This is an insightful and practical article from Mr. Hastings.
But it would have been nice to add another element apart from political strategy i.e., financial independence or economic base for Afganistan. No economy can survive only on politics nor can any conflict be resolved with just political reconciliation.
With just poppy as a source of revenue, it is very difficult to move Afganistan away from it dependency which leads to crime and terrorism - which is very well exploited by the Taliban & ISI aka Pakistan.
Building infrastructure helps, but an economy needs to have a central core.
I don't know what that can be for Afgans.
Regards,
Pradeep Kabra
------------------------------------
Heroism is no substitute for an Afghan strategy
By Max Hastings
Published: in Financial Times on December 20 2010
President Barack Obama’s year-end review of the Afghan war asserted cautiously that General David Petraeus’s operations are going quite well so far, which caused cynics to say that this is a 20-storey building, and we still have 10 to fall. All parties to the conflict save the Taliban perceive themselves as prisoners of an unhappy predicament. The only issue is whether some outcome can be contrived which is “just good enough”, to borrow one of the military’s favourite clichés.
Both the US and British armies enthuse about progress made in Helmand and Kandahar – markets flourishing, new schools opened, civil aid projects completed, and the Highway 1 main arterial road relatively secure. Special forces’ night raids on local Taliban leaderships have achieved impressive successes. An insider often sceptical about military operations applauds the SAS, especially, as “best of British”.
The phrase most popular among commanders is “bottom up”: having almost abandoned the attempt to empower President Hamid Karzai’s government, they are now focused upon building local institutions in spite of Kabul.
Where General Stanley McChrystal enjoyed an amicable, even close relationship with Mr Karzai, his successor Gen Petraeus has almost none. He regards the president with contempt, and is bent upon sorting out the country without much help from its leader, a doubtful proposition. Gen Petraeus’s efforts are focused upon showing sufficient progress by summer to persuade Mr Obama and the American people to stay the distance, to accept a token summer troop cut in place of beginning a wholesale withdrawal.
The towering irony about Afghanistan is that almost everyone who knows the region perceives its problems as political, and thus requiring political remedies. But, because western diplomacy seems paralysed, soldiers are left to find all the solutions.
Admiral Mike Mullen, chairman of the joint chiefs of staff, said in March this year: “US foreign policy is still dominated by the military, too dependent upon the generals and admirals who lead our overseas commands. It is one thing to be able and willing to serve as emergency responders: quite another to always have to be the fire chief.”
This seems a profound and important observation. Some of the west’s finest soldiers are serving in Afghanistan; but whatever new-age gloss is put upon their role, their professional business is to fight, which must skew their vision. I have always worried that the British army’s attitude to the conflict is distorted first by its admirable “can-do” spirit, which has prompted persistent unfounded optimism; and second, by a desperate desire to be seen to win a campaign, to escape a humiliating retreat to Britain, where new cuts threaten the regiments as soon as they are no longer engaged.
However enthusiastically armies profess commitment to winning hearts and minds, finding “kinetic solutions” – killing people – is what they are chiefly structured to do. The Americans and British are doing their utmost to defeat the Taliban, and achieving considerable tactical success in limited areas. But it seems implausible this will suffice to resolve the underlying problems. An officer wrote to me recently: “There is a sense of momentum that we never had in Helmand and Kandahar this time a year ago, and if only the Afghan government would step up to the plate, we might prevail.”
But his conditional is the part that matters, and is unlikely to be fulfilled. Almost everything in Afghanistan is about tribal relationships, sands shifting constantly as Alikozai elders think themselves denied patronage conceded to Ghilzai, or different branches of the Alikozai vie for cash and favours. Yet many soldiers pay insufficient heed to this issue, and it is almost impossible to master tribal complexities in a limited tour of duty.
The CIA has a vast Afghan station of some 800 officers. Electronically gathered intelligence is good, but political intelligence remains weak. The US government appears baffled about what to do with Pakistan. Of course it would be admirable if the border could be closed to insurgents and the country’s Inter-Services Intelligence (ISI) abandoned its traditional double game, aiding the Taliban.
But there seems no realistic prospect this is going to happen, that the west can either bludgeon Islamabad into compliance or exercise short-term leverage on Pakistan’s tottering institutions. US drone attacks are killing a steady stream of Taliban and al-Qaeda leaders in their Pakistani sanctuaries, but this is an expedient rather than a policy.
Many thoughtful westerners believe it is impossible to achieve regional progress without defusing the Kashmiri confrontation, the cause of so much mutual hatred between India and Pakistan, but there seems little will on either side to do this. Delhi regards itself as having legitimate strategic interests in Afghanistan, which under Taliban rule became a base for many terrorist incursions into India. This, in turn, feeds Pakistan’s paranoia.
The new road built with $136m of Indian aid money from the Iranian border to the Afghan heartland will enable India to ship goods by sea to Afghanistan, strengthening an important trading relationship while weakening Pakistan’s. When it is suggested to Delhi that its activism in Afghanistan is mischievous in its consequences if not intent, Indians respond that they have vital security interests that will have to be protected long after the west has folded its tents and gone home. Meanwhile, Iranian meddling in Afghanistan is becoming more noticeable and injurious to western interests.
These are among the important issues that soldiers cannot resolve, but which the political leaderships of America and its allies seem incapable of addressing. Of course military operations form a critical element in stabilisation, but I suggest that for too long soldiers have been left to do as they think best, because the politicians are baffled.
Hew Strachan, Chichele professor of the study of war at Oxford university, wrote recently that there has been a strategic default both in Iraq and Afghanistan: “The result has often been war shaped by platoon and company commanders, a series of ill-considered tactical actions where killing and casualties define success.”
Western commanders are today enthusiastic about progress in training Afghan soldiers and policemen. Yet almost all army recruits are drawn from the north of the country, and are seen as foreigners in the Pashtun south. Despite annual expenditures of $12.6bn on the security forces, desertions are still running at 18 per cent, which means recruiting an additional 25,000 men a year merely to maintain strength.
The most likely course for Afghanistan in 2011 is that the military will continue to proclaim progress; and that Mr Obama will accept a token summer troop reduction, because he is in thrall to Gen Petraeus, the most celebrated American soldier of his time, and because he fears the political cost of quitting, allowing Republicans to brand him “the man who lost the Afghan war”. The struggle will go on, simply because a lot of people have vested interests in avoiding explicit recognition of failure.
But it seems to some of us impossible that real headway can be made with a broken-backed Kabul government and regional political stagnation. For all the talk about reconciliation with the Taliban, why should they deal when they think they are winning, and when they prosper in large areas where Nato does not? I defer to no one in my respect for soldiers, but nobody should fool themselves that the Afghan war can have a happy ending as long as the military are left to run it on their own.
The writer is an FT contributing editor
Thursday 23 December 2010
Thursday 16 December 2010
Re: Europe cannot default its way back to health
The real problem here is the nature of democracy in US and UK and to a certain extent in the Europe. Since the democracy is run without centralised funding aka democracy tax, elections are funded by big business including banks. So, even though people think there is universal suffrage, the real pay-masters i.e., political donors control the politicians.
Just look at Ireland. Even an illiterate person would make bond-holders take hair-cuts. Instead, Brian&Brian have 'mortgaged' not just this generation of tax-payers income but also future generations.
Another example, when AIG was going down, the Fed Reserve under honorary Hank 'GOLDMAN' Paulson made sure that tax-payers booty was distributed to Goldman Sachs at 100% against their CDS's.
The same happened with the bond-holders of Northern Rock.
One can go on and on on this with examples across the 'democratic' world.
How can one justify this kind of day-light robbery? The only answer is, we live in a SHAM DEMOCRACY. The politicians are just the front-end. The real control lies with bankers and corporate honchos.
Pradeep Kabra
------------------------------------
Europe cannot default its way back to health
By Lorenzo Bini Smaghi
Published: December 16 2010 20:59 in Financial Times
Among the many things we have learnt from this crisis is that governments and financial markets find it difficult to understand each other. Governments cannot grasp why the markets lose confidence in the state of public finances so quickly and regain it so slowly, after a long period of fiscal consolidation. The markets, for their part, are mystified by the failure of governments to take simple and timely steps to sort out the problems they face.
To tackle the problems of public finance, one of the measures that many believe should be adopted in some developed countries, particularly in Europe, is to default on or restructure public debt. Not a day passes without a suggestion of that kind being made by market participants, economists and commentators.
Such a measure is considered effective because it allows – according to those who propose it – a rapid reduction in the debt burden, making it more sustainable. It enables a country to avoid implementing an overly restrictive fiscal policy, which may further hamper growth and lead to social tensions. It spares taxpayers from having to pay for mistakes made by investors, especially foreign ones, who have lent too eagerly to the country. More generally – they argue – the default of a sovereign state allows the financial markets to function better and to incorporate the risk premium appropriately.
Given all these apparent advantages, you may wonder why countries currently experiencing financial distress, starting with the European ones, have so far refused to follow this advice. Why are democratically elected governments so reluctant to default on their debt and follow the path taken in the past decade by countries such as Ivory Coast, Pakistan, Nigeria, Ukraine, Venezuela and Zimbabwe?
One hypothesis is that our democracies are incapable of handling sovereign crises such as the one we currently face. An alternative view is that the recommendations made by economists are – at best – based on simplistic models that do not allow the complexity of the situation to be grasped and thus lead to mistaken conclusions. In other words, the cure could do more harm than the disease.
An oft-made assumption is that governments can renegotiate with their creditors the terms and conditions of their debt instruments without this having major repercussions on the rest of the economic and financial system. This assumption is largely based on the experience of developing countries with underdeveloped financial systems and mainly foreign creditors. What is generally not well understood is that, in advanced economies, public debt is the cornerstone of the financial system and an important component of the savings held by citizens.
As recent events have shown, the simple fear of a default or of a restructuring of public debt would endanger the soundness of the financial system, triggering capital flight. Without public support, the liabilities of the banking system would ultimately have to be restructured as well, as was done for example in Argentina with the corralito (freezing of bank accounts). This would lead to a further loss of confidence and make a run on the financial system more likely. Administrative control measures would have to be taken and restrictions imposed. All these actions would have a direct effect on the financial wealth of the country’s households and businesses, producing a collapse of aggregate demand. Taxpayers, instead of having a smaller burden of public debt to bear, would end up with an even heavier one.
Many commentators fail to realise that the main impact of a country’s default is not on foreign creditors, but on its own citizens, especially the most vulnerable ones. They would suffer the consequences most in terms of the value of their financial and real assets.
The economic and social impact of such an event is difficult to predict. The democratic foundations of a country could be seriously threatened. Attentive observers will not fail to notice that sovereign defaults tend to occur in countries where democracy has rather shallow roots.
Europeans have not forgotten the devastating effects that the expropriation of wealth, such as that carried out during the two world wars by way of inflation or defaults, may have on the economic and social fabric. There is awareness that, in the end, it may be less costly to tackle excessive public debt with the traditional remedies – that is, achieving an adequate level of primary surplus – rather than looking for quick fixes. There is also awareness that, without restoring economic growth, the debt burden cannot be reduced over time. This requires major structural reforms aimed at improving the functioning of the labour, capital and goods markets.
That is why, even if belatedly and reluctantly, governments and parliaments in Greece, Ireland and several other European countries have adopted tough recovery programmes and radical reforms. And that is why the other European countries are supporting them. They know that the alternative is much worse for their citizens.
To understand what is happening in Europe, economics textbooks are useful but the history ones even more so.
The writer is a member of the Executive Board of the European Central Bank
Just look at Ireland. Even an illiterate person would make bond-holders take hair-cuts. Instead, Brian&Brian have 'mortgaged' not just this generation of tax-payers income but also future generations.
Another example, when AIG was going down, the Fed Reserve under honorary Hank 'GOLDMAN' Paulson made sure that tax-payers booty was distributed to Goldman Sachs at 100% against their CDS's.
The same happened with the bond-holders of Northern Rock.
One can go on and on on this with examples across the 'democratic' world.
How can one justify this kind of day-light robbery? The only answer is, we live in a SHAM DEMOCRACY. The politicians are just the front-end. The real control lies with bankers and corporate honchos.
Pradeep Kabra
------------------------------------
Europe cannot default its way back to health
By Lorenzo Bini Smaghi
Published: December 16 2010 20:59 in Financial Times
Among the many things we have learnt from this crisis is that governments and financial markets find it difficult to understand each other. Governments cannot grasp why the markets lose confidence in the state of public finances so quickly and regain it so slowly, after a long period of fiscal consolidation. The markets, for their part, are mystified by the failure of governments to take simple and timely steps to sort out the problems they face.
To tackle the problems of public finance, one of the measures that many believe should be adopted in some developed countries, particularly in Europe, is to default on or restructure public debt. Not a day passes without a suggestion of that kind being made by market participants, economists and commentators.
Such a measure is considered effective because it allows – according to those who propose it – a rapid reduction in the debt burden, making it more sustainable. It enables a country to avoid implementing an overly restrictive fiscal policy, which may further hamper growth and lead to social tensions. It spares taxpayers from having to pay for mistakes made by investors, especially foreign ones, who have lent too eagerly to the country. More generally – they argue – the default of a sovereign state allows the financial markets to function better and to incorporate the risk premium appropriately.
Given all these apparent advantages, you may wonder why countries currently experiencing financial distress, starting with the European ones, have so far refused to follow this advice. Why are democratically elected governments so reluctant to default on their debt and follow the path taken in the past decade by countries such as Ivory Coast, Pakistan, Nigeria, Ukraine, Venezuela and Zimbabwe?
One hypothesis is that our democracies are incapable of handling sovereign crises such as the one we currently face. An alternative view is that the recommendations made by economists are – at best – based on simplistic models that do not allow the complexity of the situation to be grasped and thus lead to mistaken conclusions. In other words, the cure could do more harm than the disease.
An oft-made assumption is that governments can renegotiate with their creditors the terms and conditions of their debt instruments without this having major repercussions on the rest of the economic and financial system. This assumption is largely based on the experience of developing countries with underdeveloped financial systems and mainly foreign creditors. What is generally not well understood is that, in advanced economies, public debt is the cornerstone of the financial system and an important component of the savings held by citizens.
As recent events have shown, the simple fear of a default or of a restructuring of public debt would endanger the soundness of the financial system, triggering capital flight. Without public support, the liabilities of the banking system would ultimately have to be restructured as well, as was done for example in Argentina with the corralito (freezing of bank accounts). This would lead to a further loss of confidence and make a run on the financial system more likely. Administrative control measures would have to be taken and restrictions imposed. All these actions would have a direct effect on the financial wealth of the country’s households and businesses, producing a collapse of aggregate demand. Taxpayers, instead of having a smaller burden of public debt to bear, would end up with an even heavier one.
Many commentators fail to realise that the main impact of a country’s default is not on foreign creditors, but on its own citizens, especially the most vulnerable ones. They would suffer the consequences most in terms of the value of their financial and real assets.
The economic and social impact of such an event is difficult to predict. The democratic foundations of a country could be seriously threatened. Attentive observers will not fail to notice that sovereign defaults tend to occur in countries where democracy has rather shallow roots.
Europeans have not forgotten the devastating effects that the expropriation of wealth, such as that carried out during the two world wars by way of inflation or defaults, may have on the economic and social fabric. There is awareness that, in the end, it may be less costly to tackle excessive public debt with the traditional remedies – that is, achieving an adequate level of primary surplus – rather than looking for quick fixes. There is also awareness that, without restoring economic growth, the debt burden cannot be reduced over time. This requires major structural reforms aimed at improving the functioning of the labour, capital and goods markets.
That is why, even if belatedly and reluctantly, governments and parliaments in Greece, Ireland and several other European countries have adopted tough recovery programmes and radical reforms. And that is why the other European countries are supporting them. They know that the alternative is much worse for their citizens.
To understand what is happening in Europe, economics textbooks are useful but the history ones even more so.
The writer is a member of the Executive Board of the European Central Bank
Wednesday 15 December 2010
Hail Silvio...
Dear Sir,
In the business life section of financial times, Luke Johnson aptly quotes Plato "One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors". Further in the article he explains how different are the professions of business and politics which makes it all the more difficult for a businessman to join politics.
In this background, FT's Lex Column is the only newspaper in UK which objectively analyses Silvio Berlusconi's political life. I say objectively because the failures like political corruption, weak growth in South of Italy, too much tax-evasion and organised crime are mentioned. In the same breath, it mentions the positives like, "the country has held together, Italian banks avoided the worst of the credit bubble, growth of gross domestic product has remained slow but fairly steady, inflation has been moderate, the ratio of government debt to GDP has increased less than in most rich countries and Italians are still buying almost all of the government’s debt". Most of all, during tough times, he did not resorted to budget populism.
The fact of the matter is, Silvio Berlusconi has achieved politically more than Tony Blair or Maggie Thatcher in the UK and in business more success than Rupert Murdoch.
But the biggest fact missed by or mis-represented by the media in the UK is that he has been democratically elected not once or twice but thrice by the Italians, has been ruling Italy for almost 8 of last 11 years and has been the premier 3 times. That itself deserves some respect.
Hail FT, where even publications like Economist have failed not to mention the disappointing BBC and tabloid(ish) Murdoch stable.
Regards,
Pradeep Kabra
In the business life section of financial times, Luke Johnson aptly quotes Plato "One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors". Further in the article he explains how different are the professions of business and politics which makes it all the more difficult for a businessman to join politics.
In this background, FT's Lex Column is the only newspaper in UK which objectively analyses Silvio Berlusconi's political life. I say objectively because the failures like political corruption, weak growth in South of Italy, too much tax-evasion and organised crime are mentioned. In the same breath, it mentions the positives like, "the country has held together, Italian banks avoided the worst of the credit bubble, growth of gross domestic product has remained slow but fairly steady, inflation has been moderate, the ratio of government debt to GDP has increased less than in most rich countries and Italians are still buying almost all of the government’s debt". Most of all, during tough times, he did not resorted to budget populism.
The fact of the matter is, Silvio Berlusconi has achieved politically more than Tony Blair or Maggie Thatcher in the UK and in business more success than Rupert Murdoch.
But the biggest fact missed by or mis-represented by the media in the UK is that he has been democratically elected not once or twice but thrice by the Italians, has been ruling Italy for almost 8 of last 11 years and has been the premier 3 times. That itself deserves some respect.
Hail FT, where even publications like Economist have failed not to mention the disappointing BBC and tabloid(ish) Murdoch stable.
Regards,
Pradeep Kabra
Monday 6 December 2010
Re: A Europe doomed by design flaws
Dear Mr. Münchau,
I'm sorry to say that a) there are loads of assumptions and inconsistencies in your article b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
a) there are loads of assumptions and inconsistencies in your article:
Firstly, you assume a lot about the investors viz., a) if the Eurozone was such a noodle, did they not went to sleep before investing especially the 'smart' bond-holders who unlike equity holders can lose their capital as well and whose upside is very small compared to the 'unlimited' upside of the equity holders? b) You mention that "These are fairly normal investors who are pulling out..." - do you know the break-down of these investors? For instance, what is the percentage of hedge-funds investment on these bonds?
b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
How can Euro Bonds concept work when fiscal management is divorced from monetary management? This is basics. Centralising the fiscal management without political franchise will never work. So, basically this is a political issue which will take time to resolve either way. The fault lies in the basic design of Euro where fiscal-political-monetary policies are controlled by different agencies with different masters.
Finally,
The fact of the matter is, in good times, nobody wanted to look at fundamentals before making investment decisions. Now in the bad times, everybody is using their leverage to cover their positions.
If Germany is talking about private investors taking hair-cuts, it is being prudent unlike the 'idiots' in Ireland who passed on the whole debt on to their own population (including un-born grand-children) and bailed out all the bond investors mostly from outside Ireland. What these bond-holders are doing by pulling out is just a negotiating stunt. Whoever blinks first will lose. In case of Ireland, we have seen what happens when you blink first. Obviously Germany is too strong to do that. So, to make the Germans blink use the break of Euro as a threat. I'm sure Germans are too mature and smart to fall for that trap even if you try to subterfuge it with a stupid idea like Euro Bonds.
Regards,
Pradeep Kabra
--------------------------------------------
A hopeless Europe, unable to cope
By Wolfgang Münchau
Published: in Financial Times on December 5 2010 18:54
Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone’s crisis management rather well. It is überfordert. The nearest English translation is “overwhelmed”, or “not on top of something”, but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante’s hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow.
I am not saying that every policymaker in the eurozone is hopeless. There are a few exceptions. My point is that the system is überfordert, unable to cope. This inability has several dimensions. I have identified six.
The first, and most important, is a tendency to repeat the same mistakes. The biggest of these is the repeated attempt to address solvency problems through liquidity policies. It happened in October 2008 with bank guarantees. The European Central Bank’s never-ending liquidity support is another example. So is the Greek bail-out. And so is the European Financial Stability Facility, the €440bn ($588bn) bail-out fund. Set up in May as a mechanism to resolve financial crises, it became a cause of the Irish crisis in November. What triggered last week’s panic was the sudden realisation by investors that, with an interest rate of 6 per cent and an ongoing no-default guarantee to bank bondholders, Ireland is insolvent.
The second is a lack of political co-ordination. All the decisions taken have one thing in common: no one takes political ownership of the whole system. Everybody inside the system is optimising their corner. International investors, by contrast, are looking at the system as a whole and cannot make sense of the cacophony. Germany’s motivation in the debate on the European Stability Mechanism (ESM), the anti-crisis mechanism from 2013, was to safeguard its financial interest. That is legitimate, but the way it is done offers no solution feasible for the eurozone as a whole.
The third is a breakdown of communication. The EU has a tendency to hype whatever it agrees. The markets first react with euphoria to the announcement, then with disappointment once they have read the small print. When Germany raised the issue of a permanent anti-crisis mechanism, it gave few details. The markets were spooked. When news came out that Germany had climbed down over the question of automatic bondholder haircuts, the markets were euphoric. Details that have come out since are again more alarming. The way the ESM is constructed will make a debt default in the eurozone dramatically more probable. There is a good case to be made for limiting taxpayers’ liability. But the scope and the details must be conveyed much more clearly.
A fourth aspect is a tendency by governments to blame investors when something goes wrong, rather than solve the problem. The prevailing view in Paris and Berlin is that last week’s crisis was the work of nasty speculators. It is not the first time. Remember the ban on short-selling of equities? Or the “locust” debate about private equity a few years back? The point is that this time there is no George Soros-like speculator attacking the system. These are fairly normal investors who are pulling out, or regrouping. They have lost confidence in the eurozone’s crisis management.
Fifth is the tendency to blame each other. In the spring, the Germans had a go at the Greeks. Now the Spanish and the Irish blame the Germans. Readers of this column know that I have been a frequent critic of German policy, but I think it unjustified to blame Berlin for causing the current problems. The cause of the crisis in the European periphery was the bursting of a credit bubble, and that bubble was not the work of the German government. The blame game is not a constructive way out of this crisis.
Finally, a sixth aspect is the tendency to appeal to a deus ex machina when all else fails. That would be the European Central Bank. Last week, several European politicians beseeched the ECB to act as defender of last resort. Market commentators raised expectations that the existing securities market programme would be extended from a volume of close to €70bn to €1,000bn or even €2,000bn.
It did not happen. Or did it? It is hard to say. Jean-Claude Trichet, president of the ECB, said little, but the ECB nevertheless bought hundreds of millions of euros worth of Irish and Portuguese debt that day. Mr Trichet knows that he can prevent contagion but also that he cannot save the eurozone alone.
I do not want to play down the ECB’s role. Its liquidity policies prevented a calamity in August 2007, and later in the autumn of 2008. But it also delayed a resolution to the political crisis. Europe’s bank resolution policy is the ECB, and only the ECB. That is why this crisis is lasting so long.
The euro is currently on an unsustainable trajectory. The political choice is either to retreat into a corner, and hope for some miracle, or to agree a big political gesture, such as a common European bond. What I hear is that such a gesture will not happen, for a very large number of very small reasons. The system is genuinely überfordert.
munchau@eurointelligence.com
I'm sorry to say that a) there are loads of assumptions and inconsistencies in your article b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
a) there are loads of assumptions and inconsistencies in your article:
Firstly, you assume a lot about the investors viz., a) if the Eurozone was such a noodle, did they not went to sleep before investing especially the 'smart' bond-holders who unlike equity holders can lose their capital as well and whose upside is very small compared to the 'unlimited' upside of the equity holders? b) You mention that "These are fairly normal investors who are pulling out..." - do you know the break-down of these investors? For instance, what is the percentage of hedge-funds investment on these bonds?
b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
How can Euro Bonds concept work when fiscal management is divorced from monetary management? This is basics. Centralising the fiscal management without political franchise will never work. So, basically this is a political issue which will take time to resolve either way. The fault lies in the basic design of Euro where fiscal-political-monetary policies are controlled by different agencies with different masters.
Finally,
The fact of the matter is, in good times, nobody wanted to look at fundamentals before making investment decisions. Now in the bad times, everybody is using their leverage to cover their positions.
If Germany is talking about private investors taking hair-cuts, it is being prudent unlike the 'idiots' in Ireland who passed on the whole debt on to their own population (including un-born grand-children) and bailed out all the bond investors mostly from outside Ireland. What these bond-holders are doing by pulling out is just a negotiating stunt. Whoever blinks first will lose. In case of Ireland, we have seen what happens when you blink first. Obviously Germany is too strong to do that. So, to make the Germans blink use the break of Euro as a threat. I'm sure Germans are too mature and smart to fall for that trap even if you try to subterfuge it with a stupid idea like Euro Bonds.
Regards,
Pradeep Kabra
--------------------------------------------
A hopeless Europe, unable to cope
By Wolfgang Münchau
Published: in Financial Times on December 5 2010 18:54
Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone’s crisis management rather well. It is überfordert. The nearest English translation is “overwhelmed”, or “not on top of something”, but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante’s hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow.
I am not saying that every policymaker in the eurozone is hopeless. There are a few exceptions. My point is that the system is überfordert, unable to cope. This inability has several dimensions. I have identified six.
The first, and most important, is a tendency to repeat the same mistakes. The biggest of these is the repeated attempt to address solvency problems through liquidity policies. It happened in October 2008 with bank guarantees. The European Central Bank’s never-ending liquidity support is another example. So is the Greek bail-out. And so is the European Financial Stability Facility, the €440bn ($588bn) bail-out fund. Set up in May as a mechanism to resolve financial crises, it became a cause of the Irish crisis in November. What triggered last week’s panic was the sudden realisation by investors that, with an interest rate of 6 per cent and an ongoing no-default guarantee to bank bondholders, Ireland is insolvent.
The second is a lack of political co-ordination. All the decisions taken have one thing in common: no one takes political ownership of the whole system. Everybody inside the system is optimising their corner. International investors, by contrast, are looking at the system as a whole and cannot make sense of the cacophony. Germany’s motivation in the debate on the European Stability Mechanism (ESM), the anti-crisis mechanism from 2013, was to safeguard its financial interest. That is legitimate, but the way it is done offers no solution feasible for the eurozone as a whole.
The third is a breakdown of communication. The EU has a tendency to hype whatever it agrees. The markets first react with euphoria to the announcement, then with disappointment once they have read the small print. When Germany raised the issue of a permanent anti-crisis mechanism, it gave few details. The markets were spooked. When news came out that Germany had climbed down over the question of automatic bondholder haircuts, the markets were euphoric. Details that have come out since are again more alarming. The way the ESM is constructed will make a debt default in the eurozone dramatically more probable. There is a good case to be made for limiting taxpayers’ liability. But the scope and the details must be conveyed much more clearly.
A fourth aspect is a tendency by governments to blame investors when something goes wrong, rather than solve the problem. The prevailing view in Paris and Berlin is that last week’s crisis was the work of nasty speculators. It is not the first time. Remember the ban on short-selling of equities? Or the “locust” debate about private equity a few years back? The point is that this time there is no George Soros-like speculator attacking the system. These are fairly normal investors who are pulling out, or regrouping. They have lost confidence in the eurozone’s crisis management.
Fifth is the tendency to blame each other. In the spring, the Germans had a go at the Greeks. Now the Spanish and the Irish blame the Germans. Readers of this column know that I have been a frequent critic of German policy, but I think it unjustified to blame Berlin for causing the current problems. The cause of the crisis in the European periphery was the bursting of a credit bubble, and that bubble was not the work of the German government. The blame game is not a constructive way out of this crisis.
Finally, a sixth aspect is the tendency to appeal to a deus ex machina when all else fails. That would be the European Central Bank. Last week, several European politicians beseeched the ECB to act as defender of last resort. Market commentators raised expectations that the existing securities market programme would be extended from a volume of close to €70bn to €1,000bn or even €2,000bn.
It did not happen. Or did it? It is hard to say. Jean-Claude Trichet, president of the ECB, said little, but the ECB nevertheless bought hundreds of millions of euros worth of Irish and Portuguese debt that day. Mr Trichet knows that he can prevent contagion but also that he cannot save the eurozone alone.
I do not want to play down the ECB’s role. Its liquidity policies prevented a calamity in August 2007, and later in the autumn of 2008. But it also delayed a resolution to the political crisis. Europe’s bank resolution policy is the ECB, and only the ECB. That is why this crisis is lasting so long.
The euro is currently on an unsustainable trajectory. The political choice is either to retreat into a corner, and hope for some miracle, or to agree a big political gesture, such as a common European bond. What I hear is that such a gesture will not happen, for a very large number of very small reasons. The system is genuinely überfordert.
munchau@eurointelligence.com
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