lifestyle leader

The other day a friend of mine asked me if I had any advice for visiting Greece at this time of year. I replied, half-jokingly, that after visiting Thessaloniki he might head down to Athens and wait around for about a month until the country went bankrupt - he could then buy up his very own Greek island in the Med for cheap.

(See what I did there? I cleverly inserted into my travel advice a reference to the current politico-economic climate in Europe, thereby indicating my awareness of current events and razor sharp wit).

But like I said, I was half-joking. Turns out you can actually snap up your very own island in the Aegean for, like, a pittance!* Moreover, if the Greeks are forced to sell some of their sovereign soil to raise money to pay back the IMF or ze Germans, there could be some real bargains out there.

Your own island.... Mull that one over and try to tell me that it wouldn't impress your gender of preference.


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*starting at $1-2million, or higher if it comes with a place to dock your yacht. Or mermaids.

-George Soros on Greece and the Eurozone's inherent flaws.

-Kenneth Rogoff sees a wave of sovereign defaults in the years ahead (they tend to follow banking crises).

-There is an interesting debate at Free Exchange on the need for a European Monetary Fund.

-We cite Paul Krugman a lot of these pages; The New Yorker profiles the man and his politics.

-In the wake of another coup in Africa (Niger, this time), FP Passport asks, 'Why are coups always led by colonels?'

-In Olympics news other than US Hockey's epic beatdown of Team Canada (sorry, Dave), the NYT has an interesting analysis of the controversial (for Russians, at least) men's figure skating competition, explaining why American Evan Lysacek didn't need a quad to win gold.

Dept. of Checks and Balances
After refusing to bow to the government's policy whims, the previous head of Argentina's central banker was dropped like a sack of rice. One is not suprised to learn that his replacement is decidedly more cooperative. There has been some debate recently as to whether inflation targeting should be the only goal of central banks (see here). With inflation running about about 32%/year, Argentina does not figure in this debate.

Sacrilege
Adair Turner, the head of Britain's Financial Services Agency (a position not known for siding with the pitchfork-waving anti-capitalist crowd) calls into question the prevailing dogma about the value of financial liberalization. Ditto over at the IMF blog, where the notion of capital controls is beginning to take hold as part of a 'reasonable' policy approach.

Mine is 1 louder
Last weekend, the Sunday Times published a letter from 20 economists supporting the British Conservatives' plan for fiscal, er, conservatism. This week, 60+ economists responded that the risks of cutting spending are far too high, and could tip the UK back into a recession. So the question is this: are we 1981 or 1997?

Communication Gap
Mobile/cell phone usage, worldwide. I'm guessing that using public transit in Puerto Rico is super-annoying for this reason alone.

I have been mulling a thorough post on the developing Eurozone sovereign debt crisis for the past two days, thinking of ways I could adequately present the necessary context, theoretical arguments and implications to the global economy. But in reading through Simon Johnson's coverage of the developments in Europe, I realized something: I can't possibly deliver a better analysis than he has. So instead of trying in vain to duplicate his efforts, I point you towards The Baseline Scenario:

-Johnson's first look at the situation asked whether US policymakers, specifically Tim Geithner, understood the risks posed by a European sovereign debt crisis to America and the global economy

-Over the weekend, Johnson looked at the likelihood of IMF involvement in Greece, the irrelevance of the G7 and the implications of European policymakers' dithering

-Today, Johnson, Peter Boone and James Kwak released their Revised Baseline Scenario for 2010, which includes a great treatment of the Eurozone's sovereign debt woes and its broader implications. This is a long post, but I recommend reading it in full for their 2010 outlook.

Markets rallied yesterday on signs the European big boys would step in and back Greece. ECB President Trichet rushed back from a trip abroad and there were rumors circulating that Germany, the only Eurozone country that really has the balance sheet and power to step in at this point, was constructing a 'firewall' of sorts that would stem any contagion from the Greek crisis. But Germany later denied any plans were in the works, which rattled investors again.

I suspect we'll get some official statements out of the ECB and Commission by the end of the day, hopefully laying out some concrete steps to resolve the situation. But if you believe Simon Johnson, it may all be too late.

- Facts and Myths about Greek's sovereign debt woes: this is one of the better pieces I've seen so far.

- Michael Arghyrou and John Tsoukalas argue for the creation of a "strong" and weak" euro, both managed by the European Central Bank, as a solution to the looming sovereign debt crisis in southern Europe. (possibly gated link, sorry)

- Spillover effects: as investors are betting against the Euro and possibly forcing EU governments to make some tough decisions (see below), they are simultaneously fleeing towards the safety of the US dollar. So long as the US can continue to borrow cheaply, they are less likely to be forced to make some tough decisions about their own problems.

- What if Google was a state-owned company in the Ukraine?

- Indulge yourself and set aside 12 minutes to watch this stunning video. On as big a screen as you can find. It's almost entirely computer generated (except the person, clouds and pigeons), and makes Avatar look like an etch-a-sketch drawing.

I apologize for the light posting of late. I've been preoccupied with some pretty heavy work-related stuff. But I want to devote much of this week to the developing eurozone crisis. A backgrounder will follow shortly, but to give you an idea of how serious the situation in Europe is, traders have taken over $8bn in short positions against the euro, the largest bet ever against the common currency.

That's massive, almost equal to the $10bn bet against sterling made by George Soros that 'broke' the bank of England in 1992 and ejected sterling from the European Exchange-Rate Mechanism.

The euro was supposed to be one of the big winners of the financial crisis; for the 'safety' it provided countries like Slovakia, for the credible external commitment its accession criteria provided countries like Hungary and Poland, and for its rise as a viable reserve alternative to the dollar. But all of the sudden the euro is confronted with its biggest crisis and I sense that policymakers will soon encounter a stark choice: explicitly back countries like Greece and Portugal or eject them from the common currency.

Stay tuned.

After a busy busy week, I am happy to get back to the blog today and hit on a few points I missed while drowning in Excel hell...

-Hot off the presses: US GDP surged a whopping 5.7% in Q4 2009, the best quarter in over six years, and driven by companies ramping up production to overcome thin inventories amid rising consumer demand. Consumer spending, which accounts for over 2/3 of US economic activity, expanded by a better-than-expected 2%. I'm not even going to make a comment about a job-less recovery, as these are really strong numbers, unless I just did...

-Bernanke wins reappointment, which Simon Johnson believes is the beginning of the end for financial reform. While I disagree (though I imagine the difference in our expectations is only a matter of degree), Johnson's post is great on the strength of the following sentence:

And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policy maker in the recent history of the world

Venezuela has taken the "war on inflation" to a new level (via DeLong):

"Hugo Chávez, Venezuela’s president, on Sunday threatened to deploy troops and expropriate businesses that increase their prices following a steep devaluation of the currency on Friday.... Go ahead and speculate if you want, but we will take your business away and give it to the workers, to the people,” he said, stating there was no reason for businesses to raise prices."

Hmm, expropriation by the government for the good of the people.... Maintaining that level of doublespeak must be exhausting. More likely, this money will be used by the government to pay back foreign creditors.

I gather that Venezuela's currency had been overvalued for quite some time, so this is a good news for Venezuela's revenues from oil exports, on which it relies for about 30% of GDP. That very same GDP contracted by about 3% last year.

Unfortunately for regular Venezuelans, this means that their personal savings have been devalued along with the currency, and those lovely imported DVD players are going to be more expensive. But that's okay! because you can't use a DVD player if you don't have any electricity!

One of my favourite stories from the past week has been from the United Kingdom's Ministry of Defense: under pressure from Treasury to reign in expenditures, DoD has pulled the plug on their UFO hotline. This drastic measure will save a whopping 50,000 pounds a year.

It's a sad day for skywatchers, alienophiles, crop-pattern-investigators and attention-seeking nutjobs of all stripes. According to the Guardian, this is also a sad day for science. Nobody said recessions were going to be easy.

Fitch ratings has downgraded Greece to BBB+. See FT Alphaville for their reasoning.

As an addendum to Dave's post below, if you are interested in learning about the current debate/questions surrounding sovereign ratings, have a look at the case of Mexico.

Fitch downgraded Mexico on November 23rd following the Congress' approval of the 2010 budget, which relied too heavily on borrowing and higher oil exports. Mexico's medium-term outlook is under scrutiny, in part, due to the country's over-reliance on a collapsing oil sector (output has declined by about a quarter since 2004, while the sector accounts for almost 40% of state revenue) and failure to sufficiently address the root causes of a widening fiscal deficit, including over-reliance of oil revenues and a small non-oil tax base. JPMorgan has estimated the budget deficit will swell to its widest margin in two decades.

Highlighting the current debate over sovereign ratings, however, is the fact that not everyone agreed with the downgrade. Goldman Sachs' chief Latin American economist Paulo Leme has called the downgrade 'unnecessary roughness' because it overlooks what is still a deficit equivalent to just under 2% of GDP in a recessionary economy. While each country's conditions are different, as a generic measurement a deficit under 4-5% of GDP is widely considered sustainable, especially within the context of a 7.5% annual decline in GDP. I can think of a few countries who would welcome such a small gap. Further, while Leme concedes the Congress could have done far more with the 2010 budget, he feels the downgrade overlooks the value of tax increases included in the bill. The political environment in Mexico is hardly conducive to reform, as Fitch cited as a major factor in its decision, so in this context the tax increases should be viewed as a positive development.

In my opinion, the medium-term concerns centered on the inability of the Calderon government to win Congress' approval for the restructuring of the oil sector are valid, and until this is achieved the country will remain under just scrutiny. But with respect to Mexico's ratings, this assessment places too great an emphasis on medium-term policy considerations, while overlooking the fairly stable near-term profile. Fitch correctly highlights Mexico's vulnerability to future oil-price shocks- relative to its peers Mexico's external debt-to-GDP and debt-to-revenue ratios are high- and limited room for counter-cyclical expansion. But when judged independent of its peers, a downgrade is likely a step too harsh given Mexico's 'healthy banking sector, resilient external accounts, the sovereign's manageable external debt amortization profile, as well as its ability to tap the IMF Flexible Credit Line (FCL) in case of a significant worsening of external financial conditions.' In fact, both the peso and Mexico's bonds rallied following the downgrade, perhaps reflecting a general skepticism amongst market participants.

The case of Mexico illustrates the tricky business of rating sovereign debt and fiscal sustainability, particularly in the post-crisis environment (i.e. widening fiscal deficits amidst tighter borrowing conditions.) While any credit rating agency will tell you that ratings criteria, however objective, are measured within a local context, it seems that in the current environment countries are being painted with rather broad strokes. The spike in CDS spreads for Gulf states following Dubai's announcement is one such example that wholly ignored the unique characteristics of the Dubai situation. The expansionary response of many governments to the crisis has been almost universally credited with averting a total collapse of the global economy. In fact, both the IMF and UN have recently warned against withdrawing this stimulus too soon, lest we manufacture a double-dip recession. While these policies ultimately raise important questions over the medium-term sustainability of imbalances, a clear assessment of a country's ability to exit this response and address larger deficits in the medium-term should control the outlook for a country when, like Mexico, that country is comfortably financing their deficits in the near-term. That picture isn't always clear in the current environment and ratings agencies should thus reserve their judgement until government's are sufficiently confident that growth is sustainable (which they aren't) and have been able to clearly outline their exit strategies (which they haven't.)

As explained earlier, the freespendin' ways of governments to address the economic crisis has led to some serious sovereign debt concerns for the near future. This applies to both the developing and developed economies of the world. Want to learn more? We've got you covered:

- Morgan Stanley predicts that the United Kingdom (and sterling) is in for a messy year ahead (the Telegraph)

- Deutche Bank's 2010 Outlook also predicts that sovereign debt land mines may sabotage economic recovery somewhat. I will take their four "probable scenario" forecasts with a large grain of salt, but the core point rings true: that deficit levels in some countries may prove unsustainable for the market, and that some of the most difficult economic decisions still lie ahead of us (FT Alphaville)

- Those of you who have been following the events in Dubai may have seen several references to the problems in Greece. The Financial Times summarizes the situation well, and Wolfgang Munchau describes the awkward dance being performed by the EU to deal with its fiscally irresponsible member state.

FT Alphaville charts the return of risk as the dust from Dubai settles.

Regular readers will note that I predicted on Friday that Dubai would be an isolated incident and the markets would return to calm this week as the information/communication out of the government improved.

Hand pats own back.

Dubai wastes no time in illustrating some of the sovereign debt problems highlighted below.

On Monday, Gillian Tett wrote an article in the FT speculating on whether the latest asset bubble is sovereign debt. Since the onset of the financial crisis, financial institutions have been flooding to (and indeed have been encouraged to) government bonds because they are 'safe' and 'low-risk' assets. That they are perceived to be safe and low-risk is also reflected in their prices. But as Gillian explains, this sense of safety may be misleading:

[C]ould this flight to the "safety" of government bonds in itself be creating subtle new dangers? Government debt, after all, has soared to levels not seen in peacetime for centuries, if ever, in many countries, not least the US and UK. Fiscal deficits are swelling across the western world. And the level of political commitment to curbing those deficits remains uncertain - not least because with yields currently so low there is less pressure on politicians to push through reform.... it is easy to imagine that some countries will end up eroding the value of their bonds by debasing their currencies in the coming years, printing money and stoking inflation.

Gillian's concerns reflect the main message of a book I am currently reading: This Time is Different, by Carmen Reinhart and Ken Rogoff. With a tag-line reading "Eight centuries of financial folly," the book uses a wealth of data to demonstrate just how frequently countries default on their domestic and external loans. The answer is: often.

One of the trends they identify is that banking crises are usually a precursor to sovereign debt crises. This is particularly true for emerging market economies, regardless of whether the banking crisis occurred in their country/region or the rich world, because of their reliance on funds from external sources. Since the rich world just went through a banking crisis (as part of the wider financial crisis), and levels of global trade have collapsed, this is something to watch out for.

But Gillian isn't talking about emerging markets: she's talking about large, wealthy countries like the US and the UK. Rich countries are very unlikely to default straight up. But there are other ways to partially-default on your loans, like inflation (as noted above). This works particularly well when both your domestic and external debt is denominated in your own currency (as it is in with the US).

The problem boils down to this: financial institutions just spent a lot of time & taxpayer money replacing now-worthless financial products like CDOs and commercial paper with government bonds. Now the value of those government bonds is at risk due to the huge sums of money governments spent bailing out those very same financial institutions. Unless governments (or more specifically, the wider public) are willing to make difficult spending choices to tackle national debt problems, we risk repeating this cycle a few years down the road.

And in case there's any doubt that governments have been loading up on debt, I will again point to the Economist's global debt calculator. Add to this the short-term costs of lost productivity from the financial crisis and the long-term costs of a massive demographic change in Western countries, and it's a sobering picture indeed.

After a light posting week, some weekend reading:

-The Commission on the Measurement of Economic Performance and Social Progress, established by French President Nicolas Sarkozy and counting among its members Nobel Prize winners Joseph Stiglitz and Amartya Sen, has concluded that GDP is a misleading and incomplete metric, too much so to be the primary measurement of a country's economic health. You can find the report here, and speeches introducing the report here.

-Moody's says the US and UK 'could become vulnerable' to ratings cuts after 2012 if...I know what you're thinking: it seems pretty stupid for a ratings agency to speculate over a country's credit rating years in advance. I agree.

-The FT introduces the 'new Tory establishment.' If, of course, they win.

-From the Times of London: Fatah leader Mahmoud Abbas is claiming that he was President Barack Obama's first call to a foreign leader. How does he know? Well, Obama told him so. I was highly critical of then President-elect Obama's silence on Israel's operations in Gaza, so I will be the first to say that, if Abbas is correct, Obama has made a very welcome statement on his commitment to the peace process. Apparently, Obama's first round of foreign calls were to middle east leaders (Egypt, Jordan, Israel), signalling to many that the new US prez is serious about renewed US leadership in the region. On a related matter, in case anyone doubted the political considerations driving Israel's Gaza offensive, the pullout from Gaza was completed today, Obama's first day in office.

-Portugal became the third eurozone country in two weeks to be hit with a downgrade. S&P cut the country's rating to AA minus. According to the FT, the cost of insuring Portugese government bonds through credit default swaps has risen to a record high. The government quickly labeled the downgrade as "unreasonable." In the past week, S&P has issued reviews on 10 highly rated western countries, leading Wolfgang Munchau to ask"what if" a eurozone economy defaulted?

-Foreign Policy has published the Think Tank Index, developed by the IR Department at the University of Pennsylvania. It is advertised as the "first comprehensive ranking of the world’s top think tanks, based on a worldwide survey of hundreds of scholars and experts." Below, the top 5 US and non-US think tanks:

US--> 1. Brookings Institution, 2. Council on Foreign Relations, 3. Carnegie Endowement for International Peace, 4. Rand Corporation, 5. Heritage Foundation

Non-US--> 1. Chatham House, 2. International Institute for Strategic Studies, 3. Stockholm International Peace Research Institute, 4. Overseas Development Institute, 5. Centre for European Policy Studies

Politique
-A cholera outbreak in Zimbabwe worsens as Mugabe stays silent, then denies, then blames the Brits. Meanwhile, Ghana brings some hope to African democracy.
-EU leaders burned the midnight oil to reach consensus on key climate change and fiscal stimulus proposals. Deep divisions remained over the extent of coordinated fiscal measures at the national level. Concessions made to Ireland in return for second Lisbon Treaty referendum, but leaders are careful not to instigate a backlash in the UK.
-US auto bailout dies in the Senate, as Bush is forced to reconsider the dedication of TARP money to the carmakers.
Economia
-Ecuador defaults, as President Correa brands debt "illegitimate" and foreign creditors "monsters".
-How low can Treasuries yields go?
-The WTO admits defeat for 2008.
The Rest
-In the Prem, Arsenal stumble out of the title race, Liverpool and Chelsea underwhelm, and Villa break the top 4.
-Fresh off their hostile takeover of Citi, Somali pirates express interest a certain vacant US Senate seat.
-US film industry awards season kicks off with Golden Globes nominations, New York and L.A. film critics awards.
-Bush gets two "steps" closer to retirement: