Debt.

Portugal has implemented the austerity measures prescribed at the cost of great hardship to the population. Today the interest required to sell Portuguese bonds rose to over 17%. They will need to have another bail out it appears. So it doesn't seem to be working there either.

http://www.nakedcapitalism.com/2012/02/phi...um=email&utm_ca

A very pointed article from an Irish commentator.

Amen to what he says

I had somehow missed the situation in Romania. The prime minister of that country resigned today because the people are rioting in the streets over austerity measures which include a 25% cut in public sector pay and a 15% cut in pensions. I don't know much about Rumania, but just looking at the wiki article we see a familiar story. High growth in the early 1990's;deregulation and privatisations; crash in 2007/8; IMF intervention. Poverty for the people.

http://www.debtonation.org/2012/04/ann-pet...12-2/#more-5829

An interesting synopsis of Anne Pettifor's views on debt and austerity. It pulls together much of what has been said in other threads in this forum

Been thinking about the spanish banking crisis since it is the biggest item in the news with respect to debt, now. As ever there is a lot of misinformation about and it is hard to follow what is actually happening. As an example, the bbc issued a Q&A piece purporting to explain the crisis: as ever it did no such thing.

One of the major threads in most of the press is that the crisis is largely due to the problems of the regional banks in Spain. They were generally smallish local banks and as one might expect they were very heavily involved in lending on property. As with Ireland that is a major source of the banks' problems in Spain: the assets were not worth what was paid for them and now people cannot pay the mortgages. So this is private debt.

It is essential for orthodox commentators to turn this into "spanish debt" and we have seen that conflation before. Debt is private when it suits them and public when it doesn't and I have previously demonstrated how it is difficult to tease out what is actually being referred to in any given article.

Given that necessity the particular way it is being characterised in the case of the banks in Spain is to say that the regional banks were under the control of the local politicians. So far as I can discover that is not true.

It is important to recall that Spain as a state had no debt before the international crisis: they ran budget surpluses and followed IMF prescriptions in every way. That did not save them from the crisis, and is itself evidence that the crisis is nothing to do with feckless governments recklessly spending on unaffordable welfare. Which poses a bit of a problem for the orthodox view: because whether you act like germany or you act like greece (in terms of the stereotypes normally presented) you still go down.

Bankia is the biggest bank that is in trouble. It was formed in 2010 from a merging of a number of regional banks which were in serious trouble because of the collapse in house prices and construction. The biggest of those was caja madrid. It was formerly a charitable type of institution run by the catholic church under another name, and it was certainly private as late as 2008, because you can find its listing on the london stock exchange for that year. A press release relating to an award for conservation it received describes it as a private non profit organisation: and also notes that its chairman is one Rodrigo Rato. One can justly call him a politician, because he was a conservative MP and served as the economics minister from the late 1990's till 2004. Then he became Managing Director of the IMF. He left that post in 2007 and he was head of Bankia from 2010 until it went bankrupt this year. So he is a politician: but not the kind of pork barrel vision which the charge tends to conjure in our minds. More a kind of technocrat, one might say. Though wiki does note in passing that he has been accused of failing to keep proper separation between his business interests and his political position: don't think anything was proved.

Caja Madrid did, however, have a lot of politicians on its board: that is no surprise for a non-profit organisation with a history of charitable lending going back to the 1700's and heavily influenced by the church which founded it, presumably. It is controlled by 320 representatives from a variety of bodies including ordinary depositors; employees; representatives of the royal family (through royal patronage); the Assembly of Madrid; Muncipal bodies (not specified in anything english I can find); and "entities representing group interests", also not defined in my digging about.

I find the implicature entailed in the note that the bank was controlled by politicians not sustained. I find the idea that it was always a state institution similarly not sustained. I find the idea that this was a spanish bank before the crisis not sustained.

What I would like to see is the rationale for calling this spanish debt in the sense that it is sovereign debt.

There are other elements which are used to relocate the responsibility from the banks to the state: but in light of the announcement today that the agreed bail out will be only applied to the banks it seems that in this case the European institutions have accepted that this is not Spain: the problem is indeed the banking sector.

The way the story has been reported here to date has already discounted that awkward fact: we have been told that this is some southern european version of "face": the government apparently wanted to avoid the "humiliation" of asking for help. The effect of that narrative is to allow us all to remember that Spain got a bail out and when it is pointed out that the banks got a bail out we already have an explanation: since the debt will appear on the sovereign account that will be easy to sustain.

It seems that Spain will not have to implement further imposed cuts: but since the government is already doing that there is no need. Spain has continued to follow troika prescriptions thoughout this mess. Much good that is doing in reality: though I am sure Ms Lagarde will soon come along to tell us what a great success this has been

The IMF made a report on Spain on 30/5/12, as it happens. It is here:

www.imf.org/external/pubs/ft/scr/2012/cr12137.pdf

According to them Spanish banks weathered the 2008 global crisis well due to robust capital buffers. Despite that they lost access to the wholesale funding markets. Since the eurozone countries only need to use the wholesale funding markets because they are members of the eurozone it seems to me that this is nothing to do with the Spanish government or the Spanish people. They are at the mercy of the market because the ECB will not act as a central bank even when there is no reason to doubt the solvency of the banks: at least that is how I interpret that passage.

The second phase of the problem arose because of the collapse of the property boom: and that is in line with what happened elsewhere: for example in Ireland. As in Ireland it seems that this was not to do with the government either: the banks lent more money than the houses were worth and pretended there was no risk because the loans were "asset backed". The comparison with Ireland ends there, however. Spain did not take over the banks debts wholesale, as the Irish government did. The government did offer some assistance and the small savings banks "restructured" by merging, for example the 7 which combined to form Bankia. Those banks were blamed in the report for "weak lending practices". It is frustrating that the IMF reports never do more than assert such things, but let us accept these banks were not prudent. Just like banks in the UK and the US and many other places. Lending and leveraging against assets was normal practice and the FSA concluded that nobody could have been expected to realise that this was insane: that is what is in the FSA investigation into the RBS debacle, anyway. So the IMF takes a different view with its hindsight: their track record of foresight is rubbish, but their hindsight is faultless so long as you agree with their theories and make reality fit their pre determined conclusions. At least that is how it seems to me.

The IMF goes on to say that the third wave of the crisis is still underway, reflecting concerns about the sovereign debt market. I do not see any link with the sovereign debt market: that is just sort of smuggled in, as usual. But even if that is sensible and accurate I can see no justification for forcing the Spanish government to take the bailout money and increase their debt if that is the source of the problem. There is never any mention of the fact that the transaction ought to be neutral because the nationalisation of the banks generates a balancing asset on the government's balance sheet. Yet if the story we are being told is true, that follows inevitably. Every debt creates a balancing credit, remember

I do not believe that, personally: If you buy a bankrupt bank on borrowed money I do not think it is a balance sheet transaction: I think it is more like buying chocolate and then eating it. But I am not an economist. They say that every debt creates a corresponding credit.

The IMF report then goes on to say that the restructuring of the banks was too slow. Restructuring seems to mean sacking workers and closing branches. This is the IMF answer to everything. It makes very little sense. If a bank has a lot of debt because it lent to construction companies and individuals on the security of assets which are falling in value then no matter what it does its "assets" are going to "deteriorate" so long as that goes on. Yet somehow the IMF report inserts an "as a result" after stating "restructuring was too slow" and before "the assets continued to deteriorate". The do not fill in the logical gap. Perhaps they could: but they don't.

Paragraph 17 is puzzling too. I invite you to read it for yourself and explain it to me. It appears to say that help was offered from the ECB which worked a bit: but increased the interconnection between the bank debt and state risk. That makes no sense at all: unless, of course the help was channelled through the state, as now. It doesn't say it was, but perhaps that is the situation: if it is, you can hardly pretend the government position worsened in terms of debt because it acted as a middle man: not unless you are an economist, anyway. Seems to me the whole thing is specifically designed to transfer the problem to the state: yet they discuss this as if it were an act of god.

Whatever it means the spanish banks did just what the british ones did when they got the quantitative easing money: they sat on it and continued to withold investment.

Apparently the Bankia bailout amounts to nationalising that bank, just as RBS was "nationalised" in this country: and as here, the ones that are not quite so obviously bankrupt are to get state money but with no strings attached. How does that make any sense at all? If you nationalise a bank then you don't need any others. So let depositors and pension funds in other banks transfer their money into your bank (which you will certainly have to pay for cos the banks haven't got their money any more) and let the rest take their losses and vanish. Why would you not do that? It is really fast restructuring and so obviously a damn good idea. And since that money is now in a secure place there is no reason for the customers to behave any differently than usual: so you can use a proportion of that money to invest in real things: and that will give folk jobs and give you a chance of getting your economy moving again. I really can't see what is wrong with that at all.

Anyway that is an aside and is not what it to happen. According to the report the two really big banks are fine. They account for 33% of banking assets and get most of their profit from abroad. So they can carry on as normal and there are no implications for the government that I can see: though they probably lend to the government at exorbitant rates on account of the sovereign debt risk which doesn't exist. Nothing to be done about that under current eu rules, apparently.

Then there are a group of former savings banks which have not been bailed out: they mostly hold mortgages. They are fine too, for now, because astonishingly, despite the horrendous unemployment and general lack of economic activity, people are still mostly paying their mortgages. Go figure.

The former savings banks which have had bail out money are also in the mortgage market: but they are in trouble cos they lent to construction and real estate companies: this will surprise you - they are not paying their loans. Those are corporations, remember: the folk we are all supposed to admire as risk takers and entrepreneurs and general saviours of mankind. In a pig's eye.

The fourth group are not savings banks they are described as medium sized and small private sector banks: though I think what they really mean is banks which operated for profit before the crash. They are in much the same positon as the bailed out savings banks: though they don't get singled out in the same way for some reason: as you can see in paragraph 21. I think their prejudicial underskirt is showing, personally.

Paragraph 26 is a doozy. Usual IMF crap presently best embodied in the pronouncements of their own dear Ms Lagarde: she is clearly not alone in her certainties. Paragraph 29 is a good contender for the title of crappiest paragraph in the report too, though. I especially loved this bit


That is really handy, isn't it? Ordinary folk just can't stand interest rate rises: but they can get along fine with no money coming in. All things work together for good in this best of all possible plutocracies...

And it just so happens that the country will benefit from keeping inflation low: even though it is admitted that the poor are the most heavily indebted and that knocks any possibility of relieving that pressure on them. But hey, inflation is a bad thing. In contrast the "increased flexibility" in the labour market is going to ensure their wages are kept low and there is a real chance unemployment benefit will be reduced as well. But as noted, income does not matter to them: they will carry on paying their mortgages and they will get export led growth in the sky, by and by

Unless, of course, the IMF projections are over optimistic: they almost always are, cos their theory doesn't work. If that happens it looks like we get more of the same for the people (rising unemployment is admitted: and it is already at 24%)

The report assumes a sovereign debt "haircut" and this appears to be based on their touching faith in the infallibility of the market: the cost of borrowing for the Spanish government is really really high and it wouldn't be if they were not in trouble, obviously. There is no possibility that the market makes speculative attacks and charges a lot for loans just because they can.... And George Soros is closely related to Santa and the Tooth Fairy

Do read paragraph 39 if you are asking just how far this report is based in reality: it is quite instructive.

It is almost entertaining when you get to the discussion of what else needs to be done. The report acknowledges that


Well that is a fact, though why they have done that is a complete mystery to me: it is to avoid undermining viable banks apparently. WTF? But the next bit is funny. Apparently they have required the banks to identify "impaired assets" and move them into a separate management unit. That does not of itself change the risk to the bank from those assets, obviously. So there are a number of options thereafter.

The banks could manage them and keep the risk
The banks could sell them to an Asset Management Company

They prefer the latter, and they say


Since governments are uniquely incompetent at everything in other parts of the forest that seems odd. But it does mean that the state gets to own all the really toxic stuff. A coincidence I am sure.

There are other options, one of which is a system wide Asset Protection Scheme. What that does is curiously described


That "third entity" magically turns into government by the end of the paragraph, unsurprisingly. The great advantage of this wheeze is explained: the assets remain on the bank balance sheet: but the risk weighting is reduced.It is cheaper to set up than an AMC. And best of all it avoids

Clearly the Spanish people should pay the piper: but heaven forbid they should call the tune!!

Who knew IMF reports could be so entertaining?

Edited by FionaK - 10/6/2012, 01:07

UK economic growth much worse than expected, according to figures yesterday. The press and politicians are all saying it is a great and unpleasant surprise: nobody predicted it; etc etc

Well that is just not true. It is precisely what I expected, because that is what austerity does. That, at least, is what I have concluded from my reading around.

It is a measure of how far mainstream reporting is narrowly informed by neoclassical economics that there does not appear to be much alternative analysis for people to consider, and that is why it is so difficult to get to grips with all this. If you rely on the media here you would think that there was no way to anticipate this: and further, that it does not mean the government and business should be doing anything different: there is, in fact, nothing anyone can do, and the markets will make matters worse if the government change course. Economists and all parties have paraded today to say that they might tweak around the edges, but no radical alternative is available. As noted on another thread, the IMF is now saying the tweaking is necessary: but nothing that might actually work

All over the world these policies dont work: yet they do not revise their analysis. It is one definition of insanity

This is quite obviously not true. It is profoundly depressing

Although AIG is not a bank I think their latest wheeze illustrates this point quite well

http://dealbook.nytimes.com/2013/01/07/res...sue-its-savior/


AIG do not deny they were bankrupt: they do not deny they needed the public to bail them out. But now they are suing that same public because they say the terms are onerous. It is breathtaking but it is not suprising. That is why they need to be formally bankrupted then nationalised, for they have no shame at all

http://taxjustice.blogspot.co.uk/2013/01/j...H1JLqp8.twitter

A video from Jon Stewart on HSBC and AIG: funny, I think.

As I made clear above I do not agree with the idea that students should take on debt in order to get their education: but that is the system we now have. Today the Guardian reports that the government is actively considering a retrospective change to the student loan agreements so that former students will have to pay higher interest on their debt

http://www.guardian.co.uk/commentisfree/20...k?commentpage=1

They already changed the law retrospectively so that their illegal sanctions on those on benefits were rendered legal. Seems that is to be expanded to contracts: for surely a loan agreement is a contract. Once again a contract with the government is treated differently when it suits them. Yet the law of contract is one of the few things the neoliberal plutocrats think government is there to enforce

For those of you who are still convinced that a university education is worth the financial cost you might wish to think again. We are about to return to the days when university education was only available to the children of the rich, which suits the plutocrats just fine. Another step on the road to feudalism, methinks.

I discussed the Irish crisis upthread and said that. In the last couple of days some tapes have been leaked which record conversations between executives of the Anglo Irish Bank in 2008 when the bail out of the Irish banks were underway. As comes as no suprise, those executives were laughing at those who were bailing them out.

http://www.guardian.co.uk/business/2013/ju...k-tapes-bailout

What is interesting is that the tapes have been in the possession of the Irish police for 4 years, and yet have not led to much in the way of action and have not been made public before now.

What is also quite astonishing is that the Taoiseach, Enda Kenny, has said that this damages the reputation of the Irish state and jeopardises any further help from the EU (which is likely to be necessary if the austerity measures imposed continue to be implemented), which may be a blessing, though that is a separate issue.

Once again we see a familiar pattern. Criminal or reckless behaviour by the banks is "socialised" and the state and the people take the blame and the pain. This aspect is not debt, directly: it is reputation. It matters, and it is just as illogical to hang it on the state as it is to allow the debt to "migrate" and then blame the state for high debt/deficit.

http://education-law.lawyers.com/school-la...oblessness.html

This is interesting

It seems that a student is suing a college in America because it has not delivered on promises of a high paid job because of the qualifications it offers. She is claiming a return of her tuition fees for breach of contract

As I noted in an earlier post, the pay premium for a degree is not likely to continue when more and more people have a degree: so the previous promise (explicit or implied) is false. But this student hasn't got a job at all. Course our neoliberals believe that all unemployment is voluntary, because they think that the market is magic etc. But this case challenges that view and if it goes forward it will be interesting to see how the case is defended. If the student can demonstrate that employment is dependent on there being available jobs, then you might think that the college cannot be held responsible: and you would be right, I think. But that completely undermines the neoliberal economic theory, by introducing the real world where it has no business to be . If the student can demonstrate that the college made a market offer based on that false premise then presumably it is no defence to say that you relied on this falsehood, in drawing up the contract, however. After all, it is not like nobody knows the theory is stupid.