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As with the previous such post, this thread will primarily serve as a meeting ground where S/O readers can discuss the impending US fiscal crisis. As usual, I try to provide some context and avenues for discussion:
1. On August 2nd, give or take a few days, the US Treasury will run out of money. Some commitments will have to be broken. As this article explains, first in line will be Treasury bond holders; frankly, the US sovereign reputation is so valuable that it will not want to risk it at almost any cost. Nor does either party want to see SS recipients, veterans, and soldiers not getting their salary. Once these are accounted for, little else will remain (the US borrows $1.40 for every dollar it now spends). If a deal isn’t reached, there will be massive furloughs and a shutdown of most non-“essential” government functions.
2. Though the current deficit of 10%+ of GDP is patently unsustainable, the immediate drop in spending the failure to raise the debt limit will represent will instantly plunge the US into deep recession (if not depression, if sustained; i.e. a cumulative GDP drop of more than 10%). The economy is very weak, with recent revisions showing the post-2007 drop in output to have been deeper than thought, and the subsequent recovery much weaker. With consumer spending hurt by deleveraging and high commodity prices; it is only being propped up by government stimulus.
3. The political ramifications. This is a risky bet on the Republicans’ part; whereas the Obama administration would have otherwise got the blame for a sluggish recovery, their perceived role in triggering a deep recession will erase that (nor can we take for granted that Republicans are able to logically perceive this; their Tea Party wing in particular has heavy ideological blinkers). In any case, it was the Republicans who got the blame for the previous government shutdown in 1995.
I went counter-consensus in the immediate aftermath of the Osama bin Laden killing by betting on a Republican win in 2012. This was on favorable odds, with all the commentators crowing that Obama has a victory locked up. Now I’m not sure this was such a good move. As of now, this is ALSO increasingly counter-consensus; in the last few days, many people have began to say Obama’s chances of winning are slipping. I disagree. The Republicans are volunteering themselves as free targets for the blame games that make up Presidential campaigns. If they go through and shut down government, then Obama will seize the opportunity to blame them.
4. So, in the end, what will happen? I think there is a high chance that the US will not go into formal default (that is practically impossible, for now) and that there will be a compromise, if not by August 2nd then within two or three weeks. But if the Republicans remain obstinate, then its back to deep recession.
5. The WSJ on what Russia thinks: Oil-Rich Russia Calm Ahead of U.S. Debt Deadline. I basically agree with it.
6. As in 2008, China will remain largely unaffected – even if the US slips into a deep recession. As I argued in my post on Top 10 Sinophobe Myths, the idea that China depends in any real way on manufacturing exports doesn’t hold water.
7. The PMI indicators show that large parts of Europe are slipping into zero growth or outright recession. But Germany remains solid, and Russia seems to be picking up its pace.
As soon as the US debt limit crisis is papered over, the focus will shift back to Europe. Italy’s budget deficit is small (relatively, anyway), but its debt to GDP ratio is huge and the average maturity of its bonds is only about five years. And needless to say, Italy is no Greece. That said, Europe’s overall fiscal position is better than that of the US, Japan, Britain (which is, despite a 13% of GDP budget deficit, becoming a mini safe haven) so the recent moves towards a German-controlled “eurobond” has diminished the risks of contagion.
STRATFOR provides food for thought with Germany’s Choice: Part 2.
8. Where can investors go? In the past few days, we’ve had the bizarre sight of investors, frightened by the rising turbulence and concerns about low growth, scurrying into the “safe haven” of US Treasuries; issued by the same institution that will not have money to pay the bills in a few days! Well, what can I say… Investors aren’t rational creatures. And it does illustrate the massive reputational advantage still held by the US… a reputational advantage that brings it massive benefits (very low interest rates, most of the international trade in commodities being denominated in its currency, etc) that its more rational politicians will be very unwilling to squander.
Nonetheless, this doesn’t change the fact that no matter how this debt limit issue is going to be resolved in the coming days and weeks, in the longer term US hegemony is unsustainable. That is because its fiscal position is unsustainable, and it is unsustainable because its political system is fundamentally dysfunctional. The Republicans want cuts in spending, but not enough to wipe out the deficit (since some influential lobbies like the MIC, Big Oil, agriculture, etc. are to be protected); the Democrats want to keep entitlements spending and military spending largely as is but increase revenues, but the Republicans are unwilling to raise taxes an iota, not even on natural resource companies and high income earners. It is an idiot’s limbo whose only foreseeable resolution is through a debt trap / default or massive inflation.
The only thing the current antics are doing is, by giving cause to doubt the creditworthiness of the US (previously unthinkable), the politicians are merely bringing forward the day of reckoning.
9. Whither commodities? It will basically be a race between these two forces:
- Recession – and hence falling demand – in the fiscally bankrupt Western nations.
- Stagnant oil supplies (or the onset on rapid decline); rising demand from China to fill any gap left by falling consumption in the West; and investors fleeing from stock-markets and indebted government-issued papers for commodities, where the long-term trend is now certainly for prices to go up.
Which one will win out in the next few months? I don’t have a fucking clue. If I did, I’d be out there gambling on the commodity markets.
One thing I would (still) recommend doing is investing in US credit default swaps; even if the debt limit crisis is amicably resolved, it is still a great long-term play.
10. One final article: Emerging markets could be the new safe haven for investors.
It is bizarre that Russia, a country with almost zero debt and a tiny budget deficit, or China, or dozens of other fiscally sustainable countries are rated much worse (and have higher CDS spreads on their bonds) than a country like the US or the UK. Arguably even Argentina is a less risky investment at this point.
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Personally, I’m extremely confident about the euro zone as a new possible safe haven as monetary policy is controlled by extremely tough (perhaps even “autistic”) fiscal conservatives. The ECB has the highest interest rate (1.5% vs 0.1% for the Fed) in the developed world. Euro zone deficits are at 6% of GDP vs. 11.5% in the US. Hence the values of both the pound and the dollar have collapsed by almost one full third relative to the euro (currently $1.44 = €1).
Some context: The World bank predict dollar hegemony’s replacement as a reserve/transaction currency by a tripolar dollar/euro/yuan system by 2025: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22915632~pagePK:64257043~piPK:437376~theSitePK:4607,00.html Barry Eichengreen has long predicted the end of dollar hegemony and in this WSJ piece he looks at why and the benefits the US will lose as a result : http://online.wsj.com/article/SB10001424052748703313304576132170181013248.html Particularly noteworthy is that foreign exchange transactions in euros have reached half US levels, whereas they used to be almost entirely in dollars.
I would add the fundamentals of the US economy are very bad. The euro zone has equal unemployment and growth despite having a stagnant population, a tight monetary policy (1.5% ECB vs. 0.1% Fed), an overvalued euro . In fact, EU/euro zone growth was twice that of the US (0.4% vs 0.8%) in the first quarter of 2011. There is no indication the US will reduce its structural profligacy through either higher taxes, lower military expenditure, structural cuts to old people’s welfare (SS/Medicare) or rational healthcare.
Finally, now we can add the ideological nature and irresponsibility of the American political class. All I talked about above would suggest a gradual American decline. The Republicans appear intent on provoking it today. If the US defaults then the consequences cannot even begin to be calculated and the country will face depression. If, more conservatively, we get a deal that includes big immediate (but not structural) spending cuts, the US will face a double dip recession (which will worsen the budgetary outlook anyway). Either way, foreigners will wonder if a country with such an illiterate and irresponsible ruling class is really such a “safe place” put their investments.
As a result, we may a much more precocious rise of the euro than expected. The Chinese, whose nominal GDP is small and who use yuan manipulation to boost their exports, are not yet able to establish theirs as a reserve currency (although I don’t doubt it c. 15 years from now). In the meantime, the euro will be the only currency of a super-giant economy that will be responsibly managed and stable through the particular monetary reflexes of the Germans and the ECB. The dollar falling early, the yuan taking too long to rise, perhaps Europeans can enjoy that “exorbitant privilege” the Americans have benefited from since 1945?
Russia and China etc have a worse credit rating than the profligate countries because the leading credit rating agencies, like Moody’s Standard and Poor etc, are Anglo American and the world’s leading financial centres are New York and London. That is a legacy of the American Empire and it will not last but for the moment it acts as a buffer against reality.
Agreed that, in net terms, the EU >> the US in fiscal terms. Not only does it have a lesser budget deficit as % of GDP, but the spending/revenue ratio – which is, perhaps, even more important – is far, far lower (because European taxes are far higher).
But all things are relative, and I’m more sanguine than you are on the Eurozone’s prospects. The US may be at the edge of a cliff, but Europe is just a step or two behind it.
It’s amusing to see the western media bending like a thin reed in the wind on the deficit issue. Where is the foaming at the mouth criticism of the US for its IMF-busting fiscal policy? Yeltsin was required to cut to the bone during the worst depression in modern history in order to please the IMF. The Russian government is currently running a deficit (nothing like the 10% of GDP deficit in the US in 2009) and there is criticism, 1990s style, about bad, bad, bad non-monetarist policies. The hypocrisy of the west has been exposed quite well in the last three years.
The quantitative easings in the the US are nothing more than printing money. The only reason that this is possible without triggering hyperinflation is that the US dollar is a world reserve currency so the world keeps on absorbing any excess and literally giving it value through demand. But this racket can’t go on indefinitely and eventually the world demand for US dollars will fall. This will produce a hyper-inflation backlash in the US. But at least they will inflate themselves out of debt 🙂
BTW, Canada’s Harper regime is parroting the US fiscal policy. Deficits and tax cuts for the rich.
“betting on a Republican win in 2012. This was on favorable odds, with all the commentators crowing that Obama has a victory locked up.”
I would guess that most of the really evil parts of Hillary/Obama Care health reform won’t show up until after 2012 and there’s a major EOE jobs push happening now, and EOE people with jobs vote democratic. It might look better having a democrat pushing amnesty for the Mexican illegals although most of them will be wary about getting suckered into Selective Service System registration. By 2012, snafu Obama’s fascist persona (tanned Mussolini) might become just visible enough to make it hard for any republican to get to the right of.
No comments except for a website I posted in Kremlin Stooge:-
http://dailyreckoning.com/the-great-correction-5-years-on-part-ii/
sinotibetan
“BTW, Canada’s Harper regime is parroting the US fiscal policy. Deficits and tax cuts for the rich.”
He can parrot such notions as much as he likes, provided he doesn’t act on such fantasies. Despite his extremely America-friendly outward attitudes, Stephen Harper is a shrewd businessman (that’s not an endorsement), and if he really had a tendency to put Canada’s fortunes where his mouth is, our economy would be tanking right along with theirs. It’s not. There are a lot of things he’d like to do if he were a dictator instead of an elected officer, but some he doesn’t because he knows they’re stupid and some because he wouldn’t get re-elected.
A rather good article was posted on the debt crisis at Steve Benen’s Political Animal, here;
http://www.washingtonmonthly.com/political-animal/2011_08/look_out_below031323.php
Commenter zeitgeist – an interesting and thought-provoking feature of long standing on this blog, and on The Carpetbagger Report before it – argues persuasively that:
“1) Policy making is now largely divorced from the real world, and is solely about tribal point scoring and therefore it cannot be counted on for evidence-based solutions;
2) Because no revenues were on the table, there is no seriousness about the debt;
3) The emphasis on cuts – and the risk of reckless across-the-board cuts – and the Democrats’ adoption of that same rhetoric means that Keynes is dead in D.C. even though Keynes is the only economics the market has ever seen work;
4) The above points mean that the United States cannot be looked to as the source of initiation for a global recovery (or at least stabilization), as investors apparently had assumed would be the case.
Basically, they saw that the largest economy on Earth is screwed badly, and its politics and political stability is screwed even worse. ”
You said:It is bizarre that Russia, a country with almost zero debt and a tiny budget deficit, or China, or dozens of other fiscally sustainable countries are rated much worse (and have higher CDS spreads on their bonds) than a country like the US or the UK.
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But Russia defaulted on its debt in 1999.The US has never defaulted. The UK hasn’t defaulted since before the financial revolution in the 1690s(Charles II I believe had a bad credit rating). Once bankrupt, always bankrupt. The markets don’t forget.
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But Russia defaulted on its debt in 1999.The US has never defaulted. The UK hasn't defaulted since before the financial revolution in the 1690s(Charles II I believe had a bad credit rating). Once bankrupt, always bankrupt. The markets don't forget.Replies: @Mark, @Anatoly Karlin
“Once bankrupt, always bankrupt. The markets don’t forget.”
Is that so? Why, then, did Japan have a AAA credit rating in 2000, after its meltdown in the Asian Financial Crisis – triggering, by the way, Russia’s default, which was a default on domestic debt – and why did the demand for Japanese securities increase in the following months?
http://www.huffingtonpost.com/2011/08/06/us-credit-downgrade-history_n_920280.html
Japan’s borrowing has been the highest of any developed country expressed as a ratio of GDP for a long time, and is now at 180% of GDP. How the hell did it ever get to such a point if the markets don’t forget? Japan screwed itself into the earth in 1998 – who was stupid enough to lend them money after that, if the markets don’t forget? Is there now no foreign investment in Japan?
Russia imposed a moratorium on foreign payments during the 1998 financial crisis, which is not quite as bad as defaulting, resumed payments as soon as it was able, and paid back every penny. Nobody is currently out a cent for money they lent Russia prior to 1998.
The markets don’t forget – what bullshit. The markets don’t forget an opportunity for profit, and the only thing the markets like less than volatility is stability.
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But Russia defaulted on its debt in 1999.The US has never defaulted. The UK hasn't defaulted since before the financial revolution in the 1690s(Charles II I believe had a bad credit rating). Once bankrupt, always bankrupt. The markets don't forget.Replies: @Mark, @Anatoly Karlin
Technically, the US did default in 1979. 😉
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Japan is truly a weird case. It has a huge debt, but 90% of it is from its own population; as far as I can tell, whereas in normal countries citizens pay taxes, the Japanese governments borrows from Japanese savings (e.g. retirement funds).
And this is furthermore counterbalanced by its huge amounts of assets abroad. Its international net investment position is higher than China’s or Russia’s!
So, apocalyptic as its 220% of GDP debt looks on paper, I think that it’s actually more stable than either the US or the Eurozone.
Japan lost its AAA rating years ago. But anyway it’s different, their debt is domestic, they have assets to back it up, they have large savings, etc. Japan is a rich country.
Remember Ross Perot, he was harping about the IMF squandering 20 billion on Russia. Russia paid back every penny with interest. What you see is western bias against Russia. It shows that the market is composed of humans and their biases and not some mystical impartial entity optimizing the well being of humanity.
It is not assets that back it but the printing press. Not that you need it when you pay so little interest.
Japan lost its AAA rating in 1998 when its economy imploded, but by 2000 had it back again – that’s what I’m talking about. The fact that it lost it again is of little consequence, because Japan was most decidedly bankrupt; the market appeared to care little about its previous bankruptcy, so once bankrupt, always bankrupt is a crock. It very much depends on who you are. The western world needs Japan in order to project power in the region (how very far it has come from the point when America occupied it as a check against a Japanese resurgence), therefore the market will always forgive depending on its perception that the great financial powers will not let it go down no matter how many financial rules it tramples underfoot. Japan is a rich country? Is it richer than Russia? Depends; if you talk overall net worth, Japan rates 3 to Russia’s 7. But the fly in the ointment there is, what if you had to pay back everything you owe, right now? Would you still be rich? In that situation, Japan is so far behind Russia they can’t smell the galushki. Russia is third in the world in terms of cash reserves – what is wealth, really, but the perception of your fiscal reliability? Can that be skewed by having the ratings agencies – which are all western – in your pocket? Sure it can.
The west would let Russia go down in flames in a heartbeat – would actively abet its fiscal destruction given the slightest opportunity. But that has nothing to do with any smug once-bankrupt-always-bankrupt-the-market-doesn’t-forget catechism. It’s because powerful policy interests in the west perceive Russia as Other; that it can never be made to ape western ways, and therefore any alliance would be like sleeping with a wild beast that might tear out your throat while you sleep. Those interests do an excellent job projecting their phobias, so successful that hosts of halfwits who have lost the ability to think for themselves believe it without question. But the market will always go where it can make money, and it has as little memory for financial disasters past as a river remembers the shifting rocks in its bed.
Russian policymakers who pleaded with the IMF to head off the devaluation of the ruble and the subsequent default perceived that the IMF was well aware of what was about to happen, and was part of it. Perhaps they were incorrect in that appraisal, but the lack of positive press upon Russia’s rapid satisfying of its debts tells its own story.
In most any other country – Greece, for example- going from negative to positive with near-miraculous speed would be a success story used over and over to tout for new investments; the world would grow weary of listening to how The Little Country That Could had pulled off the impossible. In Russia’s case, acknowledgment of such an accomplishment was grudging and short-lived, and now if you’re not sure what happened you have to look it up.
Didn’t some of these rating agencies give the sub prime mortgage products a triple A rating right up until the 2008 meltdown? You would have thought their credibility would be blown by now. Also aren’t they paid fees by the same institutions they’re rating? Conflict of interest anyone?
I notice some corporate interests are now snarling that the ratings agencies perhaps have more power than is good for them, and are treating them like someone who farted in church. Of course, that’s because it’ll mean a short-term loss of profits for some, although – as pointed out earlier – the giant economy-size economy of the USA is likely to cause it to be perceived as solvent and a safe risk no matter what the credit ratings say. However, it was of signal political importance that the default happen on Obama’s watch, and that’s why the boost in the credit ceiling resulted in a wrist-slap default anyway. The USA has been living on borrowed money for quite a while, and it didn’t seem to bother the ratings agencies last year or the year before. The Republicans must and will have a situation in which it appears Obama failed to prevent default.
Anatoly, have you ever come across the “Sovereign Wikirating Index”? Discovered it through a post on ZeroHedge (http://www.zerohedge.com/news/guest-post-aaa-rating-or-not-crowd-sourced-wikirating-values-your-input). According to the SWI (http://www.wikirating.org/wiki/List_of_countries_by_credit_rating_(SWI) , http://en.wikipedia.org/wiki/Wikirating , http://www.wikirating.org/wiki/Sovereign_Wikirating_Index , http://www.wikirating.org/wiki/List_of_countries_by_credit_rating_-_comparisons ) a lot of the standard ratings by western agencies seems to be badly out of sync. Only 2 countries are left with a Triple-A rating (Luxembourg and Hong Kong) and we get ratings like this:
Australia – AA+
Switzerland – AA-
China – A
Czech Republic – BBB+
Russia – BBB
United States – BBB-
Poland – BBB-
Germany – BB+
Canada – BB
UK – BB
France – BB-
Portugal – B
Italy – B
Greece – B-
What do you think? It’s supposed to have an open and transparent method for calculating credit ratings based off Public debt, Account balance, GDP growth rate, Inflation rate and Unemployment rate all adjusted by multiplying it with a “scaling factor”, which is composed by the Human Development Index, the Corruption Perceptions Index and the Political Instability Index.
Given that you have a better Corruption Index, maybe you could substitute your index for the CPI in their method and come up with a Karlin’s Ratings? 😉
There is also a very important measure missing. Private debt. As for example Ireland, Spain and Portugal aren't in trouble because of public debt because the state spend to much but because the banks needed to be rescue from to much private debtReplies: @Hunter
I missed this post when it came out.
For the record Britain defaulted in 1931 when it took sterling off the gold standard, which meant that the British government refused to exchange sterling for gold as it had previously been committed to do. Britain defaulted again in 1932 when it defaulted on payment of its World War I debt to the US. This was a straightforward default on the country’s foreign debt, which caused chaos in the international financial markets and which led directly to the US bank run in the winter of 1932 to 1933. Until 1931 sterling had been the world’s strongest and most stable currency and had acted as the world’s reserve currency for decades. The British defaults of 1931 and 1932 totally destabilised the world financial system and ended sterling’s international role and were in my opinion the single most important events in the economic history of the twentieth century. It is strange that they are so little known.
Britain also properly speaking defaulted in 1948 and 1967 when it again devalued sterling this time inside the system of fixed exchange rates set up as a result of the Bretton Woods conference. Subsequent falls in the price of sterling are not defaults since apart from the brief ERM experiment of the early 1990s sterling has floated freely with the British government making no commitment to holders of sterling or to British bond holders to keep sterling at any particular value.
The US defaulted in 1933 when it took the dollar off the gold standard and devalued the dollar. A Supreme Court decision shortly after confirmed that this was a default. In my opinion the US government’s decision to allow the dollar to trade freely in 1971 (ending the Bretton Woods system of fixed exchange rates) was also a default since the US government reneged on its undertaking to the European central banks to redeem the value of their dollar holdings in gold.
Whilst Russia’s 1991 and 1998 defaults obviously affect its credit rating they are not a good reason for keeping its credit rating at the junk bond status it has now given Russia’s exceptionally strong financial and debt position, which is by far the best amongst the G20 states. It is also worth pointing out that Russia eventually repaid the debt on which it defaulted in 1998.
Lastly any discussion of historic defaults should also mention that Germany, which now has an AAA rating and which is widely considered the most sound of the EU states, defaulted twice on its foreign debt during the twentieth century in 1931 and in 1945. Germany has also twice experienced hyperinflation and the collapse of its financial system, in 1923 and in the period 1944 to 1947.
Switzerland - AA-
China - A
Czech Republic - BBB+
Russia - BBB
United States - BBB-
Poland - BBB-
Germany - BB+
Canada - BB
UK - BB
France - BB-
Portugal - B
Italy - B
Greece - B-What do you think? It's supposed to have an open and transparent method for calculating credit ratings based off Public debt, Account balance, GDP growth rate, Inflation rate and Unemployment rate all adjusted by multiplying it with a "scaling factor", which is composed by the Human Development Index, the Corruption Perceptions Index and the Political Instability Index.Given that you have a better Corruption Index, maybe you could substitute your index for the CPI in their method and come up with a Karlin's Ratings? ;-)Replies: @charly, @Anatoly Karlin
Unemployment rate is a political measure, what is more important (and a real measure of unemployment) is the number of people who work between 22 and 60.
There is also a very important measure missing. Private debt. As for example Ireland, Spain and Portugal aren’t in trouble because of public debt because the state spend to much but because the banks needed to be rescue from to much private debt
Dear Alex,
With regard to the last paragraph of your post, several months ago I saw a documentary on Youtube, “Debtocracy” by Katerina Kitidi and Aris Hatzistefanou, which is about the Greek debt crisis and what the film-makers consider to be its origins. A historian interviewed in the film mentioned that the only time Greece was a creditor nation in its history of independence since 1820 was when Nazi Germany required the country to make it a large loan – an amount the Germans never paid back, apparently – and to send food supplies and essentials as well. The demands Germany made on Greece were so severe that over the winter of 1941 / 1942, some 300,000 people died in greater Athens from starvation.
The film-makers otherwise make the point that Greece’s severe debt crisis stems in part from a taxation regime followed by several successive governments that taxed small business and working people heavily but was generous to corporations and shipping companies in particular. (You are exempt from taxation if you derive your income from ships and shipping according to the Taxation in Greece article on Wikipedia.) At the same time governments borrowed heavily to support a welfare state and a large bureaucracy, in part because after the civil war in the late 1940s and the 1967 – 1974 military government (supported by the CIA, I believe), the new civilian government was anxious to reconcile with those people and their families who had been persecuted for their support for republicans and opposition to the colonels, and created jobs in the public service for these people. The film also mentioned that foreign firms paid bribes and sent gifts to various Greek politicians and these also make up a big part of the debt.
Now the one thing that I find really amusing / bizarre / infuriating is that while Greece is expected to reduce expenditure on social welfare, health, education and all the other things that support a middle class and a stable society, the country is expected to continue buying miltary equipment, weapons and other related items. Referring to Wikipedia’s Politics in Greece article, I found that Greece is one of the biggest purchasers of arms in the world and spends a higher proportion of its GDP on military expenditures than any other country in Europe apart from the Republic of Macedonia. The major sellers of military-related “stuff” to Greece are the US, France and Germany.
So it’s OK for Germany to have defaulted – admittedly in very abnormal historical circumstances – but somehow it’s not OK for Greece to default now and to consider reforms that would include reforming its taxation system to encourage small business and the enterprising behaviour and innovation that often go with it, and to start taxing wealthy shipping companies.
Switzerland - AA-
China - A
Czech Republic - BBB+
Russia - BBB
United States - BBB-
Poland - BBB-
Germany - BB+
Canada - BB
UK - BB
France - BB-
Portugal - B
Italy - B
Greece - B-What do you think? It's supposed to have an open and transparent method for calculating credit ratings based off Public debt, Account balance, GDP growth rate, Inflation rate and Unemployment rate all adjusted by multiplying it with a "scaling factor", which is composed by the Human Development Index, the Corruption Perceptions Index and the Political Instability Index.Given that you have a better Corruption Index, maybe you could substitute your index for the CPI in their method and come up with a Karlin's Ratings? ;-)Replies: @charly, @Anatoly Karlin
That looks like a far more accurate rating than those of the Big Three Stooges. 😉
Given that you have a better Corruption Index, maybe you could substitute your index for the CPI in their method and come up with a Karlin’s Ratings?
It’s only one measure out of several used to compile these sovereign ratings, so it will not make a huge difference. 🙂
Hong Kong - AAA
Australia – AA+
Luxembourg - AA+
Switzerland – AA-
China – A+
Russia - A-
Czech Republic – A-
Poland – BBB
United States – BBB
Germany – BBB-
UK – BB
Canada – BB
France – BB-
Portugal – B+
Italy – B
Greece – B-So China, the Czech Republic, Russia, the US, Poland and Germany would all move up a notch or more. Russia and the Czech Republic actually move up pretty strongly (Russia especially, going up 2 notches) and end up in the "A" territory. I guess it just goes to show that even though the CPI accounts for a small portion of the scaling factor, perception and measurable corruption are sometimes way out of tune.I wonder now what would happen if we incorporated private debt as charly suggested.Replies: @charly
True, but it would be an interesting exercise I think. Especially given the difference between the CPI and your corruption index. 🙂
There is also a very important measure missing. Private debt. As for example Ireland, Spain and Portugal aren't in trouble because of public debt because the state spend to much but because the banks needed to be rescue from to much private debtReplies: @Hunter
Well it is a wiki so anyone should be able to edit it, maybe you could propose it to them (the inclusion of public debt and substituting the unemployment rate for the percentage of persons who work between 22 and 60)?
And the very least with a supposedly open/transparent methodology it should be something that can be copied and improved upon in the way you suggest, unlike the ratings methodology of the Big Three Stooges as AK calls them 🙂
Interestingly enough AK, the SWI ratings display a Gaussian distribution unlike for the other ratings: http://www.wikirating.org/wiki/Credit_rating_distribution_countries
In the words of the protesters this must mean the other ratings have been fixed! 😉
Dear Jen,
I find it difficult to write about Greece though I have not lived in the country since 1968.
Briefly everything you say in your comment is true but it does not address the real problem of the country, which is that the political and economic system is completely dysfunctional. Ever since independence Greece has been ruled by a tight closed ring of powerful oligarchic families of which I am sorry to say my family is most definitely one. These families in turn perpetuate an attitude amongst themselves and the rest of the elite that sees the country and its people purely as a resource to be exploited rather than as a nation to be developed. The result is that rich people in Greece have no feeling of obligation to the country and do not pay taxes whilst the families that control the political system perpetuate their position through elaborate patronage networks of which the bloated bureaucracy and the welfare systems you mention are symptoms. There is by the way an unspoken convention in Greece that whoever is in power will not dismiss from the bureaucracy someone else’s clients. Papademos, our so called technocratic Prime Minister, is in reality simply a beneficiary of this system and is as everyone in Greece knows a former client of the Papandreou dynasty which originally secured his appointment to the European Central Bank.
To give you an idea of the extent to which politics in Greece is a family business I can best cite the example of my own family. My great grandfather was Mayor of Athens at the end of the nineteenth and the beginning of the twentieth century for several decades, my grandfather was a minister in successive governments as was my great uncle who in the 1930s became the leader of Greece’s small Nazi party and who was the Governor of the Bank of Greece in the pro German collaborator government who approved the loan to Germany to which you refer. My aunt in turn was also a minister in successive governments supposedly as a socialist. George Papandreou, who has just resigned as Prime Minister and who is also nominally a socialist, is the son and grandson of Prime Ministers, whilst Karamanlis, the man he succeeded, who is nominally a conservative, is the nephew of another Prime Minister and former President. Samaras, the man who is likely eventually to succeed Papandreou and who is nominally a conservative, is a another relative of mine.
Until the hold of these families is broken the political and economic system in Greece will remain completely dysfunctional and the tax system will continue to be what it basically is today, which is a levy the elite imposes on the population for the purpose of its own enrichment.
Deeply upsetting though I find the present crisis if it hastens the end of this system something good might come of it. Having said this the omens are not good. All the talk in political and business circles in Greece is of billions of euros being taken by the elite out of Greece in anticipation of a future default following which the elite intends to use this money to buy national assets at bargain basement prices cementing its position even more.
…only one measure out of several used to compile these sovereign ratings, so it will not make a huge difference
Hmm….actually AK, I went through the data and did it. It actually does make a difference. For instance using your CRI we only get one AAA country (Hong Kong) and the partial listing I gave before would end up looking like this:
(Luxembourg and Hong Kong) and we get ratings (in ranked order according to ratings value) like this:
Hong Kong – AAA
Australia – AA+
Luxembourg – AA+
Switzerland – AA-
China – A+
Russia – A-
Czech Republic – A-
Poland – BBB
United States – BBB
Germany – BBB-
UK – BB
Canada – BB
France – BB-
Portugal – B+
Italy – B
Greece – B-
So China, the Czech Republic, Russia, the US, Poland and Germany would all move up a notch or more. Russia and the Czech Republic actually move up pretty strongly (Russia especially, going up 2 notches) and end up in the “A” territory. I guess it just goes to show that even though the CPI accounts for a small portion of the scaling factor, perception and measurable corruption are sometimes way out of tune.
I wonder now what would happen if we incorporated private debt as charly suggested.
Not unemployment rate, which depends to much on if you get benefits if your unemployed which you don’t get if you simply don’t work.
Those other corruption indexes not only measure corruption but goodwill they have with the Anglo Saxon world. Something which is very import when you are a lender
Sorry forgot to mention that it is the employment rate that can be compared, not the unemployment rate
Hong Kong - AAA
Australia – AA+
Luxembourg - AA+
Switzerland – AA-
China – A+
Russia - A-
Czech Republic – A-
Poland – BBB
United States – BBB
Germany – BBB-
UK – BB
Canada – BB
France – BB-
Portugal – B+
Italy – B
Greece – B-So China, the Czech Republic, Russia, the US, Poland and Germany would all move up a notch or more. Russia and the Czech Republic actually move up pretty strongly (Russia especially, going up 2 notches) and end up in the "A" territory. I guess it just goes to show that even though the CPI accounts for a small portion of the scaling factor, perception and measurable corruption are sometimes way out of tune.I wonder now what would happen if we incorporated private debt as charly suggested.Replies: @charly
The Dutch wouldn’t be BBB+ for instance
Alex,
Yes I was aware that Greece is ruled by a small group of families. I figured the fact that Greek shipping companies pay no tax is one indication of the control the families have over the country’s politics and economy. Shipping is a big money-earner for Greece, am I right?
I’ve read a bit about Lucas Papademos, how he oversaw the transition from the drachma to the euro in the late 1990s as Governor of the Bank of Greece and then became Vice-President of the European Central Bank and “looked after” the foreign reserves of the Bank of Greece. I think a long stint in jail for Papademos might be in order!
I think one thing that might break the families’ hold on Greece’s politics and economy would be for diaspora Greeks who have some experience (but maybe not too much experience that they become obsessed with ideology and insist that their experience is the best) with other countries’ political and economic systems to return to the country and establish new systems and a new or revised constitution. Australia can supply plenty of politicians of Greek ancestry though I’m afraid they’re all a very mixed bunch when it comes to talent and political wisdom! At present Senator Nick Xenophon looks like the very best of a mongrel bunch and given the current sorry state of politics in Australia, he might be better off trying to help clean up Greece where his experience as a barrister and being an activist on issues such as gambling, consumer rights, taxation and environmentalism make him ideal as a champion for ordinary people there.
I think the country should get out of the eurozone but I’m concerned that the elites would then take advantage of the fall in the value of the drachma to strip the country of its assets and invest the money in tax havens.
Dear Jen,
You are again absolutely right about all of this.
I should say that the politics of the Greek community in Australia is to a great extent defined by the fact that the Greeks who emigrated to Australia in the 1950s and 1960s did so because they consciously rejected the political and social system of their own country. Still it is by no means impossible that they might have a positive effect on Greek politics in Greece. During the time of the dictatorship from 1967 to 1974 the Greek community in Australia was solid in its opposition to the dictatorship. That dictatorship was itself a response by a section of the oligarchy to the growth of more democratic sentiments driven by the return of large numbers of young people who in the 1960s had gone to work and study in Germany and France. As the Greek community in Australia gains in wealth and confidence it might conceivably have a healthy effect on political developments in Greece itself.
50 years is to long. Greece has changed to much in that time.
There is also the issue of language. Greece has been the official language of Greece for a very long time so there are many Greece words for legal and government concepts. Those words would be almost useless for a Greek in Australia. This is much less of a problem Latvia because it wasn't the real official language and its legal and government base changed so drastically.
Charly,
The country has changed a great deal but the causes of its debt crisis haven’t changed much. As Alex has said, the basic problem is the oligarchy of families that runs the country and which has rigged the country’s taxation system for its benefit.
If you have a taxation system that punishes working people and rewards the wealthy and the public service, you can see what that will do to the culture: people will urge their children to study hard, get a degree and then get a job in the public service. They will tell their children not to open and run or work for small businesses. Yet it’s the small businesses that are most likely to innovate and create change and wealth for a society.
The Greek-Australian community has changed a great deal: originally they kept their heads down and worked in factories and operated small businesses (Greeks and Italians brought cafes and cafe culture to Australia) but later generations acquired education and wealth and they are now well integrated into most areas of Australian life and society. Greek-Australians are now very prominent in Australian politics, as in the example of Senator Nick Xenophon who I think has talent and intelligence to be Prime Minister in this country. As an independent though, he doesn’t stand a chance of being PM: he has to be a member either of the Liberal Party or the Australian Labor Party and either alternative would mean considerable brainwashing to turn him into a colourless hack.
Diaspora communities do have a lot to offer home countries. Latvia had as President a woman who had spent most of her life in Canada (Vaira Vike-Freiberga) until 1999 when she was elected President. She seems a decent enough person although her entry on Wikipedia has her down at McGill University in Montreal in the 1960s studying psychology; this was the period when the psychologist Dr Ewen Cameron at the same university was using electro-shock treatments on unwilling patients for the CIA’s MK-ULTRA program.
I am sure diaspora Greeks would see some parallels between Greece’s problems in its politics and economy on the one hand, and their host country’s problems on the other. Greece has a parliamentary system of government as does Australia; the only major difference is that the Greek parliament is unicameral (like New Zealand) whereas Australia is bicameral (it has a Senate and a House of Representatives whereas Greece doesn’t have the equivalent of a Senate). I don’t think diaspora Greeks who have some political experience would have problems adjusting to Greek political processes and procedures.
In Australian politics, it’s not so much what you know that counts as in which party you belong to, what connections you make and can call on, and what party faction you identify with. Is that so very different from politics in Greece and some other countries?
I could go on: the US supported the military government that ruled Greece from 1967 to 1974 and that surely has parallels in Latin American countries of the same period and after (the US supported Pinochet in Chile and the military government in Argentina; Chile, Argentina and Greece under military rule imprisoned and tortured dissidents). The US has occasionally interfered in Australian politics as well: there was some CIA involvement in the removal of Gough Whitlam as Prime Minister in 1975 and the US government also was involved in Kevin Rudd’s removal as PM in 2010. It’s known that some people who orchestrated Rudd’s removal had been in contact with Washington DC. Is there a country in the world today where the US has NOT meddled in its politics?
Dear Jen,
I agree with all of this. You seem to be very well informed about Greece and about the Greek community in Australia.
Situation between Latvia and Greece is not the same. In Latvia most people, at least the people you want to elect were compromised in the USSR era. This is simply not true in Greece.
There is also the issue of language. Greece has been the official language of Greece for a very long time so there are many Greece words for legal and government concepts. Those words would be almost useless for a Greek in Australia. This is much less of a problem Latvia because it wasn’t the real official language and its legal and government base changed so drastically.
@ Charly,
If what Alex Mercouris says about the hold of the oligarchy in Greece is still valid, then politicians in that country are compromised by their links to the families and the system of patronage. So there’s a case to be made that if Greece were to reform the political system, that diaspora Greeks like Senator Nick Xenophon should be encouraged or invited to stand for office there. The public would see them as untainted by the oligarchy.
Language may be an issue depending on how well diaspora Greeks speak Greek and how much contact they’ve had with relatives back in Greece. Don’t forget that George Papandreou (the younger) spent the first 20 years of his life in the United States so Greek politics is open to diaspora Greeks.
Politicians are compromised but not the average Greek who can give a public speech and has a college degree. This was simply not the case in Latvia.
The younger was the son of the older. I wouldn’t use that as proof that Greek politics is open to diaspora Greeks
Charly,
I’ll qualify my previous statement and admit that Greek politics may not be open to diaspora Greeks who don’t have a connection to the oligarchy. But if diaspora Greeks can put forward talented individuals and make a case for those people and the public in Greece throw in their support as well, the political system may be forced to accept new people with no connections to the families. I hope so anyway!
Dear Charly and Jen,
In any discussion of George Papandreou it is important to stress that though he lived and studied abroad he was never a diaspora Greek. Similarly if I were to return to Greece and fulfil my family’s longstanding demand to enter Greek politics I too would not be considered a diaspora Greek even though I now speakk Greek with a strong English accent. Many members of the Greek oligarchy live and study abroad but their connections are firmly tied to Greece. In the case of George Papandreou I speak from personal knowledge since he is a close family friend.
For what it’s worth my own feeling is that there would be a strong constituency in Greece that would support a total outsider provided he or she had the necessary financial resources to break through. Financial resources are essential because one of the means the oligarchy uses to maintain power is through the media which in Greece is very tightly controlled (far more so by the way than in Russia). This means that anybody who wanted to challenge the oligarchy would have to have substantial financial resources to make him or herself known to the people.
That there is a potentially large constituency in Greece that would support an outsider is to my mind shown by the very strong support there is for the two ultra left parties. Greece is in many ways a very conservative society and the fact that there is as much support for these sort of parties as there is can to my mind only be explained by the fact that they are the only parties that are not connected to or controlled by the oligarchy.
The same as what happened in Italy were the extremist parties became the new center after the fall of the wall
Alex,
Thanks for the broad picture.
I’ve worked in local government and professional services firms over the years and have come in contact with people of different ethnic and migrant backgrounds. At university I had friends of Greek, Italian, Indian (Sikh) and Lebanese (mainly Christian, one Druze) backgrounds. In one local council where I worked, nearly all the civil engineers and one traffic engineer employed were from Sri Lanka. In the Federal and State electorates where my older sister lives, the representatives are both of Armenian background (Joe Hockey and Gladys Berejiklian respectively).
Having a public library background means it’s easy for me to find information about the experience of migrant groups in Australia. There is plenty of information now about the experience of migrants working on the Snowy Mountains hydroelectric dam scheme in the late 1940s / early 1950s and most of these workers were post-war refugees from Greece, Italy and eastern Europe.
Because Australia has so many first- and second-generation Australians now, it’s not unusual for newspapers and magazines to feature articles investigating the migration experience of particular groups even if superficially. I also have some CDs of Iannis Xenakis’s music and I know a little of his early life fighting for the republican side in the Greek civil war and his self-exile in France afterwards.
Dear Jen,
All very interesting. Still you have made the most of your opportunities.
@Charly,
I think the situation in Italy is very different from that in Greece. Italy is a much bigger, much richer, far more complex and far more sophisticated society than Greece. The culture also is completely different. Italy has never been dominated by a closed oligarchy of a few families to the extent that Greece has been and the extremist parties in Italy are very different from those in Greece. If you want to make a comparison a better one would be with some of the states in central and south America.
The parties that rule Italy now were the fascist and communist parties before the wall came down. I see the same happening in Greece. Italy does have 6 times the population of Greece so it is more difficult to rule it by a small oligarchy but they “solved” that by being ruled by the same people for 40 years.
Dear Charly,
I am not an expert on Italian politics but it always seemed to me that the Italian Communist Party was always much more mainstream (and of course much bigger) than its Greek equivalent. In Greece as I suspect in Italy the fascist party (or parties) though usually quite small have always been part of the political establishment and have always been connected to the oligarchy. As I said before the pre war Greek Nazi party was led by my great uncle whilst the son of George Rallis, the fascist Prime Minister of one of the collaborator governments during the war, became Prime Minister himself in 1980. The fascist party is now part of the governing coalition headed by our “technocratic” Prime Minister Papademos.