Category Archives: Economics & Finance

Greece-Torpedoing the “deal”.

15 July 2015

JR Max Wheel & Graham Reid


It seems barely credible that after the heavy-handed treatment of Greece by the Eurozone and the Commission over the weekend to drive a deal to which its co-members could agree, support or at least defend, that no one thought to reference the IMF figures, which were both known and available to Brussels. This makes a terrible situation, a whole lot worse for obvious reasons. It is not feasible for either the Greek Parliament or indeed the other EZ states to recommend this deal, which of course was far from a real deal at all, more talks about how to reach some kind of binding agreement short of removing Greece from EZ and possibly the EU itself.


That the IMF has gone public with it in its uncompromising wording has left all the delegates looking as inept as they have appeared vindictive. That serious long-term debt relief was required is blindingly obvious. This has been our view since at least 2009. We have argued for zero coupon bonds on the basis of the Brady bonds used successfully in the Latin American debt crisis of the 1980s, this was laughed out of court by the cognoscenti. We have called for real FX flexibility, not solely for Greece but the whole zone, since no economy can assume that it will not at some point be radically blown off course. We suggested that the IMF might consider expanding and using the SDR as a means of preventing the blow out of national budgets as countries came to grip with the banking crisis, only to run into the US Dollar as near sole reserve asset and seinorage arguments.


One suspects that future scholars will pull their hair out at the seeming near total lack of grasp by leaders of the European Union in determining that a cart should or even must pull a horse by designing a system that in nearly every way mimics that of a failed gold standard, a system that derailed economies for nearly a decade and was at worst a partial progenitor of WWII.


“Earth’s proud empires pass away” as the old hymn has it, and that is what the EU has become a quasi –empire, run in the interests of a few and as such always vulnerable to overreach.       In the Greek case there are many parties that have contributed to the present shambles; their reasoning has as much to do with outright self-interest as with the greater whole. Founding father Jean Monnet observed that the Union would be beset with crises on its way to achieving its goal, this one might be terminal, and not just for the hapless and badly ruled Greeks, unless it is quickly addressed.


“Be Prepared” The PASC Report discovers a Financial Risk Black Hole

by Graham Reid & JR Max Wheel

09 March 2015


The latest Public Affairs Select Committee (PASC) report is, as usual, wide-ranging in its attempt to assess Whitehall’s capacity to address and respond to future challenges. In this article, we limit ourselves to comment on the financial aspects of the report. Having read its findings, and whilst presuming there are many omissions are on supposed grounds of confidentiality, we are alarmed to see in its second paragraph a rather glaring hole:

 “The most surprising and urgent gap we found was in HM Treasury…..Market-wide exercises have been conducted to test resilience, but not on a comprehensive basis to address the risk of systemic financial collapse triggered by an unexpected event.”

 Perhaps, the underlying cause for this potentially dangerous position can be found in the (incredible) response from the Treasury:

 “It is unfortunate that the public administration select committee’s report takes no account of the relevant facts,” it said. “By focusing on Whitehall procedures they have entirely missed the point: the lessons of the financial crisis have been learned and acted upon by putting in place a reformed regulatory system, ring-fencing the banks, ending the ‘too big to fail’ problem, and dealing with the risks posed to the economy by an unsustainable deficit.” [So that’s all right then or do we hear echoes of “ending Boom & Bust”.]

 Clearly, as regards the UK’s financial industry little or no attempt has been made to address the flaws and gaps in the risk assessment and evaluation methodology, not to mention the outright malpractice that consigned the UK, amongst many other countries, to the horrendous effect of the 2008 crisis, one for which we are still paying a very heavy price. We are astonished at the lack of interest into what has been possible for several years to anticipate and reduce massive risks particularly those that are systemic. None of this is questioned in the report so we must assume that there is ignorance on the part of both questioners and responders. So sad!

The report reminds us that the Treasury’s 2012 review of its response to the global financial crisis identified the lack of a legislative basis to resolve failing banks and records that “Remedying this was not deemed to be a priority by the Treasury in the context of the benign financial climate (sic). War games were played for the scenario of an individual institution failure but not for a system-wide crisis, which was judged to be highly improbable.Strangely, most of us seem to recall in detail this highly improbable crisis!

Reliance on politically-inspired legislation to anticipate the effects of varying risk scenarios is naïve at best since both foreseeable and unforeseen risk situations do occur. However, modern modelling techniques can both identify potential damage and can produce warning signals in advance. Recall following Enron’s sudden collapse, the lights in the US did not go out, even if the company’s did!. The energy sector had highly sophisticated risk modelling systems in place, of the sort that could have helped mitigate the worst of the 2008 financial crisis. Systemic risk can be valued and contained but only if there is an acceptance of and the will to pool knowledge in the best interests of all but that is the subject of other articles.

We now make specific comments on some of the points raised in the report as follows:

“Market-wide exercises have been conducted to test resilience, but not on a comprehensive basis to address the risk of systemic financial collapse triggered by an unexpected event.” This is an urgent exercise and there needs to be one body coordinating it, even if the prudential supervision activity is carried out by another.

“A group of constitutional experts and economists wrote a letter to The Queen in November 2009 which contended that “the failure to foresee the timing, extent and severity of the crisis and to head it off … was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.” This is nonsense! releasing the brakes on the financial system happened in several stages and with increasing levels of potential risk. We recall in no particular order-.Big Bang deregulation, repeal of the Glass-Steagel Act, massive overseas expansion by banks, widespread growth and misuse of derivatives, weak or ill-focused regulation including by the BIS, via its Basel capital adequacy arrangements, which offered tempting targets for banks to navigate and game. Absence of proper supervision by the FSA, abusive accounting techniques, tax mitigation games, wrapping and bundling of assets as investible “securities”, the sucking in of the insurance industry to create“financial products”, an abuse of Chinese walls, growth of shadow or perhaps shadowy banking, Central Banks’ loss of control over money creation and the growth of quantitative modelling as a substitute for good judgement and management rather than a useful mathematical tool.

 It is pretty basic but surely the onus should fall on banks, not to use capital just as another source of lendable funds, but as a proper buffer against liquidity, cyclical, credit and country risks. Leverage ratios amongst major banks are still too high. As the Central Banks Club, the BIS should insist on agreed wind-up procedures for all banks including shadow banks and funds management companies.

 Black Swans (Low probability high impact events) need particular care since contrary to popular imagination in an interconnected world they are far more common than realized.

No problem though, we can relax because apparently “The Civil Service usually responds brilliantly to fast onset, short duration crises, with clear responsibility taken by a lead government department.” Really? How about Foot & Mouth, BSE, Floods, and stockpiles of Tamiflu vaccine to name a few then? Either no plans were in place and/or a joined-up response was sadly lacking.

The Committee really gets into its stride here: “We commend the development of the National Risk Register. It is a vital tool to enable and encourage thinking about better management of short and long-term risks. The challenge is to ensure that this information is used in advice to ministers, and not ignored.” This surely should be a base point from against which Government policies are costed, tested and implemented. Those that fail the risk “sniff” test should be challenged or dropped by Parliament.

“Professor Ian Goldin, Director of the Oxford Martin School, has described systemic risk as a process to be managed, not a problem to be solved.” This is a very academic view, which may be theoretically correct but absolves everyone from exercising any foresight or care. Systemic risk surely needs, where possible, to be identified and avoided, not fatalistically managed: it’s the constituent parts that need to be managed, precisely what was not done.

It gets better “Sir Nicholas Macpherson told us that: They are very good at forecasting in the good times, or indeed the bad times, if there is a steady trend. […] What forecasters are generally very bad at is forecasting inflexion points.” What forecasters are bad at doing is…ahem forecasting and understanding the difference between predictions and projections! Anyone can extrapolate from a trend.

 “To reassure us that he was not complacent, Sir Nicholas Macpherson cited a standard, well understood risk–the failure of a bank: We did a lot of analysis and contingency planning around the impact of a banking collapse on Britain. When one of the Cypriot banks got into difficulties, we basically put into practice that contingency plan. There are a lot of Cypriots living in this country and it worked pretty well.” We totally disagree; Cyprus is a rotten example of a small economy most recently dominated by laundered Greek, Russian and Mafia money, whose disproportionately sized banking system unsurprisingly imploded. Maybe is this mandarin-speak i.e. another case of selective examples chosen to prove a point. Trust us, we are the Treasury.

“Mark Carney, Governor of the Bank of England, intends that firms are able to fail without threatening the stability of the system as a whole: “firms should face the discipline of the market and consequences of their actions. We do not operate a zero failure regime.” This is very easy to say, but our guess is in the event of a future large bank crisis the Government will be forced to do the same again- bail them out, why? Because despite having increased capital, regulators have not taken action to force recognition of impaired assets, control leverage ratios and demand that assets are accurately marked to market. Better still why not also ensure that a Risk Director with appropriate experience is mandatorily appointed to Bank Boards with direct access to CEO/Chairman and the BoE as regulator.

Risk is a complicated concept and is unlikely to ever be totally eliminated but surely we should try to put proven systems in place to protect us without relying on politicians to protect us from their own mistakes.

Why not Be better Prepared by having a Select Committee for Strategic Planning?




What defines Europe? Why it matters and why the EU needs a proper foreign policy framework

JR Max Wheel & Graham Reid

18 Feb 2015

Where does Europe stop and start? This seems like a trivial question, but it is one which  needs asking, most especially in view of the eastward drift of the European Union and the turmoil in the Ukraine. It is not easily answered. If one looks at how the European Environment Agency (EEA) tries to address it, it is a mix of geography, geology, ethnography and broadly includes the almost everything west of the Ural mountains, no doubt the Russians would disagree in any context beyond a purely geographical framework.


Map1Acknowledgments: European Environment agency Eurasian Landmass

It is a truism of history that empires do not last, but they fade or are swept away by violent events;  European history is littered with vanished kingdoms and states, brilliantly documented by British historian Norman Davies in his excellent “Vanished Kingdoms”- the half-forgotten Europe of near myth.


Unfortunately in today’s Europe the European Union itself is perceived as having its own “imperial” agenda, The Push to the East[Drang nach Osten], which has hit the buffers of political reality in Ukraine. The desire of [particularly West] Ukrainians to a closer arrangement with the EU has stirred a violent reaction in its Eastern borders. This is unsurprising; the slightest familiarity with Russian history reveals it paranoia over defensible borders, frequently secured via control of buffer states. Intriguingly it is suggested that even prior to the collapse of Berlin Wall in 1987 both Gorbachev and Kohl had discussed conditions for German reunification to be agreed, provided there was explicit recognition that the Baltic States, Belarus and Ukraine were excluded –i.e. recognized as being within the Russian “sphere of influence”. Clearly this was an attempt to avoid the stigma of a Germany remaining as an economic giant but a political pygmy: such notions did not play well with the French, as the Quai d’Orsay clearly feels it has a near monopoly over the requisite diplomatic skills. Whether this Russo-German policy actually was ever enshrined in document form, is irrelevant as events overran policy. What it does serve to show was that Gorbachev was very clear that the sphere of influence ideas were (and are) still significant and that encroachments eastwards were going to be looked upon with suspicion and quite probable interference. The subsequent collapse of the Soviet Union put history on temporary hold; it also opened up a historical opportunity. The old Yalta Accord had already begun to splinter, as Poland, Hungary, the Czech and Slovak Republics and the Baltic States all joined forces with the EU as members and are further extended to Romania and Bulgaria.

Europe 1970: Acknowledgement: Erols/MSmith


Map 3

Ukraine declared its independence from the former USSR in 1991: by 1992 some 128 states recognized Ukraine as a sovereign state. The emerging Russian Federation was in no position to act contrarily because it too had recognized Ukrainian sovereignty and was economically weakened.


Amongst the hangovers remaining from Yalta are the enclave of Kaliningrad, formerly Königsberg in East Prussia and the unreformed State of Belarus, still wedded to the old USSR both politically and economically. Little real progress politically was made in Ukraine until the Orange revolution 2004-5 although the stand-off between reformers and old style pro-Russians like Yanukovich was played out amidst a chaotic and massively corrupt system. By then it was clear that the path to a democratic and market economy was going to be far from easy.  By the time of Yanukovich’s election in 2010 and the outbreak of protest in 2014, the essential divisions between a pro-Russian East and a pro European West would begin to tear the country apart. It has always been a policy for absolutist rulers to seek to destabilize in such circumstances by claiming that minority ethnic Russians or pro-Russian supporters were “at risk” and the rest is the history of infiltration, violence and compromise of Ukrainian sovereignty.


Prior to these events the EU had used its Partnership agreement of 1998 and Association agreements of 2007-11 to negotiate an ever closer rapprochement between Ukraine and the EU. Given that this went much further than trade but included energy security and the text for military and defence cooperation, virtually nothing was more likely to inflame passions on both sides. Such stumbling and toxic diplomacy engendered the current situation as much as Russian desires to keep Ukraine firmly in the orbit of the Russian Federation. Logic and a sense of history should have demanded caution by the EU. This is Eastern Europe proper and not occupied Central Europe and the cultural and political sensitivities are very different. In short the hard men like President Putin have made it clear, ” so far and no further”. Yet this is a sovereign state. Such is the degree of political naiveté that dogs EU foreign policy as well as the deals done behind closed doors the word incompetence is inadequate to describe this ineptitude. The same “fix it as we go along” stratagem  is evident in the way the EU has dealt with its currency crisis, itself a monument to political manipulation and hubris


It is clear total overreach by the EU; whilst few would entertain for a second the destabilizing and revanchist behaviour of the Russians, it is broadly similar to the sensitivities of the US over Cuba too close for comfort. That this kind of “policy making on the hoof” is viewed as an innocent technocratic deal is acceptable in a Union of 28 nation states is itself highly questionable. The original 6 EU members were of course all Western European and thus at least shared some cultural identity and shared ambition, the 28 do not remotely fit that picture, the blood-soaked history of much of Europe is due to the subversion and not infrequent upsurge of tribal grievances amid Great Power Nation States. As such the EU would be far better engaged in assimilating the huge territorial mouthful it has already accumulated, than to risk dragging Super Power politics into another historical quagmire. This must be the lesson of Ukraine. For all its proud history, it has been attacked by Huns, a pawn in the wars of Poland and Lithuania, fell to Catherine the Great of Russia in the 18thC, overrun by the Nazis and temporarily freed in 1991: tragically it is hard to see without deep political changes in Russia, a safe and independent future.  What a tragic irony for a country that gave its name to “all the Russias” and what a warning to the EU to beware its limitations.







Big Deal for Greece, Bad Deal for Europe?

JR Max Wheel & Graham Reid

12 Feb 2015


The EZ’s stand-off with Greece is so far going entirely according to plan. They have told the Greeks that they must abide by their arbitrary rules, drawn up under the terms of the bailout, the self-same ones the Greeks specifically rejected at the election. The EZ’s finance committee chaired by Jeroen Dijsselbloem has managed so far only to repeat the usual mantra of sticking to the agreements, which unsurprisingly has left the negotiations in limbo. He is just doing his job of course, however in a crisis this is insufficient. This is NOT about some technocratic fix to assuage a recalcitrant Greek Government; it is (another) existential crisis for the single currency, at worst one which it will not survive.


Irrespective of the past misdemeanours, not merely those of Greece but other over-borrowed EZ periphery members, what the Greek election has done is to fire a torpedo at the heart of the whole EU project. Ultimately, who rules? Is it democratically elected Governments of Nation States or unelected Euro apparatchiks and their backers from other member Nations? It is always very revealing to step back, go to the Lisbon Treaty (2004), in effect a draft EU constitution, but one to which not even the most committed Europhiles could bring themselves to agree. That is why of course it is a “treaty”, a typical sleight of hand manoeuvre to impose the constitutional conditions over and above those of the member states. This fundamentally anti-democratic jiggery-pokery was actually intended to make the EU more democratic! God spare us from people whose idea sets created qualified majority voting and double majorities, based on population size. Unsurprisingly it was roundly rejected by EU founder members France, the Netherlands and by Ireland. As it required unanimity to be a credible constitution the then 25 members had subjected it to their various domestic political processes, either via national parliaments or in the case of Spain and Luxembourg by referendum. Following 3 years of hiatus, the constitution was recreated as a treaty, to which member states –often with some considerable reluctance were required to sign up. Why is this important? Firstly, because it is a jumble of amendments to prior treaties of Maastricht, Nice and even the founding treaty of Rome, it is highly doubtful whether any of the directly affected Euro citizenry could remotely fathom the complexities and trade-offs inherent, but it establishes a power structure in the EU institutions, especially the Parliament and Commission which can trump decisions of the member nations’ own demos. This is why the sudden re-emergence of the Greek challenge is so important. It is less about economics alone, although any sane person would have realized that imposed austerity on a country in desperate straits like Greece (and others) is a shameful reflection on the priorities of this Club.


What remarkably this odd Greek coalition of left and right has done is to scythe through the suffocating tide of Euro speak and refuse to cooperate on the basis imposed, but rather to offer a radical national solution which the Greek electorate clearly feel to be more important, than externally imposed austerity .

It is the principle that matters here not the past economic dodgy dealing.


The laughably named Growth and Stability Pact has been broken so many times by member states, we used to nickname it the Stagnation and Instability Pact, now unwittingly the daily reality of most of the Eurozone economies.


At the heart of the dilemma is of course the single currency and its catastrophically deficient fiscal arrangements. The gamble was of course to create EMU (monetary union) and thus force political union as a consequence ( for fear that the currency would not be capable of stability without fiscal transfers, and tax harmonization). We know this because it was constantly preached for years by inter alia, Jacques Delors.


Lest this should all sound merely like British Schadenfreude, the Brits learned a very costly lesson from the fore-runner of EMU the exchange rate mechanism –ERM. Britain had entered into this arrangement partly to avoid Franco-German pressures for adoption of monetary union and partly for the largely mistaken view that shadowing the old DEM was going to create a low inflation Britain. Britain was ejected from the ERM after a prolonged period of currency instability in September 1992. Being stuck with an excessively high exchange rate and forced into a currency straitjacket by ERM, itself dominated by the Bundesbank, virtually nullified any chance of Britain wishing to enter the nascent Euro. The launch of the Euro in 1999 locked in the member countries at the then prevailing exchange rates; any student of the gold standard would immediately focus on the fact that the differing economic make-up of member countries’ economies and their interest rate and FX needs over time would diverge. If no transfer mechanism existed, then the internal imbalances could or most likely would increase. To call this in economists jargon a “non-optimal currency area” is to admit the bleedin’ obvious, adjustments will be needed, what was not said, although it could easily be picked up from any economic history book, was that the only adjustment mechanism available was in real terms, reductions in national spending, wages, falling output and misery, the exact recipe that ensured the collapse of the gold standard.


What we have today is a dominant German economy with a huge advantage of an undervalued FX rate and a massive and growing trade surplus equivalent to 7.5% of GDP. So important is the currency project and so much political capital has been invested in this project that trying to reverse its shortcomings demands as Alan Greenspan has argued that there is either full political union in Europe, not merely fiscal union or the currency cannot work. Greece will have to go as may many other member states.


That this currency construct could be let loose on Europe by a mixture of over mighty and idealistic bureaucrats was grossly dishonest: it has never been made clear to the electorates just what a gamble they were taking, or what grotesque suffering would result from its inflexibility.


Europe in denial-closing ranks against Greece

by Graham Reid & JR Max Wheel
1 February 2015
The Greek situation is singularly important for the European Union, let alone its single currency. Syriza’s message needed to be said loudly and directly to a leadership in near total denial. Insolvency not illiquidity is destroying their country, its people’s welfare and way of life. Much of the same can be said for the other deeply indebted Eurozone countries.
Currencies matter, rules matter but sometimes it is as important to break them as it is to enforce them. This is one such an occasion.
Barely three years after the ink was dry on Allied-German debt forgiveness of 1953 under the US Marshall Plan, the European Economic Community’s founding treaty was signed in Rome in 1957. Greece was a co-signatory to that debt forgiveness treaty – in short, Give rather than Lend Money. 1957 was a seminal moment for Europe, for the six original member states of W. Germany (as was), Italy, France, Belgium, Luxembourg and the Netherlands but so too was its 1953 forerunner because without it W. Germany could not have possibly enjoyed its economic miracle (Wirtschaftswunder). Within it was contained Jean Monnet’s dream of a united federal Europe, echoed by French foreign Minister Robert Schuman (a Luxemburger).
Civitas summarised the counterpoint issues elegantly:
The Treaty of Rome was a ticket to greater economic growth, enshrined the dream of a united Europe, would make it impossible for European countries to go to war again and was an incredible feat of diplomacy that paved the way for European reconciliation and the spread of democracy.
The Treaty set out an impossible goal of creating a united Europe by ignoring cultural and linguistic barriers that divided the continent, was fundamentally confused as it aimed to promote economic co-operation through an undemocratic and unnecessary political apparatus and the institutions that were created were distant and unfamiliar. In their original form they allowed many decisions to be made behind closed doors thus discouraging open debate and participation.
Civitas might well have gone on to argue that even more impossible than the United Europe was the creation of a common currency, [at least for some of its members], where few of the very basic conditions to ensure its stability were adopted by its members, lost in an orgy of self-congratulatory hype and overreach.
Is there anyone who still thinks that a common currency for 19 economically diverse countries can work without fiscal and financial union – a common treasury, taxation, benefits, pensions and regulatory framework with agreed disciplines and targets?
Financial journalists appear to becoming around to our long-held view that without a full union and mutualisation of debt, a functional Eurozone will remain an impossible dream.
We go along with debt forgiveness only as an immediate solution for Greece, but it does nothing for the built-in flaws of the whole Euro concept, doomed to repeat the same errors, lack of competitiveness, contrary cultures, differing economic requirements and in the Greek case, a largely offshore economy!
The forgiveness and restructuring of Greek debt, is required due to very particular factors. Who is next? Italy? Spain? Portugal? France? It is very doubtful that the ECB easing QE [in excess of 1 Trillion Euros] can cope in keeping patients alive, let alone thriving. Any solution is going to cost but let that cost be in building a stronger future, not paying for past mistakes.
BOE Governor Mark Carney said (Dublin Speech 28th January 2015):
Cross border risk sharing through the financial system has slid backwards. Europe’s leaders do not currently foresee fiscal union as part of monetary union”.
Leaders in this context are politicians who have a very different agenda to that of the real world where economic strength and competitiveness  is paramount. The self-same people have perpetuated the myth that the Euro will recover and remain a pillar among world currencies. Why deny the reality? Is the truth consistently hidden from view too hard to bear- that it was and is a dire error?
Change is not only inevitable but urgent and vital before more money is wasted on this absurd construct. It appears that there is a mood, part truculent, part reluctant, to do something, but matched by a total lack of commitment to set out a course of action to set the process of change in motion.
There are a few ways out of this mess, all with major costs and degrees of risk but is not some “risk” better than “certainty of loss and failure” if the problem is just kicked down the road yet again?
First , there has to be is an admittance, by member countries Germany, France, Spain etc., that the Euro’s demands cannot be met: what is required is a radically changed European Union, even without a common currency, but with less bureaucracy, expense and overweening power.
Second is to decide how to dismantle the current structure, whilst minimising the potential for transitional currency arbitrage. This needs careful and closed-door planning. It could be assisted by the US, UK, Japan, IMF agreeing to supporting a plan of action and making it difficult for currency vultures to operate.
You could call the Greek bluff – leave if you want but you still owe us and you break the principle, now any one can in theory leave – at a major cost, but not impossible.
A more credible currency grouping might be Germany, Austria, Finland, Belgium and Luxembourg with real fiscal union?
Germany agreeing to leave of its own accord. This would remove the obvious major internal value disparity but would lead to a major initial drop in the value of the Euro if recent Swiss experience is an example, but destroy the European project and clobber its exports.
Whatever is decided, then those politicians who insist on its future should tell us why and debate and let the people decide who is right.
They will not, as they appear to value their personal positions more than those they were elected to serve.
We all await an answer, not just Greece and trust that Lewis Carroll was not prophetic in his tale of the Walrus and the Carpenter and the fate of the little oysters:
O Oysters,’ said the Carpenter,
You’ve had a pleasant run!
Shall we be trotting home again?’
But answer came there none,
And this was scarcely odd,
Because they’d eaten every one.