BBC: Financial Transaction Tax for 10 EU States
CNNMoney: Robin Hood Tax Gains Traction in Europe
Guardian: European Financial Transaction Tax Moves Step Closer
Reuters: EU Commission Backs 10 Countries' Transaction Tax Plan
Telegraph: Financial Transaction Tax Will 'Raise Billions', Says EU Commission
WSJ: Eleven European Countries Support Tax on Transactions
A controversial proposal by ten European Union (EU) member states to tax financial transactions within their borders could help those countries reduce their deficits, but it could also reduce their economic growth and drive their banking and investment businesses offshore toward untaxed financial centers. The proposal by ten EU members, including Germany, France, Italy, Spain, Austria, Belgium, Greece, Portugal, Slovakia, and Slovenia, would impose a 0.1% tax on the trades of stocks and bonds and a 0.01% tax on the trades of derivatives (a contract between two parties whose value depends on other underlying assets). Although the tax on each individual transaction is low, the plan could produce substantial amounts of revenue for the ten countries due to the significant number of transactions completed within their borders each year. France’s European Affairs Minister, Bernard Cazeneuve, said such a plan could generate more than €10 billion per year.
Proponents of the financial transaction tax argue that increased tax revenues could help the ten countries offset their costs associated with the European sovereign debt crisis, including the hundreds of billions of euros spent on bailing out struggling banks. The tax is particularly popular with taxpayers who feel as though they have suffered due to austerity measures (policies designed to reduce federal deficits through cuts in government services and/or increases in taxes) implemented to help fund the rescue of failed banks. According to Jose Manuel Barroso, the President of the European Commission, which functions as the EU’s executive branch, the tax is motivated by “fairness” and is designed to “ensure the costs of the crisis are shared by the financial sector instead of just shouldered by ordinary citizens.” To show support for the tax, members of grassroots organizations have started to dress up as Robin Hood (a fictional character who robbed the rich to help the poor) at public rallies that are reminiscent of the Occupy Wall Street events in the United States.
Opponents of the financial transaction tax, including the U.K., Sweden, the Netherlands, and many other EU members, believe the tax will slow economic growth in Europe, even if just confined to ten countries. A treasury official for the U.K. said the tax could negatively impact the EU’s “real economy” (manufacturing and service production). Many financial transactions are made through pension accounts held by manufacturing companies, and imposing financial transaction taxes on these manufacturers could lower their profitability, which in turn could lower their demand for new workers. Matthew Fell, the Director for Competitive Markets at the Confederation of British Industry, believes a tax on financial transactions could also slow economic growth by making it more expensive for businesses to raise money through the issuance of new debt and equity shares to investors. Businesses typically rely on these share sales to fund their expansions and growth.
Other opponents of the transaction tax, including banks and financial lobbyists, believe the tax will drive financial transactions out of the ten countries covered by the plan and into untaxed financial centers. The European Commission has downplayed this notion by arguing that the tax would apply to both parties in a transaction. For example, an American bank purchasing shares of a German investment fund would still need to pay the tax even if the trade was made in New York, an untaxed financial center. In responding to this argument, a deputy director for the Bank of Italy recently told the Italian parliament it would be easy for the bank to avoid paying the tax by simply moving its investment trading operations to another country. The Swedish government agreed with that assessment based on its experience attempting a similar tax in the 1980s, which ultimately resulted in the loss of transaction activity to other untaxed financial centers.
Although the financial transaction tax proposal would only take effect in ten countries, it still must be approved by a majority of all the EU nations and the European Parliament. Given the small minority of countries supporting this plan, its passage is far from certain. A similar proposal by the European Commission for an EU-wide transaction tax was soundly rejected by a wide majority of EU members last year. However, it is unclear if that majority will block the current proposal due to the economic boost it could provide to countries not enacting the tax. For example, the U.K. soundly rejected last year’s proposal for a transaction tax within its borders and questioned the wisdom of the current proposal, but said it would not block the current proposal’s passage. This support is likely due to the fact that London, as one of the top financial centers in the world, would benefit greatly from an influx of transaction activity seeking to avoid taxation.
Showing posts with label Europe (UK). Show all posts
Showing posts with label Europe (UK). Show all posts
Monday, November 12, 2012
Sunday, October 07, 2012
Europe Attempts to Avoid Negative Long-Term Consequences of High Youth Employment Rates
European Commission: Youth Opportunities Initiative
Euro Observer: Youth Unemployment Risks 'Social Disaster'
WP: As Youth Unemployment Soars, France Offers to Let Companies Hire Young People on its Dime
WP: Unemployment Rate Remains Above 11 Percent in Euro Zone
WSJ: In Europe, Signs of a Jobless Generation
Out of concern for the long-term negative consequences related to youth unemployment, the European Union (EU), along with member state governments and a consortium of private businesses have adopted plans to put young people to work in Europe. In July 2012, the unemployment rate in the EU reached 11.3%, signifying 18 million Europeans were out of work. This was the highest level of unemployment in the EU since the euro was adopted in 1999. European companies have hesitated to invest and hire new workers due to weak consumer spending, triggered in part by government payrolls cuts, higher taxes, and volatility in the financial markets. European companies have also hesitated to expand their work forces because strict European labor laws make it difficult to lay off workers during tough economic times.
While the overall unemployment rate in the EU is high, its youth unemployment rate is even higher. In July 2012, the unemployment rate for workers under the age of 24 reached 22.5%, up from an already high 21.3% one year earlier. However, this increase was not uniform across the EU. The youth unemployment rate actually decreased in ten EU member states during July and increased greatly in several countries located in Europe’s economic periphery, including Greece and Spain. During July, the youth unemployment rate reached 53.8% in Greece and 52.9% in Spain, the highest levels in the EU.
A prolonged high youth unemployment rate has many long-term negative consequences for workers and businesses. A person’s job skills and work experience begin to fade rapidly after about six months of unemployment. This means that the longer a person is unemployed, the harder it becomes for that person to find a permanent job at a competitive wage. The EU’s challenging labor markets have already forced many out of work youth to accept part-time and temporary jobs for low wages. However, the International Labor Organization (ILO) believes that if a person accepts such work early in his or her career, that person will have a more difficult time finding permanent employment with proper advancement opportunities later on. The negative impact from working in these low-level positions can hamper a person’s career for up to 15 years according to Ekkehard Ernst, Chief of the ILO Employment Trends Unit. Businesses can also be hurt by sustained youth unemployment in the long run. As unemployed youth move abroad in search of better job opportunities, companies in countries with high youth unemployment rates will eventually be unable to find qualified workers to fill vacancies.
To prevent these long-term negative consequences, the EU, a group of private businesses, and several member states have adopted plans to put people to work. The EU already contributed €3 billion to education and apprenticeship programs designed to reduce youth unemployment in Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovakia, and Spain. The EU also recently proposed a Youth Guarantee program, which would help young people find employment or training opportunities within a few months of losing their jobs. Private businesses are also trying to reduce youth unemployment. A task force at the Business-20 Summit, a gathering of global business leaders, called for companies to increase their apprenticeships and internships by 20% over the next year in order to put young people to work. Several companies have already responded. For example, Starbucks recently launched a twelve-month apprenticeship program in the U.K. Finally, individual governments are trying to reduce youth unemployment within their borders. For instance, the Italian and Spanish governments have proposed tax breaks for businesses that hire young workers. In addition, the French government recently proposed to pay up to 75% of the salaries for young workers hired by private companies during the first three years of their employment. France hopes the plan will put 150,000 new young people to work over the next two years.
Despite the best efforts of the EU, private businesses, and individual member states, youth unemployment is likely to continue to be a problem in Europe going forward. Due to the continuing problems associated with the European financial crisis, the ILO forecasts that over the next five years the youth unemployment rate in the EU will decrease only slightly to 21.4% from 22.4% today. Such a prolonged period of youth unemployment could produce a “lost generation” of young workers who suffer long-term career setbacks. It could also negatively impact long-term business productivity and competitiveness in the countries experiencing the highest rates of youth unemployment today.
Euro Observer: Youth Unemployment Risks 'Social Disaster'
WP: As Youth Unemployment Soars, France Offers to Let Companies Hire Young People on its Dime
WP: Unemployment Rate Remains Above 11 Percent in Euro Zone
WSJ: In Europe, Signs of a Jobless Generation
Out of concern for the long-term negative consequences related to youth unemployment, the European Union (EU), along with member state governments and a consortium of private businesses have adopted plans to put young people to work in Europe. In July 2012, the unemployment rate in the EU reached 11.3%, signifying 18 million Europeans were out of work. This was the highest level of unemployment in the EU since the euro was adopted in 1999. European companies have hesitated to invest and hire new workers due to weak consumer spending, triggered in part by government payrolls cuts, higher taxes, and volatility in the financial markets. European companies have also hesitated to expand their work forces because strict European labor laws make it difficult to lay off workers during tough economic times.
While the overall unemployment rate in the EU is high, its youth unemployment rate is even higher. In July 2012, the unemployment rate for workers under the age of 24 reached 22.5%, up from an already high 21.3% one year earlier. However, this increase was not uniform across the EU. The youth unemployment rate actually decreased in ten EU member states during July and increased greatly in several countries located in Europe’s economic periphery, including Greece and Spain. During July, the youth unemployment rate reached 53.8% in Greece and 52.9% in Spain, the highest levels in the EU.
A prolonged high youth unemployment rate has many long-term negative consequences for workers and businesses. A person’s job skills and work experience begin to fade rapidly after about six months of unemployment. This means that the longer a person is unemployed, the harder it becomes for that person to find a permanent job at a competitive wage. The EU’s challenging labor markets have already forced many out of work youth to accept part-time and temporary jobs for low wages. However, the International Labor Organization (ILO) believes that if a person accepts such work early in his or her career, that person will have a more difficult time finding permanent employment with proper advancement opportunities later on. The negative impact from working in these low-level positions can hamper a person’s career for up to 15 years according to Ekkehard Ernst, Chief of the ILO Employment Trends Unit. Businesses can also be hurt by sustained youth unemployment in the long run. As unemployed youth move abroad in search of better job opportunities, companies in countries with high youth unemployment rates will eventually be unable to find qualified workers to fill vacancies.
To prevent these long-term negative consequences, the EU, a group of private businesses, and several member states have adopted plans to put people to work. The EU already contributed €3 billion to education and apprenticeship programs designed to reduce youth unemployment in Greece, Ireland, Italy, Latvia, Lithuania, Portugal, Slovakia, and Spain. The EU also recently proposed a Youth Guarantee program, which would help young people find employment or training opportunities within a few months of losing their jobs. Private businesses are also trying to reduce youth unemployment. A task force at the Business-20 Summit, a gathering of global business leaders, called for companies to increase their apprenticeships and internships by 20% over the next year in order to put young people to work. Several companies have already responded. For example, Starbucks recently launched a twelve-month apprenticeship program in the U.K. Finally, individual governments are trying to reduce youth unemployment within their borders. For instance, the Italian and Spanish governments have proposed tax breaks for businesses that hire young workers. In addition, the French government recently proposed to pay up to 75% of the salaries for young workers hired by private companies during the first three years of their employment. France hopes the plan will put 150,000 new young people to work over the next two years.
Despite the best efforts of the EU, private businesses, and individual member states, youth unemployment is likely to continue to be a problem in Europe going forward. Due to the continuing problems associated with the European financial crisis, the ILO forecasts that over the next five years the youth unemployment rate in the EU will decrease only slightly to 21.4% from 22.4% today. Such a prolonged period of youth unemployment could produce a “lost generation” of young workers who suffer long-term career setbacks. It could also negatively impact long-term business productivity and competitiveness in the countries experiencing the highest rates of youth unemployment today.
Thursday, May 12, 2011
Many Banks in Europe Face Funding Difficulties
Sources:
Economist: Cutting It Fine
Bloomberg: European Bank Funding Threatened as Basel III Meets Solvency II
FT: Banks Endorse Option of Creditor ‘Bail-in’; Brussels to Target Bondholders on Bail-outs
In many European countries, the maturities of bank debt have shortened dramatically in 2011 compared to 2006, according to data provided by Dealogic. In particular, in countries having sovereign-debt problems such as Greece and Portugal, the maturities of bank debt have fallen more sharply. In other countries such as Spain and Italy, banks also face funding difficulties and have been issuing more short-term bonds or paying higher yields. In the case of Italy, banks pay higher yields on their bonds by 1-1.5 percentage points than banks in France and Germany. Having more short-term funding is worrying because it makes banks vulnerable to a sudden liquidity dry-up in short-term funding markets as it happened during the recent global financial crisis.
On the other hand, banks in some countries including France and Germany have been able to improve their funding situations, issuing more long-term bonds during the same time period. In France, for instance, banks’ weighted-average debt maturity in 2011 increased over eight years from around six years in 2006.
However, most banks in euro-zone countries will likely continue to suffer from funding difficulties in the near future as new regulations pose additional challenges. The new Basel III rules require banks to hold more capital. McKinsey & Co. estimates that banks in euro-zone countries will have to raise additional €2.3 trillion ($3.4 trillion) in long-term funding. However, other two regulations imposed by European regulators may make it even harder for banks to sell long-term bonds. First, under the Solvency II rules, insurance companies are required to hold more capital against corporate bonds when they purchase longer-term bonds. Insurance companies are the biggest purchasers of bank bonds in Europe, holding about 60 percent of banks’ debt. The Solvency II rules may discourage them to hold longer-term bonds. Second, European regulators have proposed a regulation which requires bondholders to share the losses of failing banks. Under the proposed rules, bondholders will be first asked to reduce the value of their bonds before taxpayers bail them out.
Economist: Cutting It Fine
Bloomberg: European Bank Funding Threatened as Basel III Meets Solvency II
FT: Banks Endorse Option of Creditor ‘Bail-in’; Brussels to Target Bondholders on Bail-outs
In many European countries, the maturities of bank debt have shortened dramatically in 2011 compared to 2006, according to data provided by Dealogic. In particular, in countries having sovereign-debt problems such as Greece and Portugal, the maturities of bank debt have fallen more sharply. In other countries such as Spain and Italy, banks also face funding difficulties and have been issuing more short-term bonds or paying higher yields. In the case of Italy, banks pay higher yields on their bonds by 1-1.5 percentage points than banks in France and Germany. Having more short-term funding is worrying because it makes banks vulnerable to a sudden liquidity dry-up in short-term funding markets as it happened during the recent global financial crisis.
On the other hand, banks in some countries including France and Germany have been able to improve their funding situations, issuing more long-term bonds during the same time period. In France, for instance, banks’ weighted-average debt maturity in 2011 increased over eight years from around six years in 2006.
However, most banks in euro-zone countries will likely continue to suffer from funding difficulties in the near future as new regulations pose additional challenges. The new Basel III rules require banks to hold more capital. McKinsey & Co. estimates that banks in euro-zone countries will have to raise additional €2.3 trillion ($3.4 trillion) in long-term funding. However, other two regulations imposed by European regulators may make it even harder for banks to sell long-term bonds. First, under the Solvency II rules, insurance companies are required to hold more capital against corporate bonds when they purchase longer-term bonds. Insurance companies are the biggest purchasers of bank bonds in Europe, holding about 60 percent of banks’ debt. The Solvency II rules may discourage them to hold longer-term bonds. Second, European regulators have proposed a regulation which requires bondholders to share the losses of failing banks. Under the proposed rules, bondholders will be first asked to reduce the value of their bonds before taxpayers bail them out.
Monday, April 18, 2011
Vickers’ Reform Plans to Make UK Banks Safe and Competitive
Sources:
FT: Lloyds Lashes Out at Vickers Report; Ringfenced But Game’s Far From Up; Vickers to Propose More Competition for Banks
Economist: Commission Accomplished
Telegraph: Sir John Vickers Unveils Radical Shake-up of Banking Industry Regulation; The Quiet Revolution for British Banking
Last summer, the UK government established the Independent Commission on Banking (ICB) and asked the ICB to provide banking reform plans to enhance stability of the UK financial system and improve competition. The ICB, chaired by Sir John Vickers, a former chief economist at the Bank of England, published its interim report on April 11th. After the release of the report, bank shares rose since its recommendations were less radical than expected. Notably, the report did not recommend an option of requiring banks to completely separate their retail banking units from investment banking units.
Mainly, the ICB’s report suggests three measures. First, the report recommends that banks’ retail banking units be ring-fenced from other units so that retail units can keep functioning in a financial crisis. Second, as a measure to increase banks’ ability to absorb losses, the report recommends that banks hold a core Tier 1 capital ratio of at least 10 percent, higher than the minimum requirement of 7 percent set by Basel III. Lastly, in order to enhance competition in the retail banking market, the report recommends that Lloyds Banking Group reduce its market share of current accounts by selling more branches. Lloyds’ market share rose up to almost 30 percent after the purchase of HBOS during the financial crisis. As a condition for receiving state aid, Lloyds has already begun selling its 600 branches, but the report did not specify how many additional branches Lloyds would be required to sell.
Critics say that the ICB “bottled it” and its recommendations were timid. They point out that the ICB rejected options of formally separating banks’ retail and investment banking units and unwinding of the merger between Lloyds and HBOS. Also, the ICB did not provide any recommendations regarding caps on bankers’ bonuses. However, Sir Vickers claims that the report’s reform options are “very far-reaching” and would “make a world of difference to UK retail banking.”
The ICB’s final report is due in September. In the meantime, the ICB will receive comments on their recommendations from the public.
FT: Lloyds Lashes Out at Vickers Report; Ringfenced But Game’s Far From Up; Vickers to Propose More Competition for Banks
Economist: Commission Accomplished
Telegraph: Sir John Vickers Unveils Radical Shake-up of Banking Industry Regulation; The Quiet Revolution for British Banking
Last summer, the UK government established the Independent Commission on Banking (ICB) and asked the ICB to provide banking reform plans to enhance stability of the UK financial system and improve competition. The ICB, chaired by Sir John Vickers, a former chief economist at the Bank of England, published its interim report on April 11th. After the release of the report, bank shares rose since its recommendations were less radical than expected. Notably, the report did not recommend an option of requiring banks to completely separate their retail banking units from investment banking units.
Mainly, the ICB’s report suggests three measures. First, the report recommends that banks’ retail banking units be ring-fenced from other units so that retail units can keep functioning in a financial crisis. Second, as a measure to increase banks’ ability to absorb losses, the report recommends that banks hold a core Tier 1 capital ratio of at least 10 percent, higher than the minimum requirement of 7 percent set by Basel III. Lastly, in order to enhance competition in the retail banking market, the report recommends that Lloyds Banking Group reduce its market share of current accounts by selling more branches. Lloyds’ market share rose up to almost 30 percent after the purchase of HBOS during the financial crisis. As a condition for receiving state aid, Lloyds has already begun selling its 600 branches, but the report did not specify how many additional branches Lloyds would be required to sell.
Critics say that the ICB “bottled it” and its recommendations were timid. They point out that the ICB rejected options of formally separating banks’ retail and investment banking units and unwinding of the merger between Lloyds and HBOS. Also, the ICB did not provide any recommendations regarding caps on bankers’ bonuses. However, Sir Vickers claims that the report’s reform options are “very far-reaching” and would “make a world of difference to UK retail banking.”
The ICB’s final report is due in September. In the meantime, the ICB will receive comments on their recommendations from the public.
Tuesday, January 25, 2011
In the U.K., Debate Over the Future of the Banking Sector Wages On
The Guardian:Banks Go On the Defense as Commission Gears Up
The Guardian: Nick Clegg Signals Support For Banks Breakup
FT: Clegg Calls For Overhaul of UK Banks
Finance News: Talks Between Government and Banks to Set Lending Targets are Delayed
U.K. Deputy Prime Minister Nick Clegg recently said that he would support the break up of British banks into a high-risk sector and a low-risk sector. Clegg said that there is a "strong case" for insulating high-risk, casino-type banking institutions from low-risk, High Street retail banking. This separation would help prevent banks from becoming "too big to fail" and protect the U.K. economy from having to bail out the banking sector again. Clegg's comments represent the most drastic call for the overhaul of the U.K. banking sector since he took office.
Clegg's remarks came on the heels of a speech from Sir John Vickers, the chairman of Britain's Independent Commission on Banking, which is currently conducting an independent review of the banking sector in the U.K. The Commission was put in place to evaluate the structural stability of the banking sector, and has a mandate to consider whether the universal banks (firms that combine retail and investment branches) need to be altered to prevent a future taxpayer bailout. The commission will also analyze whether there is enough competition in the banking sector, currently dominated by Lloyds Banking Group. It will make its final reform recommendations in September, 2011.
Vickers suggested that he would recommend an overhaul of the banks, though he stopped short of condemning high-risk investment banking. Rather, he suggested that retail banking operations could be required to make structural changes that would make them better equipped to handle a future crisis. Vickers further stated that it is unlikely that the Commission will propose radical forms of limited-purpose banking, although large banks may still be concerned that Vickers' comments will prompt the government to to require banks' retail operations to hold more capital, which could be costly.
HSBC executive Mike Geoghegan has already spoken out against the speech, challenging the logic behind the suggestion that larger banks should be required to hold more capital. Rather, Georghegan argues that capital requirements should be linked with the riskiness of the business model, not the size of the bank. Other investment banking executives have spoken out to defend their practices, including outgoing Barclays executive John Varley, who claims that Barclays does not do "the work of a casino," but rather, provides a "real economy service."
The debate over the future structure of U.K. banks is also being waged on another front. The government recently announced that discussions with the banks, the so-called Merlin Project, have reached a stalemate. These discussions are the government's attempt to get banks to agree to lending targets and pay disclosures in order to resolve some of the perceived problems that caused the financial crisis in 2008. One major source of disagreement has been David Cameron's vision of a "Big Society Bank" which would fund social enterprises and charities. However, the talks will likely resume next week.
Discussion Question: Should the government split up U.K. banks to help minimize risk? If this is the best move for the British economy, will the government be successful in achieving it?
The Guardian: Nick Clegg Signals Support For Banks Breakup
FT: Clegg Calls For Overhaul of UK Banks
Finance News: Talks Between Government and Banks to Set Lending Targets are Delayed
U.K. Deputy Prime Minister Nick Clegg recently said that he would support the break up of British banks into a high-risk sector and a low-risk sector. Clegg said that there is a "strong case" for insulating high-risk, casino-type banking institutions from low-risk, High Street retail banking. This separation would help prevent banks from becoming "too big to fail" and protect the U.K. economy from having to bail out the banking sector again. Clegg's comments represent the most drastic call for the overhaul of the U.K. banking sector since he took office.
Clegg's remarks came on the heels of a speech from Sir John Vickers, the chairman of Britain's Independent Commission on Banking, which is currently conducting an independent review of the banking sector in the U.K. The Commission was put in place to evaluate the structural stability of the banking sector, and has a mandate to consider whether the universal banks (firms that combine retail and investment branches) need to be altered to prevent a future taxpayer bailout. The commission will also analyze whether there is enough competition in the banking sector, currently dominated by Lloyds Banking Group. It will make its final reform recommendations in September, 2011.
Vickers suggested that he would recommend an overhaul of the banks, though he stopped short of condemning high-risk investment banking. Rather, he suggested that retail banking operations could be required to make structural changes that would make them better equipped to handle a future crisis. Vickers further stated that it is unlikely that the Commission will propose radical forms of limited-purpose banking, although large banks may still be concerned that Vickers' comments will prompt the government to to require banks' retail operations to hold more capital, which could be costly.
HSBC executive Mike Geoghegan has already spoken out against the speech, challenging the logic behind the suggestion that larger banks should be required to hold more capital. Rather, Georghegan argues that capital requirements should be linked with the riskiness of the business model, not the size of the bank. Other investment banking executives have spoken out to defend their practices, including outgoing Barclays executive John Varley, who claims that Barclays does not do "the work of a casino," but rather, provides a "real economy service."
The debate over the future structure of U.K. banks is also being waged on another front. The government recently announced that discussions with the banks, the so-called Merlin Project, have reached a stalemate. These discussions are the government's attempt to get banks to agree to lending targets and pay disclosures in order to resolve some of the perceived problems that caused the financial crisis in 2008. One major source of disagreement has been David Cameron's vision of a "Big Society Bank" which would fund social enterprises and charities. However, the talks will likely resume next week.
Discussion Question: Should the government split up U.K. banks to help minimize risk? If this is the best move for the British economy, will the government be successful in achieving it?
Wednesday, January 19, 2011
Cameron Moves Forward With Major NHS Reforms
Sources:
The reforms involve a major restructuring of the NHS. They aim to make efficiency savings of 4% over the next four years, amounting to £15-20 billion cost reduction. They will also eliminate primary care trusts (PCTs) and hand over £80 billion of the NHS budget to general practitioners (GPs), who will take on the responsibilities that are currently held by the PCTs, namely, to plan and buy local medical services. Under the new regime, the government would give GPs the funds to spend on local services by 2013. GPs would also determine whether to use NHS hospitals or private care. These reforms are controversial, as critics argue such radical changes will distract the NHS from its primary role in caring for the sick. Critics also argue that because GPs are businesspersons, the reforms will lead to increased privatization because they will give more business to private care providers.
The effect that these reforms will have on the NHS is staggering. As it currently stands, the NHS provides a directly managed system of healthcare. However, if this proposal goes through, it will become more like a regulated industry of competing providers. Further, the Secretary of State will no longer have day-to-day control over the operation of the NHS, nor will he or she be able to intervene if operations fail.
A report published by the Commons health select committee argues that the new plan creates "widespread uncertainty" that will ultimately increase health care costs. Money that was initially set aside to improve NHS services is now proposed to be used to pay for the management changes if the reforms go through, according to Stephen Dorrell, the committee's chairman. Other notable organizations, including the British Medical Association and the Royal College of Nursing warned that the reforms are "potentially disastrous."
Discussion Question: Do you think that the proposed reform will improve health care services in the U.K.?
Friday, November 12, 2010
UK Tuition Hike Spurs Protests
Sources:
NYT: Protest in London Turns Violent
Financial Times: London Street Protest Turns Violent
WSJ: UK Students Protest Higher Tuition Fees
BBC: Q&A: University Funding
In an effort to curb Government spending and balance the budget, the UK Government has proposed to cut funding for higher education by 40%. These cuts include the elimination of teaching grants in all areas except for science and math. Under the new proposal, a tuition hike that will be implemented in 2012 will cover these costs. The education cuts are part of a larger UK spending plan to cut $130 billion by 2015.
The proposal will allow universities to charge £6,000 to £9,000 ($9,600 to $14,400) in tuition per year. This is a significant increase from the current caps on university tuition, which is £3,290 ($5,264) per year. The hike is even more significant in light of the fact that until the late 1990s, college tuition was free. It wasn't until the Labor Government introduced tuition fees in 1997, requiring all students to pay £1,000 in tuition fees per year of study, that British students had to pay anything at all to attend a university. Under the new plan, the Government will continue to loan students money to cover tuition costs; graduates will have to start paying their loans once they earn £21,000 or more per year, up from £15,000; and graduates will be required to pay up to 9% of their monthly income towards their student loan debts. The interest rate at which the repayments will be made, currently at 1.5%, will be raised according to a progressive tapering system: interest rates will not increase at all for anyone making less than £21,000, but will increase to 3% or more for those making more than £41,000.
The Government has traditionally subsidized higher education in the UK and many students are protesting this transition with great fervor. An estimated 52,000 people came together near Parliament on Wednesday to protest the new education proposals. Fourteen people, including seven police officers, were injured, and thirty-five were arrested. The protests turned violent when the protesters attempted to storm the Milbank Building that houses the Conservative Party. Protesting students set fires, smashed windows, fought police, and eventually made their way to the roof of the Milbank building, from which they threw down water, paper, and even a fire extinguisher, onto crowds of people below.
The protest was organized by the National Union of Students and the University and College Union, the academics' trade union, and was intended to be peaceful. NUS president Aaron Porter claimed that a "small minority" undermined the efforts of the rest of the group that sought to maintain a peaceful protest. Porter and others argued that the violence would undermine their message. One vice-chancellor from a London university making this point stated "[the protest] could not have gone better for the Government. George Osborne [the current Chancellor of the Exchequer] will be delighted."
Discussion questions: Given the state of the economy in the UK, are the protesters overreacting to the Government's decision to increase tuition? What could the UK do to avoid increasing costs for students?
NYT: Protest in London Turns Violent
Financial Times: London Street Protest Turns Violent
WSJ: UK Students Protest Higher Tuition Fees
BBC: Q&A: University Funding
In an effort to curb Government spending and balance the budget, the UK Government has proposed to cut funding for higher education by 40%. These cuts include the elimination of teaching grants in all areas except for science and math. Under the new proposal, a tuition hike that will be implemented in 2012 will cover these costs. The education cuts are part of a larger UK spending plan to cut $130 billion by 2015.
The proposal will allow universities to charge £6,000 to £9,000 ($9,600 to $14,400) in tuition per year. This is a significant increase from the current caps on university tuition, which is £3,290 ($5,264) per year. The hike is even more significant in light of the fact that until the late 1990s, college tuition was free. It wasn't until the Labor Government introduced tuition fees in 1997, requiring all students to pay £1,000 in tuition fees per year of study, that British students had to pay anything at all to attend a university. Under the new plan, the Government will continue to loan students money to cover tuition costs; graduates will have to start paying their loans once they earn £21,000 or more per year, up from £15,000; and graduates will be required to pay up to 9% of their monthly income towards their student loan debts. The interest rate at which the repayments will be made, currently at 1.5%, will be raised according to a progressive tapering system: interest rates will not increase at all for anyone making less than £21,000, but will increase to 3% or more for those making more than £41,000.
The Government has traditionally subsidized higher education in the UK and many students are protesting this transition with great fervor. An estimated 52,000 people came together near Parliament on Wednesday to protest the new education proposals. Fourteen people, including seven police officers, were injured, and thirty-five were arrested. The protests turned violent when the protesters attempted to storm the Milbank Building that houses the Conservative Party. Protesting students set fires, smashed windows, fought police, and eventually made their way to the roof of the Milbank building, from which they threw down water, paper, and even a fire extinguisher, onto crowds of people below.
The protest was organized by the National Union of Students and the University and College Union, the academics' trade union, and was intended to be peaceful. NUS president Aaron Porter claimed that a "small minority" undermined the efforts of the rest of the group that sought to maintain a peaceful protest. Porter and others argued that the violence would undermine their message. One vice-chancellor from a London university making this point stated "[the protest] could not have gone better for the Government. George Osborne [the current Chancellor of the Exchequer] will be delighted."
Discussion questions: Given the state of the economy in the UK, are the protesters overreacting to the Government's decision to increase tuition? What could the UK do to avoid increasing costs for students?
Saturday, October 09, 2010
U.K. Cuts Middle-Class Benefits in the Face of Looming Deficit
Sources:
NYT: British Leader Vows End to 'Heavy-Handed State'
NYT: In Sharp Change, Britain Will Reduce Child Benefits for the Middle Class
BBC: Your Country Needs You, Says David Cameron
Telegraph: Coalition's Cuts are a 'Strong and Credible Plan', Says IMF
In the coming weeks, the government in the United Kingdom is set to announce drastic budget cuts of approximately 25 percent in almost every UK governmental department to help alleviate the country's massive budget deficit. This amounts to a $130 billion cut in spending over the next four years. As Brits anxiously await the specifics of these budget cuts, some analysts have made bleak predictions, including the loss of 500,000 public-sector jobs and up to 1,000,000 private-sector jobs. Nevertheless, drastic measures may be necessary in the UK, where the country has a deficit of 11 percent of G.D.P., one of the highest in the world.
One cut that has become a controversial subject since its announcement on Monday is the British government's decision to stop paying a universal child subsidy for families where one partner makes over $70,000. This subsidy provides families $32 a week for one child, and $21 a week for each additional child. Once this new regulation is in place, however, 1.2 million fewer families will receive the benefit, resulting in $1.6 billion in savings. George Osborne, Chancellor of the Exchequer, announced this decision at the Conservative Party conference and suggested that the budget cuts may result in a direct attack on other benefits that have become a cornerstone of European welfare states. Despite the criticism that the government has received due to these changes, some parties offer significant support as well. For example, the International Monetary Fund recently announced its support for the proposed spending cuts, calling it "appropriately ambitious."
In the UK, $310 billion goes towards welfare spending every year, making it the government's largest portion of expenditures. Under the Labour Party, which was in power from 1997 until David Cameron's election in May 2010, public benefits available to the middle class grew. These public programs will likely see significant changes as a result of the economic downturn and the country's growing deficit problems.
Discussion Questions: Is the UK being "appropriately ambitious" by making these cuts? What are the negatives to cutting public benefits programs for middle class families?
NYT: British Leader Vows End to 'Heavy-Handed State'
NYT: In Sharp Change, Britain Will Reduce Child Benefits for the Middle Class
BBC: Your Country Needs You, Says David Cameron
Telegraph: Coalition's Cuts are a 'Strong and Credible Plan', Says IMF
In the coming weeks, the government in the United Kingdom is set to announce drastic budget cuts of approximately 25 percent in almost every UK governmental department to help alleviate the country's massive budget deficit. This amounts to a $130 billion cut in spending over the next four years. As Brits anxiously await the specifics of these budget cuts, some analysts have made bleak predictions, including the loss of 500,000 public-sector jobs and up to 1,000,000 private-sector jobs. Nevertheless, drastic measures may be necessary in the UK, where the country has a deficit of 11 percent of G.D.P., one of the highest in the world.
One cut that has become a controversial subject since its announcement on Monday is the British government's decision to stop paying a universal child subsidy for families where one partner makes over $70,000. This subsidy provides families $32 a week for one child, and $21 a week for each additional child. Once this new regulation is in place, however, 1.2 million fewer families will receive the benefit, resulting in $1.6 billion in savings. George Osborne, Chancellor of the Exchequer, announced this decision at the Conservative Party conference and suggested that the budget cuts may result in a direct attack on other benefits that have become a cornerstone of European welfare states. Despite the criticism that the government has received due to these changes, some parties offer significant support as well. For example, the International Monetary Fund recently announced its support for the proposed spending cuts, calling it "appropriately ambitious."
In the UK, $310 billion goes towards welfare spending every year, making it the government's largest portion of expenditures. Under the Labour Party, which was in power from 1997 until David Cameron's election in May 2010, public benefits available to the middle class grew. These public programs will likely see significant changes as a result of the economic downturn and the country's growing deficit problems.
Discussion Questions: Is the UK being "appropriately ambitious" by making these cuts? What are the negatives to cutting public benefits programs for middle class families?
Monday, September 20, 2010
EU Reached a Consensus on Financial Reform
Sources:
Europa: Political consensus on supervisory package - remarks from Commissioner Michel Barnier
Financial Times: Deal paves way for pan-EU financial watchdogs; London fears power shift to Brussels; EU go-ahead for regulatory shake-up
WSJ: Europe's 4-Regulator Solution
In an effort to prevent a future financial crisis, the European Union (EU) agreed to create a European financial supervisory framework. "Financial companies and markets operate mostly at a European level, and we'll now have four solid authorities to monitor macroeconomic financial risks and to supervise financial markets, banks, and insurance companies," said Michel Barnier, the European Union Internal Market Commissioner.
The EU plans to establish four pan-EU financial supervisors: the European Systemic Risk Board (ESRB) and three European Supervision Authorities (ESAs). The ESRB will evaluate risks to financial stability across the EU and provide early warnings. Each of three ESAs will be responsible for overseeing banking, insurance and securities markets. The ESAs will develop common technical rules and standards. Although the ESAs will not directly supervise financial institutions, they will be able to investigate risky financial products and financial activities. And in "emergency situations," they will have power to ban or restrict risky products and activities.
Although this "European radar screen" is expected to provide better oversight of cross-border financial activities in Europe, some countries including the UK fear that national authorities may have less regulatory or supervisory power. The ESRB and ESAs will be operational by January 2011 after obtaining approvals from the European parliament and the member states. For the initial five years, the president of the European Central Bank will chair the ESRB.
Discussion:
1. One of the controversial issues is the chairmanship of the ESRB. The European parliament wants the ECB president to be the chairman while the member countries want to make the decision by themselves. Initially, the ECB president will chair the ESRB, but this issue will be reviewed in three years. What are the pros and cons of designating the ECB president as the chairman of the ESRB?
2. The status of financial market development is different for each member state. How can the new EU-level watchdogs develop common rules and standards while balancing different interests of each country?
Europa: Political consensus on supervisory package - remarks from Commissioner Michel Barnier
Financial Times: Deal paves way for pan-EU financial watchdogs; London fears power shift to Brussels; EU go-ahead for regulatory shake-up
WSJ: Europe's 4-Regulator Solution
In an effort to prevent a future financial crisis, the European Union (EU) agreed to create a European financial supervisory framework. "Financial companies and markets operate mostly at a European level, and we'll now have four solid authorities to monitor macroeconomic financial risks and to supervise financial markets, banks, and insurance companies," said Michel Barnier, the European Union Internal Market Commissioner.
The EU plans to establish four pan-EU financial supervisors: the European Systemic Risk Board (ESRB) and three European Supervision Authorities (ESAs). The ESRB will evaluate risks to financial stability across the EU and provide early warnings. Each of three ESAs will be responsible for overseeing banking, insurance and securities markets. The ESAs will develop common technical rules and standards. Although the ESAs will not directly supervise financial institutions, they will be able to investigate risky financial products and financial activities. And in "emergency situations," they will have power to ban or restrict risky products and activities.
Although this "European radar screen" is expected to provide better oversight of cross-border financial activities in Europe, some countries including the UK fear that national authorities may have less regulatory or supervisory power. The ESRB and ESAs will be operational by January 2011 after obtaining approvals from the European parliament and the member states. For the initial five years, the president of the European Central Bank will chair the ESRB.
Discussion:
1. One of the controversial issues is the chairmanship of the ESRB. The European parliament wants the ECB president to be the chairman while the member countries want to make the decision by themselves. Initially, the ECB president will chair the ESRB, but this issue will be reviewed in three years. What are the pros and cons of designating the ECB president as the chairman of the ESRB?
2. The status of financial market development is different for each member state. How can the new EU-level watchdogs develop common rules and standards while balancing different interests of each country?
Thursday, September 09, 2010
Frustration in the Euro Zone
BBC: Trouble in Euroland Amid Record Growth
BBC: Eurozone Unemployment Still at 10%
Bloomberg: European Inflation Slows to 1.6%, Unemployment Holds at Highest Since 1998
WSJ: Euro-Zone Unemployment Holds Steady
Frustration regarding unemployment is on the rise throughout the Euro zone— the sixteen European Union member states that have adopted the euro as their sole currency. In July, for the fifth straight month, unemployment in this region held at 10%, the highest unemployment rate it has experienced since 1998, and above the current U.S. jobless rate of 9.5%. Eurostat, the official statistics agency of the EU, said that these unemployment rates have resulted in 15.833 million people without jobs in the sixteen Euro zone states, and 23 million unemployed in the EU27, which includes all 27 nations of the European Union, including those that do not use the euro. Even though the unemployment crisis has affected all of Europe, it has not fallen evenly across the area.
Austria and the Netherlands have the lowest unemployment rates in the Euro zone, at a mere 3.8% and 4.4%, respectively. Germany has also weathered the economic downturn well and is now helping to bail out some of its European neighbors, including Greece and Spain. German businesses have become more competitive in recent years, and Germany's unemployment rate actually decreased to 6.9% in July. The economic outlook in many other Euro zone nations is in stark contrast to this prosperity. Spain suffers the highest unemployment rate in the Euro zone at 20.3%.
One laid-off Spanish construction worker, Doney Ramirez, has spent the past four months protesting the irresponsible actions of his employer, which borrowed too much money when it was readily available, and now can't pay off its debts. This led to the downfall of the company and the termination of Ramirez's job. After the construction company failed, Ramirez broke in to the site and scaled the crane where he has stayed for the last four months, claiming that he will not come down until he is paid his wages. Former colleagues hoist food to him, and he remains steadfast in his mission of getting his message about irresponsible borrowing across. He is just one example of a European worker who has suffered because his employer took on too much risky debt, in a country that took on too much debt after switching to the euro.
As unemployment continues to be an issue across the Euro zone, frustrations will continue to grow. Some Europeans are now beginning to question whether the euro will survive this period of economic hardship.
Discussion Question: Should the European nations that have weathered the economic downturn relatively well, such as Germany, be expected to bail out their neighbors that have not fared as well, such as Spain and Greece?
BBC: Eurozone Unemployment Still at 10%
Bloomberg: European Inflation Slows to 1.6%, Unemployment Holds at Highest Since 1998
WSJ: Euro-Zone Unemployment Holds Steady
Frustration regarding unemployment is on the rise throughout the Euro zone— the sixteen European Union member states that have adopted the euro as their sole currency. In July, for the fifth straight month, unemployment in this region held at 10%, the highest unemployment rate it has experienced since 1998, and above the current U.S. jobless rate of 9.5%. Eurostat, the official statistics agency of the EU, said that these unemployment rates have resulted in 15.833 million people without jobs in the sixteen Euro zone states, and 23 million unemployed in the EU27, which includes all 27 nations of the European Union, including those that do not use the euro. Even though the unemployment crisis has affected all of Europe, it has not fallen evenly across the area.
Austria and the Netherlands have the lowest unemployment rates in the Euro zone, at a mere 3.8% and 4.4%, respectively. Germany has also weathered the economic downturn well and is now helping to bail out some of its European neighbors, including Greece and Spain. German businesses have become more competitive in recent years, and Germany's unemployment rate actually decreased to 6.9% in July. The economic outlook in many other Euro zone nations is in stark contrast to this prosperity. Spain suffers the highest unemployment rate in the Euro zone at 20.3%.
One laid-off Spanish construction worker, Doney Ramirez, has spent the past four months protesting the irresponsible actions of his employer, which borrowed too much money when it was readily available, and now can't pay off its debts. This led to the downfall of the company and the termination of Ramirez's job. After the construction company failed, Ramirez broke in to the site and scaled the crane where he has stayed for the last four months, claiming that he will not come down until he is paid his wages. Former colleagues hoist food to him, and he remains steadfast in his mission of getting his message about irresponsible borrowing across. He is just one example of a European worker who has suffered because his employer took on too much risky debt, in a country that took on too much debt after switching to the euro.
As unemployment continues to be an issue across the Euro zone, frustrations will continue to grow. Some Europeans are now beginning to question whether the euro will survive this period of economic hardship.
Discussion Question: Should the European nations that have weathered the economic downturn relatively well, such as Germany, be expected to bail out their neighbors that have not fared as well, such as Spain and Greece?
Tuesday, June 15, 2010
Is Basel III “Doomsday” for Banks and Economic Growth?
Sources:
Financial Times: Bankers Warn of Basel III hit to GDP
Financial Times: Bankers’ ‘doomsday scenarios’ under fire
Financial Times: Basel Chief hits back at growth curb claim
Financial Times: Digesting the Basel Reforms
Bloomberg Businessweek: Geithner Meeting Barnier on Basel III Presses Banks
Wall St. J.: G-20 is Nearing Accord on New Capital Rules
Bank for International Settlements: History of the Basel Committee and its Membership
The Basel Committee on Banking Supervision (Basel Committee) sets global banking standards, which national regulators then implement. In 1988, the Basel Committee introduced a measure of capital called the Basel Capital Accord (Basel I) requiring a minimum capital of 8%. In 2004, the Basel Committee issued a revised framework, commonly referred to as Basel II, which refined the standardized rules set forth in the Basel I.
Among other things, Basel II lowered capital requirements and allowed the largest and most sophisticated banks to use internal models to calculate risk of their assets in determining the capital charges against them. Basel II is the minimum standard for international banks and many countries have adopted it in some form.
While Basel II sought to improve on Basel I by aligning regulatory capital requirements more closely to banks’ underlying risk, many have criticized it. In the wake of the global financial crisis, criticism of Basel II has not waned, but has actually increased. In fact, many critics such as Charles Goodhart, a former Bank of England policy maker and professor at the London School of Economics, have gone as far as saying “that Basel II failed.” Therefore, regulators are trying to fix Basel II through a financial reform dubbed “Basel III.”
Basel III will still rely on the banks’ risk models, but will call for tighter control of what goes into the calculations. There will be a narrower definition of what counts as capital and higher capital charges against riskier holdings such as derivatives. Basel III may also impose a cap on the amount of assets a bank can have in relation to its equity. Put simply, Basel III would require banks to keep enough money in reserve to insulate them against future crises. Not surprisingly, these proposed changes have not been without criticism.
As you may surmise, the loudest criticism of Basel III comes from the banking industry. Banks are claiming that the increased capital requirements will significantly reduce their profitability. Moreover, the world’s leading banking industry group has warned that economic growth in the eurozone, the U.S., and Japan will be cut by three percentage points between now and 2015 if the proposed changes come into force. Another group warns that this would lead to 9.7 million fewer jobs in those countries. Thus, according to the banking industry, the combined effects of Basel III will have a disastrous effect on the worldwide economic recovery.
Proponents of Basel III believe that these worries are unwarranted. Banks are assuming the “maximum impact of the maximum change with the minimum behavioral change.” Banks’ business models are not static and can be changed to deal with the new regulations. Furthermore, if Basel III is applied with equal force to all banks, there is no reason why banks could not maintain their profitability by passing the costs of increased capital to their customers without adverse impact on business. However, it is not clear that they would necessarily do so.
Due to the differing views regarding the effects of Basel III, the Basel Committee and the Financial Stability Board have given a mandate to the Bank for International Settlements to assess the economic effects of the Basel III reform. The estimates are still in progress, but the study shows that the costs “aren’t huge” and the “improvements to the resilience of the financial system will not permanently affect growth—except for possibly making it higher.” However, even if the reforms do slow economic growth, many proponents believe that it is a price worth paying for a stable financial system worldwide.
Even though the banking industry contends that the effects of Basel III will be disastrous, it is debatable whether Basel III truly is doomsday for banks and economic growth. Indeed, if there are costs, they may be a small price to pay for global financial stability going forward.
Discussion:
1) If Basel III does reduce banks' profitability, how do you think banks will deal with it (pass it on to customers, find a loophole, more innovation, etc.)?
2) Even if Basel III slows economic growth, do you think it is a price worth paying for a stable financial system?
Financial Times: Bankers Warn of Basel III hit to GDP
Financial Times: Bankers’ ‘doomsday scenarios’ under fire
Financial Times: Basel Chief hits back at growth curb claim
Financial Times: Digesting the Basel Reforms
Bloomberg Businessweek: Geithner Meeting Barnier on Basel III Presses Banks
Wall St. J.: G-20 is Nearing Accord on New Capital Rules
Bank for International Settlements: History of the Basel Committee and its Membership
The Basel Committee on Banking Supervision (Basel Committee) sets global banking standards, which national regulators then implement. In 1988, the Basel Committee introduced a measure of capital called the Basel Capital Accord (Basel I) requiring a minimum capital of 8%. In 2004, the Basel Committee issued a revised framework, commonly referred to as Basel II, which refined the standardized rules set forth in the Basel I.
Among other things, Basel II lowered capital requirements and allowed the largest and most sophisticated banks to use internal models to calculate risk of their assets in determining the capital charges against them. Basel II is the minimum standard for international banks and many countries have adopted it in some form.
While Basel II sought to improve on Basel I by aligning regulatory capital requirements more closely to banks’ underlying risk, many have criticized it. In the wake of the global financial crisis, criticism of Basel II has not waned, but has actually increased. In fact, many critics such as Charles Goodhart, a former Bank of England policy maker and professor at the London School of Economics, have gone as far as saying “that Basel II failed.” Therefore, regulators are trying to fix Basel II through a financial reform dubbed “Basel III.”
Basel III will still rely on the banks’ risk models, but will call for tighter control of what goes into the calculations. There will be a narrower definition of what counts as capital and higher capital charges against riskier holdings such as derivatives. Basel III may also impose a cap on the amount of assets a bank can have in relation to its equity. Put simply, Basel III would require banks to keep enough money in reserve to insulate them against future crises. Not surprisingly, these proposed changes have not been without criticism.
As you may surmise, the loudest criticism of Basel III comes from the banking industry. Banks are claiming that the increased capital requirements will significantly reduce their profitability. Moreover, the world’s leading banking industry group has warned that economic growth in the eurozone, the U.S., and Japan will be cut by three percentage points between now and 2015 if the proposed changes come into force. Another group warns that this would lead to 9.7 million fewer jobs in those countries. Thus, according to the banking industry, the combined effects of Basel III will have a disastrous effect on the worldwide economic recovery.
Proponents of Basel III believe that these worries are unwarranted. Banks are assuming the “maximum impact of the maximum change with the minimum behavioral change.” Banks’ business models are not static and can be changed to deal with the new regulations. Furthermore, if Basel III is applied with equal force to all banks, there is no reason why banks could not maintain their profitability by passing the costs of increased capital to their customers without adverse impact on business. However, it is not clear that they would necessarily do so.
Due to the differing views regarding the effects of Basel III, the Basel Committee and the Financial Stability Board have given a mandate to the Bank for International Settlements to assess the economic effects of the Basel III reform. The estimates are still in progress, but the study shows that the costs “aren’t huge” and the “improvements to the resilience of the financial system will not permanently affect growth—except for possibly making it higher.” However, even if the reforms do slow economic growth, many proponents believe that it is a price worth paying for a stable financial system worldwide.
Even though the banking industry contends that the effects of Basel III will be disastrous, it is debatable whether Basel III truly is doomsday for banks and economic growth. Indeed, if there are costs, they may be a small price to pay for global financial stability going forward.
Discussion:
1) If Basel III does reduce banks' profitability, how do you think banks will deal with it (pass it on to customers, find a loophole, more innovation, etc.)?
2) Even if Basel III slows economic growth, do you think it is a price worth paying for a stable financial system?
Sunday, April 18, 2010
As Poland Mourns, Ice May Be Melting With Russia
CNN: Grieving Poland Eyes June Vote for New President
NY Times: Kaczynski Often a Source of Tension Within E.U.
Newsweek: What’s Next for Poland?
Reuters: Poles Bury Kaczynski, Eye Better Ties with Russia
Lech Kaczynski, 60-year old Polish President, his wife Maria, and 94 others died suddenly this week as their Russian-built plane crashed in the western Russian city of Smolensk in dangerous fog. The travel group, which also included top military commanders, central banking officials, and Catholic clergy, had been traveling to Russia to remember the 70th anniversary of the massacre of Polish officers during a battle in the Katyn Forest in western Russia. The city and story of Katyn is a significant element of Polish history during the Second World War, when Joseph Stalin and his army killed 20,000 Polish officers to eliminate political opposition.
For a long time, Russian leaders attempted mitigate or hide Russia’s true involvement in the event, but with the fall of communism in the late 1980s also came a partial, and some say half-hearted admission of Stalin’s participation in the murders. More recently, in an effort to rebuild Russian-Polish relations, Vladimir Putin and Poland’s Prime Minister Donald Tusk visited Katyn together where Putin more fully admitted, but also justified the crimes, leaving Poles somewhat dissatisfied. The tragedy that followed days after this latest meeting seems to have had a warming effect on the two nations’ war-tattered relations. Vladimir Putin, Russian Prime Minister, and Dmitry Medvedev, Russian President, have extended sympathy and condolences to the Polish nation and victims’ family members as the two countries try to determine the cause of the crash and what comes next.
Closure will not come easy for the Polish nation or surviving relatives, including Kaczynski's idential twin brother Jaroslaw, chairman of the conservative Law and Justice Party. President Kaczynski and his wife were laid to rest this weekend with fewer guests than expected as the result of an Icelandic volcano eruption this week. The eruption sent a cloud of ash into the air over Europe, putting a ground stop on all air travel within the region and preventing heads of state from all over the world from attending the funeral. The date for a Polish election selecting Kaczynski’s successor will be announced this week. Poland’s election was originally scheduled for June, but Poles anticipate the election will be held sometime mid-June because Poland’s constitution calls for an election to be held with 60 days of an acting president’s death.
Discussion Question:
Could EU economic distress caused by PIIGS (Portugal, Italy, Ireland, Greece, and Spain) nations help revive an economic alliance between former Warsaw Pact countries?
NY Times: Kaczynski Often a Source of Tension Within E.U.
Newsweek: What’s Next for Poland?
Reuters: Poles Bury Kaczynski, Eye Better Ties with Russia
Lech Kaczynski, 60-year old Polish President, his wife Maria, and 94 others died suddenly this week as their Russian-built plane crashed in the western Russian city of Smolensk in dangerous fog. The travel group, which also included top military commanders, central banking officials, and Catholic clergy, had been traveling to Russia to remember the 70th anniversary of the massacre of Polish officers during a battle in the Katyn Forest in western Russia. The city and story of Katyn is a significant element of Polish history during the Second World War, when Joseph Stalin and his army killed 20,000 Polish officers to eliminate political opposition.
For a long time, Russian leaders attempted mitigate or hide Russia’s true involvement in the event, but with the fall of communism in the late 1980s also came a partial, and some say half-hearted admission of Stalin’s participation in the murders. More recently, in an effort to rebuild Russian-Polish relations, Vladimir Putin and Poland’s Prime Minister Donald Tusk visited Katyn together where Putin more fully admitted, but also justified the crimes, leaving Poles somewhat dissatisfied. The tragedy that followed days after this latest meeting seems to have had a warming effect on the two nations’ war-tattered relations. Vladimir Putin, Russian Prime Minister, and Dmitry Medvedev, Russian President, have extended sympathy and condolences to the Polish nation and victims’ family members as the two countries try to determine the cause of the crash and what comes next.
Closure will not come easy for the Polish nation or surviving relatives, including Kaczynski's idential twin brother Jaroslaw, chairman of the conservative Law and Justice Party. President Kaczynski and his wife were laid to rest this weekend with fewer guests than expected as the result of an Icelandic volcano eruption this week. The eruption sent a cloud of ash into the air over Europe, putting a ground stop on all air travel within the region and preventing heads of state from all over the world from attending the funeral. The date for a Polish election selecting Kaczynski’s successor will be announced this week. Poland’s election was originally scheduled for June, but Poles anticipate the election will be held sometime mid-June because Poland’s constitution calls for an election to be held with 60 days of an acting president’s death.
Discussion Question:
Could EU economic distress caused by PIIGS (Portugal, Italy, Ireland, Greece, and Spain) nations help revive an economic alliance between former Warsaw Pact countries?
Sunday, April 04, 2010
Germany's New Stability Levy Proposal
NY Times: Germany Readies Bank Tax for Future Bailouts
CCTV: Germany Approves Plan for Bank Stability Fund
BBC News: German Banks to Pay into Financial Protection Fund
WSJ: Germany, France Both Plan Bank Tax
German Finance Minister Wolfgang Schaeuble has announced a plan that would require all German banks to pay a “stability levy” into a financial stability fund intended to serve as a bailout fund for future systemic failures in the German banking system. The proposed levies will be weighted according to each bank’s risk profile. Schaeuble and the rest of the German government predict the levy will generate approximately 1.2 billion Euros each year. While this amount is just a small percentage of the bad loans German banks presently carry as a result of the recent financial crisis, the Finance Minister expects the fund to grow large enough over time to adequately cover the costs of a future financial crisis. The German government expects to draft and pass legislation on this levy as soon as this summer.
French Finance Minister Christine Legarde, who was visiting Germany for a cabinet meeting in Berlin when the levy was proposed, has said France is also considering a similar levy, but that it must be coordinated internationally. The UK’s conservative party has also suggested that it will adopt a similar levy if it wins the upcoming election. Last year the UK imposed additional taxes on bonuses in the financial sector, but stopped short of mandating a levy of this magnitude. President Obama, in his efforts to alleviate taxpayer concerns over the U.S. Government’s bank bailout program, also recommended a “financial crisis responsibility fee” that would require the biggest banks in the United States to pay fees in an effort to recoup the cost of the bailouts.
Germany’s stability levy proposal comes at the same time that the G20 and the IMF have been developing their own plan for a G20-wide bank tax. British Chancellor of the Exchequer Alistair Darling has suggested that any levy imposed on G20 banks should go into their respective countries’ budgets, not a global bailout fund.
Supporters of the German levy say that it will generate ample funds to mitigate any future bailout risk, while not placing an overly burdensome obligation on the banks’ ability to recover from the current crisis. They say it achieves the purpose of placing the responsibility of preventing future systemic risks on big banks. Opponents, on the other hand, say that the proposed levy will not yield enough money to prevent future crises, and is just a political move ahead of an upcoming election season.
Discussion Questions:
1. Does the no-bailout provision of the EU’s treaty prohibit a collaborative stability levy creating an EU-wide bailout fund?
2. Would Darling's country-specific tax proposal circumvent the prohibition?
CCTV: Germany Approves Plan for Bank Stability Fund
BBC News: German Banks to Pay into Financial Protection Fund
WSJ: Germany, France Both Plan Bank Tax
German Finance Minister Wolfgang Schaeuble has announced a plan that would require all German banks to pay a “stability levy” into a financial stability fund intended to serve as a bailout fund for future systemic failures in the German banking system. The proposed levies will be weighted according to each bank’s risk profile. Schaeuble and the rest of the German government predict the levy will generate approximately 1.2 billion Euros each year. While this amount is just a small percentage of the bad loans German banks presently carry as a result of the recent financial crisis, the Finance Minister expects the fund to grow large enough over time to adequately cover the costs of a future financial crisis. The German government expects to draft and pass legislation on this levy as soon as this summer.
French Finance Minister Christine Legarde, who was visiting Germany for a cabinet meeting in Berlin when the levy was proposed, has said France is also considering a similar levy, but that it must be coordinated internationally. The UK’s conservative party has also suggested that it will adopt a similar levy if it wins the upcoming election. Last year the UK imposed additional taxes on bonuses in the financial sector, but stopped short of mandating a levy of this magnitude. President Obama, in his efforts to alleviate taxpayer concerns over the U.S. Government’s bank bailout program, also recommended a “financial crisis responsibility fee” that would require the biggest banks in the United States to pay fees in an effort to recoup the cost of the bailouts.
Germany’s stability levy proposal comes at the same time that the G20 and the IMF have been developing their own plan for a G20-wide bank tax. British Chancellor of the Exchequer Alistair Darling has suggested that any levy imposed on G20 banks should go into their respective countries’ budgets, not a global bailout fund.
Supporters of the German levy say that it will generate ample funds to mitigate any future bailout risk, while not placing an overly burdensome obligation on the banks’ ability to recover from the current crisis. They say it achieves the purpose of placing the responsibility of preventing future systemic risks on big banks. Opponents, on the other hand, say that the proposed levy will not yield enough money to prevent future crises, and is just a political move ahead of an upcoming election season.
Discussion Questions:
1. Does the no-bailout provision of the EU’s treaty prohibit a collaborative stability levy creating an EU-wide bailout fund?
2. Would Darling's country-specific tax proposal circumvent the prohibition?
Sunday, March 28, 2010
Pope in Crisis
NY Times: As Archbishop, Benedict Focused on Doctrine;
Abuse Scandal’s Ripples Spread Across Europe
Pope May Be at Crossroads on Abuse, Forced to Reconcile Policy and Words
Financial Times: Protest at priests’ abuse reaches Vatican steps
Joseph Ratzinger, better known as Pope Benedict XVI, is in the middle of a stormy scandal of abuse involving the Catholic Church, many nations, numerous priests, and thousands of victims. In this latest round of scandals, this week new allegations surfaced against a priest in Germany who reportedly abused young victims for over two decades, all under the presumed knowledge of archbishop Ratzinger who, at the time, allegedly did nothing to investigate or stop the abuse. When Ratzinger was archbishop in Munich, he was copied on a memo informing him that a priest who had undergone therapy after sexually abusing children would return to working with children in a new parish. Church investigators say that the priest, Rev. Peter Hullermann, sexually abused young children for decades, and to avoid disclosure of these wrongs, church officials transferred Hullermann from parish to parish and continued to allow him to work with young children, even after being convicted of pedophilia crimes in 1986. This history of Hullerman’s career is as follows:
o He was abruptly transferred from Bottrip to Essen in 1977, without comment of abuse.
o H was then transferred to Munich for pedophilia therapy after three claims of sexual abuse in 1980.
o Hullerman returns to parish duties in Munich shortly thereafter.
o He was later transferred from Munich to Graming, where he was criminally convicted for more abuse in 1986, resulting in a fine and probation.
o After his probation, he was transferred to a Garching to work in another parish with young children, where he worked for 21 years. More allegations of abuse have resulted from his tenure in Garching.
The Pope’s supporters, describing his tenure as archbishop when he overlooked repeated signs of Hullerman’s abuse, defend him by characterizing him as an academic - more concerned with theology than with the personal affairs of his priests or congregations. They suggest that the recent media crisis is just an “elaborate attack on the Pope.” Those accusing the Pope of wrongdoing suggest he his oversight and neglect reveal an evil intent to conceal and protect pedophile priests’ actions from the public.
Hullermann isn’t the only Catholic priest facing scrutiny these days. Ireland’s Bishop John Magee resigned this week after reports surfaced that he failed to respond to accusations of abuse in Cloyne. Magee later issued an apology for his failure to protect child victims from sexual abuse. Irish Catholics are dissatisfied with the extent of repercussions from the Irish scandal because the four other Irish bishops involved in the issue have not resigned, nor has Cardinal Sean Brady, despite revelations that in 1970 he encouraged two young children to sign secrecy statements to prevent disclosure of their abuse.
Allegations of abuse are not isolated to Europe. There have been many reports of abuse in the United States, including a 1991 warning sent to Cardinal Ratzinger th at a Wisconsin priest had abused over 200 deaf boys over the span of 25 years beginning in 1950. Similar to the warnings about Rev. Hullermann, Ratzinger took no action against this priest for his misconduct.
Discussion Questions:
1. How does a religious scandal affect a country’s financial affairs? Is the effect of religious scandal more pronounced in countries where there is no formal or effective separation between church and state?
2. What is the effect of scandal on contributions to the church? Might the church be forced to sell assets? Would a large scale sale of church assets have an impact on markets?
Abuse Scandal’s Ripples Spread Across Europe
Pope May Be at Crossroads on Abuse, Forced to Reconcile Policy and Words
Financial Times: Protest at priests’ abuse reaches Vatican steps
Joseph Ratzinger, better known as Pope Benedict XVI, is in the middle of a stormy scandal of abuse involving the Catholic Church, many nations, numerous priests, and thousands of victims. In this latest round of scandals, this week new allegations surfaced against a priest in Germany who reportedly abused young victims for over two decades, all under the presumed knowledge of archbishop Ratzinger who, at the time, allegedly did nothing to investigate or stop the abuse. When Ratzinger was archbishop in Munich, he was copied on a memo informing him that a priest who had undergone therapy after sexually abusing children would return to working with children in a new parish. Church investigators say that the priest, Rev. Peter Hullermann, sexually abused young children for decades, and to avoid disclosure of these wrongs, church officials transferred Hullermann from parish to parish and continued to allow him to work with young children, even after being convicted of pedophilia crimes in 1986. This history of Hullerman’s career is as follows:
o He was abruptly transferred from Bottrip to Essen in 1977, without comment of abuse.
o H was then transferred to Munich for pedophilia therapy after three claims of sexual abuse in 1980.
o Hullerman returns to parish duties in Munich shortly thereafter.
o He was later transferred from Munich to Graming, where he was criminally convicted for more abuse in 1986, resulting in a fine and probation.
o After his probation, he was transferred to a Garching to work in another parish with young children, where he worked for 21 years. More allegations of abuse have resulted from his tenure in Garching.
The Pope’s supporters, describing his tenure as archbishop when he overlooked repeated signs of Hullerman’s abuse, defend him by characterizing him as an academic - more concerned with theology than with the personal affairs of his priests or congregations. They suggest that the recent media crisis is just an “elaborate attack on the Pope.” Those accusing the Pope of wrongdoing suggest he his oversight and neglect reveal an evil intent to conceal and protect pedophile priests’ actions from the public.
Hullermann isn’t the only Catholic priest facing scrutiny these days. Ireland’s Bishop John Magee resigned this week after reports surfaced that he failed to respond to accusations of abuse in Cloyne. Magee later issued an apology for his failure to protect child victims from sexual abuse. Irish Catholics are dissatisfied with the extent of repercussions from the Irish scandal because the four other Irish bishops involved in the issue have not resigned, nor has Cardinal Sean Brady, despite revelations that in 1970 he encouraged two young children to sign secrecy statements to prevent disclosure of their abuse.
Allegations of abuse are not isolated to Europe. There have been many reports of abuse in the United States, including a 1991 warning sent to Cardinal Ratzinger th at a Wisconsin priest had abused over 200 deaf boys over the span of 25 years beginning in 1950. Similar to the warnings about Rev. Hullermann, Ratzinger took no action against this priest for his misconduct.
Discussion Questions:
1. How does a religious scandal affect a country’s financial affairs? Is the effect of religious scandal more pronounced in countries where there is no formal or effective separation between church and state?
2. What is the effect of scandal on contributions to the church? Might the church be forced to sell assets? Would a large scale sale of church assets have an impact on markets?
Sunday, March 07, 2010
Iceland Voters Reject National Repayment Referendum
NY Times: Iceland Voters Reject Repayment Plan
NY Times: Iceland Blocks Bank Compensation for Foreigners
BusinessWeek: Iceland Rejects Icesave Depositors Bill in Referendum
Ninety-three percent of Icelandic voters rejected Saturday’s national referendum that proposed to repay $5.3 billion to Dutch and British governments for bailing out nearly 300,000 citizens when an Icelandic bank failed in 2008. The referendum was called when the President failed to sign a bill that required Iceland to repay the debt over 15 years at 5.5% interest. The President claims that his refusal stemmed from a petition signed by one-fifth of his country’s citizens rejecting the plan because it unfairly saddled each Icelander with $16,400 of debt created by negligent regulators and irresponsible, greedy bankers who allowed the failed banks to take on debt 10 times the size of Iceland’s economy. Icelanders’ deposits were protected by a national deposit guarantee program, but the British and Dutch citizens only recovered the first $30,000 of their lost deposits from national bailout programs.
The failed internet bank IceSave, also known as Landsbanki, was one of three Icelandic banks that failed in 2008 as a result of Iceland’s stock market crash and currency collapse that completely shut down the nation’s banking system. The money that Britain and the Netherlands paid to their citizens to recover lost deposits in the bank were really considered loans to Iceland amounting to 40% of the country’s gross domestic product. Despite the “no” vote on the referendum to repay these loans, Iceland officials made clear that country would fulfill its loan obligations, just on different terms than the referendum’s proposal. Britain and the Netherlands are eager to come to agreement because of the pressure they feel from their increasingly finicky bond investors and the Central Bank’s increased scrutiny on all EU nations’ spending and deficits.
Besides pressure from Britain and the Netherlands, Iceland is pressured by other reasons to repay its loans. Since the beginning of the country’s financial crisis, Iceland has received $2.1 billion from the IMF, funding that was conditioned on coming to an agreement with British and Dutch governments on the repayment of their bailout loans. Iceland is also under pressure to repay because it was recently invited to begin discussions to join the European Union. Failing to repay its international debts would reflect poorly upon Iceland and might cause Moody’s and Standard & Poor’s to follow Fitch’s lead in downgrading the country’s sovereign debt to below investment grade, a move that would put Iceland on the same precarious level as debt-laden Greece.
The IMF and EU nations have been careful not to push Iceland too hard because they known that an alternative to repaying its debt is filing bankruptcy. Fear of insolvency prompted Britain and the Netherlands to propose a repayment plan at a more attractive interest rate of LIBOR plus 2.75 percent (now about 3%) after two-years of interest-free payments. EU Nations, candidate EU nations, and non-candidate EU nations will all watch with great interest to see how this international drama plays out.
1. Has the dialogue shifted from financial institution systemic risk to sovereign systemic risk, or are these terms fundamentally the same thing?
2. As the old saying goes, “as goes General Motors goes the nation.” So, might the new saying be “as goes a country’s largest financial institution, so goes the world financial system?”
NY Times: Iceland Blocks Bank Compensation for Foreigners
BusinessWeek: Iceland Rejects Icesave Depositors Bill in Referendum
Ninety-three percent of Icelandic voters rejected Saturday’s national referendum that proposed to repay $5.3 billion to Dutch and British governments for bailing out nearly 300,000 citizens when an Icelandic bank failed in 2008. The referendum was called when the President failed to sign a bill that required Iceland to repay the debt over 15 years at 5.5% interest. The President claims that his refusal stemmed from a petition signed by one-fifth of his country’s citizens rejecting the plan because it unfairly saddled each Icelander with $16,400 of debt created by negligent regulators and irresponsible, greedy bankers who allowed the failed banks to take on debt 10 times the size of Iceland’s economy. Icelanders’ deposits were protected by a national deposit guarantee program, but the British and Dutch citizens only recovered the first $30,000 of their lost deposits from national bailout programs.
The failed internet bank IceSave, also known as Landsbanki, was one of three Icelandic banks that failed in 2008 as a result of Iceland’s stock market crash and currency collapse that completely shut down the nation’s banking system. The money that Britain and the Netherlands paid to their citizens to recover lost deposits in the bank were really considered loans to Iceland amounting to 40% of the country’s gross domestic product. Despite the “no” vote on the referendum to repay these loans, Iceland officials made clear that country would fulfill its loan obligations, just on different terms than the referendum’s proposal. Britain and the Netherlands are eager to come to agreement because of the pressure they feel from their increasingly finicky bond investors and the Central Bank’s increased scrutiny on all EU nations’ spending and deficits.
Besides pressure from Britain and the Netherlands, Iceland is pressured by other reasons to repay its loans. Since the beginning of the country’s financial crisis, Iceland has received $2.1 billion from the IMF, funding that was conditioned on coming to an agreement with British and Dutch governments on the repayment of their bailout loans. Iceland is also under pressure to repay because it was recently invited to begin discussions to join the European Union. Failing to repay its international debts would reflect poorly upon Iceland and might cause Moody’s and Standard & Poor’s to follow Fitch’s lead in downgrading the country’s sovereign debt to below investment grade, a move that would put Iceland on the same precarious level as debt-laden Greece.
The IMF and EU nations have been careful not to push Iceland too hard because they known that an alternative to repaying its debt is filing bankruptcy. Fear of insolvency prompted Britain and the Netherlands to propose a repayment plan at a more attractive interest rate of LIBOR plus 2.75 percent (now about 3%) after two-years of interest-free payments. EU Nations, candidate EU nations, and non-candidate EU nations will all watch with great interest to see how this international drama plays out.
1. Has the dialogue shifted from financial institution systemic risk to sovereign systemic risk, or are these terms fundamentally the same thing?
2. As the old saying goes, “as goes General Motors goes the nation.” So, might the new saying be “as goes a country’s largest financial institution, so goes the world financial system?”
Monday, February 22, 2010
Will New Bond Issue Solve Greek Debt Worries?
Financial Times: Greece Set for Critical Test with Bond Issue
Financial Times: Greece Ponders High-Risk Bond Move
Petros Christodoulou, treasurer at the National Bank of Greece, was just appointed as new senior debt commissioner Friday, replacing Spyros Papanicolaou as the head of Greece’s Public Debt Management Agency. Papanicolaou was let go amidst negative speculation regarding his issuance of the latest five-year Greek bond issue. Newly appointed Christodoulou has a challenge on his hands because the Greek government has little time to issue €53 billion in bonds to cover upcoming debt maturities at higher costs than the original debts.
This task will be a challenge because Greek debt yields have skyrocketed in the wake of Greece’s current financial troubles (see Greece's Financial Troubles). Higher yields means that Greece will have to pay higher premiums to its bondholders on any new debt it issues during its struggle to get its finances under control.
Usually a sovereign nation only has to pay a small premium (5-10 basis points) when it issues bonds similar to its existing bonds with commensurate maturity dates. But because of Greece’s financial woes, investors are speculating that the premium will be more like 20 basis points, or double the usual cost. The Prime Minister of Greece would like to avoid this premium, requesting that investors allow it to issue new debt on the same terms as other European countries.
This high bond pricing could cause a crowding out effect for corporate bonds because similarly rated corporate bonds are trading at rates lower than the same rated sovereign bonds. Ratings agencies could increase corporate debt spreads to match sovereign spreads, increasing the cost of borrowing for companies. It could also cause problems for other European countries whose sovereign debt premiums could rise as investors reconsider euro-zone pricing and the potential of an EU bailout.
Recent debt offerings in Spain, Portugal, and Ireland—other European countries struggling with weak finances—might offer some hope to Christodoulou. On Wednesday Spain raised €5 billion of debt at just over 1% of the pricing for German bunds, the industry benchmark. Cynical investors wonder if Greece’s high deficit and sovereign debt pricing problems are just the beginning of a much bigger problem.
Discussion Questions
1. Who would bail out the EU if the monetary block fell into a monetary crisis?
2. Might an all-European debt premium readjustment cause a contagion effect and trigger a true sovereign crisis?
Financial Times: Greece Ponders High-Risk Bond Move
Petros Christodoulou, treasurer at the National Bank of Greece, was just appointed as new senior debt commissioner Friday, replacing Spyros Papanicolaou as the head of Greece’s Public Debt Management Agency. Papanicolaou was let go amidst negative speculation regarding his issuance of the latest five-year Greek bond issue. Newly appointed Christodoulou has a challenge on his hands because the Greek government has little time to issue €53 billion in bonds to cover upcoming debt maturities at higher costs than the original debts.
This task will be a challenge because Greek debt yields have skyrocketed in the wake of Greece’s current financial troubles (see Greece's Financial Troubles). Higher yields means that Greece will have to pay higher premiums to its bondholders on any new debt it issues during its struggle to get its finances under control.
Usually a sovereign nation only has to pay a small premium (5-10 basis points) when it issues bonds similar to its existing bonds with commensurate maturity dates. But because of Greece’s financial woes, investors are speculating that the premium will be more like 20 basis points, or double the usual cost. The Prime Minister of Greece would like to avoid this premium, requesting that investors allow it to issue new debt on the same terms as other European countries.
This high bond pricing could cause a crowding out effect for corporate bonds because similarly rated corporate bonds are trading at rates lower than the same rated sovereign bonds. Ratings agencies could increase corporate debt spreads to match sovereign spreads, increasing the cost of borrowing for companies. It could also cause problems for other European countries whose sovereign debt premiums could rise as investors reconsider euro-zone pricing and the potential of an EU bailout.
Recent debt offerings in Spain, Portugal, and Ireland—other European countries struggling with weak finances—might offer some hope to Christodoulou. On Wednesday Spain raised €5 billion of debt at just over 1% of the pricing for German bunds, the industry benchmark. Cynical investors wonder if Greece’s high deficit and sovereign debt pricing problems are just the beginning of a much bigger problem.
Discussion Questions
1. Who would bail out the EU if the monetary block fell into a monetary crisis?
2. Might an all-European debt premium readjustment cause a contagion effect and trigger a true sovereign crisis?
Sunday, February 14, 2010
Sovereign Insolvency - Global Financial Crisis, Round II?
WSJ: The Greek Tragedy that Changed Europe
Financial Times: EU Stops Short of Immediate Aid for Greece
The Economist: The Spectre that Haunts Europe
The financial woes of Greece reported a few weeks ago in Greece’s Financial Troubles were only the beginning of a much bigger problem for the euro. Despite the vehement opposition to a Greece bailout a few weeks ago, European governments are now reconsidering as the European currency continues to fall. Finance ministers from EU nations met last week to discuss a possible Greece bailout that isn't exclusively altruistic. In addition to helping prevent Greece from defaulting on its debts, EU members are looking for a way to reassure the rest of the world that investment in other euro-zone countries remains sound. The meeting fell short of complete and immediate aid to Greece, with the 27 members of the EU pledging to take a coordinated and determined action “if needed to safeguard [monetary and economic] stability.”
While this economic crisis has caused some to call for coordinated EU action to prevent further currency deterioration and a possible European divide, German Chancellor Angela Merkel is insistent that if Germany or any other EU member is going to bail out Greece, Greece must make additional efforts to stabilize its monetary situation by cutting more spending and increasing its value-added tax, among other things. Others echo Merkel’s concerns, calling for Greece austerity before coming to the rescue.
Others are more leery of a European bailout, noting that this kind of a crisis should have been anticipated when EU members agreed to a common currency because of the complications in maintaining a separate governments while sharing a common currency. (Britain held on to its currency, the pound, for this very reason). Because of the interrelatedness of the euro-based economies, uncontrolled spending by one country in the currency union can greatly affect other union members. This was the case in 2003 when France increased spending to curtail an economic recession, an act that prompted outcries from other euro members like Portugal and Italy that had cut budgets to qualify for euro membership. Some members have even called for Greece’s ejection from euro membership for lying and tricking the EU through false financial reporting, but euro treaties do not provide for this kind of penalty.
The EU Stability and Growth Pact, a pact signed by all EU members that is notoriously inflexible yet sometimes unenforceable against larger EU members, explicitly prohibits any EU member bailout. Despite the fact that the IMF has experience in pulling troubled nations back from the brink of collapse, Greece and other EU members are resistant to an IMF bailout for political reasons, including the stigma that comes with it, the fact that many view the IMF as an “American-influenced institution,” and the international burden-shifting that would result.
Discussion Question:
1. Will stricter economic and monetary policies cause other European counties to adopt the euro (to become a “United States of Europe”), or will they prompt non-EU countries to continue to hold onto their monetary independence like Britain?
Financial Times: EU Stops Short of Immediate Aid for Greece
The Economist: The Spectre that Haunts Europe
The financial woes of Greece reported a few weeks ago in Greece’s Financial Troubles were only the beginning of a much bigger problem for the euro. Despite the vehement opposition to a Greece bailout a few weeks ago, European governments are now reconsidering as the European currency continues to fall. Finance ministers from EU nations met last week to discuss a possible Greece bailout that isn't exclusively altruistic. In addition to helping prevent Greece from defaulting on its debts, EU members are looking for a way to reassure the rest of the world that investment in other euro-zone countries remains sound. The meeting fell short of complete and immediate aid to Greece, with the 27 members of the EU pledging to take a coordinated and determined action “if needed to safeguard [monetary and economic] stability.”
While this economic crisis has caused some to call for coordinated EU action to prevent further currency deterioration and a possible European divide, German Chancellor Angela Merkel is insistent that if Germany or any other EU member is going to bail out Greece, Greece must make additional efforts to stabilize its monetary situation by cutting more spending and increasing its value-added tax, among other things. Others echo Merkel’s concerns, calling for Greece austerity before coming to the rescue.
Others are more leery of a European bailout, noting that this kind of a crisis should have been anticipated when EU members agreed to a common currency because of the complications in maintaining a separate governments while sharing a common currency. (Britain held on to its currency, the pound, for this very reason). Because of the interrelatedness of the euro-based economies, uncontrolled spending by one country in the currency union can greatly affect other union members. This was the case in 2003 when France increased spending to curtail an economic recession, an act that prompted outcries from other euro members like Portugal and Italy that had cut budgets to qualify for euro membership. Some members have even called for Greece’s ejection from euro membership for lying and tricking the EU through false financial reporting, but euro treaties do not provide for this kind of penalty.
The EU Stability and Growth Pact, a pact signed by all EU members that is notoriously inflexible yet sometimes unenforceable against larger EU members, explicitly prohibits any EU member bailout. Despite the fact that the IMF has experience in pulling troubled nations back from the brink of collapse, Greece and other EU members are resistant to an IMF bailout for political reasons, including the stigma that comes with it, the fact that many view the IMF as an “American-influenced institution,” and the international burden-shifting that would result.
Discussion Question:
1. Will stricter economic and monetary policies cause other European counties to adopt the euro (to become a “United States of Europe”), or will they prompt non-EU countries to continue to hold onto their monetary independence like Britain?
Sunday, February 07, 2010
Concurrence at Hillsborough Castle
NPR: Justice Deal May Save Northern Ireland Government
The Guardian: Brown Hails 'New Chapter' in Northern Ireland as End to Years of Violence
New York Times: Agreement Saves Northern Ireland Government
Northern Ireland is one of the four countries that make up the United Kingdom (England, Scotland, and Wales are the other three). For decades Britain governed many aspects of Northern Ireland’s activities, a situation that has long been a source of social disorder and political unrest. While Protestant Unionists want to remain part of the United Kingdom, Nationalist Catholics have opposed British rule and have fought, often violently, for independence from Britain and assimilation with the rest of Ireland.
The focus of recent independence debate has been on Northern Ireland’s freedom from British oversight in policing and legal authority. This week British Prime Minister Gordon Brown and Irish Prime Minister Brian Cowen met with Northern Ireland’s religious and political leaders Peter Robinson, head of the Democratic Unionist Party (predominantly Protestant) and Martin McGuinness, head of the Sinn Fein Party (predominantly Catholic). Together these leaders came to an agreement to terminate the British power-sharing plan and formally transfer the policing and judicial power from British to Northern Irish rule and ultimately create a Department of Justice in Belfast.
Before this accord, entitled the Hillsborough Castle Agreement, is finalized, the Northern Ireland Assembly must ratify the proposed agreement on March 9. In addition to the settlement regarding police power and justice, the agreement also establishes a number of commissions to resolve key political issues dealing with the “parades issue” and protecting the Irish language. The parades under scrutiny are politically and emotionally charged spectacles that commemorate the Protestant defeat of Catholic forces many years ago. The proposed agreement will establish a framework that empowers local residents to regulate the contentious parades through mostly Catholic neighborhoods. The Irish language commissions’ role is to protect Northern Ireland’s linguistic heritage, a concession to Nationalist Catholics despite that fact that English is the predominant language.
Despite the accord, republican dissidents have carried out violent attacks on Northern Ireland police stations this week in protest of the power-sharing arrangement between the Protestant and Catholic leaders. True political reconciliation may take time, but some suggest political stability might be the most important factor in strengthening Northern Ireland’s fragile economy.
Discussion Questions:
1. Can you really preserve culture by legislating the use of language? Did it work in Quebec?
2. With respect to the “parades issue,” when does recognizing a controversial event become a provocation?
The Guardian: Brown Hails 'New Chapter' in Northern Ireland as End to Years of Violence
New York Times: Agreement Saves Northern Ireland Government
Northern Ireland is one of the four countries that make up the United Kingdom (England, Scotland, and Wales are the other three). For decades Britain governed many aspects of Northern Ireland’s activities, a situation that has long been a source of social disorder and political unrest. While Protestant Unionists want to remain part of the United Kingdom, Nationalist Catholics have opposed British rule and have fought, often violently, for independence from Britain and assimilation with the rest of Ireland.
The focus of recent independence debate has been on Northern Ireland’s freedom from British oversight in policing and legal authority. This week British Prime Minister Gordon Brown and Irish Prime Minister Brian Cowen met with Northern Ireland’s religious and political leaders Peter Robinson, head of the Democratic Unionist Party (predominantly Protestant) and Martin McGuinness, head of the Sinn Fein Party (predominantly Catholic). Together these leaders came to an agreement to terminate the British power-sharing plan and formally transfer the policing and judicial power from British to Northern Irish rule and ultimately create a Department of Justice in Belfast.
Before this accord, entitled the Hillsborough Castle Agreement, is finalized, the Northern Ireland Assembly must ratify the proposed agreement on March 9. In addition to the settlement regarding police power and justice, the agreement also establishes a number of commissions to resolve key political issues dealing with the “parades issue” and protecting the Irish language. The parades under scrutiny are politically and emotionally charged spectacles that commemorate the Protestant defeat of Catholic forces many years ago. The proposed agreement will establish a framework that empowers local residents to regulate the contentious parades through mostly Catholic neighborhoods. The Irish language commissions’ role is to protect Northern Ireland’s linguistic heritage, a concession to Nationalist Catholics despite that fact that English is the predominant language.
Despite the accord, republican dissidents have carried out violent attacks on Northern Ireland police stations this week in protest of the power-sharing arrangement between the Protestant and Catholic leaders. True political reconciliation may take time, but some suggest political stability might be the most important factor in strengthening Northern Ireland’s fragile economy.
Discussion Questions:
1. Can you really preserve culture by legislating the use of language? Did it work in Quebec?
2. With respect to the “parades issue,” when does recognizing a controversial event become a provocation?
Sunday, January 31, 2010
Davos—Impetus for Change?
MarketWatch; Uncertainty Seen Over Global Bank Regulatory Push
BBC News; Davos 2010: Bankers Hit Out at Regulation Plans
Financial Times; Diamond Lashes Out at Obama Bank Plans
This month a group of the world’s most powerful economic and political leaders will converge in Davos, a small Swiss town in the Alps. The event is the World Economic Forum, started in 1971 to promote education and collaborative discussion on a number of global issues, including corporate risk management, poverty, and climate change. Many distinguished guests are invited, like presidents, heads of state, and foreign ministers; however anyone can receive an invitation by paying for it, as do many corporate strategists, social and political activists, religious leaders, and journalists.
This year the event’s theme is “Rethink, Redesign, Rebuild,” focusing on recovery from the global financial crisis. Although not attending the event, U.S. President Obama is focused on financial reform of the U.S. banking system and has presented a plan to limit U.S. banks’ growth by taxing them based on size and limiting their banking activities. He is encouraging other countries to adopt similar measures in an effort to help improve the global financial system. Even though Mr. Obama did not travel to the event, his ideas are spurring discussion among the event’s attendees. European Central Bank President Jean-Claude Trichet says he supports Obama’s plan for the United States but would like to see it implemented on a global scale. The Bank of England Governor Mervyn King also encourages this approach and has outlined his own plan to reduce the size of England’s biggest banks by requiring permanent pay cuts.
Not every leader supports Mr. Obama’s proposal. German’s BdB Banking Association opposes greater financial regulation and is instead in favor of mandating increased capital adequacy. Barclays president Robert Diamond also disputes the need to reduce the size of banks, arguing that such a plan will have negative consequences on global trade and won’t reduce the risks that banks pose to the global financial system. While Diamond agrees that some level of global regulatory reform may be in order, he thinks that upcoming U.S. and UK elections present local political impediments to achieving that goal. He also believes that President Obama’s plan to charge U.S. banks extra fees will limit liquidity and reduce the number of financial services in the marketplace.
One clear opinion has emerged from both camps: both believe that something must be done to change the global financial system to prevent another crisis. However, most also agree that obtaining international agreement is going to be the most significant, if not complete, barrier to success.
Discussion Question:
1. Can a global financial reform work if not every country agrees to be bound by the same measures?
BBC News; Davos 2010: Bankers Hit Out at Regulation Plans
Financial Times; Diamond Lashes Out at Obama Bank Plans
This month a group of the world’s most powerful economic and political leaders will converge in Davos, a small Swiss town in the Alps. The event is the World Economic Forum, started in 1971 to promote education and collaborative discussion on a number of global issues, including corporate risk management, poverty, and climate change. Many distinguished guests are invited, like presidents, heads of state, and foreign ministers; however anyone can receive an invitation by paying for it, as do many corporate strategists, social and political activists, religious leaders, and journalists.
This year the event’s theme is “Rethink, Redesign, Rebuild,” focusing on recovery from the global financial crisis. Although not attending the event, U.S. President Obama is focused on financial reform of the U.S. banking system and has presented a plan to limit U.S. banks’ growth by taxing them based on size and limiting their banking activities. He is encouraging other countries to adopt similar measures in an effort to help improve the global financial system. Even though Mr. Obama did not travel to the event, his ideas are spurring discussion among the event’s attendees. European Central Bank President Jean-Claude Trichet says he supports Obama’s plan for the United States but would like to see it implemented on a global scale. The Bank of England Governor Mervyn King also encourages this approach and has outlined his own plan to reduce the size of England’s biggest banks by requiring permanent pay cuts.
Not every leader supports Mr. Obama’s proposal. German’s BdB Banking Association opposes greater financial regulation and is instead in favor of mandating increased capital adequacy. Barclays president Robert Diamond also disputes the need to reduce the size of banks, arguing that such a plan will have negative consequences on global trade and won’t reduce the risks that banks pose to the global financial system. While Diamond agrees that some level of global regulatory reform may be in order, he thinks that upcoming U.S. and UK elections present local political impediments to achieving that goal. He also believes that President Obama’s plan to charge U.S. banks extra fees will limit liquidity and reduce the number of financial services in the marketplace.
One clear opinion has emerged from both camps: both believe that something must be done to change the global financial system to prevent another crisis. However, most also agree that obtaining international agreement is going to be the most significant, if not complete, barrier to success.
Discussion Question:
1. Can a global financial reform work if not every country agrees to be bound by the same measures?
Saturday, January 16, 2010
Greece’s Financial Troubles
Reuters, Analysts Give 20 Percent Chance Greece Will Need Bailout
Financial Times, Europe Cannot Afford a Greek Default
Bloomberg, Moody’s Says Greece, Portugal May Face ‘Slow Death’
Market News, Update: ECB Trichet: Rumors of Greece Eurozone Exit "Absurd"
Greece faces intense scrutiny after falling into its first recession in 16 years and becoming the Eurozone’s most indebted member with a budget deficit 12.7% of GDP, more than 4 times the allowable 3% deficit in the European Union (“EU”). Greece’s economic woes came as a surprise to many when Eurozone finance ministers revealed that Greece had been misrepresenting its budget deficit statistics for years. Greece’s Prime Minister George Papandreou has publically committed to an economic recovery plan to reduce the deficit to less than 3% by raising taxes and cutting expenditures in national defense and healthcare.
Foreign investors have not found comfort in Greece’s promises of reform and have demanded higher yield premiums on Greek debt because the country’s risk of default. After the news of Greece’s financial troubles were released, the cost of insurance products to protect against a Greek default—credit default swaps—also rose almost 50 basis points, their largest one-day increase on record. Analysts are skeptical that Greece can achieve a quick financial recovery. In December, Moody’s cut Greece’s credit rating from A1 to A2, and half of the agency’s analysts predict another downgrade below an A rating by the end of 2010.
Another challenge to Greece’s economic recovery is the downward cycle that financial troubles create. The more financially unstable an entity becomes, the higher its cost of funds, and the more difficult it is to return to profitability. One solution, like Greece’s recovery plan, is to raise taxes and cut costs, but these actions might lead to deflation and emigration which could further threaten the country’s social and economic stability. Another solution is financial aid from the IMF or a financial bailout by other EU members or the European Central Bank.
Some analysts suggest that if Greece does not receive economic support and were allowed to default, other EU countries would face increased scrutiny and credit downgrades because of their EU association. For example, Spain and Portugal are struggling economically, and a default in Greece could impact their credit ratings, increase their cost of funds, and reduce their chances of an economic recovery. Greece could also withdraw from the EU after a default to recover outside EU scrutiny, but such a move would probably weaken the EU’s image and be disastrous for its remaining members. Greece’s Finance Minister George Papaconstantinou said last week that there was no chance that Greece would require a financial bailout or leave the EU.
Twenty percent of analysts questioned predicted that Greece would need financial assistance within the next five years, but European Central Bank President Jean-Claude Trichet refuses to consider granting the country any special concessions to help alleviate its economic troubles. Some think this decision is a way of making an example of Greece for its financial deceptions.
Discussion Questions:
1. Why did it take years to discover Greece's budget problems?
2. Can Greece be held accoutable for its misgivings without harming innocent Greek citizens?
Financial Times, Europe Cannot Afford a Greek Default
Bloomberg, Moody’s Says Greece, Portugal May Face ‘Slow Death’
Market News, Update: ECB Trichet: Rumors of Greece Eurozone Exit "Absurd"
Greece faces intense scrutiny after falling into its first recession in 16 years and becoming the Eurozone’s most indebted member with a budget deficit 12.7% of GDP, more than 4 times the allowable 3% deficit in the European Union (“EU”). Greece’s economic woes came as a surprise to many when Eurozone finance ministers revealed that Greece had been misrepresenting its budget deficit statistics for years. Greece’s Prime Minister George Papandreou has publically committed to an economic recovery plan to reduce the deficit to less than 3% by raising taxes and cutting expenditures in national defense and healthcare.
Foreign investors have not found comfort in Greece’s promises of reform and have demanded higher yield premiums on Greek debt because the country’s risk of default. After the news of Greece’s financial troubles were released, the cost of insurance products to protect against a Greek default—credit default swaps—also rose almost 50 basis points, their largest one-day increase on record. Analysts are skeptical that Greece can achieve a quick financial recovery. In December, Moody’s cut Greece’s credit rating from A1 to A2, and half of the agency’s analysts predict another downgrade below an A rating by the end of 2010.
Another challenge to Greece’s economic recovery is the downward cycle that financial troubles create. The more financially unstable an entity becomes, the higher its cost of funds, and the more difficult it is to return to profitability. One solution, like Greece’s recovery plan, is to raise taxes and cut costs, but these actions might lead to deflation and emigration which could further threaten the country’s social and economic stability. Another solution is financial aid from the IMF or a financial bailout by other EU members or the European Central Bank.
Some analysts suggest that if Greece does not receive economic support and were allowed to default, other EU countries would face increased scrutiny and credit downgrades because of their EU association. For example, Spain and Portugal are struggling economically, and a default in Greece could impact their credit ratings, increase their cost of funds, and reduce their chances of an economic recovery. Greece could also withdraw from the EU after a default to recover outside EU scrutiny, but such a move would probably weaken the EU’s image and be disastrous for its remaining members. Greece’s Finance Minister George Papaconstantinou said last week that there was no chance that Greece would require a financial bailout or leave the EU.
Twenty percent of analysts questioned predicted that Greece would need financial assistance within the next five years, but European Central Bank President Jean-Claude Trichet refuses to consider granting the country any special concessions to help alleviate its economic troubles. Some think this decision is a way of making an example of Greece for its financial deceptions.
Discussion Questions:
1. Why did it take years to discover Greece's budget problems?
2. Can Greece be held accoutable for its misgivings without harming innocent Greek citizens?
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