Can’t pay? Can pay! (97)
Autors: Mortens Hansens
Publicēts: 2010. gada 16. februāris 00:41
Atslēgvārdi: , , , , , , , , , , , .
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That is the beauty of Latvia. You think you’ve seen it all and, nevertheless, something crops up and surprises you.

Thus Inguna Sudraba, Head of the State Audit Service, who seems to hint that Latvia will be unable to repay what it has borrowed from the IMF and EU by saying that “Latvia will not have a single euro cent to repay the international debt relying just on tax income” and asking which sanctions the IMF might impose if Latvia cannot repay.

Hm!?

To my mind, the first statement reveals lack of knowledge of fiscal policy, the second a lack of knowledge of IMF stand-by arrangements.

Some comments:

1) Without the agreement with the IMF and EU in December 2008 Latvia would have faced a government default, a banking sector collapse and a currency collapse. Borrowing to avoid that seems like a good idea to me.

2) Without borrowing Latvia would be forced to balance its government budget. This would require substantially harsher cuts than have been implemented, leading to even fewer public services and even higher unemployment. Not very attractive, I think.

3) The lending from the IMF and from the EU is in both cases on very favourable terms.

On the IMF part of the loan, Latvia pays a basic rate of charge for the first 300% of its IMF quota worth of credit (this rate of interest rate is currently 1.25%), and this charge plus a 2% surcharge (i.e. 3.25%) on the amount drawn above 300% of quota. Latvia has currently borrowed 563% of its IMF quota so the weighted interest rate should be around 2.2% – dirt cheap compared to borrowing in financial markets, assuming Latvia could. And all the details are here , including the conditions of repayment, namely that each disbursement gets repaid in 8 equal quarterly instalments, with first payment 3 1/4 years after disbursement.

So repayments begin in 2012; that year will include 4 repayments of the December 2008 disbursement, and a first repayment of the August 2009 disbursement. Then 2013 sees 4 (final) repayments of the December 2008 disbursement, 4 repayments of the August 2009 disbursement, and first repayments of tranches drawn in 2010. And so on.

And nothing about any possible sanctions in case of non-payment. Such sanctions do not exist.

For the EU part, Latvia can borrow as if it were AAA rated (which it is not…) i.e. at interest rates as low as Germany’s. The loan may run up to 7 years.

4) Summing up, Latvia is borrowing at dirt-cheap interest rates and the whole loan is not due for immediate repayment at the end of the 27-month Stand-By arrangement.

5) When it comes to repayment, Latvia will have to rely on refinancing the loans. It will have to go to the financial markets, which is completely normal – it’s how it is always done.

In Sudraba’s words, however, this will imply that “Latvia will borrow at very, very expensive rates, much more expensive than now” – the latter I can somehow agree with since current rates are so low but “very, very expensive”? Part of the programme is to create sustainable government finances for Latvia. If successful, this will enhance Latvia’s credibility in financial markets and interest rates will thus be lower. Last week Standard & Poor’s revised Latvia’s outlook from negative to stable, a first (small) step in such a direction.

6) And Latvia does not need even a budget surplus to have sustainable finances – budget deficits add to government debt but if the economy eventually grows faster than debt, the debt to GDP ratio will start falling. S&P estimates that Latvia’s debt-to-GDP ratio will peak at 45% (even I find that optimistic, however), which is low by EU standards and a far cry from the 100%+ ratios in countries like Greece and Italy.

7) And, hey! The IMF/EU package is even wrapped in a long list of sensible measures on how to create sustainable finances and promote efficiency and transparency – as I have discussed on already too many occasions.

Morten Hansen is Head of Economics Department, SSE

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Labi rūkts. Sūdraba tiešām jau krīt uz nerviem.

>SAIMNIEKS:”Labi rūkts. Sūdraba tiešām jau krīt uz nerviem.” – JA BIROKRĀTS-’eirokrāts’ savu darbu dara apzinīgi, nevis ‘elastīgi’ pielāgojas ’shēmotājiem’, tad tiešām – visā pašreizējā haotiskumā un bezatbildībā tas ‘krīt uz nerviem’ (tāpat kā ST tiesnešu lēmumi). NAV vēlmes ‘hanseniešiem’ atbildēt par savām kļūdām, nav vēlmes – ne Latvijā, ne pašlaik Grieķijā. Viņi vēlas turpināt pa vecam – šie ‘fat cats’ un viņu ‘eksperti’ – smērēt ratu riteņus un braukt sev vēlamajā virzienā. Un ‘loģiska’ ir viņu un viņu oponentu reakcija pret jebkuru objektīvu kritiku – der atcerēties M.Hansena reakciju pret M.Hadsona (Michael Hudson) rakstu ‘Latvijas Stoholmas sindroms/Latvia’s Stockholm syndrom’. Starp citu – Hansena retorikas fani nejauc viņu ar Hadsona rakstītajām atziņām ? Kļūdīties ir viegli – un cilvēcīgi.

The loans, indeed, are cheap. However, the total amount of EUR 7.5 bn is scary. One could pay for nuclear power plant serving whole Baltics; proper motorway to Daugavpils, hopefully bring more Russian and Belorussian cargo to Riga port and exposing residents to some Latvian language; and use spare change to build the national library.

However, the full amount will be used to save one(!) private bank and support government expenditure. There is not going to be any return from the borrowed funds and the principal is lost.

Part 1

This is clasical Kensian economics debate. Keynes argued for digging holes during the recessions. State intervention in labour when unemployment has reached 22% IS MANDATORY.

Plus social costs of unemployment (loss of skills, exclusion, loss of selfesteem, demographics, substance abuse, persistance of negative results in future generations etc) would exceed any intervention costs.

Given our tax rate- 50% would come back as income tax 21% as expense pluss multiplayer effect (eg modest salaries are spent on food, shelter not fancy German cars). The actual costs to the state is quite negligable compared to benefits. (of corse the more the leaks to outside are closed the better)

So if you undertake moderatly more meaningful activities than building black holes, such as roads, powerplants and similar infrastructure is not that far off.

At the same time i recognize that state alone can not bridge fall in the private spending and investments to reach full capacity.

So our long term solution is to bridge the capacity gap with exports. What i am arguing is modestly to cushion fall of unemployment with limited state interventions.

Part 2

In LV our companies and banks do not borrow from financial markets directly (except Liepajas metalurgs?). Busineses borrow from banks, banks from parents in Scandinavia (with good ratings already). So your argument for ratings as a goal is irrelevant. So why the pain?

Ratings will be important when state will have to refinance the debt.

Structual reforms are your euphenism for cost cutting. It can demonstrate resolve and impress markets a bit. However at national level someones cost is anothers income. Such actions will decrease GDP increasing Debt/gdp ratio with negative effect for ratings. It is high cost/ low return approach. Given the markets current obsession with sovergein risk this is still pretty far off.

Exports as solution

Agriculture seams to be on the right rack.

Industry- I beliewe Krugman deserved his prise for international trade theory and analysis of export enterprises. There are VERY few companies capable of going from green field to export.

When working as financial analyst in LV i was always surprised that you could track all the changes in the given field of industrial statistics to one company (eg all paper and packaging statistics movement stands for Stora Enso Packaging SIA. Furniture for Amber Furniture + Saga group). Rest of the sector companies is just white noise- subcantractors, niche etc. Latvia IS small. Its micro not macroeconomics stuff.

So state should identify these national champions and protect them (letting Amber go bankrupt was huge misstake) expand (eg new product ranges for Ltvijas Finieris) orchistrated stuff Japanese style.

Part 3

State planning has its place. Its been demonstrated by France, Japan, Singapur etc.

It is essential for large scale projects. In USSR it achiewed electrification, erdication of near universal iliteracy etc. Spontanious cooperation does not come automaticly.

Of course planning at private consuption level is unnecessary and conterproductive. That was soviet misstake.

I’m honored to be addressed in three parts.

And here are the questions:

1) Where is the money supposed to come from?

2) Last I looked aggregate tax average is ~33%, so where do the 50% come from?

3) There was a recent study done by one of the banks, that people repay their credit debt before paying for communal payments and only then use the remaining amount for food and shelter. Your proposal hence would solve the bad debt situation, but is it the best way to do it? and for whom?

4) Infrastructure to where and how? what materials? would they not be imported, and hence any financing that would be acquired would go outside the economy anyways?

5) Even “micro” firms get assessed when asking for credit. If my memory hasn’t failed me the basic interest rate calculation was risk free rate + country risk rate + busines risk rate? Even “swedish mothers” have to assess their risk exposure to “country rating” as that affects their own business ratings.

6) how do large scale (I understand infrastructure) projects help maintain the skills of those previously working in the “service” side of real estate and retailers? How does building help in developing skill sets for long term growth through exports?

At least we agree on the bit about exports.

Par bezdarba radītajiem riskiem un to vienkāršoto risinājumu – migrāciju – esmu izpaudies šeit… http://tinypaste.com/20a76

pārāk gari, lai iekļautu vieknāršotā atbildē.

Par manu bāzes filozofiju argumentiem/jautājumiem var izlasīt te… http://tinypaste.com/a947e ja ir interese.

1. Money to companies will come from existing banks anyway even in your model. Banks will get it from parents. You prefer doing it indirectly that somebody in Stockholm will read Financial times and decide that Latvia is worth lending to. I suggest doing it directly. Hassle them in giving more loans, lowering capital requiriments and yes giving them controls over failing enterprises etc

2. 24% Employees tax+ 9% Social tax+ 23% social tax employers contribution=56% So this is actualy closer to 60% and larger than average in Scandinavia (except for high income bracket). Sorry for understatement.

3. I am big proponent of debt relief. Those who can not pay debts should not. Changes in insolvency law should shift balance towards debtors rather than collectors as currently planned. Insolvency law should be written by ministry of Economics not Justice.

4. a) Any labour intensive operations. Building Daugavpils HES would be fantastic. Ground works plus concrete 100% local. It was marginal before now the benefits would outweight any loss.

b) saving failed enterprises. Giving controls to venture capitalists with bank support.

5. We can get overall interest rate down temporarly by lowering firms individual risk trought state implicit suport for champions. In long term state (systematic risk) component trought higher economic activity will come down faster than trough austerity measures.

6. Usualy companies have skills components such as sales, marketing, HR, Management, Accounting, Logistics, equipment maintenance, production which are universal. Object of application is secondary. So 75% of skills components can be transfered to another industry quite easy.

7. Exports. We can look at Agriculture where Duklavs using old school aproach of individual companies microeconomics has reached modest recovery quite fast. I really hope we can do it for industrial sector the same.

1. Control over companies for now has been shown. Swedbank “security” arriving at production facility, closing down operations, blocking all entry points, searching employees as they are forced to lay down work and forced to exit the premises. Leave the banking to banks and the production to producers.

2. :) iesaku iepazīties ar grāmatvedību 101 un visu par nodokļiem. īsi, ienākuma nodoklis ir (bruto – 9%*bruto – neapl.min – apgādāj)*26% Domāju, ka ātri var atskārt – šos nodokļus summēt nedrīkst. Nodokļa slogu ekonomikā adekvātāk izvērtē, skatoties ~(budžeta ienākumi) vs GDP (jeb ekonomikas ienākumu summa). Latvijā tas ir ~34%.

3. How exactly is a credit market supposed to work if “loan providers” will end up diversifying their business in everything that an economy is. Possible leverage-ratios will go down, thus achieving smaller gains/efficiency.

4.
a) environmental factors? loss of agrable land? And a Hydro-damm station requires more than just concrete ;) much more

b) saving failed how? Ensuring the solution of the reasons for failing HOW? again – efficiency, competitiveness and sustainability are ignored. Introducing – MORAL HAZARD.

5. Support how? State guarantees? From what financial source? Out of a plastic bag? Tax payers money? most importantly – MORAL HAZARD.

6. And yet, the larger amount of unemployed come from construction and retail. Production companies oriented on export are still reporting shortages of well qualified workers.

7. I wouldn’t be so sure about Mr.Dūklavs involvement here. Sure, he knows his beer business. Nevertheless, the bigger reason why export is growing is because there is less consumption locally. The same “export growers” today are those companies, which two years ago could care less about opportunities outside of Latvia – the required investment and hassle was too much for them to be worth it.
The crisis has changed this attitude, but even today I see constantly major food production firms offering their products to major retail chains with the use of catalogues IN LATVIAN!!!!

Sudraba very well knows how the deficit money is being WASTED as she audits all state structures.

Anyone who would see what she is seeing every day would doubt any need for additional
cheap loan based spending and its efficiency in Latvia.

So she is absolutely rigth that problems are being ( or rather, are not being) tackled from the wrong end.

Most of the government backed spending ends up in non-productive consumption of either foreign travel or extra purchases of overpriced imported goods ( e.g medical machinery, medical supplies, construction products, etc. ). It is pure waste of money with no multiplicator effects in local economy. Its lost moeny, gone, forever.

Paldies par linkiem. Seviskji migraacijas teorijas- ljoti labs apkopojums. Tas tieshaam ir komplekss fenomens.

Eksportspeejiigi uznjeemumi neradiisies ne no kaa. (skat Krugman). Tie ir uznjeemumi kuri transformeejas, izaug organiski. Ir lielaaki un efektiivaaki par konkurentiem. Kurus vada strateegjiski domaajoshi liideri kuri nerodas seezjot maajaas un skatoties televizoru. Pat ja muusu zinaatnieki izdomaa ko gjeniaalu vajag struktuuru kura var paardot, sarazjot, nofinanseet utt.

Pat ja mees nostaadam kaa paraugu Pure food un Laacu maizi mums tikai viens RVR jaunuzbuuveets elektrovilciens atsver 50 shaadus uznjeemums. Ja RVR uzbuuveetu 10 sastaavus muusu razoshanas GDP statistika nkaarshotos.

Nokia liidzinieks LV ir Provodnik/ RER. Saaka ar gumiju pirms 1X0 gadiem. Pieveersaas sadziives tehnikai un tad elektronikai. Tikai RER apstaajaas izaugsmee pirms 40 gadiem ar veljas mashiinaam “Riiga 19″.

Ericsson -VEF

Volvo- Vairogs/ RVR

Saakumi visiem shiem uznjeemumiem bija liidziigi. Bet 80. gados radaas paarraavums. Produktu dizains strauji novecoja. Kvalitaate bija chaabiiga, jaunaa modelii neinvesteeja.

Kaa atjaunot izaugsmi? Kaa paarleekt 30. gadiem atpaliciibas. Vai shie flagmanji uz to ir speejiigi?

Investiicijas sheit ir tikai viens no komponentiem. Liekas lielaakaa tragjeedija ir ka uznjeemumus kaa RER, Vagonu ruupniicu (vairogs), kugju buuveetavu, Hirsha impeeriju, VEF-Radiotehnika kontrolee krieviski runaajosjie mafiozi kuri dziivo pagaajushajaa gadsimtaa.

Vai tieshaam vinjus norakstiit?

1. Kaa banka pazaudees vairaak?

Paardodot izsolee iekaartas luuznjos (Amber furniture) vai piespiezjot esosho vadiibu (neefektiivo) atdot uznjeemumu kaadam ar biezaam kabataam (piem Latvijas Finieris) vai saviem draugiem (piem. Bluumas konsultaaciju kantorim), bet saglabaajot uznjeemumu. Anyway risinaajumi pasaulee ir atstraadaati. Vairums no shobriid labiem uznjeemumiem kaadreiz bijushi uz izniiciibas sliekshnja. BMW valsts izglaabusi vismaz 2x. Nekur lielus straadaajoshus eksporta uznjeemumus nelikvidee.

2. Biju revidents lielajaa 4. vairaakus gadus. Neaizmirsti pieskaitiit 24.09% (vismaz pirms 6 gadiem kad auditeeju) ko maksaa darba deveejs sociaalaa nodoklii. Algaam taa nodoklju proporcija mums ir pilniigi cita nekaa kopeejaa valstii. Videejais cilveeks sanjemot tikai algu samaksaa stipri virs 50%. Un Skandinaavijaa IR mazaak. :)
Tas ka nekustamajiem iipashumiem, mantojumam, kapitaala pieaugumam, auto mums nodoklju nebija/ ir minimaali un uz taa reekljina mums krietni mazaaks kopeejais slogs arii kaut ko liecina.

3. Diversifaying in evrything that economy is the defenition of systematic risk. There is no hedge against systematic risk.

This is the same as piont 1. You have to use carrot stick to force banks in resuming lending. Not contracting.

My mother receives pension 150 LVL. She saves 20 LVL every month (dont ask how but she does). I receive 2800 LVL and have debts of 2000 lats. (true figures). Whom banks will lend 7000 lats to buy new apartment in Liepaja? This is same choice you are offering to the banks which is no choice at all.

4. a) Sure there is oportunity costs involved. Latvenergo did study couple of years ago and determined that project would make small loss. To mee seams that we can absorb it quite well.

b). Of corse owners and lenders have to take haircut. See also part 1.

6. What shortages? What specific skills? You have specialized in something (like me in audit). Then either this is real estate developer or hi tech equipment manufacturer is irrelevant. Specific accounting treatments are 5% which i can pick in 1 day. If you can maitain construction equipment you can also maitain production line. and so on. On the other hand if I would be not doing any audits then say i would have no idea what tax law is today, what banks are asking etc. I would loose skills which can be applied elswere.

7. Well Duklavs pushed for some cooperation in export field and supplies for local markets which seems to be paying off. Anyway Latvia is so small that it requires really little to have noticable results.

why have you all wasted so much time debating a few words spoken by a toothless incompetent mouth piece of an even greater incompetent??
Every audit she does and every comment she makes seems to be at the prompting of Latvia’s answer to Napoleon. He had many brown nosers, but most are now not quite so loyal as his ability to pay for loyalty is not as great as it used to be. However silly little Ms Silver has not woken up to this yet. She may not be the brightest of the bright, but I suppose she must be relatively cheap as he can still afford her….

Hansenam ir taisnība, mums iedeva salīdzinoši lētu aizdevumu. Īpaši salīdzinot ar tām zālēm ko dabūs izjust grieķi.

Tai pašā laikā Sudrabai vajadzētu vairāk pievērst uzmanības, kam tiek tērēta nauda, kas ir aizņemta.

Parex bija jāiegulda tieši, tik lai garantētu noguldītājiem to ko valsts garantē, t.i. mums kā valstij bija jāzipilda savas saistības.
Kreditorus no Austrumiem vajadzēja pasūtīt d…, kad bija iespēja. Man kā nodokļu maksātājam negribas vilkt no sūdiem Kargina un Krasovicka ādu. Patiesībā man par viņiem, kā pilsoņiem ir slaidi nospļauties. Tomēr tieši KK pakaļu glābšanai aizgāja mūsu un aizņemtā nauda.
Lai nodrošinātu noguldītājus vajadzēja līdz 800 mlj Ls. Abus KK vajadzēja atdot saplosīšanai un austrumiem, kā norēķinu par pārējo.

Diemžēl izskatās ka KK karaliski ir atalgojuši tā laika lēmumu pieņēmējus par iespēju noraut persoīgās pakaļas no pannas.

Tas pats tagad notiek ar Liepājas Metalurgu.
Kāda velna pēc vilkt ārā faktiski beigušos uzņēmumu, kura vadība nevelk? Ātri ļaut bankrotēt un iespējami ātri atdot citās rokās – tiem kas var vilkt.

Parex, Latvijas Metalurgs u.c. kā arī auklēšanās ar Zviedru bankām veido to ko sauc par MORAL HAZARD.

She hasn’t got a clue – granted…

Sudrabai līdz ekonomikas pamatprincipu zināšanai vēl tāls ceļš ejams. Mortena līmeni ekonomikā viņai vispār nekad nespīd sasniegt, neskatoties uz darbu Finananšu Ministrijā :) ))))))))))))).

sorry, Finanšu :) .

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