BREXIT: Life after, and Ideas worth throwing in the pot

Posted on June 27, 2016. Filed under: Uncategorized | Tags: , , , , , , , , , |

Greetings of the day everyone !

So based on the popular calendar that we currently use, this day is, the 27 th of June 2016. I was away last week, partially it was an intentional decision and also I had to do some running around. A lot has happened while I was away, and now we are living in and with the aftermath of the post referendum day in the UK. I went to the classroom earlier today, and my teacher said, the topic of the entire day is going to be BREXIT. I went around the classroom, to see if any of my friends have done some work, which I could use, to write up something that might please my teacher, or at least get her off my back. But to my surprise, most of friends aren’t in the mood, and after talking with some of them, I am getting a sense that, they are probably not willing to accept a BREXIT or what has transpired. I sincerely hope the teachers and the principals, have a sense of what might be coming. And, if you are wondering, why principals and not principal? Well, we go to a special school where we have a number of principals, and that’s why it’s difficult to run the school sometime. Also, most of the times, the teachers and the principles haven’t a clue of what’s happening inside the school.

Anyways, it seems to me that, while some of my friends are visibly quite confused and in shock, but others are getting quite determined to teach the teachers and the principals, a lesson, and they may be gearing up to bring down the school, not in the literal sense of the word obviously. I didn’t know what to do, so after consulting with my grandMa, I decided that the prudent thing to do, will be to take my leave, and also take my books and belongings with me, just in case. And I can’t blame my friends, because 99% of what they thought was known is, now Unknown to them.

But, I don’t want the teacher to complain to my parents, for not doing the assignment, so therefore, I called upon my Birdie friend ( the tweeting bird ), to help me out with the assignment. The translation equipment that I generally use to communicate with her, isn’t working well today, so I hope, I am doing justice to whatever she shared with me.

And here is what I believe, she wanted to share with me.

  • U.K. could replace its current arrangement with EU, with a free trade agreement. Obviously, the details will need to be worked out.
  • U.K. could also create similar free trade agreement with selective partners in Asia, Africa as well as Latin America.
  • To agree the free trade agreement with the EU and also to keep access to the single market. UK could possibly agree with the EU, to keep the status quo of all the EU citizens currently living in the UK. And also a quota based immigration with the EU could be agreed, to support its services and construction sector. Also an arrangement could be reached, where EU migrants could still enjoy quasi home status in the UK, and to remove the stress on the healthcare system, new migrants could be asked to pay a nominal consultancy fees to GP ( general doctors ), and any social benefit claims could be restricted for at least 2-3 years. So they may not immediate access to public funds. Their kids under 16 could access the healthcare system for free, but a nominal fee could be charged by the state school for education. And the same arrangements could apply for British citizens, who may want to live and work in the EU.
  • UK could possibly become an offshore hub for euro denominated trades as well as RMB and who knows going forward may be Indian Rupees, and other growing markets.
  • In a post BREXIT world, UK should be able to free up some of the cumbersome EU legislations, to make its financial system as well as the overall economy more attractive. Also any dial up on the existing efficiency level of various parts of the economy, will and should positively reflect on the investments coming into the country.
  • U.K.’s financial sector could still play a larger role in creating revenues for the country, and it can surely help China and India as well as other Emerging markets upgrade their financial infrastructure, and help them become developed markets over the years. This could be done through bilateral agreements.
  • A cheaper pound isn’t always a bad thing, it could help UK in getting some high end manufacturing back, also it may help improve the overall demand for real estate especially in London from overseas buyers. Councils could be given powers to work with overseas as well as local developers to allow them to build more housing across the country especially in high demand areas. UK companies may be able to gain market share while exporting good and services to other countries with a chapter pound. All this will help the economy.
  • And some inflation, because of cheap pound, might in fact end up becoming, a blessing in disguise. And it will put UK in a better position than EU. Also, a rate hike isn’t necessarily going to be, a net negative for the overall economy. A positive interest rate differential with continental European might in fact encourage investors to put capital in the city of London, which also give a floor to pound.
  • Scotland and Northern Ireland won’t do well in the EU, for a number of obvious reason, the biggest one is, delinking themselves from the overall UK economy, can and will have a damaging impact on their respective economies, and they have much more in common with their cousins in the UK than EU. Ireland could get a special status, so the existing relationship can be preserved without the need for setting up borders.
  • UK could delink NHS from Westminster and party politics, and it could be independently managed, but continued to be funded by the treasury. Also, to keep the funding sustainable, NHS could create provisions, whereby GP access will come with a nominal consultancy fee paid directly to the GPs, with exception for children under 16 and pensioners. Foreign residents could be asked to buy into a partially subsidised healthcare insurance program enabling them to access NHS.
  • To help with the mounting retirement costs, UK government while working the private sector could encourage some of the retirees, to consider retiring in places with lower living costs. A board could be set up, to monitor and supervise the standards. And UK companies with their local partners could participate in tenders to build and develop the infrastructure and townships, with funding support from pensions schemes etc.
  • UK could dial down on some of the heavier regulations as well as the cost of doing business, to become more competitive.

I was hoping the tweeting bird will keep talking, but while we were talking, the birdie got another distress call, and left saying, we can talk about other things later, but for now, at least your teacher won’t be disappointed in you. And some of your friends, don’t seem to be in a mood to accept a BREXIT, so who knows, they may force the teachers along with the principals, to come to the negotiation table. You don’t fight nature, you work with it, or nature can destroy you.

So, there we are. I thought, I will take the liberty and share the ideas from the tweeting bird, and throw it in the pot along with others.

Good day to you all!

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Taking measures to manage the future financial crises better – KNOWING the UNKNOWNS.

Posted on August 31, 2014. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , , |

A well thought out financial regulatory framework, economic system, and policy decisions that can stand the test of time needs to be evolutionary, and requires a certain level of debate, discussion of ideas and possibilities. A strategy and approach that has gone through an evolutionary process, and is proactive, tend to have a greater chance of success than a policy decision or measure that is more or less reactive. And that’s just common sense. But during the financial crisis of 07/08, and in its immediate aftermath, we were hit by a barrage of half baked ideas and measures that came out of a reactive decision making process, and although the aim of the exercise  were well intended, and in some case temporary in nature, they haven’t made the markets or the global economy any more safer than they were before.

Also the existing reactive measures put in place to deal with the financial crisis can only be defined as an experiment. And even in a post crisis world, we continue to operate in the experiment mode, be it, the ultra loose monetary policy experiment to support the markets and the economy or the hard core regulatory environment aimed at avoiding future financial crises. Making it a hot topic of debate, and the possible outcome or outcomes of this ongoing experiment are being discussed around various quarters.   But the end result still remains somewhat unknown because quite simply there are no precedent, so all we have is, best guess estimates, and theories to help us navigate through the unknown terrain.

Having said that, we are at a better place today than during the financial crisis of 07/08, but even after being 5/6 years on the road to recovery, the global economy is still not firing on all cylinders, and there are obviously a number of reasons for that. In my own view, we will only be able to get a better assessment of the strength of the economy after the unconventional monetary policies are taken offline (exit), as there are still many UNKNOWNS out there. The record high stock markets is not fully reflective of the real economy, and although the global economy is in a much better shape than during the financial crisis, parts of the economy are still not firing on all cylinders. A large percentage of the people on the main street are still stretched as evident from the lack of wage growth. And the ongoing geopolitical instability will most likely have an impact on the markets and the economy especially the EU states. The Euro area is still in a very precarious situation, and it is quite likely that the year 2014 will turn out to be a lost opportunity for Euro Zone nations especially if the leadership in the EU fail to get their priorities right. And going forward, we may see significant monetary policy divergence among developed nations especially between the EU, UK and the United States because the respective economies are already in different speed gears. Also major economies like China are going through a transition period, in other words, a gear shift which needs to be managed well through policy changes as we all know that running a car in a wrong gear for a long period of time can pretty much ruin the car’s engine. So the Central bank in China as well as major world economies including of the US and UK will need to manage the gear change efficiently. And this is why, it is important to  create a mechanism that allows greater policy coordination in the global financial system going forward.

 And though, there are still many unknowns, but what we do know, and have learnt so far especially in the immediate aftermath of the financial crisis of 07/08 is that, the financial markets and the economy are anything but efficient, and this may be contrary to what some may believe. The fear of the unknown will always trouble the market participants, and as a way to better understand the road ahead, people will make their own projections, which at times could raise more questions than answers.

So while taking a stock of the overall situation, may be its time, we look ahead , and find a way to revisit some of these experiments to help us better understand, and improve the existing structure of the economy and the markets going forward. And with this in mind, I thought, I will take the liberty, and share my own two cents worth on the subject.

To start with, I believe, we can all agree that the  financial crisis has revealed to us the vulnerabilities of our existing economic system and financial infrastructure. And, if we are to attempt to find a way to upgrade the system then we will need to explore ways to remodel, the whole financial infrastructure, in order to make sure it’s sustainable over a long run. So here is an outline of the broader idea, which is based around creating an ” emergency only use spare money supply capacity ” in the system, that could be tapped into during an exceptional situation ( a financial crisis type event ). This could be a possible solution to mitigate or address some of the underlying solvency related concern on a sovereign nation.

And here is how it could work, first and foremost, the utilisation of the newly added capacity will have to be approved by a country’s parliament, second the whole process could be monitored by a global financial stability board or a body under the IMF, and third the market should have a clarity about the rules. So the assumption is, if the markets know or knew that a country could tap into its inbuilt safety mechanism put in place or in other words utilise a back up facility under a defined set of rules in case of emergency then it is less likely to speculate about a potential bankruptcy of that country.

The overall premise is based on a common sense approach that an efficient and sustainable system should  have a back up or IN CASE OF EMERGENCY provision put in place to be  used under exceptional circumstances. So for example, in event of a tyre puncture, you would use the spare tyre that comes with your vehicle or in case of a power failure, you will switch on a back up generator, in same way the emergency money supply pool ( as a spare capacity )  could be tapped into or utilised during an exceptional financial crisis type event. So under the proposed framework, a country could be allowed to print emergency money equivalent to up to 10% of its GDP, and this new money supply will automatically cease to exist within a period of let’s say 5 years, and could be linked to the overall GDP growth. In others words, the money supply by design will be created with a limited shelf life, to be used under extreme and exceptional circumstances. And the assumption here is that a five year cycle should be a sufficient transition period to help the economy rehabilitate.

 Also linking the temporary additional money supply to the GDP growth creates a balance. So the overall idea works more or less like the rocket booster engine system that are used to take spacecraft into space, they do a job and then cut off  (burn out ). We are taking about, creating a provision that will allow a country to tap into its spare capacity, a builtin safety mechanism that could kick in, in case of emergency. And since the provision will have a defined set of rules, the debate around a possible exit, and its outcome will not have to factor in many UNKNOWNS, making the outcome somewhat certain. So we know what happens, and at what level.

And beside the concern over sovereign risk, the other big issue item are the large financial institutions considered too big to fail. Asking the institution to create a living WILL doesn’t really go far enough. So one of the idea worth exploring could be, creating a mechanism that will allow troubled large ( too big to fail ) financial institutions to temporarily come under the protection of the central bank. The limited protection will not be for a period longer than 2.5 years, and the restructuring and unwinding process could be monitored, supervised by a special committee reporting directly to the central bank.

The experimentation with unconventional monetary policies like QE  created uncertainty causing extreme volatility, and the problem was not the QE but the perception of QE, and what it will do or has done to the overall economy. Unconventional monetary policy tools like QE aren’t really a complete idea, and just like any human idea they need to reach a level of maturity through evolution. Also by design, the current structure of our economic system makes it prone to crises so if you are operating in a global financial system that has inherent builtin inefficiency then there is always a good chance that any policy measure even with best intention or design may not have the desired result.

So creating a defined safety mechanism in the overall infrastructure of the financial system should hopefully go a long way  in providing a level of certainty to the market. And here is an example, during the financial crisis, the uncertainty over whether a country would get bailed out or not, and on what terms sort of magnified the problem.

Also an investment or a business model can only factor what is known, and what  can be seen so a decision making will always have an element of risk involved. But knowing that there are many UKNOWNs keeps us honest and wise.  So going forward,  what we need to admit, and fully understand is that ,the journey to creating an efficient financial system will come with failures, and we may not have all the answers so being open to all and any good ideas makes all the sense. A Market economy is nothing but a human idea, and it has to go through an evolutionary process, and one of the reasons why the financial markets go through boom and bust is simply because the undefined rules creates an environment for extreme uncertainty leading to speculation.

That said, striving to create a financial and economic system that is 100% efficient, is quite impractical ( at least for now) . Also it must be said that inefficiencies do create opportunities, which allows entrepreneurs to add value, and in the process profit from it. Money or capital has no NATIONALITY so people will chase opportunities where ever they can find, and I believe thats a fair game because it encourages economies and businesses to compete for capital.

However, as a part of the evolutionary process, and over time, we have learnt to make safer cars, planes, and made tremendous progress in making various manufacturing process safer, transformed the telecom industry. And we have also made significant progress in many other fields including of space exploration among others, but our innovation in financial markets hasn’t  really made the economy or the markets any safer.

So its about time that we focus our efforts on not only making the economy and the financial markets safer, but also on making it work better by improving the overall design of the existing system, and take measures to manage the future financial crises better, in order to minimise the financial hardship on people in the Main Street as well as on the nation states during the time of an exceptionally damaging financial crisis that leads to broken people, broken families as evident from the financial crisis of 07/08. This will be a journey of knowing the unknowns.

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GREECE – Discovering The Road To Prosperity In a Difficult Debt Terrain

Posted on October 15, 2012. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , |

The gruesome reality of the ongoing European Crisis is that some countries in the EU including of Greece were living way beyond their means and in the last decade benefitted the most from the European Union idea without realizing that all the rise in the living standard and good times hasn’t been paid for. For example after Greece adopted Euro the public sector wages rose by over 50% during the 8 years period ( 1999 to 2007), which is by far the fastest rise in the Euro Zone.

As evident from the unfolding events of the past few years. There is no doubt that Greece was ill-prepared to cope with the global financial CRISIS and has thus seen its real GDP growth decline year-on-year since 2008. According to Eurostat, the real GDP Growth for Greece in 09 was -3.3%, for the financial year (FY) ending 10 was -3.5% and the projection for 2011 is -6.9% and for the year  2012 its around 3.8 – 4.4% . The human cost has been enormous. And the pain and sufferings of millions has gone from bad to worse.

Although people on the streets across Greece have vented their frustrations and anger continuously by rejecting the status quo. A large percentage of the population still wants to be in the European Union. The onus is on the politicians as well as the population to fully understand and appreciate the gravity of the situation. Greece should take this once in a life time opportunity to reconfigure its economy.

The rebalancing and reconfiguration of the economy is a process that will take time and will require all the parties with vested interest to work together without losing sight of the BIG PICTURE. The solution will come from an open and honest collaboration and each party delivering their side of the bargain.

Getting GREEK debt on a sustainable downward trajectory is KEY. And this will require the lenders as well the policy makers in Greece to agree on a clear road map outlining the debt reduction plan.

Based on various media reports the troika consisting of the IMF, the European Central Bank and the European Commission is believed to be working on a Greek debt sustainability analysis and the officials are trying to figuring out ways to bring down the huge debt burden on the country. It is estimated that under the current scenario Greece’s debt to GDP ratio target set by the troika of 120% (of GDP) by 2020 is beyond reach. The median forecast for the economy is to shrink by 3.8 % in the financial year 2013, which will obviously be its sixth consecutive year of declining growth putting the overall debt to GDP ratio to around 180%. This falls way short of the initial goal and is clearly unsustainable going forward.

The need of the hour is to work out a plan incorporating the ground realities that has a real chance of SUCCESS. And creating a sustainable debt reduction strategy will require exploring all the feasible OPTIONS.

Here are some IDEAS worth considering. The suggestions below covers the debt held by troika including of the bonds held by European Central Bank (ECB), the bilateral loans as well as the IMF loans.

  • Consider recapitalising the GREEK banks through European Stability Mechanism (ESM) as planned for Spain.
  • Look at converting a portion (around 25-30%) of the agreed Euro 48 billion loan from European Financial Stability Fund ( EFSF ) marked for the recapitalisation of the banks into equity. This could be managed through the Central Bank of Greece.
  • Consider extending the overall maturity of the loan facility by additional 2 – 3 years  with a grace period on the interest payment.
  • The European Central bank (ECB) should consider taking a hair cut on the bonds it bought from the secondary market as investors or agree on a debt swap extending the overall maturity of the bonds by at least 2 years. Rules defining ECB’s role are vague and unclear but the central bank should take the initiatives here.
  • The policy makers in the EU should consider extending the bilateral state loan to Greece in the amount of euro 53 billion (already provided) by another 2-3 years with a reasonable grace period.
  • Greek government should fast track the planned privatisation process expected to bring in euro 40-45 billion and use part of the proceeds to buy-back the existing debts especially the post restructured PSI bonds that are currently trading at around 22-28% of the par value.

The above measures should reduce the overall debt burden on the Greek economy which is just over euro 330 billion but it won’t be sufficient especially if there are no clear strategy to GROW the economy and fill the fiscal hole from the revenue side. This will require a close cooperation between the Greek Government and Brussels. The politicians in Athens will have to set and drive the AGENDA forward at war footing.

The Government will have to start implementing the structural reforms including of reforming the complicated tax laws, increase competitiveness and productivity by  identifying champion sectors that will drive growth forward providing employment and support them with right legislation and tax incentives, use part of the  privatisation proceeds to support SMEs funding requirement, encourage investment in the real estate and other struggling sectors by inviting the Non- EU nationals to invest in the Economy through various programs that may include providing tax incentives and resident permits, provide flat tax rate to new foreign companies especially the GREEK Diaspora living overseas and explore all the other feasible options.

The next 6 to 9 months will be critical for Greece and the country should use this   CRISIS as an opportunity to come together with a strong resolve and  mindset that it will get over the line. And there is a road that leads to PROSPERITY but discovering it in this difficult DEBT terrain will require patience, perseverance and a right strategy.

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