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Highlights
HILSENRATH'S TAKE: Greece's Debt Restructuring, Like Others, Is No Morality Tale
Debt crises have a way of playing out like morality tales for the people involved and many of those observing.
One of the more searing memories of the 1997-1998 financial crisis in Asia was the image of International Monetary Fund managing director Michel Camdessus standing, arms folded, over former Indonesian President Suharto as Mr. Suharto signed a bailout deal with international creditors packed with painful austerity measures and efforts to break up family-controlled monopolies. For the IMF and many in the West, it was the price a corrupt government needed to pay for funds aimed at keeping a deeply broken financial system afloat and to turn a weakened economy toward sustainable reform. For many in Asia, it was emblematic of the arrogance of the West and its imposition of economic policies that failed in the first place to revive their economies.
Both sides were right, which is why debt crises are best not thought of as black and white morality plays. Each instead represents its own contest of competing interests. How it plays out depends on the broader goals, strategic leverage and degree of desperation experienced by the various players involved.
This reality struck me some months after Indonesia's January 2008 IMF deal, while based in Hong Kong, when Malaysian officials imposed curbs on foreign divestment. Western bankers in Asia, claiming a higher moral ground, again cried foul and said foreign capital would never return. They were wrong. Capital controls helped to stabilize a worsening financial crisis and the Washington consensus on capital markets suffered a blow.
Who is right in Greece's standoff today with the IMF and European creditors?
German leaders claim a higher moral ground. When you borrow money you are expected to pay it back. If you can't you don't get to borrow again. If you are living above your means you must change your style of living. If you want more money from a lender, you need to behave in ways the lender expects to ensure that money will be returned.
Greece's leaders feel no less righteous about their position. Why should they suffer when lenders get repaid in full? Didn't both make a mistake when agreeing to government loans in the first place? Why should Greece accept onerous austerity that hasn't turned its economy around, and in fact has made it worse in the near-run? Why should Greek workers suffer more than German bankers?
Don't bother answering these questions. Both sides have a point. What will ultimately dictate the terms of this debt restructuring is the desperation Greeks feel if their banks run dry of euros, competing against the anxiety European leaders feel about the prospect of their single-currency experiment failing. Who is right and who is wrong? They all are. Who wins and who loses? Stay tuned.
--By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Big U.S. Banks Refile 'Living Wills.' Twelve of the largest U.S. banks refiled with regulators their plans for navigating bankruptcy, their latest attempt to show they wouldn't need a taxpayer bailout in a financial crisis. Summaries of the firms' "living wills" were set to be published Monday on the websites of the Federal Reserve and the Federal Deposit Insurance Corp. But last year, the Fed and FDIC found most of the banks' plans were flawed, based on their unrealistic assumptions and other deficiencies. Regulators ordered the firms to start fixing the problems or face sanctions such as higher capital requirements or forced divestitures.
New Additions at New York Fed. The New York Fed said Monday that Joshua Rosenberg will become its chief risk officer and executive vice president effective July 16, replacing Sandra Krieger, whose retirement was announced earlier this year. Mr. Rosenberg is a veteran of the bank, joining as an economist in 2001. Before that, he was a finance professor at New York University. The New York Fed also said Helen Mucciolo , another veteran staffer, will become its executive vice president, principal financial officer and leader of the institution's corporate group on Aug. 1.
Summit Offers Chance to Get Back to Negotiations on Greece Bailout. The eurozone's top decision makers were meeting Tuesday in an urgent effort to get back to the negotiating table on Greek bailout funding after voters overwhelmingly rejected creditors' austerity measures.
ECB Raises Pressure on Greek Banks. The European Central Bank tightened the screws on Greek banks on Monday by raising the amount of collateral they must post to secure the emergency lending that is keeping them alive. It also decided to maintain the cap on the emergency loans that has been in place for more than a week. Despite the tighter rules, Greek banks still have sufficient collateral for the existing EUR89 billion ($99 billion) stock of emergency central bank loans, according to a person familiar with matter, an indication that the ECB's move wasn't so extreme as to force any Greek banks into collapse.
ECB's Nowotny: If Greece Misses Payment, Funds Will Be Cut Off. The European Central Bank will be forced to cut off liquidity to Greece should the Mediterranean country miss its July 20 deadline to pay back the central bank, a member of the ECB's governing council said Monday night. "That would be a state bankruptcy, a default in English," Ewald Nowotny said in an interview with Austrian state television news program ZiB 2. "In this situation, it would no longer be possible for the ECB to provide further liquidity."
Muted Response to Greece Reflects Change in Markets. Financial markets' quiet response to the latest Greek crisis shows how much things have changed since worries about Greek debt helped disrupt global markets in 2011 and 2012. Money managers have become more confident in the ability of the European Central Bank and U.S. Federal Reserve to deal with this kind of crisis and in the ability of the global economy to withstand it.
Chinese Share Price Rescue Comes at a Price. While the flurry of government rescue moves may stem panic in the short term, some economists warned that if not implemented carefully, it could encourage another market bubble even as the existing one deflates. Investors are likely to conclude that Beijing will make good on even reckless investments, they say.
Australian Central Bank Keeps Rates Steady. Australia's central bank kept interest rates steady Tuesday as expected by economists, while playing down any immediate risk posed to the economy by uncertainty surrounding Greece's debt negotiations and recent sharp falls in Chinese share prices.
GRAPHIC CONTENT
How Stagnant Are Wages, Really? Since 1979, real earnings are up just 17%, after adjusting for inflation using the consumer-price index. But this analysis ignores one of the major shifts in the labor market in recent decades: Employers have paid larger and larger health insurance bills for their employees. When the cost of employee benefits is included, suddenly workers are doing quite a bit better. Adjusted for the personal consumption expenditures price index, the median worker has seen a gain of 38%. The median woman has gained 73% and the median male 13%.
FORWARD GUIDANCE
-8:30 a.m. EDT: Commerce Department releases U.S. international trade report for May
-Central Bank of Kenya releases a policy statement
RESEARCH
OECD: Slower Diffusion Behind Slower Productivity. The Organization for Economic Cooperation and Development's economists conclude that businesses are still innovating in ways that increase their productivity. But why are innovations not spreading as quickly as before? One key reason appears to be that the process of "creative destruction" identified by Austrian economist Joseph Schumpeter as essential to capitalism's dynamism appears to have lost some of its ferocity. In the OECD's words, "market selection is weak."
Labor Market Effects of Open Borders. Andreas Beerli and Giovanni Peri look at Switzerland's experience with opening its labor markets to immigrants from the European Union. "We find that opening the border to EU immigrants increased their presence by 4 percent of employment, and this had no significant impact on average native wages and employment. Decomposing the effect between skill groups we find that immigrants complemented highly educated native workers, while they displaced middle educated workers and had no effect on less educated," they write.
COMMENTARY
Greg Ip: If Greece Goes, the Contagion Risk is More Political than Economic. He writes in the Journal, "Whatever the odds of Greek exit from the euro were last week, they have topped 50% since Greeks voted "no" to their creditors' demands in Sunday's referendum. The question then becomes, if Greece goes, how likely is it that larger, more consequential countries will follow? A sober appraisal must conclude that the odds of a wider contagion are uncomfortably high. "
Reach a Deal Asap. Gregory Claeys, writing on Bruegel, says that Greece's European creditors should set aside the "often divisive rhetoric" and reach a compromise with Greece. Allowing Greece to leave the eurozone would be devastating, and not just to the Greeks, he writes. "This would also be dramatic for the rest of the Eurozone as this would definitely show that the euro is a reversible currency and that the promise of the ECB to 'do whatever it takes' to preserve the integrity of the monetary union cannot be taken seriously."
(MORE TO FOLLOW) Dow Jones Newswires
July 07, 2015 07:14 ET (11:14 GMT)
Beijing Upends the Market. Writing in the Journal, Carl E. Walter and Fraser J.T. Howie blame Chinese authorities for creating the conditions that led to recent stock volatility in China. "The guilty parties are easy to find because they are the same ones organizing the bailout. This bear market was totally expected; only its timing was unknown. Such incredible upward moves, built on ever-increasing leverage and drawing in millions of new investors, was always going to end in tears. That the authorities never understood this, or ignored it, is staggering. Perhaps they really do believe there is something called Chinese economics, that they aren't bound by the same rules as everyone else."
BASIS POINTS
Gusztav Bager Selected to Central Bank Policy Board. Hungary's parliament Monday elected Gusztav Bager, an economist and professor, to the central bank's monetary policy board and approved a new supervisory board to the central bank. -- Dow Jones Newswires
Canadian Businesses Continue to Suffer From Low Oil Prices. Views on sales prospects, capital investment and hiring remain at relatively weak levels, the Canadian central bank said in its quarterly business outlook survey. The findings are likely to add to pressure on Bank of Canada Governor Stephen Poloz to cut interest rates for the second time this year.
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(END) Dow Jones Newswires
July 07, 2015 07:14 ET (11:14 GMT)
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