Second review of the IMF - December 2011

The IMF has concluded the second review, see press release

Relevant note: the drop of the fiscal devaluation is now official, but no substitute is known up to the moment.

combate de blogs

This is a post with a different nature, the portuguese economy has been nominated in the short list to win the category of best collective blog in Portugal.

You can see all categories and nominations here.

It is always good to know that others pay attention to our efforts!

Smart interpretations of a Treaty and debt management

If you have followed the debate on the ECB as a lender of last resort you probably came across Article 123 of the Lisbon treaty. Article 123 prohibits the ECB from purchasing bonds directly from public bodies. Paragraph 1 says:

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

However Paragraph 2 allows the ECB to purchase bonds from a public bank.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

(Paragraph 2 was the basis of Soros proposal to transform the ESF into a bank in order to have access to the ECB liquidity. The proposal was rejected.).

Now the key question is who qualifies as a "publicly owned credit institution" described in paragraph 2? At first sight the German Finance Agency (Finanzagentur) qualifies (any one can confirm?). Finanzagentur auctions german debt, through the Buba, using a retention mechanism. The retention mechanism, that came in the highlights with the last November Bund auction, allows Germany to use "the sale of German Government securities in the secondary market that stem from the portions set aside in the auctions" to meet borrowing requirement. According to the Corriere della Sera, the Italian treasury already expressed interest in the retention mechanism as it permits a less risky debt management (if you check the graphs below, you will notice that the last bund auction, where 40% of the bonds have been retained has commanded an average yield of 1.98% when the coupon offered was 2%). Other euro governments might want to follow as well.


(click to enlarge)

Webinar on European Safe Bonds (ESBies)

Tomorrow at noon (New York time. EST), 5pm Portugal time (GMT). Register here if you want to listen in or ask questions:
http://prmia.org/events/view_events.php?eventID=T4705

The European Debt Crisis: a succession of bad ideas

I recently gave a talk about the European debt crises. I focussed on the many policy blunders committed so far, as well as on the many that are still occupying the agenda. Here was my list:

Bad idea #1: You can run a monetary union and have a single currency and central bank without:

1. Fiscal backing for your central bank

2. European-wide banking regulation and deposit insurance

3. A European-wide safe asset

Portuguese State Budget was approved but it needs corrections.

The Portuguese State Budget (SB) was approved last wednesday (30th of November)with the votes of the political parties who support government (PSD and CDS) and the abstention of the Socialist Party. It is the toughest budget ever approved in Portugal with a progressive cut in summer and christmas bonuses of civil servants and pensioners (more than 600 euros up to 1100) and a proportional cut (2/14) when income is above 1100 euros, equivalent to two salaries.

Apart from a possible unconstitutionality of these measures, this Budget implements certain aspects of the memorandum with the troika, but departs from it in several important respects. First, the memorandum predicts a cut in transfers to regional and local governments of, at least 150M. euros and also predicts that civil servants' salaries should be freezed. Therefore, we would expect that other expenditures (not wages) would be cut at least in 150M. However, with the bonuses' cuts local governments save around 240M. euros. This means that instead of leading to a reduction in other expenditures the Budget leads to an increase in local exenditures (other than wages).

An additional problem is an error in calculating the state budget deficit in public accounts
(cash basis) of 297,4 million euros due to a consolidation problem (see my article in Publico newspaper today here). What is worrying about this mistake, not clarifyed yet by the Ministry of Finance, is that it may increase the Budget deficit in this amount, and also what it reveals in terms of lacking of cross checking information in the Ministry of finance.

In Portugal there are two seminal initiatives of civil society that scrutinize the budget and the budget process. The budget watch (2012 results will be available soon) and the open budget initiative. They start producing results. But it is also important that the Council for Public Finances, an independent body predicted in the memorandum is also implemented.