This is not the first time that central bank gold reserves have been evoked as a partial solution to public debt problems. In the depths of the Greek crisis, the sale of nation’s bullion reserves was briefly discussed as a means to bring down the debt burden, but the holdings were too small to make any difference. In Cyprus, a proposal to sell the bulk of the island’s gold reserves was endorsed, at least by EU finance ministers. So, it was not shocking to hear about a proposal to put Italy’s ample bullion holdings – the second highest in the EU after Germany’s – to use in tackling its massive debt overhang.
“As soon as a nation decides to borrow money from foreigners, it loses its sovereignty. Curiously, when Francois Baroin, the French finance minister shared this sentiment during a TV interview, he was talking about his own country, not Greece. He is right, of course: in the very simplest terms, borrowing money means that one loses control over the part of one’s disposable income that has to be used to make the repayments. If the debt service costs are equivalent to one’s entire disposable income then the loss of control – or sovereignty – is also entire.
Hyperactive rating agencies currently are on the hunt for sovereign debt sinners. However, although they have stripped debt ratings several notches at a time in some parts of the world, US Treasuries have always been seen as somehow untouchable. So nobody reckoned with the aggressive stance recently taken by Fitch, which threatened to downgrade Treasuries to junk in case of a default.
Do you prefer a 50 percent loss today or 70 percent loss in three years’ time? This is essentially the choice that faces holders of Greek sovereign debt according to Barron’s. They base their beliefs on data from Citi Investment Research Analysis concerning the size of the haircut that would be necessary to bring Greece’s debt-to-GDP ratio to a manageable 90 percent now, and in each of the next four years. Barron’s recommends taking the 50 percent hit immediately, which it undoubtedly finds easy to do because it does not actually hold the paper.
If you ask investors this question I doubt any of them would say ‘a hundred years’ or any other figure that corresponds to reasonable long-term historical average. Chances are you won’t even hear 50 or 20 years. Most of the responses will be generously below a decade. Among the lessons we have learnt from the bubble-bust that provoked the latest crisis is that major financial upset causes more damage to public finances than we would like, is less predictable than we would like, and occurs with a greater frequency than we would like. So it worries me enormously when economists seem to suggest that governments have all the time in the world to get on with fiscal consolidation.
The Irish Prime Minister’s claim that the EU/IMF bailout terms are in the country’s best interest is not strictly true. This is because part of the money comes from the country’s own sovereign wealth fund, the National Pensions Reserve. This fund, set up in 2001 to provide for social welfare and public services pension claims from 2025 onwards
Demonstrations in the Irish capital, Dublin, yesterday looked like a publicity stunt – the narrow-angled images and the presence of more photographers than demonstrators gave it away – but the foul mood of the Irish public is undeniable.
After denying for weeks that it needed or wanted an EU/IMF bailout, the Irish government has decided to apply for one after all. Ministers assure us that it is nothing more than a standby facility. The government supposedly has no intention to actually use it
At the kindergarten, the rules stipulate that children have to be picked up by 16:00. Late pick-ups are annoying for the caregivers, as one of them has to stay behind with the child until the errant parent arrives. It does not happen too often – the sight of one’s child sitting alone among the assembled buckets, mops and other cleaning materials, as well as the stern glance from the caregiver, makes sure of that.
A thrilling conclusion to the soccer World Cup tournament in South Africa has thrown up the possibility for the victor, Spain, to consider a bond marketing strategy we theorised about in any earlier post. The strategy exploits the popular appeal of assets, even financial assets, with a celebrity ‘label’.
The more high-profile economists line up on one side or the other of the austerity vs. stimulus divide, the more observers are seduced into framing the entire debate along these lines. As we focus on the pros and cons of one or the other policy, all other possible solutions are squeezed out of the discussion.
The austerity vs. stimulus debate is seemingly intractable. Some well-respected economists call austerity a certain recipe for a depression; other, equally-imminent scholars see a solid fiscal base as the prerequisite for sustainable growth and are dismayed by the prospect of yet another debt-driven expansion. One thing is certain: now that austerity decisions have been made, it has become much easier to call for stimulus. If the recovery does falter, the Keynesians know they will be able to say ‘I told you so’; if it doesn’t, no-one will ask.
Despite being an Englishman, former soccer player and manager, Jack Charlton, is immensely popular in the Republic of Ireland. As manager of the national team, he led the soccer-mad nation to its first World Cup competition in 1990.