New CB's role

A note by WB chief economist. I see the new trend that the central bank's role is changing from a traditional lender of last resort to a more proactive financial agency to enhance growth and address unemployment, which was traditionally realm of government's structural reform. I am a little bit concerned on this trend, because it will surely buy time for the government to do its homework in advanced economies - structural reform in labor market, establishment of social security system etc.  

Austerity measures raises the concern over inter-temporal equity

Simon Johnson's excellent article on inter-temporal equity over fiscal austerity. Standard economic model that assumes indefinite time horizon may not be useful here. His quote...very true.

"Today’s children did not play a role in any of these policy mistakes. The preschoolers who are about to lose access to Head Start weren’t even born when they were made."

Cyprus bail-out and debt sustainability

The Economist's article on the signed Cyprus bailout program. It says "...The creditors were helped by the IMF’s view that too big a loan would simply make Cyprus’s debt unsustainable." I would interpret this statement as: high reliance on official loans limits the window for market access, posing a challenge on future debt financing and thus debt sustainability. Now that we live in a period of debt crisis,  you may feel it is an easy task to pinpoint the obvious link between DSA and debt management strategy, while this linkage has been often omitted with over-simplified financing assumptions in a standard DSA. In the post-crisis era in particular, capital market factors are playing a key role here, if not constitute a condition for sustainable debt. 

China’s Hidden Debt Risk by Ms. Monan

Zhang Monan alarmed the Chinese public debt problem in the PS. While technical details may need to be revisited (for instance, she argues that revenues account for 6 percent of the sovereign asset; theoretically speaking, this should be the present value of future revenues), I agree with her key message.

Ms. Monan argues that simply comparing the aggregate levels of assets and liabilities do not deliver a right message about  the Chinese sovereign debt risk: if the assets are not liquid enough,  liquidity shortage (she writes "short-term solvency" but it should be interpreted as "liquidity") could be a real possibility. This statement is relevant, given too many economists look at either net or gross debt level in terms of GDP only, which is misleading. The maturity, investor base, and instruments matter. We all know that.

I wish she applied this perspective to corporate debt story as well. Although the high leverage of the non financial corporate sector is already worrisome,  it would be interesting should there be more granular discussion on the asset and liability structures (e.g., instruments and maturity structure, among others.), which could aggravate the problem.

Euro Area's unpleasant truth

The Economist argues that given weak competitiveness and growth prospect, France needs to cut its welfare and public sector wages/benefits. Seems like tax increase would be difficult economically, politically, and legally. This is a difficult game, because as Moscovici rightly suggests, front-loaded fiscal austerity kills the economy, while loss of market access could be a reality if confidence in public finance is lost. Now that the tail risk is gone after the announcement of OMT last year, euro area countries need to run this narrow path.

Just one small minor comment on the following chart. To have a balanced argument, would not it be possible to have a 3-4 year projection, together with real growth projection. The current picture masks an important link between real and fiscal sectors.

                             Source: The Economist

Christina Romer on minimum age.

From a NY times article. Mankiw also cited here.

Prof. Romer discusses why minimum wage policy may not achieve its intended goal.

First,  basic economics tells us that minimum wage harms competition and reduces the employment. You may want to counter-argue that empirically the minimum wage does not necessarily lower the employment.  Then she took a step further to say that even if employment is manitaned (as opposed to micro  101), still the minimum wage may not be a good policy, as employment is maintained:

1. Because of high turnover. Good thing.
2. Because a higher wage attracts more efficient works and raise productivity. Partly good, but this could harm the disadvantaged.
3. Because the increased wage is passed on to consumers, including the very poor.

Quite convincing. At least, we should stop naively taking an empirical relationship between the minimum wage and the employment rate in a reduced-form regression formula. We have to understand mechanics.

Austerity would not work...

Joe Stiglitz's appraisal of the Italian general election here.

The article argues that austerity is misguided and would not work, in particular if not accompanied by a growth strategy. This is not news. An interesting element is the statement that internal valuation would not work because it would increase the debt burden of household and companies and distort the allocation of wealth in more general.

African frontier market: hot eurobond issuances

Another Africa-related article from The Economist.


This article should mention the most recent case of Tanzania: no rating, 600 bps spread, variable rate, and 3-year grace.

Sure frontier countries benefit from a flood of "search for yield" but once again let's go back to basics:

(i) the borrower country is most advised to do all the homework; and
(ii) investors should understand that a debt restructuring (a la CIV) is a real possibility.

I know this statement is extremely boring but it is time to remind ourselves of this boring statement, because the history repeats itself so many times.

Africa's banking industry

Takeaways from this article from The Economist.

• The country bank penetration rate is disperse, and generally low among various countries. 
• Banks in Africa still face challenge in technology but could pick up because they can install the machine from scratch (cost-to-income is 30%, compared to 50% mark in developed countries)
• Post crisis, local banks have extended their retail network while international banks

Beyond the size, effectiveness of credit intermediation also needs to be assessed. I suspect, most likely, those local banks face not much credit demand. Hence, banking system ends up piling cash at the vault of central bank. In order to survive, banks need to charge high spread between lending rate and deposit rate.... 

Economist Blog: The mighty dollar?

The statement "foreign exchange is all about relative prices" in this The Economist's blog is so true. The current  US growth projection is solid with consumer confidence recovering, in contrast to the ongoing recession in euro area (Need to check IMF WEO January Update). Japan is staggering and trying its best to weaken yen also.

I don't know if it goes to a new realignment but perhaps it is true that we need to put in a bit longer time horizon, back to the end of BW and forward to say 4-5 years in the future. Unless China moves to another currency regime, which could happen, this fragile status quo will likely continue.

Roubini's ten QE questions

Roubini warned ten drawbacks of QEs in this article.. I think this is a bit one-sided, because without QE the situation could have been worse with negative output gap and  prolonged recessions.

But he has the case. The key question is how to rebuild  and bring back the economy to a sustainable path through medium-term growth strategy and structural reforms, while buying time through monetary policy. This is a considerable challenge, because, for one, excessive reliance on money financing could dis-incentivize the government to tackle such challenges. Another complication is that you never know what "medium-term" means in practice and thus, policymakers could either (i) tackle the challenge too harsh and damage the still fragile economy further; or (ii) delay the badly-needed reforms.

A piece on India by ADB President.  I like the word "inclusive growth", which is definitely a key word.