Friday, 5 February 2016

The trade effect of negative interest rates

Yesterday, HSBC prepared the ground for imposing negative rates on business depositors. This is an excerpt from HSBC's letter announcing the necessary change to the Terms & Conditions of HSBC business accounts:


Now, this requires some explanation. Firstly, the change applies only to BUSINESS accounts. Retail depositors are unaffected. Secondly, it applies only to currency accounts, not sterling accounts. And thirdly, despite HSBC's mention of "negative rates set by central banks including the European Central Bank", the relevant "policy or reference rate" at present is still positive everywhere except Sweden, where the policy rate is currently -0.35%.

Central banks set several interest rates, of which only one is the so-called "policy rate". The policy rate is usually the rate at which the central bank will lend to banks against good collateral: it is the benchmark not only for the interbank lending rates (Libor, Euribor and their relatives), but also for retail and wholesale bank lending rates: for example, in the UK, standard variable mortgage rates (SVRs) are typically priced as base rate plus margin. 

For the US, the "policy rate" is the Fed Funds Rate. For the UK, it is "bank rate" or "base rate". And for the ECB, it is the "main refinancing operations" (MRO) rate.  The rate that HSBC refers to in its letter is the MRO rate. In effect, it is saying that if the MRO rate falls below zero, it may impose a negative rate on Euro deposit accounts held by UK business customers. 

The MRO rate falling below zero is not as unlikely as it sounds. Currently, the Fed Funds target rate is 0.5%, as is the Bank of England's base rate: the Fed raised rates in December 2015, and the Bank of England has just decided to leave the base rate on hold. But the ECB has been progressively cutting interest rates since 2011. As this chart from the ECB shows, the ECB's deposit rate has been negative since June 2014 (this is the "negative rate" that people talk about), though it was recently reduced further. But more importantly, the MRO rate is only just above zero, at 0.05%:


The ECB is widely expected to cut interest rates further because of continued poor economic performance and very low inflation in the Eurozone. Dropping the MRO rate below zero is no doubt one of the options being considered.  

So what is the impact on banks of a negative refinancing rate? Clearly, since policy rates are benchmarks for bank lending rates, it forces down the price of new lending. Currently, banks like HSBC have resisted the temptation to cut deposit rates below zero in response to the ECB's negative deposit rate, because they have been able to maintain their net interest margins by keeping lending rates up. But downwards pressure on benchmark lending rates would squeeze their margins. So HSBC is giving notice that if the ECB pushes the MRO rate below zero, the cost to them of reducing the price of new lending in Euros may be passed on to businesses in the form of a negative interest rate on Euro deposits. 

But hang on. HSBC is a British bank, and the letter has been sent to UK business customers, most of whom have sterling accounts. And these days, foreign currency payments can be made directly to sterling accounts with the bank managing the currency exchange. So who would this affect? 

It would affect any business which is doing sufficient business with the Eurozone to justify having a Euro account. Particularly, businesses which are both exporting to and importing from the Eurozone, perhaps importing raw materials and parts and exporting finished goods. A negative MRO rate would, in effect, be a tax on UK businesses doing business with the Eurozone.

Now it could be argued that if a UK business faces the equivalent of a withholding tax on sales to the Eurozone, this would benefit Eurozone businesses. But if HSBC can apply this tax to its UK clients, so too can Eurozone banks to their Eurozone customers. So I wouldn't bet on this effect, personally. 

It does, however, seem possible that businesses - both Eurozone and foreign - might push the cost on to customers by raising the price of goods and services. This would help bring Eurozone inflation back towards its target. But raising inflation by deliberately increasing business costs is contractionary: it would do absolutely nothing for the Eurozone's chronic demand deficiency. And businesses might choose to absorb the cost by putting downwards pressure on wages and - if possible - supplier prices, by cutting investment and even by laying off staff. They might also reduce dividends to shareholders. Given this, is hard to see how a negative MRO rate would constitute "expansionary policy".

I've argued before that negative rates are not expansionary. At that time, I hadn't thought about the trade effects. But looking at the trade effects now just confirms my view. Negative policy rates would make the Eurozone's economic performance worse. Don't go there. 

Related reading:



Monday, 1 February 2016

What they really want

As Henry Tapper puts it, today is WASPI day. Today is the day that "Women Against State Pension Inequality" get the Westminster debate for which they have campaigned.

Eh, wait? Wasn't there a debate on this back in early January?

Yes, there was. It was a backbench motion proposed by the SNP MP Mhairi Black. It called on the government to re-examine the acceleration of the equalisation of women's and men's pension ages in the 2011 Pensions Act, which added up to 18 months to the state pension age of some women born in the 1950s:
That this House, while welcoming the equalisation of the state pension age, is concerned that the acceleration of that equalisation directly discriminates against women born on or after 6 April 1951, leaving women with only a few years to make alternative arrangements, adversely affecting their retirement plans and causing undue hardship; regrets that the Government has failed to address a lifetime of low pay and inequality faced by many women; and calls on the Government to immediately introduce transitional arrangements for those women negatively affected by that equalisation.
The motion was carried by 158 votes to zero, a remarkable achievement for Black, the youngest MP in the House of Commons. But the Government is not bound to take any notice of it, and so far has declined to do so.

And it wasn't what WASPI wanted anyway. They are not really interested in the 2011 change. Their aim is much larger: payment in lieu of pension at 60 for all women born between April 1951 and December 1959 whose pension age has risen as a consequence of the 1995 and 2011 Pension Acts. This is why they continued to drum up support for their petition even after Mhairi Black's motion was carried unanimously.

On Monday last week, in an interview on BBC2's Victoria Derbyshire show, one of the WASPI women, Wendy Eachus, made a heartfelt case for the state pension to be paid from her 60th birthday.  She described how her dream of stopping work and visiting her family in Australia and Canada had been shattered. In her words: "I wanted to do some travelling and enjoy life a bit while I'm still fit enough to do so".

The following day, Simon Read, in the Independent, wrote a sensible piece particularly highlighting the plight of women affected by the 2011 change and women born 1951-3 who will not qualify for the new State Pension. He featured Wendy's interview.

But there's a problem. Wendy Eachus was born in 1956. She is not one of those affected by the 2011 change. And when she reaches her state pension age in 2022, she will receive the new State Pension. Simon Read's piece is not about her. It just shows how confused the whole subject is that a good journalist like Simon Read managed to miss this.

By choosing Wendy Eachus to front this interview, WASPI shot themselves in the foot. They inadvertently revealed their real aim on mainstream media. No more could they pretend that this was about "fair transitional arrangements" for those caught by the 2011 change. No, it is all about the 1995 equalisation of mens' and womens' pension ages, which affects younger women more than older ones. Wendy herself made it clear that she wants the pension at 60 to which she believes she is entitled.

In her briefing to today's debate, the Pensions Minister, Ros Altmann, summarises the WASPI demand thus:
The Debate is about the WASPI petition, claiming to call for ‘transitional arrangements’ for 1950s women whose state pension age has increased from age 60. These so-called ‘transitional arrangements’ actually call for all 1950s women to be paid their state pension from age 60. They are effectively and unequivocally asking Government to reverse the women’s pension age changes of the 1995 Pensions Act not just the 2011 Pension Act. This would give thousands of pounds to each of these women. 
It is fair to say that this aim is not clearly expressed in the petition, which simply calls for "fair transitional arrangements" for women born in the 1950s:


But it is pretty clearly stated on their Facebook page:


More importantly, it was explicitly stated by Anne Keen, one of the co-founders, in her verbal evidence to the Work and Pensions Committee:
"Basically, what we are asking – and we feel this is a very fair ask – is for the Government to put all women in their 50s born on or after 6 April 1951 and affected by the state pension age in exactly the same position they would have been in had they been born on or before 5 April 1950.  …all our lives we expected to receive our pension when we were 60...Although there was not a written contract as such there was a psychological contract."
Ros Altmann appears to be correct. Putting all 1950s women into the financial position that they would have been in had they been able to claim their state pension on their 60th birthday, as women born prior to 5 April 1950 did, is equivalent to rolling back the state pension rises in the 1995 and 2011 Pension Acts.

But WASPI have repeatedly denied that this is the correct interpretation. They claim to support equalisation of womens' and mens' pension ages. They insist that the issue is inadequate notice, and that the demand is for "fair transitional arrangements", not repeal of the 1995 and 2011 Pension Acts. And they've convinced a lot of people. Over 135,000 have signed the petition.

The 1995 Act included transitional arrangements. It delayed the start of the equalisation by 15 years so that women had adequate time to prepare. And it provided for women's pension age then to be raised gradually over the course of 10 years, from 2010-20. All women born prior to April 1950 would retire on their 60th birthdays, but for those born from April 1950 to March 1955 the SPA would rise by one month in two. All women born from April 1955 onwards would retire at 65.

The 2011 Act accelerated the 1995 change for women born 1953-4, and added an extra year for those born September 1954 onwards. They will now retire at 66, not 65. Wendy Eachus was sent a letter about this change. The trouble was, she didn't know about the 1995 change, because DWP communication was - to put it mildly - inconsistent. So to her, this letter told her not about a 1-year increase, but about a 6-year one.

The DWP says that "all women were written to". This is now true for 1950s women, though not yet for younger ones: most women born in the 1960s and 70s, whose pension age was 60 when they started work, still have not been written to about the rises. But the DWP's statement misses the WASPI point about notice. Receiving a letter telling you that your state pension age has effectively risen by six years when you are less than two years from the state pension age that you expected is a terrible shock, and for some women will have caused financial as well as emotional distress. It is unfair to blame women for DWP communication cock-ups.

WASPI argue that the 1995 transitional arrangement was "unfair" because it was not properly communicated.  In response to this, WASPI are demanding not the repeal of the 1995 Act, but the elimination of the transitional arrangements put in place in 1995 and amended in 2011. Would this create "fair transitional arrangements"?

If the WASPI demand were met in full, all 1950s-born women would in effect receive their pensions as if entitled to them on their 60th birthday. No doubt they would regard this as "fair". But women born in 1960 would not receive them until their 66th birthday. So a woman born on 31st December 1959 would receive the equivalent of six years' more state pension than her classmate born 1st January 1960.

The original transitional arrangements were designed to prevent severe cliff edges like this: even the 2011 acceleration did not create anything as sharp as this. The cliff edge that the WASPI demand would create if met in full is clearly shown on this chart from Suzy Allbright:


The truth is that the WASPI demand is not for "fair transitional arrangements". It is for NO transitional arrangements. And it is grossly unfair to women born in early 1960, who would not only receive six years' less pension than their classmates but would have to pay higher NICs and taxes to fund the extra payments to their peers. So WASPI want to stiff their younger sisters. Nice.

What about the WASPI claim that they support equalisation of state pension ages? Indeed they do - for the same group of slightly younger women. Under the WASPI plan, a woman born 1st January 1960 would receive her state pension at the same age as her male classmate born the same day. But a woman born 31st December 1959 would effectively receive her state pension SIX YEARS earlier than a man born the same day. So WASPI support equalisation, but for their younger sisters, not for themselves.

As Ros Altmann puts it in her briefing to the debate today, "They call their campaign ‘Women Against State Pension Inequality’, but its demands could perhaps be more accurately described as ‘Women Advocating State Pension Inequality’ ".

It is abundantly clear that rolling back state pension entitlements cannot happen, not least because it is horrendously expensive. The estimated cost of effectively restoring state pension at 60 for 3.7m women born in the 1950s exceeds £100bn, and could be double that if EU equality law means that the same payments have to be made to 1950s-born men as well. However angry women are about lack of notice, it is very hard to see how such indiscriminate payments irrespective of need and regardless of the cost to younger women and men can possibly be justified.

But that does not mean that the needs of those who face hardship because of these changes should be forgotten. Few people would disagree that the DWP should act to relieve distress caused by their communication failures. The question is what form that relief should take. Personally I think this should take the form of adjustments to working-age benefits - for example, removing jobsearch conditionality and sanctions for women and men over 60 who are claiming JSA and ESA, and relaxing the taper so that they can keep more of their savings.

When the WASPI campaign fails, as it inevitably must, it is important that this debate keeps going.


UPDATE. Since there seems to be quite a lot of confusion about the effects of the 1995 change and the 2011 acceleration, I am posting here a handy guide to retirement ages, courtesy of Ros Altmann.



Please note that I will not provide links to the WASPI petition or any WASPI source material. I will also remove any such links added in the comments. 


Related reading:


The angry WASPIs

Here I stand, I can do no other

Sunday, 31 January 2016

Japan's negative rates: the China connection

Japan has just introduced negative rates on reserves, following the example of the Riksbank, the Danish National Bank, the ECB and the Swiss National Bank. The Bank of Japan has of course been doing QE in very large amounts for quite some time now, and interest rates have been close to zero for a long time. But this is its first experiment with negative rates.

The new negative rate framework is complicated, to say the least. The Bank of Japan has helpfully produced a pretty picture to explain it:

The bottom tier is a "basic balance" which is the existing reserve level in the banking system:
The average outstanding balance of current account, which each financial institution held during benchmark reserve maintenance periods from January 2015 to December 2015, corresponds to the existing balance and will be regarded as the basic balance to which a positive interest rate of 0.1 percent will be applied.
So existing reserves will (overall) continue to bear positive interest. Even banks that hold more than their benchmark level may avoid the negative rate, since the Bank of Japan has allowed for a reserve buffer at a zero interest rate:
A zero interest rate will be applied to the sum of the following amounts outstanding.  
a) The amount outstanding of the required reserves held by financial institutions subject to the Reserve Requirement System  
b) The amount outstanding of the Bank's provision of credit through the Loan Support Program and the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake for financial institutions that are using these programs  
c) The balance calculated as a certain ratio of the amount outstanding of its basic balance in (1) (macro add-on).  
The calculation will be made at an appropriate timing, taking account of the fact that the outstanding balances of current accounts at the Bank will increase on an aggregate basis as the asset purchases progress under "QQE with a Negative Interest Rate."  
Banks that manage their reserves cleverly will be able to avoid the negative rate on most of their reserves. Indeed, this seems to be the Bank of Japan's intention, according to a footnote:
A multiple-tier system is intended to prevent an excessive decrease in financial institutions' earnings stemming from the implementation of negative interest rates that could weaken their functions as financial intermediaries.
Those who think that the purpose of negative rates is to encourage banks to lend are now no doubt muttering darkly about bank lobbying and "revolving doors". But the negative rate is not about bank lending. It is in fact a further strengthening of Japan's "quantitative and qualitative easing" (QQE) programme:
The Bank will lower the short end of the yield curve by slashing its deposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve, in combination with large-scale purchases of JGBs.
And just in case this is not clear, the Bank of Japan explains in a footnote that the purpose of the negative rate is to influence market prices (my emphasis):
A negative interest rate is expected to exert its intended effects on financial markets even under the multiple-tier system where a negative interest rate is applied partially. Transaction prices in financial markets (e.g. interest rates, stock prices, and exchange rates) are determined by marginal losses or gains made in a new transaction. Although a negative interest rate is not applied to the total outstanding balances of current accounts, costs incurred with an increase in the current account balance brought by a new transaction will be minus 0.1 percent if it is applied to a marginal increase in the current account balance. Interest rates and asset prices will be determined in financial markets based on that premise. 
Thus there is no need to penalise banks heavily for holding excess reserves. The negative rate is not primarily intended to encourage banks to lend.

But why is the Bank of Japan so intent on cutting interest rates? After all, it has just produced a pretty upbeat forecast for the Japanese economy. Yes, household spending is weak, and wages are stagnant, but corporate profits are at record highs and unemployment at a record low. Inflation is hovering around zero, but that is largely because of falling oil prices, which is net positive for the Japanese economy as an oil importer. What on earth is this all about?

It's about China, mostly:
Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy
The external environment for Japan is becoming increasingly difficult. Central banks across South East Asia are cutting interest rates and putting downwards pressure on their currencies in response to collapsing commodity prices and China's slowing economy. The offshore yuan (CNH) is falling, and China is progressively devaluing the onshore yuan (CNY) in response, in addition to doing various forms of yuan monetary easing. China has now broken the CNY peg to the US dollar, replacing it with a basket of currencies: since CNY is no longer pulled upwards by the US dollar, devaluation seems likely to proceed faster despite China's tightening capital controls.

Japan's exports are suffering from the Chinese slowdown, and from emerging market weakness generally. The trend has been downwards for the last year:


Exports not only to China, but to its other South East Asian export partners - notably South Korea - have fallen significantly. Even exports to the US have recently fallen, despite the strong dollar. And although the balance of trade improved in December, this is only because imports fell even more.

For an economy as short of internal demand as Japan, an external trade collapse is something of a disaster. It has no choice but to respond to monetary easing by its South East Asian trade partners and hope that better times return soon.

Of course, no-one would dream of doing competitive devaluation to gain export advantage, would they? Perish the thought. The Bank of Japan says that the interest rate cut is all about inflation. And indeed it is. Cutting interest rates depresses the exchange rate, and depressing the exchange rate raises inflation. Perfectly legitimate behaviour for an inflation-targeting central bank.

But I'm sorry, they can call this inflation control if they want, but the effect is the same. Deflationary economies desperately seek demand from external sources that they cannot generate at home, and these days they do so by using interest rate cuts and QE to depress the value of the currency while pretending that it is all about stimulating the domestic economy. Japan's move is no different from that of other local central banks: it is externally-driven, and the target is the exchange rate, not domestic interest rates and bank lending. The only difference is that Japan's interest rates were already on the floor because of its long-standing domestic deflation, so protecting against an external economic slowdown inevitably meant negative rates.

This is why Japan has firewalled its banks with a complex three-tier scheme. It has created a structure that will enable it to cut rates far more deeply into negative territory without breaking the banks. There is more, much more, to come.

Related reading:

Yuan vs yen: how China figures into Japan's negative rates - Wall Street Journal
El-Erian says countries weakening currencies in fight for global growth - Reuters

Monday, 25 January 2016

I am not insane

I have to straighten something out.

On 7th January, I made a remark on Twitter which with hindsight was - unwise. Well, ok, it was worse than unwise, it was stupid. I did not think about the consequences. It never occurred to me that issuing that tweet would lead to three weeks of sustained and vicious personal abuse.

For obvious reasons, I'm not going to repeat it here. All I will say about it is that it concerned the sex attacks in Cologne and other German cities at New Year, and it was part of a long Twitter conversation with several people.

And yes, I know the difference between criticism and abuse. I am not afraid of disagreement. On the contrary, I welcome it. I am known for having heated arguments with people on Twitter. It can be uncomfortable for the onlookers, but I learn from those arguments and I almost always finish on good terms with the person I am arguing with. But obscene comments ("she likes Muslim dick") and disparaging remarks about my appearance (ugly), my age (old), my supposed race (Jewish, or a Muslim man in drag) and my alleged beliefs (Liberal lefty fascist feminist) are not "disagreement", they are personal abuse. Alleging that I approve of criminal behaviour ("@Frances_Coppola loves rape of white girls by Arab men") is not "constructive criticism", it is defamation.  

At the time, I thought what I said was reasonable. But the watchers thought otherwise. They leapt on it like a pack of wolves. The tweet was retweeted, reweeted and retweeted again, with ever more unpleasant comments and criticisms. Most expressed outrage at my suggestion that someone other than refugees might have done this. But often the reasons for the outrage, far from being rational, were along the lines of "Muslims are rapists and you are a rape enabler", or "refugees are rapists and you are a terrible person for protecting them". Some even accused me - bizarrely - of blaming the women concerned.

I tried again and again to explain my point. But my attempts at explanation fell on deaf ears. The Twittermob did not want to know. They were furious and out for blood. Not only this tweet, but others too were screencapped and circulated - a "selection" of my tweets which reinforced the idea that I was some kind of lunatic conspiracy theorist, or worse, someone whose view of justice was so skewed that I regarded protecting refugees as more important than identifying and prosecuting sex attackers. Nothing could be further from the truth. The WHOLE POINT was that I wanted the real perpetrators of this crime brought to justice. Clearly I explained this extraordinarily badly. But when those with agendas can select the comments that can be used to support their case and discard those that do not, it is all too easy for views expressed in a public forum such as Twitter to be fatally twisted.

As the tweet went viral, it attracted the attention of the American far right.

By "far right", I mean those who believe that white people should rule the earth and that other races are inferior. The hardcore racist and Jew-hater Andrew Auernheimer (twitter name @rabite, have a look at the timeline if you have a strong stomach) screenshot my tweet and told me he would make sure it never disappeared from circulation:


He meant it. He repeatedly circulated the tweet to his 29,500 followers.  

Not only that, but he decided to take what he thought was my job, too. He found out that I write for Forbes. Suddenly I became not just "financial writer", but "Forbes journalist". I am not, but no matter, no-one cares about the difference between "journalist" and "contributor". Someone created a standard email complaining about me and demanding my dismissal, which was sent to Forbes by hundreds of people. Fortunately, Forbes - who have always made it clear that contributors do not in any way represent them - ignored the emails.

But incorrect though it is, "Forbes journalist" has become a meme. The Infowars account @Prisonplanet tweeted the screen shot of my tweet with a comment saying "Forbes journalist wins herp derp of 2016 so far.". That went to another 114,000 people, who retweeted it in turn and.....Try as I might, I now cannot convince people that I am not a journalist.

If I WERE a journalist, I might have had rather more protection: the media does try to give its staff some protection from online abuse, and Twitter verification gives journalists some ability to filter out trolls and abusers. But I'm not employed by mainstream media, I don't have legal or management protection, my Twitter account is my own personal account and Twitter does not see fit to verify it. The Twitter community has dubbed me a journalist, but I have none of the privileges of a real journalist. So when the American racist right attacked in force, I had no defence.

Maybe I've led a sheltered life, but I had never before encountered hardcore racism on such a scale. I've encountered racism, of course - dammit, I worked for a while as a housing officer on one of the roughest estates in London. But I'd never seen anything like this. Not only anti-Muslim tweets - though the murderous* term "kebab" was new to me - but also anti-black and anti-Semitic tweets were directed to me, many of them obscene and some of them violent. I was described as a "filthy Jewess", and told to "get gassed, yid" and to "put a gun in my mouth". There were also helpful suggestions that I would benefit from being raped by a Muslim, and - inevitably, since I am neither young nor pretty - the comforting observation that no man would want to rape me.

This last speaks volumes about the attitude of these people to women. Civilised people do not judge women's worth by their attractiveness to rapists. Their outrage had nothing to do with the rights of women - indeed many of them were rabidly anti-feminist. No, it was all about "whitey". They were appalled at the idea that "their" women could be attacked by men from inferior races, and even more appalled that I dared suggest that white men might behave in the same way, even though the obscene language they used suggested that they were only too familiar with such behaviour. These were cavemen, through and through. And they all supported Donald Trump. God help America.

When something like this happens, you find out who your friends really are. And surprisingly, among those who were most vocal in my support were some who had been severely critical of my original tweet. They did not agree with what I had said - they still don't - but they were absolutely going to defend my right to say it. THAT is free speech. Not the faux "you can say whatever you like, but if we don't like it we will silence you" of the self-proclaimed "free speech" supporters who follow the likes of Milo Yannopoulos (@Nero on twitter).

I blocked hundreds of people, I think. I had to block instead of mute, because they were feeding off my timeline, retweeting and screencapping new tweets as I made them. But in a way, blocking made matters worse. They treated being blocked as a trophy, crowing about it and circulating screen prints of the block screen. I became known for blocking people - me, the person who has always hated blocking and feels bad about doing it. I started to receive tweets asking if I was turned on by blocking people (no, I won't repeat here exactly what was said).

Eventually, on the advice of some of my critical but supportive followers, I protected my tweets. I hated doing it: it felt like giving in. And the Twittermob hated it too. They raged about "bitch has protected her tweets!" @PrisonPlanet circulated a screenshot of the protected screen with a comment saying "Forbes journalist retreats to her safe space". Of course, it wasn't all that "safe", since I continued to receive abusive comments. I routinely blocked the originators and reported threatening tweets, and Twitter suspended a few of those accounts for breaking the rules. But at least locking the account stopped them feeding off my timeline: I could talk to my followers without my words being seized upon, twisted and circulated, and I could prevent sockpuppet accounts from following me in order to troll my timeline and harass me. And eventually things started to calm down.

After a week, most of the abuse had stopped and I unlocked my account again. Using a locked account has a cost for anyone who is promoting their own work on their Twitter account, or even just issuing other information: you cannot retweet protected tweets, so items simply don't circulate as they would from an unlocked account. So both I and my followers wanted the account unlocked. When I unlocked it, I was promptly trolled, of course, but it wasn't as bad as before: it was easily dealt with by judicious use of blocking, muting and occasionally reporting. I've continued to receive abusive tweets ever since, as the screenshot of the original tweet has continued to circulate.

But the fact that the screenshot of the original tweet is still circulating means it can be used by the press and by writers, even though I deleted the original over two weeks ago. It was quoted by James Delingpole in Breitbart, and misinterpreted (though not quoted) by Deborah Orr in the Guardian. Auernheimer was right: my ill-considered words live on and cannot be forgotten. Have I done my reputation permanent damage? Perhaps. But that is partly because of another mistake that I made yesterday.

Three weeks of constant abuse has left my nerves very frayed. It has also affected my health, since my asthma is triggered by stress: I had to take a few days off work because my breathing was so bad. But the frayed nerves are a much bigger problem. I am over-sensitive and my judgment is impaired. My usual clarity of thought is no longer there. I overreact to things that I should have the sangfroid to let pass. So when a blogger quoted my tweet in a post yesterday, I reacted very badly.

He had used the tweet as an example of temporary "insanity" in a normally rational person caused by a highly emotive event. Had I been thinking straight, I would have seen that this was what he meant. But I'm not thinking straight. I took it as yet another personal attack - an attempt to stir up the whole tweetstorm all over again. I told him to take down the section referring to me or face libel charges.

That was both unfair to him and very foolish. There followed an unpleasant argument on Twitter in which I tried again to explain what the purpose of the original tweet was and he insisted that I did not mean that - all of it watched by a huge crowd who were mostly not on my side. It achieved precisely the opposite of what I wanted: not only did the blogger refuse to amend the piece, the piece ended up being circulated far more widely than it probably would have been, and a new tweetstorm developed, this time expressing outrage at my allegation of libel. I am now receiving personal abuse again, though not on the scale of two weeks ago. I've muted lots of people. But muting doesn't work, really: I still see the comment before I mute. A few hundred nasty tweets and I'm a nervous wreck, whether or not I mute the originators.

My attempt to resolve the situation by leaving a comment on his post and retweeting it myself also appears to have backfired, though it was intended as something of a climbdown. The blogger has now written a very angry post about me. I have to say that although the criticism he levels at me in this post is harsh, it is deserved. I have handled this very badly indeed and am genuinely sorry about the mess I have made. I have left a comment on that post apologising for accusing him of libel. 

But until yesterday, I was not guilty of anything more than stupidity. And heaven knows, people make stupid remarks on Twitter ALL the time. I did not deserve weeks of obscene personal abuse and threats, not only on Twitter but also in comments on my own blog, and even by email. Nor did I deserve to have attempts made to destroy my livelihood. And I am damned if I am going to be hounded off Twitter by what is the online equivalent of a lynch mob. 

This must stop. 

_________________________________________________________________________________

* The term "kebab" is used pejoratively by the American right to mean Middle Eastern Muslims. I have been told that it comes from a music video created by Serb musicians in the Bosnian war. The video was originally entitled "Remove kebab" - an approving reference to the genocide ("ethnic cleansing") of Bosnian Muslims. Hence it is both racist and murderous, not simply anti-Muslim. 

Tuesday, 19 January 2016

Much Ado About (Almost) Nothing

President Juncker's European Fund for Strategic Investments (EFSI) has produced an update on its progress to date. The update is a lovely piece of work, with elegant graphics and breakdowns of projects and investments by country and by sector. Really impressive. Kudos to the content management team.

But the content - oh dear, the content. The triumph of image over substance. From the EU-wide State of Play document, here is the total amount invested so far - projects and SME financing - and the countries benefiting from this investment;


However, exactly how much is being invested in each country, and on what, is buried in country-specific documents. So I've tabulated it here.


Obviously, it's incomplete. For about half the countries in this list, there is NO information. Well, this is awkward.

Fortunately, help is at hand. A calculator, in fact. The totals show that the EFSI has actually invested more than this, so the remainder is presumably going into cross-country projects and investments. There is (I assume) just over 1bn Euros going into cross-country projects and a further 1.2bn (approx) going into cross-border SME financing via unspecified financial intermediaries. Fair enough, but this is hardly comprehensive or transparent information, is it?

The cross-country projects can be identified from the sectoral analysis. Well, one of them, anyway. This map says that one of the projects in the Circular Economy sector is cross-country:


The cross-country project in question is an infrastructure fund in France & Belgium which is described as an "equity fund investing in transforming former industrial sites into uncontaminated and habitable areas". It has no funds allocated to it yet.

But this is the ONLY project identified as cross-border. So where on earth 1bn EUR supposedly invested in cross-border projects is actually going remains a mystery.

I was going to tabulate the projects by sector and cross-reference them to their countries. But I gave up when I discovered that construction of a bio-tech mill in Finland was listed under both Agriculture and Circular Economy. No doubt there are other examples of double counting, too. To be fair, the State of Play document does say that some projects are multi-sector. But the innocent could be forgiven for thinking that these were two separate projects. I think they call this obfuscation.

More importantly, though, there is no information anywhere in these documents on whether these are new projects, or projects already funded under existing EIB schemes that have simply been shoehorned into the new scheme to big up its numbers. The proportion of funding going on energy/climate change is highly suspicious:



The lead time for large renewable energy and transport projects is considerable - but the EFSI has only been in existence for a few months. And this paragraph from the Energy sector sheet suggests that there are as yet very few, if any, new projects:
In the first months of 2016, the regional groups established to oversee the implementation of the Projects of Common Interest (PCIs) will discuss eligible projects that the EFSI could help finance. The EU budget for 2014-2020 already increased the energy sector allocation and the EFSI should complement it to give EU consumers access to secure, sustainable and competitive energy. The EFSI can be combined with other sources of funding in the EU budget for particular projects and platforms, in particular Connecting Europe Facility (CEF) financing (both grants and financial instruments) and European Structural and Investment Funds (ESIF). The effectiveness of the EFSI could benefit from the combination of financial instruments, EIB loans and grants in a "blending approach".
 I've highlighted what is an extraordinary statement in this paragraph, given what we already know about the capital sources for the EFSI. Here is the diagram from the original EFSI proposal document. Look at the footnote:


So the EFSI, which already has 3.3bn EUR of capital diverted from the CER, proposes raiding it again. This isn't "new" investment at all, is it?

I seriously doubt if there is much financing of genuinely new projects going on. I think that EU governments have simply seized on this initiative to reduce the impact on their own budgets of already-planned infrastructure investment. For example, one of the projects financed is the UK's Smart Meter rollout programme. But the UK government has been planning this for years. The rollout would have gone ahead without EFSI funding. Kudos to the UK government for its opportunism, but providing funding to rich countries for infrastructure developments that they were intending to do anyway is surely not the point of this initiative.

But whether or not there are genuinely new projects involved, the financing is pitiful anyway. Spain's total capital investment (including capital for SME investment) is 597m EUR, which is supposed to result in 1.6bn EUR in project financing and 731m EUR in financing to SMEs, a total of 2.331bn EUR. That is about 0.2% of Spain's GDP, and most of it is expected to come from the private sector. It is hardly going to make a significant difference to Spain's fortunes - especially if much of this is simply refinancing existing projects.

Nor is the money going where it is needed. For example, most people acknowledge that Germany is desperately in need of investment, and very reluctant to do it because of its fondness for trade and fiscal surpluses. You would think that Germany would have put out lots of applications for project funding under this initiative, wouldn't you? Not a bit of it. There is only ONE project application from Germany, and that isn't for actual infrastructure development - it is for a "renewable finance guarantee", which is described as a "risk-sharing facility for loans to renewable energy projects in Germany and France".

True, Germany has received 203m EUR in funding for SME investment - the public development bank KfW has benefited from this, among others. But Germany has a massive capital surplus which it exports all over Europe. Why, in heaven's name, is this scheme providing capital to German financial institutions to support investment in SMEs?

I am, frankly, underwhelmed by this piece of marketing spin. Admittedly it is early days yet, but the combination of pitiful results with typical EU fudge and obfuscation does not bode well for the future. At present, Wolfgang Munchau's prediction that the Juncker fund would not revive the Eurozone appears all too likely to come true.

Related reading:

Investment Plan - State of Play January 2015 - European Commission
Juncker's CDO
Austria's folly and Juncker's madness - Pieria

Sunday, 17 January 2016

A countercyclical credit bubble?

Over at VoxEU, Philippe Bachetta and Ouarda Merrouche have a surprising take on "countercyclical" lending. They show that lending by US and European banks in US dollars to European non-financial corporates massively increased from 2007-2009, and that this helped to soften the effect of the European credit crunch on employment:
Over the period 2004 to 2009, we find that foreign credit denominated in dollar to non-financial corporates is countercyclical – it increased sharply (relative to domestic credit) in response to the sudden tightening of credit policies at domestic banks (Figure 1)
Here is their Figure 1 chart showing the growth of US$-denominated syndicated lending:



Well, ok. US$-denominated syndicated loan issuance did indeed increase massively from 2007q1 onwards. And European banks did indeed tighten credit standards from late 2007 onwards, in response to the failures of IKB and Northern Rock due to the market freeze in August 2007. The chart appears to show correlation between these events. On this basis, the researchers claim that foreign lending acted as a countercyclical buffer, preserving lending to corporates and therefore preventing a large rise in unemployment as the 2007-8 financial crisis hit.

It is evident in this chart that the increase in US$--denominated syndicated loan issuance led, rather than lagging, credit tightening by European banks. By quite a bit, in fact. Not only did issuance start to rise fast while European banks were still loosening, not tightening, credit conditions: issuance fell dramatically after the failure of Lehman brothers in September 2008, but banks went on tightening credit conditions for some time after that. According to this chart. European credit conditions were at their tightest in early 2009 - but US$-denominated syndicated loan issuance was already collapsing.

What we are seeing in this chart is a short-lived bubble in US$-denominated commercial lending. Now call me cynical, but I find the idea that a cross-border bubble in commercial lending could ever be "protective" frankly incredible. As every emerging market country could tell you, the sudden withdrawal of cross-border lending when a bubble bursts has catastrophic economic effects. It is very evident from this chart that there was such a "sudden stop" in the fourth quarter of 2008. Why do these researchers think this bubble was benign?

The researchers observe that it was US banks in particular that drove this bubble, and offer two possible explanations:
A first explanation, for which we do not find supporting evidence, is that low Fed rates may have induced a search for yield among US banks. The other explanation is that the retreat of domestic banks meant less competition in the riskier segment of the market, and this coupled with the fact that US banks were subjected to less risk-sensitive capital requirements implies that US banks had both greater opportunities and (unlike other foreign banks) also strong regulatory incentives to shift to riskier borrowers. Since US banks were operating under Basel I the shift in risk within the same asset class had no repercussion on their capital requirement.
I'm afraid these explanations do not stack up. The researchers correctly note that low Fed rates do not appear to have driven a search for yield, but this is irrelevant anyway: the Fed started to raise rates in 2004, and when the US$-denominated bubble was growing at its fastest rates were near their historical average. Low, they were not.

More importantly, the fact that the credit bubble led, rather than lagging, the tightening of credit conditions does not support the idea that US banks stepped into the space left by domestic banks. It rather suggests that this was lending to borrowers who under normal conditions would not be able to obtain lending because of their riskiness. The researchers show that it was lending to risky corporations in particular that grew during this period:


But they fail to draw the obvious conclusion that this was excessively risky "bubble" lending to marginal borrowers which was abruptly withdrawn after the fall of Lehman, with catastrophic consequences for European economies. There was nothing benign about this bubble, and it was in no way protective.

However, the researchers are right about the role of regulatory arbitrage in enabling this bubble to grow. And they also correctly note the importance of currency, though they do not draw the right conclusions. Unfortunately, though, they have misunderstood the role of European banks in this disaster.

I have written previously about the enormous growth of the Eurodollar market in the years before the financial crisis, driven by regulatory arbitrage. US banks, regulated under Basel 1 and (in the case of broker-dealers) a leverage ratio, lent initially to US households in US$ for property purchase, then securitised the loans. European banks, regulated under Basel II and therefore much more risk-sensitive than US banks, loaded up on those securities (RMBS and their derivatives). But as US households pulled back on borrowing and the securitisation engine started to falter from 2006 onwards, US banks looked elsewhere for high-risk, high-return lending to prop up their return on equity without hitting their balance sheet leverage limits. This is why the European corporate credit bubble grew. The risk-averse stance of European banks undoubtedly contributed, but the principal driver was the failure of the US residential mortgage market.

And this, I'm afraid, invalidates their conclusion. The US$-denominated commercial lending bubble in Europe was part and parcel of the excessively risky bank lending that directly caused the 2008 financial crisis. Yes, those corporations that were able to borrow in US$ may have reduced unemployment less than those that did not. But the collapse of this bubble itself contributed to the deep recession that affected the whole of the Western world after the fall of Lehman. To assert that this bubble was in any way "countercyclical" and "protective" to European economies is thus, I'm afraid, absurd.

Related reading:

Financial hurricanes
European banks and the global banking glut - Pieria
Countercyclical foreign currency borrowing: Eurozone firms 2007-9 - Bachetta & Merrouche

Friday, 15 January 2016

The untimely end of a flamboyant dictator

At Forbes, I have posted the latest episode in the long-running saga of the failure of Hypo Alpe Adria:
The story of the failed Austrian bank Hypo Alpe Adria (HAA), and its transformation into the world’s worst “bad bank” – the insolvent HETA – resembles a Hollywood blockbuster. Complete with a cast of thousands, colorful principal characters, an extraordinary range of special (legal) effects and a reach far beyond its national borders, the HETA saga is long, staggeringly expensive, mind-numbingly complex and at times unintentionally hilarious.
HETA’s liabilities are mostly guaranteed by the government of the province of Carinthia. Under its flamboyant far-right governor Joerg Haider, Carinthia provided deficiency guarantees for over 11bn EUR of bonds and subordinated debt issued by HAA. These would be triggered when HETA is wound up, forcing HETA’s losses on to Carinthia and – by extension – on to the Austrian sovereign. But Carinthia’s current government – now bereft of Haider and his minions – insists it cannot pay. And the Austrian government doesn’t want to pay. It has made repeated attempts to wriggle out of the guarantees and impose losses on creditors. 
But the creditors are fighting back. And the mess is becoming ever more widespread. You can read all about it here.

Now, what about that colourful charlatan Joerg Haider?

Unlike other corrupt politicians and bankers, Haider is not enjoying his ill-gotten gains somewhere in the Bahamas, safe from the reach of the tax authorities authorities and the law. He died in a car crash in 2008.

The official explanation is that he hit a street lamp while drunk. Secret Ledger on Twitter explains:


He went off the road at 88mph, hit a wall and a tree....the rest is history.

The car looked like this:



But there are always conspiracy theories, of course. See the hole in the car roof (white circle)? The link provided by Secret Ledger - from which this picture comes - suggests that the hole was made by an explosive device (translation by Google):
Conceivable would be an explosion, triggered for example by a mounted on the roof or an explosive fired by a drone missile that at the moment in which it has taken its goal this seriously injured and himself largely destroyed. This process would have taken place just before the car is out of control. The car would be in the event that this scenario is true, become a 'non-steerable floor' - not, however, because the driver had tried in vain to bring the car back under control, but because - as stated in an article [14] Jörg Haider at this time already turned and was therefore unable to somehow act on his car. The hole in the roof of the car speak for these assumptions, the lack of skid marks, just above the driver's seat, the severity of injuries and the pressed-out, flung onto the roadway the driver's side doors.
Certainly, Haider's death was awfully convenient, given that Hypo Alpe Adria was by then already in very deep trouble. It's all a bit like the death of Princess Diana, isn't it?

We will probably never know what really happened.

Related reading:

Investigative reporter offers murder theory over the death of Joerg Haider - Effedieffe
.