tag:blogger.com,1999:blog-32867166002003634662023-11-15T08:42:50.959-05:00The Globetrotting FinanceThis blog will comment on issues related to international financial services with a focus on current events and developments that impact global financial markets. The topics will be varied and cover financial institutions, instruments, individuals, markets and regulations from a variety of perspectives, including historical, social and cultural. Recent theoretical and empirical research will be highlighted with forecasts and predictions based on critical and insightful analysis.Unknownnoreply@blogger.comBlogger3125tag:blogger.com,1999:blog-3286716600200363466.post-63145115627348335972012-05-10T00:36:00.000-04:002012-05-10T00:54:48.597-04:00Dodd Frank Bill - A Year and a Half Later<div dir="ltr" style="text-align: left;" trbidi="on">
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The Dodd-Frank Wall Street Reform and Consumer Protection Act passed on July 21, 2010 has resulted in sweeping changes to the financial industry not seen since the financial reforms enacted after the Great Depression. It is estimated that the bill will result in nearly 400 rules and 87 studies before it is fully implemented.1 Although the bill will affect all financial institutions, its impact on hedge funds is notable because these private funds have generally been able to claim exemptions to the four major regulations imposed in the 1930s. </div>
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This thought paper seeks the opinions of hedge fund managers on The Dodd-Frank Wall Street Reform and Consumer Protection Act, its impact on their organization and the future of the hedge fund industry.</div>
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Please click on FULLSCREEN below to read the article or click on the link below to downlaod the pdf file.</div>
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<a href="http://www.scribd.com/doc/93076419/Dodd-Frank-hi-Resolution-April-16-2012" target="_blank">Dodd_Frank_hi Resolution April 16 2012</a></h3>
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<iframe class="scribd_iframe_embed" data-aspect-ratio="0.772727272727273" data-auto-height="true" frameborder="0" height="600" id="doc_92515" scrolling="no" src="http://www.scribd.com/embeds/93076419/content?start_page=1&view_mode=list&access_key=key-1bptwn7w1b2b6b16p0et" width="100%"></iframe></div>Anonymoushttp://www.blogger.com/profile/07703712947285622937noreply@blogger.com0tag:blogger.com,1999:blog-3286716600200363466.post-73354523296901310812012-02-08T13:16:00.000-05:002012-02-08T14:03:06.720-05:00FRANK ZARB - The Most Important Public Policy Failure of our Time - Energy<div dir="ltr" style="text-align: left;" trbidi="on">
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<strong>(Speech given at the University Club, New York, Jan. 25, 2012)</strong> </div>
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During the next 20 minutes, we will talk about America’s inability to develop a cohesive thoughtful energy policy despite the fact that we have urgently needed one for decades. But the over-arching question to consider today as we contemplate energy policy is this.</div>
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Is it possible to reform our democracy so that it will be able to deliver long-term policies that benefit the national interest in the face of short-term political pain? The answer to that uncomfortable question is at the crux of almost all of the difficult policy matters this country faces. </div>
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Using energy policy to frame the question is natural. How we use energy, where we get it, how we pay for it – all drive our economic policy, both domestically and internationally. Energy shapes our global alliances and impacts our national security.</div>
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My own experiences in energy policy, began almost four decades ago, may provide useful color. Some of you may remember that in 1973, the Arab members of the Organization of the Petroleum Exporting Countries (OPEC) organized an oil embargo on the United States.<br />
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As a direct result our GDP dropped an estimated $15 billion – a big number back then. 500 thousand workers lost their jobs - also a big number in 1974. Hospitals ran out of fuel oil. And the federal government actually took control of our ability to buy gasoline and heat our homes.</div>
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In 1973, the Unites States imported 35% of the oil it used. Today, it is closer to 60%. That’s over $400 billion leaving our country every year to buy oil from foreign sources – most of it flowing to the Middle East. </div>
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The impact of a major oil disruption to our economy and our national security today is unthinkable – but it can happen. So …</div>
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How can it be that since 1973, we have done so little to retard our exposure to oil imports from questionable areas of the world, and so little to regain some of the leverage we cede to those who may not have our best interests at heart? Here is a little history. <br />
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For a brief moment, in 1974 and early 1975 - a frightened nation seemed willing to look at major initiatives to drive down our dependence on foreign oil.</div>
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The political landscape was unique. President Ford was an unelected leader still explaining why his pardon of Richard Nixon was in the best interest of the Nation. </div>
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The House of Representatives was dominated by a liberal freshman class swept into office on the fumes of Watergate. </div>
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Long lines at service stations, hospitals running out of heating oil, and factories shutting down - all sparked broad support to do something about our energy situation.</div>
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When the embargo ended in 1974, the country was confronting inflation, recession, unemployment, some delicate labor issues and the nation was still reeling from Watergate.</div>
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Nevertheless, President Ford made energy a very high priority and asked me to lead a policy team to structure a plan that would begin a long term but steady process toward reducing imports from the Middle East. </div>
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It took us about four months in late 1974 to create a comprehensive legislative package. During that time, the President met with us regularly and went through every detail of the plan as it was being built. </div>
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He instructed other Cabinet Secretaries to be involved and to be supportive everyone got his message. This initiative was important to him and not subject to interdepartmental squabbling.</div>
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Some in the White House, especially those on the political side of the West Wing, grumbled that it gave too much ammunition to the opposition in the Congress. The grumbling was more amusing than anything else. As steady as it was, it always seemed to be just out of the President’s earshot. </div>
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President Ford introduced his plan in January 1975, by way of the State of the Union message – a quarter of which was devoted to energy policy</div>
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The President told the Joint Session of Congress that he would submit legislation which if enacted would:</div>
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1) Force conservation through a broad range of measures including - elimination of price controls that were a holdover from the Nixon Wage & Price control era and selected fuel taxes.</div>
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2) Expand the number of nuclear plants in a 10 – 15 year period. </div>
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3) Boost coal production and build power plants fueled by coal. </div>
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4) Open the outer continental shelf and other areas for domestic oil and gas exploration. </div>
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5) Support the construction of new oil refineries. </div>
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6) Develop renewable and synthetic fuels in a sensible and realistic manner. And …</div>
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7) Create a strategic oil reserve for future emergencies.</div>
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Tough stuff. And to balance some of the harsher medicine, the plan called for fuel cost subsidies for low income Americans. It was also designed to be sensitive to nuclear safety standards and environmental protection and it included a balanced “windfall” profits tax on oil companies.</div>
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The Congress and special interest groups were caught by surprise and they could not react quickly it was a wonderful but all-too-fleeting moment. </div>
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Here was this man from Michigan, drafted to be President facing his first presidential election in less than two years. This former Congressman, whose political antenna was better than most and he was proposing to increase energy costs for voters, expand controversial nuclear power and extend domestic oil exploration to areas which had been previously protected. </div>
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Here was a politician who talked about doing what he believed was right for the country even if it may not have been in the best interest of his election campaign. </div>
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When I told the President that our Legislative Proposals had managed to irritate Republicans as well as Democrats, he said “that means we have it just right.” </div>
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Eventually Congress woke up, and the opposition launched its attack but initially, they didn’t gain much momentum. The country was still bleeding from the embargo so it was hard to argue that we should not do something to guard against future disruptions. And the only way to do that would have been to significantly retard consumption through higher prices and greatly expand production of our domestic energy. </div>
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For the most part, the early opposition was shallow. </div>
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Jimmy Carter, who was getting ready to run against the President – proposed that to conserve gasoline, we should order all service stations to close on Sundays. And further, that government should allocate the available fuel supply. </div>
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He complained that the President’s tax proposals would be inflationary and of course higher fuel prices were part of the design of the Ford Plan. </div>
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Yes, gasoline would have gone from $.53 to $.70 per gallon. But the long term benefits would have been significant. </div>
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The silliness was bipartisan. A Senior Republican Senator (who was normally sober) urged that we should solve the entire problem with synthetic fuels. Never mind that he had no idea what synthetic fuels were, their state of development or whether they could compete in the market place. </div>
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Democrats in the Congress came up with some alternative ideas that were also empty and were broadly panned by the media.</div>
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So, in those early days, I truly believed that we had a real chance of getting effective legislation. But the increased flow of oil from the Mideast and flat to lower oil prices worked against us. A recession meant lower oil consumption and OPEC knowing clearly how its fortunes might be affected by our success – shrewdly influenced the debate by dropping hints about lowering prices.</div>
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As 1975 wore on, the Congress held hearings on parts of the President’s plan. The price of oil did not rise, there was ample supply and of course the ’76 elections were coming up. </div>
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Those forces resulted in a steady erosion of what initially was a limited reservoir of congressional courage.</div>
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We began to lose traction and I went to see Scoop Jackson, a Senator from the State of Washington, who was my Senate Oversight Chairman. I complained that what the Congress intended to do would be inadequate. When I asked what might push things back in our direction, he said “a new embargo.” He turned out to be right. Without a crisis, Congress was not going to do what needed to be done. </div>
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The battle continued for the rest of 1975. Strange alliances were formed as a number of trade unions sided with us. Consumer groups (led by Ralph Nader) opposed our intent to raise prices but we were surprised when he gained the backing of the environmental community. </div>
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I asked an important environmental leader – “How could you oppose a measure that would lower the use of fossil fuels?” He replied – “Nader helps us. We have to help him.” That was one of the many lessons I learned that year about how Washington works. </div>
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The President never lost enthusiasm for the plan. At one point, he told me, “we have to keep fighting for every element” but he acknowledged that “in the end, we are going to get much less than we want.” </div>
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He intended to go back to the Congress after the election and pound away for the rest of the package and I believe that if he had been elected, he would have gotten the job done. </div>
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In the end, the Congress gave us the easy stuff. They authorized the strategic petroleum reserve. They gave us the ability to mandate fuel efficiency standards for automobiles. </div>
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They also approved appliance energy efficiency labeling but punted on price decontrol and all of the other important provisions that would have angered some of their voters and you know how the election turned out.</div>
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Jimmy Carter “talked the talk” and created a government owned Synthetic Fuels Corporation to fund alternative sources of energy. It was scandal ridden, did little to advance technology wasted tens of millions of dollars, and ultimately was shut down by Ronald Reagan. But Reagan, Bush Sr., Clinton, and the second Bush did nothing significant to stop the steady expansion of our oil imports. None of them made national energy their priority.</div>
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Today, the current condition of our economy and political climate precludes any kind of major initiative. But following the election, there will be opportunity to take some positive steps.</div>
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Advanced natural gas extraction technology, and a proposed new oil pipe line between Canada and Texas, can make a major contribution to our energy supply.</div>
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Yes, both of these projects will require effective environmental standards but a good faith bipartisan effort can make them a reality. </div>
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And perhaps set the stage for a more comprehensive Energy Legislation in 2013 which, I assure you would not look anything like the 1975 plan. Today, I cannot help but wonder how the world would be different if the Ford Energy Legislation had been adopted 36 years ago.</div>
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Here are some thoughts:</div>
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1) We would have greater control over our own energy universe.</div>
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2) Energy prices would probably be lower, to the benefit of our economy.</div>
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3) We would be further along in developing competitive alternative sources of energy.</div>
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4) Our foreign policy – and defense strategy – would not be distorted by our dependence on imported oil. </div>
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I’m even willing to make the argument that we probably would not have gone into Iraq if we had achieved the higher level of self-sufficiency that the Ford Plan called for. </div>
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A few weeks ago, Iran fired rockets in the Strait of Hormuz. </div>
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One fifth of the world’s oil supply passes through that strait. Right now, our only viable response is the U.S. Navy.</div>
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Before I end, I ask you to think about today’s economic turmoil in the context of the energy crisis of almost 40 years ago.</div>
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Ultimately, there is only one way to reset the massive debt that is strangling our economy and that is to reduce spending and raise revenue. It will not be accomplished with populist rhetoric. </div>
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The continued failure to drive bipartisan legislation on urgent national needs can be summed up by an exchange I had with a highly respected Senator in 1976.</div>
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When I asked for his vote, he said, “I really support the President’s Energy Plan, but if I vote for it, and there is no emergency, my opponent will use it against me in the next election.” </div>
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So, here is the big question … how can we revise the system so that the most critical national issues can be addressed in the Congress without fear of political retribution? </div>
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Leadership, leadership, leadership on both sides of the aisle. It is entirely conceivable that party leaders could agree to carve out the few issues that are simply too important to be subjected to the usual partisan ugliness. So let’s talk about the “Carve- Out Proposition.</div>
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Our representatives, in both parties, can push these ultra-critical matters out of the political ambit. </div>
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And acknowledge up front that any bipartisan agreement will cause some shared pain. Party discipline would be less about enforcing ideological orthodoxy and more about respecting the marching orders of party leaders to address a very few important issues without primary regard for their politics. </div>
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Under this agreement, selected critical solutions could be perused without subjecting them to the very worst vagaries of the election process. </div>
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It may seem unbecoming for a man at this stage of his career to betray such naiveté about how things can work in Washington. To some of you, the notion of the “carve-out proposition” must seem inconceivable and impossible.</div>
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It should not be impossible, it can’t be impossible and it may not be as difficult as it seems to move us back in the right direction. </div>
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A good first step would be to reject the skepticism that tells us cannot be done. </div>
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Who knows? Our elected representatives may even stumble upon the epiphany that good policies are good politics and that pursuing common ground is more secure than living in the self-serving fringes.</div>
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The alternative is an unacceptable status quo. President Ford, always the optimist, would certainly share the vision of working in partnership for urgent national matters He would tell us that bipartisan cooperation on critical matters can happen but only if the voters elect and hold politicians accountable for the real value they bring to the long-term good of the United States even if their actions risk hurting their re-election. </div>
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As we head into the 2012 elections, it would be good to ask each candidate: “Which decisions have you made that risked your own personal ambitions for the greater good of the country?” </div>
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Candidates unable to point to acts of political courage in the past are unlikely to surprise us with such fortitude in the future.</div>
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<strong>Note: The author served as the US Energy Czar during the Ford Administration<span style="font-family: "Arial", "sans-serif"; font-size: 22pt; line-height: 115%; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: Batang;"></span></strong></div>
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</div>Anonymoushttp://www.blogger.com/profile/07703712947285622937noreply@blogger.com0tag:blogger.com,1999:blog-3286716600200363466.post-41924158767362402011-11-23T13:05:00.000-05:002011-12-13T09:38:28.111-05:00FIXING THE GREEK DEBT CRISIS: A CASE OF OVER OPTIMISM AND OVERDOSE?<br />
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<span style="font-family: "Times New Roman", serif; font-size: 12pt;">George J. Papaioannou</span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt;">Zarb School of Business, </span><span class="Apple-style-span" style="font-family: "Times New Roman", serif; font-size: 16px;">Hofstra University</span><br />
<a href="http://people.hofstra.edu/George_J_Papaioannou/">http://people.hofstra.edu/George_J_Papaioannou/</a></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">When in May 2010, the Greek government agreed to a bailout plan drawn by the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Union (EU) – also nicknamed Troika – it was expected that by 2012 the government budget would show a small positive primary surplus, the GDP would start to grow again and Greece would have returned to the public debt markets. With the year 2012 almost upon us, none of these expectations seem realizable. GDP is expected to decline in 2012 and Greece is not expected to return to the debt markets before 2020. The government’s recent projections show a small primary surplus but its realization is precarious. Debt has risen from 127% of GDP in 2009 to over 160% at the end of 2011 and is projected to stay way above the original projections in the Medium Term Fiscal Strategy (MTFS) unless there is a severe restructuring plan. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">So the question is: what went wrong? A case can be made that the expectations were overoptimistic and the medicine prescribed to Greece was too strong. Common to both explanations was the reliance on a set of assumptions that were not present in the case of the Greek economy and, more critically, the case of Greek politics and socio-economic culture. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">The original bailout plan provided loans up to EU110 bn. to refinance Greece’s debt up to 2013 under strict conditions aiming at repairing the fiscal imbalances. The conditions included significant reduction of public sector expenditures, additional revenues through direct and indirect taxes, and liberalization of the labor and professional markets. Keeping with the accepted view about the efficacy of fiscal measures, the plan was slightly tilted toward greater cuts in public sector expenditures than revenue increases through taxes. Furthermore, restoring external competitiveness had to come from internal devaluation since currency devaluation was precluded. The plan’s prescriptions and its anticipation of recovery within a few years betray a diagnosis of the debt crisis as being a liquidity rather than an insolvency problem. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">The success of the plan was dependent on three conditions. The first condition was that the pro-growth effects of the fiscal consolidation and market reforms would more than offset the contractionary effects of the public sector cuts and tax increases. The second condition was that the Greek government would seek to shrink its budget deficits by downsizing and streamlining the public sector as well as curbing tax evasion than by overly taxing the private sector. The third, and most difficult to meet, condition was that the market reforms and the improved competitiveness would contribute materially and relatively fast to a climate conducive to economic growth through investments and rise in exports.</span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">Two years into the crisis, we can see now that the expectations of the original plan has not come to pass. For example, recent statistics show that Greek nominal GDP in 2011 will be EU218 bn. compared to EU225 bn. projected in the MTFS. Similarly, in 2012, the nominal GDP is expected to be EU213 bn. compared to EU228 bn. in the MTFS projections. It is clear that the negative effects of public sector cuts and new taxes have hit the economy with potency and immediacy that has not been matched by any pro-growth effects expected from market reforms and a more positive sentiment about the soundness of future public finances. The plan’s designers and advocates could plausibly argue that had the plan been executed with clinical precision it would have succeeded. Nonetheless, in the implementation of any business or economic plan, the designer must count on the ability of those responsible to execute the plan as well as the disposition of those affected by the plan and the capacity of the organizational – in this case socio-economic - culture to adjust to the dictates of the plan. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">It seems that the plan itself did not account for certain idiosyncracies of the Greek economy. One of them was the makeup of the GDP, which was heavy in consumption and light in savings and capital formation. Thus, while the fiscal adjustment took a heavy toll on consumption it got little support from the other two components. The statistics show that consumption had grown through the last ten years and by 2010 it represented 75% of GDP compared to an average of about 58% in the rest of the Euro zone. Accordingly, a major hit in the consumption component was destined to have a critical impact on GDP. Indeed consumption has significantly declined through 2010 and 2011. This echoes the U.S. case where the loss of purchasing power following the debacle of the housing market has had a persistent negative impact on consumption and in turn on US GDP growth rates. To offset this loss of aggregate demand, investments and/or exports would have to increase significantly. Although investments in Greece had achieved a respectable level in the eight-year period after the entry to euro in 2001, the slowdown of an extensive infrastructure improvement program due to the Olympic Games had returned investments to more modest levels. Moreover, most of the investment in recent years was in construction (allegedly fueled by rampant tax evasion) than in productive capital formation. Finally, exports of goods have historically been a small part of the GDP. Thus, they could not make up for the loss of domestic demand, despite the notable increases in tourist services and exports in 2010 and 2011. <b></b></span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">The political cycle did not help the realization of the plan’s objectives either. In the fall of 2009, the socialist party PASOK returned to power following the decisive defeat of the center-right New Democracy party that stood accused of fiscal profligacy during the last few years of its reign and of false representation of the budget deficit. The political significance in the coincidence of a socialist party being in government and the need for unprecedented fiscal retrenchment lies in the plan’s demand for extensive dismantling of the statist economic model PASOK had espoused and practiced during its many years as the ruling party of Greece. Apart from any accusation of patronage, favoritism, and crony capitalism, which after all could be also levied against the center-right New Democracy party, PASOK’ philosophy was embedded in the intellectual and political belief that the state’s presence in the economy was a beneficial force and as such it should be sustained. Thus, it was an historical irony that PASOK had the unenviable task to go back on a fundamental principle of its economic policy. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">A hypothesis can be made that PASOK’s economic policy as a response to the crisis was perhaps unintentionally abetted by the optimistic forecasts of the Troika’s plan, and especially the anticipation that a return to near normalcy was possible in a few years. Although the PASOK government ascended to the plan’s austerity measures, it is plausible to conjecture that, based on the plan’s relatively short horizon, the government concluded that it would be possible to ride the crisis without a serious downsizing and transformation of the public sector. If relief was attainable within a few years, this logic would suggest that the statist economic model could persevere despite some unavoidable cuts in salaries and retirement incomes as well as pension reform. The important objective from this standpoint was to avoid extensive layoffs of public employees and the privatization of state-controlled enterprises. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">Reluctance on the part of the PASOK government to downsize the public sector and its payroll meant that the brunt of the revenue enhancements would come from the private sector through various business and personal taxes, including value-added tax rate hikes. Indeed the record shows that although government expenditures (apart from interest payments) come close to the MTFS targets, they have not declined between 2010 and 2011. The reason is that the government has eschewed the termination of government related entities and public employee contracts and instead has preferred to reduce public expenditures through cuts in salaries and pensions. Failure to curtail public expenditures and inadequate tax revenues, due to the recession, continue to generate primary budget deficits that push the public debt upwards. As a result, interest payments have increased putting additional pressure on the budget. More critically, the inability to curb tax evasion means that the brunt of new taxes falls on the “visible” economy which has continued to decline due to the recession. Indeed the government practice is to resort to new ad hoc tax increases to close the budget gaps and satisfy the conditions of the agreement with the Troika. The result has been diminished purchasing power, declining consumption, and difficulty on part of businesses to retain their work force as revenues drop. Indeed, by August of 2011, unemployment had soared to 18% (seasonally unadjusted) most of it afflicting the private sector work force. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">In addition, the government has been painfully slow in organizing and initiating the privatization program due to both its partisan philosophy and the power of the labor unions of the state-owned enterprises. From a resource allocation standpoint, the result of this distribution of the austerity measures has been a still bloated public sector and a weakened private sector. In other words, human and capital resources have not been released from the less productive sector of the Greek economy (that being the general government and the assets under its control) but instead resources have been sidelined in the more productive private sector. Thus one of the major beneficial consequences of a forced restructuring of the Greek economy was thwarted, sacrificed to political imperatives. Eventually, at the behest of Troika in June 2011, the Greek government agreed to embark on a serious effort to cleanse its payroll of low-value agencies and personnel by placing public servants in a labor reserve that pays reduced benefits. It also promised to accelerate the privatization program. It must be noted, in this connection, that the success of the privatization program has also lost part of its original efficacy because the severe austerity measures and the down-spiraling economy have naturally reduced the economic value of the state-owned assets.</span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">The third pillar of the debt crisis resolution plan was reforms that would liberalize the labor and professional markets, simplify bureaucratic red tape in the case of new business formation and operations, and in general lead to a more hospitable climate for inward foreign investments. Notwithstanding the necessity and high degree of urgency of these policy prescriptions for future economic growth, a more careful reading of Greece’s politics and socio-economic culture would suggest that the anticipated benefits would materialize slowly over a longer time framework than it was needed for debt relief. Nonetheless, there were some immediate benefits from the liberalization of labor laws and regulations, which allowed Greek firms to gain greater flexibility in structuring their work force in terms of size and flexibility of working conditions. This has led to a substantial reduction of labor costs and is most likely responsible for the growth of exports. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">On the other hand, liberalization of the professional markets could not seriously contribute to growth, at least in the short-run. First, the laws were enacted with significant tardiness due to political resistance. Second, it was unlikely that the reforms would attract new entrants amidst a climate of worsening economy and dropping demand. Similarly, improving the conditions for the creation of new business and inward foreign investments will take time before they produce tangible results for several reasons. A case can be made that the entrepreneurial and risk-taking spirits have suffered considerable suppression in Greece following a long period of over-reliance on the state to provide well-paid jobs and financial security. It has not helped either that politicians of the left and the right are not used to talking in favor of private resourcefulness, initiative, and profit seeking. Whether it is a majority view or not, the ostensible sense is one of distrust of entrepreneurial efforts, especially those of large scale, and the underlying belief that the firm should operate at the benefit of its labor force irrespective of its viability or capacity to generate a minimum and acceptable reward to capital and risk-taking. Furthermore, crony capitalism has established a culture where firms rely on business with the state to support their growth and viability. With the economic retrenchment of the state, it will take some time for Greek firms to get accustomed to the idea of operating within a more arms-length business environment. The contraction and precariousness of the banking sector places additional hurdles to the growth of – especially new – businesses as market liberalization takes hold.</span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">Turning Greece into a more hospitable venue for foreign investments and capital is a venture still in the making. Unfortunately, the future prospects have to overcome the bad record of the past. Greece has a worse than mediocre record in attracting foreign direct investments (FDI) and usually occupies one of the last places among EU states. (A study shows that FDI accounted for no more than 1% of GDP in the period 1970-2010!) The last 20 years, foreign capital has been invested in already existed firms rather than creating large new enterprises. In addition to uncertainty relating to tax policies, regulation, and labor union unrest, the setting up costs are of legendary proportions. There is a story of a tourist resort in the southern Peloponnese that took 20 years to put together. A foreign gold extraction investment in Macedonia (North Greece) was delayed over eight years. Recently, a billion plus investment by a Gulf Arab state near Messologi (Western Greece) was scrapped for dubious environmental reasons. Still two years into the debt crisis, press reports suggest that the relevant rules and arrangements to facilitate foreign investments are being worked out. Not surprisingly, Greece perennially ranks very low in the <i>Doing Business</i> tables of the World Bank. Overall, it will take time and a very determined effort on part of Greek governments and local authorities to convince foreign investors to establish green field operations in Greece. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">Looking back it is clearer now that the Troika plan to resolve the Greek debt crisis was ill-designed and poorly executed. Its design flaw was the excessive reliance on fiscal austerity which had an unanticipated contractionary effect on the economy. The reason for this design was most likely the misdiagnosis of the Greek debt crisis as a liquidity than an insolvency problem. The plan’s design also suffered from the unrealistic expectation that market and regulatory reforms would generate adequate growth through new investments and exports to offset the impact of austerity on aggregate demand. The plan was further poorly executed by the Greek government which opted to close the gap by across-the-board taxation that hurt businesses and households. The ad hoc nature of the revenue enhancement measures also accentuated the degree of uncertainty, thus damaging the investment climate. The reluctance to reduce faster and more drastically the size of the public sector and proceed with a reliable and fast-track privatization program intensified the misallocation of resources and stymied the private sector’s growth. As a result, the general view has finally arrived to the conclusion that the Greek debt is insolvent and only its reduction to a size that is compatible with the medium-run potential and capacity of the Greek economy to service it will extricate Greece from the vicious circle of austerity measures followed by more debt. </span></div>
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<span style="font-family: "Times New Roman", serif; font-size: 12pt;">Acknowledgements</span></div>
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<span style="font-family: "Times New Roman", "serif"; font-size: 12pt;">In writing this short paper I have benefited from the following sources:</span><span style="font-family: Calibri;">1. Various releases of Eurobank Research.</span><span style="font-family: Calibri;">2.<span style="mso-tab-count: 1;"> </span><i style="mso-bidi-font-style: normal;">Boomerang</i> by Michael Lewis, Norton, 2011.</span><span style="font-family: Calibri;">3.<span style="mso-tab-count: 1;"> </span>“Can Greece Jumpstart Growth without Bank Credit Expansion?” (in Greek) by<br /> D. Malliaropoulos, Eurobank Research, September 2011.</span><span style="font-family: Calibri;">4.<span style="mso-tab-count: 1;"> </span>“The Growth of the Greek Economy: Sources, Prospects, and the Role Investments and </span></div>
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<span style="font-family: Calibri;"> Exports,” by N. Karamouzis and T. Anastasatos, Eurobank Research, October 2011. </span></div>
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<span style="font-family: Calibri;">5.<span style="mso-tab-count: 1;"> </span>“Economic Crisis and Fiscal Policy:The Case of Greece,” by V. Rapanos and G.<span style="mso-spacerun: yes;"> </span>Kaplanoglou, in<i style="mso-bidi-font-style: normal;"> </i></span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;"> From the International Crisis to the Crisis of the Eurozone and Greece</i> (in Greek), edited by</span></div>
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<span style="font-family: Calibri;"> N. </span><span style="font-family: Calibri;">Karamouzis and G. Hardouvelis, Livani, 2011.</span></div>
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<span style="font-family: Calibri;">6.<span style="mso-tab-count: 1;"> </span>“Greece and the Fiscal Crisis in the Economic and Monetary Union,” by W. Buiter and E.</span></div>
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<span style="font-family: Calibri;"> Rahbari, in <i style="mso-bidi-font-style: normal;">From the International Crisis to the Crisis of the Eurozone and Greece</i> (in Greek)</span></div>
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<span style="font-family: Calibri;"> edited by N. Karamouzis and G. Hardouvelis, Livani, 2011.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: Calibri;">7.<span style="mso-tab-count: 1;"> </span><i style="mso-bidi-font-style: normal;">Greece’s ‘Odious’ Debt</i> by J. Manolopoulos, Anthem Press, 2011.</span></div>
</div>Unknownnoreply@blogger.com26Hofstra University, 100 Hofstra University, Hempstead, NY 11549-4000, USA40.7169943 -73.5976940.704957300000004 -73.617431 40.7290313 -73.577949