28/9/17: Schauble: A Requiem For Austerity Finance

My comment for yesterday’s NY Times on Wolfgang Schäuble’s departure from the Finance Ministry post: https://nyti.ms/2k5N2Er 

28/1/2014: Decline in Debt and Regaining of Trust?

The following out this morning:

So is Herr Schaeuble correct? Did reductions of debt help 'regain trust during the crisis'? Were there actual reduction in debt?

Table summarises 2007-2013 maximum debt levels (for General Government Debt as % of GDP) attained by the euro area economies and the year when this maximum was attained:

Three observations:

1. With exception of two countries: Germany and Portugal, 2013 debt to GDP ratios are maximal for the entire period 2007-2013.
2. In the case of Germany, peak debt level attained in 2010 was 82.44% of GDP, while in 2013 estimated level of debt/GDP is expected to be 80.393% of GDP. The reduction is small. Meanwhile, German bund yields are not reflective of any specific reduction - they were low in 2009 and 2010 and they are low now.
3. Portugal's peak debt/GDP ratio is notionally at 2012 at 123.8% of GDP. Country 2013 expected debt/GDP ratio is 123.56%, which is statistically indifferent from 2012 levels, so we cannot call this material by any measure.

Here's evolution of debts over the period in two charts, confirming that there has been no reduction in debt levels relative to the earlier stages of the Global Financial Crisis:

And here is the chart showing how dramatic were the increases in debt levels over the course of the crisis:

But, of course, virtually the entire euro area bond yields have shown improvements in 2012-2013, which is really totally and completely divorced from the debt dynamics:

The IMF is not even projecting decline in debt until 2015...

3/12/2011: Latest Euro Crisis Proposal: A Debt Fund to Solve Nothing

The latest technocratic deram of European sovereign finance engineers is out. Here's the extracts from Reuters report with my comments (full report link here):

"Wolfgang Schaeuble outlined his plans under which states would effectively siphon off a chunk of their debt to a special national fund and pay it off over about 20 years while committing to reforms to keep debt levels on target."

What's that, you say? To "boost confidence" of the proverbial markets, the Euro states "should put into a special fund that part of its debt which exceed 60 percent of its GDP, and should pay that off with tax revenues. Over a period of 20 years, the debt should be reduced to 60 percent".

So let me run through this in some order:

1. The debt will remain the debt - within the fund and outside.
2. The 'balanced budget' rules once adopted (and in Germanic fashion anything adopted = implemented) will assure no new debt accumulated.
3. Part of the debt above 60% of GDP will be extended in maturity (somehow, there will be 'no credit event' there?)
4. The part of the debt above 60% of GDP will be repayable out of tax revenues (the rest, presumably will be repayable out of  Schaeuble's pension fund?)
5. There will be no common liability - as "an earlier proposal this month from a panel of independent economic advisers to the German government which was rejected as unrealistic by Merkel, envisaged a European Redemption Pact. That proposal, for a fund of up to 2.3 trillion euros, was anathema to Merkel because it suggested pooling excess debt into a fund with common liability." Which means risks of each individual state debt will remain the same within and outside the fund. Just how this will impact sovereign yields begs some explaining.
6. Repayment of debt accumulated in the fund will have, presumably, some priority over other debts. Otherwise, what's the difference if this debt is in the fund or not. If so, what seniority implications will there be for two types of debts - within the fund and outside the fund? If none, there will be no material difference between the two and thus no change on current status quo. If Fund debt were to be more senior (having a first call on repayment by tax revenues) then the remaining debt quality will deteriorate. Implications - the Fund will make things worse, not better, for the sovereigns.

Overall, the whole idea of a Fund can only work if the following are simultaneously true:

1. There is a pooled liability for the Fund-held debts to assure improved ratings (already ruled out).
2. The combined (Fund-held and non-Fund) debts of all countries participating in the fund are jointly and separately sustainable (repayable) and the reason for the Fund creation is solely a short-term liquidity crunch. Note: only in this case future tax revenue will be sufficient to repay debts. But of course we already know that the Euro area problem is that the debts are NOT sustainable in Italy, Portugal, Greece and Ireland, and most likely also unsustainable in Belgium.
3. More indebted countries receive, during the period of repayment, sufficient fiscal transfers to prevent their economies from imploding and thus preventing their unsustainable debts triggering common liability clauses. This might be the case, but how will it go down with the electorates and Governments in surplus countries, over 30 years, one can only wonder.
4. The commitments to new budgetary rules of, say 2% maximum deficit, are fully implemented in real budgetary processes across all member states over the entire 30 years horizon. 

And that's a lot of "if"s, even more "no"s and not a single one "Yes!"...