurozone states. As I said, Ms Merkel must be totally confused.
In truth, the significance of the coalition agreement lies not in what it prescribes for Germany, but in what it says about a wider affliction. Europe suffers from an excess of caution. Globalisation has turned the world upside down. Europe’s response is to pretend otherwise.
A chronic aversion to risk stunts decision-making across the continent. Manifested in Germany by high savings rates or the closure of nuclear plants, it is also at the heart of immobility in France, where politicians and voters behave as though they can stop the world and jump off. Why should the French pay attention to what is happening anywhere else?
The insider-outsider psychology stokes nationalist fires against “job-stealing” immigrants. Supposedly freewheeling Britain is hamstrung by antiquated planning laws and immovable vested interests. David Cameron’s government runs scared even of expanding London’s overcrowded airports.
The euro has not made life easy for Europe but, in a curious way, it has crystallised the choice between modernisation and stasis. Fiscal deficits matter; so do unit labour costs. What Europe really misses, however, is the economic dynamism that comes with a willingness to strike out in new directions.
The risk aversion is readily explicable – it comes with relatively high living standards and ageing populations. It is no less dangerous for that. Doing nothing is as much a policy choice as doing something. Europe’s best hope of holding on to its prosperity and its liberal political order is to embrace the need to change. Ms Merkel is a cautious leader, but Germany has done better than most to adjust to globalisation. The threat to Europe is Europe itself.

Philip Stephens

Fonte: FT

quarta-feira, 11 de dezembro de 2013

Martin Wolf: The emerging risks of ticking time bonds

The most sobering lesson of the global financial crisis was that developments expected to increase resilience – in that case, the “originate and distribute” model of finance – turned out to reduce it. Does a similar danger now threaten stability? Yes. The next round of global illiquidity might derive from foreign currency bonds of non-financial companies of emerging economies. The centre would be asset managers, not banks.
Last summer’s “taper tantrum” was a foretaste. The indication by the US Federal Reserve that it was considering a reduction in the rate at which it would expand its balance sheet had a dramatic effect on emerging economies. As the International Monetary Fund noted in its October World Economic Outlook: “Expectations for earlier US monetary policy tightening and slowing growth in emerging market economies prompted major capital outflows from emerging markets during June 2013.” The results included a widening of risk spreads, equity market falls and big declines in exchange rates against the dollar.
Why did turmoil follow the mere possibility of a twitch towards tightening in Fed monetary policy? At a conference on Asia at the Federal Reserve Bank of San Francisco, Hyun Song Shin of Princeton University, among the world’s foremost financial economists, suggested an answer: the growth of demand for the private sector bonds of emerging economies.
In booms, finance floods the market, driving excesses; in busts, finance dries up, causing slumps. This phenomenon is known by the loose term “global liquidity”. Before the global financial crisis, banks were the main providers of liquidity. Since 2010, a locus has been the bond finance of non-financial corporate sectors of emerging economies. Asset managers (BlackRock, Vanguard, Fidelity, State Street, Pimco and so forth) drive the flows. This, then, is the “second phase of global liquidity”. It is also why portfolio flows to emerging economies reversed last summer.
External finance of emerging economies has changed in two ways: non-banks have become bigger borrowers, relative to banks; and debt securities have largely replaced loans. Much borrowing is done abroad. An indication is the widening gap between borrowing by place of residence and by nationality: Chinese companies, for example, issue foreign currency bonds in Hong Kong, not the mainland (see charts).
The purchasers of these bonds search for yield in a low-yield world by lending longer and riskier. Borrowers take advantage of the lower cost of foreign-currency bonds. But in the process, they assume a currency mismatch: foreign currency debt against domestic currency assets. These borrowers are speculating on their domestic currencies. Students of the Asian financial crisis of 1997-98 will find this disturbingly familiar. Non-financial companies have taken on a “carry trade”, by financing local assets with apparently cheap dollars.
When funding conditions turn, such trades can become lethal. As the Fed is expected to tighten, the dollar will rise, prices of dollar bonds will fall and dollar funding will reverse. As the bonds they issued lose value, borrowers will be forced to post more domestic currency as collateral. That will squeeze their cash flows and trigger a downturn in corporate spending. A fall in the exchange rate will exacerbate the squeeze upon them. Highly indebted non-financial corporations may even go bankrupt, imperilling domestic creditors, including the banks.
Such a pattern of currency and risk mismatches partly explains the volatility last summer. That stress eased, but the Fed will tighten at some point. Then the doom loop is set to restart: a brutal unwinding, with attendant corporate distress and even sharp recessions.
Thus, even asset managers may be a source of cyclical instability – provided they, too, behave pro-cyclically, just as leveraged lenders do. The two fundamental problems, in this case, are the lack of long-term holders of the debt and the currency mismatches inside borrowers. Indeed, non-financial corporations are behaving more like banks, with rising financial assets (in domestic currency) and liabilities (in foreign currency). They are more like financial intermediaries than conventional companies. This makes them vulnerable to bank-like risks.
The case that the development of this new pattern of financing could be a source of vulnerability and volatility seems strong. The story underlines a point that emerged in previous crises in emerging economies: national balance sheets matter. Currency mismatches emerge whenever borrowers find it attractive to borrow in apparently cheaper foreign currencies. They have repeatedly proved devastating to emerging economies, whether they have occurred in the government sector, the banking sector or the non-financial corporate sector.
Yet it is hard to know how big such risks are without better data. The meticulous monitoring of build-ups of mismatches is an essential part of better financial housekeeping. Focusing on the financial sector’s leverage and mismatches is, alas, insufficient. One must track the debt issuance of domestic financial and non-financial corporations – both onshore and offshore – and the build-up of domestic currency deposits of non-financial corporations. These are, as Prof Shin argues, in part the counterpart of their foreign currency borrowing. The dollar value of the deposits of the non-financial corporations of emerging economies has been volatile, partly because of swings in exchange rates, but has also been rising rapidly (see chart).
What, finally, are the policy implications, beyond the well-known fact that the combination of today’s hyper-aggressive central banks with the private sector’s reach for yield is bound to create fragility? One is that controls on capital inflows count for next to nothing if companies can borrow offshore. Another is that currency adjustments, albeit vital for managing our volatile world, will expose such mismatches. Above all, managing a return to normal monetary conditions without further large-scale instability is going to be quite difficult.
Emerging economies must be aware of such perils. So must the institutions charged with helping them.

Martin Wolf

Fonte: FT

terça-feira, 10 de dezembro de 2013

Lorenzo Bini Smaghi: The ECB’s reserve currency dilemma

As economist Robert Triffin explained more than 50 years ago, the development of an international reserve currency requires that the issuing country or area records a current account deficit. This partly explains why the yen and the Deutschmark did not develop an equivalent role to the dollar, in spite of the relative strength of the Japanese and German economies. The eurozone economy is now in the same position.
The eurozone countries have adjusted, during the financial crisis, from running a broad external balance, which prevailed until 2010, to a rising surplus (2.7 per cent of gross domestic product in 2013, up to 3 per cent in 2015). Only Estonia, Greece, France, Cyprus and Finland are still expected to have a slight deficit this year. Spain, Italy, Malta, Austria, Slovenia, Portugal and Slovakia have moved from deficit to a surplus.
The fact that the eurozone records a surplus in the trade of goods and services with the rest of the world may be considered appropriate for an ageing society. The accumulation of net assets with the rest of the world is a way to smooth consumption over time.
However, this situation is inconsistent with the desire of the rest of the world to invest part of its savings in the eurozone, given the reserve status of the euro and international investors’ diversification of their portfolios away from the dollar. This strong demand is not being met by a sufficient supply of assets by the eurozone, which is a net exporter of capital.
In the current global financial environment, the status of reserve currency cannot be imposed by the monetary authorities. It is largely determined by the decisions of international investors. The international role of the euro gradually increased after the start of monetary union but stalled in the midst of the euro crisis. More recently, however, as international investors have regained confidence in the ability of the eurozone authorities to muddle through and ultimately avoid a collapse of the single currency, the demand for euro assets has recovered, putting upward pressure on the exchange rate.
The rising eurozone external surplus is magnifying this effect, by reducing the net supply of euro-denominated assets. The combination of rising capital inflows from the rest of the world and higher eurozone current account surplus is creating a new tension in global financial markets, which may distort the valuation of the European single currency. This represents a threat for the economic recovery in the euro area.
There are no easy solutions. A reduction of the financial market fragmentation within the eurozone would certainly help, but only at the margin because the countries that in the past experienced external deficits cannot afford to increase their external debt again. The surplus countries would have some margins to reduce their net savings, but their current policy preferences do not signal any change in that direction. The eurozone could discourage the inflow of capital, but it is difficult to see how this could be achieved without imposing capital controls, as some emerging markets have done.
Short-term capital inflows in the euro area could be discouraged by imposing a negative interest rate on deposits at the central bank. This measure would also encourage eurozone financial institutions with excess liquidity to look for international investment opportunities.
Another possibility could be for the European Central Bank to stop its policy of reabsorbing back the liquidity issued against the purchase of Italian, Spanish, Irish and Portuguese bonds under the Securities Market Program which was conducted in 2010-11. These operations are currently conducted through weekly tender operations. Their termination would release about €180bn of liquidity in the money market. It would create a further incentive for eurozone institutions to lend to each other and to invest in external assets, thus alleviating the pressure on the euro.
If the sterilisation operations were still considered necessary, for window-dressing purposes, they could nevertheless be implemented in a more flexible way – allowing, for instance, counterparties to use foreign currency. This would contribute to absorbing the increasing foreign demand for euro-denominated assets. The maturity of these operations could also be extended, to meet international investors’ preference.
If these instruments prove not to be sufficient to curb international investors’ excess demand for eurozone assets, more drastic measures might be needed, following what other central banks have done. The recent sharp reduction in the size of the ECB’s balance sheet, while that of all other central banks is increasing, is not consistent with the fragile state of the eurozone economy nor with an inflation rate that is increasingly deviating from price stability.
Overall, the eurozone is in a unique situation. It is the issuer of the second-most important currency, whose demand by the rest of the world is on the rise. At the same time its trade surplus with the rest of the world increases. This requires innovative solutions.

Lorenzo Bini Smaghi is a former member of the executive board of the European Central Bank, and currently visiting scholar at Harvard’s Weatherhead Center for International Affairs and at the Istituto Affari Internazionali in Rome.

Fonte: FT

segunda-feira, 9 de dezembro de 2013

A weak EU banking union risks deflation

Barely one year after agreeing to build an integrated banking union, Europe is on the verge of meeting its promises to create a single supervisor and rule book for banks, a common resolution fund and harmonised national deposit insurance mechanisms.
But it has failed miserably in its primary objectives: to sever the vicious link between sovereigns and banks, to protect the European Central Bank’s independence, and to jump-start a genuine process of cross-border mergers and acquisitions to create a single European banking market.
The outcome, which resembles a weak confederation rather than a strong union, increases the odds that the euro area slips into deflation.
Banking union will fail to break the sovereign-bank feedback loop. In the event of resolution, banks will remain dependent almost entirely on national funding sources. The first port of call will be equity and subordinated debt holders (and eventually senior unsecured creditors under the new Bank Recovery and Resolution Directive).
Domestic creditors, a subset of domestic taxpayers, will still probably have to pick up the tab, not least because most national resolution funds will not be pre-funded. Sovereign loans from the European Stability Mechanism (ESM) will be next in line, but there is little euro area capital set aside as a backstop: at the end of the rainbow lies a paltry €60bn in ESM funds dedicated to direct bank recapitalisation.
For a group of 130 banks that carry a mountain of €25tn in assets, the common backstop looks like a pebble. Meanwhile, common deposit insurance is nowhere in sight.
The result? With sovereign and private sector debt levels high and growth low, foreign creditors will stay away from any whiff of a capital problem.

Entrenched fragmentation
This will force banks to be “national in life as well as in death”, entrenching fragmentation in the European banking system.
Banks will continue to hold primarily national assets and their size will be constrained by their resident deposit bases. Any reconvergence of funding costs comes not as a function of greater confidence, but from the forced reimposition of national financing constraints.
Loan pricing, on the other hand, will remain highly differentiated amid elevated periphery default risk, as highly indebted economies will be unable to grow their way out of a debt trap. A complete banking union would remove these national financing constraints and promote a greater flow of credit to viable entities.
Fragmentation along national lines is reinforced by myriad regulatory changes – designed to make the global financial system safer – that create powerful financial disincentives for cross border acquisitions.
Basel III and related regulation generally work against building scale. Larger capital charges based on size, leverage and complexity, and a bias toward ringfenced subsidiaries, may make for a safer global banking system, but applied across euro area countries, and in the absence of a strong banking union, they constitute a recipe for less efficiency and greater fragmentation.

Independence compromised
Finally, given the lack of common fiscal backstops for the banking sector, the ECB’s independence is compromised. Indeed, without a credible backstop, supervisory responsibilities cannot be separated, giving rise to conflicts between monetary policy and financial stability objectives.
The likely agreement on a weak Single Resolution Mechanism echoes a broader banking union theme that eschews centralisation of powers in favour of one where national governments and regulators still have significant veto power. The link between persistent fragmentation, unstable periphery debt dynamics and corresponding risks of deflation draws the ECB ever closer to quantitative easing policies that are indistinguishable from the underwriting of fiscal policy.
The optimistic view of Banking Union 1.0 is that a confederation regulated by a single supervisor marks an irreversible step towards fiscal integration.
In Banking Union 2.0, all countries might belatedly accept stronger supranational authority over resolution and recovery as the price of a healthy, growth-enhancing single market for European banks. But by then, it may be too late.
The risk is that weak confederations create more, not less, conflict, and delay allows deflation to seep through the cracks in the current configuration. A stronger union is needed now as the price of a healthy, growth-enhancing single market for European

Gene Frieda is a global strategist for Moore Europe Capital Management

Fonte: FT

sexta-feira, 6 de dezembro de 2013

Africans must walk to freedom in Mandela’s memory

Nelson Mandela led a singular life of sacrifice, dignity and political genius that brought about the peaceful end of one of the great evils of modern times. The most important lesson he leaves us with, however, is not about the promise of visionary leadership. Rather, I believe, it is about the potential within each of us individually – men, women, citizens everywhere – to help build just and cohesive societies.
On a continent cursed by the blight of the “big man” leader, Mandela – our one leader deserving of that status – rejected the rule of strongman in favour of a commitment to establishing lasting democratic institutions. At every juncture – when he could have made the struggle, and the ultimate victory, over apartheid about himself – he invested his authority in building a party, a state and a rule of law that was greater than any individual. By stepping down after one term in office, the former president set an example that too few of his peers on the continent have had the courage to follow.
Coming from the most unequal of societies, he understood the corrosive nature of great divisions of wealth and power. And he knew that, for future generations of South Africans, political rights were incomplete without economic rights and access to equal opportunities.
For my generation of Africans, Mandela performed an exceptional service. During our independence struggles a half-century ago, we witnessed the exhilarating possibility of peaceful change, only to have our youthful hopes for self-determination betrayed by decades of misrule and military coups. By ending apartheid peacefully through a relentless commitment to dialogue, reconciliation and power-sharing, as well as an extraordinary partnership with FW de Klerk (the final apartheid president, who became Mandela’s vice-president), Mandela restored our faith in the possibility that we might, with our own hands, shape a future worthy of the immense sacrifice of our liberation movements. That a majority of the continent’s countries are now governed by elected leaders committed to building sustainable pillars of legitimate government is a reflection of how his example continues to inspire.
A mischievous sense of humour and an irreverent attitude to power were powerful weapons in a formidable personal armoury. Mandela may have been the world’s best-known and most revered political figure but he was the most gentle, good-humoured and mischievous of icons. As UN secretary-general, I grew used to being greeted by him, with a big smile, as “Boss”. I made a point of speaking to him regularly on the telephone and he remained an indispensable source of wisdom and guidance beyond my day-to-day crisis management.
When it came to facing the reality of HIV/Aids in Africa, Mandela was an inspiration to all of us who came together to create the Global Fund to Fight Aids, Tuberculosis and Malaria. In the run-up to the catastrophic invasion of Iraq in 2003 – as I sought to secure through peaceful means Iraq’s compliance with the resolutions of the UN Security Council – Mandela’s reassuring voice would steady my resolve to seek unity over division.
In brokering a power-sharing agreement between Burundi’s squabbling parties, his admonition to them – “The way you are behaving makes me feel ashamed to be an African” – carried a force that no militia, however misguided, could ignore. His unique global authority – moral, political and personal – set a very high bar for those who would persist with the folly of conflict.
For all that Mandela’s example has become a common heritage of humanity, he was at his core an African. Completing his long walk to freedom is not, however, about finding “another Mandela” in many of Africa’s states still struggling to combine sound governance and the legitimate exercise of power. This is not the answer, nor is it Mandela’s legacy.
What he taught all of us is that it is for individual African men and women – empowered and educated citizens of their countries and their continent – to take responsibility for their societies and establish accountable institutions that serve all the people and not just the elites, be they economic, political or tribal. And that is why it is so exciting to witness the development of robust civil society across the continent, determined to hold leaders and governments to account.
Almost 20 years ago, Mandela said South Africa had come as far as it had on the path to peace and democracy only because the world had set his country “a moral example which we had dared to follow”. As we mourn his passing and honour his memory, the task for leaders and citizens alike is to dare to follow his example – in every corner of Africa and across the world.

Kofi Annan


quinta-feira, 5 de dezembro de 2013

The bridge-builder who led a nation to democracy

South Africa was exceedingly fortunate to have had a man of the stature and charisma of Nelson Mandela – a man forged, in important respects, by the court process and 27-year incarceration that was meant to discredit and destroy him.
Mandela’s speech at the 1962 trial in which he and his comrades where sentenced to life imprisonment on Robben Island catapulted him to international stardom. He became the symbol of the international campaign against apartheid, an effective weapon against the South African government and won the stature to stand up to the African National Congress’s radical fringes.
Prison may also have saved and prepared Mandela for his later role. His soulmate, Oliver Tambo, ANC leader, was so wearied by a rootless life in of exile and the effort to keep a fractious party together that he suffered a debilitating stroke. He died a year before South Africa became a democracy.
Mandela’s imprisonment also allowed him time to think, not as a parochial partisan, but as a leader who would take the interests of all his compatriots into account. Jail shielded him from some of the negative aspects of ANC politics. His conviction and sentence moulded the man who became the first president of a democratic South Africa.
That much was evident in his actions. After his release in 1990, when he was negotiating with F W de Klerk, the last president of apartheid South Africa, he wanted everybody in the tent – victors and vanquished. He sought triumph without humiliation for his adversaries. That was the basis of his reconciliation policy.
Yes, he had some luck: the communists, who wanted radical reforms, had been weakened by the collapse of the Soviet Union. That is why he was able to agree to guarantee property rights for all South Africans – defying calls for expropriation of land and property from hardliners in his party and the Communist party.
Yet who but Mandela, the freed prisoner, could have formed a government of national unity with the old white National party, with Mr de Klerk as one of his deputies? And who but him, in that situation, would have wanted to?
A significant expression of this approach was the Truth and Reconciliation Commission, a platform for victims and perpetrators of apartheid violence to relate their respective experiences. It was an exercise intended to to enable them to deal with the past and, ideally, bury the hatchet.
Views on the TRC are mixed: perpetrators who gave evidence were footsoldiers who carried out orders while their political masters were not called to account. But it kickstarted a national dialogue. The TRC was a classic Mandela compromise between an amnesty and wholesale recrimination – and it was groundbreaking. A similar process is being attempted elsewhere, notably in Liberia.
This was just all part of his bridge-building – he realised significant gestures were needed to win the trust of white South Africa. In 1995 he travelled to the whites-only enclave of Orania to have tea with Betsie Verwoerd, widow of H F Verwoerd, the spiritual father of apartheid. He retained the Springbok emblem, long regarded as a symbol of white sport.
He insisted that the new national anthem be an amalgamation of “Nkosi Sikelel’ iAfrika” and “Die Stem van Suid Afrika”. For many black people that was just too much. “Die Stem” was for years regarded as a celebration of their subjugation. Once at a function when Mandela was still president, a black choir left out the Afrikaner parts. He called them back and insisted they sing the whole anthem.
Probably the most prominent display of Mandela’s reconciliation was during the 1995 Rugby World Cup final in Johannesburg, when he arrived at the stadium wearing Springbok captain Francois Pienaar’s number six jersey. He won the hearts of the mainly Afrikaans community who follow the sport. A week before, wearing the same garment, he had urged black youth to support “our boys” – and black South Africans celebrated the eventual Springbok triumph.
Mandela did not always have his way within his party. He failed to have Cyril Ramaphosa, the party’s secretary-general, elected as his deputy. The party chose Thabo Mbeki instead. Mandela’s view was that the party hierarchy was dominated by former exiles who did not always have an accurate appreciation of conditions on the ground. He was also wary of the possible domination of the country’s politics by one tribe: he and Mr Mbeki were both Xhosa from the Eastern Cape province. But the party saw differently.
Mandela also posed some difficulty for those who followed him. His commanding performance is often used as a yardstick – and they are found wanting. Mr Mbeki was once asked how he hoped to fill his predecessor’s big shoes. He did not like Mandela’s ugly shoes, he curtly responded.
People such as Mr Mbeki did not like the fact that Mandela seemed to hog the credit for the destruction of apartheid. He had also eclipsed the role played by Tambo, their hero. But more importantly, Mr Mbeki did not share Mandela’s world view. Once in office, he set about undermining or dismantling Mandela’s reconciliation policies and initiatives. The country became more racially polarised.
There is also a view, held by a vocal minority – critics mainly on the left of the ANC who would have preferred the nationalisation of the economy – that Mandela did not drive a hard enough bargain for black South Africa during the negotiations. This was reflected in the recent statement by Robert Mugabe, the Zimbabwean president, that Mandela was “saintly” in giving in too much to white fears.
But despite such reservations, Mandela is held in great affection by people of all races – a rare accomplishment for a South African politician. Democracy may not be all they want, but South Africans see the freedoms they enjoy today as the result of his sacrifice. He took their hands and led them across the bridge from apartheid to democracy and their promised land. South Africa was lucky to have him. Damned lucky.

Barney Mthombothi is former editor of South Africa’s Financial Mail

quarta-feira, 4 de dezembro de 2013

On the inevitability of justice

A Exortação Apostólica “Evangelii Gaudium” (A alegria do Evangelho) do Papa Francisco parece não ter agradado nenhum pouco os conservadores. Um deles, americano, chegou a acusa-lo de ser marxista. Os progressistas, naturalmente, tiveram reação oposta. Nenhuma surpresa. Confesso não entender a reação dos conservadores: o documento do Papa Francisco retoma criticas do Paulo VI, João Paulo II e Bento XVI ao capitalismo, para mencionar apenas os três últimos Bispos de Roma.

Gostei muito do comentário abaixo.

Last week the Pope, who has surprised many in his short tenure by adopting a reformist, populist—one might go so far as to say Christian—tone, offered a lengthy statement on economic justice. It was a highly progressive comment in its way and was therefore sure to make for occasionally uncomfortable reading in economics departments. Said the Pope:

"Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world...This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacra­lized workings of the prevailing economic system.

On Saturday Greg Mankiw, author of the bible of first-year econ courses, weighed in:

"First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose. It is equivalent to those on the right referring to the "soak-the-rich" theories of the left. It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.Third, as far as I know, the pope did not address the tax-exempt status of the church. I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down."

This is just the sort of response that leads non-economists to detest economists: condescending, callous, and, worst of all, intellectually lazy. It is also an example of some truly epic point-missing.

Economic growth is indeed a wonderful thing. Enormous increases in real output per person over the past two centuries have allowed humanity to escape the grinding poverty that was the normal human condition for thousands of years. But the Pope does not appear to be attacking growth. Rather, he is attacking the view that "economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world". (Emphasis mine, since that is apparently an easy word to miss.) Mr Mankiw may feel that "trickle-down" ideas have been wronged, but he certaintly seems to be displaying precisely the viewpoint that the Pope is warning about: don't worry about the outcomes of growth (and for heaven's sake don't do anything about them), because growth is pretty rad.

But let's be clear. Historically it has taken quite a lot of hard work to ensure that economic growth does bring about greater justice and inclusiveness. It took an enormous public investment in public schooling to ensure that the benefits of growth in the late 19th and early 20th centuries were broadly enjoyed. That was not a market outcome; it was a massive example of government-managed redistribution. A massively successful example.

Neither did economic growth magically free American slaves or end Jim Crow. There was nothing inevitable about the end of institutionalised racism in America, and without the end of institutionalised racism in America growth would manifestly not have led to greater justice and inclusiveness in the world.

We can also be grateful that growth has pulled so many of the world's poorest out of dire poverty: hundreds of millions in just the last two decades. But we should remember that for most of modern economic history, the developing world was not catching up; it was falling further behind. The broad-based catch-up growth of the past 15 years may be a new normal, or it may be an anomalous period associated with the rise of China. To look at the history of global economic development and call ever greater inclusiveness an inevitable consequence of growth is simply wrong.

Now Mr Mankiw might argue that growth enabled the generosity that led to social pressure for change: for redistribution, public investment, and broad social reforms. Perhaps that is what he's after in referring to Ben Friedman's book. But societal improvement was not an immaculate thing. It had living, breathing agents here on earth working and often suffering to engineer change, in the teeth of opposition from those who reckoned that they ought to simply shut their traps. If you want to praise growth as justice-enhancing because growth improves our moral intuition, then you also have to praise those who act on their moral intuition in an effort to create institutions that deliver greater justice. Mr Mankiw would rather be snide and complain that the Pope is name-calling.

History suggests that growth doesn't simply take care of things while we go about our business. Growth often creates significant injustices which are ameliorated when popular outrage demands change. The Pope's words, and the public response to them, suggest that just now—with the top income share rising, the share of income going to labour falling, and real wages and employment rates stagnant—there is a certain appetite for calls for change. Mr Mankiw had better improve at handling criticism of current economic structures and outcomes. He's likely to hear much more of it. Maybe at some point he will begin to ask himself why.

Fonte: The Economist

terça-feira, 3 de dezembro de 2013

Roberto D’Alimonte: Letta needs to start governing – or call an election

The Italian political scene keeps changing, yet all could stay the same. It is an old story. The biggest centre-right party – Silvio Berlusconi’s People of Freedom (PDL) – has disappeared. In its place, Angelino Alfano, deputy prime minister and once Mr Berlusconi’s protégé, has formed the New Centre Right. Meanwhile, Mr Berlusconi has split off to resurrect Forza Italia, the party he formed in 1994 as his vehicle for entering politics.
Last week, after being expelled from the Senate, Mr Berlusconi withdrew the support of his MPs from the grand coalition government, led by Enrico Letta of the Democratic party (PD). Even so, the conventional wisdom today is that the Letta government will survive until 2015. It has the support of Mr Alfano’s party, as well as the president, the majority of the PD, the EU institutions, the foreign press and other EU governments. In fact, Mr Letta and others see Mr Berlusconi’s exit as strengthening their position. But they are not out of the woods yet. The record of the grand coalition between the socialist PD and the PDL is poor.
The rationale behind the coalition arrangement was that, governing together, the two parties would be able to take joint responsibility for unpopular economic and constitutional reforms. But nothing has happened. So far the Letta cabinet has been muddling through, hampered by all sorts of vetoes. Will it act more decisively now that Mr Berlusconi is out? It should.
After all, Mr Alfano claims to be a moderate and a reformer. If so, in the next few weeks we should see concrete progress on at least two big points: fiscal policy and the faulty electoral system. If this happens, it will be a clear signal of change. But if it does not, can Italy afford to wait more than a year for elections? Why not try again with a vote in April?
This view may soon have a new champion. On December 8 Matteo Renzi, the charismatic 38-year-old mayor of Florence, is expected to win the open primaries to become secretary of the PD – and therefore its candidate for prime minister. Mr Renzi’s position is that the grand coalition has not worked. Unless the Letta-Alfano cabinet makes progress, it would be better to vote in 2014.
Mr Renzi has not been so explicit. The idea is not popular. But there is little doubt this is what he thinks. This could put him and Mr Letta on a collision course. Their rivalry could destroy them and the PD.
The only beneficiary would be the centre-right. Chaos on the left would help them – and the Alfano-Berlusconi split into two parties might help them build support, too. At the last elections, Mr Berlusconi lost 6.5m votes. These are supporters that he cannot win back. Yet an independent Mr Alfano, with his more moderate appeal party, might. Meanwhile, Mr Berlusconi’s Forza Italia will be able to hang on to his hardcore constituency of radical conservative voters.
It is such a good plan that one has to wonder whether it was agreed by the two centre-right leaders. The words used at their divorce lend credibility to the plot. Both leaders talked about the need not to create an unbridgeable schism; the electoral system will force them to run under the same umbrella. And if things go right for them, they might even win or cause another stalemate in 2015. All they need is to see Mr Renzi and Mr Letta start fighting. A year is a long time to manage a rivalry. If it is not done well, the centre-left will have wasted a good chance to score a decisive victory, even with the present faulty electoral system.
So it is up to Mr Letta to prevent this scenario from playing out. He has to work out a new deal with Mr Alfano and press for change. Real change, not cosmetic. He has leverage now; he should use it. Europe should pay critical attention. Muddling through is not what Italy and the EU need. If the Letta-Alfano cabinet will not step up, Mr Letta and Mr Renzi should agree a plan – including early elections – to break the deadlock.
The window to call a vote early in 2014 will close in February. After that, with European elections and the Italian presidency of the EU to come, Italy will have to wait until 2015. Anything could happen by then. Even a Forza Italia resurrection.

Roberto D’Alimonte is a professor of politics at LUISS Guido Carli, Rome

Fonte: FT

segunda-feira, 2 de dezembro de 2013

Wolfgang Münchau: Germany’s coalition will have to break promises

A thought experiment. Imagine a coalition agreement between the Conservatives and Labour in the UK; or, gulp, the Democrats and the Republicans in the US. Unpleasant – and unlikely.
Yet in Germany such “elephant marriages” of arch-rivals are part of normal politics. And what the country’s rival political parties achieved last week with their grand coalition agreement was, in the end, not too bad. The deal between Chancellor Angela Merkel’s Christian Democrats and the Social Democrats may have been a little verbose. In its 185 pages, I counted the word “competitiveness” 42 times – Germany really does want everyone in the world to become more competitive against everyone else.
That said, the parties agreed a minimum wage and a modest investment programme. They are not raising taxes. They will not pile on any more austerity. Given that the country stands accused of running excessive savings surpluses, you could legitimately call it a small step in the right direction. It is certainly not as bad as it could have been.
The problem is not the agreement. It is a lack of preparedness by the political class for what will hit it in the next four years. The big threat to Germany over the next four years is not demography but the unfolding eurozone debt crisis. No matter which crisis resolution scenario prevails, some promises made to the electorate are going to be broken.
Just take a sample of last week’s news. The Organisation for Economic Co-operation and Development is forecasting that the Greek sovereign debt ratio will stabilise at 160 per cent of gross domestic product in 2020. The EU and the International Monetary Fund have been basing their entire bailout arithmetic on a target of 124 per cent. In the next four years, Greece will either default or exit the euro – or both. The EU’s “pretend-and-extend” strategy of revolving loans at longer maturities and lower interest rates is approaching a natural limit.
There has also been news of a disturbing build-up of deflationary pressure in the eurozone. The European Central Bank said growth in the broad measure of money supply fell again in October. Lending by banks to the private sector is contracting at accelerating rates.
What German politicians generally do not realise is that their stance on a proposed eurozone banking union contributes to the credit crunch and its persistence. The ECB is about to start an asset quality review, an indepth look at bank balance sheets, which will be followed next year by stress tests. As the end of this exercise, the largest 130 or so banks in the eurozone may have to raise up to €100bn in new capital. The German political elite are adamantly opposed to capital injections by the European Stability Mechanism, the eurozone rescue umbrella, except under extreme circumstances.
Unsurprisingly the banks are trying to minimise the amount of capital they need to raise by scaling back their risky exposures to private creditors. It is rational to expect the credit crunch to continue for as long as the adjustment in the banking sector takes place – all the way through to 2014.
The ECB, meanwhile, is close to exhausting its conventional monetary policies. It can fiddle around the edges with a funding-for-lending scheme, more long-term liquidity operations, or maybe another tiny rate cut. But this will hardly be enough to counter the deflationary pressure from the credit crunch, and the adjustment of prices and wages in the south with no offsetting adjustment in the north.
The eurozone would risk the scenario recently described by Lawrence Summers, former US Treasury secretary – a secular stagnation with permanently negative real interest rates. It is hard to imagine a decentralised monetary union such as the eurozone surviving in those circumstances. If Mr Summers is right, the eurozone is dead.
The ECB does have an alternative course of action. It could buy up large chunks of eurozone debt. This should not be confused with the outright monetary transactions – a conditional emergency backstop for sovereign debtors that may never be triggered. The ECB could supplement that programme with one of credit easing, or quantitative easing, to bring down long-term interest rates.
The big political question is how well Germany’s political class, and its constitutional court, would adjust to this type of crisis resolution. It would not be consistent with the current political or legal consensus.
I am not pessimistic about the quality of this grand coalition. My expectation is that the ministers will on average be more competent than those in the outgoing government. You get the top players of the top teams. But grand coalitions are traditionally workhorse governments. They get things done. They are good for projects such as pension reforms but useless when it comes to shifting public opinion on sensitive issues because each party fears being outmanoeuvred by the other.
For now, both sides can take comfort in agreeing red lines on the eurozone crisis: no common resolution funds, no outside intrusion into the German system of savings banks, no eurobonds, no this, no that. The biggest job for them will be to find a way to say yes.

Wolfgang Münchau

Fonte: FT