The now famous 2009 deficit reporting debacle to the IMF still hunts Romania as foreign investors doubt the accuracy of the last GDP growth figures and postpone a firm commitment to return. Romania must learn the lesson of financial credibility the hard way.
I’m not a big fan of the political spectacle. Its weapons are filthy and rather primitive, while the entire scenario looks wasteful and unworthy. A view which kept me away from its curtains from the inception of my deliberate thinking. And would have kept me even further away if not for its tentacles crawling on the floor of the economic showroom just across the street. Too bad I’ve already booked 2 tickets, one for me, one for you…
Surfing around, I could not help myself from noticing the buzz going around the international media channels on the recent street riots. Their points of view vary across sources, differ and sometimes contrast awkwardly.
This time, The Economist was satisfied with reporting the underlying reasons of the developments in the public squares. Maybe they considered too early for a full in-depth analysis – more likely, the Eastern Approaches team felt unprepared or unqualified to deliver it. Other views were far more alarming, for opposite reasons.
On the one hand, the Romanian “free” press was a bit taken by the early euphoria in the streets, in a moment when a clear and thoughtful political and social coverage is crucial.
On the other hand, some major economic news&opinion agencies provided a troubling perspective. Fueling vigorously the image of a modern-age European powder keg, they pointed out, supported by more or less relevant data, countless similarities among the situations in Greece, Hungary and Romania, warning that the events in Romania have been largely underestimated. Titles such as : “Greece? Worry Over the Romanians, Most commentary on Europe’s troubles has focused on the PIIGS nations (Portugal, Italy, Ireland, Greece and Spain). But the meltdown that’s followed the financial crisis of 2008-9 is having even more severe political and economic effects in much of the European Union’s expansion zone, in the formerly Communist east.” from Forbes, or “Protests will have negative impact on Romania’s rating - warns Moody’s ” from the Business Insider covered the world economic headlines.
What bothers me most is Romania’s association with the developments in countries such as Greece and Hungary. I can even go to extremes and say that an association with the Arab Spring movement, which circulated locally – albeit largely exaggerated, is in a way more appropriate and far more desirable. Clearly, there are some similarities. All countries experienced rather harsh austerity measures, and the publics are angered. But the reasons for they anger, and the target the anger is directed to – are significantly different. And on these aspects, hopefully, we should emphasize.
In Hungary, public discontent resulted in a huge majority supporting a radical right wing coalition government, which, violating basic democratic principles, canceled central bank’s independence, sent the IMF commission home twice in the most undiplomatic manner and violated foreign banks domestic operations – winning investors anger and political isolation. In Greece, the results were a general rejection of austerity measures, a blame on international institutions for their own problems and a call towards default. I hereby illustrated in the most simplified manner, the situation in both countries being much more complex, to show what sort of climate of lack of trust and confidence these countries successfully promoted.
“This is what we want to promote?” I ask myself. The fact is Romania’s protests do not even seem to be directed against the IMF, nor against reform itself, but the way reform is implemented, not even against austerity measures, which the population eventually accepted as necessary. It is the hypocrisy, the humiliation, the corruption or the theft and luxury this government promoted during the last few years, in the face of an embattled quality of life, that bothers ordinary people.
We should therefore underline these differences and keep ourselves away from the trap the public opinion, politicians and the society in the neighboring countries fell when discrediting the international financial institutions and the markets. We are a debtor nation, we are in desperate need of foreign investments, so the consequences could prove disastrous.
Meanwhile, some official press releases proved what I feared most. On the one hand, The US Embassy in Romania, through the voice of the US Ambassador Mark Gitenstein, firmly expressed the view that Romania must continue to implement economic and structural reforms, regardless of, and particularly important now, in the face of the recent street riots. This view is consistent with the mainstream opinions in the US foreign politics regarding Romania and seems to reinforce what the IMF stated lately( Romania agreed in 2009, facing a huge fiscal gap, on a stand-by agreement for 20 billion Euros to be provided on demand, criteria fulfilled, by the IMF, European Comission, the World Bank and the EBRD) that the program was on track, the most difficult part has been managed successfully but further structural measures are to be taken for Romania to re-enter a path of economic growth. In essence, what the IMF officials said was a clear vote of confidence towards international markets.
On the other hand, the Romanian top opposition parties repeatedly stated that although they understand its necessity, Romania’s agreement with the IMF, in the current form is against, and harmful to Romania’s interests and went to openly support the rights of foreign currency debt owners through a modified Government Degree No. 50/2010 (OUG 50). Two points of view which resemble, on a much smaller scale, the attitudes behind the decisions taken by the right wing Hungarian government to send IMF home and to artificially freeze the exchange rate for mortgages denominated in foreign currency.
The official opposition parties making unnecessary comments is no surprise. There were countless before. Most of them were innocent or plain foolish. Yet these in particular are not foolish – are stupid and undiplomatic. And while political analysts at home know the opposition is not capable or may not even have in mind such drastic measures, foreign analysts do not. They are, for the sake of popular support or who knows why, effectively sending negative signals to the anxious external observers.
Still, you might argue, the financial system, while restructuring, is on track. Recently, the Romanian National Bank released a series of prudential requirements on bank crediting which are meant to significantly lower the amount and percentage of bad loans in the system and to enforce domestic financial stability, while the official shift towards the International Financial Reporting Standards starting this January is likely to release precious funds from provisions and send banks’ financial statements back on the profit side. Exports are registering record growth rates as well.
The truth is – no matter if the overall macroeconomic environment is faring well, no matter if foreign and domestic investment has been and remains, at least at a declarative stage, one of the primary objectives of Romanian politicians -regardless their partisanship, this is what foreign observes, Moody’s included, perceive: a series of highly concerning signals which fuel risk and uncertainty about Romania’s changing power scene.
People are dissatisfied and rightful to act this way. And it is nothing unusual or concerning in this respect in a democratic society. But this article is not about their riots. Moreover, there is no need to talk any further about the current governing power. We are all fed up with lies. promises, corruption and indolence. This article is not entitled to them either.
Instead, the lines’ above only purpose is to formulate an honest warning to those parties which are expected deliver a change. They are not and do not wish to create a wholistic view, which may all not even be appropriate, since I am not a political analyst. They illustrate a single instance, the criticism sent to financial institutions of all sorts- a crucial strategic mistake sent in the most unfavorable moment, of which they may not even be aware of. There are many others, for sure.
The media has the responsibility to remain impartial and moderated, and not to fall pray to intrigues and insults. From the opposition, investors expect a signal of external credibility. Markets don’t like populism. What investors see in opposition declarations is plain noise, which they treat accordingly.
For the opposition to gain some international legitimacy, to show both their citizens and foreign stakeholders that they can, if necessary, provide a trustful alternative, and put an end to the political crisis – they must come out. Recently, the two coalition leaders announced a series of meetings to take place in Washington and Brussels this year. Hope still lies somewhere. Yet so far, they only stated they want to show the Europeans and Americans “what is really happening at home”. They must have some Intelligence of their own, I reckon. For me, it seems they just want to replace “Romania is a sort of Greece” with “Romania is a sort of Hungary”. Poor consolation…
The sad truth is – there is no political alternative.
Euro keeps losing ground against the dollar and the yen following Standard & Poor’s decision to downgrade the European Financial Stability Facility by one notch, from triple A to AA+ – soon after France and Austria, two important fund contributors, lost their maximum rating - the Financial Times reports.
The decision was justified by the fact that EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities,which they perceive as the reduced creditworthiness of guarantors.
The decision was a “mechanical consequence” of the previous rating cuts and “does not represent in any way a lack of trust in the European financial backstops” – an European Commission spokesman reassures.
Mechanical or not, the decision sends ripples across the financial media. The future looks dim for Europe once again… or not. Recent financial activity has shown that big players like the US or France went largely undisturbed by the hasty decisions taken at the top of the credit rating industry. US securities trade even better than before. French borrowing costs fell at a sale of one-year notes yesterday and borrowing costs also dropped for Spain today in its first debt offering after a two-step cut by S&P. What would make this case any different. It turns that market demand for ESFS securities has exceeded 3 times its supply for the last three months, and for good reasons: in a world where safe or profitable investments are scarce, investors are desperate about finding safe heavens to stash their cash.
I believe media might be overreacting here. Currencies are right to react first and they tend to be more volatile. In the end, what matters is not how Forex traders switch their short term positions on carry trade, but how they would trade afterwards.
Instead, what troubles me is the fact that, once France and Austria have been downgraded, Germany would largely bear the burden of financing the ESFS single-handedly, as EFSF requires a large part of the funding to be AAA rated. More, the Bank of Japan is seriously considering a devaluation watching nervously as Euro hits its lowest figure against the yen in more than a decade. And this after The Swiss National Bank established a floor at 1.2 CHF/EUR in autumn as all previous measures to bring the Franc down faltered.
Competitive devaluations are not a sustainable solution to end this crisis, and a credit rating media frenzy won’t help either. The solution lies elsewhere – Consistency. Less talk, more do.
Pe langa daune materiale directe, intreruperea activitatii agentilor economici in zonele afectate si incurajarea vandalismului, pretul economic platit de Romania pentru acest gen de manifestari sociale este mult mai mare - Nu cu mult timp in urma, Romania primea aprecieri pentru stabilitatea politica si sociala si modul “exemplar” prin care a implementat reformele de austeritate; acum, tara noastra risca acum sa piarda acest statut privilegiat ce ne deosebea de piete precum Grecia sau Italia.
O Europa recent lovita de retrogadarea a 9 state plus EFSF de S&P Rating Services priveste uimita catre noi. Iar previziunile sunt sumbre, spun analistii – Orice intarziere a restabilirii ordinii creste indicele de instabilitate si face ca o viitoare retrogradare sa planeze asupra finantelor locale. Pietele nu au rabdare, agentiile de rating nici atat.
Urmarea: cresterea costului datoriei bugetare a Romaniei, inasprirea conditiilor de creditare si intreruperea putinelor fluxuri de investitii straine ce se mai incumeta sa ne calce granitele.
Situatia actuala cu siguranta nu este una economic dezirabila. E oare politic necesara?
In the Democracy Index 2011 released by the Economist Intelligence Unit, Romania ranks 59th, as a flawed democracy, way behind countries like Botswana and Sri Lanka and not far from Moldova and Lesotho. Interestingly, it still ranks lower than Hungary, given the recent right-wing sort-of-fascist moves. Worse still, it shows one of the lowest political culture in the world. Well done guys – Your magic reform plan has paid off. In a country where opinion journals disappear on a regular basis and where culture, smart media coverage and good humor are chased and overrun by paparazzi, there is little sign of hope.
“Baldwin thought Europe was a bore and Chamberlain thought it was only a greater Birmingham.”
Winston Churchill, July 1953
Surely, a critique of the appeasement policy, a tacit disregard of the political and military reality of the Thirties which made an unbearable irresponsible impression on the Lord of War. Yet it shows a deeper side of things, a state of mind, an image of what Europe means to them and even more, of the self perceived British role in world affairs.
Hardly could one find a single instance in which Britain would change its scornful, arrogant stance on Continental Europe- a French may well say. But it wasn’t pure arrogance, and British weren’t to blame, as they always had something different in mind. In the eyes of their ruling elites, as in ordinary citizens’, Britain was never meant to be part of Europe. There were Continental Europe and the splendid British Isles. Not even the man who delivered the famous speech on the United States of Europe, the venerable Sir Churchill to whom I trusted a last decent pledge to European Union on equal grounds - did not really believed in it. In fact, few other British did:
“We see nothing but good and hope in a richer, freer, more contented European commonality. But we have our own dream and our own task. We are with Europe, but not of it. We are linked but not compromised. We are interested and associated but not absorbed”
Winston Churchill, February 15th 1930
Even so, there is little of the current trend of euroskepticism to be blamed on the mere British ideals of greatness. Europe played its part as well. And did it brilliantly! The European project seemed inconsistent, ill-crafted, and at no time there have been anything entirely benevolent in the process, how a thatcherite might add. No wonder the British never fell in love with the idea of deeper European Integration! Integration into what?
Thatcher, by instance, saw the entire process unsustainable:
“(I)t is highly questionable whether when ‘Europe speaks with one voice’, as we are so often told it is doing, anyone is really listening. Europe’s reputation as a serious player in international affairs is unenviable. It is a feeble giant whose desperate attempts to be taken seriously are largely risible. It has a sluggish inflexible economy, still much reliant on hidden protectionism. It has a shrinking, ageing, population and, with the exception of Britain, rather unimpressive armed forces and, not excepting Britain, muddled diplomacy.” — Margaret Thatcher, Statecraft, P. 395
Not to mention the idea of a common European currency:
“The European single currency is bound to fail, economically, politically and indeed socially, though the timing, occasion and full consequences are all necessarily still unclear.” — Margaret Thatcher, P. 355
Statecraft was published in 2002. Nine years later, the causes and circumstances become a lot clearer. And when economic theory is also at odds, one must have been a foul to believe it would stand the test of time and the market. Let us briefly consider the Theory of Optimal Currency Area. Cause apart from the utopian dreams of few but preeminent West European political figures, the European Monetary Union was meant to be based on solid theoretical grounds.
Published by Robert Mundell(author of the Mundell Trilemma and many other theoretical breakthroughs)in 1961 the theory brought about the concept of an optimal homogenous geographical region for which the existence of a single currency, all criteria fulfilled, would minimize transaction costs, minimize risks and allow for lower interest rates, thus maximizing efficiency. The model found its practical use, Mundell unsuspecting, in the Monetary Union project. It was thus further assumed that each European country wouldn’t make an optimal currency area on its own, but instead, an European monetary union would do the job. One catch though… remember those convergence criteria.
The entire Monetary union masterpiece, as a pro-european might brag and boast, was built around the Maastricht Convergence Criteria. The inflation rate, long term interest rates, budget deficit caps, public debt cap and exchange rate stability were all mandatory prerequisites for euro zone access.
Yet there was another catch- one which can prove itself lethal. The Maastricht criteria were nothing more than nominal criteria, a far cry from what poor Mundell envisaged- a list of real convergence criteria, including a similar level of economic development, a similar structure of the economy, factor mobility (capital and labour mobility- to be understood), level of economic openness, production and consumption diversification, factor price flexibility ( ie wages, prices, rents), business cycle synchronization and finally, fiscal policy integration. Now- there is no need to bother our discussion with the different levels of economic development (just take Romania and Luxembourg) or fiscal policy integration- the matter we owe, in large extent, our paper today.
Two items, still, grab my attention: First – business cycle synchronization or the amount by which a country’s GDP varies from its potential, which correlated with monetary policy lag, or the amount of time it take for monetary policy transmission mechanisms to apply changes in policy to the real economy of individual states - varies greatly. What that means is CBE monetary policy would at all times be inefficient and discriminatory. Second, the ease with which nominal criteria indexes can be counterfeited or crafted to fit the data in the short-term, ignoring their long-term sustainability (take case of Greece, par example)
In these circumstances, euroskepticism would become rather a stance of smart politics and the British, instead of being perceived as Europe’s troublemakers, should be praised for their wisdom.
Add to it a sovereign debt crisis, born out this reckless ignorance of pure economic principles and common sense, and a de facto financial war among debtor countries trying to secure the sustainable roll-over of their debts, investors and speculators on the one hand, looking to bring governments to their knees and pocket the profits – and creditor countries, on the other, hoping to limit their exposure to troubled markets as they would limit provisions and please the all-mighty credit rating agencies, always eager to downgrade them a point or two.. And there you have it – a glimpse on the economic and political setting on which the current play is performed.
Equipped with this background of British interests in Continental Europe, and watching how the local media positively and rather undisturbed received the news of PM David Cameron’s veto on the framework for a new EU treaty, his decision left me barely surprised. The man did what it said it would. The ones who compared Cameron with a modern Chamberlain should show some apologies.
Twenty years have passed since the United Kingdom secured in its favour the terms of the Maastricht Treaty negotiations, a moment that marked the placement of the building blocks of the European Union and the euro zone as we know it today. Then, as at the moment, Britain fought for separate treatment of the issues it held most interest in. it rejected that all aspects of co-operation to come within European Community competence, for obvious sovereignty concerns. It refused to take foreign policy decisions by majority voting in the Council, as it could not agree to be outvoted on any substantive matter, or quoting PM John Major, “if Britain needs to act on its own, it must be free to do so”. It set the stage for its later refusal of Schengen Zone membership, due to security concerns. And possibly most significantly, it opted out from an agreement on common currency. All these proposals have been accepted and secured into the treaty. Then, as today, Britain made some proposals for the benefit of all members, which were also approved. Prior to it, Margaret Thatcher, the influential conservative leader, lost its grip on power after saying a firm nay to deeper European integration. Cameron’s seat isn’t secured either, as tension in its coalition may build to its fall.
Today, on the contrary, Britain failed to secure any of the pressing issues it wanted separate treatment. Strictly speaking, they were secured, as Britain would not have to comply with the obligations of meeting balanced budgets, reporting any national debt issuance plans in advance to the European body, modify its legal system to make these changes possible and delegate some of its legal powers directly to the European Court. In a word, they rejected fiscal union with Europe as they rejected monetary union twenty years before.
More, Britain does not have to provide billions to the IMF, perceived instead as an international funding body, as enshrined in Bretton Woods – to be devoted to the troubled euro zone countries, and would not have to comply with a new row of financial regulation which could wreck havoc in the City of London.
One tiny critical distinction though. The conditions Britain imposed in 1991 were ratified in the treaty. One may read them in the official paper, anytime. This time, however, Britain vetoed the entire treaty framework. Britain, in a sense, was left on the sidelines. Further decisions will follow, some regarding the very issues Britain fought for. But Britain’s place at the negotiations table had vanished. In fact, the negotiations table itself moved away, with Britain watching paralyzed on its chair, as the demise of this talks would probably spur into existence a union within The Union, with its own regulating bodies, for which Britain would not be granted a chair. It is true, as Cameron declared for The Telegraph:
“Britain’s interest in the European Union, keeping markets open, free trade, selling our good and services with rules over which we have a major say, all those things are protected, they don’t change.”
Yet other matters regarding its financial stakes in Europe may well change, with Britain lamenting powerless – or worse, not even knowing. And the fears of the analysts and brokers on Liverpool Street and Canary Wharf may very well be justified. The pain The City bore when all of a sudden – FOREX transactions of the former European currencies worth of billions of pounds - vanished into thin air with the emergence of the single currency is still fresh on many of their field.
Meanwhile, the first cracks begin to show up in the Coalition. Yet, despite slogans such as “the lonely man of Europe” or “Britain hovering somewhere in the mid-Atlantic, not standing tall in Europe and not being taken seriously in Washington” and the fact that Britain, having been turned down on its attempt to secure safeguards for its vital financial sector, loses their right to ward off any wave of future regulations aimed at The City, and while millions of jobs depend on that – PM David Cameron remains largely undisturbed. He sees the events as an opportunity to negotiate a new relationship with the European Union that is in their interests.
Cameron did what many would have expected Margaret Thatcher to have done. It is yet to be seen if they would share the same political fate.
The events of these chilli December mornings are still too recent for us to acknowledge the full extent of their consequences – and until the mist would finally clear away to let us stare at the full length and depth of the British European fault line, I end by quoting what seems to me the clever closing remark of the journalists from The Guardian: no matter how things sort out for Britain and the euro zone, things will never be the same again.
Article 2:
Postface:
There are reliable signs of heavy Downing Street briefing over at the Daily Telegraph, where the well-connected Ben Brogan is reporting that it was all the fault of the French, who crammed the text on the summit table so full of impossible demands that the British had no choice but to walk away. He writes:
The events of the past 12 hours have exposed a truth that many chose to ignore, namely that in its relentless pursuit of its national interest, France’s strategic objective has been to drive the UK to the margins – if not out of the EU – and to destroy the City. The French narrative of the crisis is that it is all an Anglo-Saxon creation, and we must be punished for it. The failings of the euro so obvious to us are not recognised by the French. The British view is that packing the treaty proposals full of changes that Britain could never conceivably accept was a ploy to force us into a veto, and so into the departure lounge. Or here’s another way of putting from inside the machine: “The French are out to screw us,” one source tells me. “Despite all the jollity, the fact is that Sarko doesn’t gives a s*** about us. It’s all bull***. They have their view that the Anglo-Saxon model is a disaster and was responsible for the crisis.”
