29/7/2012: Financial Markets Repression

In my recent conversation with Carmen Reinhart, we discussed at length various forms of financial repression to be unleashed onto the public with the coming systemic deleveraging in the US, EU and elsewhere. One of the most prominent topics in our discussion were potential capital controls. And we both agreed that most likely, it will be Eurozone that will be first in the races to impose such. Of course, there are signs of softer version of capital controls within the banking system already present. So much so that Mario Draghi had to identify national regulations as barriers to single market in banking under current conditions.

Never mind. The US Fed is not about to fall behind the curve. And in the latest suggestion for policymakers, the Federal Reserve Bank of New York (Staff Report No. 564, July 2012, linked here) puts forward an idea that "for money market fund (MMF) reform [to] mitigate systemic risks arising from these funds by protecting shareholders, such as retail  investors, who do not redeem quickly from distressed funds... a small fraction of each MMF investor’s recent balances, called the “minimum 

balance at risk” (MBR), be demarcated to absorb losses if the fund is liquidated."

Wait, does this mean that fund investors can face some small share loss imposed onto them because they might be quicker than other investors in exiting or more foresightful enough to spot the fund running into trouble ahead of other investors? Yep, that's right.

"The MBR would be a small fraction (for example, 5 percent)  of each shareholder’s recent balances that could be redeemed only with a delay.  The delay would ensure that redeeming investors remain partially invested in the fund long enough (we suggest 30 days) to share in any imminent portfolio losses or costs of their redemptions.  However, as long as an investor’s balance exceeds her MBR, the rule would have no effect on her transactions, and no portion of any redemption would be delayed if her remaining shares exceed her minimum balance."

And the rationale: "to reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises."


That, folks, is a hell of a capital control proposal.

29/7/2012: One ugly chart

One ugly euro chart:

Nothing new, of course, just an illustration.

29/7/2012: Irish Competitiveness

Unedited version of my Sunday Times article from July 22.

These days, with nearly 15 percent unemployment, and almost 530,000 currently in receipt of some unemployment supports, the minds of Irish policymakers and analysts are rightly preoccupied with jobs creation. Every euro of new investment is paraded through the media as the evidence of regained confidence in the economy. This week, even the insolvent Irish Government got into the game of ‘creating jobs’ with an ‘investment stimulus’.

Alas, economics of jobs creation is an entirely different discipline from the political PR accompanying it. In the real world, some private and public jobs are created on the basis of sustainable long-term demand for skills. Others are generated on the foot of tax advantages and subsidies, including stimulus. In the short run, the latter types of jobs can still yield a positive boost to economic activity. But in the longer run, they are not sustainable and drain resources that can be better allocated to other areas. The ultimate difference between the two types is found in productivity growth associated, or the competitiveness gain or loss generated in the economy.

The prospects of Irish economic recovery have been rhetorically coupled with the improvements in our cost competitiveness since early 2008. And for a good reason. Rapid deterioration in competitiveness in years before the crisis is what got us into the situation where structural collapse of the economy was inevitable.

During the Celtic Garfield era of 2001-2007, Irish Harmonized Competitiveness Indicators (HCIs) have deteriorated by some 26%. Our productivity growth, stripping out effects of MNCs transfer pricing and tax arbitrage, has been running well below the rate of the advanced economies average. In years of the property bubble, Ireland was the least competitive economy in the entire euro area.

Structurally, our lack of competitiveness was underpinned by the labour costs inflation in relation to producer and consumer prices. Consumer costs-related competitiveness indicator for Ireland deteriorated by 38 percent between the end of 2001 and mid-2008, more than one-and-a-half times the rate of deterioration in producer costs-linked measure. Another, even more pervasive and long-term force at play was creation of hundreds of thousands of jobs in the sectors, like building and construction, domestic retail and finance that lagged in value-added well behind the exporting sectors.

This was not a model of sustainable jobs creation. Instead of incentivising investment in real skills and aptitude to work and entrepreneurship, we taught our younger generation to expect a €40-45,000 starting gig in a ‘professional’ occupation or laying bricks at a construction site. Not surprisingly, uptake of degrees in harder sciences and more mathematically intensive fields of business studies slumped, while degrees in ‘softer’ social and cultural studies were booming. The workforce we were producing had a rapidly expanding mismatch between pay expectations, career prospects, and reality of an internationally competitive economy.

Placated by the opportunity to locate in the corporate tax haven, our MNCs were drumming up the myth of the superior workforce with great skills and education. The Government and its quasi-official mouthpieces of economic analysis in academia, banks, and financial and professional services were only happy to repeat the same line.

The crisis laid bare the truths about our fabled competitiveness outside the corporate tax arbitrage opportunities.

Since then, the focus of the Government labour market reforms, in rhetoric, if not in real terms, has been on regaining cost competitiveness. Sadly, this process so far replicates, rather than corrects the very same errors of judgement we pursued before the crisis erupted.

In terms of headline metrics, things are looking up. Our harmonised competitiveness indicator (HCI) has improved by 5% between January 2009 and April 2012 – the latest data available. However, these gains are accounted for by two drivers. Firstly, jobs destruction in the construction and retail sectors has led to rapid elimination of less productive – from economic value-added point of view – activities. Secondly, domestic business activity collapse added price deflation to the equation, distorting gains from any real productivity improvements. Thus, our HCI deflated by producer prices has fallen 7.7% over the above period of time, while consumer prices-deflated HCI dropped 12.5%.

Thus, much still remains to be done on the competitiveness front, especially since deflationary pressures in the economy are no longer rampant. The momentum of gains in competitiveness experienced in 2008-2010 has slowed dramatically and is likely to continue declining.

On the one hand, jobs destruction has moderated markedly, while across the economy overall earnings are rising. Wages inflation in several sectors where skills shortages are present, such as ICT and internationally traded services, now complements declining competitiveness of individual tax policies.

Year on year, Q1 2012 saw average weekly earnings rising in Ireland by 0.7%. Weekly earnings in the private sector went up 1.5% annually, while there was an increase of 2.0% in the public sector over the year. Between Q1 2008 and Q1 2012, average weekly earnings fell 3.5% in the private sector and rose 0.8% in the public sector.

The skills crunch is evident both via the earnings inflation within the larger size enterprises and by occupational categories. earnings of Managers, professional and associated professionals rose 5.7% y/y in Q1 2012 and are now 1.1% ahead of where they were in Q1 2009. Earnings for clerical, sales and service employees are up 2.4% y/y and down almost 2% on 2009.

The real problem with our labour costs competitiveness is that with rising tax burdens it is becoming increasingly difficult to import skills and our system of training and education simply cannot deliver on the growing demand for specialist knowledge. The former problem has been repeatedly highlighted by the indigenous exporters. The latter has been a major talking point for the larger MNCs. The latest example of this is PayPal, whose global operations vice-president Louise Phelan warned this week that Ireland needs to focus on language skills, especially in German, Dutch and Nordic languages “to protect our status as a European gateway”.

Sadly, the Government is listening to the latter more than to the indigenous entrepreneurs.

Reforming education system is a long-term process and should not be tailored to the current demand for narrow skills. Instead, it should aim to provide broad and diversified education base, including leading (not obscure) modern languages, proper teaching of core subjects, such as history, philosophy, arts and sciences.

Such reforms will not have a direct impact on the likes of PayPal’s ability to hire people with very narrow skill sets. Which means that Ireland will have to systemically reduce the costs of importing human capital.

To derive real competitive advantage anchored in sustainable jobs creation and productivity growth, we need to focus on creating the right mix of tax incentives, educational supports and immigration regulations to lower the cost of employing highly skilled workers and increase returns to individual investments in education and training. Let us then leave the job of selecting which areas of study should be pursued to those who intend to succeed in the market place.

Box-out

The CMA Global Sovereign Credit Risk Report for the second quarter 2012 shows Ireland improving its ranking position from the 7^th highest risk sovereign debt issuer in the world in Q1 2012 to the 8^th – a gain that is, on the surface, should signal that the country Credit Default Spreads (CDS) were improving compared to its peers. While Ireland’s CDS have indeed improved during the quarter falling below 600 basis points (bps) in the last two days of June for the first time since the first week of May, in effect Ireland ended Q2 2012 pretty much where it started it in terms of CDS levels. What really propelled Irish rankings gain was the return of Greece to the CDS markets few weeks after the country ‘selective default’. In fact, Ireland’s rate of improvement (by 1 notch) is identical to that of Cyprus and marks below average performance for the group of the highest risk sovereigns. Perhaps even more revealing is the comparative between Ireland and Iceland. The latter is ranked 20^th in the risk league table, improving in Q2 2012 by two ranks. At the end of June, Icelandic 5 year CDS were trading at 290 bps, with implied cumulative probability of country default over the 5 years horizon of 22.9%. Ireland’s CDS were trading at 554 bps with implied cumulative probability of default of 38.6%.

27/7/2012: June 2012 Retail Sales for Ireland - Massive Disappointment

This is a second post on irish retail sales for June 2012. Digging through the numbers, the results released today by the CSO are just short of horrific.

Look at the following two charts:

So Q1 and Q2 2012 have witnessed some of the deepest falls in value and volume since Q1 2010. 

Monthly changes for June were equally bad:

To sum up:

• Value of sales is now at the lowest point since January 2010, m/m decline is the sharpest in 5 months and y/y decline is the steepest since January 2010.
• Volume of sales is at the lowest point since January 2010, and y/y decline is the steepest since December 2009.
• Ex-motor sales, value of sales index is now at the lowest point on record, m/m decline is the sharpest on record.
• Ex-motor sales, volume of sales are at the lowest point on record, m/m decline is sharpest in 5 months.

Not good!

27/7/2012: A thought... for a Happy Friday

Just a thought:

How soon will the Finns be sending a note to Merkel along the usual 'concerned neighbors' lines: "Angie, neighbors here across from de puddle. You've left for a vacation, we know, but yer kid from de Frankfurt is running wild partying. Shouts he'll buy up every lemon from the garage sale across the roundabout, yer know - where de siesta fans live - with mum's credit card. Threattens something about 'giving dem de bank'... Not to be too concerned, ...err... but de Dutch family de other side of de fence is a bit ruffled up by this ruckus... Though the pesky Frenchies the other side of the street are egging yer kid on. Enjoy sunshine, but do give your lad Draghi a buzz there to calm him a bit."

27/7/2012: Irish Retail Sales June 2012 and 'Confidence Fairy Tales'

Irish Retail sales data is out for June 2012. Here are the updates to charts:

In the above:

• The volume of retail sales (i.e. excluding price effects) decreased by 0.7% in June 2012 when compared with May 2012 and there was an annual decrease of 5.5%. 
• If Motor Trades are excluded, the volume of core retail sales decreased by 1.51% in June 2012 when compared with May 2012, while there was also an annual decrease of 1.71% when compared to June 2011.
• The sectors with the largest month on month volume decreases are Food beverages & Tobacco (-9.7%), Hardware Paints & Glass (-4.8%), Fuel (-3.9%). 
• A monthly increase was seen in Electrical Goods (2.9%), and in Books, Newspapers and Stationery (2.6%).
• The value of retail sales decreased by 1.3% in June 2012 when compared with May 2012 and there was an annual decrease of 4.9%. 
• If Motor Trades are excluded, there was a monthly decrease of 2.08% in the value of retail sales and an annual decrease of 0.95%.
• Do note two sub-trend lines showing the complete detachment of Consumer Confidence trend from the Retail Sales trend. That (discussed more below) is probably the real illustration of the so-called 'confidence trick' not working in the real world.

Adding a bit more definition to core sales changes:

• Value of core retail sales (the index I prefer to consider in this environment, as opposed to CSO focus on volume of sales, which tells me preciously nothing about the revenues and employment in the sector) is down 1.57% in June compared to March 2012. 6mo average is now running at 95.4 against previous 6mo average of 95.2. This means that last 12 months we are running below 2010-2011 average of 96.6. 
• Compared to 2005 levels, we are now 5.72% below in value terms.
• Volume is down 0.91% on March 2012 level and 6mo MA is now at 98.65 against previous 6mo MA of 99.5 and 2010-2011 average reading of 101.23.
• Compared to 2005 levels, volume of retail sales is down 2.02%.
• Despite these deep falls, consumer confidence (I should start calling it La-La-La Index) from the ESRI came in up-beat at 62.3 in June up on 61.0. Relative to March 2012, Consumer Confidence apparently rose 2.81% and y/y June Consumer Confidence is up 10.66%. Wow, things are really hotting up, folks. 6mo MA through June is boisterous 60, up on previous 6mo MA of 56.3 and ahead of 2010-2011 average of 57.3. 
• Compared to 2005 average, current Consumer Confidence is up 23.06%.
• To summarize: actual retail sales are down in volume (-2.02%) and value (-5.72%) on 2005 average readings in June 2012, but Consumer Confidence is up 23.06%. 

Unlike ESRI's Consumer Confidence indicator, my own Retail Sales Activity Index posted contraction in June, in line with twin fall-off in retail sales in volumes and value:

27/7/2012: Some thoughts on Draghi's thoughts

Just two reactions - reflective of the markets sentiment - to yesterday's statements by Mario Draghi:

Markets are thin, as Europe slides into its annual 'Beach lounge & sun screen' mode, but nonetheless yesterday's statement by the ECB chief is significant. Not a game changer overall, yet, but a sign that the team captain is starting to see the problem more clearly.

So what did he really say?

1. Raised a possibility of direct bonds purchases for distressed sovereigns (read: Italy and Spain) - in my opinion a minor issue. Take Spain - from now through mid-2015 it will need €542 billion to roll over existent bonds and fund itself, plus €20 billion potentially in regional financing. ECB's hands are currently relatively tied when it comes to rescuing Spain by the fact that two out of three tools ECB can use to do so are ineffective if not damaging to Spain. Usual policy tool of lowering interest rates will have little-to-no impact on Spain which is suffering from the same breakdown in the monetary policy transmission mechanism as the rest of the euro zone. Draghi hinted at as much within the overall euro area context. ECB can use the LTRO3 tool. Alas, (1) this would mean that LTRO3 will be explicitly focused on financing sovereign (as opposed to banking sector) needs; (2) financing Spanish Government via LTRO3 would only increase contagion from the sovereign to the banks and back to the sovereigns; (3) Unable to issue LTRO to a specific country, the ECB is likely to risk even more carry trade and contagion across the euro zone as the result of such a move. So the only tool left is SMP. ECB has built up some back pressure here with no SMP purchases in 19 weeks, hence the trigger reaction yesterday to Draghi's statement, but I have severe doubts this will work, even if restarted as the scope for SMP purchases for Spain would be well under €75-80 billion - a drop in the funding requirement.
2. Noted that elevated sovereign yields can restrict the monetary policy transmission mechanism (presumably via the heightened liquidity trap effects and carry-trade incentives), which would bring them within the ECB mandate. This is consistent with his statement to the EU Parliament earlier this month where he stressed that both inflation and deflation are part of the ECB mandate. More specifically, Draghi said that "The short-term challenges in our view relate mostly to the financial fragmentation that has taken place in the euro area... Investors retreated within their national boundaries. The interbank market is not functioning... the key strategy point here is that if we want to get out of this crisis, we have to repair this financial fragmentation... So [first] regulation has to be recalibrated completely." In other words, Draghi sees regulatory, not balancesheet barriers to interbank lending (and thus regulatory causes of a liquidity trap). Fine, but that does not mean a short-term response on the cards. And it does not mean a major departure from the previous position of the ECB that regulatory fix must be applied ahead of monetary fix.
3. Spoke about the fact that the ECB mandate is too restrictive to deliver effective monetary policy - again re-iteration on his statement to the EU Parliament and potentially a clear signal the ECB would not mind if its mandate was expanded. Yesterday, Draghi went further to link the ECB unbalanced mandate to the ECB's ability / willingness to act in the sovereign bond markets. This is what referenced in the quote that the ECB is 'ready to do whatever it takes' to preserve the euro. But the quote contains much more than that: "...another dimension to this that has to do with the premia that are being charged on sovereign states borrowings. These premia [relate to] default, with liquidity, but they also have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty – they come into our mandate. They come within our remit." FTAlphaville has a good note on the convirtibility bit (here).

In short, I don't read Draghi's statement as a major and definitive turnaround in the ECB policy, but rather a continued sign of ECB drift toward pressuring both: 

• the markets sentiment, and 
• the euro area policymakers to act to increase ECB powers and/or carry out significant policy framework changes (ESM, banking union etc).

Continued is the key word here, because, in my view, yesterday's statement is not as divorced from the earlier Draghi comments as some analysts might suggest (or wish for).

These pressures, however, is an important component of policy drift across the euro zone. Leaderless Europe needs a jolt from the ECB to force it out of policy stalemate. That such an approach might be working is reflected in this latest report from the 'front'.

27/7/2012: Ireland's Institutional Accounts Q1 2012

Some positive news on the economy front: Q1 2012 Non-Financial Quarterly Institutional Accounts are out today from CSO (link) and headline numbers showing no significant deterioration and even improvements in areas that do matter, except for the one that matters most to Government plans for the future.

The text below mostly quotes from CSO release linked above, with my comments in italics:

Point 1: The gross disposable income of households was €21,986m in Q1 2012 – an increase of €771m or 3.6% y/y.

This was driven by wages rising by +€170m and profits increases for the self employed of +€365m. Lower interest repayments on loans of -€272m further increased gross disposable income.

Point 2: Household expenditure fell marginally by €9m in Q1 2012 compared to Q1 2011 to €19,361m.

Point 3: Points 1 and 2 above mean that gross household savings increased from €2,439m in Q1 2011 to €3,209 in Q1 2012. The gross savings ratio, which expresses savings increased from 11.2% of gross disposable income in Q1 2011 to 14.2% in Q1 2012. Meanwhile, consumption of fixed capital by households fell from €1,056m in Q1 2011 to €1,037m in Q1 2012, and overall deficit in capital account for the households was shallower at -€154m in Q1 2012 as opposed to -€296m a year ago. This suggests that while deleveraging is still on-going, the rate of capital paydown has slowed slightly. In other words, households have slowed deleveraging and potentially increased capital acquisition. Albeit both effects are very small, these are welcome, if confirmed.

Point 4: An increase in current taxes of €673m between Q1 2011 and Q1 2012 was slightly offset by a fall of €312m in social contributions over the same period, resulting in an increase of €361m in the resources side of the government account.

Point 5: On the uses side of the account social benefits paid by government increased by €289m.

Point 6: Combining Points 4 and 5, the government savings deficit (resources less uses) showed an improvement of €125m – up from -€3,700m in Q1 2011 to -€3,575 in Q1 2012.

Point 7: When account is taken of investment and capital transfers, the net borrowing of the government sector amounted to €4,182m in Q1 2012 compared with €4,489m in Q1 2011.

Point 8: combining Points 4-7: in the nutshell, taxes went up faster than spending went up and voila we are ‘doing less worse’.

Point 9: A major bit: the rest of the world recorded a surplus of €994m with Ireland in Q1 2012 so that Ireland recorded a current account deficit with the rest of the world compared with a surplus of €1910m in Q1 2011. A swing of €2,904m in the wrong direction. Recall that per economics gurus of Green Jersey type, current account surpluses are the only hope for Ireland’s recovery. Oops…

26/7/2012: Soft Skills - Survey of Evidence

A superb survey of the literature on soft skills (major component of human capital) published by IZA (DP No. 6580 May 2012) and written by my old prof: James J. Heckman and Tim Kautz, titled "Hard Evidence on Soft Skills". H/T to Professor Liam Delaney for spotting the paper.

The paper summarizes recent evidence on 

• what achievement tests measure; 
• how achievement tests relate to other measures of “cognitive ability” like IQ and grades; 
• the important skills that achievement tests miss or mismeasure, and 
• how much these skills matter in life. 

Core conclusions are: 

• Achievement tests miss, or perhaps more accurately, do not adequately capture, soft skills – personality traits, goals, motivations, and preferences that are valued in the labor market, in school, and in many other domains. Incidentally, this is straight confirmation of the Nozickian bais (see here).
• Ssoft skills predict success in life, causally produce that success, and 
• Programs that enhance soft skills have an important place in an effective portfolio of public policies

Awesome to see this work summarized.

24/7/2012: Residential Property Price Index for Ireland, June 2012

So that 'stabilization' in Irish property markets on foot of 0.2% rise in May in the Residential Property Price Index (RPPI) turned out to be just the statistical noise? Looks increasingly so to me. The latest data from CSO is bleak:


"In the year to June, residential property prices at a national level, fell by 14.4%. This compares with an annual rate of decline of 15.3% in May and a decline of 12.9% recorded in the twelve months to June 2011."

Overall residential property prices "fell by 1.1% in the month of June. This compares with
an increase of 0.2% recorded in May and a decline of 2.1% recorded in June of last
year."

Dublin - the 'bright spot of the previous months for the 'green jerseys' hopes on recovery in the property markets has recorded a fall of 1% m/m in June and a 16.4% decline y/y.


"House prices in Dublin are 56% lower than at their highest level in early 2007. Apartments in Dublin are 62% lower than they were in February 2007. Residential property prices in Dublin are 57% lower than at their highest level in February 2007. The fall in the price of residential properties in the Rest of Ireland is somewhat lower at 47%. Overall, the national index is 50% lower than its highest level in 2007."


Charts updates and forecasts later today, so stay tuned.

23/7/2012: Eurozone, Greece and the IMF - Part 2

On foot of my previous post on Greece and the IMF, the Fund has issued the following statement, quoted in full:

"We have received a number of inquiries related to the Der Spiegel report on Greece. You can attribute the following to an IMF spokesperson:

“The IMF is supporting Greece in overcoming its economic difficulties. An IMF mission will start discussions with the country’s authorities on July 24 on how to bring Greece’s economic program, which is supported by IMF financial assistance, back on track.”"

Key words here are "...to bring Greece's economic programme... back on track" which is a de facto admission by the Fund that the programme is 'off track' now. Another key issue with the statement is that it does not directly reject the claims made in Der Spiegel that the IMF is considering exiting the programme funding Greece.

Now, here's a problem the Fund is facing: it has two options now:

1. Admit that the programme is off track and hope that meetings with Greek authorities will put it back on track via some new additional measures to deliver more savings. In which case Greece buys few months more until that new sub-programme gets off track again, or
2. Admit that the programme is off track and cannot be restored to any reasonable level of performance. In which case the Fund must exit the programme.

Economically, (2) is the only rational choice. Politically (1) is the only feasible option. 

So long and thanks for all the fish, as they say...

23/7/2012: Eurozone, IMF and Greece

One must treat seriously the possibility that Greece will see its funding from the IMF cut-off or suspended. For a number of reasons, extending well beyond the simple financial arithmetics of aid.

Here are the details of the report.

Assuming the report is true, the questions it raises are:

• Validity of the Troika assessment during the structuring of the 'aid' packages: Greece received two 'bailouts' including a partial debt restructuring. Both packages were heavily criticised during their structuring as being insufficient in scope and excessively restrictive / ambitious in terms of fiscal adjustments required. In all cases, Troika rejected any criticism and pursued adjustments as planned.
• Validity of the Troika monitoring: since May 2010, there were ample signs that Greece will not be able to deliver on the 'bailouts' targets due to: (1) political constraints, (2) lack of real policy enforcement by Troika, (3) structural economic failures in the economy incapable of generating growth, (4) nature of the 'bailouts' that did not correct for debt overhang, and (5) social breakdown within the Greek society. Yet, the Troika continued to insist on compliance with the programmes that were clearly misfiring.
• Validity of the Troika assessments: since May 2010 numerous Troika reports were issued, all in effect (albeit with caveats) confirming that the programme in Greece was 'on track'. There was not a single report that sounded an outright alarm. Prior to each report publication, Greece was pressured to deliver on targets, with some marginal noises from the Troika that the programme is at risk. However, every tranche of loans was delivered in the end. With every bogus report being published, Greek authorities and international markets received a wrong and purposefully deceitful signal that no matter what, Greece will be provided loans to cover its ongoing obligations.
• Validity of the Troika capacity to design functional economic programmes: since May 2010, Greek economy continued to accelerate in the rates of decline - as measured by growth, unemployment, and growth components metrics. Objective assessment of the Greek situation can only conclude that an outright and full default on the country debts back in 2010 would have by now corrected the major debt imbalances and most likely restored economy to some positive expansion path. Objective assessment of the Greek situation also clearly shows that the Troika measures have not only failed to do this, but actually made the situation far worse.

Now, given that the Troika programmes for Greece were effectively driven by European, not the IMF, structuring, the questions above clearly reinforce the view of the EU authorities as being (a) incapable of economic policy formation, (b) unwilling to be honest and transparent in the assessment of the economic, political and social conditions in the member states, and (c) completely out of touch with reality of what is happening within a member state.

And at this stage, the IMF is left with few options but to present this exact assessment of the situation to the EU counterparts in a hope that they wake up and smell the roses. Unfortunately, to do so would require the IMF to exit the programme of assistance to Greece. Doing so might rescue the IMF reputation. Or it might not. But doing so will also clearly expose the EU's failure, with implications not only for Greece, but also for the rest of the euro area 'periphery'. Contagion will, therefore, be carried over straight to Spain and Italy - the heart of the EU core.