Europe's sovereign-debt crisis

by Natalie de Vallieres and Biodun Iginla, Financial Anlaysts for BBC News and the Economist

The Greek debt crisis is spreading. Europe needs a bolder, broader solution—and quickly

Apr 29th 2010 | From The Economist print edition

THERE comes a moment in many debt crises when events spiral out of control. As panic sets in, bond yields lurch sickeningly upwards and fear spreads to shares and currencies. In September 2008 the failure of once-stellar Lehman Brothers almost brought down the world’s banking system. A decade earlier, Russia’s chaotic default on its sovereign debt rocked the credit markets, felling Long Term Capital Management, a hugely profitable American hedge fund. When the unthinkable suddenly becomes the inevitable, without pausing in the realm of the improbable, then you have contagion.

The Greek crisis—or more properly Europe’s sovereign-debt crisis—looks dangerously close to that (see article). Even as negotiators from the European Union and the IMF are haggling with the Greek government over an ever-growing bail-out package, the yield on Greek debt has ballooned: two-year bonds soared towards 20% this week. Portugal’s borrowing costs jumped. Spain’s debt was downgraded, along with Portugal’s and Greece’s, and Italy came worryingly close to a failed debt auction. European stockmarkets have slumped and the euro itself fell to its lowest level in a year against the dollar.

The road into Hades…

It will strike some as mystifying that a small, peripheral economy should suddenly threaten the world’s biggest economic area. Yet, though it is only 2.6% of euro-zone GDP, Greece sounds three warnings that reach far beyond its borders.

The first is economic. Greece has become a symbol of government indebtedness. This crisis began last October when its new government admitted that its predecessor had falsified the national accounts. It is labouring under a budget deficit of 13.6% and a stock of debt equal to 115% of GDP. It cannot grow out of trouble because of fiscal retrenchment and its lack of export prowess. It cannot devalue, because it is in the euro zone. And yet its people seem unwilling to endure the cuts in wages and services needed to make the economy competitive. In short, Greece looks bust.

Few, if any, European countries suffer from all of Greece’s ills, but many scare investors. Portugal has a high budget deficit and is chronically uncompetitive. Spain has a low stock of debt, but it seems unable to restructure its economy. So too Italy, which is heavily indebted to boot. Non-euro-zone Britain has let its currency fall, but its budget deficit is unnerving.

The second lesson is political. Two weeks ago, having concluded that an eventual Greek restructuring was all but inevitable, we said Europe’s leaders had “three years to save the euro”. We presumed that they would quickly get a proposed €45 billion ($60 billion) deal to stave off an imminent and chaotic Greek default, buying time for an orderly rescheduling and for the other weak economies to begin overdue structural reforms. We overestimated their common sense.

The chief culprit is Germany. All along, it has tried to have it every way—to back Greece, but to punish it for its mistakes; to support the Greek economy, but not to spend any money doing so; to treat this as just a Greek problem, when German banks and German citizens, who lend to Greece, stand to lose money too. German voters do not favour aiding Greece. But rather than explain to them why it is in Germany’s interest, the chancellor, Angela Merkel, has run scared of upsetting them before a big regional election on May 9th.

Playing for time has backfired. Now the mooted rescue plan has climbed above €100 billion because no private money is available. The longer euro-zone governments dither, the more lenders doubt whether their promises to save Greece are worth anything. Each time politicians blame “speculators” (see article), investors wonder if they understand how bad things are (or indeed that investors have a choice). Euro-zone leaders initially refused to seek IMF help because it would be humiliating. Their ineptitude has done far more than their eventual decision to call in the IMF to damage the euro.

This political and economic failure leads to the third Greek warning: that contagion can spread through a large number of routes. A run on Greek banks is possible. So is a “sudden stop” of capital to other weaker euro-zone countries. Firms and banks in Spain and Portugal could find themselves shut out of global capital markets, as investors’ jitters spread from sovereign debt. Europe’s inter-bank market could seize up, unsure which banks would be hit by sovereign defaults. Even Britain could suffer, especially if the May 6th election is indecisive.

What then is to be done? The mounting crisis—and the fact that Greece will almost certainly not pay everybody back on time—will renew some calls to abandon it. That would spell chaos for Greece, European banks and other European countries: the effect would indeed be Lehman-like. Hence the necessity, even at this stage, of a show of financial force, linked to the construction of a stronger firewall between Greece and Europe’s other shaky countries. The priority for European policymakers is to do the same as governments eventually did with the banks: to get ahead of the crisis and to convince investors that they will spend whatever is necessary.

…and the expensive way back

The economics starts with the politics. Europe will not stem this crisis unless its decision-making apparatus is overhauled and Germany radically changes its tune. Mrs Merkel needs to go on German television and explain to her people what is at stake—laying out how much Germany has gained from the euro and what it has to lose from a cascade of chaotic sovereign defaults. Germans need to understand the risks to their banking system and their prosperity. They need to understand that stemming Greece’s debt crisis is less an act of charity than of self-interest. However unfair it seems—and the frugal Germans are as furious about the profligate Greeks as the rest of the world was about bankers—a bail-out is justifiable on the same logic: doing nothing would cost them even more.

The resolve cannot stop at Germany’s borders. Financial markets have no idea who is in charge. Europe’s Byzantine decision-making structure does not help but Germany needs to ensure that decisions are reached fast, that Europe speaks with one voice—and that co-ordination with the IMF is smooth. As a way to convince financial markets that the political weather has changed, the euro zone should set up a single crisis-management committee, with the power to take decisions.

Political resolve won’t work unless the underlying economics make sense. The first test of this is the Greek package. In return for fiscal and structural adjustments that give the economy a hope of stabilising its debts, this must provide enough money to prevent a forced default. Up to €150 billion may be needed over the next three years—better to err by offering too much. But the firebreak between Greece and the other embattled sovereigns of the euro zone is even more important. In economic terms, that should not be too hard to justify. Despite their problems, no country other than Greece is manifestly bust. Portugal is in the greatest danger, but it has a better history of fiscal adjustment which, under plausible assumptions, could allow its debt to stabilise at a manageable level. Spain and Italy could be made insolvent by a long period of high interest rates. But none has the near-inevitability of Greece.

Europe’s policymakers must make those distinctions clearer. The vulnerable economies must step up the reforms they need to rein in deficits and boost growth. Portugal, especially, needs action. The European Central Bank should demonstrate that it has the tools to maintain liquidity even if there is panic. Euro-zone governments should pre-emptively create inter-governmental liquidity lines. Thanks to extraordinary incompetence, Europe’s leaders have almost ensured that the Greek rescue failed before it began. They are paying for that today.

Posted by biginla at 7:09 PM BST

Share This Post

Post Comment | Permalink

India's criminal tribes

by Susan Kumar for the BBC and the Economist's Biodun Iginla

Millions of poor Indians are considered criminal by tradition. Most are nothing of the sort

Apr 22nd 2010 | ASHTI, MAHARASHTRA | From The Economist print edition

Badshah, not bad man

INSIDE his hovel of branches and rags, a grizzled pauper called Badshah Kale keeps a precious object. It is a note, scrawled by a policeman and framed by Mr Kale, proclaiming that he “is not a thief”. For members of his Pardhi tribe, who are among some 60m Indians considered criminal by tradition, this is treasure.

Squatting beside Mr Kale, on a turd-strewn wasteland outside Ashti, a village in India’s western state of Maharashtra, Pardhi men and women describe what it is like to be branded criminal at birth. A woman says her husband is hauled in every week or two by the police, against whom the Pardhis have ring-fenced their wretched colony with thorny branches. He has thrice been tried for robbery but was never convicted. Sporting a bright pink turban, another Pardhi says six of his seven sons have been imprisoned numerous times. All, predictably enough, claim to be law-abiding—though, giggling, Mr Kale’s wife admits to hawking copper trinkets as gold. “Even if we try to live like normal people,” she says, “the [Hindu] upper-castes will never accept us.”

This stigma goes back over a century. Mostly itinerant—some blue-eyed Pardhis look like they might come from the far north-west—India’s “criminal tribes” have always lived on society’s edge. Yet their plight was made worse by a series of 19th-century changes, including rapid deforestation, which stopped them from hunting, and the imposition of a tax on salt, which many had traded. No doubt this drove many to crime—which encouraged India’s British rulers to a harsh conclusion. Imbued with a bureaucratic aversion to nomadism and a Victorian relish for the Hindu caste system, they adjudged many Indian tribesmen, Pardhis included, to be preordained crooks. According to an 1880 report of the Bombay Presidency, an area dominated by the modern states of Maharashtra and Gujarat, members of a Pardhi sub-tribe are “always ragged and dirty, walking with a sneaking gait”.

To fix these vagabonds, the Raj introduced the 1871 Criminal Tribes Act, under which members of around 150 tribes were forced to register with the police, forbidden to move around freely and, in many cases, herded into barbed-wire camps. The law was scrapped soon after India won independence, and the criminal tribes were formally “de-notified” in 1952. Some have prospered: in Rajasthan, the Meenas dominate a preferential-treatment scheme to allocate government jobs to tribal people, which has let them become part of India’s elite civil services. Yet the fortunes of many de-notified tribes (DNTs) have scarcely improved.

The Pardhis, of whom there are more than 200,000 in Maharashtra, are especially wretched. They are mostly jobless and landless, and they are often informally barred from villages. Thousands live destitute in Mumbai, Maharashtra’s capital. In response, the state government has made two of the three local Pardhi sub-tribes eligible for positive-discrimination measures. Yet few Pardhis have the documentation or education needed to take advantage of this. Around 80% are illiterate, even if more than half of Pardhi children may now be in school. Among 60-odd Pardhis squatting outside Ashti, only one has a formal job, as a school janitor. He credits his success to passing himself off as a dalit, one of Hinduism’s former “untouchables”.

To examine the plight of India’s estimated 100m-odd DNTs and other nomadic people, the central government appointed a commission which reported back in 2008. Its recommendations, to which the government has not responded, included taking steps to extend positive-discrimination measures to those tribals—perhaps a fifth of the total—who lack them. It also urged state governments, which control policing in India, to scrap draconian laws used by the police to lock up repeat offenders. These are often used against DNT members, enforcing a cycle of poverty and discrimination that keeps many in crime. Pardhi poachers, for example, are one of the biggest threats to India’s dwindling population of tigers, which they have eradicated from several national parks.

According to Ashti’s police chief, S.S. Gaikawad, a quarter of local thefts are carried out by Pardhis. His deputy reckons half of Pardhi men are criminal. Mr Gaikawad attributes high rates of criminality to poverty, but believes culture also plays a part: “The more criminal cases against a Pardhi man, the higher his status, and therefore the better his marriage prospects are.” In a country where over a quarter of parliamentarians face criminal charges, this is not as surprising as it might seem. Yet Rajendra Kale, a Pardhi activist in the nearby town of Ahmednagar, says it is exaggerated. He reckons no more than 10% of Pardhi men break the law. To help his poor community, Mr Kale, who says he was twice wrongly imprisoned for theft as an eight-year-old, demands a reform that the government cannot easily provide: “Pardhis must be accepted into the village.”

This is happening, he says, but slowly. He points to some bloodied figures, a Pardhi man and two women, waiting on the pavement nearby. The man, Faillu Bhosle, said they had been attacked by high-caste Marathas while they were cultivating common grazing-land. They had come to town seeking treatment for Mr Bhosle’s father, who lost an eye in the attack, and to report the incident to the police. The policemen of their own village, who have arrested Mr Bhosle four times, refused to record their complaint.

Posted by biginla at 10:20 PM BST

Share This Post

Post Comment | Permalink

Cyber-crime

by Tamara Kachelmeier, Tech Analyst for the BBC and the Economist, for the BBC's Biodun Iginla

International efforts to police the net remain deadlocked

Apr 22nd 2010 | From The Economist print edition

WHEN people talk about the digital divide, they usually mean the gap between people who are benefiting from the information revolution, and those who through lack of education or money are missing out. But at a United Nations conference in Brazil that concluded on April 19th, a different (though related) sort of divide was on show, and ten days’ chatter by over 100 countries failed to bridge it.

If there was one thing on which almost everybody agreed, it was that criminals are mastering computer technology much faster than most governments are learning to foil them. Rich countries say they are beset by fraudsters, pornographers and hackers operating from poor places where they will never be caught—because their “host” governments can’t or won’t stop them.

One response is the Budapest Convention, an accord launched at the Council of Europe in 2001, and ratified by the United States in 2006. One of its aims is to let authorities in one country give chase, at least electronically, to criminals in another.

But Russia has opposed the principle of “transborder access”, especially since 2000, when American agents hacked into the computers of two Russians who were defrauding American banks. Instead, Russia is backing a UN treaty which would be respectful of borders while also giving police more powers to shut down websites dealing in “propaganda.” Many countries like that idea—but not enough to push it through. For now, the only winners are the criminals.

Posted by biginla at 5:38 PM BST

Share This Post

Post Comment | Permalink