A estratégia grega

A Grécia tem monopolizado as notícias dos últimos dias. Queria escrever sobre a estratégia seguida pelo Governo grego e sobre os constrangimentos da situação, mas não é difícil encontrar quem já o tenha feito, e de forma bem mais sintética e conseguida do que eu seria capaz. Aqui ficam os links.

Negociar do lado grego, por Ricardo Reis:

A quinta e última opção é ser louco, autêntico ou fingido. No Portugal do “agarrem-me senão eu mato-o” sabemos bem que este postura pode ser muito eficaz nas negociações. No famoso jogo em que dois carros avançam na direção um do outro, perdendo quem se desvia primeiro, o louco ganha sempre. O louco tem de estar disposto a sair da União Europeia, confiscar as poupanças dos gregos, e causar o aumento da pobreza. Ele tem de defender políticas que sabemos levam ao desastre pelo menos desde a queda do muro de Berlim. Tem de prometer fortunas quando nada tem no bolso. Quanto mais irresponsáveis as suas posições, e mais catastróficas as suas consequências, mais credível é a sua loucura, e melhores as hipóteses do outro lado ceder para evitar o sofrimento de todos. Se tudo falhar, o louco pode sempre culpar os malvados europeus imperialistas e capitalistas. As próximas semanas vão ser muito interessantes.

O perdão à Alemanha em 1953, por Bruno Faria Lopes:

A conferência de Londres serve para percebermos o óbvio: na dívida, uma reestruturação não pode ser separada do contexto político e dos incentivos dos credores. E, no caso da zona euro, os incentivos de credores e devedores não estão tão alinhados como em 53. Oincentivo comum, a viabilidade da zona euro, não passa por cima do incentivo político alemão e de outros estados credores: evitar um dominó de perdas para os seus contribuintes, causadas por países que são alvo de maus estereótipos. Perdas que podem levantar obstáculos jurídicos e sociais ao euro nesses países. A questão de fundo é, assim, política e exige tempo e liderança política quer nos países devedores (reformas e diplomacia activa para destruir estereótipos), quer nos credores (pedagogia aos eleitores sobre o que têm de aceitar para partilharem uma moeda). Até lá é muito prematuro concluir que “a Europa está a mudar”.

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Como ensinar economia

O ensino de economia é um tema quente desde a célebre debandada de alunos de uma aula do célebre Gregory Mankiw. A questão levanta tantos problemas – mais científicas do que propriamente pedagógicas, parece-me – que qualquer discussão acaba sempre por ser longa e demorada. Para quem tem tem tempo e paciência, aqui fica o contributo de Karl Whelan (o melhor que li até agora): Thoughts on teaching economics after the crash.

A posição de capital do BCE

Será que interessa mesmo? Karl Whelan argumenta que não em Can you really make losses printing money? Mais um capítulo de uma guerra antiga (I e II) do economista irlandês.

Imagine you’re a smart young rich kid. You invent a money-printing machine. You use it to magic up money to buy $100 in assets. It turns out, though, you didn’t make a great investment and the assets end up being worth on $90.

Do you (a) Be grateful that you’re $90 better off or (b) Call up your Dad to tell him you need $10 to make up your losses?

The debate about potential ECB asset purchases continues to focus incessantly on the issues surrounding potential losses, with the ECB playing the role of the rich kid asking his Dad for an unnecessary bailout.

Take this from my old mate Hans Werner Sinn (via Constantin Gurdgiev).

Apparently tax-payers will have to make up for a shortfall of profits from the ECB if there are losses on ABS purchases. In saying the ECB will have reduced profits, Sinn focuses solely on losing the $10 and forgets about the $90 profit.

One could question whether money creation by the Eurosystem is really just pure profit. Doesn’t this expand the supply of liquidity to the banking system, increasing the amount of money on deposit with ECB and thus increase the interest payments it has to make to banks?  Not now – the ECB currently charges banks to keep money on deposit with it so this factor now actually raises the profitability of money creation. (Interest on reserves is also not a necessary feature of a central bank operational framework – the Fed managed fine without it for years.)

I think there are two reasons there is so much confusion about these issues.

The first is the arcane way that central banks do their accounting. All money that is created is counted as a “liability” even if, like bank notes, it doesn’t actually ever impose a cost. Central bank capital measures based on subtracting reported liabilities from reported assets thus grossly underestimate the true financial value generated by central banks.  (See here for a more detailed discussion).

Central bank profit and loss measures are calculated in line with this wholly uneconomic methodology.  In the analogy above, the central bank would report a $10 loss because its assets had increased by $90 while its “liabilities” had increased by $100.  Reporting a loss in these circumstances doesn’t actually make any economic sense but is sure to generate lots of hand-wringing from people who imagine something terrible has happened.

The second problem is the widespread failure to understand that central banks are fundamentally different from commercial banks. Central banks do not need to have assets greater than liabilities and cannot “go bust” due to losses on asset purchases. That said, most of the international policy community seems happy to perpetuate this myth.

For example, consider this Very Serious report from the BIS last year. It recommends that central banks should maintain positive capital, not because they need to, but because the public might be confused about this stuff and so it’s best not to get them too concerned. A quick flavour of the thinking:

«we have no doubts about the central banks that are currently shouldering extraordinary financial risks. But our confidence is based on an understanding of the special character of central banks that may not be shared by markets and others.»

So if financial markets believed central bankers needed to wear Hawaiian shirts, would it be best to ditch the suits and start drinking pina coladas at press conferences?

There may be another case where an international policy organisation recommends an incorrect policy solely because private investors believe strongly the incorrect policy must be solved, but I can’t think of one offhand.

These points are not intended as a recommendation for central banks to purchases whatever assets just take their fancy.  There is an important opportunity cost here. For example, the money could have been distributed to the public by providing each person with a fixed amount of money.  So it’s important that the purchases are made in a fair and transparent way using market prices.

The other cost usually cited is that money creation may lead to inflation.  But in the case of the ECB’s ABS purchases, this is a feature not a bug. The whole point of it is to raise inflation back to the ECB’s target level. The fact that the programme also fits with the ECB’s secondary goal of supporting the general economic goals of the EU is welcome but not crucial.

Anyway expect lots more of this stuff over the next few months as the widespread lack of understanding of central bank balance sheets continues to see irrelevancies held up as crucial economic principles.

Mario Draghi e as reformas estruturais

Numa nota enviada ao Parlamento Europeu, Karl Whelan fala sobre o BCE, reformas estruturais, política monetária e alguns dos aspectos mais sinistros do discurso de Mario Draghi – Inflation differentials and euro-area monetary policy.

As the ECB takes a more active role in battling the ongoing slump, Mario Draghi has intensified his rhetoric about structural reforms. The transcript of his September press conferences shows fifteen uses of this phrase.  Draghi now says he has “concluded that there is no fiscal or monetary stimulus that will produce any effect without ambitious and important, strong, structural reforms.”

It is hard to find a logic (at least one based on macroeconomic theory as we know it) for this argument.  It is certainly the case that potential output growth in the euro area is currently low and can be improved by various policy reforms.  However, it is also true that there is currently a very large shortfall between aggregate demand and the current supply potential of the euro area economy, a shortfall summarised in an unemployment rate of over 11 percent.  So there is room for fiscal and monetary stimulus to boost the economy, even without structural reforms.  In addition, to the extent that we are worried about deflation, the initial impact of structural reforms that boosted the supply capacity of the euro area would be to further depress inflation.

My point here is not to argue against structural reforms. There are many such reforms that can have an important positive effect over the medium- and longer-run (though we know little about the magnitude of their potential impact). But it is important for the ECB to take responsibility for its crucial role in the shorter-term macroeconomic management of the euro area and ECB officials continually placing structural reforms at the heart of discussions of this issue is unhelpful.

Segredos do cautelar

O Governo irlandês dispensou o Programa Cautelar e vai regressar aos mercados pelo seu próprio pé. Apesar de tudo o que se disse, não é imediatamente óbvio o que ganha um país como a Irlanda em abdicar de uma rede de segurança deste género. Em Ireland exits bailout with no backstop: a good news story?, Karl Whelan avança uma explicação um pouco mais racional do que a tese simplista do ‘orgulho nacional’.

Irish government politicians have been keen to claim that there is some good economic news in this announcement, that it “provides clarity” and “reduces uncertainty”.  In fact, the opposite is the case.

A precautionary credit line is something that doesn’t have to be used. Anything that can be done without a precautionary credit line can also be done with one.  However, without such a credit line, the Irish government run the risk of running out of funds and having to negotiate a new bailout or credit line under far less positive circumstances than currently prevail.  This adds to the uncertainties facing Ireland in the coming year, particularly given the possibility that Irish banks may need further recapitalisation next year.

Ireland’s finance minister, Michael Noonan, acknowledged yesterday that economic conditions may not be so benign next year. This should be seen as an argument for negotiating a credit line now but, strangely, Noonan used this observation as an argument for not seeking a credit line.  He seemed to be struggling to find anything better than weak talking points to explain the benefits of not having a credit line.

There is, of course, a narrow political benefit to the Irish government from this “clean” exit, because it allows them to triumph about the full restoration of “sovereignty.”  However, I don’t think they are so cynical as to have made this decision purely for that populist reason.  Instead, my assessment is that the precautionary credit line could not be arranged now because it was politically impossible and that the Irish government are merely putting a brave face on what is a bad outcome.

The political problem is that credit lines from ESM require the approval of all euro area member states and this was not going to be possible now. Germany still does not have a government as Angela Merkel’s CDU continue negotiations with the SPD to form a coalition. During these negotiations, the SPD has regularly insisted that they would not support an ESM credit line for Ireland unless the country followed a series of highly specific policy recommendations.

SPD requirements for approval of a credit line included raising the corporate tax rate and introducing a financial transaction tax. The SPD also ruled out any deal that involved used funds from the credit line to recapitalize banks.

This kind of micro-managing of other people’s economies was not what most people had expected ESM conditionality to look like. Given the existing raft of EU monitoring programs that exist (the six pack, the two pack, the macroeconomic imbalances) a sensible approach would be to require that a country seeking a credit line from ESM commit itself to meeting the recommendations on macroeconomic policy of the European Commission.

When Germany finally has a government and SPD politicians are firmly ensconced in ministerial Mercs, I suspect the desire to micro-manage Ireland’s affairs will recede. However, the damage may well be done. Having sold the Irish public on the idea that the credit line was something to be avoided, it seems unlikely that the government can change its mind next Spring.

This is the odd aspect of yesterday’s decision. Why not announce that Ireland was exiting the program without a precautionary credit line but that discussions about this issue were ongoing? One unattractive possibility is that Ireland’s leaders were asked by their German colleagues to make this announcement to remove it as an issue in the government formation negotiations.

Missed in yesterday’s discussion is that these developments have implications for the ECB’s Outright Monetary Transactions (OMT) program. This is the program announced by Mario Draghi after his “whatever it takes” speech last year.  Under this program, the ECB can purchase unlimited quantities of a country’s government bonds. However, the ECB decided that countries could only avail of OMT if they had an agreement with ESM for a bailout program or precautionary credit line.

Ask yourself this: If star pupil Ireland couldn’t negotiate a precautionary credit line based on reasonable conditionality, what chance is there that a credit line of this sort for Italy will be approved by all countries in the euro area? OMT may have been cast as the plan to save the euro but getting it up and running may not be so easy.

Leitura recomendada

Umas interessantes notas de leitura de Karl Whelan acerca dos problemas bancários que ainda subsistem na Zona Euro. O tema teve algum destaque neste blogue, e os comentários de Whelan podem ajudar a lançar luz sobre o problema.

Por onde anda o MEE

Karl Whelan faz hoje, em Has Cyrpus already left the euro?, uma pergunta óbvia: por que não recapitalizar os bancos cipriotas através do Mecanismo Europeu de Estabilidade e abdicar dos potencialmente corrosivos controlos de capitais?

Some of the coverage of today’s events in Cyprus has been drawing the conclusion that the plan to restructure Cyprus’s banks is going well because there has been no “bank run”.  However, the only reason there isn’t a massive bank run in Cyprus today is the imposition of severe capital controls (full details here).

The controls have frozen accounts over €100,000 in Cyprus’s main banks and have limited cash withdrawals to €300. The large deposit withdrawals that really destroy a bank are not possible. And most ordinary people in Cyprus know full well there is no point in queuing up to withdraw all their money because such withdrawals are not allowed. Hence, no bank run.

As it is, it is hard to see how the capital controls can be lifted without a complete reworking of Cyprus’s agreement with the EU. Depositors with over €100,000 still do not know how much they are going to get back, while those with under €100,000 may still feel worried that their turn to take a hit may come around again.  The likely collapse of the economy may trigger a sovereign default which would further hit the banks and further increase creditor losses.

The capital controls could be lifted if the ECB allowed the Central Bank of Cyprus to provide unlimited amounts of Emergency Liquidity Assistance to facilitate massive deposit flight.  However, neither the ECB nor the Central Bank of Cyprus are likely to be interested in doing this.  The ECB are very touchy about allowing ELA and worry a lot about how to end such programs. The Central Bank of Cyprus are aware that they are supposed to take the credit risk associated with ELA lending which differs from regular Eurosystem lending in which the risks are shared among participating central banks.

For these reasons, the capital controls are likely to remain in place. As long as they do, Cyprus is a member of the euro in name only.

As long as Cyprus is a member of the euro in name only, the question will remain as to whether it can ever return to being a normal member of the euro or whether it will be better off to set up its own currency.

One way to ease a return to Cypriot euros being equal to euros elsewhere is for Europe’s leaders to reverse course on Cyprus.  This would involve ESM taking over the Cypriot banks and putting in enough money to ensure these banks are well-capitalised and safe beyond question.  Since this outcome seems unlikely, Cyprus’s euro membership seems to hang in the balance.  The fear that capital controls are coming to their country will also be influencing behavior in other euro area countries in the coming weeks.

Ler também The bahamian dollar and the cypriot euro, por Matt Yglesias.

E entretanto, no Chipre

Karl Whelan explica tem duas óptimas peças na Forbes a explicar o que se passou na reunião do Eurogrupo e quais as consequências que a decisão cipriota poderá ter para o resto da Europa. Cyprus depositor tax: genius plan or the end of the euro? e Cyprys deposit levy: no panic yet but scary long term consequences.

Second, the decision to apply the levy to people with deposits under €100,000, who were covered by a deposit insurance scheme, has severely undermined the credibility of these schemes throughout Europe.  The ongoing delays in passing the legislation to introduce the levy indicate the possibility that this part of the levy could be rolled back with the full burden falling on uninsured deposits.

Hopefully, this reversal will occur because the current design of the scheme is unnecessarily unfair. But the fact that this element was part of the original proposal will have damaged the reputation of deposit insurance schemes across Europe. (And this at a time when the European Commission has been working to harmonize and improve deposit guarantee schemes.)

Third, once this tool has been used once, there is likely to be external pressure for it to be used again when other European banks get into trouble, an event that is as sure to happen as night following day.

In fact, once the dust settles in Cyprus, those who are less well off in other countries may come around to the viewpoint that levies on uninsured deposits are a fairer way to deal with failing banks than sticking all of their debts on taxpayers. Depositors in Spain may not feel today that their money is currently in danger.  However, given the full extent of unrealized bad debts in Europe, it is hard to see why anyone should rule out depositor levies being imposed elsewhere in the future.

A final observation for now: How foolish must Ireland’s citizens be feeling today? After being reassured time and again that all depositors and senior bond creditors of the now-defunct Anglo Irish Bank must be saved in the name of European financial stability, now they find out that Europe’s leaders now believe hair-cutting depositors is fine and fair and doesn’t cause contagion.  The moral grounds for a retrospective compensation deal for Ireland have increased substantially with this new development.

Ler também Cyprus is different (Marco Annunziatta), Cyprus, the next blunder (Charlez Wyplosz), Walking back from Cyprus (Mitu Gulati) 

 

O colapso do dólar e o fim da Fed

Karl Whelan comenta Maintaining Central-Bank Solvency under New-Style Central Banking, um paper de Ricardo Reis e Robert Hall que tem dado que falar. Is the Fed going to go bust? é mais um artigo acerca de uma questão que tem gerado polémica entre os economistas: pode um banco central ir à falência?

In particular, Hall and Reis are concerned about the Fed’s ability to pay interest on the reserve accounts that banks hold with it. Payments made to Fed ultimately arrive via deductions from various reserve accounts that institutions such as private banks or the Treasury hold with it while interest paid on reserves to banks takes the form of additions to the relevant bank reserve accounts.

Given this structure, if the interest payments made to the Fed don’t cover the interest payments it makes on reserves, then the total stock of reserves will increase. Hall and Reis express a concern that this process of additional money creation stemming from such an increase in the stock of reserves would result in higher inflation. (Exactly how this gets so bad that the currency ends up being dissolved is a little unclear to me.)

So it turns out that Hall and Reis are not actually concerned about the Fed going bust in the usual sense of being unable to meet its obligations. Rather they express a concern the Fed might only be able to meet its obligations by creating a quantity of money that generates high inflation.  Alternatively, they discuss a scenario in which the Fed keeps the interest rate on reserves low to restrict the growth in total reserves but this low interest rate results in a loss of control of the price level.

A trindade impossível da Zona Euro

A hipótese da Impossible Trinity (também chamada de Trilema da economia internacional) sustenta que é impossível manter, ao mesmo tempo, uma taxa de câmbio fixa, liberdade de circulação de capitais e política monetária independente. A política económica do banco central tem necessariamente de abdicar de um dos três pilares.

O ajustamento – isto é, redução da dívida – da periferia europeia segue um trilema semelhante. É impossível reduzir a dívida com uma meta para a inflação de 2%, com políticas macroeconómicas inalteradas no ‘centro’ da Europa e com a existência do euro. É possível abdicando de um destes pilares, mas não mantendo todos inalterados.

Se isto não é óbvio para o leitor, aconselho a leitura de Macroeconomic imbalances in the euro area, um pequena nota técnica do Parlamento Europeu acerca do Procedimento por Desequilíbrios Macroeconómicos Excessivos, o novo ‘braço’ da Comissão para analisar a situação económica dos estados-membro.

Without access to an exchange rate adjustment, the road to current account surpluses forthese countries is difficult. EU policy makers repeat the mantra that “reforms” are thesolution to all ills but reforms are unlikely to repeal the existence of downward nominalwage rigidity, a phenomenon that exists even in well-run countries that do not require suchreforms. With an average inflation target of two percent for the euro area, competitivenessgains for Greece, Portugal and Spain will be slow, as will the pace of progress towards thesize of current account surpluses. Moreover, the adjustment period is likely to be extremelypainful.

The Commission’s Macroeconomic Imbalance Procedure provides an important opportunityfor the EU to acknowledge that imbalances have two sides, that policies to actively reducesurpluses in countries like Germany are just as effective in restoring balance as policiesaimed at increasing competitiveness in the European periphery. However, the new alertmechanism scorecard has an asymmetric focus on reducing deficits at the almost-completeexpense of any focus on steps to affect large surpluses. It represents a missed opportunityto deal with the euro area’s problems in a balanced manner. To the extent that Europe isrunning out of time to come up with real solutions to the problems that afflict the commoncurrency, it represents a serious disappointment.