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Sunday, October 27, 2013
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Seasons in the sun and the jet-set junta
This island is known the world over for its tourism, its beaches, sunshine and hospitality, some of it is the mass market booze-a-thon for those who have been given fewer choices in life, some of is for families or couples of all ages who want somewhere sunny and safe to wander around.
The first come because it’s cheap, the second because it’s special. Neither group understands the other, but they both spend money. As the song says, ‘There’s No Romance Without Finance.’
Neither are there schools, hospitals or the basic services that the 99% will need.
Years ago, a businessman in an African town near a string of slightly shabby beach resorts, was trying to explain to an educated friend of mine and asked that he be considerate towards some of the visitors excesses.
“They all come here to get away from it all,” he explained, “Imagine how terrible your life must be if you have to get away from absolutely everything.”
The visitors have almost all returned home by now, but the numbers were good this year, but the prices were bad... for the people who live here.
Former Commissioner, Neil Kinnock, before losing an election, he warned people not to be poor, sick or elderly. Advice he could have given to Greece before the Troika came in town to make decisions that increased the misery before flying off again, like a jet-set junta.
The tourists started jetting in around 50 years ago and I found a dusty copy of a guide for holidaymakers, “Off You Go” from 1971, which was given to all 300,000 who booked “all-in” breaks.
It doesn’t expect too much from the clients, “The attempt has been made to include just as much as you want to know – and as little,.” it boasts.
Greeks are described as “Great travellers, and there is scarcely a village in the whole country that hasn’t its share of inhabitants who have sailed the seven seas and roamed the wide world before returning to the land they love best. It has always been so.”
It is today, with many searching for a future abroad, while those even less fortunate head towards Greece and the EU.
Others are taking another escape.
This island has seen an increase in suicide, up by 10 cases a month because of austerity. Many of these are elderly who are making a final sacrifice for their families who just can’t afford to get by. The true figure is higher as police and coroners will try to put in ‘accidental death’ verdicts for the sake of the grieving family.
The old guidebook notes the relics left by subsequent colonists with gentle humour, “The Romans left mosaics and classical sculpture; the British left a cricket pitch, ginger beer and excellent chutney.”
What are the Troika leaving behind? Dead bodies.
It’s time to stop. It’s time to put people first. If we don’t the body count could cross that undefined border, where austerity stops looking like policy and begins to look like a crime against humanity.
Misconceiving British Austerity
LONDON – Was the British government’s decision to embrace austerity in the wake of the global financial crisis the right policy, after all? Yes, claims the economist Kenneth Rogoff in a much-discussed recent commentary. Rogoff argues that while, in hindsight, the government should have borrowed more, at the time there was a real danger that Britain would go the way of Greece. So Chancellor of the Exchequer George Osborne turns out, on this view, to be a hero of global finance.
To show that there was a real threat of capital flight, Rogoff uses historical cases to demonstrate that the United Kingdom’s credit performance has been far from credible. He mentions the 1932 default on its World War I debt owed to the United States, the debts accumulated after World War II, and the UK’s “serial dependence on International Monetary Fund bailouts from the mid-1950’s until the mid-1970’s.”
What Rogoff’s analysis lacks is the context in which these supposed offenses were committed. The 1932 default on Britain’s WWI loans from America remains the largest blemish on the UK’s debt history, but the background is crucial. The world emerged from the Great War in the shadow of a mountain of debt that the victorious Allies owed to one another (the US being the only net creditor), and by the losers to the victors. John Maynard Keynes predicted accurately that all of these debts would end up in default.
The UK was the only country that made an effort to pay. Having failed to collect what other countries owed it, Britain continued to pay the US for ten years, suspending debt service only in the depth of the Great Depression.
Rogoff’s discussion about the debts accumulated after WWII is beside the point. It is neither here nor there to claim that “had the UK not used a labyrinth of rules and regulations to hold nominal interest rates on debt below inflation, its debt-to-GDP ratio might have risen over the period 1945-1955 instead of falling dramatically.” The fact is that the UK did manage to reduce its debt using a series of policies, including encouragement of economic growth.
As for the UK’s “serial dependence” on the IMF from the mid-1950’s to the mid-1970’s, there were actually only two episodes: the 1956 bailout during the Suez crisis and the 1976 bailout that preceded the winter of discontent when strikes in many essential industries – even the dead went unburied – practically brought the country to its knees. (It hardly needs stating that borrowing money from the IMF is not a default.)
In 1956, the UK was facing a speculative attack in the midst of the Suez crisis. The country was running a current-account surplus, but the pound was slipping against the dollar, causing the Bank of England to sell its dollar reserves to defend the fixed exchange rate. As its reserves drained away, Prime Minister Anthony Eden was forced to appeal for help, first to the US and then to the IMF.
The IMF’s involvement was necessitated only by America’s unwillingness to provide support. Furthermore, US President Dwight Eisenhower went so far as to use America’s clout within the IMF to force Eden to withdraw British troops from Egypt in exchange for the loan.
The reality of the 1976 bailout is even more complicated. In the aftermath of the crisis, Chancellor of the Exchequer Denis Healey revealed that the Public Sector Borrowing Requirement had been grossly overestimated in the 1970’s, and that, had he had the right figures, the UK would never have needed a loan. According to him, the Treasury even failed to recognize that the UK would have a tax surplus.
Of course, all of this had drastic implications for the economy. Tony Benn, a Labour cabinet minister in the 1970’s, later revealed that the “winter of discontent,” which ushered in a Tory government at the end of the decade, had been caused by the severe cuts in public expenditure demanded by the IMF: “Why did we have the winter of discontent? Because in 1976, the IMF said to the cabinet, ‘You cut four billion pounds off your public expenditure or we will destroy the value of the pound sterling.’”
There is little evidence for Rogoff’s implicit assumption that investors’ decisions today are driven by the government’s handling of its debt in the past. The number of defaults is largely irrelevant when it comes to a country like the UK, which is politically stable, carries significant economic weight, and has an independent central bank.
Consider Germany, the “biggest debt transgressor of the twentieth century,” according to the economic historian Albrecht Ritschl. In the table on page 99 of their book This Time is Different, Rogoff and his co-author, Carmen Reinhart, show that Germany experienced eight debt defaults and/or restructurings from 1800 to 2008. There were also the two defaults through inflation in 1920 and 1923. And yet today Germany is Europe’s economic hegemon, laying down the law to miscreants like Greece.
The truth is that a country’s past failures do not influence investors if its current institutions and economic policies are sound. That was clearly the case when Osborne and his colleagues opted for austerity.
Copyright: Project Syndicate, 2013.
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Puerto Rico's Debt Crisis: Puerto Pobre
A heavily indebted island weighs on America’s municipal-bond market...
ALTHOUGH investors are now less jittery about a possible default by the American Treasury, they are rightly still nervous about a drama unfolding in the market for state and local debt. Since May, yields on bonds issued by Puerto Rico, a self-governing American territory, have shot up to between 8% and 10%, despite their (barely) investment-grade rating and tax-exempt interest.
Puerto Rico carries outsized importance in America’s almost $4 trillion municipal-debt market, which includes bonds issued by states and other local authorities as well as by cities. The island’s current debt, between $52 billion and $70 billion (depending on how it is measured), is the third-largest behind California’s and New York’s, despite a far smaller and poorer population. In America’s 50 states the average ratio of state debt to personal income is 3.4%. Moody’s, a ratings agency, puts Puerto Rico’s tax-supported debt at an eye-watering 89% (see chart).
Puerto Rico’s debt has long been a staple of American municipal-bond funds because of its high yields and its exemption from federal and local taxes--of particular appeal to investors in high-tax states. That let Puerto Rico keep borrowing despite its shaky economic and financial condition, until Detroit’s bankruptcy in July alerted investors to the threat of default by other governments in similar penury.
America won control of Puerto Rico in the Spanish-American war of 1898. Its people have American citizenship and receive American government pensions, but pay no federal tax on their local income.
The economy has big structural problems. Participation in the labour force, at 41%, is some 20 percentage points below America’s. The island has the federal minimum wage, even though local productivity and incomes are far lower than in the rest of America, creating a strong disincentive to hire. Inflated benefit payments, for disability for instance, discourage work. Moody’s Analytics reckons the territory’s bloated public sector accounts for 20% of employment, compared with 3.7% for the average state (though it provides some services that the federal government would on the mainland). Growth and investment are hampered by bureaucracy, stunted infrastructure and crime.
Shrinking, sinkingPuerto Rico has been in recession virtually since 2006, when a federal tax break for corporate income expired, prompting many businesses to leave. As Puerto Ricans with prospects emigrate, the remaining population has aged and shrunk. The government has run budget deficits (prohibited for states) for the past decade, averaging 2.5% of GDP from 2009 to 2012. Its pension fund is only 7% funded, which is abysmal even by the standards of other American states and territories.
The current administration has sought to shore up its finances by increasing taxes by $1.1 billion (about 1% of GDP) and raising the retirement age for government employees, as well as the share of their salaries they contribute to their pensions. It has promised to wipe out its budget deficit, projected at $820m this fiscal year, by 2016.
Such austerity could further hobble growth, making it harder to shrink debt ratios. Luis Fortuño, the previous governor, lost his job last year partly because of public anger at the cuts he oversaw. Like Greece in the euro zone, Puerto Rico has no control over monetary policy (the preserve of the Federal Reserve), and so cannot mitigate a fiscal tightening with lower interest rates or a cheaper currency.
Investors meanwhile are so wary, after years of missed deficit targets, tardy financial reports and accounts opaquer than those of other states, that Puerto Rico has had to cut back on new bond issues. It is filling the gap with more short–term bank loans; but they come at punitive rates of interest and must be rolled over more often.
Investors are now openly debating whether Puerto Rico will default. Its constitution requires that its general-obligation bonds ($10.6 billion of the total) get first claim on tax revenues. Other bonds are backed by dedicated revenue such as sales tax and power bills and by a law authorising the government to pay interest ahead of other claims. "Honouring debts is not only a constitutional but also a moral obligation," Alejandro Padilla, the governor, told investors earlier this month.
Yet politically it may be tough to gratify bondholders if police, doctors and teachers go unpaid. The federal government cannot be counted on for a bail-out: fiscal hawks in Congress would almost certainly balk at the expense and the precedent.
Should Puerto Rico seek to restructure its debts, it would be entering uncharted legal terrain. Unlike a city it cannot declare bankruptcy. It does not enjoy the same sovereignty the constitution grants the states; should it try to renege on its debts, Congress might intervene. Years of litigation would follow.
Puerto Rico’s problems have not yet had much effect beyond its shores. Its debt is held mainly by mutual funds and individuals, although in recent months many have sold to distressed-debt specialists. Some brokers have stopped selling its bonds to their clients. Borrowing costs have risen for a few highly indebted states such as Illinois, but the majority have no trouble selling bonds, says Chris Mier of Loop Capital Markets, which specialises in municipal debt. Happily, state finances are much healthier today than in 2010. But complacency would not be wise. No state has defaulted since 1933. A default by Puerto Rico could come as a wake-up call.
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