Quotulatiousness

July 24, 2011

Bank of Ireland “suffered a restructuring credit event”

Filed under: Economics, Europe — Tags: , , — Nicholas @ 10:46

I’m not fluent in banker . . . does this Reuters report really say that the Bank of Ireland is in default?

The ISDA said a restructuring credit event occurred after Bank of Ireland closed an offer to buy back about 2.6 billion euros of Tier 1 and Tier 2 subordinated debt at a discount of up to 90 percent earlier this month.

A credit event is financial industry jargon for default on payment, breach of bond covenants or other event that casts doubt on an issuer’s ability to service its debt.

If it does mean the bank is in default, how come it hasn’t received much attention in the media? (Aside from the focus being on Norway right now for other reasons, of course.)

H/T to Karl Denninger for the link.

July 21, 2011

This is why the Bank of Canada will raise rates soon

Filed under: Cancon, Economics — Tags: , , — Nicholas @ 09:58

Stephen Gordon explains why the Bank of Canada will be raising interest rates in the near term:

The relatively hawkish language in the Bank of Canada’s interest rate decision — most notably the removal of the word ‘eventually’ from the sentence describing the conditions in which interest rates will increase — took financial markets by surprise.

Central banks try to avoid surprises when they can, but in this case the Bank has the best of excuses: the facts changed.

[. . .]

These new numbers may well be revised away in the coming months, but policy makers have to work with the data they have before them. If you take an output gap that is shrinking much faster than you thought and add it to a core inflation rate that is drifting towards and perhaps past the Bank’s 2 per cent target, you will find yourself in a position where you have to start preparing to increase interest rates earlier than you had planned.

July 19, 2011

Walsh: This is what the debt-ceiling fight is really all about

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 09:20

Michael A. Walsh puts the real issue into focus:

Forget all the numbers being tossed around in Washington — the millions and billions and trillions of dollars being taxed, borrowed, printed and spent as the country approaches the Aug. 2 debt-ceiling deadline.

Forget the political jockeying for position between a president desperately seeking re-election in 16 months and a Congress equally desperately seeking not to be blamed for spending even more money that we don’t have.

Forget the fact that such “entitlements” as Social Security and Medicare — social-insurance programs that the public long thought to be actuarially sound — have been exposed as little more than legal Ponzi schemes, paying today’s benefits out of tomorrow’s borrowed receipts.

Instead, just ask yourself this simple question: When did it become the primary function of the federal government to send millions of Americans checks?

For this, in essence, is what the debt-ceiling fight is all about — the inexorable and ultimately fatal growth of the welfare state. If you don’t believe it, just look at President Obama’s veiled threat to withhold Grandma’s Social Security benefits if Congress doesn’t let him borrow another $2 trillion or so to get himself safely past the 2012 election.

July 18, 2011

It won’t hurt just the “rich”

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 11:00

Michael Boskin illustrates just what the current levels of US government spending will mean when translated into personal tax rates:

Many Democrats demand no changes to Social Security and Medicare spending. But these programs are projected to run ever-growing deficits totaling tens of trillions of dollars in coming decades, primarily from rising real benefits per beneficiary. To cover these projected deficits would require continually higher income and payroll taxes for Social Security and Medicare on all taxpayers that would drive the combined marginal tax rate on labor income to more than 70% by 2035 and 80% by 2050. And that’s before accounting for the Laffer effect, likely future interest costs, state deficits and the rising ratio of voters receiving government payments to those paying income taxes.

It would be a huge mistake to imagine that the cumulative, cascading burden of many tax rates on the same income will leave the middle class untouched. Take a teacher in California earning $60,000. A current federal rate of 25%, a 9.5% California rate, and 15.3% payroll tax yield a combined income tax rate of 45%. The income tax increases to cover the CBO’s projected federal deficit in 2016 raises that to 52%. Covering future Social Security and Medicare deficits brings the combined marginal tax rate on that middle-income taxpayer to an astounding 71%. That teacher working a summer job would keep just 29% of her wages. At the margin, virtually everyone would be working primarily for the government, reduced to a minority partner in their own labor.

Nobody — rich, middle-income or poor — can afford to have the economy so burdened. Higher tax rates are the major reason why European per-capita income, according to the Organization for Economic Cooperation and Development, is about 30% lower than in the United States — a permanent difference many times the temporary decline in the recent recession and anemic recovery.

While policy makers may shrug off the impact of higher tax rates, it has a significant effect on individual choices when it comes to part-time jobs, overtime, and even raises. Even if in reality working a few hours of overtime won’t make a difference, psychologically, the higher tax burden can act as a deterrent: “why put in the effort if the government gets more out of my effort than I do?”

July 16, 2011

Reason.tv: The debt ceiling debate is full of malarkey

Filed under: Economics, Government, USA — Tags: , , , — Nicholas @ 10:47

July 15, 2011

The US government’s plight, as a poker technique

Filed under: Economics, Government, Politics, USA — Tags: , , , , — Nicholas @ 11:05

Jagadeesh Gokhale points out that President Obama is not only bluffing, but that it’s transparently obvious what this tactic is intended to achieve:

The president’s Wednesday night warning to House Majority Leader Cantor to not “call his bluff” suggests that… well, he’s bluffing. But the president has already been playing some transparently thin cards in this game of poker, including his melodramatic — but highly questionable — hint that Social Security checks would be interrupted on August 2.

The go-to strategy in a literal train wreck is to jump off a nanosecond just before the collision. The debt-limit debate is more complicated, however, because no one really knows what the effect would be if the deadlock on budget negotiations continues through August 2nd.

Debt-rating agencies may soon downgrade U.S. debt. But does the debt of a country on a fiscal path to borrow and spend 45 percent more than its revenues — at a time when its debt already equals its annual output — really warrant a AAA rating? Won’t House Republicans really be doing investors a service by revealing a more honest debt rating?

[. . .]

Regarding a potential “bluff” by the president and high officials of the Treasury and the Federal Reserve: It’s only natural that they would sound the most dire of alarms. There is no guarantee that the government would default on its existing contractual debt and that financial markets would tank even if such a temporary technical default were to occur. But the risk of such events is not zero and no high government officials would wish to risk it on their watch.

A hint about whether and how much President Obama might be “bluffing” is his unwarranted warning that Social Security payments could not be guaranteed if the debt limit is not increased. There is every reason to believe that those payments could and would be made in full in August — and for many more months — no matter whether the budget deadlock is resolved by August 2nd.

July 14, 2011

The Eurozone crises

Filed under: Economics, Europe, Greece, Italy — Tags: , , , , — Nicholas @ 17:30

That’s right, crises, not crisis. There are three interlinked crises, not just one:

The crisis in the Eurozone has been lurching from one country to another over the past year or so. After bailouts for Greece, Ireland and Portugal, and with a second bailout for Greece in the offing, the financial markets this week turned their attention to Italy, a far larger economy than those previously affected. Spain, another country struggling to pay its way, has also been hit by austerity measures and political turmoil. But while it is easy to get caught up in the specifics of each new stage of the crisis, it is worth taking a step back to understand what is going on and the possibilities for the future.

The Euro crisis, like just about every other economic story these days, has a three-fold character. It is not, in fact, a single crisis; it has three inter-related elements: financial, economic and political.

Of the three, the financial crisis is, paradoxically, the least significant, even though it is the most prominent of the three and the one which threatens to spin out of control with serious broader consequences. Alongside the financial, the economic aspect is the most entrenched and material of the three, while the political crisis — that is, the failure of the political elites to get on top of the other two challenges — is the most critical, as it is, or should have been, the key to the resolution of the other two. The shift in focus to Italy, the Eurozone’s third largest economy, indicates that time may have run out for effective containment. The Euro genie is probably out of the bottle.

Confused by all this “debt ceiling” talk? Here’s an analogy you’ll understand

Filed under: Humour, Politics, USA — Tags: , — Nicholas @ 11:32

Don’t we all understand the debt ceiling situation so much better now?

July 12, 2011

Have the markets already “priced in” the risk of a US government default?

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 11:48

Along with everyone else, I’ve been watching the US government’s fiscal game of “chicken” with some alarm. What is puzzling is that the opposition in congress doesn’t seem to be all that scared by the risk of default:

The facts, in fact, are plain enough. In the unlikely event that the U.S. government would hit the real ceiling on August 2 as advertised, the federal government would still be on track to collect about $2.2 trillion in the fiscal year. That wouldn’t change. And net interest for the year would still be about $205 billion, or less than a tenth of incoming revenues. And in light of the consequences, there is no doubt that President Obama and his Treasury Secretary would ensure that the interest payments are made on time and in full.

Thus it should not be surprising, as Fox Business News senior correspondent Charlie Gasparino wrote in a New York Post piece some days ago that “just about every private-sector economist I speak to says that Treasury could simply use its ample cash on hand to pay off our creditors first—then begin to prioritize payments for the military and various social programs.”

This view appears to be shared in spades by the credit markets, which so far have reacted to the Obama-media scare tactics with a big yawn. When the markets fear real default, they respond by jacking up interest rates, as we’ve seen in Greece, Italy, Portugal, etc. It’s happening right now in those countries.

In sharp contrast, U.S. long-term rates are actually falling. The 10-year Treasury bond rate, which only a few days ago was around 3.15 percent, has dropped 20 basis points to 2.95 percent. Maybe the markets just aren’t paying attention. Or maybe they know Obama and Company are blowing smoke. Whether the debt ceiling is raised on time or not, markets are confident that the interest will be paid.

July 11, 2011

The Euro: who’ll be the first to leave?

Filed under: Economics, Europe, Government, Greece, Italy — Tags: , , — Nicholas @ 11:15

With all eyes on Greece recently, the troubles of Italy come as a sudden shock to many:

Greece, Ireland, Portugal, (maybe) Spain…and now Italy? Contagion. The hope on the part of the EU and ECB was to contain the contagion by throwing money at it, but every time they fill one sink-hole with Euros another one opens up. It’s been obvious for a long time that the Eurozone was simply a bad idea, and this crisis has exposed the rotten underpinnings for all to see. Europe wanted to have a currency union just like the United States, but they are finding out the hard way that a monetary union without a fiscal-policy union just won’t work. European countries are not like US states — they have different langauges, different work rules, different governing philosophies…different cultures. The big question in everyone’s mind is…now what? Some countries must default, and a default will probably require leaving the Euro and going back to the sovereign currency. But no one knows exactly how this will work, or what the consequences will be.

Some people are floating the idea of a Euro-Bond, but I find that a little nonsensical absent any fiscal-policy union backing it. But of course this may be the point to the enterprise: to “force” Europeans into a closer union without having to go through the messy (and time-consuming) processes of holding a vote. The EU project has never really been a democratic enterprise from the very first — the Eurozone was implemented without the say-so (even over the protests of) its citizens. If I Eurobond is floated, I expect it to be another example of droit de Seigneur on the part of the Eurozone elite. (And it probably won’t work, and will piss away a lot more good money after bad, but none of that has stopped them so far.)

July 5, 2011

When (not if) Greece defaults

Filed under: Economics, Europe, Government, Greece — Tags: , , — Nicholas @ 09:30

John Lanchester explains why default is inevitable, and that the only question remaining is how it will happen:

The economic crisis in Greece is the most important thing to have happened in Europe since the Balkan wars. That isn’t because Greece is economically central to the European order: at barely 3 per cent of Eurozone GDP, the Greek economy could vanish without trace and scarcely be missed by anyone else. The dangers posed by the imminent Greek default are all to do with how it happens.

I speak of the Greek default as a sure thing because it is: the markets are pricing Greek government debt as if it has already defaulted. This in itself is a huge deal, because the euro was built on the assumption that no country in it would ever default, and as a result there is no precedent and, more important still, no mechanism for what is about to happen. The prospective default could come in any one of several different flavours. From everybody’s perspective, the best of them would be what is known as a ‘voluntary rollover’. In that scenario, the institutions that are owed money by the Greek government will swallow heavily and, when their loan is due to be repaid, will permit their borrowings to be rolled over into another long loan. There is a gun-to-the-side-of-the-head aspect to this ‘voluntary’ deal, since the relevant institutions are under enormous governmental pressure to comply and are also faced with the fact that if they say no, they will have triggered a proper default, which means their loans will plummet in value and they’ll end up worse off. The deal on offer is: lend us more money, or lose most of the money you’ve already lent.

This is, at the moment, the best-case scenario and the current plan A. It reflects the failure of the original plan A, which involved lending the government of George Papandreou €110 billion in May last year in return for a promise to cut government spending and increase tax revenue, both by unprecedented amounts. The joint European Central Bank-EU-IMF loan was necessary because, in the aftermath of the financial crisis of 2008, Greece was exposed as having an economy based on phoney data and cheap credit. The cheap credit had now dried up, and Greece was faced by the simplest and worst economic predicament of any government: it couldn’t pay its debts.

June 29, 2011

The real reason for the Greek bailout

Filed under: Economics, Europe, Government, Greece — Tags: , , , , , — Nicholas @ 15:03

Eric S. Raymond explains why all the politicians and apparatchiks of the world’s bureaucracies are lining up to pump for a Greek bailout:

Lost in the eye-glazing babble about maturity extensions, haircuts, and which acronymic organization is going to funnel the money into place is the real magnitude of the stakes here. It’s not just the Greeks’ opera-bouffé parody of the modern redistributionist state that is circling the structural-insolvency drain; what really terrifies our political class is the prospect that, very soon, the investors simply won’t buy government bonds anymore — and massive borrowing through bond issues is the only thing keeping the redistributionist state afloat.

As I have documented many times on this blog, the entitlement-spending commitments of the U.S. Federal government, most U.S. state governments, most European governments, and indeed most national governments everywhere exceed the capacity of their economies to generate wealth. And demographic trends are making the imbalance worse over time, not better.

This is why raising taxes won’t help. The amount of private wealth available to be taxed is insufficient, even if taxation could be raised to 100% without suppressing all economic activity. In practice, raising taxes leads to increases in spending which more than consume the increased revenue (by a ratio of 1.17:1 in the U.S. since the 1940s).

[. . .]

That is the assumption that is now under threat. Greece must be bailed out in order to preserve the illusion that the borrowing can continue indefinitely, that the bill will somehow never come due. When the political class speaks of “contagion”, what they’re really worried about isn’t the solvency of German banks holding Greek paper, it’s a general flight of investors from the sovereign-debt markets.

Auditor skeptical of Ontario government spending cut promises

Filed under: Cancon, Economics, Politics — Tags: , , , — Nicholas @ 07:15

With their track record on spending, it’d be hard to take the promises seriously, and the Auditor General isn’t optimistic that they will deliver on their promises:

A plan by Ontario’s Liberal government to slash the increase in annual spending by almost 400 per cent is too optimistic and could lead to service cuts, Auditor General Jim McCarter warned Tuesday.

The Liberals increased spending by 7.2 per cent a year since they were elected in 2003, but in the March budget vowed to cut the growth in spending to 1.8 per cent annually to help trim the $16.7-billion deficit.

Ontario voters, who head to the polls Oct. 6, should view the Liberal plan with “a moderately big grain of salt,” said McCarter. “Basically take that into consideration when you look at the pre-election report.”

The Liberals’ revenue projections were fine, he said, but their plan to keep the growth in spending below the rate of inflation for the next three years is “aggressive” rather than prudent.

“You’ve really got to have a pretty hard look at the assumptions underlying those expenses, and you may be forced to make some hard decisions from a service delivery point of view,” said McCarter. “The assumptions underlying those expense projections, rather than being cautious and prudent, were optimistic, they were aggressive, and in a lot of cases really reflected a best-case scenario.”

Political promises are rarely worth the paper they’re printed on, and this particular government’s spending habits make it even less likely that they’ll meet this promise.

June 27, 2011

The Economist calls for Greek debt restructuring

Filed under: Economics, Europe, Government, Greece — Tags: , , , — Nicholas @ 10:23

A Greek default. It’s stopped being a possibility, moved into being a probability, and it’s starting to look inevitable:

There is an alternative, for which this newspaper has long argued: an orderly restructuring of Greece’s debts, halving their value to around 80% of GDP. It would hardly be a shock to the markets, which have long expected a default (an important difference from Lehman). The banks that still hold a big chunk of the bonds are in better shape to absorb losses today than they were last year. Even if Greece’s debts were cut in half, the net loss would still represent an absorbable proportion of most European banks’ capital.

An orderly restructuring would be risky. Doing it now would crystallise losses for banks and taxpayers across Europe. Nor would it, by itself, right Greece. The country’s economy is in deep recession and it is running a primary budget deficit (ie, before interest payments). Even if Greece restructures its debt and embraces the reforms demanded by the EU and IMF, it will need outside support for some years. That is bound to bring more fiscal-policy control from Brussels, turning the euro zone into a more politically integrated club. Even if that need not mean a superstate with its own finance ministry, the EU’s leaders have not started to explain the likely ramifications of all this to voters. But at least Greece and the markets would have a plan with a chance of working.

No matter what fictions they concoct this week, the euro zone’s leaders will sooner or later face a choice between three options: massive transfers to Greece that would infuriate other Europeans; a disorderly default that destabilises markets and threatens the European project; or an orderly debt restructuring. This last option would entail a long period of external support for Greece, greater political union and a debate about the institutions Europe would then need. But it is the best way out for Greece and the euro. That option will not be available for much longer. Europe’s leaders must grab it while they can.

June 25, 2011

Taxes must rise to maintain “the overall size of government programs”

Filed under: Economics, Government, Politics, USA — Tags: , , — Nicholas @ 11:59

Treasury Secretary Timothy Geithner was being as honest as he knows how in talking to the House Small Business Committee this week. Reducing the size of government is literally unthinkable:

[T]he Obama administration believes taxes on small business must increase so the administration does not have to “shrink the overall size of government programs.”

The administration’s plan to raise the tax rate on small businesses is part of its plan to raise taxes on all Americans who make more than $250,000 per year — including businesses that file taxes the same way individuals and families do.

[. . .]

Geithner, continuing, argued that if the administration did not extract a trillion dollars in new revenue from its plan to increase taxes on people earning more than $250,000, including small businesses, the government would in effect “finance” what he called a “tax benefit” for those people.

“We’re not doing it because we want to do it, we’re doing it because if we don’t do it, then, again, I have to go out and borrow a trillion dollars over the next 10 years to finance those tax benefits for the top 2 percent, and I don’t think I can justify doing that,” said Geithner.

Not only that, he argued, but cutting spending by as much as the “modest change in revenue” (i.e. $1 trillion) the administration expects from raising taxes on small business would likely have more of a “negative economic impact” than the tax increases themselves would.

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