Gonzalo Raffo InfoNews

EUROPE IS STUCK ON LIFE SUPPORT / THE FINANCIAL TIMES COMMENT & ANALYSIS ( A MUST READ )

2012-02-01T04:18:00.001-05:00

January 31, 2012 6:42 pm

Europe is stuck on life support

By Martin Wolf

Economic decision-makers are more optimistic than two months ago. The main reason is the belief that the European Central Bank, under the shrewd leadership of Mario Draghi, has eliminated the risk of a financial implosion in the eurozone. As Mark Carney, the respected governor of the Bank of Canada and Mr Draghi’s successor at the Financial Stability Board, remarked at the World Economic Forum in Davos: “There is not going to be a Lehman-style event in Europe. That matters.”

Spreads on credit default swaps on Italian and Spanish banks have fallen since the introduction of the ECB’s three-year long-term refinancing operations in December. Spreads between yields on debt of some vulnerable sovereigns and German Bunds have also eased.

Does this mean the eurozone crisis is over? Absolutely not. The ECB has saved the eurozone from a heart attack. But its members face a long convalescence, made worse by the insistence that fiscal starvation is the right remedy for feeble patients.

Last week’s downgrading of its forecasts by the International Monetary Fund shows the dangers. The IMF now forecasts a recession in the eurozone this year, with a decline of 0.5 per cent in overall gross domestic product. GDP is forecast to fall sharply in Italy and Spain, and stagnate in France and Germany. This is a terrible environment for countries seeking to cut fiscal deficits. Forecasts are far from satisfactory for other high-income countries. But the eurozone is the most dangerous part of the world economy: only there do we see important governments – Italy and Spain – menaced by a loss of creditworthiness.

Elsewhere, governments of high-income countries can continue to support their economies, largely because they possess a central bank and an adjustable exchange rate. This combination has given them the ability to run large fiscal deficits. In post-crisis conditions, such deficits are both the natural counterpart and the principal facilitator of necessary private sector deleveraging.

The eurozone has no such internal mechanisms. When private external financing dried up, as happened to a number of countries, affected members needed both financing – in the short run – and a mechanism for adjusting their external accounts – in the longer run – other than via deep slumps. The eurozone lacks both capacities. It has turned out, as a result, to have limited ability to cope with the global financial disease. As Donald Tsang, chief executive of Hong Kong, remarked in Davos: “I have never been as scared as I am now.” Astute observers have a sense that little stands between them and a wave of sovereign and banking defaults inside the eurozone, with ghastly global repercussions.

The ECB has reduced the risk of an immediate collapse of the banking sector. But the demand of informed outsiders is for stronger firewalls against the possibility that a collapse of, say, Greece, perhaps including its exit from the eurozone, would lead to a panic over prospects for far more important countries. Christine Lagarde, managing director of the International Monetary Fund, made that one of her three imperatives, along with stronger growth and deeper integration, in a courageous speech in Berlin last week.

What these outsiders want to see is a commitment that vulnerable eurozone countries will be given the time and the treatment they need to recover. Naturally, they also want to see a commitment of resources by the eurozone that makes clear the determination of its members to secure this outcome.

Only then would it make sense for an enhanced IMF to add its own contribution. Why indeed should a relatively poor country, such as China, be expected to contribute to rescuing a eurozone that has shown little will or ability to heal itself?

Alas, the problem is not just one of will. It is one of a lack of a correct diagnosis. This is a problem the ECB cannot correct. Germany, as creditor country, opposes a “transfer union” and insists that fiscal discipline is everything. It is right on the first point and wrong on the second.

A long-term transfer of resources to uncompetitive members would be a disaster, enfeebling recipients and bankrupting providers. But fiscal indiscipline is not all. Just as it was not the dominant cause of the collapse, but rather sloppy lending and improvident private borrowing, so fiscal discipline is not the cure. This attempt to vindicate the catastrophic austerity of Heinrich Brüning, German chancellor in 1930-1932, is horrifying.

The perspective embodied in the fiscal compact– itself an attempt to revive the failed stability and growth pact – lacks the necessary understanding of the dependence of output in one member country on demand in others, of the role of payments imbalances and of the fact that competitiveness is always relative. If Italy and Spain are to become more competitive within the eurozone then Germany or the Netherlands must become less so.

Moreover, if the private sector is running a structural financial surplus to lower its debt, policymakers can eliminate structural fiscal deficits if and only if the country runs a structural current account surplus. Germany should understand this because that is precisely what it is doing. Countries hit by financial crises almost always have large structural private sector financial surpluses. If these countries are indeed to eliminate structural fiscal deficits, they, too, must run structural current account surpluses, just like Germany. Yet every country cannot run such surpluses, unless the eurozone as a whole is to do so.

It is impossible for individual countries to heal without offsetting changes elsewhere. As Ms Lagarde said in Berlin: “Resorting to across-the-board, across-the-continent, budgetary cuts will only add to recessionary pressures.” Fiscal tightening must be selective. More important, the indication that the adjustment process is working – so making unnecessary the long-term fiscal transfers Germany rightly detests – would be buoyant demand in the core of the eurozone, with inflation well above the eurozone average – a mirror image of what happened before the crisis.

The strongest note of optimism on the eurozone I heard in Davos rested on the dire results of a break-up. Yet desperate people do desperate deeds. Members now need the time and the opportunity to adjust. Strong firewalls should give the time, but only shifts in competitiveness will give the opportunity. Without both, the crisis will surely return.

Copyright The Financial Times Limited 2012

THE CHANCELLOR WHO PLAYED WITH FIRE / PROJECT SYNDICATE ( A MUST READ )

2012-02-01T04:17:00.001-05:00

The Chancellor Who Played with Fire

Joschka Fischer

2012-01-31
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BERLIN – German Chancellor Angela Merkel should be happy nowadays: her party’s approval ratings aren’t bad, and her own are very good. She no longer has serious rivals within the center-right Christian Democratic Union (CDU), while the left opposition is fragmented into four parties. Her response to the European crisis has prevailed – or at least that is the impression that she conveys, and that most Germans believe. So everything is fine and dandy, right?

Not so fast. Two issues could complicate Merkel’s re-election bid in the autumn of 2013.

Domestically, her coalition partner, the liberal Free Democrats (FDP), is disintegrating. Even if the FDP survives the next election (which is by no means certain), the current coalition is unlikely to retain its parliamentary majority, leaving Merkel increasingly dependent on the Social Democrats (SPD). While this need not matter to her too much as long as she retains the chancellorship, in Sigmar Gabriel, the SPD’s leader, she faces – for the first time – an opponent whom she would underestimate at her peril.

But the real danger to Merkel is external: the European crisis. If she is unlucky, the crisis will come to a head at the start of the German election year, and all previous calculations could be moot, because, despite Germans’ frustration with Europe, the electorate would punish severely those who allowed Europe to fail.

The European Union’s economy is sliding into a severe and, in all likelihood, long-lasting recession, largely self-inflicted. While Germany is still trying to banish the specter of hyperinflation with strict eurozone austerity measures, the EU crisis countries are facing a real threat of deflation, with potentially disastrous consequences. It is only a question of time – no longer very much time – before economic destabilization gives rise to political instability.

Hungary, where democratic backsliding appears to be taking hold, provides a foretaste of a Europe in which the eurozone crisis and deflation persist. The mood in the Mediterranean EU members, as well as in Ireland, is heating up, owing not only to the tightening squeeze of austerity, but also – and perhaps more importantly – to the absence of policies that offer people hope for a better future. The explosive nature of current trends, which point to eventual re-nationalization of sovereignty from the bottom up, is greatly underestimated in Berlin.

The crisis has now reached Italy and is threatening to spread to France. With Mario Monti’s premiership, Italy has mobilized its best people, and neither Italy nor Europe will get a better government for the foreseeable future. If Monti’s administration is toppled – either in parliament or in the streets – the EU’s fourth-largest economy could come crashing down. Monti is urgently calling for help. Where is it?

Developments in France (the second-largest eurozone economy) should also not be underestimated in this presidential election year. If a majority of the French come to believe that a course of action is being imposed on them from outside – and by Germany, no less! – they will respond with traditional Gallic stubbornness.

What is at stake is less the election’s outcome than the margin between President Nicolas Sarkozy and the far-right National Front leader, Marine Le Pen – and whether she overtakes him to qualify for the second-round run-off against the Socialist candidate. While she would be unlikely to win the presidency, she could reshape and realign the French right. For that reason, a Sarkozy debacle would drastically reduce his Socialist successor’s room for maneuver on European policy, fundamentally altering France’s position in Europe.

But, while the French election’s outcome will hinge to a crucial extent on European crisis politics, Germany’s government acts as if this were none of its concern. Instead, the main – almost exclusive – topic in Berlin is the upcoming election. And the central question is not, “What needs to be done now in the interest of Europe?” Rather, it is, “How much can people in Germany be expected to accept – in particular, how much honesty?”

No one will act in a way that jeopardizes their electoral prospects, at least while there are still alternatives. So it is conceivable that Germany is not at all interested in a serious effort to resolve Europe’s crisis, because that would mean taking big risks and investing a lot of money.

The CDU-FDP coalition prefers to sugarcoat the situation by convincing themselves of an Anglo-Saxon conspiracy, abetted by those in the European crisis countries unwilling to perform and reform and whose only purpose is to make the Germans pay. So far, Merkel’s coalition is like someone driving against traffic, dead certain that everyone else is going the wrong way.

Europe’s disintegration has already advanced much further than it might appear. Distrust and national egoism are spreading rapidly, devouring European solidarity and common purpose.

Institutionally, Europe has been on the right track since the last summit, but it threatens to disintegrate from the bottom up. To save the euro – which is essential, because the European project’s fate depends on the success of monetary union – Europe needs action now: in addition to indispensable austerity measures and structural reforms, there is no way to succeed without a viable economic program that will assure growth.

That won’t come cheap. If Merkel’s government believes that paying lip service to growth is enough, it is playing with fire: a euro collapse in which not only Germans would be badly burned.

Joschka Fischer, Germany’s foreign minister and vice-chancellor from 1998 to 2005, was a leader in the German Green Party for almost 20 years.

Copyright: Project Syndicate/Institute for Human Sciences, 2011.

WILL GOLD-MINING STOCKS FINALLY HIT PAYDIRT ? / BARRON´S GETTING TECHNICAL ( VERY HIGHLY RECOMMENDED READING )

2012-02-01T04:16:00.002-05:00

Getting Technical
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MONDAY, JANUARY 30, 2012
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Will Gold-Mining Stocks Finally Hit Paydirt?
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By MICHAEL KAHN
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The price of bullion is rising again after a correction. But can the mining sector glitter like the metal itself?
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After five months of choppy declines and arguments by pundits that the so-called gold bubble has burst, the yellow metal just scored a technical breakout to the upside.

Action from gold's peak last September above $1923 per ounce through last months' low under $1524 was a correction in a long-term bull market. And with January's breakout, that bull market is ready to resume. Gold traded Monday at $1734.

The question I'll answer shortly is whether gold-mining stocks will join the metal in a rally.

But for a moment, let's look at the metal itself, who usually needs to perform well if gold miners have a reasonable chance of heading north. Using the SPDR Gold Trust (ticker: GLD) as a proxy, I wrote of a critical support level that needed to hold last month (see Getting Technical, "Gold's Last Stand," December 12, 2011). Twice, this exchange-traded fund dipped below the critical 154 level only to reverse course and start to climb higher (see Chart 1).
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Chart 1

SPDR GOLD TRUST ETF

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In technical analysis, a breakdown followed by immediate reversal is a powerful bullish signal.
Last week, the market confirmed this bullish change when it broke out to the upside from its five-month pattern, soon after Fed Chief Ben Bernanke reported that he would hold short-term interest rates near zero until late 2014. Midday Monday, it traded at 168.24. Chart watchers now expect the gold ETF to top 190. The equivalent in gold itself would be $2000 and that would indeed open a few eyes.

Gold-mining stocks have alas been a different story. Last year, I wrote that mining stocks, despite lagging the metal for several years, were not ready to play catch up to the commodity (see Getting Technical, "The Trend Is Gold Bullion's Friend," May 18, 2011).

Since then, the relationship has not changed much - with one small exception. Starting in December, the Market Vectors Junior Gold Miners ETF (GDXJ) started to move higher both in absolute price and relative to gold itself. In other words, junior miners -- which tend to be smaller, younger companies that are still in the exploration and discovery phase of developing gold mines -- have started to outperform (see Chart 2).
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Chart 2

MARKET VECTORS JUNIOR GOLD MINERS ETF

There are several reasons why technical analysts think junior miners look good. From momentum indicators to moving averages, the weight of technical evidence does seem to have tipped towards the bullish side. And with last week's Fed-induced rally in gold, the junior gold miner ETF also enjoyed volume support.

Real money flowed into the sector and that suggests demand is higher, too.

To be sure, the path to higher prices is not an easy one. Resistance from a giant trading range between roughly 30 and 40 is daunting (the ETF traded at 29.20 Monday). But the underlying mood has changed for the better.

The junior gold miners index itself is constructed from more than 80 stocks. Nearly two thirds are stocks traded in Canada, one fifth are traded in Australia and only about 7% are traded in the United States. Therefore, domestic investors might be better sticking to the ETF instead of trying to pick component stocks.

Keep in mind that by definition, these stocks have relatively low market capitalizations and the dollar volume of shares traded each day is much less than more large, liquid gold stocks such as Newmont Mining (NEM). Most component junior-mining stocks account for less than 3% of the weight of the junior miners ETF. Therefore, it would take a good deal of effort to assemble a portfolio representing a cross section of the index.

So, despite the naysayers, gold is starting to shine again. This time, it may be ready to take junior gold-miners with it on a ride higher.

Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.

NEVILLE CHAMBERLAIN WAS RIGHT / PROJECT SYNDICATE ( A MUST READ )

2012-02-01T04:15:00.003-05:00

Neville Chamberlain was Right

J. Bradford DeLong

2012-01-30
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BERKELEY – Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.

Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron’s government (with Chancellor of the Exchequer George Osborne leading the cheering squad). The country’s real GDP has flat-lined, and the odds are high that British real GDP is headed down again.

Indeed, in less than a year, if current forecasts are correct, Britain’s Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain ever.

that is quite an accomplishment. As Phillip Inman of The Guardian recently put it: “The UK’s plan for recovery from the financial crisis was based on a full-throttle recovery in 2012....Consumer confidence, business investment, and general spending would converge to send the economy on a trajectory of above-average growth.”

It did not work: government ministers “have done what the right-wing economists told them to do and moved out of the way – the theory being that public-sector spending and investment was ‘crowding out’ the private sector.” Instead, as Inman says, “Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow...”

The failure of expansionary austerity in Britain should give all of its advocates around the world reason to reflect on and rethink their policy calculations. Britain is a highly open economy with a flexible exchange rate and some room for further monetary easing. There is no risk or default premium baked into British interest rates to indicate that fear of political-economic chaos down the road is discouraging investment.

There is an argument – not necessarily true, but an argument nonetheless – that, while in office from 1997 to May 2010, the Labour governments of Tony Blair and Gordon Brown overshot long-term sustainable government spending as a share of GDP. Their actions stand in contrast to countries that reduced their debt-to-GDP levels in the 2000’s, and to the United States, where the problem was not excessive spending but insufficient taxation under the Bush administration.

Yet, if one takes this view seriously, Britain, with a ten-year nominal interest rate of less than 2.1% per year, should already be in a boom. If there was ever a place where expansionary austerity should work well – where private investment and exports should stand up as government purchases stood down, confirming its advocates’ view of the world – it is Britain today.

But Britain today is not that place. And if expansionary austerity is not working in Britain, how well can it possibly work in countries that are less open, that can’t use the exchange-rate channel to boost exports, and that lack the long-term confidence that investors and businesses have in Britain?

Nick Clegg, Britain’s deputy prime minister and the leader of Cameron’s coalition partner, the Liberal Democrats, should end this farce today. He ought to tell Queen Elizabeth II that his party has no confidence in Her Majesty’s government, and humbly suggest that she ask Labour Party leader Ed Miliband to form a new one.

To be sure, if Clegg did this, his political career would probably be finished, and his party’s electoral prospects would be damaged for a long time to come. But Clegg’s political career and his party’s fortunes will be shaky for a long time to come in any case, given the economic hardship that Britain is enduring (and will continue to endure). At least defection from the ill-advised Conservative-Liberal coalition now would benefit his country.

Policymakers elsewhere in the world take note: starving yourself is not the road to health, and pushing unemployment higher is not a formula for market confidence.

J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.

Copyright: Project Syndicate, 2012.

THE FED´S NEW TRANSPARENCY EFFORTS RISK UNDERMINING IT / THE FINANCIAL TIMES COMMENT & ANALYSIS ( HIGHLY RECOMMENDED READING)

2012-02-01T04:14:00.006-05:00

The Fed’s new transparency efforts risk undermining it

Lorenzo Bini Smaghi

January 31, 2012

Last week’s decision by the Federal Reserve to provide a quantitative definition of price stability and the publication of the 17 Federal Open Market Committee members’ expectations of the Fed funds rate over the next few years aims at improving transparency and accountability of the central bank. It also raises several questions.

The first relates to the time horizon over which the Fed is supposed to achieve price stability, namely the long-run. This differs from most other central banks in advanced economies, where price stability is targeted over a horizon of two to three years. The reason for focusing on the medium term is that inflation forecasts over a longer period are not very reliable. Price movements 10 years from now will depend on factors that cannot be foreseen today and in any case are hardly affected by today’s policy decisions.

Monetary policy produces its effects with lags of one to three years. This is the period over which the central bank should be held accountable. Focusing over this time horizon also helps market participants. For instance, it’s not too difficult to anticipate a monetary policy tightening if a central bank publishes forecasts that show inflation rising above the stated objective for the next two to three years.

But if the objective of price stability is defined over the longer term, communication becomes more complex. In particular, the link between the inflation forecasts and the policy decision is unclear. What should market participants derive from a published inflation forecast above the two per cent target in the long run (but not necessarily over the next two years)? Should they expect a tightening to take place? And when? The long run is not a “policy-relevant” time horizon and thus has little value for those attempting to understand the central bank’s next moves.

The second question relates to the fact that the interest rate expectations formulated by the FOMC members are all conditional on the state of the US economy. If conditions change over time, the members will revise their forecasts at the next meeting. But for the market to understand this process, and to be able to continiously update its views, it needs to have some idea of the forecasting model used by each of the members. Without this, the task of Fed-watchers will become much more complicated. The suspicion may arise that the interest rate forecasts are ultimately dictated by the members’ short- term policy preferences, rather by than their ability to predict prices over the long-term.

Finally, while the concept of a conditional interest rate forecast is understood by market participants, it may not be by the public and politicians. This could lead to misunderstandings and recriminations. How will people react if, after having taken a decision (for example, take up a mortgage for a new house) on the basis of the Fed’s published expectation of unchanged interest rates until 2014, they find out that interest rates might rise earlier because the conditions underlying the central bank’s forecast have changed. Won’t they, and their elected representatives, blame the Fed for having induced them to take decisions that turned out to be more costly than expected? How easy would it be for the Fed to explain that the earlier interest rate forecast was conditional on assumptions that did not materialise and that people should have taken the forecast with more caution?

To be effective, central bank communication needs to be well understood not only by sophisticated market participants but also by the public. As they are currently designed, the new tools might turn out to be too complex, and risk creating confusion, for both groups. This could be exploited by those, in particular in Congress, who are looking for new excuses to undermine the independence of the Fed. This risk should not be underestimated.

The writer is a former member of the executive board of the European Central Bank and currently visiting scholar at Harvard’s Weatherhead Centre for International Affairs

CREATE A MEANINGFUL LIFE THROUGH MEANINGFUL WORK / HARVARD BUSINESS REVIEW ( HIGHLY RECOMMENDED READING )

2012-02-01T04:13:00.001-05:00

Create a Meaningful Life Through Meaningful Work

10:03 AM Monday January 30, 2012

In case you haven't been following my tell-all confessional — I mean Twitter feed — lately, I've been in Manhattan for the last few weeks. Hanging out in all the wrong places (read: painfully hip power hotels), I've had the questionable privilege of overhearing more than my fair share of Very Serious Conversations from the movers and shakers of the world.

And boy, have they been tedious: mostly, about eking out slightly sharper terms for deals for more yawn-inducing stuff (whether flicks, financial instruments, or kicks) that's destined not to matter. So here's a tiny hypothesis: maybe the real depression we've got to contend with isn't merely one of how much economic output we're generating — but what we're putting out there, and why. Call it a depression of human potential, a tale of human significance being willfully squandered (on, for example, stuff like this).

If that's the best we can do, no wonder our economy is falling short of its potential — and no wonder our lives occasionally feel empty, even meaningless. (Even star quarterbacks married to Brazilian supermodels occasionally say to themselves, there's got to be more than this.) Hence, If we want to do better, I suggest it's time to get lethally serious about doing stuff that actually matters. So here are three questions to ask about yourself about what you're spending your life doing:

Does it stand the test of time? Ponder this for a moment: the vast majority spend the vast majority of our lives sweating, suffering, and slogging mightily over stuff that's forgotten by next quarter, let alone next year or next century. Call me crazy, but I'd suggest: mattering means building stuff that's awesome enough to last. Maybe not forever, like Giza's Pyramids — but surely more than a couple of months, before it's absent-mindedly tossed into the dustbin of history along with the rest of the flotsam and jetsam of the age of disposable plastic junk. I'd give you a handful of recent real-world examples, but beyond the labors of love a new generation of artisans are working on, whether microbrews, novels, or games, here's the hard truth: when it comes to the stuff our largest institutions are invested in, I can't think of any, so poor is our cultural performance at standing the test of time. (Just ask yourself: is anybody really going to be watching Mission Impossible 4 a century from now, except a handful of irony-soaked action-movie-worshipping 22nd century hipsters?). Of course, all that really means is that since nearly everyone seems to suck at standing the test of time, you've got a tremendous opportunity not to.

Does it stand the test of excellence? In most boardrooms, the first and last question asked is: will "the markets," financial and "consumer," like your latest shiny trinket slightly better than the next guy's? Of course, that's a perfect recipe for mediocrity: to have barely satisfied weary, oppressed, jaded "consumers" already trained to demand the bare McMinimum is to have furiously smashed the glass ceiling of the lowest common mass-market denominator — and little more. Here are some higher bars: do critics, scholars, aficionados, and diehard enemies pan it, or love it? Mattering means recognizing that everyone's opinion is not created equal — some count more than others, for the simple reason that some opinions are more nuanced, educated, sophisticated, historically grounded, and self-aware than others.

Does it stand the test of you? Sure, I can understand why the dudes and gals I've been overhearing in my little Manhattan adventure are so energized by the stuff they're "working" on — it feels exciting to be part of a buzzing milieu's in-crowd. But let's face it: on our deathbeds, the accomplishments that matter most to most of us probably won't be recounted thus: "In 2012, I sold another thousand copies of someone else's middle-of-the-road blockbuster to an overweening VP with really bad hair and worse manners at a giant monopolistic corporation that was destroying my grandkids' futures. Man, I lived." So while I too sometimes feel enchanted by the seductive power of glittering fantastic excess that seems to have mesmerized my little informal sample of Manhattanites, I'd also like to challenge them — and you — to consider the questions of mattering in a slightly more sophisticated, humane, considered way. It's one thing to work on stuff that seems sexy because it's socially cool and financially rewarding. But fulfillment doesn't come much from money or cool-power — all the money in the world can't buy you a searing sense of accomplishment.

Being human is never easy. But that's the point. Perhaps as an unintended consequence of our relentless quest for more, bigger, faster, cheaper, now, we've comfortably acceded to something akin to a minor-league contempt for the richness and grandeur of life unquenchably meaningfully well lived. Hence, call this post my tiny statement of rebellion. Hex me with all the bland management jargon in the world, zap me with all the perfect theories and models you like, but I'll never, ever accept the idea that triviality, mediocrity, and futility are appropriate goals for any human being, much less our grand, splintering systems of human organization.

We're all built differently — but none of us is here to not make a difference. So what are your three questions for getting lethally serious about doing stuff that matters?

Umair Haque is Director of Havas Media Labs and author of Betterness: Economics for Humans and The New Capitalist Manifesto: Building a Disruptively Better Business. He is ranked one of the world's most influential management thinkers by Thinkers50. Follow him on twitter @umairh.

KNOWLEDGE LIES AT THE HEART OF WESTERN CAPITALISM / THE FINANCIAL TIMES COMMENT & ANALYSIS ( A MUST READ )

2012-01-31T04:32:00.004-05:00

January 29, 2012 7:50 pm

Knowledge lies at the heart of western capitalism

By Hernando de Soto

The world economy is made up of many tiny parts that are useful only when we combine them into more complex wholes. The higher the value of these aggregations, the more economic growth.Humanity’s achievements – from the 120 ingredients of my clock to the countless financial deals and developments that produced the internet and flight navigation systems – all result from joining people and things to each other.

That’s why western capitalism has triumphed for the past 150 years: it gave us the best knowledge to explore economic combinations. Capitalism does not need to be re-thought or re-invented; it simply has to be re-discovered.

The reason credit and capital have contracted for the past five years in the US and Europe is that the knowledge required to identify and join parts profitably has been unwittingly destroyed. The connections between mortgage loans and liquid securities, between non-performing financial derivatives and the organisations that hold them; the non-standardised, scattered records that obscure who holds risks; and the off-balance-sheet accounting that obscures many companies’ health: these all make it harder to trust and hence combine. Until this knowledge system is repaired, neither US nor European capitalism will recover.

Reformers and policymakers must recognise that they are not dealing with a financial crisis but with a knowledge crisis. Capitalism lives in two worlds: there is a visible one of palm trees and Panamanian ships, but it is the other – made up of the property information cocooned in laws and records – that allows us to organise and understand fragments of reality and join them creatively.

The world of organised knowledge and joining began in earnest in the mid-19th century, when reformers in Europe and the US concluded that the segmented, undirected knowledge left by the old regimes could not cure the recessions that beset early capitalism. They faced what was known as “the knowledge problem”, the inability to select and store dispersed information about economic things. Those reformers created “property memory systems” to map – in rule-bound, certified and publicly accessible registries, titles and accounts – all the relevant knowledge available on assets, whether intangible (stocks, patents, promissory notes) or tangible (land, buildings, machines).

Knowing who owned – and owed – what and where, and fixing that information in public records, made it possible for investors to locate suppliers, infer value, take risks and combine such simple things – to borrow a famous example – as graphite from Sri Lanka and wood from Oregon into pencils.

Reformers also helped to solve “the binding problem,” finding the information needed for parts to fit together. This metaphysical concern affected all disciplines: physiologists discovered that what binds cells to form an organ performing specific, sophisticated functions is a nucleic acid now called DNA. The logic behind the property documentation is the DNA of capitalism.

Modern recording systems evolved from data warehouses certifying isolated assets, into factories of facts for facilitating the knowledge entrepreneurs need to combine assets, skills, technologies and finance into more complex and valuable products. Thus, real estate documentation no longer just says that Smith owns the house on the hill but also describes that house as the address at which mortgages can be foreclosed; debts, rates and taxes collected; deliveries made; and from which utilities services can be controlled and bills collected.

This knowledge allowed western economies to grow more since the second world war than in the previous 2,000 years without big credit contractions.

Until 2008, when we began to learn that memory systems had stopped telling the truth – through off-balance-sheet accounting; debts buried in footnotes or the ledgers of “special purpose entities”; financing raised by “bundling” mortgages into securities not recorded in traditional public registries; and nations masking debt as income by swapping it from one currency to another. No wonder institutions and investors have lost confidence in the system.

The brilliance of western capitalism lies not in providing a formula for wealth creation but in its property memory systems, which are the result of examining, selecting and validating information about who owns land, labour, credit, capital and technology, how they are connected and how they can be profitably recombined.

For the past 15 years, the records of western capitalism have been debased, leaving governments without the facts to spot what needs to be fixed and for businesses to know where their risks are. To regain its vitality, western capitalism must bring under the rule of law and public memory hundreds of trillions of dollars now swirling mindlessly out of control in the obscure world of financial innovation. That task requires major political leadership.

The writer is author of ‘The Mystery of Capital’ and ‘The Other Path’

Copyright The Financial Times Limited 2012.

A BLUFFING GAME / DER SPIEGEL ( A MUST READ )

2012-01-31T04:17:00.000-05:00

01/30/2012 01:04 PM

A Bluffing Game

European Politicians in Denial as Greece Unravels

By Sven Böll, Alexander Neubacher, Ralf Neukirch, Christian Reiermann, Christoph Schult and Anne Seith
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Europe's politicians are losing touch with reality. Greece is broke, and yet Brussels wants to send the country billions in new loans, to which there is growing opposition within the coalition government in Berlin. Rescue efforts are hopelessly bogged down by bickering over who will ultimately step up.

Martial music booms from the loudspeakers as warlike images gallop across monitors. A short euro crisis film montage shows police officers being posted in front of the parliament building in Athens and the jostling of frantic reporters, then US investor George Soros uses grim words in an appeal to rescue the euro zone. "The alternative is just too terrible to contemplate," he says.

Speaking in a panel that follows the short film, German Finance Minister Wolfgang Schäuble, a member of Chancellor Angela Merkel's center-right Christian Democratic Union (CDU), has a gloomy expression. It is last Friday when the global business elite were at the World Economic Forum in Davos, Switzerland, to discuss the "Future of the Euro Zone." It becomes quickly apparent that Schäuble would have preferred a different opening than the dark film for this event. The negotiations with Athens' private creditors are going well, he says, and he points out that he is "quite optimistic" Greece can be rescued.

But later European Union Economic and Monetary Affairs Commissioner Olli Rehn, standing next to the stage, imparts a very different message to reporters. He concedes that Athens needs money once again, but that he cannot yet reveal just how much. Nevertheless, he adds, it is "likely" that the donor countries will have to come up with "a slightly larger contribution."

Once again, Europe is arguing over a bailout for Greece, and it looks as though the result will be no different that it has been in the past. German Chancellor Angela Merkel opposed lending money to Athens in early 2010, and then the first bailout package for Greece was put together. A year later, she balked at further aid, and then came the second program. Now she is trying to protect the euro zone's coffers once again, though no one in Berlin or Brussels is willing to bet that she will have more success this time around.

Europe's politicians continue to battle reality. Everyone knows that Greece cannot repay its massive pile of debts, now at more than €350 billion ($459 billion). But instead of effectively reducing the financial burden, European politicians intend to approve new loans for the government in Athens and go on fighting debt with new debt. "If the country wants to remain in the euro zone, we should support it," says Austrian Chancellor Werner Faymann.

No Progress

Though the rescuers may be issuing calls for perseverance, resistance is growing in Europe. In Athens, political parties and citizens are fighting too keep austerity measures from transforming their economic downturn into a full-on crash. And in Germany, the main donor country, leading politicians within the two coalition parties, the CDU and the business-friendly Free Democratic Party (FDP), do not believe that a majority of parliamentarians will vote for additional aid to Greece. "Our position has not changed," says Horst Seehofer, the chairman of the CDU's Bavarian sister party, the Christian Social Union (CSU). "There is no money for a standstill in reforms."

The effort to rescue Greece is clearly moving in circles, and there is no evidence of any progress.

Ironically, only three months ago European leaders believed that things were already on the mend. Greece's private creditors were supposed to abandon half of their claims, and the partner countries planned to contribute another €130 billion ($172 billion). These efforts were expected to bring the country's debt level from more than 160 percent of gross domestic product (GDP) to a more tolerable 120 percent by 2020.

But these hopes were deceptive. The Greek economy is shrinking faster than European politicians believed was possible in autumn, and now the country is short on funds once again. The representatives of the so-called troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), estimate the shortfall to be about €15 billion, meaning that Greece needs €145 billion instead of €130 billion. "We do not assume that the additional funds can be collected solely from private creditors," say sources within the troika.

The only other option is to redistribute the burden. Under the current program, the IMF is responsible for about one-third, and the Europeans for two-thirds of the costs. But obtaining cash is becoming increasingly difficult. A serious dispute over who will come up with the additional money has been raging behind the scenes for days -- a dispute that resembles a game of Old Maid.

Politicians Bicker with Banks

The German government feels that the financial sector should bear much of the additional burden. If additional funds were needed, the banks would simply have to contribute more, the Germans argue. The countries involved are already pitching in €130 billion to the new bailout package, and Berlin feels that that ought to be enough.

The banks' representatives disagree completely. They have already increased their contribution several times, and now they point out that it isn't just private institutions that hold Greek government bonds. The European Central Bank, for example, holds up to €55 billion in Greek securities. Why shouldn't the ECB participate in the write-downs, Deutsche Bank CEO Josef Ackermann asks himself?

But Europe's monetary watchdogs indignantly reject such proposals. They only bought the bonds to maintain the money supply, say officials at ECB headquarters in Frankfurt's Eurotower. Waiving some of their claims, they argue, would be tantamount to intervening in the fiscal policy of countries. "If we did that, we would be taking on a portion of a country's debt," says a central banker. "And we are barred from doing that."

With such arguments, the monetary watchdogs passed the unwanted baton back to politicians. Last Thursday, EU Economic and Monetary Affairs Commissioner Rehn conceded that the hole in the second bailout package could only be plugged with government funds. The German government was not amused. "Rehn is completely alone in his opinion," a senior government official in Berlin grumbled. Nevertheless, European leaders know that the countries in the euro zone will not be able to avoid coming up with the funds for new loans to Greece. If there are no other options, says Luxembourg Finance Minister Luc Frieden, "the public sector may have to provide more money."

Europe is pursuing a Greece strategy of pressing on regardless of the potential cost. Meanwhile, it is becoming increasingly obvious that this method is not helping the country's economy get back on its feet. Although the Athens government is spending €20 billion less this year than it did in 2009, the debt ratio is still climbing, because the Greek economy will shrink for the fifth year in a row in 2012. And almost all experts agree that the country will not be able to pull itself out of the crisis on its own.

The Dismal Greek Economy

The Greek economy is not productive enough to generate growth. Aside from olive oil, textiles and a few chemicals, there are hardly any Greek products suitable for export. On the contrary, Greece is dependent on food imports to feed its population.

"Greece has been living beyond its means for years," an unpublished study by the German Institute for Economic Research (DIW) concludes. "The consumption of goods has exceeded economic output by far."

Especially devastating is the assessment that the DIW experts make about the condition of an industry that is generally seen as a potential engine for growth: tourism. According to the DIW study, the Greek tourism industry concentrates on the summer months, with almost nothing happening throughout the rest of the year.

There is almost no tourism in the cities, which translates into low overall capacity utilization and high costs for hotel operators. By contrast, capacity utilization in the hotel sector is much more uniform in other Mediterranean countries.

According to the study, a key cause of the problem is the relatively poor price/performance ratio. In Mediterranean tourism, Greece has to compete with non-euro countries like Croatia, Tunisia, Morocco, Bulgaria and Turkey, which can offer their services at significantly lower prices. The per-hour wage in the hospitality industry was recently measured at €11.39 in Greece, as compared with only €8.49 in Portugal, €4 in Turkey and as little as €1.55 in Bulgaria. The study arrives at grim conclusions, noting that the drastic austerity programs will not only remain ineffective, but will also stigmatize the country as "Europe's problem child" for a long time to come.

Others in Europe are also noticing that the transformation of the Greek economy is not progressing. This translates into resistance within national parliaments against approving new aid for Athens.

Resistance Mounts in Berlin

This also applies to Merkel's center-right coalition government in Berlin, in which the first Greece package and the European Financial Stability Facility (EFSF) bailout fund were already hotly contested. Since then, resistance to additional German aid for debt-ridden countries has only grown. "Greece would be the most difficult decision by far for the parliamentary group," says Florian Toncar, the FDP's deputy parliamentary leader, who is a member of the party's pro-European wing. It is already clear that significantly more parliamentarians will refuse to go along with their leadership in the future.

Bavarian FDP member of the Bundestag Erwin Lotter, for example, who has voted for all euro bailout packages until now, would no longer do so in the case of Greece. "I was of the opinion that the Greeks needed time," he says. "Now I assume that there will be a national bankruptcy, and that the problems cannot be solved with more money."

There are also serious concerns within the CSU, which has only supported Merkel with great reluctance until now. "The CSU rejects new aid for Greece beyond the approved programs," says CSU Chairman Seehofer. The CSU wants to hold a European conference on Monday to discuss the subject of Greece. Seehofer has already set the tone: "If the Greeks do not implement the reform programs, there can be no further aid."

Doubts are also growing within the CDU. "I will not vote for new aid to Greece," says CDU domestic policy expert Wolfgang Bosbach.

"The Greeks don't lack the political will, but they do lack the economic strength to get back on their feet." Anxiety is also spreading through the party's European wing. "A great deal of irritation has spread through the party," says Gunther Krichbaum, the chairman of the CDU's Europe committee. "All Greek parties must finally show the unconditional will to make fundamental changes."

The displeasure at the party base has now reached the leadership of the coalition too. In a move designed to generate good publicity, CDU/CSU parliamentary group leader Volker Kauder has called for sending a European state commissioner to Athens. His FDP counterpart, Rainer Brüderle, is also not mincing his words.

"Solidarity is not a one-way street. In this sense, the European Community must remain tough and demand the necessary structural reforms," says Brüderle. "Only if the Greeks also offer proof that they are serious, can and might we, as the European Community, come to their aid."

Restructuring with a Crowbar

Perhaps the only purpose of the sharp tone being taken by the parliamentary leaders is to pave the way for the next aid payment. According to the deal these statements are trying to prepare for, Greece will receive new money if it bends to even stricter requirements and conditions. The country is to be restructured with a crowbar.

Experts believe that this recipe is just as unlikely to get the country's ailing economy back on its feet as the other form of radical therapy currently being discussed: Greece's withdrawal from the euro. "It is naïve to believe that the problems will be solved if Greece reintroduces the drachma," says Ansgar Belke, director of macroeconomic research at the DIW and a professor at the University of Duisburg-Essen. The country's products would become cheaper, but at the same time, the turbulence caused by currency reform would send thousands of companies and banks into bankruptcy. Interest rates could rise, and a bankruptcy would also infect other countries. As a result, says Belke, "the problems of Greece and the euro zone could even become worse."

Instead, economists recommend finally doing what is already unavoidable: sending the country into an orderly insolvency. Greece's government creditors, which include the ECB and, most of all, the partner countries that have lent the country money until now, would have to abandon about half of their claims so that the country's mountain of debt could be reduced to a tolerable level.
Then the measures that can return the Greek economy to growth on its own can become more effective: reforms in the labor market, more competition in the service industries and foreign investment.

The majority of European politicians still refuse to recognize reality, though. This is understandable, given that abandoning portions of their claims against Greece would translate into substantial losses. But some government representatives are at least willing to approach the first warm-up exercises.

When Luxembourg Prime Minister Jean-Claude Juncker was asked by German financial newspaper Handelsblatt last Friday whether the euro countries should also forgive Greek debts, he replied that such proposed solutions are "not entirely absurd."

Translated from the German by Christopher Sultan

HORDES OF HOARDERS / THE FINANCIAL TIMES COMMENT & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

2012-01-31T04:16:00.001-05:00

January 29, 2012 7:40 pm

Hordes of hoarders

By John Authers

Companies’ growing cash piles are irking shareholders and stunting growth

Call it the $1,700bn problem. Companies in the US are flush with cash and are paying out a smaller proportion of their earnings as dividends than ever before. Much the same can be said for western Europe. Governments and households on both sides of the Atlantic are meanwhile strapped for cash. This cannot persist much longer.

The implications for politicians, the financial services industry and the economy as a whole are profound. Money paid to investors does not go to acquisitions or new investments; businesses run “for cash”, rather than spending in an attempt to boost revenues, do not promote growth. “Politicians and policymakers are going to have to ask the question – how much longer are we going to allow companies to run themselves for cash?” says David Bowers of Absolute Strategy Research in London.

Click to enlarge

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At present, cash accounts for more than 6 per cent of the assets on the balance sheets of US non-financial companies. That is the highest in at least six decades, and represents the fruit of record high profit margins. Companies cut costs through redundancies during the post-Lehman economic swoon, while negligible interest rates reduced their borrowing costs. As a result, US corporate profits are higher, as a share of gross domestic product, than at any time since 1950.

But as uncertainty persists, groups are reluctant to repay that cash to shareholders by buying back stock or – particularly – paying dividends. The pay-out ratio (the proportion of earnings that go in dividends) for the S&P 500 index is at its lowest since 1900.

Why? For years, investors have not pushed the issue. Academic theory says they should not care whether cash is paid out or left on the balance sheet. Either way, it belongs to them. “There was a time in the 90s when dividend was a four-letter word,” says Jim Cullen, a Boston fund manager. “They were for old ladies.”

James Henderson, a fund manager for Lowland Investment Company, a UK investment trust, puts it another way. “Companies held back on dividends to make themselves look more like growth stocks,” he says. Then came what he depicts as “a return to the roots of equity investing, which was that you put your money into a venture and then you harvested your return – and that return didn’t depend on whether the price of the asset had gone up recently”.

Now, companies that disappoint dividend expectations are punished. Not even Apple, the world’s largest company by market value, is immune. Despite reporting phenomenal profits this month, its price-earnings multiple remains about 10 per cent below that of the S&P 500. Some attribute this to Apple’s cash pile of almost $100bn – enough to buy Dell, its erstwhile conqueror, three times over. It has never yet paid a dividend. During Apple’s conference call, investors asked insistently about the chances that – like Microsoft before it – Apple would start disgorging its cash as dividends.

Investors’ push for higher cash pay-outs is affecting market performance. Last year, the S&P 500 was flat; but the 10 per cent of stocks with the highest dividend yield enjoyed an average gain of 18 per cent, according to Savita Subramanian of BofA Merrill Lynch. Demographic trends drive this. Ms Subramanian describes it as a secular imbalance of demand and supply. On the demand side, the west’s population is ageing fast and needs income in retirement.

Fund managers are marketing dividend funds hard. “Equity income is the only mutual fund asset class left standing in the UK,” says Neil Dwane at Allianz Global Investors, which launched a new dividend fund in 2009.

Demand is also driven by low yields on bonds – pension funds have to consider equities instead – and by falling appetite for risk after two market crashes in a decade. For more than 50 years, US stocks had a lower cash yield than bonds did. That has now shifted. Where once the philosophy was that bonds should pay a higher yield because stock prices could go up, now investors demand a higher yield from stocks, because their prices can go down.

Dividend demand also betrays a crisis of trust. Robert Schwob of Style Research in London calls this a “batten down the hatches” attitude. “It’s an expression of fear. It’s saying ‘give it to me now, I cannot wait’.”

Unlike earnings, which are subject to accounting tricks, a dividend cheque is solid. And investors no longer trust managements to invest surplus cash wisely, preferring “dividend discipline”. Andrew Lapthorne of Société Générale drew laughter at a London conference this month with a series of “examples of how zero yielders use your money”. For example, Google, a non-payer, plans to develop a “space elevator”.

Faced with such investor demands, companies may opt to maintain fat margins and pay more of their profits out in dividends. Their reward would be cheaper equity capital (through a higher share price).

Managing “for cash” makes sense if the economy grows slowly, as it is hard for revenues to grow. But while this might keep investors happy, governments would feel differently. Politicians want companies to grow, to create jobs and to generate the tax revenues needed to plug their deficits.

“We are seeing a symbiotic relationship between government ‘borrowing’ and corporate ‘saving’ the likes of which has rarely been seen before,” says Ian Harnett of Absolute Strategy.

Governments could yet respond by raising corporate taxes, tweaking them to encourage spending, or increasing dividend taxes. But it will be hard to cut public deficits without some aid from corporate cash, which investors want paid to them. Neither option – a heavily taxed corporate sector or one that pays out cash rather than reinvesting it – is conducive to capitalism at its most vibrant.

FISCAL TREATY COULD TRIGGER A DEBT EXPLOSION / THE FINANCIAL TIMES COMMENT & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

2012-01-31T04:15:00.001-05:00

January 29, 2012 9:01 pm

Fiscal treaty could trigger a debt explosion

By Wolfgang Münchau

I recently had a conversation in which everybody seemed to agree that the new European fiscal pact was quite mad. The conversation was overheard by a former policymaker, who turned to us and said that he agreed in principle – but he then added that if the treaty encouraged the European Central Bank to become more flexible, it might still be worthwhile. Later I spoke to a central banker, who also agreed that the treaty was irrelevant, but he was nevertheless in favour of it because it served as a signal to the financial markets. When I spoke to my contacts in the financial markets, I was told that the treaty was quite mad.

The best thing that one could say about the treaty is that it is not necessary. Everything we are likely to see in the final version is either in existing treaties or in legislation, notably the so-called “six-pack”, a set of policy surveillance measures passed earlier this year. The rest could easily be introduced through new secondary legislation.

While I have yet to meet anybody who can explain what good the treaty will do – except as part of some circular logic – the damage it will do is more evident. Just think of the entirely unnecessary fight with David Cameron, UK prime minister. But the British problem pales in comparison with the treaty’s truly destructive powers. It will encourage eurozone member states to adopt extremely pro-cyclical policies.

This is already happening in Spain. Until last week, the government said it would not keep piling one austerity measure on top of another to meet the agreed deficit targets. That seemed a sensible policy. Spain’s economy is shrinking at a faster rate than forecast for reasons outside the country’s control. Under these circumstances, it would be sensible to let the automatic stabilisers work. That is what the eurozone member states did in 2009. It ensured that the recession, while very deep, was at least not excessively long.

The International Monetary Fund also agreed with the position of the Spanish government as of early last week. The Spanish newspaper El País quoted an IMF official as saying that further adjustment of the deficit would be undesirable because it would exacerbate, rather than alleviate, market tensions. The IMF forecast a two-year recession, with the deficit falling from 8 per cent of gross domestic product last year, to 6.8 per cent this year and 6.3 per cent next year. So even with a significant deficit target overshoot, Spain would still have a recession – almost as bad as the one in 2009.

But no. Last week on a visit to Berlin, Mariano Rajoy, Spain’s new prime minister, duly reiterated his government’s commitment to the agreed deficit targets – 4.4 per cent of GDP in 2012, and 3 per cent in 2013. This year, he wants to cut the deficit by a further 2.2 percentage points, relative to the IMF baseline, and by another 3.3 per cent next year – all while the economy is contracting.

Spain is following the same path taken by Greece. Spain is a much healthier economy, of course. But it also has a problem that Greece did not – a deeply indebted private sector. This is the reason why a policy of excessive deficit reduction could become so toxic.

Richard Koo, chief economist at the Nomura Research Institute, recently took a look* at the impact of the deleveraging in the US, the UK and the eurozone. Spain is experiencing an extreme version of what he calls a “balance sheet recession”, on a much greater scale than the US or the UK. Since the third quarter of 2007, the Spanish private sector has reduced its debts by 17.2 per cent as a ratio of GDP, while the public sector partially compensated the private sector’s deleveraging with an increase in debt of 11.8 per cent of GDP. The difference came in the form of a positive contribution from the external sector – in other words, from a fall in the current account deficit.

Mr Koo makes the point that – as in Japan during the 1990s – it is essential that European governments support the economy during a phase of private-sector deleveraging to avoid what would otherwise lead to a deep depression.

So if Spain were to follow the example of Greece, and ignore what happened in Japan, the most likely result would be a severe and prolonged recession. To me, that is a much larger threat to the eurozone than any of the various crisis offshoots that excite us momentarily. In the big scheme of things, it really does not matter whether Greek bondholders agree on a voluntary participation. If Spain were to fall down a black hole, no rescue fund, however large, would be able to drag it out.

The irony is that a fiscal treaty that set out to reduce the eurozone’s debt could be the cause of a debt explosion, because it greatly increases the risks of a semi-permanent slump in large parts of southern Europe. If that were to happen, nothing could save the eurozone.

*‘The world in balance sheet recession: causes, cure, and politics’

THE SLIPPERY SLOPE DOWN FROM DAVOS / THE FINANCIAL TIMES COMMENT & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

2012-01-31T04:14:00.001-05:00

The slippery slope down from Davos

Moisés Naím

January 30, 2012

The ancient Greeks thought that “those whom the gods wish to destroy, they first make mad.” For them, the surest way to destroy a person is to fill him or her with success, power, prosperity and fame. Excessive success induces inordinate self-confidence, which inevitably leads them to make disastrous mistakes and to fail. Hubris, they called it.

Many centuries later we got the Brics: poor countries whose economic and geopolitical success and influence – and hubris – is growing quickly. And its not just these countries. HSBC reckons that if current trends continue, by 2050 the 100 largest economies in the world will include (in addition to the Brics and traditional leaders such as the US, Germany and Japan) countries such as the Philippines (the 16th largest), Peru, Bangladesh and Colombia. Of course, the critical assumption is “if current trends continue”.

Here is where it is worth mentioning the meeting hosted by the World Economic Forum in Davos. After many years of attending these meetings, I have become a great believer in the existence – and the power – of hubris. I do not know if it is the gods or human nature, but success and failure are too frequently inextricably linked and the Davos meeting offers an extraordinary laboratory to observe the phenomenon.

I remember vividly one of the most exuberant parties in Davos, hosted in the mid-1990s by the Mexican government. The host and star celebrity was then-president Carlos Salinas de Gortari. Shortly thereafter, the country - and its president – fell on hard times. I also remember Kenneth Lay, explaining to an enthralled audience that his business model, which generated $100bn in revenues in 2000, was the future. Soon after, his company Enron crashed.

Mr Lay, if he had not passed away, would surely be in jail, joining several of his former colleagues. I also witnessed president Carlos Menem of Argentina describing the wonders of his country pre-debacle, and heard the triumphant narrative of the tycoons investing unjustifiable sums in internet companies with scant revenues and no profits. The acclaimed merger of the giant “old” Time Warner with the ”new” AOL was a prime example of this. The results were catastrophic.

Another shining star very visible in Davos was Jean-Marie Messier, who tried to convert Compagnie General des Eux, a water utility and garbage collection company, into a media conglomerate: VivendiUniversal. He entitled his autobiography J6M.com Messier. In French this reads as Jean Marie Messier, myself, master of the world. I saw him at the 2002 WEF meeting in New York offering an fancy multimedia presentation of his company. A few months later VivendiUniversal announced the largest losses in French corporate history and Mr Messier was fired. I have not seen him at Davos since.

I also attended the presentations of the finance ministers of Thailand, Indonesia, Malaysia and South Korea right before the Asian economic crisis erased them from the lists of the most sought after speakers. Davos offers many more of these cases of rapid rises and dramatic falls.

This does not mean that all who go to Davos are success-crazed characters. From Nelson Mandela to Elie Wiesel, shy researchers working on the frontiers of knowledge about cancer, brain and genetics, or activists who risk their lives confronting despots and protecting the innocent, it is easy to find admirable people who are successful but far from arrogant. But it is also all too easy to trip over characters clearly possessed by hubris.

What does all this have to do with the Brics and other poor countries that have become fashionable? You can perhaps imagine. As I was recently talking in Davos with Turks, Brazilians, Indians, Indonesians, Russians and Chinese, the symptoms of the many fallen celebrities who no longer stalk the corridors of this Swiss mountain town seemed just below the surface. Are the gods plotting to put these new arrogant characters in their place? Could it be that a crash is in the future of these emerging countries? Could this be one of the most important warnings coming from this year’s meeting on the Alps?

The writer is a senior associate in international economics at the Carnegie Endowment

A CRISIS IN TWO NARRATIVES / PROJECT SYNDICATE ( A MUST READ )

2012-01-30T05:20:00.004-05:00

A Crisis in Two Narratives

Raghuram Rajan

2012-01-27
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CHICAGO – With the world’s industrial democracies in crisis, two competing narratives of its sources – and appropriate remedies – are emerging. The first, better-known diagnosis is that demand has collapsed because of high debt accumulated prior to the crisis. Households (and countries) that were most prone to spend cannot borrow any more. To revive growth, others must be encouraged to spend – governments that can still borrow should run larger deficits, and rock-bottom interest rates should discourage thrifty households from saving.

Under these circumstances, budgetary recklessness is a virtue, at least in the short term. In the medium term, once growth revives, debt can be paid down and the financial sector curbed so that it does not inflict another crisis on the world.

This narrative – the standard Keynesian line, modified for a debt crisis – is the one to which most government officials, central bankers, and Wall Street economists have subscribed, and needs little elaboration. Its virtue is that it gives policymakers something clear to do, with promised returns that match the political cycle.
Unfortunately, despite past stimulus, growth is still tepid, and it is increasingly difficult to find sensible new spending that can pay off in the short run.

Attention is therefore shifting to the second narrative, which suggests that the advanced economies’ fundamental capacity to grow by making useful things has been declining for decades, a trend that was masked by debt-fueled spending. More such spending will not return these countries to a sustainable growth path. Instead, they must improve the environment for growth.

The second narrative starts with the 1950’s and 1960’s, an era of rapid growth in the West and Japan. Several factors, including post-war reconstruction, the resurgence of trade after the protectionist 1930’s, the introduction of new technologies in power, transport, and communications across countries, and expansion of educational attainment, underpinned the long boom. But, as Tyler Cowen has argued in his book The Great Stagnation, once these “low-hanging fruit” were plucked, it became much harder to propel growth from the 1970’s onward.

Meanwhile, as Wolfgang Streeck writes persuasively in New Left Review, democratic governments, facing what seemed, in the 1960’s, like an endless vista of innovation and growth, were quick to expand the welfare state. But, when growth faltered, this meant that government spending expanded, even as its resources shrank. For a while, central banks accommodated that spending. The resulting high inflation created widespread discontent, especially because little growth resulted. Faith in Keynesian stimulus diminished, though high inflation did reduce public-debt levels.

Central banks then began to focus on low and stable inflation as their primary objective, and became more independent from their political masters. But deficit spending by governments continued apace, and public debt as a share of GDP in industrial countries climbed steadily from the late 1970’s, this time without inflation to reduce its real value.

Recognizing the need to find new sources of growth, towards the end of Jimmy Carter’s presidency, and then under Ronald Reagan, the United States deregulated industry and the financial sector, as did Margaret Thatcher in the United Kingdom. Productivity growth increased substantially in these countries over time, which persuaded Continental Europe to adopt reforms of its own, often pushed by the European Commission.Yet even this growth was not enough, given previous governments’ generous promises of health care and pensions – promises made even less tenable by rising life expectancy and falling birth rates.

Public debt continued to grow. And the incomes of the moderately educated middle class failed to benefit from deregulation-led growth (though it improved their lot as consumers).

The most recent phase of the advanced economies’ frenzied search for growth took different forms. In some countries, most notably the US, a private-sector credit boom created jobs in low-skilled industries like construction, and precipitated a consumption boom as people borrowed against overvalued houses. In other countries, like Greece, as well as under regional administrations in Italy and Spain, a government-led hiring spree created secure jobs for the moderately educated.

In this “fundamental” narrative, the advanced countries’ pre-crisis GDP was unsustainable, bolstered by borrowing and unproductive make-work jobs. More borrowed growth – the Keynesian formula – may create the illusion of normalcy, and may be useful in the immediate aftermath of a deep crisis to calm a panic, but it is no solution to a fundamental growth problem.

If this diagnosis is correct, advanced countries need to focus on reviving innovation and productivity growth over the medium term, and on realigning welfare promises with revenue capacity, while alleviating the pain of the truly destitute in the short run. For example, Southern Europe’s growth potential may consist in deregulating service sectors and reducing employment protection to spur creation of more private-sector jobs for retrenched government workers and unemployed youth.

In the US, the imperative is to improve the match between potential jobs and worker skills. People understand better than the government what they need and are acting accordingly. Many women, for example, are leaving low-paying jobs to acquire skills that will open doors to higher-paying positions.

Too little government attention has been focused on such issues, partly because payoffs occur beyond electoral horizons, and partly because the effectiveness of government programs has been mixed. Tax reform, however, can provide spur retraining and maintain incentives to work, even while fixing gaping fiscal holes.

Three powerful forces, one hopes, will help to create more productive jobs in the future: better use of information and communications technology (and new ways to make it pay), lower-cost energy as alternative sources are harnessed, and sharply rising demand in emerging markets for higher-value-added goods.

The advanced countries have a choice. They can act as if all is well, except that their consumers are in a funk, and that “animal spirits” must be revived through stimulus. Or they can treat the crisis as a wake-up call to fix what debt has papered over in the last few decades. For better or worse, the narrative that persuades these countries’ governments and publics will determine their future – and that of the global economy.

Raghuram Rajan is Professor of Finance at the Booth School of Business, University of Chicago, and the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

MF GLOBAL : UNCERTAIN FUTURES / THE FINANCIAL TIMES COMMENT & ANALYSIS ( A MUST READ )

2012-01-30T04:17:00.003-05:00

January 26, 2012 7:17 pm

MF Global: Uncertain futures

By Hal Weitzman and Gregory Meyer

The question is how can regulation now be tightened

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David Kasouf did not feel like celebrating over the festive season. The 32-year-old independent futures trader from Long Island is one of the 36,000 former customers of MF Global whose money is yet to be returned to them in full.

Almost three months after the spectacular collapse of the broker-dealer, former customers such as Mr Kasouf, as well as farmers, grain transporters and small manufacturers, are still waiting to find out the whereabouts of $1.2bn in missing funds. Until regulators and investigators discover what happened, more than a quarter of the money once held in MF Global customer accounts will remain frozen.
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People such as Mr Kasouf increasingly feel they will never get their money back. As Christmas approached, with a wife and two children to support, he considered selling his house or declaring bankruptcy. Ultimately, the 72 per cent of his funds MF Global’s bankruptcy trustee has since returned prevented this, but his view of the markets has been shaken. “This has practically destroyed my trust in the whole system,” he says.

Since MF Global filed for bankruptcy on October 31 and revealed that customer money was missing, attention has been focused on Jon Corzine, the firm’s former chief executive. Once a Wall Street “master of the universe”, with a career including stints as head of Goldman Sachs, a US senator and governor of New Jersey, Mr Corzine is now one of the most reviled figures in finance.

There has also been intense scrutiny of CME Group, America’s biggest futures exchange operator and the industry body responsible for regulating MF Global’s commodities business. Some customers are angry at what they say was a lapse in oversight; others say a for-profit entity should not be regulating its own customers. CME responds that no watchdog can guarantee against fraud.

But the MF Global scandal is more than just a question of tarnished reputations. It has had a profound effect on the entire financial industry. The realisation that customers could lose money kept in segregated accounts separate from the firm’s own money – thought by many to be as safe as a bank – has severely damaged confidence in the 163-year-old US futures market. Before the financial crisis, futures were among the fastest-growing of all exchange-traded products.

“This is unprecedented. It’s the single biggest blow the industry has ever had to its business and credibility,” says a former senior CME executive. “It has forced us to ask the question: is the model of the futures industry so flawed that it can never be the same again?”

Such soul-searching is rare for a business that in the past 30 years has transformed itself from an agricultural backwater. Futures markets – which enable producers such as manufacturers to fix for the longer term the prices at which they buy or sell rather than expose themselves to the risk of volatility on the daily spot markets – were once seen chiefly as a system of crop insurance for farmers. Today investors trade agreements to buy and sell in the future anything from oil to financial products.

The sector is proud to have made itself a central element of global financial institutions’ risk-management strategies. CME, once a member-owned trading club, is now one of the world’s most powerful exchange groups. The MF Global debacle threatens to undermine those achievements. The most obvious indication of the loss of trust in the industry is a fall in futures trading volumes since the collapse of MF Global, which was a dominant force in Chicago’s agricultural trading markets and the largest broker on the New York Mercantile Exchange, an energy-trading venue also owned by Chicago-based CME. Most observers say the effect of MF Global’s collapse is the primary explanation.

The impact has reverberated across the industry. “Even brokers who didn’t necessarily have their accounts at MF Global are seeing incredible trepidation, especially from international market participants,” says Christine Cochran of the Commodity Markets Council, a Washington industry group whose members include big agricultural traders such as Archer Daniels Midland, food companies such as Kraft, hedge funds and futures brokers. “They will pull their money out every night ... It remains to be seen if that trust can be repaired.”

At groups such as Scoular, which handles grain at 58 silo complexes in North America, risk managers are rethinking how to insure against price fluctuations. “The industry felt using the commodity exchanges was a way to transfer risk without having to worry about counterparty risk [that trading partners would go bankrupt],” says Bob Ludington, Scoular’s chief operating officer. “When the MF Global situation happened, that really woke everybody up. They said: ‘Wait a minute, there is counterparty risk.’ Then the question is, who do you do business with?”

Regulators have viewed futures as a model for reforming the vast markets in swaps – derivatives that are privately negotiated rather than traded on exchanges – such as the credit default swaps made infamous by the financial crisis. But the collapse of MF Global has prompted some grain merchants to move in the opposite direction. Scoular, for example, is buying from big banks more agricultural swaps, where physical delivery of the underlying commodity is not required. Unlike futures, these derivatives are not “cleared”, or protected against the risk of default by an exchange clearing house.

“It’s basically taking bank counterparty risk as opposed to [futures broker] counterparty risk,” says Mr Ludington.

. . .

Before MF Global fell, CME often touted the fact that no customer had lost money as a result of a clearing member default. Futures brokers reiterated that claim, leading customers to leave plentiful money in their accounts to cover margin calls – increases in the deposit traders must leave at the exchange clearing house to indicate good faith in fulfilling their contracts. Indeed, futures brokers depend on this, making their profits by reinvesting excess capital and receiving interest on the investments.

As it turns out, unlike bank deposits, futures trading accounts are uninsured by the federal government. And there is no industry body akin to the Securities Investor Protection Corporation, which has a reserve covering securities customers for up to $500,000, to help clients of failed futures brokers.

In the wake of MF Global’s collapse, traders are scrutinising brokers more closely. However, the Commodity Futures Trading Commission, the Washington futures watchdog, this week said 70 firms subject to an emergency spot check were compliant.

“People are really evaluating, who am I doing business with?” says Scott Cordes, president of Country Hedging, a Minneapolis-based futures broker. The lack of trust, he adds, could prompt clients to take their chances in spot markets. “If we can’t restore the integrity back in the marketplace, long term I think you’ll have people taking on more risk than they should be. They might not be hedging.”

Since the missing money was held in MF Global’s own accounts, CME is not legally obliged to make up the shortfall in customers’ funds. Had this happened before CME became a public company a decade ago, its members might well have clubbed together to bail out its traders. Now, its shareholders would be loath to do so.

CME did offer a guarantee of $550m to encourage the bankruptcy trustee to release more frozen funds. That has not, however, stopped calls for CME to come up with all the money itself.

Yet even if the money is found or replaced, it is far from clear confidence can be rebuilt without a change in oversight. “The damage has been done,” says John Lothian, who runs MarketsWiki, an industry website. “There are some structural issues that need to be addressed – bankruptcy, self-regulation – and they will be.”

. . .

The affair has already spurred changes. Last month the CFTC revived a rule limiting brokers’ investment options for customer cash. On January 11, as it passed new rules imposing stricter protection for big traders that use cleared swaps, it said it might consider similar safeguards for futures.

Self-regulatory bodies including CME and the National Futures Association are working on possible rule changes for customer funds. The Futures Industry Association, which represents brokers, has set up a task force to suggest reforms.

CME’s role as a designated self-regulatory body is under intensifying scrutiny. Barney Frank, the congressman who spearheaded the overhaul of financial regulation, has suggested stripping it of this function. “How did the government allow a for-profit company to have such major regulatory authority?” asks the head of one Chicago futures broker. “It would certainly appear that there’s a conflict of interest there.”

CME demurs. “The self-regulatory model is really a misnomer for a complex system of organisations that work together to ensure effective regulation,” says Anita Liskey, a CME spokeswoman. “It is a proven system that has withstood the test of time. For over 75 years, customers have lost money due to a shortfall in their segregated accounts only once, and that was due to a firm’s actions in violations of law. That record compares very favourably to alternative approaches.”

CME argues that because it guarantees trades, it has a vested interest in ensuring firms are fully compliant. It also says it has the expertise to do so and notes that self-regulation does not cost taxpayers. It employs 200 auditors and regulators, at an annual cost of $40m, to carry out its duties.

Brokers, too, face further scrutiny. “CME, along with the industry, is exploring additional protections for customer collateral held at the firm-level,” says Ms Liskey. “That is where the failure occurred, not at the clearing house, and that is where we and others in the industry believe we need to focus.”

The debate has gone further, however, with some questioning the very structure that allows brokers to make profits. “The model has always been that you hold the customers’ cash, you invest it and keep the interest,” the former CME executive notes. “It’s the customers’ money – why shouldn’t they keep the interest?”

Already, changes made by the CFTC threaten brokers’ business model. Limiting their investment options will cut a crucial source of revenue. Fees might be increased as a result, which could put off retail investors.

Ultimately, a quick fix looks unlikely. “Trust has been completely shaken and it’ll be a long, slow, hard climb back,” says the futures broker’s head. “When farmers and small-town banks don’t trust us, we need to take a long look in the mirror.”

Scandals and losses of speculators past

MF Global’s fall is a fresh embarrassment for an industry that has worked hard to disown a history of scandal, writes Gregory Meyer.

Since the US futures markets were founded in the 19th century, many scandals have involved “corners” – buying up large quantities of a commodity to drive up the price. In 1888 Benjamin Hutchinson, known as Old Hutch, amassed wheat supplies and shipped them out of town in order to corner the Chicago futures market, according to a book on futures by Robert Kolb and James Overdahl. The resulting scarcity meant traders who had agreed to deliver the grain to him and other buyers at a lower price found it extremely costly if not impossible to honour their contracts. Some reportedly killed themselves in the face of financial ruin.

In the 20th century’s most notorious corner, the Hunt brothers tried to gain control of the silver futures market in 1979-80, more than quintupling the price. This unleashed a flood of scrap silverware into the market – which, combined with the intervention of regulators, deflated the bubble.

With the advent of financial futures in markets from interest rates to currencies, the industry has attracted a broader clientele, from Wall Street banks to pension funds. “It had much more of a Wild West feel, with many larger-than-life characters, prior to the 1980s,” says Professor Craig Pirrong of the University of Houston.

Still, in 1985 the fall of the Volume Investors brokerage over a gold trade cost customers money. In 1998 the bankruptcy of Griffin Trading, a Chicago-based futures firm, caused big losses to traders in London, driving several out of business.

“The futures industry has worked very hard for decades to overcome that stigma and image of itself,” says Emily Lambert, author of The Futures, a market history.

U.S. BANKS TALLY THEIR EXPOSURE TO EUROPE´S DEBT MAELSTROM / THE NEW YORK TIMES ( A MUST READ )

2012-01-30T04:16:00.001-05:00

January 29, 2012, 7:56 pm

U.S. Banks Tally Their Exposure to Europe’s Debt Maelstrom

By PETER EAVIS
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John Kolesidis/Reuters
Demonstrators in Athens. Banks are disclosing more of their exposure to Greece, Italy, Ireland, Portugal and Spain.

After a hurricane, homeowners check nervously to see if their insurance will cover all of their damages. With the European financial crisis still threatening a trail of defaults, United States banks are betting that their insurance is going to pay out.

Five large American banks, including JPMorgan Chase and Goldman Sachs, have more than $80 billion of exposure to Italy, Spain, Portugal, Ireland and Greece, the most economically stressed nations in the euro currency zone, according to a New York Times analysis of the banks’ financial disclosures.

But these banks have made extensive use of a type of financial insurance, called credit-default swaps, to help them offset any losses that might occur if defaults swamped the five troubled nations. Using these swaps, along with other measures, the five banks have cut their theoretical exposure to the troubled countries by $30 billion, to $50 billion. The analysis also shows that Citigroup has the greatest percentage of its exposure potentially protected at 47 percent, while Bank of America has bought the least protection at 12 percent.

Graphic Margins of Uncertainty
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Big banks have reduced their sovereign debt exposure, but they still have tens of billions of dollars of it.

On Sunday, the Greek government appeared close to a deal with the majority of its creditors that would lead to big write-down in the value of its debt. But even a deal could spawn a series of events that could lead to payouts on Greek credit-default swaps. While the Greek swaps would probably be paid, they represent only part of the $602 billion of swaps that have been written on the five troubled countries.

Credit-default swaps have functioned well for big bankruptcies, but they were also a big source of systemic weakness in 2008, when the American International Group nearly collapsed because it could not make payments on its side of its swaps contracts. Some market participants now doubt they would work properly during periods of great financial instability.

“The likelihood of actually getting paid out from owning a credit-default swap would be troubling to me if this were my hedge against a systemic shock — especially in a political environment unfriendly to more Wall Street bailouts,” Mark Spitznagel, chief investment officer at Universa Investments, a hedge fund, said through a spokesman.

Since the A.I.G. debacle, regulators have been working to make sure financial firms will actually be able to make, or collect, payments on their swaps when markets are failing. While regulators have the power to get a detailed look at banks’ swaps positions, investors have struggled to get a solid grasp of their exposures from the banks’ financial filings.

Analyzing banks’ Europe-related swaps can be like a walk through a fun house, where appearances are distorted and you don’t know what’s around the corner. The degree of disclosure among the five banks differs greatly and not all of them give a complete snapshot of their exposures and offsetting bets.

But that could change in February, when the banks release 2011 annual reports. The Securities and Exchange Commission this month requested that banks now provide fuller and more consistent presentations of their European positions, saying disclosures have lacked transparency, and might therefore be inadequate for investors. Bank representatives last week said they would comply with the guidance.

One upshot of the new disclosure might be that certain banks’ European numbers suddenly look substantially bigger, since the S.E.C. is effectively asking banks to unbundle key exposures in their financial statements so outsiders can see how big they are before offsetting items. “If you do see a jump in gross exposures, there will be new questions for management,” said Mike Mayo, a bank analyst with brokerage CLSA.

Citigroup said it had $20.2 billion of exposure to the five stressed peripheral countries at the end of last year. The bank said it had $9.6 billion of “credit protection” on those countries, and had set aside $4.2 billion of collateral that would also offset its total exposure.

Collecting on the credit-protection swaps would mean Citigroup’s counterparties having the money in stressed times to make a full payment. John Gerspach, Citigroup’s chief financial officer, said this month that the bank was highly confident that it could collect, adding that the entities it bought protection from were “very high quality.”

Citigroup’s disclosed gross exposure to the five countries, including $7.4 billion in loans that have not actually been drawn, was $28.9 billion at the end of last year. Its net number, after credit-default swaps and collateral, was $15.1 billion. Put another way, Citigroup has “hedged” 47 percent of its disclosed exposure to the five countries.

Bank of America appears to have hedged the least, with only 12 percent of its stated $14.4 billion exposure offset with credit-default protection, according to the analysis. “We carefully manage our risk while still supporting our clients in Greece, Italy, Ireland, Portugal and Spain,” said Bank of America spokesman, Jerome F. Dubrowski.

Like other firms, Bank of America has cut its Europe exposure by aggressively selling assets and cutting back on lending since 2009, when the region’s debt began to look like a serious problem. The bank’s exposure to the five countries is down by 44 percent since 2009, said Mr. Dubrowski. Also important, the new S.E.C. disclosure request could reveal the extent to which a bank has bought credit protection from banks based in the stressed European countries.

The fear is that a bank, say, in Italy, would be unable to pay out on its swaps if the country’s government went into default. Morgan Stanley implicitly recognizes that in its European disclosures. Alone among the five banks, it broke out the amount of default protection it had bought from banks in the five peripheral countries, about $1.43 billion.

Credit-default swaps can be dangerous because they have the ability to hit one side of the trade with a demand for a overwhelmingly large payout if a default occurs. Right now, it costs a bank $401,000 a year to insure $10 million of Italian government debt for five years, according to Markit, a data provider. If Italy took a serious turn for the worse, and its government debt seemed in real danger of default, that swap price would rapidly spike higher, as happened with Greece.

If that occurred, the bank that sold the protection might then have to post a lot of cash to ensure it would make good on the swap. Large cash calls like that might drain some banks of liquid assets, causing systemic stress.

If an important part of the financial system overhaul were in place by now, there may be fewer questions about whether banks will be able to meet cash calls in stressed times. The change involves directing most swaps trades to clearinghouses, whose job is to ensure that the money flows underlying a trade are made. Clearinghouses would standardize collateral payments across the default swap market, and they might demand higher amounts of collateral than banks currently demand from each other.

Recognizing this weakness in the derivatives market, finance ministers and central bankers from the Group of 20 leading industrialized nations said in 2009 that they wanted to have clearing in place for all standardized derivatives by the end of 2012.

Yet, as of June last year, only 9.4 percent of the $29.6 trillion credit-default swap market is centrally cleared, according to the Bank for International Settlements. Notably, the credit-default swaps that pay out if a European government defaults appear to have been held back from central clearing by the British regulator, the Financial Services Authority. The F.S.A. declined to comment on why it has not yet approved these swaps.

As things stand, banks still may be able to avoid using their default swaps, except, perhaps, those on Greece. That’s because the European Central Bank has taken stronger actions to prevent the crisis worsening, like making $620 billion of cheap loans to European banks in December. But the bank’s moves do little to actually reduce European government debt levels.

Until those come down, the banks are betting on their hedges, imperfect as they may be.