Wednesday, May 23, 2012 1:11 PM EDT
Is Europe ready for a banking union?
Systemic fragility in the European banking sector predates the Greek fiscal crisis. It was revealed by the subprime/Lehman shock of 2007-08, and has never been properly addressed since then, in spite of successive “stress tests.”
In recent weeks, several senior policy makers have become more explicit on the need for a “banking union” – in other words, a federal framework for banking policy. Among them is Christine Lagarde, managing director of the International Monetary Fund (IMF), who, on April 17, said:
“To break the feedback loop between sovereigns and banks, we need more risk-sharing across borders in the banking system. In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks would help. Looking further ahead, monetary union needs to be supported by stronger financial integration, which our analysis suggests should be in the form of unified supervision, a single bank resolution authority with a common backstop, and a single deposit insurance fund.”
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Friday, May 18, 2012 4:32 PM EDT
Euro zone lacks engine for growth
In my previous postings here, I have suggested that by mid-year, Greece will be back in the market’s crosshairs. Now, time to look beyond that which consumes the media space once again.
The latest data on first-quarter GDP growth shows that the euro area economy has now trifurcated into a slow-growth core (Germany and Finland, plus Estonia and Slovakia), a Titanic-like periphery (Italy, Spain, Greece, Cyprus, Portugal and the Netherlands) and a no-growth pool containing all the other member states. The only uncertainties remaining at this stage are the smaller countries yet to report their figures for the quarter: Ireland (in an official recession since the fourth quarter of 2011); Luxembourg (which was still expanding at the end of 2011), Malta (which registered quarter-over-quarter contraction in the last three months of 2011); and Slovenia (which had a third consecutive quarterly contraction in GDP).
Tuesday, March 27, 2012 11:09 AM EDT
Why Europe is on a path to financial disaster
With Greek Bailout 2, Europe has run out of options for supporting its failing states and, in doing so, has run out of room for its economies to grow. Domestic savings are stagnant; and given already hefty fiscal spending bills and rising tax burdens, availability of private capital will be a major problem for investment in the medium term.
Take a look at some numbers – courtesy of the unseasonally optimistic IMF. Between 2011 and 2014, the IMF earlier predicted the troubled euro zone economies would grow cumulatively by between 1.7 per cent for Greece, Italy and Portugal, to 4.8 per cent for Spain and 5.7 for Ireland.
Monday, March 26, 2012 7:38 PM EDT
Change at top of World Bank and its ilk has to be all-or-nothing
U.S. President Barack Obama has nominated Jim Yong Kim, a candidate with impeccable international development credentials, to succeed Robert Zoellick as World Bank president. Prior to the nomination of Dr. Kim, a Korean-American physician and president of Ivy League school Dartmouth College, volumes had been written on why the United States should not have the de facto right to unilaterally appoint the head of an important international institution. But complaining about World Bank succession was like complaining about the weather: Regardless of how much you talk about it, there is nothing you can do to change it.
Critics of the status quo pointed out that the rules for appointing the heads of the International Financial Institutions (IFIs) such as the World Bank and the International Monetary Fund are anachronistic, reflecting the economic realities of the mid-20th century. They are absolutely correct. Moreover, in nominating Dr. Kim, Mr. Obama demonstrated that he heard them.
Friday, March 16, 2012 9:19 AM EDT
A new era of global financial standards
Even as headlines continue to be dominated by the euro zone crisis, the financial world is transforming itself along multiple other dimensions. One intriguing but so far little-noticed development is the gradual shift in the role of global financial standard-setters, which are becoming more assertive in looking at how their standards are adopted and implemented around the world.
Global financial standards have emerged since the 1970s as a byproduct of global financial integration. While some global bodies set norms for small and arcane corners of finance, two cases stand out for the magnitude of their impact on financial firms’ operations and incentives: the successive agreements reached by the Basel Committee on Banking Supervision, or Basel Accords; and International Financial Reporting Standards (IFRS), which govern the preparation and presentation of listed companies’ financial statements and are set by the London-based International Accounting Standards Board (IASB).
Until recently, both the Basel committee and the IASB, like other global financial standard-setters, felt their role was to publish and update standards of high quality, and to a certain extent to promote their adoption and use, but not to control how they were used. (There was some sharing of experiences among public authorities in the Basel Committee, but no corresponding public disclosures.)
This is now changing. The Basel committee is creating a whole new framework of direct oversight over how its standards are made into law in individual jurisdictions, and how they are being applied by individual financial institutions there. Crucially, the committee has announced that its findings would be made public. In October, 2011, it duly released for the first time a table comparing the state of adoption of the Basel II and Basel 2.5 Accords in its member jurisdictions and the European Union (EU).
Friday, March 16, 2012 5:09 PM EDT
Greek Bailout 2 just a Band-Aid solution
With Greek Bailout 2 on its way, has the euro zone escaped the clutches of the markets? Not a chance. Greece remains the euro zone’s weakest link and Europe remains the sick man of the global economy. The reasons are simple: too much debt, not enough liquidity and too little growth.
Debt-wise, Greece is now actually worse off than when the whole mess of the second bailout began. After the private sector haircut, which, together with the European Central Bank swap, amounts to a $138-billion (U.S.) debt writedown, Greece is now in line for $170-billion in new loans, an additional $38-billion “pro-growth” lending facility from the IMF, and a standing $40-billion reserve loans facility for its banks.
Tuesday, March 6, 2012 7:18 PM EST
It’s time for the G20 to address debt’s dangerous legacy
James Haley is director of the global economy program at the Centre for International Governance Innovation (CIGI).
Ireland’s decision last week to hold a referendum on the euro zone’s fiscal compact adds a new source of uncertainty to global markets. It also underscores the extent to which high sovereign debt levels and how they are dealt with are political issues.
The politics matter because, unlike claims on firms or individuals, no means exist to enforce claims on governments that can’t or won’t pay. If Walter Wriston, the legendary CEO of Citibank in the 1970s, was right to assert that “sovereigns don’t go bankrupt,” the appropriate corollary is “neither do they have to repay their debts.”
These twin maxims explain why governments are able to issue so much debt and why, when they reach their borrowing limits, restructuring the debt can be so disruptive. The process ends with a bang, not a whimper. And it is typically accompanied by banking or exchange rate crises that plunge the economy into stagnation, with large costs in lost output and unemployment. The uncertainty that prevails during protracted restructurings slows economic growth as individuals and firms exercise the “option value of waiting” and defer consumption and investment.
It is not surprising, then, that each round of sovereign debt problems spawns proposals to improve the process. This was the case in the debt crisis of the 1980s; it is true of the Asian financial crisis. The euro zone crisis of today is no different. Given the risks to the global economy, it is time to reconsider the case for a framework for the timely, orderly restructuring of sovereign debt.
Tuesday, March 6, 2012 7:55 AM EST
Our companies need more than ‘blue-sky’ commentary
Over the past couple of weeks, there have been a series of articles (here, here and here) in The Globe and Mail about Canada’s competitiveness.
As I finished reading the various pieces, I was left with that uncomfortable feeling that our national dialogue on competitiveness is a little on the thin side and excessively weighted on macro (country level) versus micro (firm level) analysis.
Yes, we have to have a competitive corporate tax structure in our country; yes, we need to be aware of the impact of a rising Canadian dollar on our firms; yes, we should be concerned about the productivity gap we have with the United States; and yes, innovation is the key to business competitiveness.
But now what? Silence fills the room . . .
Monday, March 5, 2012 11:05 AM EST
Irish referendum a much-welcome test of the fiscal compact
Constantin Gurdgiev is head of research with St. Columbanus IA and lecturer in finance at Trinity College, Dublin
The decision by the Irish government to hold a referendum on the new European fiscal compact came as a surprise to many, for two main reasons. The first was the faulty assumption that Ireland can be expected to sit on the sidelines of the European debate, lest it jeopardize the prospect of tapping into the permanent Euro-area rescue fund, the ESM, to finance its post-2014 fiscal and banking liabilities.
The second reason was the assumption that following the suspension of the democratic processes in Italy and Greece in recent months, the rest of European periphery would lose appetite for exercising independent democratic mandates.
Friday, March 2, 2012 11:43 AM EST
Why climate change is not on India’s radar
Sumeet Gulati is an Associate Professor in the Food and Resource Economics Group at the University of British Columbia. He also maintains a blog on environmental policy, and can be followed on Twitter.
I am going to India, one of the world's fastest-growing economies. Measured by purchasing power parity (how much it takes to buy a uniform set of goods), India's economy is now the world's third largest. Isn't now the time for India to take part in the battle against climate change?
It's midnight, as Cathay Pacific 695 descends into Delhi. Through the haze its passengers see a brightly lit freeway. Even at this late hour, a constant flow of traffic. The visibility is a distinct improvement over January, when some nights, almost nothing can be seen. I take a taxi from the airport to Hari Nagar, an Ambassador -- a uniquely Indian car -- its body unchanged from a 1956 Morris Oxford III. Sitting on a flat sofa backseat, I smell fumes from the engine leaking into the interior, a slightly open window lets in Delhi's smoky air. Indoors after forty five minutes, I wash my face; dark water drips from it, my nostrils are black with soot.
