Europe: Saved By The Genius Of Spanish Bankers

9 Oct

“It is a truth universally acknowledged that a country formerly in possession of a housing bubble must be in want of a substantial equity recapitalisation of its banking sector”

As Dan Davies has noted, the bailout antics of the last few years have “always been about Spain”. Greece, Ireland, Portugal, Cyprus and Slovenia seem small and/or ringfenced enough to really damage the core banks.  Italy has deep and intractable problems, but more or less the same deep and intractable problems they had when they joined the Euro and they have the considerable cushion of a relatively modest total (private plus public) debt burden. This leaves Spain as the more obvious possible trigger. In particular, Germans develop a visible twitch at the prospect of filling in the “black holes” in Spanish banks’ books. Cyprus was pushed over specifically to spell out to peripheral politicians that bailout funds were geschlossen to their banks.

Let’s just look at Spain against a couple of other countries who managed to run stupid property bubbles:

Domestic  Non-FinancialPrivate Credit:GDP House Price rise 1997-peak House Price Drop from peak Credit growth 97-peak Bank Bailout Bill (% of GDP)
Spain 198% 302% 28% 426% ~4%
Ireland 288% 418% 36% 575% ~36%
UK 204% 306% 3% 216% ~5 %

Sources: BIS, Dallas Fed, IMF Financial Stability Report

Note: non-financial credit= credit to end-users, netting out intrabank lending.
Not all lending property, let alone residential, obviously.

Looking at this table and two questions spring to mind – how has Spain turned an irish-style slump in its property market into a merely UK-sized banking problem? And, what in God’s name did the Irish bankers get up to? Spain’s house price crash looks a lot like Ireland’s, its banks lent out two-thirds of as much (relative to GDP) yet its bailout bill is a tenth of that of Ireland. Is this convincing?

The instinctive response – certainly shared by many in the US – is that the bill to date is just an appetiser, that Spain is hiding the slump and a bill is just waiting to land. But these claims seem to be pretty hazy as to where, exactly, in the system the extra bad loans are going to show up.

First up, the world has spent a decent part of the last five years stress-testing the Spanish banking system. This is not 2007-08 when the Irish could strong-arm a critical analyst into silence. Although the Banco de Espana has done itself no favours by hiring Oliver Wyman Who Thought Anglo Irish Was The Best Bank in The World to do their official Stress Test, recent private attempts to do the same have not produced markedly different outcomes. Spanish outcomes so far are well within the adverse scenario suggested by Oliver Wyman Who Said AngloIrish Was The Best Bank In The World. Who knows, the arsonist-to-loss-adjuster trope may not be the disaster it first appeared. Rather than Oliver Wyman Who Said Anglo Irish Was The Best Bank In The World being systematically and grossly optimistic about how easy it is to run a bank, they got carried away with the spirit of the times. Now that the zeitgeist implies being sceptical, they may do rather better. Certainly they have published a detailed 95-page stress test, which is approximately 95 pages more detail than I’ve seen from any of the generic doomsters. In particular, NPLs appear to have stalled (ht @ibexsalad).

A hopeful sign of late has been a (very) few large transactions going through the Spanish market. While not remotely enough to absorb a potential firesale, these transactions do give us an idea of clearing prices. Goldman Sachs recently assessed the banks’ capital needs on the basis of these prices and found no gaping capital hole (though it did expect 5 out of the 6 banks it looked at to require extra capital totalling up to €9bn. Again a long, detailed report).

The point here is not an investment view: Spanish bank equity may be a lousy deal, it may be a great one. The point is rather that if there is another bailout to come, it is unlikely to be make the total much larger relative to Spanish GDP. Limited comfort from the point of view of say an Andalucian jobseeker, but an existential threat to the euro is looking a lot less scary than pessimists (like me) have admitted.

Obligatory handwringing: Spain’s macro indicators continue to look pretty bad. It has Anglo-Saxon private debt levels, and increasingly continental public sector ones. Its international position is one of massive net external debt, and domestic demand remains dead in a ditch. The economy does appear to have bottomed and the external flow position has moved to balance even as the UK sets new record deficits. But it’s not good enough to assume a massive capital deficit without suggesting where exactly this has occurred. Spain continues to underperform fiscally, but generally rather better than the UK. To say that the banks won’t need massive future help is of more interest to their currency-mates – what’s already in the price is bad enough, as non-performing loans continue to grow.

It’s a pretty strong signal that there’s more to life than macro. The parallels between Spain and Ireland in macro terms are pretty exact, but Spain’s bankers appear to have escaped the very worst of the sheer, jaw-dropping imbecility of their Irish counterparts. For my money, Anglo Republic is actually one of the very best books about the whole global crisis because it’s a wonderful and highly entertaining (the bank spent €200,000 on corporate golfballs)  take on just how a little success can drive people, but especially bankers, insane with greed and hubris. Clearly the Cajas especially were awful banks, but Spanish losses are not in the Irish stratosphere. Not all bubbles are created equal – and the EU can give thanks that its largest troubled economy appears to be its Korea rather than its Indonesia.
The UK might also usefully reflect on how the main difference between the UK and Ireland was that sterling prevented an Irish-style property meltdown. Plenty of evidence that the Scottish banks were as rotten as their Irish counterparts.

Note because a lot of people on the internet struggle with sarcasm: ‘Genius’ is basically clickbait. I don’t really think ‘better than Sean Fitzpatrick’ is evidence of genius.

Here’s a couple of gratuitous Anglo quotes:

Banking and golf went hand in hand at Anglo. In 2001 FitzPatrick was asked by the Sunday Business Post about his favoured sources of personal finance information. ‘For information, one of the best sources is FT.com,’ he said. ‘For analysis, read The Economist. But for the real McCoy, you can’t beat the nineteenth hole on the golf course.’

Carswell, Simon (2011-09-05). Anglo Republic: Inside the bank that broke Ireland (p. 86). Penguin UK. Kindle Edition.

Incredibly, during a two-year period when the size of Anglo’s loan book more than doubled, there was no one on the board of the bank overseeing risk.

Carswell, Simon (2011-09-05). Anglo Republic: Inside the bank that broke Ireland (p. 93). Penguin UK. Kindle Edition.

(if you’re Anglophone and interested in Spain, you should probably check Charles Butler’s excellent blog, even if most of what he does with me is roll his eyes at my taking Spanish employment stats seriously. )

Twitter Map

14 Aug

Comes from playing around with this. Bigger dot means more followers among the people I follow. Not sure any higher significance beyond once again pointing out that most interesting freeware is for Windows rather than OS X.Image

Guest Post: The IMF in Greece Mistakes We Knew We Were Making

14 Jun

delighted to again host Dan Davies. The IMF in Greece made an honorable compromise in a crappy situation

Mistakes we knew we were making …

”When you ask them about the bloodshed, they tell you that you can’t make an omelet without breaking eggs. When you ask where’s the omelet, they tell you Rome wasn’t built in a day” – George Orwell, possibly apocryphally.

I am not sure that I would have chosen the job of “Professional Apologist For Extremely Problematic People And Organisations” on the graduate milk-round, but I also suspect that if it was a choice between that and losing my benefits, I’d have the sense to realize that I’m more temperamentally suited to that than many other things. And it does strike me that in the specific case of Greece, the IMF deserves a fairer shake than it got, and that its “lessons learned” exercise is in danger of learning a load of wrong lessons. In particular, even if I spot the IMF’s many detractors most of the political and bureaucratic constraints summarized in that tweet Pawel quoted, there are still a number of issues on which I think that the general market and media consensus is oversimplifying and (literally) taking things at face value. Mind you, I need two subheadings and a conclusion to make my case, which is usually a sign that it’s wrong, and I still basically end up criticizing the IMF staff …

1. This Isn’t Your Parents’ 180% Debt Ratio

Consider Tarquin, who has rich parents. He has monthly income of $x, and monthly expenditure of $x + y. Historically, the gap has been financed by, every few months, calling up his dad and asking for a “loan” of $3y. Tarquin’s dad keeps track of these “loans”, and the balance has built up to somewhere around $36y. Tarquin has no other liabilities at present, so his equivalent “debt/GDP ratio” is 300%.

I think the sharp cookies who read this blog can see where this example might be going. Tarquin’s debt profile is completely sustainable and more importantly the 300% figure is utterly irrelevant to assessment of that sustainability. In Tarquin’s case, if he is asking you to lend him a score until Tuesday, the only piece of information you need to know is whether he’s in his dad’s good books at the moment.

Debt that is very likely to be written off isn’t debt; it shouldn’t go into the calculation at face value and it might be less misleading to exclude it entirely. And debt which, with high degree of certainty, is going to be rolled over again and again, always on concessional terms, into the far future, is quite like debt that’s going to be written off, for a lot of financial purposes. When one considers that there is a road map to fiscal union for the Eurozone (which is obviously as controversial as all hell and shot with political difficulties, but see the section below), I would say that on the relevant continuum, Greece’s intra-EU official sector debt looks much more like borrowings from the Bank Of Mum And Dad than Argentina or Indonesia’s external debts ever did.

Which, to me, says that the exercise of doing a bunch of forecasts, dividing the “debt” number by the “GDP” number and seeing if the line on the chart is going north-east or south-east is not going to give you a useful answer, particularly if your question is “has this program been good or bad for Greece?”. The program needs to be assessed on the basis of the cash flows, not the debt stocks, precisely because this is not a case where double-entry bookkeeping is appropriate; the true debt burden of Greece isn’t necessarily equal to the sum of past borrowings.

In cash flow terms (and presuming that at some future date there is going to be major official sector writedowns, because there will), the program was a massive positive for Greece. One can certainly argue about the speed of consolidation and whether it made any sense to try to get Greece back to primary balance so fast[1]. But that’s the sort of argument that needs to be had, not anything based on the debt burden number being “too big” or “unsustainable”. Anything’s sustainable if there’s a clear and obvious interest on the part of one of the world’s biggest economies in sustaining it.

But … my argument here is that the Greek debt burden doesn’t matter, because the dogs in the street know it’s going to be restructured [2]. So why not just write it down and make the accounting a little cleaner and more transparent? That goes on to …



2. Rome Wasn’t Built In A Day, Minister

I admit it, I was the only viewer of “Yes Minister” who used to cheer for Sir Humphrey, but really – RWBIADM. Some delays are the result of bureaucracy, foot-dragging and politicized attempts to run out the clock. But some delays are the result of either a) something taking a while to do because it is difficult, or b) something being more sensible to delay, because it depends on something else, and that something else will be in better shape if you leave it a while. Greece was very much a case of b), where the “something else” was the Euroland banking system.

It’s sometimes very frustrating to watch people in the markets demand that everything must be sorted out! now! and with certainty! now! while you can see that a civil service is operating to its own timescale, and is keeping control of developments by, literally, controlling the agenda – the order in which things are decided. If you’re going to have a PSI debt writedown, you do it after you’re sure that it’s not going to cause any domino effects anywhere else. If you’re going to put a bank into insolvency, you do it after you’ve created a set of legal and administrative structures that allow you to default on the bonds while keeping money in the ATMs.

And in so far as is possible, you don’t set hares running by talking about massive apocalyptic scenarios more than you absolutely have to. Which is a principle that the EU doesn’t really observe, and the IMF rightly criticizes them for. Lots of reserves of energy, goodwill and risk tolerance were burnt up by Trichet’s steadfast refusal to rule out Grexit in any kind of clear or unambiguous language. But that wasn’t the IMF’s fault.

Related to this issue is that it doesn’t make much sense to talk about any program as having been one in which the interests of Greece were sacrificed in the name of broader stability in the Euro area. The number one interest of Greece was in preserving its external financing, the number one provider of financing to Greece was the Eurogroup, and it’s pretty obvious that the ability (let alone the political feasibility, and remember that in context “politically possible” just means “possible”) of the Eurogroup to provide financing to Greece is highly dependent on whether or not they are having a massive crisis triggered by trying to do things too quickly in Greece. The Eurogroup were totally correct in doing this – it’s the equivalent of making sure that your own oxygen mask is securely fastened before helping others.

Rome really wasn’t built in a day, minister. And it’s surprisingly difficult to say what would have been gained by writing down the debt early. All the IMF can come up with is that it “allowed private sector participants to exit without losses and increased the cost to the official sector”. To which, a) this is only true for the bonds which matured between 2010 and 2011, everyone else took their lumps, b) conversely, the way things were done preserved the T-Bill roll and therefore kept a bunch of private sector participants in the game, who would otherwise have had to be replaced, and c) since the IMF is a preferred creditor, where do they get off anyway, telling the Eurogroup how to spend their own money.

There are a lot of other RWBIADMs which in my view explain all sorts of things about the Eurocrisis, but they’re not directly relevant to Greece.

3. Conclusion

In the end, I think people just hate the IMF debt sustainability analysis because it was so far off, and it was a political compromise. Fair enough, if a private sector bank or quoted company printed anything into the markets that was so clearly in bad faith I would be jumping up and down and calling the regulators. But really – in context, honesty is over-rated. Given the constraints on the IMF’s ability to act (and the requirement for the ESM to only lend in the context of an IMF program), to fail to find the debt to be sustainable would have meant no package, no loan and probable Grexit. If I was a Greek diabetic in a hospital running out of insulin, I think I’d like to be sure that if I was having my health sacrificed for something, it would be a bit more significant than the sacred purity of IMF debt sustainability analyses. Sure, it’s wrong to sign off on a dishonest document, but there are always get-outs when the consequences are disastrous. By convention, it’s even acceptable to lie to the House of Commons about an impending devaluation of the currency.

And in any case, how very very awful was this analysis anyway? It failed because of pretty predictable incompetence and bad faith on the part of the political partners. But really, is it incumbent on the IMF to predict that everyone else involved in the deal is going to screw it up? You or I might want to operate on that basis as a principle of sensible risk management, when investing our own or other people’s money. But is it really actually dishonest for the IMF to plan on the basis of the assumption that the people it deals with will keep their promises? Remember as well that this was 2010, at which point it was not at all yet known that Germany wasn’t prepared to pick up the whole tab or allow some form of mutualisation, eventually.

I’m not Dr Pangloss here. This wasn’t the best of all possible programs in the best of all possible worlds. But it was a decent stab at a compromise, given the actual world that we have. It bought time, and (with the Banking Union, a new ECB governor and a roughly 50% increase in the capital base of the banking system) I do not agree that this time was entirely wasted, just because some of it was spent chasing up a blind alley of Eurobonds. As I keep saying, the IMF, ECB and Eurogroup aren’t supervillains and they aren’t bumbling incompetents. They are reasonably intelligent public servants, trying to deal with an almost unimaginably difficult problem (which was not created by them), under circumstances of absurdly difficult constraint (most of which, to be fair, were created by them in the first place). I am going to keep on writing lousy adventure games until people get this point.

” The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair.” – Douglas Adams
[1] The IMF document explicitly rejects “speed of adjustment too fast” as a possible ground for criticism, despite the fact that it’s one of the main ways in which any such problem could have been really “bad for Greece” (the IMF actually says the program was “bad for Greece” because the debt/GDP ratio was a big number, and this might have depressed ye confidence and investment. Which, yeah maybe, but surely probably a second-order effect at most?).

[2] It is even possible to construct a “Springtime for Hitler” scenario in which Greece ends up getting, ex post, debt relief which is larger, as a EURbn sum, than its entire outstanding debt burden before the crisis struck. ”But … Mr Bialystock … it seems that in some circumstances a peripheral state could get more fiscal transfers by not running a functional political and economic system!”

IMF: Whoops I Did It Again

6 Jun

The IMF’s mea culpa on Greece is here. This is turning into a bit of a habit.

From the IMF’s post-mortem on the Argentina fiasco, written in 2003

The experience raises more general questions about the Fund’s use of its “seal of approval”. If the Fund had chosen to withdraw its financial support, the main consequence would have been the adverse impact on market sentiment. (This was the case particularly during the period when Argentina’s arrangement was precautionary, but even when it was not, the IMF’s financing—at least until September 2001—covered a relatively small portion of Argentina’s total borrowing requirements.) The IMF yielded to external political and market pressures to continue providing its support, despite serious concerns over fiscal and external sustainability. Such attempts to make strategic use of the “seal of approval” ultimately devalue that signal and compromise the Fund’s credibility more generally. The limits to the Fund’s involvement should be base d on the underlying quality of policies, not on the perceived cost of withdrawing support.
….
An important consideration that has to guide the Fund’s decision-making process and that was clearly underscored by the Argentine experience is that, in a situation in which the debt dynamics are clearly unsustainable, the IMF should not provide its financing. To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring.
…..
And from the Asia equivalent:
The program projections badly misgauged the severity of the downturn. In part, this reflected the fact that the IMF’s projections were somewhat more sanguine than the consensus, partly reflecting pressures to agree with the authorities on a common set of program projections and, perhaps, partly a concern to avoid damaging confidence through gloomy forecasts. Erring on the side of optimism in this way was probably detrimental to the programs’ credibility.
….
Failing to foresee the depth of the recession meant that the monetary programs were originally set to allow more rapid growth of money and credit; and fiscal targets were originally more restrictivethan they would otherwise have been;1 it also meant underestimating the magnitude of financial sector restructuring needed.
Hindsight is always 20:20 for sure. But even the financial sector manages to come up with creative new errors for new crises, rather than repeating the same old mistakes (although the Dijsselbloem plan for Cyprus shows an encouraging tendency to find exciting new catastrophes).
Back in 2010, it was an open secret that the Fund’s Staff at least were scarred by Argentina and had no appetite for pouring money into another unsustainable debt trap. They were overruled – and the Fund indeed gave its seal of approval.
Back in 2010, Greece had few palatable options. On the table:
1) Hard, disorderly default. With an underlying budget deficit of around 9% of GDP (Argentina was in balance) this would essentially have meant doing the fiscal adjustment since mid-2010-2013 in one year, not three, and would have made preserving Greece’s banks probably unacheivable. People who think this would have looked like Iceland know nothing about Iceland or Greece.
2) Pour more money into Greece accompanied by debt guarantees and a mini-Marshall Plan (Germany would essentially guarantee Greek debt worth 60% of GDP in return for patronising lectures on running a successful economy) . Politically not a flyer in Germany, would ultimately still have required a debt restructuring
3) Unilaterally write off a big chunk of Greece’s debt. Unlike 2 at least practical in economic terms. But politically unacceptable to the core. Probably the most “efficient” solution in economic terms – the lowest level of losses across all actors.
4) An early PSI-style debt restructuring. This would have cost Greece less and the core more. But protecting core interests is no part of the IMF’s mandate. Greece would still have required an aggressive fiscal tightening, but much less severe.
I would note here that a lot of the unpalatability of the “better” options e has to do with the Greek political class. Pretty much all the “good” options (forebearance on austerity, debt writedowns) involved a level of trust in the established politicians that frankly a six-year-old would be reluctant to give. As long as concessions were seen as “giving more money to Evangelos”, they were always going to be a struggle. From Poland in the 90s to Iceland in 2009, the IMF’s record with governments acting in good faith is far better than widely perceived.
As it is, look what’s been acheived. As with Argentina (terrific account here), the Troika provided cover to the Global Investor to get out. Greece paid down around 35 bn Euros between the start of the program and PSI. The PSI losses were much bigger than they need have been because of the establishment of a big share of senior creditors (the Troika, including the abortive Securities Market Programme, which at peak accounted for over EUR45bn). Greek (and Cypriot) creditors were left holding the bag, creating the need for another round of borrowing to repair the banks. Greek Debt:GDP is at fresh, nosebleed highs. ( though to be fair, at fairly concessional terms – the servicing cost of this debt is far lower than market rates, so the burden of a given level of debt is lower).
The choices were indeed tougher than some of the finger pointing admits, and I have some sympathy for Dan Davies’point:
But the IMF did sign off on what it knew was a bad plan, and deserves most of the criticism being handed over, both for the Greek economy and for the standing and legitimacy of the Troika. Writing down Greek debt early was the only honest option, and signing off on dishonest options is itself a bad thing. The IMF knew the Greek debt was unsustainable, should have known the GDP path was unrealistic because it had made these mistakes before. A rotten, sorry chapter.
Update: Excellent look through the actual Greece document here. Strongly recommended

Bubbles: How I Learned to Stop Worrying and Love the Bond

5 Jun

Yada yada QE yada yada debasement yada yada bubbles as far as the eye can see yada lifted on a tidal wave of money yada yada tulips yada yada will end in tears yada yada we have learned nothing yada yada subprime contained yada

Every single opinion-former on the planet, basically

I compared QE to persuading a fat man to exercise by paying too much to buy his car, and expressed reservations about how the mechanism relies on pumping money to the (ideally leveraged) asset-rich. But the bubble thing has run out of control, with people who’d struggle to distinguish an interest coverage ratio from a sucking chest wound holding forth on the sharp rise in cov-lite loans. Let’s concede that much about asset prices which is worrying, but shutting down QE on the basis of what we see so far is akin to responding to a stalled elevator by drawing lots to decide who gets eaten first.

What is a bubble? The current definition appears to be “anything that has gone up a lot in price”. This won’t do.

I suggest that to qualify as a toxic financial bubble you need:

1) Yes, a big ramp up in prices sucking in investors through force of sheer momentum

2) Prices to reach levels that make them uneconomic. The only rational reason to own assets is the prospect of an even bigger sucker willing to pay even more. A loss of interest in sensible funding models.

3) The diversion of money to activities that are pointless and damaging.

4) Not so much the hallmark of a bubble as a “thing to watch” Bonus marks for extra damage – a high degree of leverage applied to said assets.

The above are a much higher bar than just “expensive”. Most financial assets are fairly expensive on most conventional metrics – PE ratios, real yields, spreads. But they’re typically 1-1½ standard deviations rich – not wild levels. But this is how QE is supposed to work. Investors pay more for fundamentally productive assets to drive them into creating marginally productive assets. The key is avoid generating the garbage – in #4. In short: paying too much for Amazon or Ebay, fine. Pets.com or Webvan? not so much. Similarly, Brazilian debt at 80bps over US Treasuries (or GE, or MacDonalds), fine; AAA-rated subprime MBS at the same level? Not so much.

1) prices gone up? sure.

2) Stuff at silly levels? Questionable. Looking back to the Nasdaq bubble – on pretty much any measure, stocks had reached silly levels. Use Tobin’s Q, Cyclically Adjusted Price Earnings, Dividend Yields, on almost any measure we were on a multiyear high. Similarly with the housing bubble – look at housing affordability, rental yields or price to rent. Yet this time round, most of these indicators look tolerable. Certainly credit yields look low, but within historical precedent.

3) Bubbles result in some damaging, wasted activities. Ireland’s ghost estates are worth less than the land they were built on (“Cows can’t eat fecking concrete” as a NAMA executive pithily put it). The NASDAQ bubble produced some very very rum ideas (here are 10 of the worst). I haven’t seen much evidence of similar happening yet. This example popped up today, but if this is the worst the bubbleers can do – a $70m Chinese IPO – we’re some way from AOL-Time Warner type distractions.

In funding terms too, it’s not clear that “CovLite” (loans with fewer strings attached) are quite the problem we’ve been told. (good roundup with back links to discussion here). Covlite remember was supposed to be “Corporate Subprime” until it wasn’t. If we look at other traditionally-tricky areas like PIK (payment in kind – a kind of built-in Ponzi scheme), stuff which really did blow up during the Recent Unpleasantness they have not remotely picked up at the same rate.

And when things do go wrong, it’s noticeable that you do get strong, watertight accounts of “Why this is a bubble/why this stuff is crap”. Here is Pershing Capital’s 64-page presentation more than a year before the crisis broke – when the securitisation machine was still running, whcih accurately captures chapter and verse of the subprime fiasco.

4) what turns a bubble into a bomb is leverage. Look at the difference between 2000 and 2008′s worst mainstream investments – the NASDAQ and AAA Residential Mortgage Asset-backed paper. The difference is that massive leverage was applied to the latter – with disastrous consequences. As I’ve noted before, the Shadow Banking system is in severe remission, and mainstream bank leverage remains very contained.

bubbles

source: Bloomberg, Markit

Key elements of a bubble – a wild departure from any historical precedent of valuation, and glaring engagement in downright demented economic activity – appear to be missing so far. The nature of QE is that “financial instability” will be a nagging risk – but so far that’s all it is. Perhaps a little bit early to be assessing fellow lift passengers for edibility.

Oh and one final note: We in finance are entirely capable of making the same mistakes again. However we won’t make literally exactly the same mistakes again. In 1998, Hedge Funds blew up and (despite what Taleb says) VaR was discredited. Not coincidentally, hedge funds had – broadly speaking – a better crisis than the rest of the financial sector. While the resurrection of the Synthetic CDO market is no cause for joy, it won’t be Ground Zero next time around, if only because anyone in the vicinity will be thinking “how do i avoid getting fired for being involved in this?” .I have tentative confidence that we’ll be able to avoid another massive bubble, especially if regulators stay awake this time. I have absolute confidence it won’t be a reenactment of 2008. Look for stuff that did ok in 08 and has grown immensely since then.*

 

* I did not say ETFs. absolutely not.

Turkey: Some Stuff Isn’t Very Similar to Other Stuff

2 Jun

As I type this, Turkey is reeling from a weekend of mass demonstrations in Istanbul and Ankara, with a very heavy-handed police response. Since then – as a keen observer of social media – we’ve had the usual parade of insta-experts. But “Market colour” in full effect makes Twitter look like the Encyclopedia Britannica. Wild rumours will be repeatedly attributed to Reuters. We will get think-pieces from clippings-job “intelligence service” Stratfor and if we’re really unlucky zerohedge-meets-Mossad-rejects rumoursite Debka. With so many unqualified, ignorant insta-experts on Turkey, the last thing the world needs is for me to add my tuppence worth on the trials of the secular state or Erdogan’s struggle with Ataturk’s legacy (*finish the bottle*).

The pitfalls of following English-speaking, Twitter-literate Turks as a complete picture are obvious (that said, @UlasAkincilar and @akinUnver have been fascinating). So is speaking to London’s astonishingly numerous Turkish contingent on the EM Trading Desks. Just as these sources wildly overestimate opposition to Putin or Chavez, the dangers of getting locked into the views of an unrepresentative sample are pretty clear.

I’ll avoid all the following subjects: Ergenekon; the Deep State; the Grey Wolves; the Battle of Salamis; the Young Turks; alcohol bans; the role of PM Erdogan’s son-in-law and his development firm. They’re all fascinating topics which are worth reading about from someone who knows about them. Similarly, I’m not going to compare PM Erdogan to Egypt’s Morsi, or the MHP to Golden Dawn. Some stuff just isn’t actually very similar to other stuff

I will however venture to add some point around the economy and how markets will likely react. Amid all the inevitable noise, the “billions wiped off shares” and the rest of the fodder for currency spivs and the spread-betting daytrader crowd, I will make some notes on the stuff that I do know about. Please note: this is not me saying that only markets and finance matter: it’s me saying that only around markets and finance do I have anything to offer.

One, Turkey is not Egypt: Since 2003 (when the current AKP government took power) it’s been the fastest-growing economy in the OECD (the countries at the other end of the scale will be depressingly familiar. This indeed it should be, being also by some way the fastest-growing in terms of population. But unlike the Arab Spring countries, Turkey has been generating jobs for its people – 4.2 million jobs, more than the UK, France and Italy put together.
gr 2003.
Even the UK Guardian, which has recently taken to denouncing Sweden as a neoliberal dystopia struggled to find anything really negative to say about Turkey’s economy. Data on inequality is patchy, but using the best data we have, it actually fell between 2003 and 2010 (the last datapoint), with the World Bank Gini coefficient falling from 43 to 40 .

Data for the Arab Spring countries is noticeably patchy; Turkish GDP growth has crushed its Arab neighbours, but in terms of job creation looks – to me at least – surprisingly undistinguished. PPP $ GDP per capita is up 93% since 2003, propelling the country from level with Bulgaria to level with Poland. Egypt’s rose 55%, Tunisia’s 49%. Labour force indicators however look pretty similar: total employment: population over 15 stagnant in the low 40s, for men in the mid-60s. Obviously measures are for formal employment which is a pretty big hole in the data, but generally this issue is worse rather than better for poor countries. If you want to look through the data, it’s all here.

two – and here I drift into Global Political Analyst Tourism – there’s clearly something pretty rum about Turkey’s free press:

Three, Turkey has been ludicrously profitable for foreign investors in this time. This is what investing in local currency markets has returned since the later of 1994 or when markets were opened to foreigners:

ELMI Turkey (source: JP Morgan ELMI+)
This came in 3 stages – high inflation means very real high interest rates and massive nominal rates (until 2001); stabilisation 2003-2005 (you get interest rates designed for 100% inflation but inflation drops to single digits); since 2005, Turkey has behaved pretty much like the rest of the world – the benefit of breaking the high inflationary cycle is that you’re not paying huge subsidies to people with money. Over this period, government debt:GDP in Turkey has dropped massively, from 70% in 2004 to around 35% today.

For Once, really It’s Not That Simple. Trying to ram Turkish turbulence into the Arab Spring paradigm, or the “It’s All Kicking Off” paradigm, or Orange Revolution, or Sweden obscures more than it reveals. Even “more Moscow than Cairo” which makes a certain amount of sense to me needs to be qualified by the fact that I know sod all about what’s really motivating people in Istanbul and Ankara. As ever, people struggling for greater democracy would be wise not to rely on too much help from markets.

UK: Agent Gideon Goes Rogue

31 May

KGB

Nikolai strolled into the stuffy office where the older man stood waiting behind a desk which had stood in the same spot back in Stalin’s day. The older man – Colonel Rakhmetov – gestured him brusquely to a seat in front of him, sat down himself, looked up and said “Sit”.

The Colonel glared at him. “The plan for Agent Gideon began under Brezhnev. Do you have any idea of the resources required to place a mole at the heart of the British establishment, trained from birth to further the cause of Communism? So can you tell me what, precisely, is happening in that miserable backwater right now?”

Nikolai took a deep breath. He was new to this world of hidden communist sleepers, left in place as the KGB became the FSB and knew he had to tread carefully around an officer who had earned his pips back when the letters CCCP still struck such fear into the heart of capitalists that they’d made concessions to the working class.

“Sir, you are familiar with the works of Nikolai Chernyshevsky?”

The wrong thing to say. The Colonel ran nicotine-stained fingers through his hair, glared. “I am. The originator of the doctrine of ‘the worse, the better – that only through a continual worsening of the conditions of the proletariat can they be motivated to throw off their chains. Author of the original “What is to be done?” a work that so inspired Lenin that he named his own book after it. What of it?”

“Well agent Gideon has rather taken the doctrine to heart. Rather than gradually introduce Socialism, as per his original instructions, he’s trying to incite the British working class to revolution. Thus, although government debt interest accounts for only a shade over 3% of UK GDP, he’s inflicted growth-destroying fiscal tightening of more that amount on the country already, with more to come. And to ensure maximum damage, he’s taken the bulk of the money from public sector investment – which he’s halved.It’s killing two birds with one stone sir. You kill economic growth and you also reduce the ability of the country to grow in future.”

The Colonel’s brow wrinkled. He disapproved of initiative, which in his day had meant replacing a long retirement by the Black Sea with an early but short one by the White Sea.

“Yes so I heard. And the riots were surely promising, even if class-consciousness wasn’t entirely obvious in the raiding of sportswear retailers over government ministries and barracks. But now he’s run out of control. But wouldn’t it be more effective to just bankrupt the country by running up debt?”

“Not really sir. All the money in the UK is crying out for a home, so interest rates are extremely low. And the average maturity of the debt is 13 years, so it’s almost impossible to provoke a liquidity crisis – I think our other agents in the banking sector are much more promising in that respect. And without getting completely into the realms of fantasy, it’s quite hard for the government to get rid of a huge amount of extra borrowing without causing some economic growth. But the cuts are excellent for provoking discontent with the public at large.”

“Interesting. Sounds like things are going well. So why did you request this meeting?”

“Well sir, to be frank, it looks like Agent Gideon is going rogue. He’s overreaching, and it can only lead to his downfall. He’s been emphasising the privilege of the ruling plutocracy” – Nikolaj wondered if he should spit, decided against it – “by cutting taxes that only apply to the very elite, insisting on defending the privileges of the bankers who brought the country to its knees. Only someone with his training in Socialist theory would be quite so adept at underlining the injustice and contradictions of capitalism, and it’s only a matter of time before British Intelligence catch on.”

“Yes, I can see why this is an issue, and you were right to come to me-”

“Excuse me sir, but that’s not the worst of it. His latest scheme seems intent on provoking revolution this year, and I fear he’s overreaching. It’s called Help to Buy. Essentially it puts the government balance sheet – which he’s promised can’t be used for even essential infrastructure – to work to boost house prices without really increasing the number of houses being built. So the government can take losses, but all the benefit accrues to the homebuyer.”

“So he pushes up house prices in a country with already expensive prices, increases the risks to the banking sector, pushes more people into loans they can’t afford and spends money without creating any real benefits to society?”

“Yes sir. He did try to get it extended to buy-to-let landlords, but even the Treasury spotted that one. But it will make a nice subsidy for second homes for the rich.”

The Colonel frowned, but paused no more than a second. “We’ll risk it. This is the best chance we have to make England the vanguard of the new socialist revolution. You’re overruled. let Agent Gideon proceed.”

Update: The evidence mounts. Alex Hern of the New Statesman proving in the process that a teenager with Photoshop trumps a middle-aged man with Paint.

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