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| Why the IMF should not aid a Greek bailout | Why the IMF should not aid a Greek bailout |
| (about 1 hour later) | |
| The International Monetary Fund is only stating the bleedin’ obvious: Greece’s debts are unsustainable and debt relief is required “on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM”. | The International Monetary Fund is only stating the bleedin’ obvious: Greece’s debts are unsustainable and debt relief is required “on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM”. |
| The ESM is the European Stability Mechanism, the fund that is meant to be leading the latest €86bn (£62bn) bailout of Greece. So, in essence, the IMF is saying the plan will not achieve one of its primary goals of allowing Greece to fund itself in financial markets within a few years. Even if the country succeeds in implementing the market reforms, VAT increases and pension cuts demanded in Monday’s agreement, the debt will still be too big to service. | |
| Instead, eurozone lenders will have one of three options, according to the IMF, which, naturally, is not volunteering to take a financial hit on its own loans. They could give Greece a 30-year grace period on servicing all its European debt. They could make fiscal transfers. Or they could accept “deep upfront haircuts” on loans, meaning cancellation of part of the debt. | Instead, eurozone lenders will have one of three options, according to the IMF, which, naturally, is not volunteering to take a financial hit on its own loans. They could give Greece a 30-year grace period on servicing all its European debt. They could make fiscal transfers. Or they could accept “deep upfront haircuts” on loans, meaning cancellation of part of the debt. |
| The last of those was explicitly ruled out on Monday. Fiscal transfers would be politically impossible. So that leaves a grace period on repayments. This was mentioned on Monday, but only as a “possible additional measure” once all reforms have been implemented. There was no hint from eurozone lenders that a grace period as long as 30 years might be contemplated. | The last of those was explicitly ruled out on Monday. Fiscal transfers would be politically impossible. So that leaves a grace period on repayments. This was mentioned on Monday, but only as a “possible additional measure” once all reforms have been implemented. There was no hint from eurozone lenders that a grace period as long as 30 years might be contemplated. |
| There is, of course, a complication. In IMF eyes, the need for debt relief is so great partly because Greece’s economy has been mismanaged. Eurozone lenders would argue that granting upfront relief is therefore nonsensical; Greece must first prove it is serious about reform. Therein lies a huge debate. | There is, of course, a complication. In IMF eyes, the need for debt relief is so great partly because Greece’s economy has been mismanaged. Eurozone lenders would argue that granting upfront relief is therefore nonsensical; Greece must first prove it is serious about reform. Therein lies a huge debate. |
| Yet IMF rules are supposed to be clear. The organisation only lends to a country when it can see a clear path back to debt sustainability. If the eurozone won’t grant debt relief in advance, why should the IMF chip in its €16.4bn contribution to the latest bailout? Surely it can’t. | Yet IMF rules are supposed to be clear. The organisation only lends to a country when it can see a clear path back to debt sustainability. If the eurozone won’t grant debt relief in advance, why should the IMF chip in its €16.4bn contribution to the latest bailout? Surely it can’t. |
| Budget fallout | Budget fallout |
| The stink caused by George Osborne’s decision to cancel renewable power generators’ exemption from the climate change levy grows stronger. Here is Neil Woodford, the type of long-term investor one assumes the government would like to attract to help fund big infrastructure projects: “I have to conclude that the government has either failed to understand the implications of this policy change, or wilfully ignored the interests of capital providers in this vital industry. Long-term capital projects need consistency that extends way beyond the length of a political cycle.” | The stink caused by George Osborne’s decision to cancel renewable power generators’ exemption from the climate change levy grows stronger. Here is Neil Woodford, the type of long-term investor one assumes the government would like to attract to help fund big infrastructure projects: “I have to conclude that the government has either failed to understand the implications of this policy change, or wilfully ignored the interests of capital providers in this vital industry. Long-term capital projects need consistency that extends way beyond the length of a political cycle.” |
| Woodford is an interested party, it should be said. His fund is a big investor in Drax, whose shares have fallen 30% since last week’s budget. Drax qualified for an exemption because it is converting its dirty coal-fired stations into a biomass-burning operation. | Woodford is an interested party, it should be said. His fund is a big investor in Drax, whose shares have fallen 30% since last week’s budget. Drax qualified for an exemption because it is converting its dirty coal-fired stations into a biomass-burning operation. |
| Biomass – wood pellets, in Drax’s case – is not every green lobbyist’s idea of a sustainable fuel. But there’s no doubt that the UK government encouraged its use, presumably for two good reasons: biomass is cheaper than many renewables and, unlike wind and solar, can be relied upon in all weathers. | Biomass – wood pellets, in Drax’s case – is not every green lobbyist’s idea of a sustainable fuel. But there’s no doubt that the UK government encouraged its use, presumably for two good reasons: biomass is cheaper than many renewables and, unlike wind and solar, can be relied upon in all weathers. |
| Woodford calculates that Drax has spent £1bn, at present values, building “Europe’s largest renewable energy project”. His point is that investors committed their capital because they believed they would be allowed to earn an attractive long-term return. Exemption from the climate change levy was meant to be part of that deal. Plus, exemption made sense because renewable energy has the same policy objective as the levy: reducing the UK’s carbon emissions. | Woodford calculates that Drax has spent £1bn, at present values, building “Europe’s largest renewable energy project”. His point is that investors committed their capital because they believed they would be allowed to earn an attractive long-term return. Exemption from the climate change levy was meant to be part of that deal. Plus, exemption made sense because renewable energy has the same policy objective as the levy: reducing the UK’s carbon emissions. |
| Removal of the exemption will cost Drax £60m in lost profit next year, the company said last week, enough to undermine the economics of an investment that was delivered on time and on budget. “It is probable that Drax’s shareholders would have been better off if the company had simply continued to generate power by burning coal,” says Woodford. | Removal of the exemption will cost Drax £60m in lost profit next year, the company said last week, enough to undermine the economics of an investment that was delivered on time and on budget. “It is probable that Drax’s shareholders would have been better off if the company had simply continued to generate power by burning coal,” says Woodford. |
| That’s a damning verdict. Drax, love it or hate it, generates 7%-8% of the country’s energy. If the chancellor can remove subsidies retrospectively from such a critical piece of UK infrastructure, there will be consequences. | That’s a damning verdict. Drax, love it or hate it, generates 7%-8% of the country’s energy. If the chancellor can remove subsidies retrospectively from such a critical piece of UK infrastructure, there will be consequences. |
| Woodford is right: “If government cannot be trusted to fulfil its long-term commitments, then it will have to accept that it cannot rely on support from institutional investors. That would not be a good outcome for the UK economy.” | Woodford is right: “If government cannot be trusted to fulfil its long-term commitments, then it will have to accept that it cannot rely on support from institutional investors. That would not be a good outcome for the UK economy.” |
| No insight | No insight |
| You wait ages for Stephen Green to appear before a parliamentary committee, and then the event is a complete letdown. | |
| The former chief executive and chairman of HSBC did his duty by apologising and confessing that “we didn’t get everything right” in Mexico and Switzerland. But the members of House of Lords economic affairs committee failed to gain any real insight into why, for example, the bank didn’t act on warnings from US and Mexican regulators in 2007-08 that only money laundering by drug cartels could explain the size of transfers of cash between HSBC Mexico and HSBC US. | |
| Andrew Tyrie, chair of the Commons Treasury committee, would have done a more forensic job. He still could – if he’s minded to call Green. | Andrew Tyrie, chair of the Commons Treasury committee, would have done a more forensic job. He still could – if he’s minded to call Green. |
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