Uncharted Territory

May 13, 2012

Gifts to Greece

My first thought this morning was to write about the so-called UK drought again. Maybe I’ll post something on that later.

Then I had a strong urge to comment on the absurdly excessive punishment of Lewis Hamilton (a 5 place penalty or inadmission of his final run – moreorless equivalent punishments – would have been appropriate) after an error by his team in qualifying for today’s Spanish GP. I’d hardly call myself an expert on the sport, but a previous foray into F1 commentary attracted a good deal of attention.

Instead I’m going to channel my annoyance at the spoiling of what might have vaguely resembled a sporting event in Barcelona towards the Greeks.

All I want to convey is one simple point, that the Greek people have benefited hugely from the international loans on which they have already partially defaulted and look increasingly like failing to repay in their entirety.

We haven’t invented this thing we call money just for fun. Money allows resources to be allocated. If you borrow it, spend it and fail to repay the loan, you have acquired or consumed resources that could have been used by someone else. Take the Athens metro railway and all the other billions worth of infrastructure to support the 2004 Olympic Games. How was that funded? I’ll hazard a guess. Borrowed money, at least in part. And what will happen to all that capital investment when Greece defaults? It’ll still be there. These assets will remain in existence indefinitely for the benefit of the Greek people. To the extent they haven’t been paid for, they’ve effectively been stolen from the rest of the world.

Some loans may be riskier than others, because that’s how the world is, but, unlike equity investments, loans are designed to be repaid. Financial disruption – on a global scale over the last 5 years – arises when debts are not repaid. So, because of the knock-on effects, Greece’s default is worse than theft! The entire EU has been plunged into recession in large part because of the need for the financial system to prepare for possible Greek default. Instead of using capital to support new lending, banks have been writing down Greek (and other) debt and taking actual losses.

Obviously we’re just reaping what was sown when Greece and other European sovereigns borrowed unsustainably. The question is how to prevent repeats of this cycle of behaviour?

Let’s mull over that question for a minute. What is the popular conception of what’s going on?

I think it was Arthur Smith I heard on the radio yesterday saying the Greeks should be let off their debts because “it’s not the fault” of those protesting. In what sense is that, Arthur? Are you perhaps saying the average Greek took no executive decisions regarding the nation’s finances? Clearly true. But isn’t a large part of the problem that they haven’t paid and continue not to pay their taxes? What do you think is fairer, that every Greek homeowner should pay a special tax (they’re refusing) or that you and I should find the money?

And isn’t a large part of the problem the Greek public-sector? What do you think is fairer, that Greek workers should take whatever pay cuts it takes to balance the books (as has happened elsewhere in Europe, such as in Estonia – now growing again – Latvia and Lithuania) or that you and I should find the money?

Many non-wealthy Greeks must also be culpable of wilfully participating in a cash economy, benefiting from lower prices for services whilst complicit in tax avoidance. What do you think is fairer, that the Greeks start paying taxes commensurate with their public spending like people in most other countries, or that you and I should find the money?

But the really interesting point is that Greece is a democracy. They’ve chosen their own government since the ousting of the colonels in the 1970s. Collectively, then, they’ve repeatedly elected politicians, at least some of which have overspent, undertaxed and cooked the books, or appointed officials to do so on their behalf. Clearly, collectively, the Greeks have benefited from this behaviour. I’m intrigued, Arthur, whether you’re suggesting that, collectively, the Greek people are also not responsible for the situation they find themselves in.

That’s probably enough. After all, Arthur is a national treasure, practically the new Queen Mother, and perhaps a little fragile. Maybe he just didn’t think. Maybe, like the QM, he inhabits a world where decisions are made by waving a magic wand. Maybe, like the QM, he lives in a world where one need take no responsibility for one’s finances.

I also caught a snippet this morning of someone on the Andrew Marr Show invoking the precedent of Argentina. That great and honourable country, that upstanding, exemplary member of the international community most recently defaulted on their debts about a decade ago. And it’s been great for their economy! Who’d have thought it? It’d be great for my personal finances if I went out and bought a house, a car, new furnishings and white goods, new shoes, clothes and so on and then didn’t bother paying for them. I’m sure I’d feel pretty well off for a few years too.

Let’s pick on someone else. Arianna Huffington writes in the NYT:

“Yes, the Greeks acted irresponsibly before the economic collapse — the same way my father had acted irresponsibly in his private and professional life. But that is not reason to punish the children, to destroy their future as part of a remedy for a past for which they bear no responsibility.”

What Arianna is saying – for some reason “bleeding heart liberal” is the outmoded phrase that comes to mind – is a little more sophisticated than Arthur Smith’s indignant genialism. We have to draw a line, she says, to protect the innocent. Though, I can’t help pointing out yet again, these “innocent” are nevertheless beneficiaries of the misappropriated funds spent in Greece over the last decade or so. Perhaps they’ll remember that every time they hop on Athens’ shiny new metro trains.

The fear gripping financial markets – and contributing to the unnecessary economic hardship and suffering of innocent little children currently taking place in, say, the UK – is that other countries will follow Arianna’s line of reasoning too. Why shouldn’t Ireland, Spain, Portugal and even Italy say “don’t punish the children”? Having elected profligate, irresponsible governments that have given them what they wanted – low taxes, high spending – why won’t they now elect governments to satisfy their new desire for debt writeoff with some kind of moral justification (right wing nationalist or left wing anti-capitalist – take your pick, or, hey, what the hell, you can even pick both!).

If we want financial stability – quite possibly a good thing, I suggest, in light of the 1930s, just as a for example – then debts have to be repaid. And sovereign debts would be a good start.

So how can the international community protect itself against freeloaders? Against those countries who run up debts, fail to collect enough tax and then, in the words of the song about the girl next door and the bathroom floor, plead “It Wasn’t Me”?

Here’s my suggestion. Many of the countries that default are serial offenders. There’s something deeply ingrained, in their DNA if you like, that leads them to spend too much and collect too little tax. So cut them off from international finance for long enough for them to lose thir habits. This would be simple to implement. The financial services industry is highly regulated (all that effort’s been really effective, hasn’t it?). Regulators in responsible countries (say the UK, the US, the EU apart from Greece) could simply demand that no financial institution or its subsidiaries (maybe even no company) lends at all to a government that has defaulted on sovereign debt over the last 50 years – or maybe even more. Or, crucially, to any institution in that country dependent on its government, such as a bank or a company.

Since holding the currency of the defaulted country would constitute lending, all investment in defaulted countries would have to be funded locally in their own currency. Imports would require foreign currency that would have to be acquired beforehand by local institutions or individuals, i.e. by selling goods and services as exports (or small amounts of currency to tourists and other visitors). No publicly funded export credit guarantees would be available to UK companies, for example. In effect, such countries would be forbidden from running a trade deficit.

Such a measure would do two things. It would financially quarantine serial defaulters for a time longer than short-term market memory currently manages (defaulters tend to return to the international markets within a decade). And it would give non-defaulters pause for thought.


May 1, 2012

The Wettest Drought in History

One of my responsibilities as a teenager was to keep the lawn under control. Flymos had presumably not yet been invented, and petrol-driven mowers were perhaps too much hassle, so ours was manual. If the grass got too long it was hard work and it could even become necessary to resort to shears, which was back-breaking work. But mowing was also difficult if the grass was damp. There was therefore a trade-off each spring. The first mow had to be done when it was mild enough for the grass to be reasonably dry, but couldn’t be put off until it was too long. And as the grass grew it dried out more slowly each day. So it was essential to make use of any opportunity to mow in case the weather turned wet again. It probably only happened once or twice, but it seems I was always caught out. I’d wait for one more dry day to make the job easier, but the skies would open and a week later the job would be twice as difficult.

Nowadays the internet and improved forecasting allows me to monitor the weather far more effectively. Thus it was I’d already been out with the mower in March, and, seeing the long-range forecast, made sure I got a mow in just before it started raining early in April.

The point is that the 5-10 day forecast is now fairly reliable.

Why, then, was the UK drought – declared in a few regions in March, with hosepipe bans from 5th Aprilofficially extended in mid April?

Yes, that’d be in the middle of the wettest April on record!

We’re now in the farcical situation of the “wettest drought in history”, with a succession of “experts” (and junior ministers) popping up on TV claiming the rain in April somehow doesn’t count. Apparently it’ll run off compacted ground. Yes, maybe for the first day or two, but not after a month. With the wettest April on record followed by significant rain already in May, and more forecast in a day or two, the drought risk is simply receding. We’re in one of those surreal situations where reasons are being invented not to contradict previous claims, in this case that the drought would last into next year.

What baffles me is why the drought was extended when wet weather was forecast. Surely – since most of the time it’s dry – the drought risk is receding as long as there’s significant rain in the forecast. And, as the 5-10 day forecast is fairly reliable and everything after that isn’t, you simply run the risk of looking stupid if you don’t wait until the forecast is for dry weather.

I wonder whether there’s a tendency to believe long-term forecasts more than short-term ones. But long-term forecasts only indicate a small bias one way or another, as Met Office modelling indicates:

“New three-month forecasts by the Met office suggest little respite with April, May and June expected to be drier than average. ‘With this forecast, the water resources situation in southern, eastern and central England is likely to deteriorate further during the period. The probability that UK precipitation for April-May-June will fall into the driest of our five categories is 20-25% while the probability that it will fall into the wettest of our five categories is 10-15%, it says.’ ” [my emphasis]

So 20-25% dry plays 10-15% wet plays (presumably) 60-70% around average. Not sure I’d have put a lot of money on the “expectation” of a dry spring this year (certainly wouldn’t now!). Even less after I’d looked at the Met Office report (scroll down to find PDFs) because the model runs are all over the place.

And are these “probabilities”, anyway? Isn’t the modelling signal swamped by the noise of uncertainty? It seems to me likelihoods based on model-runs are not the same as probabilities in the real world.

I’d say the Met Office and the media (the quote marks indicate the introductory sentence was written by the Guardian’s John Vidal) need to mind their language. How about “slightly more likely than not to be” rather than “expected to be”? And perhaps “indication” rather than “forecast”? And “x% of model runs gave…” rather than “the probability that…”? And definitely “might” rather than “is likely to”!

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