Month: March 2010

European Parliament Papers on Deficits and Global Imbalances

Here‘s a link to the latest set of briefing papers for the European Parliament’s Economic and Monetary Affairs Committee. One set of papers (including one by me) focuses on global imbalances and the role they played in the financial crisis. The other set of papers focuses on European fiscal issues. These papers include a summary by Daniel Gros (CEPS) of his proposal with Thomas Mayer (Chief Economist of Deutsche Bank) for a European Monetary Fund.

These briefing papers are provided to MEPs on the committee prior to a meeting they will have with ECB President Trichet on March 22nd at which these and other issues will be discussed.

Asset Booms and Structural Fiscal Positions: The Case of Ireland

Daniel Kanda has written a new IMF working paper on this topic: you can download it here.

Summary: Asset booms and sectoral changes can distort traditional estimates of structural fiscal revenue, and could lead to serious fiscal policy errors. This paper extends the estimation of structural revenues to take account of asset prices and sectoral changes, and applies this to the case of Ireland, where a property bust has revealed a large hole in the public finances. It is shown that excluding these factors led to a substantial bias in the estimation of structural revenues, and the structural balance prior to the crisis was much larger than earlier estimated.

New Guidelines for NAMA Pricing

Following the approval of NAMA by the European Commission, the Department of Finance has published revised guidelines in relation to NAMA’s pricing of assets. This is a revised version of these regulations released before Christmas. Based on a quick read, there are appear to be a couple of changes, both of which show that the Commission is pushing the government towards paying lower prices.

The first relates to the discount rate used to value cash flows when coming up with long-term economic value.  These had provided for an adjustment of 0.8 percent above the relevant government bond rate. This adjustment is now 1.7 percent.  This change will lower the value of the assets.

Government bond rates are, of course, lower now than they were last September. This is probably what the Minister was referring to when he said “There will, however, be a reduction in the interest rates used for loan discounting purposes” a comment widely (and now it seems incorrectly) reported as being related to the Commission’s recommendations. We see now that the Commission’s recommendations, taken on their own, will imply lower prices paid.

The other change I can spot relates to the (to me) mysterious “Standard Discount Rate”. The regulations for this used to be as follows.

The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs.

The 2.75 percent is now 5.25 percent. From previous discussions, the prize for best answer as to what the standard discount rate was went to Frank Galton: NAMA LTEV = LTEV*(1-Standard Discount Rate). Assuming that’s correct, then this latest change would also imply lower prices. Anyone who understands the standard discount rate (or can see any other interesting changes) feel free to explain it to us.

Proposals for a European Monetary Fund

There are lots of stories in today’s press about the German-backed proposal to introduce a new European Monetary Fund to help out EU states in difficulty. Setting up the fund would require a new treaty, which would take a long time. So, on the face of it, this isn’t about helping out Greece, though it could turn out that Greece becomes the “test case” for how an EMF would operate.

One aspect of this story that I’m having some trouble understanding is why the IMF cannot be used to assist an EU member. The Irish Times Cantillon column explains the argument as follows. Current circumstances imply that:

The only possible lender of last resort is thus the International Monetary Fund, but an IMF intervention in a euro-zone economy would be a mortal blow to the credibility of the euro.

Ok, here’s a question. What does “mortal blow to the credibility of the euro” actually mean? And if it means something concrete (and bad) why does an IMF intervention produce this bad outcome while an EMF intervention does not? Answers on an electronic postcard …

Eichengreen-O’Rourke update

Barry and I have updated our graphs here.

To recall: the red lines show what happen when governments respond to a worldwide economic crisis with monetary and fiscal stimulus. The blue lines show what happens when governments stick to monetary and fiscal orthodoxy. All very purgative and morally satisying no doubt, except that it led directly to the election of Adolf Hitler (something that I have been meaning to blog about for a while, but now I have to prepare for class..)