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Showing posts with label Bailout. Show all posts
Showing posts with label Bailout. Show all posts

Monday, April 1, 2013

Will the lessons be learnt from the financial crisis in Cyprus?

This time, it is Cyprus’ turn to face a bitter financial crisis as bank depositors get hit and capital controls are imposed. 


Demonstrators in Athens. The roots of the eurozone crisis lie in its unwillingness to uphold fiscal discipline. Photograph: Louisa Gouliamaki/AFP/Getty Images



THE financial crisis in Cyprus has again shown that over-dependence on the financial sector and an unregulated and liberalised financial system can cause havoc to an economy.

The particular manner in which a financial crisis manifests itself may be different from country to country, depending on the ways the country became financially over-reliant or over-liberalised, and also on how ever-changing external conditions affect the country.

For the past two weeks, Cyprus hit the headlines because of the rapid twists and turns of its crisis, the terms of the bailout it negotiated with its European and IMF creditors, the hit that bank depositors are forced to take, and finally the “capital controls” that the government has imposed to prevent bank runs and capital flight out of the country.

Depositors with more than 100,000 (RM396,000) could lose more than half their savings.

Bank customers can only withdraw 300 (RM1,189) daily; cashing of cheques is prohibited; transfers of funds to accounts held abroad or in other credit institutions are prohibited; transfers due to trade transactions above 5,000 (RM19,832) a day require central bank permission; the use of credit cards overseas is restricted to 5,000 (RM19,832) per account a month; and travellers can only take out 1,000 (RM3,960) or equivalent in foreign currency per trip.

These capital controls, announced on March 28, were highlighted in the media as the first to be imposed by a country belonging to the European Union.

It was like the slaying of a “sacred cow”, because the freedom to move funds out of and into the European countries had been treated almost like a human right.

But it is this total freedom for the flow of funds that has contributed or even been ultimately responsible for so many financial crises in so many countries in the past few decades.

This liberalised system of capital flows enables residents to place their funds abroad or to purchase foreign assets like bonds and shares.

It also enables foreigners to bring in funds either for short-term speculation and investment or longer-term investment and savings.

After the Second World War, capital controls were the rule: flows of funds to and from abroad were mainly restricted to activities linked to the real economy of trade, direct investments and travel.

From the mid-1970s, the liberalisation of capital flows took place in the rich economies and gradually spread to many developing countries.

The finance ministers of Brazil and of other developing countries have been protesting against the easy-money policies in rich countries that have had adverse effects on emerging economies.

When the internal or external situation changes and investor perception changes with it, the inflow of funds turns into its opposite.

The sudden outflow of funds, and depreciation of the currency, can then cause an even more devastating effect on the economy.

In the 1997-99 crisis, East Asian countries that had over-liberalised their financial system found that local banks and companies had borrowed heavily in US dollars.

When their currencies depreciated, many of the borrowers could not service their loans.

The countries’ foreign reserves dropped to danger levels, forcing them to go to the IMF for bailout loans.

Malaysia fortunately had some control over the amount local companies could borrow from abroad, which prevented it from falling into an external debt crisis.

The imposition of capital controls over outflows in September 1998 enabled Malaysia to avoid a financial crisis requiring an IMF bailout.

The immediate response from the IMF and the Western establishment was that the capital controls would destroy the Malaysian economy.

Today, the economic orthodoxy has changed, and most analysts including at the IMF give credit to Malaysia for the capital controls.

The Malaysian controls included a temporary ban on foreigners transferring their ringgit denominated funds (for example in the stock market) abroad, a limit to the funds local travellers could take out of the country, and limits to overseas investments by local companies and individuals.

Today, the IMF itself has changed its position, saying that capital controls in certain situations are not only legitimate but may also be necessary.

It has partially recognised that unregulated capital flows can cause financial instability and economic damage.

In the case of Cyprus, analysts now conclude that its growth model was flawed because it was too reliant on a bloated financial sector, having become a haven for foreign savers, especially from Russia.

But a major factor in its recent crisis was that the country’s biggest banks invested in Greek government bonds.

In October 2011, a bailout package was arranged for Greece by the European Union and the IMF.

Part of the bailout terms was that holders of Greek government bonds would take a “haircut” or loss of about 50%.

This Greek debt restructuring meant a loss of 4bil (RM15.9bil) for banks in Cyprus, a huge amount in a country whose GNP is only 18bil (RM71.4bil).

Now, it is Cyprus’ turn to be reconfigured and re-created as part of a 10bil (RM39.7bil) bailout scheme. The two biggest banks, Bank of Cyprus and Laiki Bank are to be drastically restructured, with the latter to be closed.

The biggest innovation designed by the European Union and IMF creditors is that the bank depositors will have to take losses. Deposits less than 100,000 (RM396,000) are to be spared, after an original plan to also “tax” them by 6.75% was cancelled after a huge outcry and the fear of contagion, with bank runs in many European countries.

The final plan is for deposits over 100,000 (RM396,000) in the two banks to take losses not by the originally planned 9.9% but by much more.

The new European policy of getting bank depositors to take a big hit in bailouts of banks will have big ramifications for public confidence in banks.

The new perception is that money put as savings in banks is no longer safe.

The question remains: will the policymakers learn the real lessons from these crises?


GLOBALTRENDS BY MARTIN KHOR 

Related posts:
Financial crises a result of governance failures

Sunday, March 31, 2013

Financial crises a result of governance failures

ROMAN emperor Julius Caesar was famously warned by a seer about the Ides of March, traditionally March 15.

On March 15 this year, banks in Cyprus were closed to allow politicians time to decide how to raise 5.8 billion euros so that the country could qualify for 10 billion euros in bailout funds from the rest of eurozone and the International Monetary Fund (IMF). The solution suggested was to levy a tax on depositors, sparking a realisation that finally, the Europeans had decided to “bail-in” investors and depositors, rather than using public funds to “bail-out” everyone else.

The Cyprus crisis caused a stir in global financial markets, because it punctured expectations that the worst was over. Instead, it demonstrated another episode of muddling through.

Banks in Cyprus re-opened on Thursday with new capital controls on the amount depositors can take out. Larger depositors with over 100,000 euros would stand to lose up to 40% of their deposits. Of course, a significant portion of the deposits in Cyprus banks belong to Russians, who may suffer losses of 4 billion to 6 billion euros. For certain investors, this is the price of putting money in higher risk offshore financial centres. The price to Cyprus of operating as an offshore financial centre is likely to be a drop of GDP of more than 20% in the next couple of years.

The Cyprus outcome is not unexpected. If European governments are to be loaded with heavy debt burdens as a result of the crisis, they will be bound to start “taxing” offshore financial centres, where rich Europeans had been avoiding tax for years. If the eurozone banking union is to have any credibility, they will have to start controlling banking centres which operate largely on tax and regulatory arbitrage. Moreover, having banking assets seven to eight times GDP is no longer considered viable, whether for Cyprus or Iceland.

At the heart of such troubles lies the issue of governance. Financial crises are more governance failures than anything else.

Last week, The End of History philosopher and political scientist Francis Fukuyama published an important blog commentary on “What is governance?” This is the much-awaited part of his promised series on political governance, beginning with his 2011 book The Origins of Political Order. In that book, he looked at the three components of a modern political order a strong and capable state, the rule of law and accountability of the state to its citizens. Since the 2011 book stopped at the French Revolution, most readers would be curious to see how he handled the rise of China, which has a different political system from the West.

Fukuyama's new definition of governance is “a government's ability to make and enforce rules, and to deliver services, regardless of whether that government is democratic or not.” Notice that he has decided to remove any suggestion that democracy is automatically associated with good governance, appreciating that “an authoritarian regime can be well governed, just as a democracy can be mal-administered.”

Accordingly, he uses four approaches to evaluating the quality of governance: procedural measures, input measures, output measures and measures of bureaucratic autonomy. To put it into simple language governance should be measured according to how you govern (the processes); the efficiency of governance (how much tax or resources you need); the effectiveness (outcomes rather than objectives) and whether the bureaucracy is independent of politics or not (the autonomy question).

In dissecting governance into its different dimensions, Fukuyama has helped to clarify the methodology in thinking about the tradeoffs between the ability to have high discretion versus being bogged down by excessive rules, and high capacity to execute, versus low capacity to execute. Critics of that approach would argue that strong states with excessive discretion may not be sustainable. On the other hand, weak states with too many rules and no discretion may not be sustainable either.

Fukuyama is right to point out that the bureaucracy's interests may not be identical to those of the people. The bureaucracy is supposed to be agent of the people (the principal), but many bureaucracies serve their own interests, rather than the public to the extent that civil servants may be neither civil nor servants.

Indeed, the simplistic view that the state is deterministic versus the view of free market self-order misses the fundamental point that large bureaucracies also have self-order. Anyone familiar with working in large complex bureaucracies in China, India or the United States, with many layers of government, would recognise that it is not easy to implement policies from the centre. State or provincial governments have a mind of their own, with very different priorities from that of the centre.

Indeed, in the 21st century, many cities have become more effective instruments of state, and it is not surprising that effective mayors have become national leaders because they show a capacity to deliver close to the people.

The more interesting question about governance is: why are collective action traps so pervasive? In other words, it is understandable why ineffective and weak bureaucracies or political systems are unable to overcome gridlock in their systems, but it is common to see highly effective and capable bureaucracies also caught in gridlock.

These gridlocks are apparent in the resolution of the euro crisis, the stalemate in the Doha World Trade Organisation negotiations and the Durban climate change debates. In the first week of April, the Institute for New Economic Thinking, the Centre for International Governance Innovation and the Fung Global Institute will be hosting a major conference in Hong Kong on how creative and innovative thinking can open up new avenues of thinking on the solutions to global governance. As a respected member of the global economic community, Hong Kong should make its voice heard.

You can watch most of the podcasts on www.ineteconomics.org or www.fginstitute.org.

THINK ASIAN By ANDREW SHENG
Tan Sri Andrew Sheng is president of the Fung Global Institute. 

Related posts:
Euro zone economy shrinks, worst since 2009
 US fiscal deficit position is cheating American Children
IMF aid to Europeans stirrings of resentment 
Unemployment Fuels Debt Crisis 

Sunday, October 16, 2011

"Occupy Wall Street": Lessons From and For the Class Struggle, Tahrir Square to Times Square in Over 1,500 Cities Worldwide!

Wall Street Sign. Author: Ramy Majouji


by Art Carden Forbes

A consensus has emerged that there really isn’t a consensus view among the Occupy Wall Street crowd and its assorted offshoots. Occupy Wall Street represents a motley collection of the disaffected and disenchanted from across the political spectrum that is more than just a left-wing version of the Tea Party. From the coverage I’ve seen, the Occupiers make some important points about the apparently never-ending wars and distributive politics favoring the few at the expense of the many. They would do well to take a handful of lessons to heart so that they can channel their frustrations in a productive direction.

First, wealth is not prima facie evidence that wrong has been done. When it is allowed to work free from interference, commerce is a positive-sum game.  Look at some of the names on the Forbes 400. The Gateses and Waltons of the world didn’t get rich by stealing. They got rich by finding newer and better ways to make other people’s lives better—in short, by creating wealth. This isn’t to lionize the wealthy: no doubt, you will find skeletons in every closet and dirt under every rug if you look hard enough. By and large, though, it has been access to the institutions of commercial society rather than access to the institutions of political society that explains some of the vast fortunes about which so many of the Occupiers are so upset.

This raises a second important point originally made by Nobel Laureate Robert Lucas: economic growth, not redistribution, is what raises people out of poverty. If we’re serious about alleviating suffering, eating the rich is a spectacularly unwise course of action. As Lucas writes:

Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
Third, a little consistency is in order if we’re going to talk about bailouts. So, for that matter, is a little frankness. Steven Horwitz points out the inconsistency in decrying bank bailouts for agitating for relief from the burden of student loans: “To complain about bank bailouts while also arguing, as some have, for student-loan debt forgiveness would suggest the problem is not that government shouldn’t bail out failed investments, only that it shouldn’t bail out failed investments by corporations.”



A lot of people are learning that describing their spending on higher education as “failed investments” is probably to err on the side of charitable interpretation. It might be more reasonable to say that attending an expensive school to earn a boutique degree with limited employment possibilities is consumption, not investment.

As Horwitz also notes, this should also make us reflect a bit on what it means to give “power to the people.” Suppose you have spent several years picking up a degree in a field where there are no jobs, and you find that the concatenation of the people’s voluntary choices in the marketplace means that your most attractive opportunities involve waiting tables or making lattes.

Why should you be upset? I modify here something that I first read on Duke University economist and political scientist Michael Munger’s blog. “Power to the people” is apparently all good and well until “the people” start making the wrong decisions. In that case, power will accrue to those who know what is really best for “the people.” There might be dissenters, sure, but you can’t make an omelet without breaking a few eggs.

Fourth, as Sheldon Richman explains, “Wall Street Couldn’t Have Done It Alone.” Malfeasance was enabled or encouraged by government. In his book The Housing Boom and Bust (which I review here) Thomas Sowell explains how today’s cause for protest and outrage–banks making loans people didn’t understand to help them buy houses they couldn’t afford–was yesterday’s policy objective.

While a lot of people envision a model of politics as a form of noble savagery that is corrupted by evil people who stubbornly refuse to play the game the “right” way, the kinds of intrigue that have the Occupiers (and the Tea Partiers) so exercised are (to borrow from Steven Horwitz again) features of political society, not bugs. As the economist Gordon Tullock has argued, what should puzzle us is not that politicians are for sale. What should puzzle us is that the supply side of the market for political favors is so competitive that favors can be had for such low prices.

In light of economic conditions, it isn’t surprising that people are angry. It’s important, though, that they be angry about the right things. Blaming “greed” is unhelpful; as economist Lawrence H. White has written, blaming “greed” for economic malaise is like blaming gravity for plane crashes. Reality is much more complex, and simple rage, no matter how well organized, isn’t likely to do us much good.

OccupyWallStreet
The resistance continues at Liberty Square

From Tahrir Square to Times Square: Protests Erupt in Over 1,500 Cities Worldwide

Posted Oct. 16, 2011, 1:08 a.m. EST by OccupyWallSt
Tens of Thousands in Streets of Times Square, NY

Tens of Thousands Flood the Streets of Global Financial Centers, Capitol Cities and Small Towns to "Occupy Together" Against Wall Street Mid-Town Manhattan Jammed as Marches Converge in Times Square

New York, NY -- After triumphing in a standoff with the city over the continued protest of Wall Street at Liberty Square in Manhattan's financial district, the Occupy Wall Street movement has spread world wide today with demonstrations in over 1,500 cities globally and over 100 US cities from coast to coast. In New York, thousands marched in various protests by trade unions, students, environmentalists, and community groups. As occupiers flocked to Washington Square Park, two dozen participants were arrested at a nearby Citibank while attempting to withdraw their accounts from the global banking giant.

"I am occupying Wall Street because it is my future, my generations' future, that is at stake," said Linnea Palmer Paton, 23, a student at New York University. "Inspired by the peaceful occupation of Tahrir Square in Cairo, tonight we are are coming together in Times Square to show the world that the power of the people is an unstoppable force of global change. Today, we are fighting back against the dictators of our country - the Wall Street banks - and we are winning."

New Yorkers congregated in assemblies organized by borough, and then flooded the subway system en mass to join the movement in Manhattan. A group calling itself Todo Boricua Para Wall Street marched as a Puerto Rican contingent of several hundred playing traditional music and waving the Lares flag, a symbol of resistance to colonial Spain. "Puerto Ricans are the 99% and we will continue to join our brothers and sisters in occupying Wall Street," said David Galarza Santa, a trade unionist from Sunset Park, Brooklyn. "We are here to stand with all Latinos, who are being scapegoated by the 1%, while it is the bankers who have caused this crisis and the banks who are breaking the law."

While the spotlight is on New York, "occupy" actions are also happening all across the Midwestern and the Southern United States, from Ashland, Kentucky to Dallas, Texas to Ketchum, Idaho. Four hundred Iowans marched in Des Moines, Iowa Saturday as part of the day of action:

"People are suffering here in Iowa. Family farmers are struggling, students face mounting debt and fewer good jobs, and household incomes are plummeting," said Judy Lonning a 69-year-old retired public school teacher. "We're not willing to keep suffering for Wall Street's sins. People here are waking up and realizing that we can't just go to the ballot box. We're building a movement to make our leaders listen."

Protests filled streets of financial districts from Berlin, to Athens, Auckland to Mumbai, Tokyo to Seoul. In the UK over 3,000 people attempted to occupy the London Stock Exchange. "The financial system benefits a handful of banks at the expense of everyday people," said Spyro Van Leemnen, a 27-year old public relations agent in London and a core member of the demonstrators. "The same people who are responsible for the recession are getting away with massive bonuses. This is fundamentally unfair and undemocratic."

In South Africa, about 80 people gathered at the Johannesburg Securities Exchange, Talk Radio 702 reported. Protests continued despite police efforts to declare the gathering illegal. In Taiwan, organizers drew several hundred demonstrators, who mostly sat quietly outside the Taipei World Financial Center, known as Taipei 101.

600 people have begun an occupation of Confederation Park in Ottawa, Canada today to join the global day of action. "I am here today to stand with Indigenous Peoples around the world who are resisting this corrupt global banking system that puts profits before human rights," said Ben Powless, Mohawk citizen and indigenous youth leader. "Native Peoples are the 99%, and we've been resisting the 1% since 1492. We're marching today for self- determination and dignity against a system that has robbed our lands, poisoned our waters, and oppressed our people for generations. Today we join with those in New York and around the world to say, No More!"

In Australia, about 800 people gathered in Sydney's central business district, carrying cardboard banners and chanting "Human need, not corporate greed." Protesters will camp indefinitely "to organize, discuss and build a movement for a different world, not run by the super-rich 1%," according to a statement on the Occupy Sydney website.

The movement's success is due in part to the use of online technologies and international social networking. The rapid spread of the protests is a grassroots response to the overwhelming inequalities perpetuated by the global financial system and transnational banks. More actions are expected in the coming weeks, and the Occupation of Liberty Square in Manhattan will continue indefinitely.

Occupy Wall Street is a people powered movement that began on September 17, 2011 in Liberty Square in Manhattan’s Financial District, and has spread to over 100 cities in the United States and actions in over 1,500 cities globally. #OWS is fighting back against the corrosive power of major banks and multinational corporations over the democratic process, and the role of Wall Street in creating an economic collapse that has caused the greatest recession in generations.The movement is inspired by popular uprisings in Egypt, Tunisia, Spain, Greece, Italy and the UK, and aims to expose how the richest 1% of people who are writing the rules of the global economy are imposing an agenda of neoliberalism and economic inequality that is foreclosing our future.

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