Nine countries?

Here is a conundrum: if everybody's credit ratings are cut then what do credit ratings signify? Well, we shall soon find out. France, as we know, has had her AAA credit rating cut, as has Austria. This is very bad news for President Sarkozy who has vowed to preserve that cherished AAA and is starting the presidential election campaign by losing it.

The downgrade of France in particularly is evidence of the divergence taking hold between those European countries that still enjoy rock-solid faith on international markets and those whose economic and financial path is more questionable.

As Reuters details:

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status. It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

This may not be the disaster gleefully predicted by many(a disaster, incidentally, that will affect this country) but it is bad news. However, credit rating is really just that: information that needs to be taken into account when a country tries to borrow money. So one has to ask again: when this many countries are losing their rating, will markets go on paying attention or will they simply metaphorically shrug their shoulders?

Let us not forget that the USA lost its AAA rating last August and the world did not collapse.

Is this important?

According to Sky News

Standard & Poor's is about to downgrade France's credit rating, sources including the French news agency AFP are reporting.

They quote Reuters correspondent Peter Thal Larsen:

Reuters columnist Peter Thal Larsen told Sky News: "If we're talking about expectations then clearly France is what we would consider to be most vulnerable to a potential downgrade."

Mr Larsen went on to explain that a French downgrade would be significant due to the country's role as one of the AAA guarantors of the eurozone's rescue fund, the EFSF, which would in turn also need to be downgraded.

This would make it more difficult to raise funds to bail out weaker countries, like Italy and Spain, if the need arose.

Nobody quite knows what to do with the credit rating agencies. Their track record prior to the financial crisis is lamentable and their intervention, always very long-drawn out, tends to have negative effects on the market. At one point there was a proposal to silence them, which would not have the desired effect. The question is, will anybody go on listening to them as they downgrade one country after another?

Spanish economy in free-fall

This does not come as a surprise to anyone but here are some interesting graphs about the Spanish economy, published by The Atlantic.

To sum up: The overall unemployment rate is in the mid-20s, industrial production and services activity have both cratered, construction indicators like cement consumption have been devastated after doubling between 1998 and 2007, retail is in a free fall, and exports (most of which go to Europe) are falling. [Word of warning: None of these graphs have the same Y-axis range, so beware direct comparisons.]

In the next year, Spain is meant to cut spending to show the bond market that Madrid can stabilize its all-important ratio of debt to GDP. But what Spain really needs today is what it had 10 years ago: Lots of money flowing into the country! Spanish leaders know the intricacies of Spanish economics far better than I ... but I do know something about ratios, and if your GDP isn't growing, it's rather impossible to increase your GDP faster than your debt.

Spain has avoided an even worse recession, if you can believe it, by growing exports in every year since the housing crash. But even here, trouble lurks. As you can see (bottom-right graph in the collection above), export growth is slowing down as the nation's largest trade partners -- in order: France, Germany, Portugal, Italy, and the UK, which account for more than half of Spanish exports -- all face austerity regimes of their own, which is likely to make businesses and consumers cut back on Spanish goods. In a word: Yikes.

I have noticed that there are more Spanish youngsters working in various low-skill jobs in London than there had been for years. They are competing with the Poles and, personally, I think the Poles are more efficient, friendlier and better at learning English. However, that is, undoubtedly, a sign of the times.

Are we allowed to say sub-prime mortgages?

Come to think of it are we allowed to quote that bromide about people in power (not just the Bourbons) learning nothing and forgetting nothing? Those are the thoughts that go through one's head as we read the following:

The Prime Minister and his deputy, Nick Clegg, will unveil proposals to help first-time buyers of new homes by carrying part of the risk of their mortgages.

They also propose subsidising the construction of 16,000 homes by giving £400 million of taxpayers’ money to property developers.

In a further move, ministers are working on a scheme under which billions of pounds of money in pension funds will be used to finance the construction of power stations, wind turbines and roads.

Would it be too much to expect the people who blithely misuse taxpayers' money to do just a little bit of thinking? Yes, I expect it would. What will happen if those who take out mortgages that will be gaily handed out because the taxpayer will provide, find themselves too deeply in debt to be able to pay their interest?

James Delingpole has a more sinister explanation than just incompetence for this appallingly stupid idea.

Did you know that as part of his initiation for the Bullingdon Club, David Cameron had to steal a fluffy kitten from a kindly old lady called Mabel, barbecue it, and dance round the flaming kitty embers chanting: "Ra ra ra! I'm an Old Etonian and you're a filthy oik, moggy, and that's why I'm having you for dinner," before washing the charred feline down with a lovely bottle or three of Cheval Blanc '47 in readiness for the arrival of the Buller's harem of Russian whores?

Not, you understand, that I have any evidence that this story is true. But Cameron must have a skeleton in his closet of that magnitude, surely? It's the only explanation for the extraordinary grip exerted on him by the house building industry, which has just persuaded him to embark on the most harebrained scheme of his political career: the recreation, in Britain, of President Clinton's Community Reinvestment Act and of Freddie Mac and Fannie Mae.

Possible. For the moment I go with idiocy and economic illiteracy on a monumental scale.

Allister Heath, as ever, manages to connect his hammer with the nail head.

THERE are two ways one can address a problem caused by faulty policies: by tackling its root causes – or by addressing some of its manifestations, and risk creating more issues thanks to the law of unintended consequences which plagues all government actions. Regrettably, when it comes to house prices, the government is largely going for the second option, albeit with a small nod towards the first. There are massive problems in the housing market – but today’s announcement that the government is going to partly underwrite mortgages for first time buyers and move some risk onto taxpayers is a terrible, short-sighted blunder.

Developers will also be able to bid for public money to finish stalled developments: this implies yet more corporatism to fund projects nobody really wants. Have we all forgotten the sub-prime crisis in the US? Over there, politicians concerned that many poor people couldn’t afford homes forced and bribed lenders to lower credit standards and extend mortgages to those who couldn’t afford them. In the short-term, this boosted home-ownership; but it all ended in tears. It is good to care about the poor and young people who can’t get onto the housing ladder; but it is bad to give people false hope, to create moral hazard or to privatise gains and socialise losses in the housing market.

But they will not listen. It will all end in even bigger tears.

Osborne is off the hook for the time being

This morning the Telegraph trumpeted that George Osborne our Chancellor of the Exchequer in the strange world we live in, was going to get tough:

George Osborne, the chancellor, will tell EU finance ministers in Luxembourg today that Britain does not intend playing a part in any new aid package for Greece.

As one reads the article, though, one finds that the decision is not actually Mr Osborne's.

Germany and France have signalled that there is no reason for London to pay a share of a repeat bailout, likely to be finalised within weeks and for a similar sum as the first.

At today's talks in Luxembourg, Mr Osborne is expected to say that the issue is one for the eurozone alone.

Britain's only potential contribution to bailing out Greece again now comes from its shareholding in the IMF, in the form of loan guarantees which would only be called in if Greece defaults.

Meanwhile, the IMF is urging the Eurozone (or possibly the EU) to go on pouring money into Greece, who seems curiously reluctant to do anything to help itself, relying possibly on yet more bail-outs. Furthermore, says the Acting Head of the IMF (there was a spot of trouble with the man who is supposed to be making these comments) further integration is needed.

The fund added: "Rapid implementation of the commitment to scale up the European financial stability facility and a further extension of its potential uses would sent a much needed signal that member countries 'will do whatever it takes to safeguard the stability of the euro area'. In this context, it will be essential to bring the unproductive debate about debt reprofiling or restructuring to closure quickly, and avoid and impression that the European stability mechanism will be conditional on debt restructuring."

Nevertheless, the Finance Ministers have decided to wait and see. In particular they would like to see some of those proposed austerity measures and selling of state assets, that the Greeks keep demonstrating against, actually being put into place.

Euro zone finance ministers have postponed a final decision on extending 12bn euros ($17bn) in emergency loans to Greece, until it introduces further austerity measures.

The ministers said on Monday that they expected to pay the next tranche of a 110bn-euro bailout package, backed by European Union and the International Monetary Fund, by mid-July.

Greece has said it needs the loans by then to avoid defaulting on its debt.

Keeping up their pressure on Athens, where public opposition to austerity has been growing, the ministers insisted that disbursement would depend on the Greek parliament first passing laws on fiscal reforms and selling off state assets.

"To move to the payment of the next tranche, we need to be sure that the Greek parliament will approve the confidence vote and support the programme, so the decision will be taken at the start of the month of July," Didier Reynders, Belgian finance minister, said after the meeting in Luxembourg.

Mr Osborne must be relieved.

This sort of thinking leads to financial crises

The European Court of Justice is about to decide whether British insurance firms will be allowed to offer policies with lower premiums to young women or whether it can be said to infringe that magical concept, equality. This is what happens when business is controlled by people who do not have the faintest concept of basic economics and have never had to deal with any kind of financial issues.

There is a reason why young women get car insurance at more advantageous terms than young men: they are less likely to have major accidents, being more careful and less harum-scarum drivers. D'uh!

While equality is something we must all espouse when it comes to, for example, equality before the law (a concept that seems to be under pressure, as I hope to show in another blog), there is no equality as far as financial or actuarial risk is concerned. None. Insurance companies calculate quite carefully (though, undoubtedly, they sometimes get it wrong) what any individual's risk value is. It is not something that can be decided by notions of gender equality.

Then again, how different is this from our politicians demanding that banks lend money to small businesses regardless of whether they are a good risk or not? Or same politicians planning to set up a bank, using seized property and taxpayer backing in order to lend money to politically approved businesses regardless of their fiscal worth? Or, infamously, mortgage lenders being forced not to "discriminate" against certain applicants for mortgages on the grounds of them never being able to pay back what they borrow?

Why politicians should just butt out

Back in the days I led the Honest Food campaign at the Countryside Alliance every now and then we would have various campaigns to do with small and specialist food producers and retailers. What, people would ask, should we tell the government to do to make things easier for those producers and retailers. My answer was always the same: butt out of it. Best thing governments and politicians can do.

If one reads Allister Heath's list of the real reasons for the financial crisis, one can see that the same principle applies to financial and economic matters.

In a nutshell

I spent most of the day at a conference organized by the Legatum Institute, which was a mixed bag. I was, however, impressed to a very high degree by two speakers, both in the first session, Nicole Gelinas and Kevin Hassett.

There is an article by Nicole Gelinas on the subject of her presentation in the City Journal, in which she analyzes several books on the subject of the recent financial crash. She finds it extraordinary how many people who ought to know better have accepted the narrative that it was the untramelled free markets or capitalism or lack of regulation that was at fault.

It would be easy to read the Vegas story as one more piece of evidence that free markets in the financial world failed us over the past two years. How could the markets have been so wrong, so careless, and so wasteful? Even Steve Eisman—one of the four Vegas interlopers, who made a mint from their contrarian stand—sees the financial crisis as evidence of market failure. Eisman was shocked, he told Lewis, that “inside the free market” there hadn’t been any “authority capable of checking its excess.” This has become the casual mainstream narrative arc of the crisis: deregulation took the economy down, and the government had to step in to save us from free markets.

Over the past year, hundreds of authors have published books on the crisis. What becomes clear—often despite the authors’ own intentions—after reading ten of the most significant of these works is that the mainstream narrative is wrong. Over the two decades leading up to 2008, financial markets were anything but free. The nuts-and-bolts government infrastructure that free markets require to thrive—healthy fear of failure, respect for the rule of law, and fair rules for everyone—was crumbling. The crisis books make clear, too, that Washington’s extraordinary rescues of Wall Street have eroded much of what’s left of free-market infrastructure in finance. Worse, Congress’s efforts to reform the industry will do yet more damage. The next time the financial world implodes, it will hurt the economy even more severely.

The rest of the article, which is very well worth reading, tells the sorry tale of government interference, the prevalence of bail-outs, the creation of the "too big to fail" phenomenon and the people who bet on that. What there is very little of in this whole saga is untramelled or even mildly tramelled capitalism. And, as Ms Gelinas points out, present policies and reactions to the crisis make it an absolute certainty that there will be another one not too far down the line.

The Greeks prefer to ask for gifts

When I said that the EU was on holiday and nothing much was happening there, I was a little economical with the truth. There is the ongoing saga of the Greek crisis. One might argue that financial crisis is an almost permanent feature of Greek politics but recently it has become bigger and more important. In fact, there has been talk of Greece becoming bankrupt, not a fate that usually befalls a country, however spendthrift its politicians might be.

There is an additional problem here. Greece is, after all, in the Economic and Monetary Union and its currency is the euro. What will happen to the other countries in EMU if one member is declared bankrupt?

This is what Der Spiegel wrote on the 14th:

German Chancellor Angela Merkel refrained from commenting for three long days as the value of the Greek bonds continued to fall. The chancellor knew she had to say something to prevent the nose dive. Something needed to be done to defuse the ticking time bomb threatening Europe and the euro: the possible bankruptcy of European Union member state Greece.

Speculators in the trading rooms of banks had been waiting for a signal. They wanted to know whether EU member states were going to rush to the aid of the hemorrhaging country on the Aegean. The longer they waited the further Greek bonds slipped - and the closer the country slid toward national bankruptcy.

Merkel doesn't believe that Greece can cope with its problems without help from Brussels - regardless of whether the Growth and Stability Pact prohibits such aid or not. That's what she told close advisers in the Chancellery on a number of occasions.

Some readers with long memories might recall that one of the arguments against entering the euro was that the Growth and Stability Pact would never be used against a recalcitrant member.

The rest of the article discusses the dire financial situation of the country and the various options open to the rest of the EU - not least the problem of what kind of signal would EU aid send to the Greek government. Then again, as the author points out with some agony in the words:

Europe might perhaps be able to afford to let a country go bankrupt just as the US was able to cope when California went broke. But what if this happens to a number of EU countries? That would trigger what euro skeptics warned about right from the start: the European common currency would collapse.

When I recall the hubris of that first day of the euro on January 1, 2002 when we were told by numerous commentators that finally politics triumphed over economics, I cannot help smiling wryly and recalling Margaret Thatcher's famous comment about not being able to buck the market.

It is, perhaps, particularly unfortunate that the Greek tragi-comedy should be unfolding now as the euro is officially the currency of the European Union since December 1 when the Constitutional Lisbon Treaty came into effect.

Today's article in Der Spiegel gets a little more precise. It seems that the EU will not let the IMF step in and rescue Greece because that would be against the rules:

It is becoming increasingly unlikely that the European Union will allow the International Monetary Fund (IMF) to step in and provide ailing euro zone member state Greece with a bailout. A growing number of politicians and central bankers are opposed to any form of IMF intervention.

"We don't need the IMF," Axel Weber, president of Germany's central bank, the Bundesbank, said, according to a report published in Monday's issue of SPIEGEL. Weber noted that it is illegal in Europe to finance budget deficits using the kind of central bank funds which are at the IMF's disposal. With his statement, Weber joins ranks with German Chancellor Angela Merkel, who believes IMF intervention would send the wrong political signal. The EU, she believes, is strong enough to handle Greece's problems on its own.

Central bankers also feel there's another reason the IMF shouldn't intervene: Greece's case, they argue, does not involve a loss of trust in the country's currency. Instead, they say, financial markets have doubts about the credibility of the debtor, the Greek state.

One can't help feeling that Chancellor Merkel is becoming a little confused as to which political signals are to be sent and to whom.

However, lessons need to be learnt, say some politicians:

Meanwhile, the research service of the German parliament, the Bundestag, has also analyzed the situation. In an assessment provided to Volker Wissing, a member of parliament with the business-friendly Free Democratic Party (FDP) -- which shares power in government with Merkel's Christian Democrats -- the experts concluded that a member state cannot be kicked out of the EU if it becomes insolvent. Nevertheless, if a euro zone member violates monetary union rules, certain rights that come with EU membership can be suspended. For example, a country could be temporarily stripped of its vote in the European Council, the EU institution comprised of the heads of government or state of the 27 member nations.

For that reason, Wissing is calling for the EU, "to thoroughly examine new members in the future to ensure that they will actually be in a position, in the long term, to meet the demands of a common currency."

Can't wait to see which rights of which bankrupt country will be suspended.