Thursday, June 30, 2011

USA today editorial: What the US congress can learn from Greek parliament

June 29, 2011

Greece has never been a shining example of how to run a government or grow an economy. It is plagued by massive debt, an oversized public sector, rampant tax evasion and a host of byzantine anti-business laws.

So why is it that this economic basket case is suddenly showing more courage and fiscal discipline than the United States?

In a bid to stave off a default that could bring down European banks and start a disastrous run on U.S. money-market funds, the Greek parliament on Wednesday approved an austerity plan that includes tax hikes, sharp cuts in spending and the sale of tens of billions of dollars of government-owned assets. All this came despite the plan's deep unpopularity with Greeks (many of whom were on the streets rioting) from a left-wing majority that wasn't responsible for the binge borrowing in the first place.

If only American leaders would show similar spine.

Like a number of countries, the U.S. is nearing a point where its debt will get out of control. And like Greece, the U.S. government could default on its loans in a matter of weeks. Only in America's case it would be a default of choice, precipitated by Congress' failure to hike the debt ceiling and reach a deficit-reduction deal before the Aug. 2 deadline.

Some of the problem is that members of both parties, but particularly Democrats, are loath to admit that the great bulk of America's long-term debt problems are in popular benefit programs such as Medicare and Social Security.

But the immediate impasse is brought on by Republicans' refusal to consider revenue increases, or even curbs in tax breaks for wealthy corporations and individuals, as a relatively small part of the debt deal. As President Obama put it Wednesday at his news conference, his daughters show more maturity getting their homework done on time than lawmakers are displaying at the budget talks.

We never thought we'd say this, but Congress could learn something from the Greek parliament about making unpopular decisions. Granted, the Greeks were forced to act as the price for a bailout, but they did so in time to avoid calamity. Whether Congress can muster equal courage remains to be seen.

Tuesday, June 28, 2011

Iceland Shows Default Doesn’t Lead to a Deep Freeze

By Daniel Gross

, On Tuesday June 28, 2011, 2:02 pm EDT

The specter of sovereign default is haunting Greece and much of Europe. Defaulting on financial obligations is one of the worst things a sovereign nation can do. Stiffing domestic and foreign creditors makes you a persona non grata in the international credit markets, threatens the flow of vital capital, and condemns a country to a future of high interest rates and beggary. After all, who in his right mind would lend to an entity that has displayed a willful inability to do the basic blocking and tackling of financial management?

Argentina in 2001 defaulted on its sovereign debt and in 2005 restructured its bonds. "Nongovernment foreign investors — the biggest included pension funds from Italy, Japan and the United States — took haircuts costing them two-thirds of their investments," as The New York Times reports. While the Argentine economy has recovered and grown, as Paul Krugman notes, it is still shut out of international bond markets and pays high interest rates to borrow.

A formal default by a European country such as Greece, Ireland or Portugal wouldn't just threaten bondholders — it would threaten the French, German and Belgian banks that own so much of those countries' sovereign debt. Because the Euro binds together the currency and banking systems of many countries, the establishment — the European Union, the European Central Bank and the International Monetary Fund — has gone to great lengths to forestall default. Governments have been pressed into passing austerity plans, hacking budgets and raising taxes. The ECB is guaranteeing oodles of dodgy debt and providing limitless liquidity and bailout funds — all so that Greece, Ireland and Portugal can remain current on the financial obligations they've assumed on behalf of their citizens (Greece and Portugal) and their banks (Ireland). And to what end? Wary of the potential for an Argentina-style haircut, investors are demanding high interest rates from the bailed-out European countries. Interest rates on Ireland and Portugal's three-year notes top 14 percent, while rates on Greece's three-year notes are an astonishing 27 percent.

But here's the thing: While default would be a disaster for Europe, it wouldn't necessarily be a lengthy tragedy for Greece or Ireland. Rather than being sentenced to a long stay in a debtors' prison, as Argentina was, they might find that they'll simply be put into the penalty box for awhile. Consider the case of their neighbor to the north who recently defaulted in spectacular fashion: Iceland.

Last decade, Iceland's deregulated banks stormed out of the North Atlantic like Vikings, amassing huge deposits and liabilities all over the world — some $85 billion in total. When Iceland's banking industry capsized in the fall of 2008, the government nationalized the banks. It then faced the question of whether its 320,000 citizens should make the banks' global bondholders and depositors whole. The answer was something of a no-brainer. Iceland's banks had assets that amounted to ten times the country's Gross Domestic Product. And so while the country received an IMF-led bailout, it let the bondholders suffer losses. "Bondholders should not rely on the government stepping in and bailing them out," Iceland Central Bank Governor Mar Gudmundsson said last December. "They should do their due diligence." The Icelandic banks had also taken lots of deposits from savers in the U.K. and the Netherlands, who were lured by competitive interest rates. These savers were bailed out by their own governments. But in 2010, the question as to whether Icelanders should reimburse some $5.3 billion to the governments of the U.K. and Netherlands was put to a referendum. And the answer was a resounding "no." In April 2011, even as Iceland was put on notice that failing to step up would inhibit its ability to borrow on international markets, the referendum failed again. As Bloomberg noted: "This will force the government to postpone its plans to enter the international bond markets."

And yet just two months later, Iceland was back in the international borrowing markets for the first time in five years. In early June, Reuters reported, the government sold $1 billion in five-year bonds that yielded just under five percent. "According to the Finance Ministry, the order book was two times oversubscribed, with the majority of the bonds purchased by U.S. and European investors." Given the world's low interest rate environment, that's not so hot. (The U.S. pays just 1.47 percent to borrow for five years.) But Iceland is paying about one-third the interest rate that other crisis-ridden European countries are paying.

That makes sense. It's actually a much better move to lend to people after they've declared bankruptcy and been able to shuck their debts, not while they are trying to stave off collapse. In 2006, I interviewed a subprime mortgage marketing pro who told me that data on personal bankruptcy exits were a great source of leads. After all, these folks were guaranteed to have the irresistible (to him) combination of poor credit ratings and not much in the way of debt. Companies emerging from Chapter 11 can likewise easily find plentiful, cheap capital — they've already stiffed their creditors, sold assets, fired workers and slimmed down to a manageable profile. Iceland had gone through that process.The economy, which shrank sharply in 2009, is growing again — in part because its devalued currency is making exports cheap. Growth, combined with the refusal to assume its bank debts, means Iceland can handle new debt with relative ease.

With this month's bond sale, Iceland has formally been welcomed back into the international financial community — even as it continues to stiff-arm creditors. And there's more to come. Europeans, some of whom are still feuding with the island nation over the deposits issue, are preparing to welcome Iceland into the fold. Yesterday, the Associated Press reported that Iceland "is beginning formal accession talks with the European Union, following several months of preparation by both sides." (Maybe the EU is recruiting Iceland for its bankruptcy expertise?)

So while bond investors are still crying for their losses in Argentina, they're hot for Iceland. And if this is the punishment you get for default — 5 percent interest rate on five-year debt and an invitation to become a member of a formerly prestigious club — maybe default isn't such a bad option for countries struggling to come to grips with a legacy of financial recklessness.

Making the Argument for Greece’s Austerity Plan

From the NYT

Published: June 28, 2011 The Greek Parliament is prepared to vote on austerity measures on Wednesday, and its people have been gathering in demonstrations and strikes to protest the cuts. Here is an open letter explaining why members of Parliament would be crazy to vote no:

Dear Greeks,

The anger you feel about your plight is understandable. You are staring at several unpalatable options, all of which will involve big cuts in living standards for years to come. But the choices are not equally bad. You must avoid an emotional reaction that leaves you in an even worse state. And you should ostracize those who resort to violence.

One option is to persuade your politicians to say no to the austerity plan set forth by the euro zone and the International Monetary Fund. That proposal is not perfect. But rejecting it outright would be childish.

If there is no agreed plan, you will get no money. The consequence wouldn’t be just that the government defaults on the loans it took out on your behalf. There would be a run on your banks and an even deeper recession. You would probably also lose your remaining friends in Europe.

That’s not to say you should repay all your debts. Even with Herculean efforts, that won’t be possible. But you can probably negotiate an orderly default some time in the next year. An orderly default would cut your debts, say in half, but in the context of an agreed broader program that provided you with enough money to survive until you are healthier.

You might ask why you can’t have an “orderly” default now. Wouldn’t that be better than waiting? Yes, if an orderly default could be agreed on now. Unfortunately, the rest of Europe isn’t yet ready for your default. So it won’t agree on one; and that, by definition, means a default now would be disorderly.

Fast forward a few months, though, and the rest of Europe might be in better shape to withstand a Greek debt restructuring, particularly if the Continent used the time well and shored up its banks. You, too, might be in better position to negotiate a new package — provided that you recapitalize your own banks and squeeze your budget deficit so you are less dependent on external financing.

There’s no denying this would be painful. Your challenge isn’t just to cut the deficit but also to restore your economic competitiveness. That means further cuts in living standards.

Is there a shortcut to avoid this pain? Wouldn’t bringing back the drachma restore competitiveness? Probably not. It’s true you should never have joined the euro. But nobody has yet come up with a way of putting this particular toothpaste back in the tube without creating a giant mess.

Again, the weak link is your banks. If your compatriots thought the drachma was about to return, at what would be a much lower rate, they would be crazy to keep their money in a Greek bank. There would be a panic before the new drachmas were even minted.

All this may seem terribly unfair, and to an extent it is. Politicians of both major parties have let you down for decades. They presided over a monstrously inefficient public sector, often staffed by friends and clients. They spent too much money and then cheated on the figures so Greece could get into the euro. Corruption and tax evasion have been rampant and have gone largely unpunished.

You can also blame foreigners for your plight. Foreign banks were among those that lent you all that money. Some also helped you fiddle with your figures. And the rest of the euro zone turned a blind eye when you ran up astronomical debts. But remember: your creditors, both banks and governments, won’t get off scot-free. When you default, they will pay a hefty price.

You should also realize you are not blameless. Many of you were evading taxes and enjoying those highly paid public-sector jobs; most of you were consuming more than you produced and retiring too early. You also voted for your useless politicians.

By all means, protest. But focus on the right goals. Don’t spite yourself by turning away foreign help. What’s more, keep it peaceful.

Wednesday, June 15, 2011

Social media governments: Iceland, Nigeria, Rwanda & South Africa

an interesting article:

An increasingly crucial part of our daily lives, social media is changing the way we interact, work and live. As a truly people-oriented medium, it is even altering our concept of society and democracy. Governments, from Iceland to Nigeria, are coming up with innovative solutions for meeting the needs of their citizens.

A fair amount of discussion at a recent World Economic Forum annual meeting held in Davos focused on the future of governance: “Governments today are operating in an environment where citizens’ expectations are communicated through digital means to global audiences in a matter of minutes, with incredible ramifications, as evidenced by the revolutions across the Middle East,” Borge Brende, the fund’s managing director, writes in a report titled The Future of Government.

Smart governments know they need to connect with their citizens on a grassroots level and eGovernance is becoming a buzz word in many cabinet meetings. This changing shape of democracy is best demonstrated in three inspiring case studies:

Crowdsourcing the constitution

Iceland is currently crowdsourcing its new constitution. When your banks and government are free falling, it’s time to ask the people what they want.

Thorvaldur Gylfason, a member of Iceland’s constitutional council, told the Guardian that this was the first time a government had used the internet to draft its constitution. He emphasised the importance of the public seeing the constitution “come into being” before their eyes: “This is very different from old times where constitution makers sometimes found it better to find themselves a remote spot, out of sight, out of touch”.

There’s no doubt that transparency is the best policy for a struggling government. Drafts of the constitution have been posted on the council’s website since the project’s launch in April. The council has also given the public the opportunity to discuss constitutional clauses on its Facebook page.

Getting the people involved at this level brings back a very Athenian sense of democracy, where the mass populace is actively involved in government and decision-making. Last year, the US initiated a similar idea when the White House released a memo to crowdsource innovative approaches to governmental initiatives and programmes.

While the idea of crowdsourcing is popular as it involves citizens in the decision-making process, there is little point if the results are ignored. A crowdsourcing attempt by the UK coalition last year fell flat when the more than 9,500 suggestions went unheeded.

The Nigerian Facebook president

Nigeria was propelled on to the world’s stage in 2010 during the build-up to the presidential elections. The rising star of that media coverage was Goodluck Jonathan, now the country’s president. Jonathan drove his campaign via social media, capturing international attention less than a month after setting up his Facebook account.

The choice to announce his candidacy via Facebook was a stroke of genius. In a society full of young people trying to find their voice and questioning government’s interest in their needs, a social media-driven campaign is a smart choice – a model few governments are adopting.

Jonathan’s approach to Facebook was to avoid simply having a presence on the social network, he actively engaged with users. He discussed many areas of the Nigerian government’s actions and policies through this account. He even reversed a policy decision , based on comments that citizens had put forward on Facebook.

Jonathan’s account seems to be dedicated to listening and providing information. One famed post by the president reads:

“Again I spent time reading your comments and yesterday a youth named Toyin Dawodu indicated that he had an idea for a project that could deliver 4 000 MWs of electricity … Toyin, someone from my office will make contact with you regarding your idea. I know I cannot attend to every comment or suggestion due to time constraints, but please do know that I read them and they influence my actions.”

While Jonathan has found a way to engage with the people and make decisions in their interests, one has to wonder whether this is sustainable as the pressures of fulfilling his role as president ramp up.

Building a community

eGovernance needs more than crowdsourcing information or active listening. There should also be some sense of community building, which is, after all, at the heart of social media success. The Canadian government, for example, recently encouraged its citizens to build apps that inspired and encouraged action around climate change. The government offered US$40 000 in prize money for the best app, inspiring community involvement around a common cause.

Rwandan President Paul Kagame is very active on Twitter and responds openly to issues relating to the current state of governance in his country. Kagame was recently featured on YouTube’s Worldview, answering questions about Rwanda and life after the genocide.

If more of the world’s leaders, especially in Africa, are willing to openly discuss questions with the people in this Q&A format, surely there would be more trust between leaders and their people?

South African President Jacob Zuma’s state of the nation address trended on Twitter because the president asked citizens to pose questions online while he prepared his speech. His use of questions from social media platforms turned his state of the nation address into an online event — hashtags and all.

These ideas can only work in societies which are connected, or at least have a sizeable audience that is connected. Iceland may succeed because a worthwhile portion of its population has access to the internet. While Nigeria’s president is applauded for his efforts, critics point out that not enough of Nigeria’s population is online, somewhat undermining the representativeness of his efforts. The challenge, then, will be for governments to find a way to straddle this divide, and bring their citizens together.

Tuesday, June 14, 2011

Europe tackles huge fraud in research

From Naturenews (14/6/11)

Regulators scramble to recover millions of euros awarded to fake research projects.

Stifling bureaucracy is often blamed for discouraging scientists and businesses from participating in the research programmes of the European Commission (EC). But the commission's notoriously cumbersome procedures and rigid control mechanisms have apparently not prevented a criminal syndicate from conducting a brazen fraud that has siphoned off millions in EC grant funds.

Italian authorities and the European Anti-Fraud Office (OLAF) in Brussels, Belgium, have confirmed that they are prosecuting members of a large network accused of pocketing more than €50 million (US$72 million) in EC grants for fake research projects. In Milan, Italy, the Finance Police last month charged several individuals in relation to the fraud. In Brussels, meanwhile, the EC has terminated four collaborative projects in information technology, and excluded more than 30 grant-winners from participation in around 20 ongoing projects. Investigations are still under way in the United Kingdom, France, Greece, Austria, Sweden, Slovenia and Poland.

"We don't have any records of [previous] fraud at such a scale," says David Boublil, the commission's spokesman for taxation, customs, anti-fraud and audit. While investigations continue, Italian prosecutors and OLAF will not disclose the names of the suspects, or the research projects with which they were involved.

The fraud has been conducted in a "highly sophisticated manner, resembling money laundering", by means of a cross-border network of fictitious companies and subcontractors, says Pavel Bořkovec, a spokesman for OLAF. Several project coordinators stand accused of having claimed inflated costs, or expenses for non-existent research activities and services, he says.

"The projects were apparently organized with the sole intention to deceive the commission and its control mechanisms," says Boublil. To make them seem legitimate, grant applications included the names of real scientists, established research institutes and existing companies, he says. But in most cases the alleged project partners were included without their knowing.

Insiders in Brussels say that rare cases of minor financial dishonesty, from inflated invoices to smaller cases of embezzlement, are regarded as unavoidable in large collaborative research projects. But the commission does extensive checks on project partners, including companies, which are meant to catch large-scale fraud. The success of the fraud suggests that those involved were unusually familiar with weaknesses in the EC's procedures, and adept at forging legal documents.

Boublil insists that the commission has learned lessons from the case. All departments handling research grants — including the EC's Information Society and Media Directorate General, which oversaw the terminated projects — are now trained to look out for the methods used by the network. Guidelines for evaluating projects and their partners are set to be updated. The EC has already recovered €10 million of the money, and will seek to recover the rest through the courts, Boublil says.

The commission is currently developing a multibillion-dollar 'Common Strategic Framework' which, from 2014, will combine its various funding streams into a single channel for all research and innovation funding. Concerned about the burden of Brussels bureaucracy, several thousand European scientists signed a petition this year ( calling for the framework to be "based on mutual trust and responsible partnering". Some now fear that the fraud could hamper efforts to cut red tape.

"I'm worried that some will argue that what has happened proves that we need more rather than less control," says Herbert Reul, chair of the European Parliament's committee on industry, research and energy, which supports the simplification of the EC's funding procedures. "I sincerely hope that this will not happen. Actually, it is a good sign that this worrying attempt at deceiving the commission has been discovered and will be punished.