It was posted exactly two years ago

It was posted exactly two years ago on

Friday, November 27, 2009

Just a REMINDER, republished exactly the same!

Few days ago, inquiring minds asked Nobel Prize Krugman about debt/GDP ratio comparisons. There is a bizarre school of thought who tend to think that sovereign public debt does not matter or debt can be accumulated for long time without sustainability and solvency problems.
The Dubai crisis is simply reminding us: a) the financial crisis is not over b) any debt needs to be paid back, no matter if it's private or sovereign (or a mix of the two).
In the case of Dubai, Buiter is stressing that the debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. Yet financial markets are reacting as if either private or public (sovereign) debt levels are important. As a matter of fact the financial crisis has shown how private debts of banks and financial institutions become public debt and greatly contribute to its growth.
The volume of activity in sovereign credit default swaps – which measure the cost to insure against bond default has recently increased enormously. Some countries, like Greece, are showing clear sign of Sovereign Credit Deterioration. Bets on rich country bond defaults aim at guessing Which of the “Rich Four” Countries Will Default First?.

Italy is an interesting case as CDS volumes (USD gross notional) and contracts increased both about 48% in one year. Italy has one of the highest debt/GDP ratio of the developed economies and CDS volume is now the highest for an individual country.

So what are CDS and Interest Rates Telling Us? Simply that investors are increasingly worried about debt in the world, particularly industrialized countries and they are hedging long-tail risk.
Although debt as the percentage of GDP is not the only criteria to really assign a viable ranking to the default risk, it's a reminder that investors would like to be paid back sooner or later and all bills have to be paid.
That is why it is so important that you eat debt immediately, on Thanksgiving.
And do not tell people that Dubai is a Black Swan when it's just a roasted turkey as usual.

Euro bonds or Bonds to be alive!

When I published this post about Euro bonds in March 2009 I actually imagined the present situation. Now even the European Commission proposes something along the same lines I sketched them out in my posts. They call it wrongly  Stability Bonds just for cosmetics reasons, to try to be different.
It took the European Commission almost 3 years to understand the situation and table a proposal. It did it collating and collecting material on internet.  Yet the first proposal was made in 1993 by Commission's President Jacques Delors.

The title of the James Bond movie on my post was Never say never again.

Today Spiegel on line International writes: German Resistance to Pooling Debt May Be Shrinking - "Never say never: The German government remains officially opposed to controversial euro bonds. Behind the scenes, however, press reports indicate that some within Chancellor Merkel's government have begun discussing the conditions under which they might accept a pooling of euro-zone debt". 

After several years it's really time to say Never say never again.

Yet you have a Euro pessimist like Nobel Prize Paul Krugman writing that recent higher rates in Germany is to be seen as market "in effect pricing in a real possibility of eurozone collapse".
I think it's easier to think that actually the market is pricing and pushing the launch of Euro-bonds. Against this backdrop German rates will have to be a bit higher...

I still contend that EU bonds are necessary to further EU economic and financial integration as they are Bonds to be alive. Not just stability. I may technically also add they are now necessary to take European Central Bank out of impasse of buying bonds of doubtful value or incurring losses. De facto the ECB is already running on kind of notional EU bonds, at its expenses...

UPDATE: On issues like organisational set-up and conditions for entering the system of Euro-bonds, I think that it should be possible the transformation of EFSF/ESM into a full scale debt management agency where Member States could initially simply opt to transfer common issuance functions to the agency providing collateral (why not gold or revenues?) and guarantees (joint and several). Germany could even opt-out but it will realize immediately that actually competition within EU in issuing government bonds is not necessarily good and could result just in a beggar thy neighbour wrong policy. I do not see the need of treaties changes in such a transformation. Let's also avoid the proliferation of mechanisms, instruments and facilities as money is money and debt is debt.
UPDATE of 27/11/2011: Reading the press a new option to avoid treaties modifications appears and would also simplify the launch of Eurobonds: to sign a mini-stability pact (along the lines of Schengen for immigration and just among those countries willing to do it with opting-out of some) then to also launch euro-bonds with joint and several guarantees of the mini-stability pact signatories. That means that Eurobonds system can be set up on a voluntary basis among those willing to abide by the rules and conditions of the pact.

WHEN THE GOING GETS TOUGH, THE LIES GET GOING

"Market jitters bring difficult choice between truth and lies for politicians, spokespeople".

It's true that WHEN THE GOING GETS TOUGH, THE LIES GET GOING....

 

But how to interpret the words of Jean-Claude Juncker, prime minister of Luxembourg, for whom the threat of immediate market turbulence means the usual norms of transparency don't apply.

He is reported to have said that "When it becomes serious, you have to lie". This about markets reactions to Greece's situation bring us back to other lies I wrote about. Then there are lies and inconvenient truth...

Yet for politicians the usual liar paradox applies: "Everything I say is a lie". 

 

Does it apply to some economists as well?

For the Italians future: "Ordem e Progresso" or stop voting Berlusconi...

WHY ITALIANS ARE STILL VOTING AND/OR SUPPORTING SILVIO, OR JUST 

LAUGHING AT HIS JOKES ?

New ways of farming: why not?

What does FARMING mean nowadays?

Energy farming ensures that there is a consistent supply of energy by means of expanding, improving the various energies supplies aimed at maintaining a constant and local supply.
Energy farming can be done in any country. One cannot stay without energy.


YES, WE CAN: in developing countries as well....
From traditional agriculture farm to wind and solar farms.
From lands of oil and uranium to lands of renewables.

The "Domino theory" goes on: from Apocalypse Now to Odyssey Dawn

"By early 1954, it was clear to many U.S. policymakers that the French were failing in their attempt to re-establish colonial control in Indochina (Vietnam), which they lost during World War II when the Japanese took control of the area. The Vietnamese nationalists, led by the communist Ho Chi Minh, were on the verge of winning a stunning victory against French forces at the battle of Dien Bien Phu. In just a few weeks, representatives from the world's powers were scheduled to meet in Geneva to discuss a political settlement of the Vietnamese conflict. U.S. officials were concerned that a victory by Ho's forces and/or an agreement in Geneva might leave a communist regime in control of all or part of Vietnam. In an attempt to rally congressional and public support for increased U.S. aid to the French, President Eisenhower gave an historic press conference on April 7, 1954.
He spent much of the speech explaining the significance of Vietnam to the United States. First was its economic importance, "the specific value of a locality in its production of materials that the world needs" (materials such as rubber, jute, and sulphur). There was also the "possibility that many human beings pass under a dictatorship that is inimical to the free world." Finally, the president noted, "You have broader considerations that might follow what you would call the 'falling domino' principle." Eisenhower expanded on this thought, explaining, "You have a row of dominoes set up, you knock over the first one, and what will happen to the last one is a certainty that it will go over very quickly." This would lead to disintegration in Southeast Asia, with the "loss of Indochina, of Burma, of Thailand, of the Peninsula, and Indonesia following." Eisenhower suggested that even Japan, which needed Southeast Asia for trade, would be in danger. A year later in 1955 the Vietnam War started...

Eisenhower's words are having big impacts in history as the domino theory and later its reverse with Iraq's invasion is still being applied and Apocalypse Now is in Lybia called Odyssey Dawn as somebody "loves the smell of napalm in the morning".

Is nuclear power an option worthing the risks and costs?

Reading this article about The lessons of Fukushima, one should draw few conclusions without fallacies:
a) people tend not to learn from previous mistakes. Learning from lessons is a psychological human being, particularly politician, constraint and limit. Black Swans, in financial markets, earthquakes or nuclear accidents, do exist, but some prefer to ignore them. 

b) Nuclear power is an option that never undergo proper cost-benefit analysis and impact and risk assessment. Its "true" cost is never revealed whereas the benefits are always overstated for political and ideological reasons.
c) Renewable energy alternatives, energy savings and energy efficiency are options which still find some difficulties to be understood and be widely accepted because of ideologies, political lobbies and special interests not really economic or strategic reasons. 

Think about: to build a nuclear plant it takes 10-12 years and unknown costs and risks whereas renewables, energy saving and efficiency options take only few days to be built while costs and risks are known in advance. Which rational option one should choose? It's quite clear that the nuclear option is neither rational nor economically sound. Rather a risky option.