Monthly Archives: May 2012

Dear Prudence, won’t you open up your eyes?

If one accepts the definition of insanity as doing the same thing over and over again, and expecting different results, then surely re-doubling belt-tightening austerity, and expecting growth, is economic lunacy?

The only part of the Irish economy that is growing in any meaningful sense is our record-breaking trade surplus. Overall, the economy can only grow if this is enough to offset the opposing contractionary forces of fiscal austerity and inconspicuous consumption. Continue reading

Mexico: A Political Risk Assessment

Here is the final paper for my course in ‘Managing Political Risk’ at Columbia with Ian Bremmer, Preston Keat & Ross Schapp. I enjoyed learning from the best!

Ten takeaways:

1. Enrique Peña Nieto is long odds-on favourite to be elected President on July 1st, the first time PRI will hold the Presidency since losing it in 1997 after 71 years of unbroken rule.

2. Current polling suggests the PRI-PVEM alliance will comfortably secure a Congressional majority, raising the prospect of unified government for the first time since 1997 (NB: this did not subsequently come to pass; November 2012).

3. Unlike at past Presidential elections, no significant political or economic instability is anticipated to ensue, chiefly because Mexico’s macro fundamentals are now far stronger. Continue reading

Ireland’s Sudden Stop

This graph is an extract from a term paper written by three co-authors and I for Professor Guillermo Calvo. We adapted Calvo’s own ‘Sudden Stop’ framework, and applied it to peripheral Europe.

Because the GIIPS are members of a monetary union, they experience some, but not all, of the effects typically associated with ‘Sudden Stops’. There is a large, if slower, adjustment in the Current Account as the capital needed to finance it dries up. Being members of monetary union, lacking monetary policy autonomy, inflation does not soar on the back of a currency devaluation, while the Real Exchange Rate adjustment – through ‘internal devaluation’ is consequently slower. Continue reading

Financial Liberalization & Financial Crises: No Smoke Without Fire

What role has financial liberalization, including capital account liberalization, played in recent financial crises in emerging markets? What policy conclusions should one draw from this?

You can’t have smoke without fire. Recent economic history would suggest that neither can you have financial crises without weak macroeconomic fundamentals. Certainly, capital flows can increase vulnerability to, and the amplitude of, emerging market crises. Moreover, it is often capital flow reversals that signal the onset of financial crises in dramatic fashion.

While it is true that prohibiting global capital flows would prevent or dampen many economic crises, it does not necessarily follow that this is the appropriate policy course. If you can’t have smoke without fire, then it’s also true to say that you can’t have fire without tinder. Removing all tinder would surely prevent future fires, but we should not forget that learning to use fire was one of homo sapiens’ most important social evolutions.

This this is not to say that all capital flows are good flows, or even that restrictions on flows could not yield a pareto improving outcome. It is simply recognition that a certain degree of international mobility of capital is critically important if emerging and developing economies are to have some chance of converging with advanced economies. Continue reading

Global Imbalances: It Takes Two to Tango

What role did global imbalances play in the center (2007-) financial crisis? What were the primary causes of theses imbalances? What are the difficulties involved in resolving them?

Just as it takes two to tango, so current account imbalances require offsetting capital flows to keep international payments in balance. Global imbalances thus have two drivers: borrowers and lenders. In the middle of the last decade, the US’ growing twin fiscal and current account deficits were the focus of much debate. Continue reading

Are Wages Adjusting on Europe’s Periphery?

Countries in economic crisis typically try to make their exports more competitive by devaluing their currencies. This option isn’t open to members of a monetary union (or those with a currency peg, like Latvia & Lithuania).

Hard-hit peripheral members of the Eurozone have been pursuing an ‘internal devaluation’ strategy, targeting an improvement in the all-important Real Exchange Rate by allowing nominal wages and prices to adjust. The graph below shows the extent to which labour costs have adjusted on Europe’s periphery since 2008, compared to Germany and the EU average.

Continue reading

This is What Financial Repression Looks Like

Since the blanket bank guarantee was introduced in September 2008, the Irish banks’ holdings of Irish sovereign debt have soared from a mere half billion euro to €14.6bn, or about 12% of total govt. debt.

In the 9 months since July 2011 alone, Irish banks’ holdings of our national debt have increased by 40%, or more than €4bn. Interestingly, the yield on benchmark 10 year Irish sovereign debt has fallen from over 14% then to just over 6% now. This is prima facie evidence of an increasing tendency towards financial repression in recent months.

Given that Irish resident holdings of our govt. debt has been trending downwards, one could conclude that the largely govt. owned banking sector has been snapping up govt. debt, just not not as quickly as the rest of the Irish private sector, including pension funds, has been offloading it.

Is there a false floor under Irish bond prices, and a consequent ceiling on yields?