‘Geopolitics’ and the IMF: Is Pakistan delusional or myopic?

Uzair M Younus in The Dawn


Despite the pronouncements coming out of Islamabad that the 9th review of the ongoing International Monetary Fund (IMF) programme is still a possibility, the fact of the matter is that successful completion of the review is a distant possibility.

This view is reinforced by the fact that the IMF’s own executive board calendar, which shows planned meetings through June 29, does not mention Pakistan. While these calendars can and do shift, recent developments would lead one to believe that if the Staff Level Agreement (SLA) has not happened yet, it is not happening in the next ten days or so.

The root cause of this failure, of course, is the hard-headedness of Pakistan’s finance minister who has refused to pay heed to common sense ever since returning to Pakistan and taking over the economy.

Whether it be the infamous Dar Peg – which angered the IMF and distorted the entire economy – or the strategy of negotiating through a staring contest, Dar has been lost at sea. As a result, Pakistan’s rock-bottom credibility in front of international creditors, key among them being the IMF, has further collapsed.

This view was summed up to me during the IMF’s 2023 spring meetings by a couple of bondholders who had gathered to listen to Pakistan’s central bank governor talk about the country’s economy. Following the discussion, these bondholders noted that the best way for Pakistan to gain its credibility and bring the IMF programme back on track was to do just one thing: get rid of Dar.

Alas, this has not happened and the prospects of the prime minister firing his family member are even slimmer than the resumption of the IMF programme.

As if keeping Dar in place was not enough, the government has also started to blame everyone but itself and its finance minister: Dar has been once again hinting at the fact that the programme is not moving forward due to geopolitics.

The truth of the matter is that everyone involved, including the United States and China, want Pakistan to remain economically stable.

But let’s assume that Dar is being truthful. This logic then leads one to question whether China and Saudi Arabia, two of Pakistan’s strategic partners, are in on the conspiracy.

After all, both these countries have made disbursement of their financial commitments to Pakistan contingent on successful completion of the 9th review.

So, if these countries were opposed to the geopolitics being played to punish Pakistan, as it has been alleged by the finance minister, then why is it that they have not yet released the additional funds they have promised to Islamabad?

This is why Islamabad’s apparent Plan B, to get additional deposits from friendly countries (like China and Saudi Arabia), also seems to be wishful thinking.

How and why these same countries would give additional funds to Pakistan when it fails to remain in the IMF programme is a question that Islamabad seems unwilling or unable to answer.

And while Dar and company continue to insist that all will be well, it is time for Pakistanis to recognise and accept that digging the economy out of this hole will be a Herculean task even in the best of circumstances. The challenge becomes that much more daunting if one were to look at the cast of characters across party lines that are potential contenders to be finance czars.

The recovery will first and foremost require rebuilding the country’s credibility, which can only be achieved by pushing through extremely painful short-term measures that help balance the books.

This would require major cuts to government spending, drastic measures to truly broaden the tax net – existing taxpayers are basically tapped out – and a structural reform agenda that is viewed positively by creditors. If this were to happen, then the recent budget put forth by the government would have to be tossed into the dustbin.

These would only be the easiest steps in a long journey.

According to data released by the IMF in September 2022, Pakistan has gross external financing needs in excess of $35 billion a year for the next three years. These needs would have to be fulfilled at a time when economic growth is down sharply, supply-chains have been distorted, investor confidence has been shattered, and the era where cheap capital was available in global markets has come to an end.

How ruling elites manage to meet these financing needs in the near future is a big question mark, and the next government will have its work cut out for it.

An alternative solution that is being discussed is debt restructuring. But this will be an even more painful process, especially for a sovereign that already has limited capacity to deal with the fallout of the IMF’s existing demands. In addition, external debt restructuring may also open the door for a conversation on domestic debt restructuring. This would stoke chaos in the country’s fragile banking sector which has binged on government debt over the last few years.

The prolonged process of debt restructuring would essentially mean that Pakistan has declared default. As a result, import of critical inputs would stall, leading to shortages of everything from fuel to imported pulses and palm oil.

As supply-chains would get distorted, prices of essential commodities would skyrocket. The value of the rupee would also collapse, leading to further inflation. Hospitals would run out of essential medicines, farmers would run out of essential inputs for the next harvest, and the entire economy would come to a grinding halt.

In short, this process would lead to near-term economic and political fallout that may be untenable for any government, let alone a coalition of status quo parties that is already deeply unpopular.

What the ruling elites in Pakistan have continuously failed to do is take a bit of a long-term view of the situation. After all, given where the politics of Pakistan is at this point in time, members of the existing coalition are likely to come back to power after general elections. This means that they will have to ultimately take charge of the situation and take measures that they are unwilling to take today.

Perhaps their rationale is that elections will provide them with a fresh mandate, but that logic is also flawed – after all, an election that leads some or all of the government’s existing members to form government in Islamabad will be seen as a continuation of the existing setup. This means that a new government will not be able to magically gain some new political capital that it can then utilise to push through painful reforms.

It appears the PML-N’s thinking is that since it will not be the senior member of a government come October, this will be someone else’s problem. There is some merit to this logic, but perhaps Pakistan’s ruling classes ought to do some deeper thinking.

After all, a country on the verge of default, where the ruling elites have run out of ideas and capacity to rescue the situation, is a problem for everyone that is part of the status quo elites.

Will Pakistan Dismantle?

 

What is a Default - A Pakistan Scenario

Asad Ejaz Butt in The Dawn

When Pakistan’s dollar reserves fell below $5 billion in December, and its credit default risk had reportedly become too high for analysts to ignore the possibility of an imminent default, the central bank made a policy decision to allow the opening of import letter of credits (LC) in a staggered manner to ensure spreading of the dollar reserve over a longer period of importing time.

The idea was to allow the government some diplomatic time to knock on the doors of friendly countries and multilateral organisations, including the International Monetary Fund (IMF). The Fund had dilly-dallied on the ninth review to force monetary authorities in Pakistan to take the first steps towards a few baseline reforms, including the relegation of the dollar to the markets. Markets that the central bank and the government regards as ripe with imperfections.

The rupee was finally devalued last week which automatically implied that it was left to a market that had the propensity to sell it to gain dollars. This provided IMF with the confidence to schedule the ninth review, which is now ongoing in Islamabad. It is likely that the IMF’s review will be completed, and default, as was predicted by some and wished by a few others, didn’t happen.

However, while the media thundered about the staggeringly high levels of inflation and alarmingly low levels of reserves, and analysts evaluated an infinitely large number of scenarios that would lead to a default, no one from the economists ever explained what a default meant and what would have happened to the economy if it took place. 

From the mid of November to the end of January, I was asked this question many times: “is Pakistan going to default, or has it already defaulted?” None of those asking the question seemed to know what it meant for a country to default and what would happen if it did. Last week, for the first time, someone asked me what Pakistan’s economy would have looked like under the influence of default.

Put in very simple terms, a default for a country like Pakistan with large exposure in commercial loans means defaulting against commercial debt. Bilateral debt can be rolled over, while debt from multilateral organisations often has long-term maturity cycles making a country’s default vulnerability depend primarily on commercial loans.

So, imagine if Pakistan’s reserves had declined to such low levels that it would have defaulted against its commercial debt. This would have led the central bank to refuse commercial lenders’ payments to repay or service their debt.

That would have reflected in the further downgrading of the country’s ratings by agencies like Moody’s and S&P, dampening the trust of other international lenders and, after that, the government’s ability to raise new commercial debt.

Since the dollar inflows would have declined due to limitations of debt inflows, you could have only imported as much as you exported plus the dollars that expat Pakistanis remit from all over the world. This would be like a situation where you are forced by circumstances to keep your current account deficit close to zero.

Many of the imports that you would not afford would be inputs to the industry. While that would impact exports, the slowdown would impact production in the non-exporting sectors, pulling down the overall level of production in the economy. The natural consequence of all of this is the classic saga of too much Pak­istani rupee chasing too few goods.

Inflation would have skyrocketed as the local currency that people would be holding would not translate into consumable items. Contraction in the economy due to production losses would have seen many people get laid off in a span of weeks, leaving some with money but nothing to buy and many without even money to buy. Economists call such situations characterised by slow growth but high unemployment and inflation ‘stagflation’.

This was played out in Sri Lanka in the summer of 2022. It suspended repayments on about $7bn of international loans due out of a total foreign debt pile of $51bn while it had $25m in usable foreign reserves.

Pakistan has around $3bn in reserves against an external debt pile of $126bn. Pakistan, in December 2022, was definitely headed in the Sri Lankan direction. However, we did not default and any chance of doing so has been left far behind.

Reviving even mere inches away from default is a world different to an actual default since, in the former case, you can resume business as usual as soon as a multilateral like the IMF returns with a few dollars in hand. However, in the latter case, even multilateral balance of payments support will take years to rebuild the economic edifice.

Pakistan didn’t default, and those who thought what happened to Pakistan in December of 2022 was a default must realise that a real default would have been much scarier than a few hundred LCs being opened with delay.

This piece is based on several conversations held with Mubashir Iqbal and Haider Ali.

Crow meat replaces Chicken in Pakistan?

 

Bajwa's world view

 

Personal Guarantee, Debt Recovery and Fraud Tycoons

 

Why the coming emerging markets debt crisis will be messy

Colby Smith and Robin Wigglesworth in The Financial Times 

The Maldives’ coral-encrusted islands have long been irresistible to tourists. But today its secluded luxury resorts are deserted, except those converted into makeshift quarantine facilities for stranded coronavirus patients. 

The virus has shattered global tourism and devastated the Maldivian economy. The IMF has gone from projecting a 6 per cent expansion in gross domestic product this year to an 8 per cent contraction. The risk is that this brutal, abrupt recession could translate into the Maldives becoming the latest country to sink into sovereign bankruptcy. 

Zambia, Ecuador and Rwanda have all announced in recent weeks that they are struggling to repay their debts. Lebanon has already kicked off its restructuring process, while Argentina, which was already battling its creditors even before the pandemic struck, appears to be heading for its ninth sovereign default since independence in 1816. Investors believe many other developing countries are not too far behind. 

The Maldives is hardly the biggest country likely to succumb, but given its debt burden to creditors such as China and the severity of its recession, it is the “poster child of how easily the dominoes will fall”, warns Mitu Gulati, a sovereign debt expert at Duke University. 

The IMF has already lent the country $29m to tide it over, but warned that the loss of tourism has “severely weakened” the economy and that additional financial support would be needed. The country’s $250m bond due in 2022 has tumbled to trade at just 81 cents on the dollar, indicating that investors are increasingly concerned about the Maldives’ capacity to make good on its obligations. 

The kindling for another big emerging markets debt crisis has been accumulating for years. The investor thirst for higher returns has allowed smaller, lesser-developed and more vulnerable “frontier” countries to tap bond markets (Editor's note - this refers to bond markets not denominated in the country's own currency)  at a record pace in the past decade. Their debt burden has climbed from less than $1tn in 2005 to $3.2tn, according to the Institute of International Finance, equal to 114 per cent of gross domestic product for frontier markets. Emerging markets as a whole owe a total of $71tn. 

“The challenge is enormous,” says Ramin Toloui, a former head of emerging market debt at bond manager Pimco and assistant secretary for international finance at the US Treasury, who now teaches at Stanford University. “The withdrawal of money [from EM funds] is greater and more sudden than in 2008, the economic shock is huge and the path to recovery more uncertain than it was after the last crisis.” 

The G20 has agreed to temporarily freeze about $20bn-worth of bilateral loan repayments for 76 poorer countries. It has urged private sector creditors to do the same, but few analysts believe that is feasible, and predict the result will probably instead be a series of ad hoc debt standstills and restructurings for swaths of the developing world. 

Resolving the coming debt crises may be even tougher than in the past, however. Rather than the banks and governments — the primary creditors in the mammoth debt crisis that racked the developing world in the 1980s and 1990s — creditors are nowadays largely a multitude of bond funds. They are trickier to co-ordinate and corral into restructuring agreements. 

Although the need for financial relief is stark in many cases, there are indications that some investment groups may break with the custom of reluctantly accepting financially painful compromises to achieve a restructuring, and instead fight for a better deal. 

“Normally these guys would get out of Dodge City at the first sign of trouble in the debtor country. They're not set up to deal with prolonged debt restructurings and don't like the reputational risk that would result from an aggressive campaign against a country in deep economic and social distress,” says Lee Buchheit, a prominent lawyer in the field. “But having watched some holdout creditors extract rich payouts, even some of the traditional institutional investors appear to be reconsidering the virtues of passivity.” 

 Holdout strategy 

In the past, such aggression has been the preserve of what critics call “vulture funds” — investors who seek to profit from government debt crises through obstinacy and legal threats. 

Their basic strategy is to act as a “holdout”. Sovereign debt restructurings amount to exchanging a country’s old bonds for new ones, often worth less, with a lower interest rate or longer repayment times. Holdouts refuse to join in, and instead threaten to sue for the full amount. As long as the number of holdouts is tiny, countries have often elected to simply pay them off rather than deal with the nuisance of a potentially lengthy courtroom battle. 

For example, when Greece restructured most of its debts in 2012, it grudgingly chose to repay in full a smattering of overseas bonds where hedge funds had congregated. Others, like Argentina, have chosen to fight. The uncertainty of the outcome — and how hard it can be to compel a country to pay through legal means — long ensured a delicate but functional balance to the sovereign debt restructuring process. 

However, in 2016 Elliott Management’s Jay Newman etched his name in the annals of big hedge fund hauls by extracting $2.4bn from Argentina for the firm after a decade-long legal battle. 

“[Holding out] long seemed like a cat-and-mouse game that was costly and uncertain, but now it has shifted to a more promising strategy,” says Christoph Trebesch, an academic at the Kiel Institute for the World Economy in Germany. Although still daunting, Elliott’s success could inspire more copycats and complicate the looming spate of EM debt crises, some experts fear. 

Moreover, there are signs that traditional investment groups are also toughening up, which could turn a difficult process into a more protracted nightmare for government lenders and borrowers alike. 

One lawyer who has worked with creditors points out that many investment funds have piled into EM bonds in recent years, and the prospect of deep and broad losses could be ruinous to some heavily-exposed funds. “Before, the holdouts were the main problem, but now it could be the traditional funds,” he says. “If your back is against the wall, you’re going to fight.” 

After the IMF’s failed attempt to set up a quasi-sovereign bankruptcy court in the early 2000s, the main response by governments has been to introduce “collective action clauses” into their bonds. These dictate that if a large majority of bondholders vote for a restructuring, typically 75 per cent, the agreement is imposed on all holders. 

But investors have wised up, buying bigger chunks of specific bonds in an attempt to amass such a large position that they enjoy a de facto veto over the restructuring terms of the instruments. And some older bonds have no such clauses. 

So far there are only a few examples of larger investment firms taking a tougher stance, but they are notable for how successful they have been. The first was Franklin Templeton, which managed to extract what some analysts say were surprisingly favourable terms in Ukraine’s 2015 debt restructuring, having snapped up enough bonds to become the country’s largest private creditor. 

More recently, Ashmore has built up a huge stake in Lebanon’s debt that in practice gives it a veto over how the country will restructure some of its bonds. And this year, Fidelity successfully played hardball with Buenos Aires, calling the Argentine province’s bluff that it was unable to make a $250m payment due in January. Buenos Aires ended up paying in full. 

Fidelity is also part of a larger creditor group that has pushed back on Argentina’s plans to restructure its $65bn foreign debt burden. The group includes some of the world’s largest institutional investors, including BlackRock and T Rowe Price, and together with the two other main bondholder groups, wields enough power to make or break any deal. 

Franklin Templeton and Ashmore declined to comment. Fidelity declined to comment on its Argentine bust-up, but said in a statement that its policies on sovereign restructurings had not changed.

“When it becomes necessary to negotiate with those who have borrowed our investors’ money, we do so in good faith and in a reasonable, professional manner,” the investment group said. “The interests we represent are those of the millions of individuals, and thousands of financial advisers and institutions who have entrusted their money to us to invest on their behalf.” 

Debtor advantage 

Fidelity’s nod to the fiduciary duty money managers owe clients is telling. Traditional asset managers are unlikely to be quite as stubborn or litigious as Elliott. But with a spate of examples that a tougher approach can be successful, more may feel compelled to follow suit — no matter how severe the coronavirus crisis proves for many countries. 

“They don’t want to be Elliott, but they have a fiduciary duty and for some of them it will be existential, so they might as well fight to the death,” says the creditor lawyer. “It doesn’t take many of them to change their attitudes and this will become very difficult.” 

Clinching a victory, however, is another story, says one holdout investor. Amassing a blocking stake “gets you a seat at the table, but it doesn’t tell you when you will be eating”, the person adds. 

These dynamics are why many investors believe the G20’s call for private-sector creditors to copy their blanket debt “standstill” will probably prove futile. Absent some kind of extraordinary legal mechanism — such as the UN Security Council resolution that shielded Iraq’s assets from seizure from creditors after the US invasion in 2003 — investors warn it will be challenging to come to a collective and voluntary agreement. Instead, they say the coming wave of debt crises will have to be handled on a case-by-case basis. 

For the investment funds looking to take an aggressive stance in any default talks, the obstacle might not be the potentially bad PR but the perception among some governments that the pandemic gives them more leverage. Given that bond prices have plummeted to distressed levels, countries will probably harden their stance and seek more favourable terms in forthcoming restructurings. 

Bill Rhodes, a former top Citi executive who was one of the key figures in the Latin American debt crisis of the 1980s, argues that the threat of fresh outbreaks of coronavirus will strengthen the hand of debtor countries when negotiating repayment terms. “We are looking at just the first wave of Covid-19, so some of these finance ministers are going to feel like they really have to drive a tough bargain,” he says. “The IMF will be very firm on pushing for the countries to get discounts.”

Institutional deal 

A group of sovereign debt experts, including Mr Gulati and Mr Buchheit, has come up with a pandemic debt relief proposal. Countries should strike an agreement with creditors to funnel debt payments into credit facilities set up by the World Bank or a regional development bank, which would then be lent back to the countries to pay for essential spending. 

Its backers hope this would avoid a technical default and impose a de facto debt standstill. The carrot of the legal protection enjoyed by organisations such as the World Bank — which are considered “super-senior” in debt restructurings — might help sweeten the deal. Once the crisis has faded a decision can then be taken on whether a full but orderly debt restructuring is needed, and any money deposited in the facility would be protected. 

It is unclear whether the World Bank, which has not publicly commented on the idea, would go for this proposal, and some heavy-handed coercion from the likes of the US would probably be needed to get many creditors to agree. But Mr Trebesch says the proposal may be acceptable to China, which has edged out the IMF and the World Bank as the largest official creditor to developing economies via its Belt and Road Initiative, according to data he compiled with Harvard’s Carmen Reinhart and economist Sebastian Horn. “If things really blow up, China might prefer this option to an outright default,” he says. 

Whatever avenue is eventually taken, it is essential that policymakers start grappling more forcefully with emerging market travails, given the danger that their severity is likely to reverberate across the international financial system, according to Scott Minerd, chief investment officer at investment firm Guggenheim Partners. 

“This pandemic will quickly escalate from a health crisis to a humanitarian crisis, and ultimately to a solvency crisis,” Mr Minerd wrote in a recent note to clients. “Political stability will be the last domino to fall. But my biggest concern is that this crisis will be much deeper and more prolonged than people anticipate, which leaves a lot of space for another shoe to drop in the global financial crisis.”

Pakistan, IMF and the Small Print

Najam Sethi in The Friday Times



Finally, after flip-flopping for nine months, the PTI government has signed on the dotted line with the IMF. It has also revived the PMLN’s tax amnesty scheme that it once lambasted as “a national security threat”. In the bargain, it has ditched the finance minister, Asad Umar, and the Governor of the State Bank of Pakistan, Tariq Bajwa. Both gentlemen seemed to be overly concerned about protecting Pakistan’s interests, while their boss, Prime Minister Imran Khan, was ready to throw in the towel. Peeved, Mr Umar is threatening to reveal details of his disenchantment with the IMF.

To be honest, though, there’s no point in haggling when you don’t have a leg to stand on. Without the IMF’s financial assistance, we will default on our external payments and be declared bankrupt. Without an extra injection of funds from the Tax Amnesty Scheme, we will have to cut back on defense or development expenditures, which we can ill-afford.

The “deal” with the IMF is subject to certain tough conditions. First, we must get the green light from FATF. As we speak, Pakistani officials are negotiating compliance before the Asia Pacific Group of FATF chaired by India. A lot of homework has been done. But this will be an on-going review process. If there are terrorist attacks in India whose footprints can be traced to Pakistan, the FATF file on Pakistan will be opened again.

Second, the IMF wants Pakistan to roll over its debts to China, Saudi Arabia and the UAE so that the burden of debt payments can be staggered over time. So Prime Minister Khan will have to pick up the begging bowl and grovel in faraway capitals all over again.

Third, the provinces will have to be pressured to accept a cut in their constitutional share of federal revenues so that IMF targets of the primary deficit can be met. While PTI governments in three provinces may be expected to roll over and play dead, Sindh will scream. But NAB can be leveraged to silence it.

Fourth, the IMF wants to “facilitate trade”. This will mean an end to export subsidies and restraint on increasing import duties. In other words, trading volumes will be determined exclusively by the exchange rate.

Fifth, the exchange rate will float freely so that the SBP doesn’t deplete its reserves by selling forex in the market in order to prop up the rupee. In other words, there will be continuing devaluation and rising inflation.

Sixth, the IMF wants to encourage spending on development and poverty alleviation. With given debt payments, that will lead to pressure on defense expenditures. Can we expect the brass to receive this with equanimity?

Last, but most important, it is an established fact that Washington leverages the IMF, World Back, Asian Development Bank and other international financial institutions through the US Treasury to achieve its foreign policy goals. Should Pakistan fail to deliver on US objectives in Afghanistan and India – a difficult task – we may expect these institutions to get tougher on future installments of funds.

The PTI Tax Amnesty Scheme is not dissimilar to the PMLN scheme that fetched less than Rs 100 Billion. But with the economy headed into a deeper trough, even that amount seems far-fetched. Some wisdom has therefore prevailed in allowing tax payable to be determined in the next six weeks but payment made over the course of the next twelve months, albeit with some surcharge.

But, like the PMLN scheme, the PTI scheme suffers from one major defect. It excludes “holders of public office” in the last twenty years. Why twenty years? Why not the last five or last thirty? What is the objective criterion for this cut-off date? Then there’s the definition of public office. It is all encompassing, spanning full three pages of an Ordinance. It includes everyone from the President of Pakistan at the top to Tehsil Nazims at the bottom, including paid private sector executives, advisors, consultants, etc., of statutory organisations or institutions or organisations in the control of the government of Pakistan. In other words, it excludes tens of thousands of officials and “public” representatives who are amongst the most corrupt in the country. This is the cream of the elite that has captured the state. This is the elite against whom we all love to rail. But what is good for the goose is not good for the gander. It seems that the bowels of the state of Pakistan are not to be cleansed after all.

The Tax Amnesty Scheme was nine months in the making. If the PMLN scheme had been extended when the PTI government took over, there would have been a lot of money in the coffers today. In the event, it took half a day to be promulgated via a Presidential Ordinance after proroguing the National Assembly so that it couldn’t be debated.

The small print in the IMF Agreement and Tax Amnesty Scheme testifies to the incompetence of the PTI regime in the face of rising national security challenges to the state of Pakistan. The forecast is grim.

Argentina defaults as debt talks break down

Finance minister Axel Kicillof said Argentina would not be held to ransom by bondholders demanding to be paid in full

• Julia Kollewe and Graeme Wearden
• theguardian.com, Thursday 31 July 2014 11.25 BST

Argentina's economy minister Axel Kicillof speaks to the media at a press conference in New York July 30, 2014. Photograph: CARLO ALLEGRI/REUTERS

Argentina has fallen into default for the second time since 2001 after last-minute talks with "vulture" bondholders in New York failed to produce a deal overnight.

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At a dramatic press conference in New York on Wednesday night, Argentinian finance minister Axel Kicillof declared that Argentina would not be held to ransom by the holdout bondholders, who are demanding to be paid in full on debt which the country defaulted on in 2001.

Kicillof said: "We're not going to sign an agreement that jeopardises the future of all Argentines. Argentines can remain calm because tomorrow will just be another day and the world will keep on spinning."

Shortly before the deadline, Daniel Pollack, the court-appointed mediator, confirmed that the talks had broken down. "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default."

Earlier, the credit rating firm Standard & Poor's declared that Argentina was now in "selective default". The default comes two months after a US court ruled that Argentina must pay the holdout bondholders in full, saddling it with a bill of more than $1.5bn.

The vast majority (more than 90% of bondholders) agreed to restructure debts in 2005 and 2010, taking a big "haircut" – a reduction of more than 70% in the value of their investments in return for regular interest payments.

Argentina's last default, in late 2001, came after a major political and economic crisis; scores were killed in riots, and both the president and the economy minister resigned. But there was little sign of a panic in global financial markets this time, as the default was widely expected. However, it could add more pain for Argentinians, with the economy already in recession.

Pollack said: "The full consequences of default are not predictable, but they certainly are not positive."

The holdouts – branded "vulture funds" by Argentinian president Cristina Fernández de Kirchner – are US hedge funds spearheaded by the billionaire Paul Singer's NML Capital, an affiliate of Elliott Management, and Aurelius Capital Management.

Steve Ellis, portfolio manager at Fidelity emerging market debt fund, said: "We expect contagion to other markets to be fairly limited. This is a highly technical legal case and a selective default.

"Argentina was isolated from international capital markets for years so we don't expect the default to distort any global capital flows. However, there will be remaining risks around a longer term default which would have negative impacts on the Argentine economy. At this stage, the market will likely price in a delay of payments should the government continue to deposit coupon payments until they can reach a deal with the holdouts in 2015."

Adjust your Defaults

This column will change your life: adjust your defaults

'This notion turns out to be a surprisingly useful way to think about other kinds of habit change'

• 
• • Oliver Burkeman
  • The Guardian, Friday 7 December 2012 22.59 GMT

 

'Every hour spent sitting watching TV knocks almost 22 minutes off your life.' Illustration:ladythingamajig.co.uk

Are you sitting comfortably? Then get up, because sitting is killing you. Or that, at any rate, was the conclusion of two studies widely reported a few weeks back: one suggestedthat, after the age of 25, every hour spent sitting watching TV knocks almost 22 minutes off your life – twice the impact of one cigarette. The other found that the average adult spends 50-70% of the day sitting down, with the most sedentary among us at vastly greater risk of disease and early death. Across the world, I'm guessing, people saw this news and leapt from their chairs, determined to take the first of many bracing walks – before becoming distracted by something on TV and flopping absent-mindedly back down, like a dead-eyed crystal meth addict lured back to his destruction. Except with a sofa, instead of crystal meth. I'm aware this analogy may need some work, but I trust you see my point.

Fashionable solutions to the sitting epidemic, in the context of work, include standing desks (one of Donald Rumsfeld's favourite things, along with reckless military interventions) and treadmill desks (great, so long as you don't mind the sweat-flecked keyboard). But I solved the problem differently, by accident, while trying to solve another. As a feckless work-from-home type, I decided it was time to make sure I was sitting with good posture, so I forked out £500 for a widely recommended Norwegian ergonomic chair, the Håg Capisco. Its seat resembles a saddle, so instead of slouching, you perch. Or that's the idea; in reality, it's just rather uncomfortable. After 40 minutes, it's extremely uncomfortable – so I get up, stretch, go for a stroll, or squeeze out 30 push-ups, although technically I've never done the push-ups. Now I don't sit for too long, because it's simply no fun to do so. After a few weeks, I realised that something intriguing had happened: I'd switched my default state. Standing or strolling was now my automatic, baseline behaviour; sitting was something I actively "did".

This notion of adjusting your defaults turns out to be a surprisingly useful way to think about other kinds of habit change. It becomes easier to resist the siren call of the web and social media, for example, if you come to see "not being online" as the default state, and "being online" as the active, chosen one – something you sporadically choose to do, then stop doing. It's also the spirit behind the idea the productivity blogger Thanh Pham calls"clearing to neutral": the habit, after any activity, of clearing up the equipment involved – dirty pans, work files – so they're ready for next time. Gradually, tidiness becomes the default, mess the anomaly, and the good habit happens without thinking or effort. My latest experiment is a default bedtime of 10.30pm. I'm not sticking to it religiously, but that's not the point: it's what I revert to when there is no good reason to do otherwise.

This idea goes deeper: "adjusting your defaults" is one way that the meditation teacher Jon Kabat-Zinn defines the goal of mindfulness meditation. Being lost in thought is the default state for most of us; adjusting your defaults involves not ceasing to think, but rather making "present-moment awareness" the default, with thinking as the activity you choose to do when it's useful. He doesn't pretend this is easy. But it is a shift in perspective worth contemplating – preferably, of course, while standing up.

Fitch downgrades Argentina and predicts default

Credit rating agency Fitch has downgraded Argentina, which is locked in a court battle in New York over its debt, and said the country would probably default.

Also read Ratings Agencies - The Power of Modern Day Astrologers

Also read How could Greece and Argentina – the new 'debt colonies' – be set free?

Fitch also said that Argentina's economy has slowed sharply this year Photo: AFP

11:55PM GMT 27 Nov 2012

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Fitch cut its long-term rating for Argentina to "CC" from "B," a downgrade of five notches, and cut its short-term rating to "C" from "B". A rating of "C" is one step above default, AP reported.

US judge Thomas Griesa of Manhattan federal court last week ordered Argentina to set aside $1.3bn for certain investors in its bonds by December 15, even as Argentina pursues appeals.

Those investors don't want to go along with a debt restructuring that followed an Argentine default in 2002. If Argentina is forced to pay in full, other holders of debt totaling more than $11bn are expected to demand immediate payment as well.

Argentine politicians, even those opposed to President Cristina Fernandez, have nearly unanimously criticized the judge's ruling as threatening the success of the debt relief that enabled Argentina to grow again.

Ratings by agencies like Fitch are used by investors to evaluate the safety of a country's debt. Lower ratings can make it more expensive for countries to borrow money on the bond market, exacerbating their financial problems. 

Argentina is in a deepening recession and is grappling with social unrest. Besides the court case, Fitch cited a "tense and polarized political climate" and public dissatisfaction with high inflation, weak infrastructure and currency.

Fitch also said that Argentina's economy has slowed sharply this year.

Of the two other major rating agencies, Standard & Poor's has a rating of "B-" for Argentina, five steps above default, and Moody's rates it "B3 negative", also five steps above default.

Possible Options for the Euro

The single currency has arrived at a three-pronged fork in the road

There are three possible ways out of the eurozone crisis: austerity, investment or the route taken by Argentina in the 90s

• 
• • Larry Elliott
  • guardian.co.uk, Sunday 15 April 2012 18.28 BST 
  • 
    

Greeks protest outside the headquarters of the Bank of Greece in Athens. Photograph: Simela Pantzartzi/EPA

The next 12 months will decide the fate of the eurozone. The single currency's problems have not gone away and will again dominate this week's meeting of the International Monetary Fund in Washington. Every one of those attending knows that the crisis could erupt again at any moment; last week's selloff in Spanish and Italian bonds was like the puff of smoke billowing out of a volcano getting ready to blow.

Here's a summary of how things stand. The euro was constructed on the false premise that monetary union would lead to a harmonisation of economic performance across member states. Greece would become like Germany; Portugal would be similar to Finland. Instead, the euro has led to a widening gulf between rich and poor, and this has been brutally exposed by the financial crisis and its aftermath.

It became clear that the countries on the periphery of the eurozone had a cocktail of problems. Their economies were much less productive than those at the core, so they were gradually becoming less competitive. They had shaky banking systems. And they had weak public finances. Investors, unsurprisingly, came to believe that holding Greek, Italian or Spanish bonds was risky, and demanded higher interest rates for doing so. This added to the pressure on banks and governments, and by pushing up borrowing costs, affected growth prospects as well.

By late last year the eurozone was on the brink of meltdown. At that point, the European Central Bank stepped in and announced long-term refinancing operations (LTROs). These pumped unlimited ultra-cheap money into the eurozone banking system to satisfy the funding needs of banks for three years.

The idea was to kill two birds with one stone. Banks would have more cash and could use it to buy government bonds in their own countries, thus driving down interest rates and so boosting growth.
This was a high-risk strategy that depended on the crisis-affected countries quickly returning to steady and robust growth. If they didn't, their banks would be loaded up with government bonds and vulnerable to a selloff in the markets.

In the past couple of weeks this possibility has dawned on markets. They have started to mull over a scenario in which a deepening recession in Spain leads to the government missing its deficit-reduction targets, prompting rising bond yields and eventually necessitating an international bailout.
There is much talk in European circles about how Greece was a one-off. Few in the markets believe that.

In the very worst case the euro will break up entirely, leaving the ECB nursing big losses and ruing the day when it embarked on an expansion of the money supply.

As George Soros noted last week, the Bundesbank perceives the risk, which is why it is campaigning hard against any further LTROs. The message from Germany, and from other core countries, is that it is time for Spain, Italy, Greece and Portugal to start delivering on their promised structural reforms.
All that explains why Christine Lagarde, managing director of the IMF, keeps insisting that Europe has bought itself just a little time to sort out its problems. Lagarde is absolutely right about that: the single currency has arrived at a three-pronged fork in the road.

Route number one is Austerity Avenue. The eurozone continues on the same road, the poorer countries on the fringe making themselves more competitive by what is known as internal devaluation. This involves driving down production costs via wage and welfare cuts, and state assets selloffs. Living standards take a big hit for a prolonged period, but eventually countries such as Greece bridge the gap between themselves and Germany.

Economic and political problems beset this route. Austerity is killing growth, making it harder to reduce government borrowing, and it inflames populations unhappy at the prospect of falling living standards year after year. It's a bumpy road; it could also prove a short one.

Next up is the High-Investment Highway. The premise for this route is that the single currency can survive but only if measures are taken to stimulate growth. Soros proposed a plan last week in which all countries could refinance their debts at the same rate – but, as he admitted, this would never get past the Bundesbank.

Another idea, suggested by the former Labour MP Stuart Holland, is bond-financed investment programmes modelled on Roosevelt's New Deal. This would have two components: Union bonds, under which a country could convert up to 60% of its national debt into non-traded Union bonds; and Eurobonds, which would be traded and actively marketed to fast-growing countries of the emerging world wanting an alternative to dollar reserves.

The idea, which caught the interest of France's socialist presidential candidate, François Hollande, would be to use Union bonds to stabilise debt and Eurobonds to finance investment.

As with the Soros plan, this would no doubt run into stiff opposition from Germany. It would also involve a much higher degree of fiscal integration. But if Austerity Avenue is a dead end and High-Investment Highway a road to nowhere, that really leaves only one other exit: Buenos Aires Boulevard.

A paper published last week by Capital Economics described the similarities between the struggling eurozone countries today and Argentina in the late 1990s. Argentina had fixed the peso against the dollar irrevocably at the start of the 90s but, after a few good years of strong growth and low inflation, by the end of the decade was under severe strain.

The solutions tried now in Greece – austerity, debt rescheduling, IMF programmes – were tried in Argentina to no avail. Indeed, output crashed, making the country's debt position even worse. Eventually the pressure was too much and Argentina devalued and defaulted.

But far from the sky falling in, which was what the IMF and the other proponents of orthodoxy predicted, Argentina's growth averaged 9% a year from 2003 to 2007.

As Andrew Kenningham, of Capital Economics, accepts, Greece would not be expected to do nearly as well as post-crisis Argentina, which benefited from rising commodity prices and did not have to cope with the inevitable contagion effects arising from a country leaving a single currency. But, he says, Argentina's example offers a "painful but viable" exit from the crisis that the current deflationary policies do not. And unless policymakers in Europe can offer their citizens somethingmore enticing than endless austerity, a stroll down Buenos Aires Boulevard will look increasingly enticing.

Kingfisher and India's Crony Capitalism

Ask a small businessman what it’d mean to default on depositing provident fund dues, or to not deposit tax deducted at source, or to default on interest payments on a bank loan. For the first two offences, you can be fined heavily and imprisoned. For the third, you can lose control, first of the business, and then of your personal assets. And yet, nobody expects any of these things to happen to flamboyant liquor baron Vijay Mallya, even though his Kingfisher Airlines is in a similar situation.
Mallya is not only expecting more money from banks to fund his eternally cash-guzzling business, but also a policy change that will help him get a partner with deep pockets. No, of course, that would not mean giving up control—no matter that accumulated losses at Kingfisher by the end of this year would be Rs 7,000 crore. He is a big businessman, he is a Rajya Sabha member, he plays hard. He cannot lose. That’s capitalism, Indian style.

About a decade ago, Raghuram Rajan wrote the path-breaking Saving Capitalism From the Capitalists. The book’s theme was simple: what we label as capitalism is often a distorted version; the true spirit of capitalism is undermined by capitalists themselves—by getting an unfair advantage, as in crony capitalism. India’s airline business is a great example. Interestingly, Rajan is quite comfortable being an advisor to PM Manmohan Singh, whose government has set new standards for crony capitalism. (Rajan prefers to rail against India’s education system, but that’s another story.)
As part of a perverse policy followed by successive governments, Indian private sector entrepreneurs with no experience in the airline business were licensed. This led to the quick entry and exit of many players (some with questionable reputations) like East West Airlines, ModiLuft, Damania Airways, Air Deccan, Air Sahara, Paramount, among others. This was not normal business mortality. While the Indian air carriers were experimenting with business models, the “open skies” policy remained closed to deep-pocketed foreign investors who had real expertise in running airlines unlike chicken kings, liquor lords and sundry egomaniacs.

This policy of admitting the undeserving, while keeping out the deserving, has created a sick industry and harassment for Indian air travellers. Indeed, Kingfisher was not only allowed entry, it could also easily lean on government-owned financial institutions to fund a business that never had any real hope of making money. Later, when the loans turned bad, it could get part of the bank loans converted to equity.

As part of the same kind of capitalism, the aviation ministry wreaked havoc on the national carrier, Air India. Canadian research firm Veritas calls the civil aviation ministry’s attitude to Air India “duplicitous” and observes, “It could be on the diktat of the regulatory authorities involving various ministries of the Government of India that an unviable airline, Kingfisher, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions.” Entry for dubious parties, barring foreign investors who have run airlines, suffocating the state-owned carrier, getting state-owned banks to lend, getting the banks to convert debt to equity—this is copybook crony capitalism.

Since Manmohan Singh’s government will do nothing, redress may come by other, natural means. About three years ago, I was chatting with a foreign institutional investor who has put quite a bit of money into United Breweries. He asked me what I thought of UB. The “story” was great: Indians were getting prosperous and drinking more beer, per capita consumption was low and UB was the biggest player. How could you go wrong? Having seen Indian businessmen from close quarters for 28 years now, I told him UB will go bankrupt before making him rich because that would be Mallya’s only source of funds for the eternally loss-making Kingfisher. He smiled and said: “We are betting on that.”

Mallya had already given up a part of the UB’s spirits and beer business to foreign partners and was running down the rest of the value by using it to fuel his flying adventure. Competitors like Kishore Chhabria and Mallya’s own partners and investors have been biding their time. Has the time come for the tale to play out rapidly to its obvious conclusion, now that respected activists like Aruna Roy or Nikhil Dey have voiced their well-reasoned protest? Or will capitalism continue to be undermined by capitalists, netas and babus?

by Debasis Basu in Outlook India

The callous cruelty of the EU is destroying Greece

Peter Oborne in The Telegraph

For all of my adult life, support for the European Union has been seen as the mark of a civilised, reasonable and above all compassionate politician. It has guaranteed him or her access to leader columns, TV studios, lavish expense accounts and overseas trips.

The reason for this special treatment is that the British establishment has tended to view the EU as perhaps a little incompetent and corrupt, but certainly benign and generally a force for good in a troubled world. This attitude is becoming harder and harder to sustain, as this partnership of nations is suddenly starting to look very nasty indeed: a brutal oppressor that is scornful of democracy, national identity and the livelihoods of ordinary people.

The turning point may have come this week with the latest intervention by Brussels: bureaucrats are threatening to bankrupt an entire country unless opposition parties promise to support the EU-backed austerity plan.

Let’s put the Greek problem in its proper perspective. Britain’s Great Depression in the Thirties has become part of our national myth. It was the era of soup kitchens, mass unemployment and the Jarrow March, immortalised in George Orwell’s wonderful novels and still remembered in Labour Party rhetoric.

Yet the fall in national output during the Depression – from peak to trough – was never more than 10 per cent. In Greece, gross domestic product is already down about 13 per cent since 2008, and according to experts is likely to fall a further 7 per cent by the end of this year. In other words, by this Christmas, Greece’s depression will have been twice as deep as the infamous economic catastrophe that struck Britain 80 years ago.

Yet all the evidence suggests that the European elite could not give a damn. Earlier this week Olli Rehn, the EU’s top economist, warned of “devastating consequences” if Greece defaults. The context of his comments suggests, however, that he was thinking just as much of the devastating consequences that would flow for the rest of Europe, rather than for the Greeks themselves.

Another official was quoted in the Financial Times as saying that Germany, Finland and the Netherlands are “losing patience” with Greece, with apparently not even a passing thought for the real victims of this increasingly horrific saga. Though the euro-elite seems not to care, life in Greece, the home of European civilisation, has become unbearable.

Perhaps 100,000 businesses have folded, and many more are collapsing. Suicides are sharply up, homicides have reportedly doubled, with tens of thousands being made homeless. Life in the rural areas, which are returning to barter, is bearable. In the towns it is harsh and for minorities – above all the Albanians, who have no rights and have long taken the jobs Greeks did not want – it is terrifying.

This is only the start, however. Matters will get much worse over the coming months, and this social and moral disaster has already started to spread to other southern European countries such as Italy, Portugal and Spain. It is not just families that are suffering – Greek institutions are being torn to shreds. Unlike Britain amid the economic devastation of the Thirties, Greece cannot look back towards centuries of more or less stable parliamentary democracy. It is scarcely a generation since the country emerged from a military dictatorship and, with parts of the country now lawless, sinister forces are once again on the rise. Only last autumn, extremist parties accounted for about 30 per cent of the popular vote. Now the hard Left and hard Right stand at about 50 per cent and surging. It must be said that this disenchantment with democracy has been fanned by the EU’s own meddling, and in particular its imposition of Lucas Papademos as a puppet prime minister.

Late last year I was sharply criticised, and indeed removed from a Newsnight studio by a very chilly producer, after I called Amadeu Altafaj-Tardio, a European Union spokesman, “that idiot from Brussels”. Well-intentioned intermediaries have since gone out of their way to assure me that Mr Altafaj-Tardio is an intelligent and also a charming man. I have no powerful reason to doubt this, and it should furthermore be borne in mind that he is simply the mouthpiece and paid hireling for Mr Rehn, the Economic and Monetary Affairs Commissioner I mentioned earlier.

But looking back at that Newsnight appearance, it is clear that my remarks were far too generous, and I would like to explain myself more fully, and with greater force. Idiocy is, of course, an important part of the problem in Brussels, explaining many of the errors of judgment and basic competence over the past few years. But what is more striking by far is the sheer callousness and inhumanity of EU commissioners such as Mr Rehn, as they preside over a Brussels regime that is in the course of destroying what used to be a proud, famous and reasonably well-functioning country.

In these terrible circumstances, how can the British liberal Left, which claims to place such value on compassion and decency, continue to support the EU? I am old enough to recall their rhetoric when Margaret Thatcher was driving through her monetarist policies as a response to the recession of the early Eighties. Many of the attacks were incredibly personal and vicious. The British prime minister (who, of course, was later to warn so presciently against monetary union) was accused of lacking any kind of compassion or humanity. Yet the loss of economic output during the 1979-82 recession was scarcely 6 per cent, less than a third of the scale of the depression now being suffered by the unfortunate Greeks. Unemployment peaked at 10.8 per cent, just over half of where Greece is now.

The reality is that Margaret Thatcher was an infinitely more compassionate and pragmatic figure than Amadeu Altafaj-Tardio’s boss Olli Rehn and his appalling associates. She would never have destroyed an entire nation on the back of an economic dogma.

One of the basic truths of politics is that the Left is far more oblivious to human suffering than the Right. The Left always speaks the language of compassion, but rarely means it. It favours ends over means. The crushing of Greece, and the bankruptcy of her citizens, is of little consequence if it serves the greater good of monetary union.

Nevertheless, for more than a generation, politicians such as Tony Blair, Peter Mandelson, Nick Clegg and David Miliband have used their sympathy for the aims and aspirations of the European Union as a badge of decency. Now it ties them to a bankruptcy machine that is wiping out jobs, wealth and – potentially – democracy itself.

The presence of the Lib Dems, fervent euro supporters, as part of the Coalition, has become a problem. It can no longer be morally right for Britain to support the European single currency, a catastrophic experiment that is inflicting human devastation on such a scale. Britain has historically stood up for the underdog, but shamefully, George Osborne has steadily lent his support to the eurozone.

Thus far only one British political leader, Ukip’s Nigel Farrage, has had the clarity of purpose to state the obvious – that Greece must be allowed to default and devalue. Leaving all other considerations to one side, humanity alone should press David Cameron into splitting with Brussels and belatedly coming to the rescue of Greece.

Another balanced perspective on the global economic crisis

By Chan Akya

The trick to flying is to fall ... and miss. Douglas Adams, Hitchhiker's Guide to the Galaxy

Douglas Adams should have been around now, but tragically died a few years ago aged in his late forties (rather than at '42'). If he had been around, perhaps he would have given some wise counsel to world leaders who all seem out at sea in attempting to handle a crisis that wasn't necessarily of their making but almost seems certain to be their undoing.

The weekend saw political parties in the United States failing to agree on a program to adjust let alone cut sharply the country's yawning budget deficit. Alongside, the seventh regime change since the beginning of 2010 in Europe after this week's booting out of Spain's prime minister Jose Luis Rodriguez Zapatero marks yet another chapter of voters throwing not just the baby out with the bathwater, but in this case also the midwife and the entire bedroom. (See The men without qualities, Asia Times Online, October 29, 2011).

Cue the markets pushing Spanish and Italian yields to record levels this week, and even "reassuring" statements from rating agencies about US creditworthiness being shrugged off. The talk in Europe is now when, not if, Italy and Greece leave the euro; speculation has even mounted about the tenability of the French fiscal position.

Meanwhile banks on both sides of the Atlantic are being pummeled into submission with eye-watering declines in share price which the banks are attempting to correct by shedding thousands of employees. The count this year so far is that over 200,000 banking jobs will be lost in the major financial centers of the West - in effect reversing the entire marginal hiring by the industry since 2008. Alongside business sentiment continues to fall, and as companies postpone indefinitely their plans to invest, the job market isn't going to bounce back anytime soon.

Then there is the economic data. European data is no surprise except to those who have been sleeping for a while, but the ugly numbers from US gross domestic product on Tuesday showed declining inventories - exactly the kind of multiplier effect on the negative end of the spectrum that predicts further and sharper economic pain.

Game theory
Politicians in the US and Europe need to be aware of two basic tenets of government:
a. If you are going to bluff, do it big and do it early;
b. If you are going to panic, do it early and do it big.

The unsaid supplemental rule here is: don't do both. This is the reason for the opening quote from Douglas Adams.

Suspension of disbelief is an art form but apparently also broadly applicable to various aspects of modern life ranging from market sentiment to voter angst. There is very little certainty about any initiative, which basically calls for strong confidence in one's ability to achieve something and more importantly in one's ability to convince the other side of one's confidence in respect to the same. For the markets, the common thread is really one of credibility, not of credit worthiness.

Think about this broadly - if the European Union had stepped out and initiated a broad program to buy every unsubscribed bond from Greece, Italy, Spain et al in the beginning of 2010, would any of the problems really have gotten out of hand since then? Instead, they embarked on a series of "limited" interventions, which have been fruitless precisely because everyone knows they are limited.

It's a bit like walking into battle carrying a single revolver - everyone knows you only have six bullets, and once they dodge those you are the one in serious trouble. If on the other hand the other side has no clue about your weapons and ammunition, the battle is most likely won without firing a single shot.

In the end, this is the primary reason for the Keynesian policies of the past three years to have failed utterly. They were simply insufficient, vastly under-estimating the true economic damage wrought by the 2007-8 financial crisis (I really shouldn't be dating this financial crisis, given that it very much continues to this day). This was then a case of bluffing late and bluffing small time. I am of course happy with this failure because, as I argued before, the demographic necessity of the West was to embrace poverty either broadly through inflation or narrowly through significant write-offs in savings and investments.

So much about the Keynesian failures, but how did the Austrian School followers do in their neck of the woods? Not too well I am afraid. Austrian principles such as credit tightening in a crisis, allowing banks and companies to go bust without hesitation were observed in the exception (Lehman Brothers) rather than the rule (countless US and European banks).

Even in the case of sovereign debt, the demands for austerity (Greece) were trivial and the penalties for noncompliance, laughable ("You veel resign Mr Papanderou, ja?"). This isn't the way that free markets work.

If you really wanted to stem the moral hazard tide, the best way would have been to rescue depositors but let the banks go into administration. That would have ended up costing Ireland a fraction of what the country has spent on its banks since the beginning of 2008, primarily to mollify German bankers who had made incredibly stupid lending decisions (see (F)Ire and Ice", Asia Times Online, November 20, 2010) in the first place.

Even in the US, research has shown that in situations where private institutions purchased mortgages at deep discounts from the banks (or more likely from the Federal Deposit Insurance Corporation, which rescued the banks), the turnaround has been palpable. Mortgages have been quickly modified, some useless tenants kicked out while a majority see their payments adjusted to more affordable levels along which they also have upside participation. In contrast, the government-rescued banks still carry billions of zombie mortgages and have simply failed to address them adequately if at all.

This isn't a surprise as the banks invested government bailouts not into their decrepit operations but rather in punting across their fixed-income books, essentially loading up on a whole bunch of underpriced assets. Some of these assets rose in price, but some others have since fallen back over the course of this year.

"Those damn Europeans sold from summer," exclaimed an American banker by way of explanation of his horrific trading losses in the second half of this year. "Yes, but what were you doing with a 30x leverage position on your books in the first place?" I countered, to no avail. "What else could I do - everyone else was hiring in 2009 and management asked me why I wasn't" he replied. That is moral hazard in practice for you. A game of passing the parcel where everyone knows that the parcel contains an explosive device that may be set off by movement, time or just randomly.

The way forward
How do I expect this all to be resolved? This presupposes that I do expect this situation to be resolved in the first place, which I really can't see at this stage. Among all the worst body of options out there, it is my belief that the following combination is likely to produce the most acceptable solution from here on:
1. An unpopular Obama administration attempts to reverse the mollycoddling of US banks going toward the elections. This means a crackdown on banking system leverage, proprietary trading and a long look at jailing a bunch of bankers. This would also involve taking a couple of US banks (you know who you are) to the proverbial cleaners, in essence allowing a controlled bankruptcy of those institutions.
2. Meanwhile the Europeans simply go ahead and commit big time to Keynesian solutions, essentially overruling the German opposition. The European Central Bank indulges in significant and unlimited quantitative easing, while European governments turn their back on austerity.

In this combination, the following market impacts come through:
a. A significant decline in the value of the euro against the US dollar, perhaps approaching parity or worse;
b. A sharp decline in global stock prices followed by a sharp rally next year;
c. Rampant inflation in the Western world that helps to push up commodity prices after the initial decline;
d. Recovery in European sovereign bonds for the short-term.

In every possible way of looking at all this though, I cannot help but admit to a strong whiff of wishful thinking in all this. Oh well, it is Thanksgiving after all.