Posts Tagged ‘IMF’

Will Greece Pay Its Debts Via The Agamemnon Option?

Wednesday, June 17th, 2015

Legend has it that, at the onset of the Trojan war, the Mycenaen king Agamemnon sacrificed his daughter Iphigenia to Artemis, the goddess of (amongst other things) wildness, in order to obtain favorable winds for the Hellenic fleet’s crossing of the Aegean.

Some three millennia after the events that inspired this story, the government in Athens finds itself again attempting to appease greater powers in the face of an increasingly wild regional conflict. And yet again, perhaps Greek leaders have already made a terrible sacrifice of youth which could go some distance to calming the seas their beleaguered nation must navigate, if those greater powers view the offering with favor.

Standing in for Artemis are the so-called “Troika” of Greece’s institutional creditors, the International Monetary Fund (IMF), the European Central Bank (ECB) and the eurozone countries. In the role of poor Iphigenia we have a generation of young, educated, professional and entrepreneurial Greeks. In these more civilized times, however, the sacrificial instruments are not altar and dagger but an airline ticket and an EU passport.

At least two hundred thousand Greeks have emigrated since the financial crisis began, the vast majority of whom are youthful, skilled and facing bleak prospects in their home country. They are the next generation of Greece’s experts in medicine, the sciences, engineering, finance and academia. Their primary destinations are other EU nations – for example, the UK’s Guardian reports Germany alone has received 35,000 Greek physicians.

While many of these émigrés might prefer to return to their native land someday, Greece’s stifling regime of regulation and taxation, its bloated welfare state and rampant corruption are likely to continue to render that nation far too uncompetitive to accommodate their ambitions. The 2014-15 World Economic Forum competitiveness ranking places Greece eight-first, just behind Uruguay (but, in fairness, one ahead of Moldova). By contrast, the U.S is third, while Germany ranks fifth. Rather than implement meaningful additional legal, pension and labor market reforms, Athens proposes to roll back many of those the Troika has already imposed, thus ensuring this unfortunate state of affairs is likely to continue for some time.

Yet there is a kind of tragic silver lining in all this, both for Greece’s creditors and its government’s apparent vision. Consider the value of Greece’s professional diaspora in Europe to its recipient nations. Let’s do an admittedly “back of the envelope” calculation. First, a few compensation figures. For German engineers the average is around $57,000, for bankers around $55,000. The average physician in Germany made $155,000 in 2010, in France a bit lower at $131,000. So for the sake of argument, let’s assume a $50,000 per capita income for two hundred thousand Greek professional émigrés (a number which could rise if Greece continues on its current trajectory) and an average working lifetime of thirty years. Discounting by the current German thirty year bund rate of 1.5% over that time frame (a not unreasonable proxy given integration into largely northern European economies) yields an expected present value of $240 billion. Assuming a 50% rate of total taxation (income,VAT, property etc.) yields $120 billion, or approximately 44% of the $273 billion Greece owes the Troika creditors and the central banks of the eurozone. In particular, this is $30 billion more than the $90 billion the ECB has extended to Greek banks under the former’s Emergency Liquidity Assistance (ELA) program*.

Thus, if the Troika and the eurozone’s central banks are to take a hit on Greece, the transfer of that country’s human capital to the rest of Europe and other IMF members should provide the creditors with some recompense (in an ideal world some inter-creditor transfer system would be implemented to make things fair, given that many Greek expats may head to the non-eurozone UK and the non-EU United States, and that poorer creditors like Portugal may not get a pari passu share of Greek emigration). A full realization of the value of this emigration might ameliorate the Troika’s reticence concerning whatever restructuring, discount, or other euphemism for a Greek default ensues, perhaps to the point of extending the ELA to prevent bank runs, with a bit left over for some form of humanitarian aid.

To be sure, some of the Troika’s actions and proposals have been neither helpful nor realistic, especially as regards overly aggressive near-term primary surplus targets (1% for the next couple of years would be in the outer realm of the possible). Yet the irony here is that, absent very necessary reforms to the welfare state that Athens is loath to agree to, the conditions in Greece are likely to persist, such that young, talented Greeks will remain in diaspora, lending their abilities and energy to the economies of Greece’s creditors. Effectively, Athens will have guaranteed at least a partial repayment of its debts, albeit at the cost of its nations’ youth.

Of course, the Greek polis may not be entirely pleased with its government’s sacrificial policy. After all, in Pindar’s poetic telling, certain members of Agamemnon’s constituency, notably Clytemnestra, mother of Iphigenia and his queen, registered displeasure with the monarch in the manner of a time before the invention of the parliamentary no-confidence vote, making for arguably the most notorious bathing scenes in literature. With polls consistently showing a majority of Greeks in favor of remaining in the eurozone even if that means agreeing to painful reform, Greece’s leadership may yet choose to compromise. Otherwise, they could find themselves grateful that the democratic process allows them to lose power without taking a bath considerably less pleasant than even the one they would impose on their creditors.

Then again, in some old versions of the tale, at the last moment Artemis rescues Iphigenia and replaces her with a stag, so hey, there’s always the chance of a deal, though bailing out Greece will take a lot more than a single buck.

*Of course this analysis neglects the social welfare cost of the émigrés to their adopted countries; this may be justified to the extent that these young people are already educated and that much of the other expenses will be incurred in old age and thus are to be heavily discounted in terms of present value. Such costs would also be partially offset by revenue from assets transferred out of Greece by the expats and other Greeks, and also by revenue from enterprises founded by disproportionately entrepreneurial immigrants, at least if one goes by the American experience.

“Send Treasury Your Retired, Your Not-So-Poor, Your Befuddled Classes Yearning To Invest Risk-Free…”

Thursday, February 9th, 2012

If they continue on their current course, the architects of America’s fiscal and monetary policies might want to consider the above revision to Emma Lazarus’ great exhortation on the pedestal of the Statue of Liberty. For it is in no small measure the flight of capital from investment on other shores that’s has been driving down yields on United States Treasuries, allowing the US to borrow with remarkable abandon despite ratings downgrades and Washington’s ongoing budget follies. As forbidding as the US debt and deficit might be, last year investors continued to bid up America’s debt, lowering the interest cost to finance economic stimulus programs while keeping tax rates unchanged. This injection of capital has almost certainly helped to spur the nascent US recovery, just as some economists argue pre-war European flight capital helped lift America out of the Depression in the later 1930’s.

Washington has had various factors to thank for the easy credit terms the world continues to offer. From Iranian saber-rattling to Japanese earthquakes, many forces served to drive frightened capital into the arms of the US Treasury market. However, at the top of the list is surely the political leadership of the Eurozone. The Obama-Boehner show has nothing on the extravaganza headlined by Merkel and Sarkozy, with a supporting cast of various and changing guest stars governing the solvency-challenged PIIGS (Portugal, Ireland, Italy, Greece and Spain) and of course the folks at the IMF and ECB (every comedy needs a few straight men and women, after all). This noisome cavalcade had provided a continuous flow of confidence-shaking news, keeping sovereign default risk and systemic shock ever present in investors’ minds. Meanwhile, the US has muddled through a budget deal which, while insufficient in the long run, indicated some capacity for concord even in the current poisonous political atmosphere. Similarly, the Fed, aided by TARP financing, seemed to succeed in stabilizing the American financial system. Through late in 2011, the result was an increase in the cost of euro-denominated borrowing for key large Euro sovereigns with the exception of Germany, the yield on whose bunds declined almost in lockstep with a simultaneous drop in US Treasury bond yields.

At the time of this writing, with the “voluntary” Greek debt restructuring talks dragging on, observers may understandably have a difficult time conceiving of an end to “Euro-fear.” Nevertheless, it is precisely the possibility that, with or without Greece in it, the Eurozone will find a way to get its house in some kind of order that threatens America’s ultra-low borrowing costs. We are in fact seeing some tentative signs of, as Churchill put it, not the end or even the beginning of the end, but perhaps the end of the beginning.

New ECB president Mario Draghi’s Long Term Refinancing Operation ostensibly provides a three-year, multi-hundred-billion euro stabilization line of credit to European commercial banks, but as the ECB is “allowing” (read: encouraging) those banks to use this credit to buy better European sovereign bonds (and avoid having to dump weaker Euro nation credits in bulk) what we’re really seeing is a back-door program to lower European states’ borrowing costs. Because the ECB loans represent money created by the central bank, this is a form of bailout that does not require direct taxation of “core” European nations citizens (e.g. Germans), though to be sure, they may end up paying the price through inflation (see “Europe Learns To Default The American Way, Restoring Transatlantic Balance Of Irresponsibility”) and devaluation, though export-driven economies like Germany actually need a weaker currency more than they might like to admit (“It’s Hard To Make That German Export Wiener Without PIIGS – And That Goes For Chinese Dumplings, Too”).

Second, whether or not the Greek debt restructuring talks result in a formal default or an effective one (and the contemplated 70% write-down will surely be a default in fact if not in name) is not so important as whether the process is orderly. So long as any any write-offs and triggered credit default swaps are handled in a way that does not lead to bank runs and frozen markets, such an event could be kept contagion free. There is no guarantee such a systemically benign scenario will play out, but the aforementioned willingness of the ECB to inject liquidity on a massive scale does provide reason for optimism.

And therein lies the rub for US government borrowing costs: as the Eurozone crisis subsides, so may the safe haven “panic bid” on US Treasuries, causing the yields on those bond to rise and further increasing the burden on American taxpayers of financing the deficit. Indeed, the 10 year US Treasury yield has crept up from below 1.87% in late November of last year to over 2.02%, while conversely (and despite it’s own rating downgrade), France’s ten year debt yield declined to below 2.90% since spiking above 3.73% during the same period. Similarly, the Italian 10 year yield dropped from over 7.36% to less than 5.49%.

To be sure, there are significant benefits to the US economy in this “risk-on” shift; the reduction in Eurofear has bolstered equity markets with a knock-on wealth effect boosting consumption and, yes, tax-revenue even in the absence of a rate hike. Even so, higher T-bond rates translate into an increased cost of servicing America’s heavy debt, so even if the core Euro countries seem to be picking up the tab, their Greek holiday may not come without cost for Uncle Sam.

N.B.: One advantage of a weakened euro – cheaper French wines (in dollar terms), and in particularly that said-to-be-excellent 2009 Bordeaux vintage; for insight into this and all things vino, check wine expert (and Duke econ grad) Jessica Bell’s very excellent webcasts at

China Brings Home the Gold

Friday, November 6th, 2009

Seems China waited until after the Beijing games to really go for the gold. The People’s Bank of China, the nation’s central bank, has of late stocked up on the precious yellow to the tune of about a thousand tons, and is said to be hunting for more. Why?

The PRC’s export-driven growth has put China’s central bank in a spot. Selling all that stuff to the American consumer means importing trillions of US dollars. Financing America’s trade deficit (and thus China’s surplus) necessitates lending those greenbacks back to the United States, which the People’s Bank does by buying Treasuries. But,  in order to keep interest rates low, the Fed has been doing the same thing; buying US debt and effectively printing the money to do so, flooding the globe with dollars. The result has been a precipitous decline in the dollar’s value against most major currencies. A crucial exception has been China’s renminbi, with the yuan remaining steady at about 6.83 to the buck for most of this year.

Without intervention by the People’s Bank, the yuan would appreciate sharply against the dollar, making it cheaper for the Chinese to buy imports and helping to equilibrate China’s balance of trade with the world, especially the US. But China’s central bankers know the nation’s domestic demand cannot yet support the production necessary for the nine percent annual growth the country currently enjoys, and indeed may require for social and political stability. So the People’s Bank goes on buying yet more dollars and suppressing upward pressure on the renminbi.

Thus, the PRC is left with huge and growing dollar reserves, subjecting it to further potential losses from a deteriorating greenback, while its artificially low yuan makes importing raw materials necessary for production  increasingly expensive. This latter price pressure can, of course, lead to domestic inflation, which has never been a recipe for the civil contentment China’s leaders seek.

What, then, is a central bank to do when it must simultaneously hedge against both weakness in the world’s reserve currency and inflated raw material prices? China’s answer, at least in part, has been to go for the gold, literally. Despite the PRC overtaking South Africa as the world’s largest producer (with an annual production of around 280 tons), China remains a net importer of the metal. To be sure, some Chinese demand for gold is industrial, and with two trillion dollars in foreign reserves, the People’s Bank is arguably underweight in its holding of the metal. But the Bank’s move into gold is hardly a vote of confidence in the dollar. Indeed, China’s leadership surely realizes that sooner or later they will have to let the yuan rise, effectively devaluing the dollar against their own currency, so diversifying into gold amounts to a hedge against their own future policy.

China is not alone in this gold rush. India’s central bank, facing similar dollar diversification issues, just bought 200 tons off the IMF at approximately $1,045 per ounce, and reports have the Fund looking to sell another 200 tons and tipping the probable buyer as… yes, China.

The rising Asian nations are accumulating other commodities, both as dollar hedges and to secure raw material inputs to production. Key among these is “gold” of the black kind: oil. These moves are part of a secular shift in the structure of global trade, one whose roll in the recent crisis has been seriously underestimated in some quarters. I’ll have more to say on this later, but for now, the next time someone tells you the rise in gold and other raw materials is just “rampant speculation,” ask if the central bankers of China and India are to be counted amongst the gamblers. If so, then the punters are policymakers, and wagering against them in recent days would have felt a bit like betting against the house.

Blame It On Rio

Thursday, October 8th, 2009

In the wake of the International Olympic Committee’s decision to award the 2016 Summer Games to Rio de Janeiro there has been no shortage of hand wringing over how Chicago and the United States lost. My personal favorite: Brad Flora’s very amusing “Chicago Loses, Nerds Win” in Slate, in which the city’s bid is hamstrung by “good government” types opposing public funding of stadiums. You know the country’s taken a turn toward state enterprise when a derisive moniker once reserved for bespectacled bookish types is now hurled at anyone against getting taxed to fund a government-sponsored sports complex. Flora’s point that local opposition didn’t help is well taken, but the hard truth is the current political economy made Brazil’s Olympic victory a virtual sure thing.

At a time when the BRIC (Brazil, Russia, India and China) nations are credited as new dynamos of global economic growth and the financial authority of the G7 is discarded in favor of the G20, the zeitgeist favored one of the rising players (I’ll set aside the question of whether Russia’s experiment in secret policing of markets really belongs in this group). Brazil, a nation of whom it was once joked was “the land of the future, and always will be” is now the tenth largest economy in the world and is lending money to the IMF its President often scorned. Its 2008 growth rate was an estimated 5.1% and, despite the global economic slump, managed to expand at a 1.6% annual rate in the second quarter. Though still heavy in agriculture and natural resources, Brazil’s development has been accomplished with impressive diversification of economic activity, as anyone who’s flown in an Embraer jet can attest.

The Rio games will be the first in South America and in the Southern Hemisphere outside of Australia, emblematic of formerly Third World nations asserting themselves in the international arena.  With that new-found self-confidence, and in the wake of America’s image problems in the last few years, I suspect there’s a certain satisfaction on the part of much of the international community in seeing a diminished United States. Obama’s election has surely helped in the public relations department, but when you’re leader is praised by those who are after all not only allies but rivals, some caution is in order. Knocking Chicago out of the running at the start of the Copenhagen round and rebuffing the American President (he was flying home when he got the news) is just part of a process of humble pie consumption. It’s worth noting that Luiz Inacio Lula da Silva, a man not shy in his critiques of the U.S. and a sometime supporter of Chavez and Ahmadinejad, is now provided with a capstone achievement for his own presidency. Take that, Yankee.

It’s likely the White House figured the odds and never thought there was much chance the United States would prevail in Denmark, hence the early reluctance to send Obama to plead the Windy City’s case. But a second calculation obtained, rather along the lines of “Dammed if you do, more damned if you don’t” With Japan, Spain, and Brazil sending their heads of state, had Obama not gone he would have inevitably been accused of depriving the American cause of its strongest possible advocate, and by his hometown supporters to boot. Better to go and take you lumps than be seen as having failed to back your backers.

So no need for a urine test: Brazil won fair and square, a victory that can be credited to economic achievement and a realigned world order (well, in that sense maybe the judges could be said to have been in the bag). That country’s challenge remains translating recent growth into broad prosperity, security against crime and political stability. To this end, it remains to be seen if the Rio games will mean more displacement than development for the teeming poor of the city’s favelas. As for America, conciliation can sooth friends but also encourage adversaries, and Joe Biden predicted Obama would be tested early in his Presidency. Would it not be wonderful if the challenge in Copenhagen represents the zenith of frustrated international ambitions for the new President? Unfortunately, I’m not sure we’ll all be that lucky.

Meanwhile, the nerds had a hard enough time in gym class; let’s stop blaming them for losing the Olympics.