Greeks Taking Money from Banks to Store in Garages: No End to EU Crisis

As I've argued before, EU leaders have shown very little evidence that they are capable of taking the bold steps necessary to contain the crisis. Italy and Spain's continuing troubles show that markets have no faith in these band-aid measures and that they next crisis is not too far off. A recent article in the Guardian about a silent bank run in Greece is scary:

In May alone, almost €5bn (£4.4bn) was pulled out of Greek deposits, as part of what analysts describe as a "silent bank run". This version is also disorderly and jittery, just not as obvious. Customers do not form long queues outside branches, they simply squirrel out as much as they can.

One senior investment banker [said]: "People are scared that the government doesn't know what the fuck it's doing." He tells a story about an acquaintance who took out €30,000, wrapped it in a bag and stashed it in his garage. "The bag had previously had some food inside," he says. "So it attracted rats, who ate the notes."

These sorts of stories remind one of the Great Depression and it is incredible to read about it happening so close to home in this day and age.

US Cities Compares to Countries: Ireland Ranks Above Minneapolis and Detroit

From an interesting report comparing GDP of countries against gross metropolitan product of the large cities in the US ($$s in billions):

Rank Country or Metro Area 2010

1 United States 14,660.4

2 China 5,877.2

3 Japan 5,462.6

4 Germany 3,297.7

5 France 2,554.5

6 United Kingdom 2,241.9

7 Brazil 2,088.0

8 Italy 2,046.9

9 India 1,607.6

10 Canada 1,574.1

11 Russia 1,479.3

12 Spain 1,405.4

13 New York-Northern New Jersey-Long Island, NY-NJ-PA 1,282.6

14 Australia 1,232.5

15 Mexico 1,040.1

 

Ireland ranks 56th on the list, below NY, LA, Chicago, Washington DC, Houston, Dallas, Philadelphia, San Francisco, Boston, Atlanta, Miami, and Seattle, and just above Minneapolis and Detroit. Here's a map showing how some countries compare, via the Atlantic:

 

Ireland Gets Lower Rates on Bailout in EU Deal on Greece, But Default Still Possible?

The Irish newsmedia is reporting that Ireland will benefit from the new bailout agreement being hammered out at the EU summit. These reports seem to have more finality than is discernible from the leaked draft of the announcement. I looked at the draft and here are some key provisions with my comments in blue:

We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole. We also reaffirm our determination to reinforce convergence, competitiveness and governance of the Euro area.

Nothing new here as a matter of policy, they've repeatedly stated a commitment to the euro. The real consequences will depend on follow up action in new legal instruments.

We have decided to lengthen the maturity of the EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent to those of the Balance of Payment facility (currently approx. 3.5%) without going below the EFSF funding cost. This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme, including through collateral arrangements where appropriate.

...

Structural funds should be re-allocated for competitiveness and growth under a European "Marshall Plan".

Greece is in a uniquely grave situation in the Euro area. This is the reason why it requires an exceptional solution. The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options ...

EU leaders know that absent a bold plan, the contagion risk is very real. That might explain the Marshall Plan language. It is plainly a ploy to set up an exceptional situation to justify the extraordinary measures and to separate Greece from other countries like Ireland and Portugal. In the end it might be all talk and the markets may not be persuaded that Greece is all that different.

All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of Statesor Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole.

This is once again a ploy to allay contagion fears and to reassure markets that Ireland and Portugal will not default. Does a statement of this sort really mean that Ireland will not default? Or that the markets will discount the likelihood of that happening? Given recent experience, it will take a lot more than words and a selective default by Greece might well signal a likelihood of Ireland doing something similar notwithstanding this "inflexible determination" to honour its commitments. Words alone from a sovereign are worth very little, especially given the track record in this area.

We welcome the progress made on the implementation of the programmes in Ireland and Portugal and reiterate our strong commitment to the success of these programmes. The EFSF lending conditions we agreed upon for Greece will be applied also for Portugal and Ireland. In this context, we note Ireland's willingness to participate constructively in the discussions on the Consolidated Common Tax Base draft directive (CCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ pact framework.

The troika's recent review said as much about Ireland, but the markets did not pay a lot of positive attention. And there is the recent downgrade to junk status suggesting that Ireland is not being rewarded for its belt-tightening. The CCTB language was probably to appease Sarkozy and signals that Ireland is continuing to receive pressure in this area despite its best efforts at resisting tax harmonization.

All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest. In this context, we welcome the budgetary package recently presented by the Italian government which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in 2014.

These commitments are not new. The EU has looked away in the past when states including Ireland ran up deficits several times the permissible limit. What is needed is enforcement, and binding legal commitments that entail monitoring. One can expect the Germans to be more aggressive than they have been in the past as these mechanisms are fleshed out.

We look forward to the rapid finalization of the legislative package on the strengthening of the stability and growth pact and the new macro economic surveillance. Euro area members will do their utmost to help reaching agreement with the EP

We commit to introduce legally binding national fiscal frameworks as foreseen in the fiscal frameworks directive by the end of 2012.

As I wrote previously in the Wall Street Journal, the original Greek bailout is illegal. This summit statement is an acknowledgement of that reality. One hopes that the EU comes up with a legal framework that allows for transparent mechanisms to address such situations as they arise.

We agree that reliance on external credits ratings in the EU regulatory framework should be reduced, and look forward to the Commission proposals in this respect.

This is pure hogwash. The EU is living in la-la land if it thinks it can ignore market credit ratings and bully ratings agencies into hiding the truth. While the ratings system has many faults, these agencies have been willing to tell uncomfortable truths on sovereign credit. That might not please the politicians but it has kept them from selling us whoppers.

The full draft announcement is available here. My article calling for a hybrid conservatorship for Greece is available at Huffo here.

Ban on Repossessions Delaying Inevitable?

Repossession orders are down according to the latest figures in the Independent, dropping from 985 to 583 during 2010. The Irish Times also has a report on the topic noting "an increase of 65 per cent in applications for judgment mortgages" in the Circuit Court over 2009. Similar actions increased 128% in the High Court.
Unsurprisingly, there were 13,613 debt judgments in the Circuit Court during 2010 (up 25%), and 30,000 in the District Court.
The report also notes that "[t]he High Court dealt with 3,207 debt-recovery cases, up 28 per cent on 2009. The District Court issued 1,564 ejectment orders last year, up 76 per cent on the previous year. There has also been a trebling in bankruptcy cases in the last two years, with 29 bankruptcies granted in 2010 compared to eight in 2008."

Given the state of the economy, how many of those currently in arrears are likely to avoid repossession after the 12 month moratorium? This policy is just kicking the can down the road and preventing the market from achieving the necessary correction. No one wants to see neighborhoods blighted by empty repossessed homes but setting up this artificial situation with a repossession embargo cannot be a good idea.

EU Finance Ministry?

Mr. Jean Claude Trichet, President of the ECB, delivered a speech yesterday in Aachen proposing the establishment of a finance ministry for the EU. Some key points from his speech:
Would it go too far if we envisaged, at this second stage [when member states fail to restore stability] , giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged?

The rationale for this approach would be to find a balance between the independence of countries and the interdependence of their actions, especially in exceptional circumstances.
...
We can see before our eyes that membership of the EU, and even more so of EMU, introduces a new understanding in the way sovereignty is exerted. Interdependence means that countries de facto do not have complete internal authority. They can experience crises caused entirely by the unsound economic policies of others.
...
In a long term historical perspective, Europe – which has invented the concept and the word of democracy – is called to complete the design of what it already calls a “Union”.
...
In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union?

Not necessarily a ministry of finance that administers a large federal budget. But a ministry of finance that would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a “second stage” inside the euro area; second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services; and third, the representation of the union confederation in international financial institutions.

Trichet's remarks are not entirely surprising. Virtually everyone has known for quite a long time now that the EU project is fundamentally flawed and that a monetary union alone is not sustainable when you have states as disparate as Greece and Germany trying to walk lockstep. The present approach whereby the EU seeks to fix problems in Greece, Ireland, Portugal etc with bandaid, with wishful thinking to back it up, was never going to be a satisfactory solution in the long term. Something has to give and Mr. Trichet's solution is one logical solution if deeper integration is the objective. However, the speech illustrates the vast gulf between Europhiles like Trichet and those who live more modest lives in the member states. From the evidence of recent elections and opinion polls, citizens in bailout recipient states and bailout donor states alike resent the EU and the popular mood is very much against further dilution of national sovereignty. The last thing anyone wants is more power for unaccountable EU bureaucrats.

Notwithstanding the earnest desires of Europhiles, the United States of Europe might be quite a long distance away.

Iran Setting Up "National Internet"

No, I did not make this up.

The WSJ reports that Iran is taking steps toward an aggressive new form of censorship: a so-called national Internet that could, in effect, disconnect Iranian cyberspace from the rest of the world.

The leadership in Iran sees the project as a way to end the fight for control of the Internet, according to observers of Iranian policy inside and outside the country. Iran, already among the most sophisticated nations in online censoring, also promotes its national Internet as a cost-saving measure for consumers and as a way to uphold Islamic moral codes.

Anyone believing recent proposals for benign Internet regulation at the G8 level might want to read the full article.

Extravagant Pay at IMF and World Bank

Richard Pollock has an excellent piece about the cushy entitlements of those who work in the IMF and World Bank:
A PJM survey found that a common annual compensation package for senior management at the anti-poverty banks exceeds $500,000 — tax-free. World Bank President Robert Zoellick currently receives $441,980 in base salary and $284,500 in other benefits. Strauss-Kahn’s deputy, John Lipsky, receives $384,000 in base salary plus “living allowances.”

... the IMF and World Bank payments for their executives are three times the annual salary for U.S. Federal Reserve Chairman Ben Bernanke, and four times the salary of America’s Federal Reserve governors: Bernanke’s gross annual salary is set at $199,700; his governors receive $179,000.

The global banks’ stratospheric governmental salaries are not limited to chief executives. Ten of Zoellick’s deputies receive tax-free base pay of $321,00 to $347,000, plus enjoy an additional $210,000 in benefits. Even mid-level World Bank employees earn well into six digits: the average salary for a professional manager is $181,000, plus $97,000 in benefits. A senior adviser receives on average $238,000 plus $127,000 in benefits. A vice president receives $286,000 plus $153,000 in benefits.
The biggest hidden benefits are the off-the-book perks called “living allowances.” These perks can nearly double a stated salary. Of the 2,600 IMF and 10,000 World Bank full-time employees, all receive some form of supplemental living allowances in addition to their base pay. These include home leave grants, dependent allowances, travel perks, and education “grants” for their children to attend private schools.


It must be easy to lecture client states on pay cuts etc when you are living the good life! Read the full article here.

NAMA Constitutional

The High Court has just issued judgment in the case of Dellway Investment Ltd & Ors v. National Asset Management Agency, rejecting a constitutional challenge to NAMA. Detailed analysis of the judgment will follow after a more thorough reading of what looks like a well reasoned decision. For now, here is a brief extract:

The Court is of the view that the creation of NAMA, as permitted by the Act in the manner interpreted by the Court, is a reasonable and proportionate policy response to the problems which the Act seeks to address. It was, in the Court’s view, possible for the Oireachtas to conclude that impairing any rights which borrowers might have to any lesser extent, by either restricting NAMA’s acquisition powers to impaired loans or loans connected with impaired loans, or by delaying the NAMA acquisition process by putting in place an entitlement on the part of borrowers to be heard, or both, would not have achieved, to a sufficient extent, the ends of the Act. In those circumstances, the Court is satisfied that the Act meets the proportionality test. 

... the definition of possessions for the purposes of the ECHR is, if anything, narrower than the scope of property rights which may be afforded constitutional protection under the Irish Constitution. Two consequences seem to the Court to flow from that conclusion. First, it follows that the Court is of the view that there has been no interference with the rights of Mr. McKillen as guaranteed by the ECHR for those rights are, at a minimum, no more extensive than the rights guaranteed by the Irish Constitution which the Court has already determined have not been infringed. Second, the approach of the ECtHR lends reinforcement to the view which the Court has already expressed which is to the effect that property rights of a contractual or goodwill nature are required to be legally enforceable (or at least in the Irish context analogous to being legally enforceable) before those rights achieve the status of being constitutionally protected.

Conclusions
10.33 Given the Court’s view, as already expressed, that the Act does not interfere with any constitutionally protected rights of Mr. McKillen, it follows that, in any event, the Act is not inconsistent with the Constitution by reference to Mr. McKillen’s rights. Even if the Court’s analysis of the interference by the Act with Mr. McKillen’s rights is incorrect, it does not seem to the Court that any such interference could be placed at a very high level for all of the reasons which were addressed in the section of this judgment in relation to fair procedures. Even if the Court is wrong in its view that no constitutionally protected rights of Mr. McKillen are interfered with, then that analysis must, at a minimum, lead only to a conclusion that any interference with his rights is on the lower end of the scale.
10.34 For the reasons which the Court has already set out, the problem needing to be addressed is at the very highest end of the scale. In addressing the proportionality between those two matters (that is the scale of the problem and the minimal interference (if any) with Mr. McKillen’s rights), it does not seem to the Court that any such interference as might be said to derive from the absence of an impairment requirement and the absence of a right to be heard, can be said to infringe the principle of proportionality.

Anglo's David Drumm in the Independent: It's Not My Fault

David Drumm, former CEO of Anglo Irish Bank, is interviewed by the Independent here. His remarks give a good indication of the line likely to be taken by potential defendants - if the state ever gets around to prosecuting anyone. Here are some choice quotes:

I obviously can't accept responsibility for how the bank has been managed since, and I'll say no more on that. The issue I have is that the whole worldwide banking system collapsed in 2008, and it wasn't just one bank. A lot of people share responsibility, but Anglo has taken the brunt of it.
... we made a decision in 2004 to reduce our land and development exposures, particularly in Ireland, because right at that time we saw intense competition coming in from other banks, we saw land prices going up a ridiculous rate, and we made a conscious decision to pull back from it. We failed to execute on our own plan, and we never pulled back.

That was because of the strength of the relationship, we just had very strong, longstanding relationships with our borrowers and we couldn't stand back from them. If I think back about that time and what we could have done differently. . . I can't get away from thinking about that quite frankly. You know, 2008 was just a nightmare year, just a perfect storm of everything going wrong. We had the Quinn stake which created massive funding problems because of the uncertainty they created for the bank. We had short sellers who were being fed by the Quinn stock because we had the highest availability of stock in the market at one stage. So our stock was available to borrow, and short sellers need to be able to borrow stock. And ours was cheap to borrow because there was so much of it. They were shorting us. They were sowing rumours. The world around us was in a very negative state anyway, and banks everywhere, everywhere, were going bust.

Every day the media were asking which bank was going to go bust next. And if you think about it, what bank could survive that? By this stage, we tried our absolute best. We were having daily board meetings, and sometimes two board meetings a day. But I will say this: every step we took was hand in hand with our own [Financial] regulator, the Central Bank, and what really gets me now is the same people -- most of them are still there -- and their political bosses are trying to disown us. And if I'm going to take responsibility for my role, they must take responsibility too.
I would say in my own defence, that (as Anglo chief executive) I acted at all times in the interests of the bank and not only with the knowledge, but with the full co-operation and backing of our Financial Regulator and the Central Bank, and obviously with proper legal advice wherever it was required."

... the spin out there is that there were all sorts of hidden losses on the books and reckless lending and so on and so forth, which just totally ignores the fact that the market began to melt really badly in early 2009, which has created some of the issues for all the banks.

The Government has to decide which poison it wants to take. Did it agree with our accounts in 2008? I presume it did because it signed them. Or did they sign the accounts knowing that those accounts were misleading? You have to choose one. The next thing I would say is the horrendous losses that have been reported for the bank breaks out into two categories. There are the losses created through the transfers to Nama, and there are the ones that didn't go into Nama that would have occurred anyway because of the meltdown in the economy. Anglo, as a bank, was forced to sell half its loan book at a 50 or 60 per cent discount and the losses that transaction created were €22bn. So, in other words, that was a choice to create that loss. Anglo is now reported as having the biggest losses of any bank in the world. Does that seem right to you?

Is Taoiseach Brian Cowen Overpaid?

It depends. As this chart from the Economist shows, he is certainly paid far more as a ratio of pay to GDP/person than the leaders of Britain, China and India, but not as much as those of Kenya, Indonesia and Singapore. The leader of Singapore probably deserves every penny but one wonders about Kenya and Indonesia. Manmohan Singh is definitely a very good bargain for India!

Spain Following Greece?

Greece's government did the country no favours by issuing constant denials and contradictions when decisive action was needed. The Prime Minister repeated over and over again that his country did not need a bailout only to be shown up by later events. Ultimately, he had to eat a large dose of humble pie and take unpopular measures to address the underlying problems.

Now Spain seems to be following the same script. Via the NYT:
On Friday, Spain suffered another downgrade of its debt even as calls were increasing for early elections after the close budget vote. Together, the two events suggest to political leaders throughout Europe that voters and investors are fed up with the lack of resolve and leadership in dealing with the economic situation.

“The government made a real mistake in being late in recognizing this crisis and continues to make a mistake in the ‘drip by drip’ measures to solve it,” said Jordi Sevilla, one of Mr. Zapatero’s former ministers. “You can only get credibility by presenting one strong and coherent package.”
Coming up with something strong and coherent that would satisfy all the various constituencies is no easy task. And Mr. Zapatero is under pressure from all sides.
In light of the international rescue package for Greece, investors want Spain to demonstrate that it can cut its bloated deficit fast enough to avoid emergency aid. Given the size of the Spanish economy, a rescue would be much more costly than the Greek bailout. Yet a debt default or severe restructuring would be even worse, crippling foreign banks whose lending underpinned Spain’s debt splurge.
...
In neighboring Portugal, the main rival parties recently agreed on an austerity package, but in Spain the Popular Party voted against spending cuts last week, without convincing most analysts that it had anything better to offer.

With 25 billion euros in refinancing coming due in July and with Spain’s cost for issuing new debt now elevated by more than a full percentage point, Mr. Campa acknowledged that even the government’s best efforts may not appease impatient investors.
“We have to get ahead of the curve for the markets,” he conceded.

Fitch downgraded Spain's credit rating last week to AA+. The question is whether Spain's leaders will heed this message and swallow the bitter pill or continue with a drip-drip system of puny reforms. Recent incidents have proved that nothing short of decisive action on a massive scale will suffice to give markets confidence. Let's hope Spain got that memo.

Conservatorship for Greece?

Although not an exact analogy, Fannie Mae and Freddie Mac - the twin towers of mortgage finance in the United States - were placed into conservatorship to ensure their survival. Why not follow that model for Greece?

Conservatorship is designed to stabilise the enterprise and keep it afloat. Debts are backed up and management is replaced. The systemic risks presented by the collapse of Fannie and Freddie necessitated government intervention going beyond the injection of money. These GSEs had been hobbled by poor leadership and even poorer oversight for years. Seizing control was the only option. Treasury Secretary Paulson's move was a bold one because Fannie and Freddie had maintained all along that they were adequately capitalized and satisfied regulatory requirements. They also had powerful backers on Capitol Hill.

Greece is not too dissimilar. Merely loaning money - bilateral or multilateral - may not be enough given what we know about the quality of governance and financial reporting in that country. Having been led up the garden path about single digit deficits only to be shocked with the 12.7% of GDP deficit figure, the EU must exercise extreme caution before crafting any rescue plan.

Read more here.

US House Approves Healthcare Reform

In a major victory for President Obama and Speaker Nancy Pelosi, after weeks of what seemed like interminable opposition, the US House of Representatives finally passed healthcare reform yesterday. This is a defining moment in Obama's presidency, and indeed in US history. Here's what the NYT has to say:
With the 219-to-212 vote, the House gave final approval to legislation passed by the Senate on Christmas Eve. Thirty-four Democrats joined Republicans in voting against the bill. The vote sent the measure to President Obama, whose yearlong push for the legislation has been the centerpiece of his agenda and a test of his political power.
On a sun-splashed day outside the Capitol, protesters, urged on by House Republicans, chanted “Kill the bill” and waved yellow flags declaring “Don’t Tread on Me.” They carried signs saying “Doctors, Not Dictators.”

Inside, Democrats hailed the votes as a historic advance in social justice, comparable to the establishment of Medicare and Social Security. They said the bill would also put pressure on rising health care costs and rein in federal budget deficits.

Mr. Obama celebrated the House action in remarks at the White House.

“We pushed back on the undue influence of special interests,” Mr. Obama said. “We didn’t give in to mistrust or to cynicism or to fear. Instead, we proved that we are still a people capable of doing big things.”
“This isn’t radical reform,” he added, “but it is major reform.”

After a year of combat and weeks of legislative brinksmanship, House Democrats and the White House clinched their victory only hours before the voting started on Sunday. They agreed to a deal with opponents of abortion rights within their party to reiterate in an executive order that federal money provided by the bill could not be used for abortions, securing for Democrats the final handful of votes they needed to assure passage.
Winding up the debate, Speaker Nancy Pelosi said: “After a year of debate and hearing the calls of millions of Americans, we have come to this historic moment. Today we have the opportunity to complete the great unfinished business of our society and pass health insurance reform for all Americans that is a right and not a privilege.”
The health care bill would require most Americans to have health insurance, would add 16 million people to the Medicaid rolls and would subsidize private coverage for low- and middle-income people, at a cost to the government of $938 billion over 10 years, the Congressional Budget Office said.

The bill would require many employers to offer coverage to employees or pay a penalty. Each state would set up a marketplace, or exchange, where consumers without such coverage could shop for insurance meeting federal standards.

The budget office estimates that the bill would provide coverage to 32 million uninsured people, but still leave 23 million uninsured in 2019. One-third of those remaining uninsured would be illegal immigrants.

Paddywhackery

You can read my piece in the WSJ about Paddywhackery and what EU states can learn from Ireland here.

My Irish Independent article on mortgage defaults

The article was expanded from this blog post. Here's a taster:
A mortgage default crisis lurks underneath the surface. Yet all we hear is talk. Cheap talk about a government bailout, without concrete action, only creates incentives for borrowers to defer payments in the hope of a better deal, hastening a crisis.

Half measures like the mortgage relief plan and suspension of repossessions won't work. President Obama's $75bn (€55bn) rescue plan did not stop 2.8 million foreclosure filings in the US in 2009. Band-Aid cannot stop arterial bleeding. Emergency procedures are needed.

Here's why. An estimated 200,000 Irish mortgages are under water.

Monthly payments are significantly in excess of prevailing market rents for similar properties, meaning that the payments are good money thrown after bad. It makes little economic sense to continue to make these high payments when many borrowers can ill afford them.

You can read the full article here.

My Big Fat Greek Op-Ed

The Wall Street Journal published my op-ed on the Greek bailout today. Here's an extract:
The details might still be uncertain, but the European Union appears determined to bail out Greece. The problem, though, is that such a move would be illegal.

To be sure, Greece needs help to prevent the contagion of sovereign-default risk to the other euro-zone countries with special borrowing needs—commonly referred to as PIIGS (Portugal, Ireland, Italy, Greece, and Spain). But the EU should not and cannot be the knight in shining armor. That role belongs to the IMF.

The Treaty of the European Union makes it illegal for the EU as a whole and for individual member states to come to the rescue of EU countries in financial trouble. Article 125 clearly says that the "Union shall not be liable for or assume the commitments of central governments . . . or public undertakings of any member state." Likewise, "a member state shall not be liable for or assume the commitments of central governments . . . of another member state" In order to prevent moral hazard, the treaty unequivocally rejects any wealth transfers to reward the spendthrifts.

Proponents of a bail-out for Greece, though, point to article 122 as the legal justification for the EU to act.

Read the full article here. In the original draft, I had also pointed out that article 123 presents difficulties for those who support a bailout. That provision states:
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
 
Previous blog posts on the Greek crisis can be found here, here and here.

Greece Bailout Roundup

I'll have more to say about the Greek bailout in the coming days but here is some reading material for now:

• Economic government: Wolfgang Schäuble, Germany's finance minister, has asked officials to prepare a plan in time for a summit of EU leaders on Thursday, according to reports in the German media. The options include either a loan from EU states or some sort of institutional EU response. Germany's apparent backing for a bail-out comes despite worries that it will lead to the breakdown of fiscal discipline across the Club Med region. It also raises troubling questions of fairness. Ireland has tackled its own crisis by slashing wages and going far beyond any measure so far offered by Greece, yet Dublin has not received help. Germany's dramatic shift in policy changes the character of the euro project. It follows weeks of soul-searching in Berlin, and after increasingly loud pleas from Brussels, Paris and southern capitals. The deciding factor was concern that letting Greece fail risked a "Lehman-style" run on Club Med debt, with systemic spill-over across Europe.
• European Finance Ministers under pressure: After European leaders made pledges of support for Greece last week that stopped short of committing public funds, investors are looking for greater detail, as well as clues to whether an agreement on Greece could also be applied to Portugal or Spain. Even as the risk premium on Greek debt fell last week on the prospect of European support, the euro weakened on concerns the plans may fall short.
• Greek risk exaggerated: European Central Bank council member Athanasios Orphanides said Greek bond spreads suggest investors may be exaggerating the risk of Greece defaulting on its debt. Orphanides, whose mother’s family hails from Greece, said he trusts the Greek government will do “whatever is necessary” to tackle its fiscal crisis. The statement by EU leaders was “very positive,” he said. Greece’s Prime Minister George Papandreou said he will freeze public workers’ wages, reduce benefits, crack down on tax evasion and raise the retirement age as he tries to convince investors of his country’s credit-worthiness. Strikes shut down schools, hospitals and flights on Feb. 10 as unions protested against the austerity measures. Another walkout is set for Feb. 24.
• Greek accounting tricks:A Greek government inquiry uncovered a series of swaps agreements with securities firms that may have allowed it to mask its growing debts. Greece used the swaps to defer interest repayments by several years, according to a Feb. 1 report commissioned by the Finance Ministry in Athens. Greek Prime Minister George Papandreou, who came to power in October after defeating two-term incumbent Kostas Karamanlis, more than tripled the 2009 deficit estimate to 12.7 percent. Greek officials last month pledged to provide more reliable statistics after the EU complained of “severe irregularities” in the nation’s economic figures.
  
  ‘Political Interference’
  The Finance Ministry report blamed “political interference” for the collapse of credibility in Greece’s statistics. There were “serious weaknesses” in data collection, especially with spending figures, as information often came from second-hand sources, the report found.
• Wall Street role in hiding debt 

Avatar and Anti-Capitalism

I watched Avatar a few weeks ago and enjoyed it mostly for the technical excellence. The plot is as thin as one might expect from the typical Hollywood offering: weak and innocent tree-huggers versus a powerful and venal company with the backing of Uncle Sam.
James Cameron has spoken about the message of the film - a more sustainable way of living. Some people might be reading more into the movie than is perhaps required: anti-capitalism and anti-Americanism.
From a very interesting WSJ story:
In France, the movie has raked in $85.6 million—more money than in any country besides the U.S—while Germans have bought $56.1 million worth of "Avatar" tickets.

The movie's resonance with audiences abroad is a crucial propellant behind "Avatar's" ascent to the box-office stratosphere, where it topped the $1 billion mark in ticket sales this past weekend.
Two thirds of the total box-office receipts so far have been generated abroad. "Avatar" sold $352.1 million worth of tickets in the U.S. and Canada after 17 days, while its international haul stood at $670.2 million as of the weekend, according to Hollywood.com.

In France, "Avatar" is the second-most successful American-made movie in history, right behind 1997's "Titanic"—Mr. Cameron's previous movie. (Four French-made movies have done better than both.)


Some moviegoers abroad are drawn to what they see as an anti-capitalist message in the film's plot.

In the movie, the villains work for a corporation intent on mining a mineral on a far-off planet, dislocating a population of nature-loving humanoids in the process. The movie's hero, a former Marine, eventually changes sides to lead the inhabitants' fight against the destructive, capitalist Earthlings.

The plot line has drawn complaints from some conservative U.S. moviegoers, while the left-leaning French daily Liberation praised Mr. Cameron, the director, as the "galaxy's eco warrior."

Francois Eygun, a 19-year-old student in Paris, saw in the film's plot a message about U.S. foreign policy: "With what is happening in Iraq and Afghanistan it is quite relevant."

It is rather funny that Hollywood - in many ways, an exemplar of capitalism at its worst - is being credited with spreading an anti-capitalist message. Such are the ironies of life!

Iceland's Democratic Values Must be Applauded

Via the WSJ:

Iceland's president vetoed a bill to reimburse the U.K. and the Netherlands for bailing out depositors of a failed Icelandic bank, throwing into question the international plan to rescue the island nation's banks and casting doubts on its bid to join the European Union.

President Ólafur Ragnar Grímsson on Tuesday cited massive public opposition in his decision to reject the bill, which was approved in late December by the Icelandic parliament after months of wrangling.

The veto was only the second time since Iceland's independence from Denmark in 1944 that a president used that authority.

Predictably, the British and the Dutch have reacted with anger:

The U.K. Treasury said Britain "expects Iceland to live up to its obligations."

"We are very disappointed about the decision," said a Dutch finance ministry spokesman. "Iceland has the obligation to pay back the money."

The bailout of international investors is a wealth transfer. It is right that people have a say in whether such a transfer of their money, for no fault of their own, is appropriate.
More from the article:

Almost since the onset of the financial-system collapse in October 2008, Icelanders have blamed a cadre of greedy bankers for turning a prosperous nation into an international economic pariah. There is strong resistance to piling debt on ordinary citizens to undo the bankers' mess. The bill would have seen Iceland repay the U.K. £2.35 billion ($3.79 billion) and the Netherlands [euro €1.32 billion ($1.89 billion) over 15 years. That amounts to nearly $20,000 for each of the 300,000 Icelanders.

Irish Mortgage Help Program Superior to Obama's

The Irish Times is reporting about the sharp rise in the number of people applying for mortgage assistance:
Under the scheme, households receive an average of €365 every month to help them cover part of their repayments. The mortgage interest relief supplement is designed to be a short-term payment to cover the interest portion of the home loan. Anyone seeking the payment is mean-tested and required to show they negotiated to reschedule mortgage payments with their lender.

Eligibility is assessed by community welfare officers, who are attached to the Health Service Executive. Groups such as Free Legal Aid say the rules are too strict and many households who desperately need the support are not able to get it.
14,740 people are getting the mortgage interest relief supplement. This compares with 8,000 recipients at the end of 2008, and 4,000 at the end of 2007. The Government is likely to have spent about €55 million on the supplement during 2009, or almost twice what it spent the previous year.

On the face of it, this model seems far superior to the one put in place by Obama. The Irish plan is cheaper and more effective in keeping people in their homes because it transfers money directly to the source and eliminates leakages to middlemen. In contrast, the Obama plan has been a disaster - it has done very little to prevent foreclosures, and enriched the very banks that created the crisis in the first place. Banks that were bailed out at taxpayer expense are now charging hefty fees for all kinds of reasons and still kicking people out of their homes. Here's an example from the NYT:
Lenders have accepted more than one million applications and cut three-month trial deals with 759,000 homeowners. But they have converted just 31,000 of those to the permanent new mortgages that are the plan’s goal.

In New York City, where 20,000 homeowners faced foreclosure this year, a recent study by the Center for NYC Neighborhoods found that lenders have offered new or trial mortgages to just 3 percent of the homeowners who have sought help.
Obama's $75 billion program only rewards greedy banks and related special interests. The Irish model would have been simpler, cheaper, and more effective at keeping people in their homes.