Bini-Smaghi on Sovereign Risk and the Crisis

The interesting set of slides from his London Business School talk is here.

37 replies on “Bini-Smaghi on Sovereign Risk and the Crisis”

To my mind this treatise is a outright attack on the state by a supranational organisation that represents multinational interests – the EU is but a bankers charter.
We have a choice of fighting this blight or succumbing to its infection , given the supine nature of the elite here – I would bet we will become or indeed are part of the collective already.
I am Euro.
Perhaps our only hope is if they add our cultural and biological distinctiveness to their own – then we can destroy them from the inside.

http://www.youtube.com/watch?v=WZEJ4OJTgg8

Maybe its time to deploy The Bertie into the EU commission

You’re absolutely crazy or what?

Only altrnative left is sovereign default…readjustment of the errors committed by Irish leaders and their neococoons.

Wake uo Ireland before it’s too late./

Yes it’s an interesting set of slides all right, though mainly as an indicator of the man’s mentality.

“Plan A is made on the basis of an assessment that the country is solvent”

That calls to mind the well-known joke with the punchline “Assume we have a can-opener.”

“Lack of exchange rate flexibility — not an excuse”

I hope he had something a bit more thoughtful to offer in the way of economic analysis on that issue. Is he an out-and-out freshwater economist, Say’s Law and all that? I looked for his work online a while ago but somehow I failed to find anything remotely interesting. Is there any there, there?

“Quick resolution for non-viable banks.”

If Brian Lenihan is to be believed (a big “if”, admitttedly), the ECB isn’t helping much in that regard.

If, in his policy prescriptions, Dr. Bini-Smaghi cannot see a major difference between a grossly over-extended and failed banking system wiith a viable sovereign bolted on (Ireland) and an extremely dodgy sovereign with a few banks bolted on (Greece), and if this is typical of the mindset of senior officials and politicians in the EZ, then we have a really serious problem.

What nonsense – Plan A or Plan B. The reason folk are talking about default is because Plan A will cause default (Plan B) to happen. Mr Bini, it’s not a choice. If you want to do something useful, come up with alternatives to Plan B.

He uses the phrase “while remaining non-concessional” twice (wrt the 6%interest rate). This suggests a rather limited mindset.

“Plan A is painful, but most likely it is less costly than the alternative:
– for the debtor countries
– for the creditor countries”

They have been too slow at every turn. Plan A hasn’t got a hope in hell. That is what the bond yields are saying. I can imagine a Bini Smaghi advising Hitler when the Soviets reached Königsberg. Plan A will work, Führer. We just need more bullets. And we need to concentrate.

“Product and labour markets

Reduction of the minimum wage

Reform of the unemployment benefits system

Deregulation of sheltered sectors of the economy”

This needs to made know to everyone voting in the election together with comparisons of the amounts paid to bank bondholders.

Slide 56 “Quick resolution for non-viable banks”

I feel sorry for anyone from the ECB who believes that BoI and AIB are FUBR and thus, under continental logic, non-viable. This is where logic meets clientelism

The math will dictate the outcome: Less income => inability to pay down interest + principal. QED.

@ AM: “This suggests a rather limited mindset.” Yep: Rigid, military-grade reinforced concrete.

@ seafoid: I think we have been at this before. I would be a lot more pessimistic. Our Standard -of-Living is quite likely to regress significantly. With the usual self-interested Special Interest groups kicking and screaming all their way to additional handouts, subsidies, tax concessions, etc., etc. Alt energy will NOT save us.

Just wait until Ivan turns down the Gaz tap and Saudi oil exports equal their domestic consumption. 2015?

BpW

@BpW

Have you seen any John Trudell videos on Youtube? He has a very interesting view of US capitalism since he is an Indian himself.

“(it’s not by chance that default/restructuring has occurred mainly in non-democratic systems)” (Bini Smaghi 2011).

Funny how he didnt mention Iceland in this presentation.
What was the name of their dictator again? Tough guy but he gets the job done!

Slide 25 is particularly interesting in the Irish context, since the domestic banks are essentially already insolvent so a sovereign Irish default can’t really hurt the banks more than they’re already hurt. Pension funds, however, is another matter.

Also, in the context of the subsequent discussion on sovereign risk driving bank risk, for Ireland isn’t the driver the other way around. It’s bank risk that’s driving the sovereign risk, not vice versa.

However, I’m still inclined to think we’ll end up with neither A nor B, but some grey area between. If we unilaterally default it’ll go straight to black.

Is there a possibility that we might be looking at forcing a sovereign recap of Irish banks to such a level that some typical EU ‘proportionality’ fudge might be applied to the EZ banks when they may be forced to write down some of their exposure to Irish banks and to other peripheral sovereign banks following the next round of stress tests?

An intellectually dishonest document.

The fact that the disaster was caused by the banking sector or that the additional debts taken on by Ireland in particular were private banking debts has been airbrushed out of the ECB history book.
Indeed the banks and sovereigns are lumped together in the interest spreads slides. It seems that for Beni-Smagi the banks have the status of a super-sovereign.

I notice that while this is worst recession since the 1930s the default slide only goes back 20 years. The over-sensitive UK audience might have recoiled at mention of the post war defaults.

This man is on the board of the ECB. Why has he not commented on the role the ECB played in this crisis?

B-E-B

Or else the core EZ banks, the Euro and the ECB will go straight down the toilet along with the bad-bank-infested peripheral sovereigns.

@Joseph Ryan
I have consistently banged on about the ECBs apparent view that Bank debt is superior or at least equal to fiscal debt.
This makes a mockery of the 3% deficit rule , if monetory debts cannot be defaulted on then these proxy fiscal vehicles have created a catastrophic deficit mechanism withen EU states.
I am now of the belief that the Euro has engaged in a subversive monetory war on this state since the inception of the Euro – more and more information is confirming this belief.

A very tendentious presentation.
The claim that ‘over the past 20 years only 19 out of 120 countries on IMF programmes had debt restructuring’ conveys a false impression that the other 101 countries repaid their debts on schedule. In fact probably a majority of them rescheduled at the end of the original arrangements.
Bini Smaghi also overlooks the scale of private bank default in the US in the wake of the sub-prime crisis.

It’s great to be able to read all of this stuff from the great and good to see how off the wall making up their own reality many of them are. The internet is really changing the nature of respect for authority .

@ Brendan Walsh,

Also doesn’t mention all the European banks/insurers who invested in sub-prime (or related) took the hit.

@ Keith Cunneen,
“I have consistently banged on about the ECBs apparent view that Bank debt is superior or at least equal to fiscal debt. This makes a mockery of the 3% deficit rule.”

That’s an interesting point.

Bini Smaghi ignores the lessons of history and how so many ‘advanced’ countries have shrugged off their accumulated debts either through inflation or devaluation or both.

It is curious that none of the comments on sovereign risk topic have mentioned the interesting parallels between the peripheral EU debt crisis and the one now building up in US states, cities and towns.

For a discussion see
http://blogs.reuters.com/columns/2010/10/04/feds-might-bail-out-u-s-cities-and-states/

@Kevin Donoghue

“Is he an out-and-out freshwater economist, Say’s Law and all that?”

His bio mentions that he got his Phd in 1988 from the University of Chicago , the home of Friedman and the impregnable to new ideas fortress of monetarism.

Perhaps more stagnant than fresh water.

Slide 49 is interesting. Does it mean that if the current policy Plan A does not succeed or is doomed to failure the the troika is willing to countenance
a) long term loans at a non concessional interest rate…say 4%
b) while not the preferred option a haircut on the debt.

To me this suggests a willingness to consider the unthinkable

@ Tull

i noted that slide too, i thinkl we’ll see something along the lines of (A) come out of the EU Summit

I think creditors need to chill out and realise that it is not realistic to expect to get back all of one’s capital in extraordinary situations such as these. Sr. Bini Smaghi is trying his damndest but if he has to break the solemn pledge to give everyone their money back the world isn’t going to end. So we end up with higher interest rates and debt is priced more appropriately. The ECB doesn’t have time on its side. Credibility is at stake.

Smaghi’s analysis is well-presented and his case well-argued.

But nowhere does he seem to consider the scale of the total fiscal adjustment required in Ireland. We had already (prior to the December budget) seen fiscal adjustments of the order of €15b. The December budget started another round of adjustments totalling the same amount.

So the total fiscal adjustment package currently envisaged for Ireland amounts to around €30b or 25% of GNP. That is a staggeringly huge adjustment. For comparison, when the UK called in the IMF in 1976, its public sector borrowing requirement (the parlance of the day) never even reached 7% of GNP.

It is the scale of the total adjustment which calls into question the political doability of Smaghi’s Plan A. Among other issues which Smaghi does not consider are:

a. the appropriateness of the Eurozone, as currently constituted, as a single currency area; or
b. the approporateness of debt for equity swaps at our banks (as opposed to the endless replenishing of bank balance sheet holes by the public).

It is those critical aspects which he does not consider which, in my opinion, render Smaghi’s analysis deeply suspect.

@ Cormac Lucey

‘Smaghi’s analysis is well-presented and his case well-argued.’

If you believe that private bad debt should be ‘socialised’ by the government.

I believe you are correct in that a. & b. have been totally ignored as instruments towards a deliverable resolution to the situation.

How ironic that bankers are advocating a socalist solution (socialise the private debt) and SF, the ‘left’, Lab., FG et al are step by step advocating a monetarist (private market for private debt) solution relative to the Irish tax payer.

I would start from we believe the Irish taxpayer owes nothing of the bank debts and has no responsibility for insuring the bondholders as a backstop. But, we are will to listen to you at one percent per point if we can justify in ‘investment in return for guarantees of liquidity and reformation of the banking structure.

How do you think that would ‘fly’ as a starter?

I would join in your suspicious analysis.

Should read

But, we are will to listen to you at one percent per point if we can justify the ‘investment” in return for guarantees of liquidity and reformation of the banking structure.

@Cormac Lucey.

With respect, I think you are stretching logic in your comment re Beni Smaghi.

It is difficult to see how you can argue in your opening statement that

Smaghi’s analysis is well-presented and his case well-argued.

and conclude that

It is those critical aspects which he does not consider which, in my opinion, render Smaghi’s analysis deeply suspect.

Indeed Beni Smagh’si summary of deficits failed to record that the debts in Ireland’s originated in private banks.

He also neglected to mention the sheer insanity of bursting a gut to get to a reasonable deficit only to have it blown out of the water by the imposition of private banking debt onto the back of the sovereign.
Nor as you point out does he have anything to offer in the area of banking or single currency management or banking regulatory reform, the failure of which were at the root of the crisis.
And a failure for which his ECB organization must take prime responsibility. But he ducks that responsibility as well.

@Shay Begorrah,

His bio mentions that he got his Phd in 1988 from the University of Chicago , the home of Friedman and the impregnable to new ideas fortress of monetarism.

That’s a tired cliché that is patently false and only shows bias on your part.

@Enda H

That’s a tired cliché that is patently false and only shows bias on your part.

It is so easy for people to just brazenly brand the home of the “Milton Friedman Institute for Research in Economics” and Eugene Fama as a fortress of monetarism. What can I have been thinking?

@Shay Begorrah,

A name that was openly debated about by, among others, Chicago economist Jim Heckman. Suggesting that Chicago (of all places!) somehow stifles debate—“impregnable to new ideas”, even—is plain ol’ silly.

(Just to clarify: Heckman isn’t just some stranger, he’s probably the most renowned economist in the world.)

@Enda H

Not being an economist I am not exposed to the full range of opinions represented by UC’s economics department, I only know it by the tradition of its public intellectuals and prominent alumni, a group who are largely on the libertarian right side of the debate on the level of state intervention appropriate in the market and indeed society and on the role, responsibilities and importance of private capital.

Would you allow that in 1988 when BS got his Phd that perhaps UC’s department of economics might have had more attraction for doctoral students with a fancy for Hayek, Friedman and Fama then Keynes, Galbraith or indeed Heckman? Just maybe?

Perhaps BS is motivated primarily by a some cyrpto-utilitarian belief that changing the current ECB and EU approach to debt and inflation would harm the common good. He is hiding his altruism well though.

Not being an economist I am not exposed to the full range of opinions represented by UC’s economics department, I only know it by the tradition of its public intellectuals and prominent alumni

Perfectly understandable. It is the mainstream portrayal of Chicago and it has essentially become a cliché at this stage.

Would you allow that in 1988 when BS got his Phd that perhaps UC’s department of economics might have had more attraction for doctoral students with a fancy for Hayek, Friedman and Fama then Keynes, Galbraith or indeed Heckman? Just maybe?

Of course it’s possible. Likely, even. Equivalently it’s possible that he went there to work with Heckman, who had published his Nobel-winning paper by that stage. Or maybe Chicago just offered him a good scholarship. Who are we to know?

Idle speculation based on a media portrait of the University of Chicago is at best presumptuous, at worst quite ignorant. What Dr. Bini-Smaghi writes is up for debate, of course it is. But we should play the ball and not the man. Right now you’re not even playing the man, you’re complaining from the outset that he went to school in Sligo and you don’t like the reputation those Sligo lads have. I think that approach is unfair on the man and distracts from the substantive debate.

@Enda H

Playing the man, not the ball? I have harped on about this before but its entirely legitimate to consider a persons politics, priorities and loyalties when evaluating their arguments. People have desired outcomes and their policy prescriptions reflect that.

Would you go through the trouble of painfully evaluating the policy recommendations from a Stalinist about the need for increased security to protect the citizen from malign outside influences?

I have searched in vain for LBS Phd supervisor or indeed any background on his politics except for the obvious one that he is a monetarist with a hankering for austerity.

http://www.foreignaffairs.com/articles/66509/lorenzo-bini-smaghi/the-future-of-the-euro?page=show

Citizens do not take fiscal reform lightly, but they are more easily convinced of its necessity if persuaded that something even worse looms as the alternative. This is why public support should coalesce around IMF-style economic reform, not debt restructuring or devaluation.

If he quacks like a duck, walks like a duck, keeps the company of ducks and emerged from a breeding ground for ducks why not accept that he is almost certainly a duck?

@Shay,

Playing the man, not the ball? I have harped on about this before but its entirely legitimate to consider a persons politics, priorities and loyalties when evaluating their arguments.

Point taken in terms of whether the man is an Anglo bondholder, for example. My argument, which (fair enough) I don’t think you’ll accept, is that drawing “Chicago conclusions” is unwarranted and thus weakens your argument.

You may think that somebody going to Chicago and studying monetary economics has strong implications as to their political persuasions, and I can of course see where you’re coming from, but I simply disagree. I know somewhere between 50 and 100 economics PhD students on both sides of the Atlantic. The admissions decision is simple for most: go to the best department that funds you. Beyond that, people try to avoid places that hold notoriously high standards for passing (of which Chicago is the shining light) and then there are the usual personal/relationship/distance issues that people in their mid-20s face. In my experience, politics plays no role in the decision0 and contrary to popular perception the little politics that remains is decidedly liberal/Democrat – see http://econ.st/eJSTZG for example.

So as I said you’re welcome to continue thinking he is a duck but from my perspective that only indicates a bias and lack of understanding on your part, which detracts from your otherwise strong arguments.

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