Database of Sovereign Defaults Updated

David Beers (formerly of the Bank of Canada, now at the Bank of England) and Jamshid Mavalwalla (Bank of Canada) have produced an update (PDF) to a database (Excel) of sovereign defaults. Coverage now extends from 1970 to 2015. The database shows, country by country and for all countries combined, who was in default, by how much, and to what groups (IMF, World Bank, Paris Club countries, foreign currency bond holders, etc.)

Another useful feature of the database is that it has a score showing how reliable the data are, in the authors’ view. It is all too often forgotten in economics, especially when comparing or combining figures across countries, that the underlying data may vary widely in their reliability, sometimes because of outright falsification, but more usually because of difficulties in measurement. Pointing out where data are of lower quality can spur researchers to go out and find better data or more accurate ways of estimation for filling in gaps.

(Thanks to David Beers for bringing the database to my attention.)

Rhodes on “Greece’s Achilles’ Heel” in The Wall Street Journal

This morning, The Wall Street Journal published an op-ed “Greece’s Achilles’ Heel” by William R. Rhodes.  Bill is the President and CEO of William R. Rhodes Global Advisors, LLC; Professor-at-Large at Brown University; and former Senior Vice Chairman of Citigroup Inc.  CFS was honored to have Bill serve as a member of the Honorary Committee at Bretton Woods 2014.

“Greece’s Achilles’ Heel” is excellent (see http://on.wsj.com/1HUxBjp).  It struck a chord on two levels.

1) The approach is clear and represents the best path for Greece.  Bill notes:

– “It has yet to start negotiating seriously about a long-term solution to its debt crisis. The government needs to understand that creditors have long memories and want assurances that it will live up to the terms of whatever deal is struck.”

– “Past crises have shown that there is never a white knight able to ride to the rescue – despite rumors that the Greeks may turn to Moscow and Beijing for aid.”

– “Sovereign-debt deals have the best chance of succeeding if they are not seen as being imposed by the creditors, but rather owned and authored by the debtor country’s government.”

In a paper “Solving the Greek Crisis,” CFS outlined the math supporting a similar strategy in 2011.  Although time has elapsed, the basic approach remains valid (See “Solving the Greek Crisis: http://www.centerforfinancialstability.org/research/Greece_062411.pdf).

2)  On a personal note, I traveled with a fellow banker to Nicaragua in the late 1980s to help structure a buyback.  Nothing happened.  In the aftermath, the country remained stagnant through 1995 when a buyback was finally orchestrated and the country began to grow again. Now is the time for action in Greece.

Lastly, at Bretton Woods, Bill offered an Honorary Committee Address called “Critical Issues for the Bretton Woods Institutions” – see http://www.centerforfinancialstability.org/bw2014/bw_rhodes.pdf.  Many of these issues and recommendations are essential reading in advance of the upcoming IMF / World Bank meetings.

Best regards,
Larry

The Economist on “The 70-Year Itch”

In The Economist this week, there is a terrific article The Bretton Woods agreements: The 70-year itch.  Highlights include:

– America learned the benefits of economic co-operation the hard way. Its failure to create institutions to help steer the world economy after the first world war exacerbated the Great Depression and paved the way for the next conflagration.

– Yet today’s pre-eminent powers seem to have forgotten this lesson.

– If John Maynard Keynes were alive, he would sigh not just at the risks in all this economic nationalism but also the huge missed opportunity. Perhaps it is time to send another group of dignitaries to New Hampshire.

The full article is at http://www.economist.com/news/leaders/21606280-both-west-and-china-are-neglecting-institutions-help-keep-world-economy

The piece is similar to my Forbes column Lessons from the Summer of 1944.

The full column can be viewed at http://www.forbes.com/sites/greatspeculations/2014/06/06/lessons-from-the-summer-of-1944/

Keynes on Sovereign Debt

John Maynard Keynes (United Kingdom) on Sovereign Debt

Mr. Chairman, since the United Kingdom is the only country here represented which has incurred large-scale war debt to our allies and associates, also here present, these three alternative amendments must be assumed, as indeed Mr. Shroff made clear, to relate primarily to her. Mr. Chairman, the various members of this alliance have suffered in mind, body and estate through the exhaustion of war, through which we are differing in kind and degree. These sacrifices cannot be weighed one against the other. Those of us who are most directly threatened and were nevertheless able to remain in the fight, such as the USSR and the United Kingdom, have fought this war on the principle of unlimited liability and with a more reckless disregard to economic consequences. Others are more fortunately placed. We do not need information in the larger fields of human affairs. Nothing could be less prudent than hesitation or careful counting of the cost. But as a result, there has been inevitably no equality of financial sacrifice.

In respect to overseas assets, the end of the war will find the United Kingdom greatly impoverished and other of the United Nations considerably enriched at our expense. We make no complaint to this provided that the resulting situation is accepted for what it is. On the contrary, we are grateful to those allies, particularly to our Indian friends, who put their resources at our disposal without stent, and themselves suffered from privation as result. Our efforts would have been gravely, perhaps critically, embarrassed if they had held back from helping us so wholeheartedly and on so great a scale. We will appreciate the moderate, friendly and realistic statement to the problem which Mr. Shroff has put before you today. Nevertheless, the settlement of these debts must be, in our clear and settled judgment, a matter between those directly concerned. When the end is reached and we can see our way into the daylight, we will take it up without any delay to settle honorably what was honorably and generously given. But we do not intend to ask assistance in this matter from the International Monetary Fund beyond the fact, as Mr. Bernstein has just pointed out, that the existence of the Fund and the general assistance it will give to stability, and expansion of trade may be expected to improve indirectly our ability to meet other obligations. We concur entirely with the view that has just been expressed by Mr. Bernstein on behalf of the American delegation that the Fund is not intended to deal directly with war indebtedness.

Now, since we do not intend either to ask for or to avail ourselves of any special treatment from the Fund, it appears to the United Kingdom delegation that this amendment could be of no practical effect, and it is therefore better to discard it if misunderstanding is to be avoided about the role which the Fund can be expected to play.

(Commission I, third meeting)

The Bretton Woods Transcripts
Typescripts and Conference Proceedings of the United Nations Monetary and Financial Conference
Bretton Woods, New Hampshire
July 1-22, 1944

Edited by CFS Senior Fellow of Financial History Kurt Schuler and CFS Senior Associate Andrew Rosenberg

Comments on TIPS Article in the WSJ

This morning, Min Zeng and Carolyn Cui from the WSJ wrote a terrific piece For Treasury, a Question of Fundamentals / Department Seeks Answers for Inflation-Protected Securities.

I would add that two factors are operative in pushing real yields (TIPS) higher:

First, investors are re-balancing their portfolios from bonds to stocks on the heels of tapering comments.  A Fed less active in purchasing Treasury obligations at some future date reduces the constant bid for all Treasuries – TIPS included.

Second, the TIPS market was mispriced with negative yields.  Inflation is positive at present…and will likely remain substantially above zero for the foreseeable future.  June CPI inflation reached 1.8% on a year-over-year basis up from 1.4% the previous month,

The bottom line is Fed purchases have distorted pricing in the Treasury market.  Changes on the margin prompt swift shifts in pricing and yields.

CFS Monetary Data are Revealing Regarding the Future

Today we release CFS monetary and financial measures for May 2013.
CFS Divisia M4, which is the broadest and most important measure of
money, grew by 4.9% in May 2013 on a year-over-year basis.

CFS monetary data provide particular insights regarding the Federal
Reserve’s supersized balance sheet, policy options, and the future.
For special analysis, please contact LeAnn Yee at lyee@the-cfs.org.

For Monetary and Financial Data Release:
http://www.CenterforFinancialStability.org/amfm/Divisia_May13.pdf

Greece and the IMF Program

The IMF recently released an internal self-critical report on how it constructed the adjustment program for Greece, thus sparking a debate on why the original, 110 billion euro, May 2010, adjustment program with the IMF, the European Commission, and the ECB — the “troika” — went off-track.

The Fund now says that it should have restructured Greece’s debt from the start, but that the ECB was opposed to that idea. As a result, the restructuring was delayed until March 2012. The IMF also says that its assumptions about the depth of the contraction were overly optimistic. Between 2008 and the end of last year, real GDP contracted by about 20 per cent; it will likely contract somewhat further this year.

My own assessment is as follows:

1. The May 2010 adjustment program had 4 main pillars — fiscal consolidation, structural reforms, privatization, and improved tax collection.

2. Only the first pillar was implemented, and that was implemented the wrong way — it placed extensive emphasis on tax increases and not enough emphasis on expenditure cuts. For the first 2 years of the program, essentially nothing was done to fulfill Greece’s agreements with the troika on privatization, tax collection, and structural reforms, except for an overhaul of the pension system.

3. For the first 6 months or so after the May 2010 agreement, fiscal consolidation, based on revenue hikes, took place. At the same time, the Greek Parliament passed a number of measures relating to structural reforms. The financial markets liked what they saw. As a result, 10-year sovereign spreads relative to Germany dropped from 1,000 basis points in May 2010 to 500 basis points in October.

4. But the markets noticed that while Greece was good at passing reform legislation, it was very poor at implementing. Spreads began to rise. Greek banks, which held large amounts of Greek sovereigns, suffered huge losses. What started out as a sovereign crisis, spread to the banking system, creating a second crisis area — the banking system.

5. The depth of the contraction was exacerbated, because the troika underestimated the size of the fiscal multiplier. The troika has recently admitted that it had underestimated the size of the fiscal multiplier in Greece. In January 2012, the Bank of Greece Governor published an article in The Financial Times, in which he stated that the fiscal multiplier had been underestimated.

6. All of this was compounded by politicians who failed to tell people why Greece found itself in a crisis to begin with, and what would be needed to get out of the crisis. Instead, politicians fought amongst themselves. They gave the impression that painful measures were being imposed on Greece by unsympathetic foreigners.

6. To date, there has been very little done in Greece in terms of structural reforms, improving tax collection, and privatization. Recent fiscal consolidation, however, places emphasis on expenditure cuts.

7. The bottom line: the adjustment program went off track because Greece failed to implement. What Greece needs to do is implement its commitments. It appears that the present 3-party coalition is determined to implement its agreements. Consumer confidence in Greece is at a 5-year high.

Bill Poole on the Budget

Former St. Louis Fed President William Poole wrote an extremely thoughtful and provocative opinion piece in WSJ this morning – A Primer for Understanding Obama’s Budget.  The piece finds fault in the budgeting process across generations and party lines.

Sadly, there is no independent entity to report a reasonable baseline for benchmarking.  It is simply too costly.

So…perhaps…it is time for the Federal government to get the math right.