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Greece

Greek parliament prepares for 3rd and final presidential vote

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In the second of three presidential votes, the Greek parliament failed to elect the government’s center-right choice for president, Stavros Dimas (pictured above), a former foreign minister and European Commission member, in voting on Tuesday.Greece Flag Icon

Though it was the second time that Greek prime minister Antonis Samaras, both failures were expected, given that Dimas needed 200 votes in the 300-member Hellenic Parliament (Βουλή των Ελλήνων) in order to win the presidency outright in either of the first two rounds. That threshold drops to just 180 votes in the third and final round that will take place next Monday, December 29. Samaras is waging an all-out campaign over the weekend to convince enough legislators to support Dimas and, by extension, his government.

Dimas won just 160 votes in the first round, but Samaras, who governs a coalition that includes his own center-right New Democracy (Νέα Δημοκρατία) and its traditional center-left rival, PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα), increased that total to 168 in the second vote after winning over a handful of independents.

If the Hellenic Parliament fails to elect a new president, Greece will hold snap elections next spring and New Democracy might lose, as polls currently suggest, to the hard-left SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς). That could put Greece’s financial future in doubt as SYRIZA’s leader, Alexis Tsipras, pledges to reverse the austerity measures of the past six years and negotiate a bond haircut to lower the country’s debt burden, from the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund that provided Greece two bailouts worth €110 billion and €130 billion, starting in June 2010. 

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RELATED: Markets shouldn’t be freaking out about Greek elections

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Samaras starts with the existing ND-PASOK governing coalition, which controls 155 votes, there’s a theoretical bank of 46 additional votes, including 24 independents, 12 legislators from  Panos Kammenos’s Independent Greeks (ANEL, Ανεξάρτητοι Έλληνες), an anti-austerity spinoff from New Democracy and 10 additional legislators from the Democratic Left (DIMAR, Δημοκρατική Αριστερά), a new social democratic party and SYRIZA spinoff that joined Samaras’s coalition between the June 2012 elections and June 2013 (when it eventually withdrew to the opposition in the face of further austerity measures). Though DIMAR leader Fotis Kouvelis has indicated he will support SYRIZA’s call for early elections and will support a SYRIZA-led government, not all of the party’s members agree. Negotiations with the Independent Greeks have been equally tenuous, and one of its members accused the government of attempting to bribe him in exchange for his support in the presidential vote.

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Snap elections would coincide with the end of Greece’s bailout program in February 2015. The the next Greek government already faces a €22 billion budget shortfall between 2015 and 2016. Among the solutions currently under discussion is a short-term credit line from the troika or the IMF, though the troika is already demanding additional wage cuts and other fiscal contraction as part of the deal. Another potential solution might be to extend the repayment period by 20 years, equivalent to writing off around €50 billion in debt. Continue reading Greek parliament prepares for 3rd and final presidential vote →

Greece

Markets shouldn’t be freaking out about Greek elections

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It’s not surprising that Greek investors would be spooked by the idea of political turmoil that could replace Greece’s center-right coalition government with a radical leftist one as soon as February.Greece Flag Icon

That possibility became much more likely yesterday, when Greek prime minister Antonis Samaras brought forward a presidential election to replace Karolos Papoulias, the 85-year-old incumbent and a founder of PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα), Greece’s traditional center-left party, whose second five-year term was due to expire in March 2015. Greece’s presidency, a chiefly ceremonial office like in many European parliamentary systems, is determined indirectly by the Hellenic Parliament (Βουλή των Ελλήνων), not directly through national elections.

Samaras’s decision only moves up the presidential vote by two months. Samaras leads a coalition government of his own center-right New Democracy (Νέα Δημοκρατία) and its former rival PASOK. If the coalition fails to elect a president, it will trigger the government’s collapse, bringing forward parliamentary elections that would otherwise take place in June 2016.

The prospect of early elections and the possibility that SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς) and its charismatic leader, Alexis Tsipras (pictured above), could be running Greece’s economic policy within weeks was enough to send the Athens stock exchange tumbling by 12.78% on Tuesday, the largest single-day drop since 1987, as analysts went berserk explaining that a potential SYRIZA victory could spell doom not just to the European but to the global economy:

“Greece in the next 6 weeks may prove to be more important for global markets than Russia/Ukraine was in 2014,” said Charles Robertson, chief economist at Renaissance Capital. “A possible [SYRIZA] election victory may force the eurozone to choose between a fiscal union (debt write off for Greece) or the first Euro exit.”

Though voters might be weary of seven years of economic pain, Greece’s economy is actually growing at one of the highest rates in the eurozone, which is struggling with low growth and deflationary pressure. At a time when most Europeans have reason to be wary of 2015, Greeks should be confident that their economy has bottomed out, and employment and GDP growth should continue to improve in 2015 and beyond. In the long-term perspective, it’s a great time for stronger investment in Greece, not panic and divestment.

There’s reason to believe that Tsipras, once in power, would act responsibly. SYRIZA, and not PASOK, is now the standard bearer of the opposition left in Greece, but Tsipras has moderated some of his more firebrand positions. Though he is arguably the loudest critics of eurozone austerity, he is more solicitous of the investor class today than he’s ever been. Tsipras still wants to restructure Greece’s public debt (still a staggering 174% of GDP) by forcing a renegotiation that could lead to a haircut or other modification. Tsipras and his economic advisers have nevertheless committed a potential SYRIZA government to budget discipline, even while promising to ameliorate the worst of the drastic cuts to social welfare spending required under the terms of Greece’s two bailouts worth €110 billion and €130 billion, respectively, from the ‘troika’ of the European Central Bank, the European Commission and the International Monetary Fund. Reassuringly, however, Tsipras has essentially promised he will not default on Greek debt and he will not attempt to leave the eurozone. 

Tsipiras is probably correct that Greece’s debt burden is not sustainable. He’s also probably right that Brussels and Berlin would cave to renegotiating that debt if the alternative is a return to the ‘Grexit’ speculation and the financial market turmoil of 2012 when the ECB is trying to wage its own fight to expand the central bank’s reflationary ‘quantitative easing’ efforts. The upside for Tsipras, if he wins a new election, is that SYRIZA would likely take credit for Greece’s economic progress just as it’s beginning to emerge from the nadir of its recessionary cycle.

Continue reading Markets shouldn’t be freaking out about Greek elections →

Austria, Bulgaria, Denmark, Estonia, European Union, Finland, France, Germany, Greece, Latvia, Slovenia, Sweden, The Netherlands, United Kingdom

The 13 key EU players in the proposed Juncker Commission

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juncker

On Wednesday, the incoming president of the European Commission, Jean-Claude Juncker (pictured above), released full details on the proposed commissioners within his Commission, which will serve as the chief executive and administrative body of the European Union between 2014 and 2019.European_Union

The most important feature of the proposed Juncker Commission is that he’s introduced the greatest amount of hierarchy in an institution that used to be flat. It’s not a secret that some portfolios have always been more desirable than others, especially as the Commission has expanded to include all 28 member-states. But Juncker has introduced a first vice president and five vice presidents, who will also serve alongside Italy’s foreign minister Federica Mogherini, who was appointed two weeks ago to serve as Commission vice president and high representative for foreign affairs and security policy.

The delegation of so much power to five ‘super-commissioners’ with roving, supervisory briefs indicates that Juncker intends to be a much less hands-on Commission president that his predecessor, José Manuel Barroso. But it also reflects a Commission that, including Luxembourg’s Juncker, contains five former prime ministers (Finland, Slovenia, Latvia and Estonia).  It also contains four incumbents (Germany, Sweden, Bulgaria and Austria) who have served throughout the full second term of the Barroso Commission. That makes the Juncker Commission possibly the most distinguished in EU history.

Each commissioner must be approved by the European parliament and, while individual nominees have had troubles in the past, the parliament typically approves the vast majority of a Commission president’s appointments, all of whom were nominated by their respective national governments.

With nine women, it’s not as unbalanced as feared even a week or two ago, and with 14 members of the center-right European People’s Party (EPP), eight members of the center-left Party of European Socialists (PES) and five members of the Alliance of Liberals and Democrats for Europe (ALDE), it generally reflects the results of the May 25 European parliamentary elections, though some social democrats and socialists are grumbling that the left doesn’t have enough representation.

So what can we expect from this illustrious college of commissioners?

Here’s a look at the 13 most important players in the proposed Commission (aside from Juncker and Mogherini, of course). Continue reading The 13 key EU players in the proposed Juncker Commission →

Italy

Despite Senate vote, Renzi’s reform push stalling in Italy

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renzihalfyear

If Rome wasn’t built in a day, it’s certainly proving that it won’t be reformed in a day, either. Italy Flag Icon

Nearing a half-year in office, the most ‘impressive’ accomplishment of Italy’s new prime minister Matteo Renzi is engineering the relatively anti-democratic putsch of his own party’s prime minister, Enrico Letta in February.

Renzi, the 39-year-old former mayor of Florence, gave Letta just 10 months to enact urgent reforms before he executed his takeover of the Italian government. Six months into his own premiership, Renzi has greater support than Letta ever had to shake up Italy’s ossified government. But Renzi nonetheless has surprisingly little to show for half a year in office, even as the country slipped this summer into, incredibly, a triple-dip recession. 

When he ushered himself into power, Renzi came to the office with a wish list of reforms, all of which he promised would be delivered before the summer: a new election law, labor market reforms, tax reform and changes to Italy’s sclerotic public administration. 

Renzi isn’t much closer to achieving any of those today than he was in the spring. He’s lucky to have won a key vote last week in the upper house of the Italian parliament, the Senato (Senate), to reduce that chamber’s powers, making it essentially an advisory body, giving Italy a unicameral parliamentary system in all but name. Renzi must still win a vote in the lower house, the Camera dei Deputati (Chamber of Deputies), where Renzi’s Partido Democratico (PD, Democratic Party) controls an absolute majority, as well as another final vote in the Senate before the reforms are put before voters in a referendum next year. Continue reading Despite Senate vote, Renzi’s reform push stalling in Italy →

Belgium, Czech Republic, European Union, Greece, Hungary, Poland, Portugal, Romania, Sweden, The Netherlands

A detailed look at the European parliamentary election results (part 2)

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 Across Europe on Monday, officials, voters and everyone else were trying to sort through the consequences of yesterday’s voting, across all 28 member-states, to elect the 751 members of the European Parliament.European_Union

Late Sunday, I began analyzing the results on a state-by-state basis — you can read my take here on what the European election results mean in Germany, France, the United Kingdom, Italy and Spain.

This post picks up where that left off, however, with a look at some of the results in Europe’s mid-sized member-states.

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RELATED: A detailed look at the European parliamentary election results (part 1)

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With the count now almost complete, here’s where the Europe-wide parties stand:

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The European People’s Party (EPP), which has been the largest group in the European Parliament since 1999, will continue to be the largest group, but with fewer seats (215) than after any election since 1994.

The second-largest group, the Party of European Socialists (PES) has 188 seats, a slight gain, but not the breakout performance for which it was hoping.

The Alliance of Liberals and Democrats of Europe (ALDE) will remain the third-largest group, notwithstanding the collapse of two of its constituent parties, the Liberal Democrats in the United Kingdom and the Freie Demokratische Partei (FDP, Free Democratic Party) in Germany.

The European Greens have won 53 seats, just two less than before the elections. The Party of the European Left, which had hoped to make strong gains on the strength of its anti-austerity message, gained nine seats to 44.

The Alliance of European Conservatives and Reformists (ECR), a slightly eurosceptic group of conservative parties, including the Conservative Party of the United Kingdom, holds steady at 46 seats — that’s a slight loss of around eight seats. The Movement for a Europe of Liberties and Democracy (MELD) gained six.

The real increase was among the ‘non-inscrits,’ the unaffiliated MEPs, which will rise from around 30 to 104. The bulk of those MEPs include the newly elected eurosceptics that have made such a big splash in the past 24 hours, including Marine Le Pen’s Front national (FN, National Front) in France.

But, in addition to being a pan-European contest with wide-ranging themes that resonate throughout the European Union, the elections are also 28 national contests, and they’ve already claimed resignations of two center-left leaders — Eamon Gilmore, of Ireland’s Labour Party, and Alfredo Pérez Rubalcaba, of the Partido Socialista Obrero Español (PSOE, Spanish Socialist Workers’ Party).

Here’s a look at how the European elections are affecting nine more mid-sized counties across the European Union: Poland, Romania, The Netherlands, Belgium, Greece, the Czech Republic, Portugal, Hungary and Sweden.

Continue reading A detailed look at the European parliamentary election results (part 2) →

European Union, Germany, Greece

An interview with Greek-German MEP Jorgo Chatzimarkakis

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Chatzimarkakis

If there’s anyone in European politics who straddles the line between the two cultural realities of Europe today, it’s Jorgo Chatzimarkakis.European_UnionGermany Flag IconGreece Flag Icon

Born in 1966 to Greek migrants in the Ruhr Valley, in what was then West Germany, Chatzimarkakis has served for the past 10 years as a member of the European Parliament from Germany’s liberal Freie Demokratische Partei (FDP, Free Democratic Party). 

Over the course of the past five years, that’s put Chatzimarkakis in one of the most unique roles of any European policymaker. As a German MEP, he belonged to a party that was one of the most outspoken critics of using German funds for what seemed, at the heart of the eurozone’s sovereign debt crisis, like an endless number of bailouts for troubled European economies, including Greece’s.

But as an MEP of Greek descent,  Chatzimarkakis also understood the emotional and social toll of the economic crisis from the other perspective, in light of the pain Greece continues to suffer due to the bailout — often referred to in Greece simply as the ‘memorandum,’ in reference to the Memorandum of Understanding that sets out the terms of the Greek bailout with the ‘troika’ of the European Central Bank, the European Commission and the International Monetary Fund.

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RELATED: In-Depth: European parliamentary elections

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Though the bailout program has kept Greece inside the eurozone, it’s come at a huge cost. The conditions Greece accepted in exchange for the loan program required tough budget cuts, tax increases, and reduced state salaries and pensions, exacerbating an economic downturn that, for Greece, has now developed into a full-blown depression. Unemployment is still nearly 27%, youth unemployment is even higher, and the Greek economy has contracted for six consecutive years:

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Cuts to education, health care and other programs have strained the Greek social fabric, civil strife and strikes are seemingly endless, and politician violence has increased. The neo-fascist Golden Dawn (Χρυσή Αυγή) is now the third-largest party in the Hellenic Parliament, despite the efforts of the current national government to prosecute many of its leaders. Though Greece’s economy may expand this year, for the first time since 2007, it’s clear that the effects of the downturn will reverberate for years to come.

In the 2014 European elections, Chatzimarkakis is running for the European Parliament in Greece, having formed a new political party, the Hellenic European Citizens (Έλληνες Ευρωπαίοι Πολίτες).  Continue reading An interview with Greek-German MEP Jorgo Chatzimarkakis →

Macedonia

Macedonian election results: double victory for ruling VMRO-DPMNE

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ivanov

It wasn’t a surprise, but Macedonia’s conservative president Gjorge Ivanov (pictured above) won reelection to a second four-year term in Sunday’s elections, and its conservative prime minister Nikola Gruevski won a fourth consecutive term, with his ruling party making minor gains in the Macedonian parliament that they’ve controlled since 2006.macedonia

Gruevski’s ruling VMRO-DPMNE (Внатрешна македонска револуционерна организација – Демократска партија за македонско национално единство; Internal Macedonian Revolutionary Organization – Democratic Party for Macedonian National Unity) actually improved their total from 56 seats to 61 seats, nearly a majority in the 123-seat Собрание (Sobranie), the country’s unicameral assembly.

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RELATED: Macedonian right seems headed for fourth consecutive win 

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Despite a high-profile call to boycott the presidential vote in the first round by the country’s ethnic Albanians, an issue that initially brought the government down when

Gruevski’s junior coalition partner, the Democratic Union for Integration (DUI, Bashkimi Demokratik për Integrim), brought the government down earlier this spring over the issue of Ivanov’s reelection. Despite a high-profile call to boycott the presidential vote in the first round by the country’s ethnic Albanians, the DUI also improved its standing from 15 to 19 seats, and it will likely resume its place in government.

The opposition Social Democratic Union of Macedonia (SDSM, Социјалдемократски сојуз на Македонија) lost ground, dropping eight seats to just 34.  Continue reading Macedonian election results: double victory for ruling VMRO-DPMNE →

Macedonia

Macedonian right seems headed for fourth consecutive win

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Gruevski

Of all the former Yugoslav states, none has a more difficult path to full EU membership than Macedonia — for reasons that have less to do with its economy than with its culture. macedonia

In what has to be the most inane conflict in international affairs, Greece has blocked Macedonia’s potential EU (and NATO) accession for years over a dispute involving the naming of the country. The term ‘Macedonia’ covers both the Republic of Macedonia that bears its name and a greater geographic region that encompasses northern Greece as well. Greece worries that Macedonia’s use of the name ‘Macedonia’ violates its own cultural and historical heritage. The reality is complex. What is today’s Republic of Macedonia was ruled by the Ottoman Empire from the first half of the 15th century until the empire’s collapse. Macedonia was annexed by Serbia in 1912, and it was incorporated as a serparate state in the Socialist Federal Republic of Yugoslavia in 1944 before it emerged as an independent country with Yugoslavia’s disintegration in the early 1990s.

Even though Greek politicians have had much more to worry about in recent years than a naming contest with a small, neighboring country of just 2.06 million people, the battle lines between Macedonia and Greece have become tighter as ever following the election of Nikola Gruevski  (pictured above) in 2006 on a center-right, nationalist platform that’s exacerbated the world’s silliest international dispute after Greece actively vetoed Macedonian accession to NATO in 2008. Continue reading Macedonian right seems headed for fourth consecutive win →

Greece

Despite bond sale, Greece is still pretty far from normal

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On Wednesday, a bomb exploded outside the Bank of Greece.Greece Flag Icon

Though it injured no one, it was a stark reminder that, despite today’s apparently successful bond sale, Greece is pretty fucking far from okay, to steal a phrase from Pulp Fiction.

Astonishing just about everyone, Greece held its first bond sale for the first time in four years, raising  €3 billion ($4.2 billion) at a freakishly low yield of 4.95% for a five-year issue. But demand for the bonds was more in the range of €20 billion ($27.8 billion), which is over 10% of current Greek GDP:

The order book includes €1.3bn of orders from the arranging banks, but is a striking confirmation of the ravenous appetite for eurozone periphery debt. One person close to the deal said there had been more than 550 different investor accounts placing orders.

€3 billion is not a lot of financing compared to the €240 billion that Greece has received through two bailouts funded by the ‘troika’ of the International Monetary Fund, the European Commission and the European Central Bank. For Greek prime minister Antonis Samaras and his coalition government, the sale was more a symbolic success than anything else — it’s a signal that Greece is once again open for business in the international bond market and emerging from the worst of its debt crisis:

“The international markets have expressed in the clearest possible manner their trust in the Greek economy, their trust in Greece’s future,” he said. “They have shown trust in the country’s ability to exit the crisis, and sooner than many had expected.”….

Deputy Prime Minister Evangelos Venizelos also hailed the country’s return to the markets, arguing that it was a “major achievement that Greece did not turn into Argentina or Venezuela.” He also launched a strongly worded attack on SYRIZA, which objected to the bond issue, accusing the leftists of being “political parasites that live off the [EU-IMF] memorandum.”

“They should be ashamed of themselves,” he said. “Instead of appreciating this moment of joy for the Greek economy and society, they are miserable.”

Despite the government’s victory lap, Greece is still a mess, it remains stuck in a depression with a political system under duress.

Continue reading Despite bond sale, Greece is still pretty far from normal →

Puerto Rico, United States

The next debt crisis in the United States may require a Puerto Rico bailout

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CIMG0357

Washington may be enjoying some well-deserved rest from the brinksmanship of the dual crises over the US federal government shutdown and the possibility that the US Congress might not raise the debt ceiling.USflagPR

Though both crises ended last week, a new crisis may have been gathering steam while the world focused on the global implications of a seemingly dysfunctional American political system.

It’s Puerto Rico, where both finances and the economy seem to be spiraling out of control.

Bondholders are pressuring Puerto Rico

Investment vehicles that buy state and municipal bonds have long loved Puerto Rico’s bonds.  Although the bonds are rated BBB+ (by Standard and Poor’s), they are a tax-exempt hat trick.  Not only are Puerto Rican bonds exempt from all federal taxes (like all state and municipal bonds), and not only are they exempt from applicable Puerto Rican commonwealth and other local taxes (which is generally how most state and municipal bonds are treated in the state or territory of their issuance), Puerto Rican bonds are exempt from state taxes in all 50 US states.  So while Virginian bonds may be taxable under New York state tax, or Californian bonds may be taxable under North Carolina state tax, Puerto Rico’s bonds are exempt from state and local taxes everywhere.

Bondholders have typically shrugged away Puerto Rico’s ‘BBB+’ rating because the yields were sufficiently high enough (around 5%) and the tax advantages so pronounced that Puerto Rican debt looked like an easy way to goose returns for the average fund manager.  So Puerto Rican bonds became predictably popular, and many mutual funds and other investment vehicles are widely exposed to Puerto Rican debt.  Morningstar estimates that 77% of all muni funds hold Puerto Rican bonds to some degree, and they’re all now incredibly itchy about their exposure.

But when yields started climbing over the summer and early autumn to above 8% and even 9%, it spread alarm not only in San Juan, but in New York and other global financial capitals, as investors and analysts started thinking more deeply about the weakest geographic link in the US financial system, a ‘commonwealth’ with a much more fragile economic outlook that shares only some elements in common with the mainstream US economy.  Puerto Rico’s governor, Alejandro Garcia Padilla, and a slew of top officials have spent the rest of October in New York, Washington and elsewhere trying to calm markets and policymakers.

No US state has a debt outlook as poor as Puerto Rico’s, and its ‘BBB+’ rating is just one notch above junk debt status.  If any of the three major ratings agencies downgrade Puerto Rican debt further, it could trigger a number of adverse ‘death spiral’ consequences.  Puerto Rican bonds are already selling on the open market well below par, but if Puerto Rican debt hits ‘junk bond’ status, it would suddenly become much, much worse.

Mutual funds could be forced to sell their entire Puerto Rican portfolios, which would flood the market with bonds that would become almost immediately worthless.  Puerto Rico’s government could be forced to post additional collateral against those bonds, leaving its government even more strapped for cash.  That’s not even taking into account the effects of any credit default swaps related to Puerto Rican debt.

All of which means Puerto Rico is now a lot closer to insolvency than it was a month ago.

But unlike the city of Detroit, which filed for Chapter 9 bankruptcy earlier this summer, Puerto Rico is a sovereign (technically an ‘unincorporated territory’) and cannot file for bankruptcy as a matter of law.  To the extent there was any legal doubt about it, a federal court slammed shut the door in 2012 when it ruled that the pension fund of the commonwealth of the Northern Mariana Islands could not file for bankruptcy.

That leaves US president Barack Obama with the unpalatable option of having to consider a bailout of Puerto Rico — an option that some Puerto Rican officials were already discussing openly earlier this month:

In a meeting with bond analysts in New York on Monday, the president of the Puerto Rican Senate, Eduardo Bhatia, said officials in the United States Treasury and White House had been analyzing the situation carefully, “wondering how they can help Puerto Rico send a very strong signal of stability right now.”

Given that the Republicans who control the US House of Representatives are incredibly anti-debt, the fight to raise the debt ceiling would look like a cakewalk compared to the congressional fight over a potential Puerto Rican bailout.  If House Republicans seem unwilling to move forward on immigration reform, they seem even less likely to approve a bailout for a territory that pays no federal income tax, that elects no members to Congress and that has no electoral votes in the US presidential election.

Is Puerto Rico the Greece of North America?

The real horrorshow element to this is that Puerto Rico could wind up being to the United States what Greece was to the European Union — the canary in the coal mine that exposes wider state-level and municipal exposure.

The immediate possibility of a US debt default through political brinksmanship has now passed, at least until February 2014.  Furthermore, no one expects Puerto Rico to fall out of the ‘dollarzone,’ or face the idiosyncratic problems that the European Union faces, where monetary policy is set at the European level and fiscal policy is still set at the national level.

But if yields remain elevated, Puerto Rico won’t be able to borrow enough to finance its government.  Its leaders say that Puerto Rico is prepared to refrain from further borrowing through June 30 of next year and wait out the current debt scare, but that’s hardly a solution to the crisis.  Even if that estimate is correct, what happens in July 2014 if yields spike again?  What happens the next time bondholders start doubting Puerto Rico’s ability to meet its debt obligations?

Like Greece, Puerto Rico spent the 2000s on a debt spree — its debt load as a percentage of what Puerto Rican GNP increased from around 60% in 2000 to over 100% today.

It now seems clear that Greek debt was mispriced following its entry into the eurozone because debt yields converged among all eurozone countries.  That allowed Greece’s government to borrow throughout the 2000s at rates lower than its fundamental economic and financial performance would otherwise warrant.  Essentially, Greece continued to borrow at Greece-level amounts but with the benefit of German-level rates.

In the same way, investors have potentially mispriced Puerto Rican debt — no one actually treated Puerto Rico’s bonds as if they were one downgrade away from junk status.  That’s partly because the tax incentives were so favorable, but it’s also because no one really thought that the debt of a US territory was actually so risky.

But the debt ceiling fight highlighted the attention of world markets on the precariousness of US debt generally.  So while a run on Puerto Rico’s debt could end with Puerto Rico, it could also make mutual funds and global investors think twice about holding US municipal and state debt, especially in the wake of the debt ceiling fight and Detroit’s municipal bankruptcy.  There’s wide variance among the credit ratings of the 50 US states:

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According to S&P state-level credit ratings (as of January 31), while many US states have stellar credit ratings of ‘AAA’ (bright green in the map above) or ‘AA+’ (spring green), there are plenty of states with ‘AA’ (yellow) or ‘AA-‘ (orange).

Two of the largest states with a combined population of nearly 51 million have even more precarious ratings — California (rated ‘A’), despite the best efforts of California governor Jerry Brown to transform his state’s finances, and Illinois (rated ‘A-‘).  State debt loads vary considerably on a per-capita basis as well — this chart from the Tax Foundation shows that per-capita state-level debt ranges from $925 in Tennessee to over $11,000 in Massachusetts.

But it’s all worse in Puerto Rico, which has issued about $87 billion in outstanding debt, which comes out to over $23,000 on a per-capita basis.

Puerto Rico’s economy has been struggling for a decade

Meanwhile, no US state has an economy that’s in such poor shape as Puerto Rico does.

Puerto Rico’s unemployment rate is 13.9% (as of August), which is higher than the national average (7.3%) and higher than any other US state or territory.

Like Portugal and Italy, Puerto Rico’s economy was stagnant long before the 2008-09 global financial crisis — since the year 2000 (when it achieved 6.3% GDP growth), the Puerto Rican economy has been in contraction more often than it’s been in expansion.  Here’s a chart of the GDP growth of Puerto Rico against that of the United States between 1999 and 2012 — you can see that Puerto Rico entered a recession in 2005 that ended only last year, when it posted 0.5% growth:

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Puerto Rico’s economy outperformed the US economy only once in the past decade — it didn’t take the sharp hit that the United States suffered in 2008 and 2009.  But even that’s bad news for Puerto Rico, because it shows just how disconnected the island’s economy is from the mainstream US and global economy.

Moreover, Puerto Rico is already starting off far behind the US mainland in just about every economic indicator. Its median income of around $18,000 is far lower than the average income in the United States, and it’s about one-half of the poorest state median income (Mississippi’s median is around $36,000).  Nearly 41% of Puerto Ricans live below the poverty line, compared to just 16% within the United States.  Its regional GDP per capita is around $27,000, about half that of the United States generally.

Also like Portugal and the peripheral economies of Europe, Puerto Rico’s population (around 3.67 million) is in decline.  Its population peaked at just over 3.8 million people in 2004, and it’s dropped more than 4% in the past eight years, partly due to migration to the US mainland and partly due to a declining birthrate.  Just as in the peripheral economies of Europe, population decline means that there are fewer workers to support an increasingly unproductive and aging population.

Continue reading The next debt crisis in the United States may require a Puerto Rico bailout →

Greece

Cracking down on Golden Dawn’s leadership is a risky strategy for the Greek government

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Over the course of the past week, the Greek government stepped up its efforts to treat Greece’s hard-right, neo-fascist party, Golden Dawn (Χρυσή Αυγή) with the kind of speed and clarity that one rarely sees in Athens.Greece Flag Icon

Those efforts follow the stabbing of anti-fascist hip-hop artist Pavlos Fyssas over a week ago, which marked a turning point for the coalition government that center-right prime minister Antonis Samaras leads.  Greek authorities over the weekend arrested Golden Dawn’s leader Nikos Michaloliakos (pictured above) and other party members, including party spokesman Ilias Kassidiairis, on charges of belonging to a criminal organization.  It was an unprecedented action in Greece’s post-dictatorship democracy — the first time since 1974 that MPs, let alone a party head, were arrested.

But things took an awkward turn on Wednesday when three of the Golden Dawn MPs (but not Michaloliakos) arrested were released pending trial, adding to doubts that Samaras’s government is making the right choice in suddenly treating Golden Dawn as more of a criminal organization than a political organization, however vile its organizing beliefs.  Kassidiaris (more on him here) did himself no favors by kicking and pushing members of the media upon his release Wednesday.

Support was already crashing for Golden Dawn in the wake of the murder — the party dropped from winning around 13% support in polls to just around 6% or 7% last week in the aftermath of the Fyssas murder.  In real terms, that means that Golden Dawn would no longer be the third-largest party if elections were held in Greece tomorrow.  After winning 6.92% in the previous June 2012 elections, Golden Dawn currently holds 18 seats in the 300-seat Hellenic Parliament (Βουλή των Ελλήνων), and the party had been threatening to resign en masse, leading to distracting by-elections.  Golden Dawn, which began as a ‘nationalist socialist’ magazine in 1980, comprised mostly of misfit supporters of the right-wing military junta that ruled Greece between 1967 and 1974, was a very minor presence in Greek political life before — until Greece’s economy plunged into contraction, unemployment, misery and social discord over the past four years.  (Read more background on the group’s history here.)

If you want to understand why Golden Dawn’s popularity has ballooned, check out the trajectory of the Greek economy from growth to severe depression over the past seven years:

greecegdpGolden Dawn was already growing into something more than a political party — a mutual aid society to provide food and other necessities (but only, of course, to ‘pure’ Greeks) and a near-paramilitary outfit that drew, according to some Greek analysts, the support of 50% of the Greek police forces.

But Golden Dawn’s polling collapse was, even before the crackdown, good news for Samaras — right-wing voters who had flirted with Golden Dawn seemed to be returning to Samaras’s more conventional conservative New Democracy (Νέα Δημοκρατία), which has boosted it once again over the anti-austerity, leftist SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς).  Before the latest drama in Greece, SYRIZA had eclipsed New Democracy in many polls, even as Greece faces the humiliating prospect of requesting a third bailout from the ‘troika’ of the European Central Bank, the European Commission and the International Monetary Fund.

So why would Samaras make this push now?  His sudden aggressive tack against Golden Dawn comes with the risk that Samaras will transform Michaloliakos and his party into martyrs, thereby boosting their support when they might have otherwise faded away as Greeks backed away from a group with such openly neo-Nazi leanings. Continue reading Cracking down on Golden Dawn’s leadership is a risky strategy for the Greek government →

Germany, United States

That ‘transcending ideology’ thing from Obama 2008? Angela Merkel did it. Obama hasn’t.

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Last Sunday’s election wasn’t just a victory for the German center-right — it was a very personalized victory for Germany’s chancellor, Angela Merkel, who will become just the third postwar chancellor to serve three terms.*  USflagGermany Flag Icon

Germans largely saw Merkel as the only viable chancellor candidate (sorry, Peer Steinbrück!), and they flocked to support Merkel for steering Germany largely unscathed through a global financial crisis and a subsequent eurozone crisis in an export-oriented economy that’s still growing and producing jobs for Germans.  They admire the fact that she’s steered the eurozone through the worst of its sovereign debt crisis and avoided the single currency’s implosion, all while tying bailouts for Greece and other Mediterranean countries to austerity and reform measures that would make more profligate countries (like Greece) more ‘German’ in their approach to state finances.

But beyond the infantilizing ‘Mutti’ meme or the idea that Merkel represents a ‘safe pair of hands,’ she has won over many Germans because she’s been such a pragmatic and non-ideological leader.  Though Merkel leads the ostensibly center-right Christlich Demokratische Union Deutschlands (CDU, Christian Democratic Party), it’s really hard to know what the CDU stands for these days other than the continuity of another Merkel government — and that’s likely to pose a difficult challenge for Merkel’s successor in 2017 or 2021 or whenever.

Merkel’s made some ideological compromises to her Bavarian counterparts, the Christlich-Soziale Union in Bayern (CSU, the Christian Social Union)  — for instance, she has avoided the question of marriage equality, preferring that the German constitutional court largely deliver equal rights and benefits to same-sex partners at a time when both conservative governments (in the United Kingdom) and leftist governments (in France) deliver legislative solutions.

By and large, though, Merkel eschews ideological litmus tests.  Merkel campaigned on an economic agenda that varies only slightly with that of her rival center-left Sozialdemokratische Partei Deutschlands (SPD, Social Democratic Party).  While the SPD favored a €8.50 minimum wage, Merkel pushed a sector-by-sector minimum wage approach.  Both parties supported increasing elements of the German social welfare model, such as child allowances and a rise in pensions.  While the SPD and other leftists pushed for tax increases, Merkel has been content to draw a line at merely no tax increases, to the disappointment of Merkel’s liberal coalition partners, the Freie Demokratische Partei (FDP, Free Democratic Party), who were completely wiped out of Germany’s parliament in Sunday’s elections.  After the nuclear meltdown of the Fukushima reactor in Japan in 2011, Merkel announced that Germany would phase out nuclear energy, thereby accomplishing in one fell swoop one of the German left’s top priorities since the 1970s — and perhaps the top policy goal of the Die Grünen (the Greens).

German political scientists refer to it as ‘asymmetric demobilisation‘ — Merkel has so blurred the lines between her position and the SPD position that on the top issues — economic policy, Europe, foreign affairs — the SPD can’t draw an effective contrast to her.

Merkel, in essence, has governed as a perfectly non-ideological leader.

Sound familiar?

It should to most Americans, who elected Barack Obama in 2008 in large part due to his pledge to transcend the increasingly polarized politics of the United States.  Here’s what Obama said upon accepting the Democratic Party’s nomination for president that summer:

America, our work will not be easy. The challenges we face require tough choices, and Democrats as well as Republicans will need to cast off the worn-out ideas and politics of the past…. For eighteen long months, you have stood up, one by one, and said enough to the politics of the past. You understand that in this election, the greatest risk we can take is to try the same old politics with the same old players and expect a different result.

In effect, Merkel has done, in her quiet and unassuming way, what Obama has utterly failed to do — govern in a way that transcends traditional ideological divides.

You could say that Obama’s rhetoric is the standard boilerplate that any change candidate serves up in American politics — the same ‘Washington-is-not-the-answer’ tropes that Republicans and Democrats have rolled out since Ronald Reagan swept to power 33 years ago on an appealing anti-government message.  But Obama’s reputation in 2008 came mostly from his keynote address to the 2004 Democratic national convention on this precise issue:

Yet even as we speak, there are those who are preparing to divide us, the spin masters and negative ad peddlers who embrace the politics of anything goes. Well, I say to them tonight, there’s not a liberal America and a conservative America — there’s the United States of America. There’s not a black America and white America and Latino America and Asian America; there’s the United States of America. The pundits like to slice-and-dice our country into Red States and Blue States; Red States for Republicans, Blue States for Democrats. But I’ve got news for them, too. We worship an awesome God in the Blue States, and we don’t like federal agents poking around our libraries in the Red States. We coach Little League in the Blue States and have gay friends in the Red States. There are patriots who opposed the war in Iraq and patriots who supported it. We are one people, all of us pledging allegiance to the stars and stripes, all of us defending the United States of America.

So there’s a lot of reason to believe that Obama genuinely believed he could transform the political dynamic in American politics.

But his absolute lack to do so is perhaps Obama’s greatest failure as a president.  Say whatever you want about his policies, the Obama era in many ways constitutes a high-water mark for American political polarization.  Republicans now lean even more to the right, in the thrall of a tea party movement that demands no compromise from Republican officeholders.

There are all sorts of rationales that explain why Merkel has succeeded in becoming non-ideological and why Obama hasn’t — but none of them are completely satisfying.  Continue reading That ‘transcending ideology’ thing from Obama 2008? Angela Merkel did it. Obama hasn’t. →

Greece

Kouvelis, Democratic Left withdrawal from Greek government leaves precarious majority

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Just a little over a year after the second of two divisive elections in Greece, the smallest partner in the three-party governing coalition withdrew its support today — leaving Greece ever closer to new elections, though the government will continue on with a slim majority for now.Greece Flag Icon

Fotis Kouvelis, in announcing that his party, the Democratic Left (Δημοκρατική Αριστερά), would leave the coalition over the growing row related to the sudden closure of ERT, the national broadcaster, emphasized that Greece did not need new elections, and he indicated that the party would perhaps provide external support to what’s left of prime minister Antonis Samaras’s coalition to keep Greece on track with respect to the terms of its bailout program with the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund.

What does that mean for Greece?

Though it’s true that the departure of the Democratic Left doesn’t necessarily mean new elections, it leaves the government in a precarious position.

Samaras’s New Democracy (Νέα Δημοκρατία), Greece’s longstanding center-right party, holds 125 seats in the 300-member Hellenic Parliament (Βουλή των Ελλήνων).  Its other coalition partner, PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα), Greece’s traditional center-left party, holds 28 seats.  Together, that gives the government an ostensible three-seat majority, though the 14 seats that Kouvelis delivered provided a wider margin for comfort over a year that’s seen Samaras’s government push forward with the fiscal adjustments mandated by the bailout program.

But more importantly, Kouvelis (pictured above, left, with Samaras in center background) delivered the votes of one of the two parties of the anti-bailout left, giving Samaras’s government a broader base and a credible claim to being somewhat of a unity government.

The Democratic Left formed only in 2010 when moderates split from the leftist SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς).  So while SYRIZA leader Alexis Tsipras is content to lead the opposition, Kouvelis and his party brought an outsized amount of legitimacy to Samaras’s government.  After all, both New Democracy and PASOK had backed Greece’s bailouts, and many voters have held the two parties, which switched back and forth in power in recent decades, especially responsible for Greece’s economic woes.

Their continued unpopularity is one reason why no one wants to risk elections anytime soon.  PASOK, in particular, has lost nearly all of its support among voters to the benefit of Tsipras and SYRIZA, which have given more muscular voice to the anti-bailout left.  If elections were held tomorrow, it’s not even certain that PASOK would pass the 3% threshold to win seats in the Hellenic Parliament.

One recent poll shows New Democracy holding onto a very narrow lead, with 21% to just 20.5% for SYRIZA.  In third place is the neo-fascist Golden Dawn (Χρυσή Αυγή) with a staggering 10.2%.  Greece’s far-left Communist Party (KKE) registered 5.7%, the center-right (but anti-bailout) Independent Greeks registered 5.2%.  PASOK won just 5.1%, and the Democratic Left won just 4.8%.

With such weak support, neither Samaras nor PASOK leader and former finance minister Evangelos Venizelos have an incentive to trigger new elections.  So while the chances that Greece will go to the polls for the third time in 12 months are slim, there’s no escaping the fact that the Democratic Left’s decision to leave the government is a setback for Samaras.  Continue reading Kouvelis, Democratic Left withdrawal from Greek government leaves precarious majority →

Bulgaria, Cyprus, European Union, France, Germany, Greece, Italy, Spain, United Kingdom

What Iceland’s election tells us about post-crisis European politics

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Iceland was supposed to be different.Iceland Flag IconEuropean_Union

In allowing its banks to fail, neo-Keynesian economists have argued, Iceland avoided the fate of Ireland, which nationalized its banks and now faces a future with a very large public debt.  By devaluing its currency, the krónur, Iceland avoided the fate of countries like Estonia and others in southern Europe trapped in the eurozone and a one-size-fits all monetary policy, allowing for a rapid return to economic growth and rapidly falling unemployment.  Neoclassical economists counter that Iceland’s currency controls mean that it’s still essentially shut out from foreign investment, and the accompanying inflation has eroded many of the gains of Iceland’s return to GDP growth and, besides, Iceland’s households are still struggling under mortgage and other debt instruments that are linked to inflation or denominated in foreign currencies.

But Iceland’s weekend parliamentary election shows that both schools of economic thought are right.

Elections are rarely won on the slogan, ‘it could have been worse.’ Just ask U.S. president Barack Obama, whose efforts to implement $800 billion in stimulus programs in his first term in office went barely mentioned in his 2012 reelection campaign.

Iceland, as it turns out, is hardly so different at all — and it’s now virtually a case study in an electoral pattern that’s become increasingly pronounced in Europe that began when the 2008 global financial crisis took hold, through the 2010 sovereign debt crisis in the eurozone and through the current European-wide recession that’s seen unemployment rise to the sharpest levels in decades.

Call it the European three-step.

In the first step, a center-right government, like the one led by Sjálfstæðisflokkurinn (Independence Party) in Iceland in 2008, took the blame for the initial crisis.

In the second step, a center-left government, like the one led by Jóhanna Sigurðardóttir and the Samfylkingin (Social Democratic Alliance) in Iceland, replaced it, only to find that it would be forced to implement harsh austerity measures, including budget cuts, tax increases and, in Iceland’s case, even more extreme measures, such as currency controls and inflation-inducing devaluations.  That leads to further voter disenchantment, now with the center-left.

The third step is the return of the initial center-right party (or parties) to power, as the Independence Party and their traditional allies, the Framsóknarflokkurinn (Progressive Party) will do following Iceland’s latest election, at the expense of the more newly discredited center-left.  In addition, with both the mainstream center-left and center-right now associated with economic pain, there’s increasing support for new parties, some of them merely protest vehicles and others sometimes more radical, on both the left and the right.  In Iceland, that means that two new parties, Björt framtíð (Bright Future) and the Píratar (Pirate Party of Iceland) will now hold one-seventh of the seats in Iceland’s Alþingi.

This is essentially what happened last year in Greece, too.  Greece Flag IconIn the first step, Kostas Karamanlis and the center-right New Democracy (Νέα Δημοκρατία) initially took the blame for the initial financial crisis.  In the second step, George Papandreou and the center-left PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα) overwhelming won the October 2009 elections, only to find itself forced to accept a bailout deal with the European Commission, the European Central Bank and the International Monetary Fund.  In the third step, after two grueling rounds of election, Antonis Samaras and New Democracy returned to power in June 2012.

By that time, however, PASOK was so compromised that it was essentially forced into a minor subsidiary role supporting Samaras’s center-right, pro-bailout government.  A more radical leftist force, SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), led by the young, charismatic Alexis Tsipras, now vies for the lead routinely in polls, and on the far right, the noxious neo-nazi Golden Dawn (Χρυσή Αυγή) now attracts a small, but significant enough portion of the Greek electorate to put it in third place.

The process seems well under way in other countries, too.  In France, for examFrance Flag Iconple, center-right president Nicolas Sarkozy lost reelection in May 2012 amid great hopes for the incoming Parti socialiste (PS, Socialist Party) administration of François Hollande, but his popularity is sinking to ever lower levels as France trudges through its own austerity, and polls show Sarkozy would now lead Hollande if another presidential election were held today.

It’s not just right-left-right, though. The European three-step comes in a different flavor, too: left-right-left, and you can spot the trend in country after country across Europe — richer and poorer, western and eastern, northern and southern. Continue reading What Iceland’s election tells us about post-crisis European politics →

Cyprus, European Union, Greece

Europe concedes Cyprus default less than a month before presidential election

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Felix Salmon has a tantalizing tidbit about Olli Rehn, European commissioner for economic and monetary affairs, apparently conceding that a Cypriot default is now virtually inevitable, less than a month before the Cypriot presidential election:European_UnionGreece Flag Iconcyprus_world_flag

EU economics commissioner Olli Rehn went on the record telling him that Cyprus is going to have to restructure its debt — just two weeks after ruling such a thing out.

That might come as little surprise, given that Cypriot banks were loaded up to the gills with Greek debt, and Greek debt suffered a 70% haircut. Cyprus is tiny, and could never afford the €17 billion needed to bail out the banks and the government — especially since that would bring the country’s debt load up to more than 140% of GDP.

Salmon cites a report from The Wall Street Journal‘s Stephen Fidler reporting from Davos.

The Republic of Cyprus, with just over 800,000 people, is the third-smallest member of the eurozone (after Malta and Luxembourg), and it’s a relative newcomer to the single currency, having replaced the Cypriot pound for the euro only in January 2008, although the Turkish-controlled northern part of the island still uses the Turkish lira.

The country accounts for just 0.2% of the eurozone economy, though its GDP per capita is a relatively wealthy $29,000, and it’s been in negotiations for a bailout for some time now.  That hasn’t yet been successful, in part because of the unique legal, political and financial complexity of the negotiations.

Rehn’s statement, if true, is essentially a declaration that time has run out — Moody’s downgraded Cypriot debt in July 2011 to junk status.

Nonetheless, a €17 billion bailout would be dwarfed by the Greek bailout (€245.6 billion), the Spanish bailout in July 2012 to provide liquidity to Bankia (€41 billion), and even the bailout provided by the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund of Romania that began in 2009 (around €20 billion).

In many ways, a Cypriot default will be a key test for the European Union, given that it would be the first default since the treaty establishing the European Stability Mechanism formally came into effect at the end of September 2012.

Unlike in Greece, where much of its debt is governed by Greek law, much of Cypriot debt is governed under various international law, which will make it a messier restructuring.

Keep in mind, also, that the island of Cyprus remains split between the Republic of Cyprus (largely populated by Greek Cypriots) and the Turkish-occupied northern half of the island, the Turkish Republic of Northern Cyprus (largely populated by Turkish Cypriots).  The island has been divided since a 1974 coup, Greece’s attempt to annex the entire island, and Turkey’s subsequent invasion, and the formal declaration of Northern Cyprus’s independence in 1983.

Add to that the fact that Cyprus is seen as a hub for worldwide money laundering, especially with respect to illicit funds from Russia, despite the protestations of Panicos Demetriades, president of the Central Bank of Cyprus, earlier this week.

That means bailout proceeds could go directly into the pockets of some of Russia’s wealthiest oligarchs, a position that’s unlikely to go down well politically throughout the rest of the eurozone, especially as Germany gears up for federal elections later this year — German officials have even demanded that Russia contribute to any Cypriot bailout.

Meanwhile, Cyprus will go to the polls in less than a month to replace Demetris Christofias, the country’s left-wing president since 2008.  Unlike in many European countries with parliamentary systems, Cyprus’s president is both head of state and head of government.

With a default (orderly or otherwise) on the horizon, Cyprus now faces a presidential election on February 17 — with a runoff, if necessary, a week later on February 24 — in the midst of a financial crisis and perhaps in the midst of bank runs.

Christofias, who has presided over economic turmoil and an unemployment rate that’s now at 14%, has so far refused to engage in massive privatizations of state-run industries as a condition for a potential bailout.

Add all of those factors together — the size of the Cypriot banking sector’s debt, the legal complexity of the debt, the Russian laundering issue, the complexity of the Turkish political reality with Northern Cyprus, and the leftism of the Christofias administration — and you start to understand why Cyprus is now allegedly headed to a default.

Continue reading Europe concedes Cyprus default less than a month before presidential election →