Floyd Norris in the New York Times last weekend put together some interesting comparative charts for twelve countries including Ireland showing trends in their trade up to the beginning of this year. The relatively small dip in Irish exports during the recession comes through clearly. He draws attention to the welcome rebound in trade globally, but classes Ireland among the four Euro laggards including Greece, Portugal and Spain. However, the data for Ireland only go to the end of 2009, whereas for other countries the data includes the first three months of 2010. As all of the rebound in the other countries has occurred in this first quarter of 2010, the charts give an unfavourable, but misleading, impression of Ireland’s comparative trade performance.
Month: May 2010
At VoxEU, Anne Sibert writes on “… how Icelandic banks issued “love letters” to each other – swapping their debt securities and using the other bank’s debt as collateral. This ruse ensnared not just the Icelandic Central Bank, but also the ECB – a fact that has only recently come to light. The ECB’s lack of transparency on this is a serious problem.”
The article is here.
Mrs Merkel has been speaking in the German parliament about her latest financial proposals. In addition to defending the CDS and short-selling proposals, the Germans are apparently preparing proposals for an “orderly insolvency of euro-region states”. In a separate story this morning, I see that former Fed Governor Rick Mishkin has been reported as follows:
“What they should have done was to let Greece go and say we are going to ringfence the rest of the system,” Mishkin said. “Ringfence the banks, protect the other countries that have problems such as Portugal, Italy and Spain, which have not been fiscally irresponsible the way the Greeks have been.”
It’s interesting to see how far the consensus has moved. We’ve gone from the idea that no Eurozone country can be let default and the IMF can’t possibly be allowed to help to getting ready for orderly defaults.
Coming hot on the heels of the EU’s restriction on hedge funds because of the role they played in the financial crisis (though this role was in fact pretty minimal) comes the latest European attempt to deal with nasty financial market participants. The German government has released the following statement, translation thanks to the FT’s Alphaville column:
The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS).
In addition, BaFin has banned naked short sales in the following financial sector companies:
AAREAL BANK AG
ALLIANZ SE
COMMERZBANK AG
DEUTSCHE BANK AG
DEUTSCHE BÖRSE AG
DEUTSCHE POSTBANK AG
GENERALI Deutschland HOLDING AG
HANNOVER RÜCKVERSICHERUNG AG
MLP AG
MÜNCHENER RÜCKVERSICHERUNGS-GESELLSCHAFT AG
These bans apply from 19 May 2010, 00:00, until 31 March 2011, 24:00, and will be reviewed.
BaFin justifies these steps given extraordinary volatility in debt securities issued by eurozone countries. Furthermore, credit default swaps on the credit default risk of several countries in the eurozone has increased significantly. Against this background, massive short sales of the affected debt securities and the conclusion of naked credit default risk on eurozone countries had led to excessive price shifts, which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system.
Faced with these circumstances, BaFin has also banned naked short sales within the selected financial institutions.
The FT notes that “BaFin had previously introduced a ‘transparency system for net short selling positions‘, and found ‘no evidence of massive speculation against Greek bonds‘ in the CDS market.”
Let’s be clear about this. Short sellers are not the cause of the European sovereign debt crisis anymore than they were the cause of the Irish banking crisis.
As an aside, it’s worth noting that this announcement appears to have triggered a pretty serious downward run on the euro. Now I happen to think that this is a good thing in our current economic circumstances but perhaps the “ve must protect ze currency” crowd might remember that much of the demand for the currency comes from people who use it to purchase financial assets. If you keep mucking around with the rules of the games for financial assets denominated in euro, eventually investors pack it in and your currency loses value.
This shouldn’t be too complicated a point to understand. For example, I teach my undergraduates about how a currency’s value depends on the supply and demand for the assets denominated in that currency.
Germany has been one of the main drivers of international and EU policy on climate change, and hence one of the key drivers of Irish climate policy.
Until recently, there was political disagreement about whether draconian greenhouse gas emissions where needed, or drastic cuts would be enough.
In the last few months, two documents have appeared that suggest that this is changing. Both are available in German only.
The first paper, by a relatively junior researcher at think tank close to the Chancellery, suggest that (whisper it) the sacred two degrees target is perhaps infeasible, that (a few odd but not entirely crazy people have argued that) there is nothing special about two degrees anyway, and that we should perhaps keep in the back of our minds that one day we may need to consider whether a Plan B might be required. The extremely cautious tone of the paper is indicative of the scale of the heresy.
The second paper does not mince words. It is by the Scientific Advisory Council of the Federal Ministry for Finance, a body of 29 professors. The Council argues that climate change is not as big a problem it is made out to be, but that it can be solved at a relatively low cost with clever policy intervention. It further argues that the first-mover advantage in technological progress is a myth (the second mover is often better off) and that Germany should stop taking the lead as nobody else is prepared to follow.
Harbingers of change to come? Time will tell.