Last January, on the eve of the launch of Argentina’s debt restructuring proposal, many market participants, pundits and commentators predicted that the offer would fail as a large 70% haircut would be unacceptable to most creditors; this, in spite of the fact that the market prices of Argentina’s defaulted debt had been hovering around 30 cents on the dollar for quite a while in 2003-2004, suggesting that this was the true equilibrium value of such debt.
At that time I predicted in a blog item I wrote on January 11th that a rational analysis of the facts would lead to the conclusion that the debt deal would instead be successful with about 75 to 80% of creditors accepting the offer. While the official figures will be out later today Thursday, most media and market reports now suggest that the deal will indeed be successful with a participation rate of about 70 to 80%. [Post-scriptum: as officially announced by Argentina on Thursday evening, the participation rate was 76%]
What did the Delphic Oracle mean on the current account? Reading Greenspan’s Tea Leaves. And a modest appeal to the Chairman to speak up on our reckless fiscal policy.
Last Friday Greenspan gave a speech on the current account arguing that the US current account deficit will soon shrink as the US fiscal deficit will improve and as the J-curve effects of delayed adjustment of import prices following the dollar fall work their way into import and export quantities. Following his speech the dollar appreciated continuing his recent rally relative to euro and yen. The speech also seemed to be an implicit endorsement of the view that the Bush administration will tackle the fiscal deficit as in the budget announced on Monday.
But today John Berry (leading Fed Watcher and Bloomberg columnist) says – in his latest column – that markets and commentators got it all wrong on what Greenspan meant.
Bush Damned Budget Lies and Voodoo Budget Magic: it will be a $600b deficit, not $233b by 2009…and over $1,100b by 2015!
The dishonesty of the administration about budget deficits has reached levels unheard of. These folks have absolutely no shame. Bush presented today a budget that claims that he will achieve his goal of reducing the deficit by half by 2008 (from a false 2004 baseline of $521 billion rather than the actual 2004 deficit of $412b) and will achieve a deficit of “only” $233b by 2009. Even better news, the administration claims today: the “halving” of the deficit will be reached by 2008, a year earlier than original 2009 target for it.
Who are these accounting scam artists trying to deceive? Do they think everyone in America and around the world is a mathematically challenged total idiot or an accounting moron?
The reality is, that based on realistic scenarios outlined last week by the non-partisan Congressional Budget Office, the deficit by 2009 will be close to $600b (or 4.0% of GDP) rather than falling to $233b; and the deficit will reach over $1,100b (or 5.5% of GDP) by 2015.
The FT on BW2 free-riding and capital losses on holdings of dollar reserves: A “Hot Rotten Potatoes” Musical Chair Game…
The FT has published yesterday an interesting editorial on the incentives of the small countries in the the Bretton Woods 2 periphery to free ride on the center (China/Japan) and on the potential large capital losses on holdings of dollar reserves once these Asian and other currencies were to move.
And similar points have been picked up before in the press.
US-China “Balance of Financial Terror” Game. A Prisoners Dilemma Game: hard landing MAD or Chinese pre-emption as the likely solution?
Can we think of Bretton Woods 2 as a Prisoners Dilemma Nash Game between the US and China? Certainly Larry Summers referred to it as a “balance of financial terror” game. So, will the outcome be cooperation for global rebalancing or hard landing mutually assured financial destruction, i.e. MAD or MAFD?
The cooperative solution – beneficial both to the US and to the world at large is for the US to agree on a serious fiscal adjustment (reverse some tax cuts for the rich and and give up on social security privatization and/or fix social security without financially reckless privatization) and for China to agree on adjusting its peg, say by 20% plus. Then, the other Asian will follow China in cooperative appreciation step as China is the large Stackelberg leader whose currency value affects the currency policies of the rest of Asia. Then you get cooperative orderly global rebalancing of current accounts with sustained global growth.
Housing Market Bubbles and the Fed: The Higher They Blow, The Harder They Crash…or Why We May Need Houdini after Greenspan…
While Greg Ip wrote a very fine front page analysis of the risks of a dollar crash in the WSJ today (and thanks for the citations of my work with Brad Setser on financial crises), an even finer article by him on the risks of a bursting of housing bubbles made it only to page 2 of the paper (I guess the informal rule is that you cannot have more than one article per journalist in the front page). And his timely analysis was matched by another good WSJ piece by Agnes Crane in the Credit Market section on how the risk of a bursting of the housing bubble may affect US monetary policy (i.e. whether Greenspan & Co. may not tighten as much as is needed if there are risks to the housing markets from higher interest rates).
As Argentina is on the verge of launching its debt restructuring deal, the two questions on the mind of everyone are:
1. Will the deal succeed (i.e. will at least 75-80% of creditors accept it)?
2. Should creditors accept this deal (or should they instead hold out)?
My quick answers to both questions are Yes: the deal will be succesful with a limited number of holdouts; and all classes of creditors should accept the current deal as they will not get a better one if they decide to hold out.
So, since investors are rational (most of the time), the deal will get done and Argentina will succesfully close this sad chapter of crisis and default.
As the entire Argentina default saga is filled with some silly views and arguments that do not make much sense, I will use this blog to review some of these misperceptions and myths to get some clarity on the most important issues in this debt restructuring episode.
As reported by the newswires Bush has decided to name a major fundraiser, and former HBS buddy, as the new director of his National Economic Council (NEC). Can we sink any lower than this?
To get a sense of what this means consider the following two points:
1. The director of the NEC is the main economic advisor of the president – in most cases, even closer to the Prez than the Head of the Council of Economic Advisors (CEA) – as he gets an office in the most precious real estate in DC, the West Wing, and as he sees the President daily, often many times a day.
2. In the past, regardless of whether the White House was Republican or Democrat, some heavy-weight individuals had the job of NEC Head. Bob Rubin was the first Clinton NEC head followed – when he moved to head Treas – by Laura Tyson who had been the first Clinton CEA head (previously a renown professor at US Berkeley and currently Dean of the London Busines School after being Dean of UC Berkeley’s B-School). Next, NEC was headed by Gene Sperling who was one of the most savvy and influential economic advisors of the president even while not having previous high profile financial or academic credentials. At that time, brilliant minds and scholars such as Dan Tarullo and Lael Brainard were the deputies of the NEC.
Israel got very lucky to have Stan Fischer accept the offer to become the Governor of the Bank of Israel. He is the ideal candidate for the job, a brilliant mind with amazing wisdom and deep policy experience.
Of course, in a more fair world, Stan would have been chosen to run the IMF (where he was the #2 for years) or run the World Bank (where he served as the Chief Economist before moving to the Fund) or even the US Fed (where he would be as good and even better than many other candidates for the job).
While our own Fed is in the strong hands of Alan Greenspan and has a first rate group of governors and staff, come January 1st 2006 we will need a new Fed Chairman. And the Fed looks like the only institution of US economic policy with a strong head and a bunch of competent senior managers (deputies, undersecretaries). The NEC is headless with Steve Friedman leaving, the CEA will be soon headless once smart Greg Mankiw goes back to Harvard, Treasury is led by lame duck Snow and has just lost its incoming assistant secretary for tax affairs. So, as the conservative WSJ editorial page put it, US economic policy is run from the “hip pocket” of Karl Rove.
In my previous blog item, I argued that 2005 is likely to be the YOTGBMR (Year Of The Great Bond Market Rout)…As strongly argued by the bond market guru Bill Gross, in 2005 Cash will be Prince and King too…and I would argue Cash will be Emperor too as the Treasury Emperor has no clothes at all (and little foreign assets or reserves left) and is digging to himself an even bigger multi-trillion funeral hole (or immolation funerary pire?) with its wretched Social Security privatization plan…