Special Relationship

UK Treasury to advise China on financing its public projects;

UK hopes new visa system will increase China visitor numbers;

As the United States is trying to strangulate (more on the steadily accumulating evidence in later blog posts) China, UK is getting closer and closer to China. No wonder this is happening:

UK Universities under scrutiny over China ties;

Of historical interest to India is this news-item from FT in 2006! I do not know if he got one and what he offered in return for getting it or if he was sincere or not. Just putting it here for historical interest.

There is no security vs. economics related trade-off for the UK. Not even so much as Germany has vs. Russia, for example. The UK is no longer a global power with an interest in Asian regional security or hegemony as the US has. Hence, they have far more of a free lunch than what the US thinks continental Europe has from the US on their Russian policies.
If the US thinks that its continental European allies are making their down payments on security, the UK is far worse. They feel that they have all to gain on the Economics front and nothing practically to lose on the security front. Worse, they think that they can get away with it.

Debt and morality

Martin Sandbu has a quick ‘Free lunch‘ on the symposium on Debt and Morality held in Germany, recently. The reason why somehow borrowing and borrowers defaulting have been equated to a moral crime is that lenders sacrifice their present consumption to enable the borrower have his/hers brought forward. Some one accepted delayed gratification for someone else’s instant gratification. That could be deemed a ‘sacrifice’ and hence the negative connotations attached to excessive borrowing, consumption and default choices.

Pl. note that I am not trying to defend present-day lenders and their greed for return that make them overlook returns and then rely on a sovereign backstop for their private lending decisions that go sour. It is a business risk. They took it and they must take the consequences that come with it.

I was trying to hypothesise on the possible historical evolution of the moral overtones attached to borrowing and lending.

The goal is Syrexit and not Grexit

My piece published in Pragati today.

The ‘Troika’ goal is not Grexit from EMU but Syrexit from Greece

by Dr Anantha Nageswaran — June 22, 2015 9:24 am

Unless timely financial assistance is forthcoming, Greece will default on its payment and this might trigger a process of reactions and actions .

In January, Greece elected a left-of-centre political party, Syriza, to office. Syriza has pledged to repudiate the debts it owed to international creditors and relax the fiscal austerity programme it had been subjected to by the ‘Troika’ of institutions – the European Commission, the International Monetary Fund and the European Central Bank. Greece has a big debt burden and its economic growth too had wilted under the severe austerity programme. Overall unemployment rate in Greece is over 25 percent, the youth unemployment rate is above 50 percent, and the Gross Domestic Product has contracted 25 percent in the last four years.


Matters have come to a head because Greece has several loan repayments, particularly to the IMF, falling due in June and there is no money. Unless financial assistance is forthcoming in a timely fashion, Greece will default on its payment and it might trigger a process of reactions and actions resulting in the possible exit of Greece from the Economic and Monetary Union in Europe and possible flight of capital from Greece. Creditors are insisting on a new round of fiscal austerity measures and the Greek government is resisting. In turn, Greece is pressing for a comprehensive debt relief programme as, otherwise, the country would continue to remain bogged down with high debt servicing costs. Creditors are unwilling. Matters have come to a head as another payment is due to the IMF before the month-end. There is a summit meeting of EU Heads of Government on Monday evening in Brussels. The points below shed light on this matter.

One, it is clear that EU Governments and IMF (with US backing, of course) do not want to do a deal with this government in Greece. America, for sure, did not like Varoufakis’ “Global Minotaur”. It is reasonable to assume that they – all of them – want to see this government in Greece in go, actually. They do not want to confer success, if they can, on a Marxist-Socialist government. They suspect that it might set off a chain reaction and lead to revival of socialism in Europe. Ashoka Mody, formerly with the IMF, notes that structural reforms are a code phrase for reducing wages and weakening employment contracts—as they are in the Greek context.

Further, Syriza’s success might mean a greater foothold for Russia in Europe. America and its European allies are frightened of the possibility. Hence, not handing Syriza any victory is the core motivation behind the charade of negotiations.

Two, however, ejecting Greece now from EMU now would actually make Syriza martyrs and they may come back with a more thumping majority, and more powerful. Further, ejection might throw up unintended consequences in Europe. For instance, does ejection evoke fear and greater compliance in Spain, Portugal and in Italy? Or, does it embolden radicals? Local elections in Spain and Italy did not go well for incumbents who are, supposedly, pro-EU and are good boys.

Three, Ms Merkel probably has a slight inclination to do a deal since she might be correctly worried about the potential slow unravelling of EMU (and the EU itself), the political consequences of Greece out of EMU and EU too and, lastly (but not the least), what if the Greek economy thrives in two to three years? That would be a major negative advertisement for EMU. Matter of time because others take to their heels.

At the core, she might be uneasy about what is happening in Ukraine even though she has gone along with the US. A Greek exit would complicate matters further now. Lastly, she would not want to be the one German leader under whose watch, European integration began to unravel. I think Philip Stephens of FT got her compulsions quite correct. Perhaps, within the Troika, she is the stumbling block to ‘kicking Greece out’. But for her, it might have happened sooner.

Four, So, what has been the EU (or, Troika) goal all along since Syriza came to office? Keep Greece in the Eurozone by doing the bare minimum while working to make life so difficult for Syriza such that Greek people come to realise that Syriza is the stumbling block for a deal. Make Greeks feel that Syriza stood between them being part of Europe and being castaways. Has it worked? Probably, it has not. But, the goal has not changed.

Five, Because it has not changed and because Tsipras has understood that goal very well and has, in the last several weeks, played his cards rather well, the Greek people want the best of both: they want a deal to stay in the single currency and they are happy with Syriza and Tsipras.

Some of Tsipras’ moves include his well-chosen remarks to provoke EU creditors, his Op.-Ed in Le Monde, sending Yanis Varoufakis to Berlin to give a speech (how many current or past Finance Ministers in the world could have given such a speech?), to use the remarks of Michael Noonan (Irish FM) as an opening for Varoufakis to write an op.-ed in Irish Times and this speech by Varoufakis in the Eurozone Finance Ministers’ gathering on Thursday. There could be others but I can think of only these.

Six, So, what would happen on Monday at the EU summit? Actually, the dice is loaded against the Troika emerging winner in the perception battle. To a large degree, the Syriza has done a better job of projecting itself and Greece as the victim or the underdog rather than a recalcitrant adolescent criminal, unable or unwilling to mend his ways. So, kicking them out on Monday (actually or, in effect, by prescribing impossible conditions) will seal their martyrdom and then what happens next goes largely out of the control of the EU.

Seven, out of hubris and arrogance, some or many European leaders are defiantly calling precisely for that outcome. But, perhaps, they do not have Ms Merkel on their side.

Eight, so, what will happen on Monday is that a ‘deal’ will be struck to keep Greece within Europe, until the end of the year. It is another “extend and pretend” chapter in the whole saga. The aim is to buy time to see if they could get Syriza out of the office by then, by engineering further economic discontent and deterioration in Greece. Or, there are always other sinister means available, if needed.

Nine, since the Troika has already lost the PR battle in the last month or so and since it has to keep Greece within EU for now, it is for them to relent a bit in their conditions without having to relent too much. So, the challenge before them on Monday is to appear uncompromising while compromising slightly to bait Syriza into agreeing. It will be a tough act to pull off. But, for exposition purposes, we will assume that they manage to do so.

Ten, why would Syriza agree to it? They should know very well the purpose of the “extend and pretend” deal. It is to see them out of office in some manner or the other. Why would they agree and why would they not call the EU bluff? I do not claim to know the answer but I can think of two reasons why they may yet go along although there is compelling logic for them to walk away, especially since they know the end-game or goal of this exercise.

Eleven, one is that we do not know what assurances, if any, Tsipras got from Putin on his recent visit to Russia. That is a crucial factor. If they were cast-iron and concrete, then that would influence their decision to stay in the game or walk away. But, was Putin in a position to offer such assurances? We do not know how secure economically Russia is, now, to offer generous financial assistance to Greece.

Perhaps, Putin might advise them to stay in the game for as long as possible until he is able to get the better of the storms he is facing in his own backyard. My hunch is that he is succeeding in that particular effort but I could be wrong. So, waiting it out or dragging it out might be his advice, for now, rather than concrete assurances. Hence, that could be one reason for Tsipras to play along.

Twelve, second, after all, the Greek want to stay in the Union and in the single currency. The club, right or wrong, remains prestigious. The emotional cost for the Greeks of being asked to leave now might be too high and Tsipras might be reluctant to risk his popularity on an exit now.

Thirteen, third, they might be genuinely unsure of how severe or serious the economic fallout of leaving would be. After all, global economic and banking levers are with the US and Europe.

Fourteen, so, Tsipras would go along with the charade, reluctantly or otherwise. His goal is to stay in the game with Europe, stay in office, get concessions here and there, hope for an economic turnaround and if there is a slight improvement in the economy engendering some confidence, then he can take the risk of walking out.

Fifteen, EU goal, to reiterate, is to keep Greece within Europe (largely on their terms), not grant too many victories to Syriza and to kick them out of office in Greece eventually.

Sixteen, whatever happens in Brussels on Monday will not be the end. It is one more chapter because both sides have not achieved their goals yet and are, in fact, far from it. If anything, the EU has suffered ‘setbacks’ in the last month or two, in its goals. Syriza and Tsipras, personally, have become more popular among Greek voters.

Seventeen, In sum, on Monday, EU will present a deal, which they will claim as a victory for their approach, while yielding some ground, on balance. Syriza will accept it.

Eighteen, in the long run, it is both cynical and realistic to assume that the odds of EU succeeding in its ‘goal’ are narrower than that of Tsipras succeeding. The Greek economy will not have much hope under the EU plans. Further, there could be unintended consequences for the rest of the world if the EU ‘succeeds’ in its goal.

Nineteen, the world that some of us grew up in and took for granted as ‘idyllic’ between 1980 and 2000 (because we did not know enough) is slowly unravelling. Most likely that the outcome in Brussels on Monday (or in the early hours of Tuesday) does nothing to reverse the unravelling and only pushes it along further.

Anantha-Nageswaran is a co-founder, and Fellow at the Takshashila Institution

No end in sight for the Greek drama

If you think that Monday would bring down the curtains on the Greek drama, you are probably making a mistake. I have a piece coming out in Pragati – later tonight or early tomorrow – that argues that the end-goal for EU and Troika is not Grexit but Syrexit from Greek government. It is an ideological battle, at the core. Myopic capitalism or capitalists driving the agenda. But, wait for my piece.

In the meantime, as Yanis Varoufakis predicted before he stepped into the Eurogroup Finance Ministers’ meeting, no deal happened. But, he did not let that come in the way of scoring some more propaganda points. Personally, I have been admiring the way the Greeks have handled the gamesmanship in the last one month or so. They have had the upper hand. May be, it is the underdog in all of us that supports the underdog in the fight, regardless of the facts of the situation. Well, I do not think so. Facts do tell their own story. That is why you have to follow the links here.

Varoufakis did not let go off the opportunity of a small opening that a remark by the Irish Finance Minister gave him, to pen a op.-ed for ‘Irish Times’. It is based on his speech at the gathering of Finance Ministers. I loved his speech in Berlin on June 8.  I loved this one too.

Ambrose Evans-Pritchard has been passionate and brilliant on the Greeks vs. Troika saga. I have liked his pieces on this matter. This one is no exception. Of course, he makes the point that the Greek bailout in May 2010 was arranged by the European leaders to pay off private creditors (banks). This is from the old bailout playbook. This is what happpened, for instance, in Latin America and in East Asia, in the Eighties and in the Nineties respectively. I wrote a letter in FT in 1998 that the West should abandon its bloodless colonialism.

But, Karl Whelan suggests that the amounts that banks had lent to Greek sovereigns were modest and that a default on them would not have triggered a global financial panic. He is suggesting ‘hubris’ as the explanation. Sounds more plausible.  Karl Whelan’s piece is well worth a read as was his earlier piece in response to this deliberately provocatively titled article by Francesco Giavazzi.

In passing, Karl Whelan also notes how European heads of IMF have done a terrible job:

Europe, it turns out, has gained very little from European influence at the top of the IMF. The rest of the world should learn from the Greek fiasco that former European politicians can no longer be trusted with the leadership of this crucial institution. [Link]

One more reason to be disappointed at the American reluctance to reform governance in multilateral institutions. Consequences wash up on their own shores. Perhaps, there is poetic justice in all this.

Jeffrey Sachs and James Galbraith predictably ooze oodles of sympathy for Greece. James Galbraith is a colleague (or, was) of Yanis Varoufakis at University of Texas at Austin.

I would give very high marks to Ashoka Mody’s article for voxeu.org. His second para is brilliant:

A medical analogy, often used to describe international financial rescues, is useful to frame the issues. When a patient comes into an emergency trauma room, the doctor on the floor typically does not refuse to treat him because the patient has lived an unhealthy life. Nor does the doctor ask him to first run around the block a few times – as proof of good faith – before stemming his blood flow. And certainly no doctor will first increase the haemorrhaging as a warning before treating the patient.

Of course, of course, the analogy cannot be pushed beyond a point. The doctor gets paid for treating him and bears no consequences for the patient’s past, present or future follies. All that being said, Greece has made a lot of adjustments already – fiscal and otherwise – and ‘punishing’ Greece is not going to work, as it might with individuals, who borrowed wilfully to support a profligate lifestyle. Greeks have paid for that type of behaviour – if that is one of the goals of some moralisers –  with a 50% youth unemployment rate and a GDP contraction of 25%. In any case, one is never sure in such blanket approaches that the true delinquent is isolated for punishment. Moral approaches are too problematic in these situations. Furthermore, the situation is long past that point.

Nonetheless, this discussion should not detract from the merits of specific proposals that Ashoka Mody is making. They are very realistic. He does let slip in, an important motive behind the Troika negotiating stance, however:

Indeed, where structural reforms are a code phrase for reducing wages and weakening employment contracts—as they are in the Greek context ….

So, are we back to the capitalism of the 18th and 19th centuries? What a shame!

Larry Summers thinks that Greece should accept VAT and pension reforms in return for large debt write-offs. May be. But, Yanis Varoufakis argued with facts that there is not much scope to squeeze out more savings from VAT and pension reforms. Ashoka Mody is a neutral voice and he has a very clear answer to Larry Summers:

increasing the VAT tax burden, for example, is a terrible idea. Japan—which, despite its troubles, is an infinitely stronger economy than Greece—only recently got its wind knocked out by a premature increase in VAT rates. To be sure, the VAT rates will eventually need to be raised, and pensions and wages will need to be scaled back. But setting a demanding timeline now—before growth is firmly established—will keep Greece trapped in a debt-deflation cycle. [Link]

So, what is the end-game? Will it be revealed late Monday night or in the wee hours of Tuesday in Europe? For my take and hypotheses, wait for Monday morning to read my piece in ‘Pragati’.

Media, (Lalit) Modi, Meteo, Monsoon and MSP

The Indian media is entranced by the Lalit Modi – Vasundara Raje – Sushma Swaraj – P. Chidambaram Saga. Frankly, the issues strike a disinterested observer as somewhat lame – no patch on the UPA’s deeds of commission and omission and corruption. But, for vast sections of Indian media, anything to embarrass the other Modi with is an opportunity not to be wasted. That is a pity. In the process, they are missing out on some of the good things that the government is doing. For the sake of the country, they need to focus on the right issues. Couple of op.-eds here for your reading pleasure.

Very few of them, if at all, were exercised by the International Labour Organisation, a U.N. body, doing this. This is far more harmful for the country than the favours that the External Affairs Minister might have rendered Lalit Modi. The media has the wrong priorities, from the national interest perspective, that is. At a personal level, they may well have their priorities very clear. That has always been India’s bane, throughout history.

In the meantime, in the first two weeks of the monsoon season, rains have exceeded expectations throughout the country, taken as a whole. Unfazed, the Indian Meteorological Department predicts (this link will keep changing every week – the link here is for June 18 press release) a disappointing July. That might ‘gladden’ the hearts of those who have been ‘disappointed’ that rain gods have been generous so far. But, one should not forget the overall forecasting record of IMD with respect to monsoons. It is not a criticism. Predicting monsoons over a three-month window is not that easy or so, I guess.

Rain gods have been generous and hence, the Government of India could afford to be parsimonious. That is what it did.

On 17 June, when the Government of India announced its policy of agricultural produce procurement, it elicited the following comment from the economist Z. Chinoy of JP Morgan:

 To its credit, the government resisted any such pressures and support prices for paddy – the main crop that the government procures in this season — were only increased by 3.7%, in line with last year’s increase and less than half the 10% average that existed for the three previous years…..

…. Those caveats apart, the government deserves enormous credit for today’s move. It signifies that authorities are acutely aware that MSPs are blunt instruments to react to rural stress or a monsoon shortfall. Furthermore, it suggests the government is far more willing to use targeted interventions (NREGA which has a self-selection component, and crop insurance) to counter any drag on agricultural production from a monsoon shortfall. More generally, it underscores the government’s commitment to keeping food inflation in check and persisting with macroeconomic orthodoxy even under populist pressure.

Has the fat lady sung?

The Shanghai Composite Index sank 6.4 percent to 4,478.36 at the close on Friday. The gauge lost 13 percent this week, entering a correction after falling more than 10 percent from its June 12 high. About 400 Shanghai shares fell by the daily limit as a gauge of volatility jumped to the highest since 2009.

Strategists at BlackRock Inc., Credit Suisse Group AG and Bank of America Corp. all issued bubble warnings this week after the market value of Chinese shares jumped by more than $6 trillion in 12 months. Fueled by record numbers of novice investors and an unprecedented $363 billion of margin debt, the median stock on Chinese bourses is valued at 95 times earnings, versus 68 at the height of the nation’s equity mania in 2007. [Link]

This is a bonus link – Chengdu’s Commercial Property Oversupply, High Vacancy Rates, etc.

Financial Markets on Greece

Gavyn Davies, in his recent blog post, raises a good question on why financial markets have been complacent on the Greek-EU stand-off and is concerned that the market complacency could change to market panic if bad outcomes happen (a Greek exit). Fair enough. He does not go far enough to answer the question. He simply considers one possibility that the markets are complacent because there is no firm deadline to focus on. May be, that is one reason. But, the compression of risk premiums has been an issue with financial markets, thanks to central banks’ ultra-easy and ultra-accommodative monetary policies. They are the culprits.

Second, there is no question that we do not have markets in financial assets as the term, ‘market’ is conventionally understood. There are no large numbers of buyers and sellers. Different central banks and sovereign wealth funds perhaps transact among themselves. There is no market and there should be no surprise that there is no liquidity in various instruments. Check out the highly informative blog post in FT here.

Perhaps, the real reason for complacency in the market place is not so much the lack of a definite deadline to focus on but more familiar suspects – the central banks, their monetary policies and asset purchases and their seduction of the financial market (whatever remains of it) with these and worse, them becoming markets themselves!

Philip Stephens, on return from Berlin, wrote – if I understood it correctly – that the German Chancellor would compromise to keep Greece in the single currency, although he begins his column on the opposite side of the debate. His conclusion is something that I agree with: whichever way it ends – she (or the EU) might emerge the loser.

As of now – and I concede, I could be wrong here – I think that the Greek side has played the game well and hence, would emerge martyrs if kicked out and emerge winners if they get a deal that they can accept.

Age-old dictum reinforced: borrow big and lenders are vulnerable. China should remember that.

The one thing I do not agree with him is this:

An objective observer would have spotted a deal: radical reform of state institutions, the taming of the oligarchs and rolling back of the cartels and closed shops that impoverish the Greek people, and a sustained attack on corruption in return for the promise of debt writedowns.

The goodwill has been squandered. Syriza’s promises have come to nought. The cliques, cartels and oligarchs flourish as before.

It takes a few minutes to type these sentences and a few years, if not decades, to do reforms of this nature that involves political economy decisions. In the short-term, shutting down oligarchs might also mean shutting down some of the services they provide. Without putting alternatives in place, such reforms might cause more disruptions in the short-term. Greece lacks resources to plan for such contingencies.

In any case, this is the Greek ‘response to Philip Stephens:

From the first day in office I have been making a simple proposal to our partners, in the Eurogroup and elsewhere: Given that we have been elected to challenge the program that you believe in, and which you want us to abide by, the negotiations will be protracted. Let us negotiate in good faith. But, also, let us agree in the meantime, as quickly as possible, on a number of reforms that we all agree are absolutely necessary and which the previous governments refused to implement. Let us pass through our Parliament three or four, commonly agreed, bills that deal with tax evasion, that set up an fully independent tax authority, that strike a blow at corruption, that reform the income tax code, that regulate and tax television channels etc. etc. Let us implement immediately these reforms while the ‘larger’, ‘comprehensive’ negotiation continues.

The answer I received was unequivocal: “No! You must not pass anything through Parliament until and unless the complete review of the Greek Program is successfully completed. Any such legislation will be considered to be unilateral action and will jeopardise your relation with the institutions.” And so it was that the negotiations have dragged on and on, draining our energies while the economy stagnates, while important reforms are still awaiting legislation.

I had extracted them from a very good speech made by Yanis Varoufakis in Berlin on 8 June 2015. I wonder which FM in the world is capable of delivering such a speech. It is not a rhetorical question but one of genuine curiosity.