Major sovereign bond defaults in recent history

via Defaulting Debtors.

Real and Pseudo-Financial Crises, the Chinese share market crash and Anna Schwartz

If we could take time out from the breathless journalism about the Chinese stock market, which some people may have heard of before this week, it’s crash should be seen through the lens that Anna Schwartz developed in 1987 of a pseudo financial crisis and a financial crisis.

Her paper is written at the same time as the 1987 stock market crash. On financial crises, Anna Schwartz said:

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As for those pseudo financial crises, she said:

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Schwartz’s principal concern with regard to pseudo financial crisis was:

proposals to deal with pseudo-financial crises is the perpetuation of policies that promote inflation and waste of economic resources

As we are talking about the Chinese stock market, Anna Schwartz also wrote about the concepts of real systemic international risk and and pseudo international systemic risk.

Once again, and as with pseudo financial crises and real financial crises, what distinguishes real systemic international risk and pseudo international systemic risk is a threat to the payment system. The threat of bank runs, which can easily be eliminated through lender of last resort facilities:

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As always it is about the security of the payments system – of avoiding bank runs, not private losses:

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The lesson for the day is that when people start panicking about the economy or the stock market or international markets, don’t go to a macroeconomist for advice, go to a monetary historian. They have seen it all before.

A lot of voters want to protect themselves from the scourge of lower prices

Richer is greener: environmentalists are Environmental Kuznets Curve deniers

The Kuznets environmental curve describes an empirical regularity between environmental quality and economic growth. Outdoor water, air and other pollution first worse and then improves as a country first experiences economic growth and development.

While many pollutants exhibit this pattern in the Kuznets environmental curve, peak pollution levels occur at different income levels for different pollutants, countries and time periods. John Tierney explains:

In dozens of studies, researchers identified Kuznets curves for a variety of environmental problems.

There are exceptions to the trend, especially in countries with inept governments and poor systems of property rights, but in general, richer is eventually greener.

As incomes go up, people often focus first on cleaning up their drinking water, and then later on air pollutants like sulphur dioxide.

As their wealth grows, people consume more energy, but they move to more efficient and cleaner sources — from wood to coal and oil, and then to natural gas and nuclear power, progressively emitting less carbon per unit of energy.

When I was living in Japan in the mid 1990s, they just completed a period of rapid operation of the Kuznets environmental curve. I was told by my professors at Graduate School that in the 1960s, cities and prefectures welcomed polluting industries because of the better paid jobs they offered. At that time, shipping companies used like to go to Tokyo because the pollution in Tokyo Bay was so bad that it would clean all the barnacles off their ships. That made them sail faster.

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Japanese incomes and wages doubled over the course of the 1960s. The Japanese voter was now prepared to support stricter pollution standards and environmental controls.

In the early 1970s, the ruling LDP stole the long-standing environmental policies of their opponents in a big crack down on pollution because the country could now afforded them.

Plenty of developing countries are democracies now. Their people could demand through the ballot box higher environmental standards and clean tap water but they don’t because of its cost to economic development.

The environmental movement lives in a state of denial regarding the relationship between economic growth and environmental quality.

Why Greece joined the Euro

The roots of Greece’s crisis are simple. Before Greece joined the Eurozone, investors treated it as a middle-income country with poor governance — which is to say, a credit risk.

After Greece joined the Eurozone, investors thought that Greece was no longer a credit risk — they figured, if push came to shove, other Eurozone members like Germany would bail Greece out. They were wrong.

Michael Dooley put forward a theory of speculative attacks on currencies as insurance attacks on currencies for emerging markets after the East Asian financial crisis:

First generation models of speculative attacks show that apparently random speculative attacks on policy regimes can be fully consistent with rational and well-informed speculative behaviour.

Unfortunately, models driven by a conflict between exchange rate policy and other macroeconomic objectives do not seem consistent with important empirical regularities surrounding recent crises in emerging markets. This has generated considerable interest in models that associate crises with self-fulfilling shifts in private expectations.

In this paper we develop a first generation model based on an alternative policy conflict. Credit constrained governments accumulate reserve assets in order to self-insure against shocks to national consumption. Governments also insure poorly regulated domestic financial markets.

Given this policy regime, a variety of internal and external shocks generate capital inflows to emerging markets followed by successful and anticipated speculative attacks.

We argue that a common external shock generated capital inflows to emerging markets in Asia and Latin America after 1989. Country specific factors determined the timing of speculative attacks. Lending policies of industrial country governments and international organizations account for contagion, that is, a bunching of attacks over time.

His model was not within the context of a currency union but his basic theory is correct.

There are speculative attacks on a currency or a bank run after foreign markets revises their estimates of the available central bank reserves and international lines of credit to bail out the banking systems and/or foreign debt.

Michael Dooley was dealing with the emerging economies of Southeast Asia and their official lines of credit that insure their foreign exchange liabilities and domestic banking system. Greece is about lines of credit for similar purposes to other European union member states.

via 12 charts and maps that explain the Greek crisis – Vox and The Most Important Graphs of 2011 – The Atlantic.

Doing business in Russia and Italy – World Bank rankings compared

Figure 1: Doing Business rankings, Russia and Italy, 2014

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Source: World Bank Doing Business 2015.

It is rather disturbing that it is a lot easier to register property and enforce contracts in Russia than in Italy and  far harder to pay your taxes in Italy. Once again, Italy’s saving grace is the ability to trade across borders Because of its membership of the European Union.

The case against waiting for trade agreements

The largest global exporters

Terrorist attacks and tourism

Gambling for Redemption and Self-fulfilling Debt Crises in the Eurozone

Donald Trump explained

Is investor state dispute settlement a form of overseas development assistance?

Would objections to the Investor State Dispute Settlement provisions in the proposed Trans-Pacific Partnership wilt away if the adjudicating body was the International Court of Justice? The left-wing opponents of investor state dispute settlement genuflect at the very mention of the International Court of Justice and international law generally (unless it is international economic law).

Disputes over the provisions of European union treaties are adjudicated by the European Court of Justice. The judgements of that court brought by individuals against member states so annoy the British that it is a leading reason for many British wanting to leave the European Union and replace the Human Rights Act 1998 with a British Bill Of Rights policed by British courts rather than by the European Court of Justice and European human rights law.

It is routine for any treaty to have some provision for arbitration of disputes. This includes trade and investment treaties.

The World Trade Organisation treaty includes a dispute settlement provision with arbitrators based in Geneva. Some of the more than 400 cases heard have been motivated by discrimination against imports on the basis of a breached environmental protection policies of the importing country.

A number of countries want to ban imports that are produced in ways that upset them. Others want to include labour and environmental standards in trade agreements to impose developed country standards on developing countries in what is a new form of colonialism.

I have previously said that investor State Dispute Settlement provisions have no place in trade and investment treaties between democracies. I must now admit there are good reasons to have arbitration clauses in treaties between democracies.

The puzzle is why refer these trade and investment disputes to a little-known arbitration body adjunct to the World Bank rather than the far more prestigious International Court of Justice.

Perhaps the reason is both sides want an arbitrator who is not too strong and not too credible. It would look very bad if the International Court of Justice was to rule against you.

William Landes and Richard Posner contended that judicial independence maximises the value of legislative deals with interest groups by enhancing the durability of those deals.

Why no International Court of Commercial Law? When deciding what type in judiciary to enforce international trade bargains, the signatories may prefer a less credible adjudication and enforcement mechanism in case they want to opt out of it or chip around the decision.

The jurisdiction of the International Court of Justice is to settle, in accordance with international law, legal disputes submitted to it by special agreement and matters specifically provided for in treaties and conventions in force.

UN member states are the parties to any litigation but that doesn’t stop them raising cases on behalf of individuals. That said, organizations, private enterprises, and individuals cannot have their cases taken to the International Court, such as to appeal a national supreme court’s ruling. Only the states can bring the cases and become the defendants of the cases.

The International Court of Justice is different from the European Court of Justice because individuals cannot easily bring complaints before it. One of the causes of action before  the European Court of Adjusters is under European competition law over member states providing financial aid to industries.

Democratic countries with high levels of economic and  social integration, such as the  European union, do find it in advantage to set up a European wide Court to adjudicate disputes over rights under European law.

Why then would a democracy sign up to an investment protection treaty with a developing country? One reason is overseas development assistance.

Developing countries with corrupt and incompetent courts, politicians and bureaucracies sign international treaties as a way of assuring foreign investors and trading partners of some degree of security of their property rights and their ability to enforce contracts with suppliers and buyers.

By folding these assurances into trade treaties, the developing country has a stronger incentive to honour its promises. There will be domestic constituencies wanting to retain reciprocal export market access who will lobby for the honouring of the promises of legal protection to investors and businesses in their home country.

New Zealand signing up to the Trans-Pacific Partnership is an example of this form of overseas development assistance. Exporters and investors from the developing country who export and invest in New Zealand have another reason to support more secure property rights and better enforcement of contracts in their home country as a way of securing their treaty rights to export and invest in New Zealand.

The Left of the political spectrum should be keen on this form of overseas development considering their general belief in greatly increasing the amount spent on overseas development assistance. Rather than pay cash to the development country, the payment is in kind as reciprocal legal promises.

Trade treaties that include investor state dispute settlement are forms of governance assistance to developing countries. The reciprocal exchange of promises about investor protection and the enforcement of contracts and property rights improves the quality of governance in the developing country.

The countries most likely to be subject to investor state dispute settlement are those with weaker governance. Even in the European Union, the member states most likely to be sued are former communist countries. The most common course of action was the cancellation of a licence or permit.

Investor state dispute settlement clauses are no different from any other international treaty include environmental and human rights treaties. All these treaties require countries to give up part of their sovereignty.

Democracies give up their sovereignty in investor state dispute settlement in the hope that developing country partners to the treaty will improve the development potential of their country through better governance and more secure property rights.

That is an overseas development aid objective the Left of the political spectrum should support, but it does not. The Left of the political spectrum is happy to use trade agreements to impose developed country labour and environmental standards on poor countries desperate for access to rich country markets, but is not willing to give up anything in return.

The difference between tariffs and quotas

Richard Cobden on John Stuart Mill’s greatest mistake

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What does America import and export?

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