Greece returns

While still on holidays, I followed the Greek Referendum and then the sudden Greek capitulation. We still do not know why some of the players have acted the way they have. In case you missed the conditions that the European Commission imposed on Greece, you can check out the documents here, here and here.

I have no sympathy towards Greece for the way it managed its economic affairs in the past but imposing more austerity when there is no safety valve for growth (cheap exchange rate, robust external demand (i.e., world growth), it is self-defeating both for creditors and debtors. Second, there are boundaries beyond which creditors cannot impose policies on debtor-nations. Sovereign rights must be respected.

I wrote in my MINT column that it was time to put the Eurozone project to bed. It appears that I was not alone. Even Germany thinks so. It does not seem to think that the Eurozone, as it is constituted today, is sustainable. That much has been revealed in a leaked transcript of a conference call that Yanis Varoufakis, the former Greek Finance Minister (he had to resign once the Greek government decided to accept all conditions imposed by creditors) had with some hedge fund managers:

At the very same time, Wolfgang Schäuble has a plan…. This is one of the very sweet moments in one’s life when one does not have to theorise, because all I did was to convey the plan as Dr Schäuble described it to me. The way he described it to me is very simple. He believes the eurozone is not sustainable as it is. He believes there has to be some fiscal transfers, some degree of political union. He believes for that political union to work without federation, without the legitimacy that a properly-elected federal parliament can render, can bestow upon an executive, it will have to be done in a very disciplinarian way. He said explicitly to me that a Grexit, a Greek exit, is going to equip him with sufficient bargaining power, with sufficient terrorising power in order to impose upon the French that which Paris is resisting. What is that? A degree of transfer of budget-making powers from Paris to Brussels. [Link]

These are comments made by Varoufakis in that conference call. In some sense, Germany wants to review the design of the Eurozone. It does not like the Eurozone as it is today.

Nothing wrong with that. It is as it should be. Unless there is a greater fiscal and political integration, there is no chance of the Eurozone surviving. This is what I wrote in an email to friends:

Everything that Germany has done on this matter makes sense if we relax the assumption that it wants the single currency project to survive and sustain.

I was partially correct. Germany does not want the Eurozone to sustain in the present shape, form and arrangement.

As for Greece, Schäuble actually offered a good deal to Greece: debt hari-cut and exit. They should have taken it. He was actually being constructive. I criticised them (Syriza government) for not having a Plan B. Looks like they had one. But, they (Tsipras, in particular) did not have the stomach to carry it through.

In the meantime, the IMF published its own analysis (I am yet to read them) that Greek debt was not sustainable. Then, how the European Commission forced through tough austerity measures on Greece without offering a debt hair-cut is baffling. Perhaps, they did not expect Greece to roll over and surrender. They actually wanted Greece to go, perhaps. I thought they only wanted a Syriza exit from Greek government but looks like they wanted Greece to exit the single currency.

Now, IMF Board is informed that the Fund cannot participate in the new bailout programme for Greece because Greece does not fulfil the conditions for the Fund to participate in an exceptionally large bailout programme.

Well, the fat lady is far from singing yet.

Revised Code

I need to and have quite a bit to say on this. India’s Ministry of Finance has uploaded a revised version of the Indian Financial Code (IFC) that was brought out as part of the Financial Sector Legislative Reforms Commission (FSLRC) in 2013. It has many priorities. Get banks moving on credit and cleaning up their books. But, it manages to muddy the waters on monetary policy, RBI, etc. The media and the commentariat latch on to the sensational aspects of the code and its implications. Rather bad and sad.

There was an article by Vivek Dehijia and his co-author in MINT today. This is an excerpt from their article:

A basic tenet of modern theory and practice of central banking is that a system which is opaque and allows discretion will invariably deliver worse outcomes than a transparent and rule-governed system, which the MPC plus the inflation targeting regime will provide.

That is a huge leap of faith and hypothesis, not borne out by reality. Mantras such as transparent and rules-based monetary policy are touted without any serious application of mind as to their relevance for economic outcomes. What is good for financial markets and financial sector participants is not necessarily good for the real economy. In fact, in most countries, categorically, it has been the opposite.

In this regard, William White’s interviews given earlier in the year and available at and the Presidential address by Luigi Zingales at the American Financial Association in January this year are important READs.  You can find Zingales’ speech here. I have blogged on William White’s interview earlier.

The heart of the issue is that and not the turf battles between MoF and RBI which is trumped up by the media. These policies are being put in place not by the present government for the present governor. They will remain in place for more time to come. Hence, the issue is not about Dr. Rajan or Mr. Jaitley. We need to move away from that.

It is about what is good for the economy as opposed to what is good for financial markets and financial market participants. This article and many other comments conflate the two.

Finally, the revised draft IFC is not just about RBI and MPC. Many aspects of it are not necessarily in the interests of economic stability even if they are in the interests of the financial sector. Hence, the implications of the draft IFC need to be examined in their totality.

MINT has done an interesting thing. It has posted an article on all the articles written on FSLRC recommendations and on the IFC. Happy to note that two of my articles on the subject are cited as well.

My longish piece on the FSLRC recommendations is here. Will have more to say in the coming days. Need to study more chapters of the revised draft IFC. Have read only two of them – on RBI and on Capital Controls.

Back on track

A three-week long sojourn away from Singapore with six days in Chennai – 4 on the way to the UK and 2 on the way back. The first four days were spent in finishing up a paper for a conference to be organised by the Hong Kong Institute of Monetary Research, affiliated to the Hong Kong Monetary Authority on monetary policy co-ordination, spillovers, etc. Odds are rather long that it would be accepted because it is too critical of the institutions that are co-organising the conference, especially the Federal Reserve.

London was vibrant. It was too hot on some days. Experienced the Wimbledon QUEUE. Not sure if I would repeat it. Managed my first entrance into the hallowed portals of Wimbledon courts. Watched matches on the 5th Friday (July 3). Four days in Scottish Highlands. Fabulous landscape – quite different from both New Zealand and Switzerland. Endless stretches of nature with nary a human being in sight. Lost my smart phone because it fell into the water. Still struggling with a old instrument. Some productivity lost.

Got back into some teaching straightaway on return. No time to catch my breath while battling jet lag. Hence, mostly been meeting regular writing obligations. But, must start somewhere. Greece, China, Draft Financial Code, etc.