Daily Hurriyet Column: Impressions from the Meetings

The unedited version of my fifth column covering The Meetings is below; you can read the final version at the Daily News web site. And for once, there is no cheesy title. As for the article itself: After a couple of strictly off-the-record conversations with IMF staff and what the Fund's top brass has been saying recently, I am now more confident that very profound changes are line up at the Fund. 2010 should be a year of Fund watching.


Now that the IMF-WB Meetings are almost over, it is time to summarize my impressions from the seminars I attended as well as interviews and casual chats with the attendees.

The Istanbul Consensus

An Istanbul consensus has emerged, but at the least expected of places: The economics outlook. Independent of the shape, almost all attendees expected a slow US recovery. They were more bearish on other developed countries and more on emerging markets, especially Asia. There was also agreement that the woes of the financial system are far from over. I could say that the views in IMF’s WEO and GFSR reports accurately reflect the median attendee opinion.

Most attendees did not see inflation as a threat in the short-run; if anything, a few voiced deflation worries. But there was serious concern on the timing of monetary and fiscal exit strategies. The nightmare scenario is that inability or unwillingness to unwind at the right time could lead to inflation and a rise in long-term yields in the US, leading to yet another recessionary spiral. Martin Wolf, Financial Times Chief Economics Commentator declared that in this scenario, the dollar would collapse, and he was not the only one. However, this doomsday is still far away; no one expects these issues to be a problem before 2011. Finally, I have not yet met anyone who thinks that markets are reflecting fundamentals, but there is unsurprisingly huge divergence of opinion on the timing or amount of the correction.

The Supervitory Challenge

The attendees were less sure on the direction of regulation and supervision. This was one most controversial and discussed issues, precisely because the attendees were aware of the challenges. For one thing, the implicit financial sector guarantees have been made explicit during the past year. Moreover, finance is too large, powerful and smart: Without more efficient regulation and supervision, there is the risk that officials will be captured by the sector or end up chasing their own tails rather than the tail risks they are supposed to look out for. There is also the risk of overregulation, which would kill off all the beneficiary aspects of finance without touching the real issues.

Then, there is the problem that everybody loves credit, especially politicians. And Chuck Prince was actually right: You have to dance as long as the music is playing. So if a party-crasher comes out waving flags, she’d better be right! Therefore, you need stronger and more independent central banks, but actually, the trend is towards the opposite direction in most countries. In any case, giving policymakers more targets than instruments will be not only politically, but also technically feasible. Finally, one of the main lessons of the crisis is the danger of contagion from international financial linkages, so a national agency might not be able to identify all risks.

There is then an unequivocal demand for an independent body that can monitor the world economy not be afraid to raise flags when required, but there can be no supply of this service at the national level because of political and technical constraints. I know I am in the minority, but that’s why I see life ahead for the IMF-FSB initiative that I outlined yesterday.

In fact, while it was already beefed up in the past year, the Fund is surely emerging even stronger compared to a week ago. I am sure many disregarded Dominique Strauss-Kahn’s comments that “these would be the meetings we would tell our children about” as PR, but an interview with Lorenzo Giorgianni of the Strategy, Policy and Review Department of the Fund and a few informal chats have convinced me to give the benefit of doubt to the self-described socialist managing director. In fact, I would not be surprised to see profound changes in a couple of years in not only the instruments and workings of the Fund, but also its building blocks that could go as far as changes to the Articles of Agreement.

This is all good news: If anything, the Fund is turning to its roots: Keynes’ main ideas in the process leading to the Bretton Woods was the creation of an international reserve currency, the Bancor, and a lender of last resort. Although even high-ranking Chinese officials were frank to admit that we are very far away from the former, the latter might be much closer than we think.

What does all this mean for Turkey? What were the main issues that came up regarding the Turkish economy? This is where I will pick up tomorrow, the last in my week-long daily coverage of the Meetings.

Daily Hurriyet Column: The Dark Knight of crisis prevention

The unedited version of my third column covering The Meetings is below; you can read the final version at the Daily News web site. As you can see, the cheesy titles are continuing unabated. As for the article, another issue I did not spell out explicitly in the article is the familiar carrot and stick problem. Suppose the IMF went to Turkey and said "Look, we see such and such vulnerabilities in the financial sector and the financing of the current account". The Turkish authorities may say, "Wow, we had no idea, we'll take precautions right away" and really do something, or they say the same thing and do nothing. And there is nothing the Fund can do about it... One way to enforce the carrot would be for the Fund not to reveal the actual vulnerabilities it finds (too much of a fire problem), but how disclose which countries are reacting to its findings more than, say 50%, but I am just thinking aloud at this stage.


The IMF has not only been tying to be more responsive to crisis-stricken countries, as I outlined in my weekend column, it has also been charged, along with the recently-beefed up Financial Stability Board (FSB), to identify vulnerabilities, warn of risks and prioritize policy recommendations. The two institutions were mandated to collaborate in conducting aptly-named early warning exercises (EWE) back in April, and the long-awaited initiative was unveiled at an undersubscribed seminar Sunday afternoon.

There is not much point in going over the details of the different mechanisms set in place. Suffice it to say that I have found the framework not a step, but rather a whole flight of stairs over the ill-fated early warning system (EWS) models of the nineties, which did a great job in predicting past crises but a very poor one in forecasting future ones. Not only the framework is much more sophisticated, it also takes into consideration the critiques of the likes of Nassim Nicholas Taleb, not only by concentrating on tail risks, i.e. Black Swans, and comovement of assets during crises, but also by adopting a more heuristic approach through making use of more qualitative indicators such as consultations with academics, market participants and policymakers. In fact, the Fund stresses that this is not an exercise in timing of crises, but one of alternative scenario analysis.

Since the whole philosophy of the exercise has changed, it is not much of an argument to declare the efforts pointless based on the Fund’s past forecasting performance. As Jeffrey Frankel of Harvard University recently noted, the crisis has already caused profound changes (and is likely to result in even more) in Macroeconomics thinking, so if anything, the IMF-FSB initiative should be applauded for being one of the early adopters.

But this does not mean that the EWE will be able to prevent all the crises all the time. Even if you have the perfect set-up, you just have to live with the fact that crises, by their nature, are unpredictable. The EWE efforts seem to have gone to great pains in incorporating lessons from the ongoing crisis, but the next major global turmoil will probably be entirely different in nature. But even if we end up getting an analogous crisis, it won’t be a walk in the park, as Jean-Pierre Landau from the Banque de France eloquently put:

First, there is the problem of signal extraction. The reason many could not see the crisis coming is the same reason Americans did not see Pearl Harbor coming despite all the indications. The signals that look so obvious in retrospect come bundled with a lot of clutter that make jumping to conclusions difficult. Moreover, even if the EWE extracts the right signals, whether to prick a bubble now or later is in fact a social welfare decision. I would not be surprised if an elected government would try to delay the adjustment as much as possible.

Then, there are the political issues: Even if the duo makes the right call, it will be very tough for a democratically-elected government to stop when the music is still playing. At the extreme, one can argue that the initiative may not have a viable future: For one thing, as the normal returns and the EWE starts raising false alarms, the exercise will lose its value added, as Peter Garber related from his own experience devising similar models at Deutsche Bank. While the framework can be adjusted to minimize erroneous whistleblowing, a major missed crisis will lead to the duo’s demise. Moreover, policymakers can never know for sure if there would have been a crisis if they had not heeded IMF-FSB’s advice, as Martin Wolf noted. They might see the nonoccurrence of crises not as the EWE working but proof that the exercise has outlived its use.

There is also the matter of communication: Economists have been aware of self-fulfilling crises and multiple equilibria for the past two decades. Simply put, the only thing worse than shouting “Fire!” in a crowded movie theater when the curtain is burning is to scream at the first sign of smoke, when in fact it is only the projectionist cooking. If you choose little or no communication, then you run the risk of losing credibility for lack of transparency and being accused of not having changed.

All these concerns are valid, but at the end of the day, someone needs to do this dirty work, and barring the operational glitches they too are aware of (after all, this is a work in progress), the IMF-FSB is in the best position to be the silent guardian, watchful guard that the world needs right now. In short, a dark knight…

Daily Hurriyet Column: Financial Center dreaming

The unedited version of my third column covering The Meetings is below; you can read the final version at the Daily News web site.

And some confessions: While writing the column, I called up my friend Kaan Sariaydin to get his opinions on the issue as a market participant. It turns out that he has spent a lot of time thinking about it, and over the course of the next hour, he shared such valuable input with me that I offered to have a joint article. All the technical details in the second part of the article are from Kaan, and due to space constraints, I could use only a small portion of what he gave me. I also have to thank the editor-in-chief of Hurriyet Daily News, David Judson, for suggesting I write on this. My journalistic instincts are nowhere near as developed as his, as I had no idea I would get so many congratulatory remarks for the article.

BTW, the news items in the Turkish papers that appeared on Monday and Tuesday confirmed my gut feeling that the valiant efforts of the Turkish authorities would not be taken seriously by the attendees. Istanbul traffic was humorously cited as the biggest obstacle to Istanbul's, or rather the Turkish government's, aspirations; a joke that came up during my interview with Martin Wolf as well.

Economics tsar Babacan disclosed the strategy and action plan (SAP) to make a financial center out of Istanbul to great fanfare on Friday. We would like to dissect the plan on its preparation and content.

It is obvious that a lot of work has gone into the plan, for which the State Planning Organization (SPO) deserves praise. Seven broad areas have been determined: Enhancing legal infrastructure, increasing financial products and services, developing a simple and effective tax system, improving the regulatory and supervisory framework, augmenting infrastructure and boosting human capital. An organizational structure to monitor this workplan as well as to promote the city has been added in as well. All in all, 23 priorities have been revealed, along with 71 action plans to carry out these priorities.

We have yet to figure out how the seven main areas were determined. While they all make sense, it seems too much like a laundry list to us. In essence, the SAP has fallen into the Washington consensus trap: The World Bank and IMF had long been advocating a long list of reforms without identifying the binding constraints. Realization of this mistake has led to the Investment Climate Assessment framework in the Bank and focused conditionality in the Fund.

As for the actual determination of the priorities and actions, as one of us has been involved in a couple of such exercises with SPO, we are not that sure that, despite the best of intentions, they reflect responses to binding constraints. In such work groups, it is usually the loudest, not the wisest, who gets her ideas in. Another issue is benchmarking: Unless you are planning to tap into Martian or lunar colony funds, you’ll be competing with other centers, so you need to know how you compare to the competition. We believe this to be one of the fundamental deficiencies of the report. Without knowing binding constraints and relative performance, you wouldn’t know what you are getting for your buck.

But it is really the content that worries us. For one thing, to have a finance center, you need, well, financing. To start, the institutional investor base and institutional funds are still marginal in Turkey. With public placement low and most of what is out there grabbed by foreigners, there is not much of a domestic participation in the game. This leaves domestic financial institutions with very low placing power. The low free floating rate and corporate governance problems limit M&A activity, one of the symptoms of a well-functioning capitalist market. Despite great efforts from the ISE, there is no small or mid-cap market. Without much of project financing and venture capital companies, there is no real venture capital.

When you get into the nitty gritty stuff, it gets uglier. Just to give a few examples, it is impossible to hedge your delta by short-selling in the current set-up. Collateral usage of third parties is prohibited. The market maker is banned from offering a lower price to a big customer, and as a result, all the big deals go through New York or London. We could go on and on…

Does the SAP address these issues? Yes and no. The government could argue that one or more of the 23 priorities or the 71 action plans touch on these issues. For example, when you get the bottom of it, the binding constraints in the selective examples we have given seem to be concentrated in the institutional, legal and regulatory frameworks. So the government could point to the relevant sections of the report, some of which could get part of the job done, at least in theory, while others are just too vague to mean anything.

Of course, we could be wrong, but all this reeks of another case of opium to the masses.

Daily Hurriyet Column: Lorenzo’s Oil heats EMs

The unedited version of my second column covering The Meetings is below; you can read the final version at the Daily News web site. And yes, I think I reached the apex of the cheesy titles with this one, but Lorenzo, to whom I showed the title to make sure he wouldn't be offended, liked it, so all is well:)

Coming to more serious stuff, Lorenzo told me more on the Latvian FX issue after the seminar, but I am not getting it here because as they say, what happens in the Meetings stays at the Meetings. We hope to do an interview with him tomorrow; if that materializes, I'll refer you to that interview.


Coinciding with the latest stint in the tragicomic efforts of the government to create a financial center out of Istanbul, one of the seminars in the meetings likely to have a lasting influence did not get the attention it deserved.

A Brave New Fund

One of the beneficiaries of the crisis has been the International Monetary Fund. Its existence questioned before the crisis, it has since then seen its influence grow virtually by the day. Recently, it was asked to help the G-20 with its analysis of how national or regional policy frameworks fit together at the Pittsburgh Summit. As noble as these and other initiatives may be, without some power to enforce its writ and, if necessary, wrath, I am not sure how this and other similar mechanisms will work out.

In the short run, the Fund will still be evaluated on its usual area of fame, how it helps out crisis-stricken countries. The Fund has been zealous in this area as well: While getting its resources tripled following the April G-20 Summit in London, it conducted a major overhaul of its lending policies. Of course, we would need to know if deed has indeed followed word, and a new paper by the Emerging Markets Division of the Strategy and Review Department, under the supervision of Lorenzo Giorgianni, who presented the paper at yesterday’s seminar, does exactly that.

Aptly named Review of Recent Crisis Programs, the paper evaluates the most recent 15 Stand-By Arrangements, in comparison to non-crisis countries in the current episode and past crises in terms of program design, fiscal policy, monetary & exchange rate policy, financial sector policies and crisis recovery.

The results are striking: Program countries have usually fared much better than crisis-stricken countries during previous episodes of turmoil and not much worse than non-program countries. For example, output losses have been comparable to non-program countries, once you account for differences in initial conditions, and external balance adjustments more modest relative to the past. Perhaps most importantly, sharp moves in interest & exchange rates and banking crises, ghosts of crises past, have been largely avoided. What has worked the magic?

For one thing, IMF support has been rapid and frontloaded, as well as being directed to the funding needs of the private and public sectors, rather than simply deposited in Central Bank coffers as in the past. Program ownership has been ensured by working with the full range of exchange rate regimes, enacting capital controls where necessary and working with institutional constraints such as the EU. Conditionality has been more focused than in the past, with the Fund opting for fewer conditions essential to the success of a program rather than a comprehensive laundry list.

With the adequate financing pouring in, there has been much more room for an expansionary policy stance, and the Fund has been glad to oblige. It used to be Mostly Fiscal, but fiscal policy has been more accommodative than in the past, keeping in mind medium-term sustainability. In fact, there is not much of a difference in fiscal stance between program and non-program countries once controlling for initial conditions. The same has been true of monetary policy, with program countries easing monetary policy, albeit to a lesser degree than non-program countries.

What about Latvia?

One striking feature of the report is that Latvia and Iceland emerge as exceptions to the rule, glitches in an otherwise-perfect track record. Iceland’s case is special, as it was hit with a major banking crisis before the global turmoil began. But the woes of Latvia beg for further scrutiny, and there are hints sprinkled throughout the report.

When you add everything up, it seems that Latvia’s plight had much to do with its pegged exchange rate, as its room to maneuver was severely limited. With prices (the exchange rate) unable to adjust, it was the quantities (GDP) that took the burden of adjustment. The report summarizes the immediate economic costs of abandoning the peg, referring to country reports for the benefits. I am not sure costs would have outweighed benefits if only economic costs were considered.

Latvia’s troubles bring to mind important questions: Is the EU the right economic anchor? Where does the jurisdiction of the IMF end and that of the EU start? The euro area has been deemed a success story, as the sovereign spreads of the lax Mediterraneans have been shielded by the stoic brother up north. Look further east, and the Latvians are sighing with envy.

(Sort of) liveblogging from seminar Financial Crisis and the Poor

The moderator, Nik Gowing from BBC, is doing an excellent job moderating- going from speaker to speaker and engaging them in follow-up questions, almost like an interview, so I will jot down few notes rather than the standard detailed liveblogging:

-3 out of 4 families cutting expenditures in Turkey- from a survey- probably the same survey as used in the ECA meeting.
- document from WB on LICs, presented to G-20, was taken as basis for discussion- must read in the next few days!
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Liveblogging from seminar Fiscal Policy During Crisis and Recovery

SF:
Praised Fund's need for fiscal expansion- would have been as deep if not so good intellectual work.
Q. Does debt threaten macho and fiscal stability?
A: very country specific. UK, US, JP debt gdp ratios projected scary! But EM projections in G-20 likely decline in long run.
Q. How get them down?
A. Fund proposed many rules. WWII good example, but some differences. There will have to tax inc., bigger red in spending. In EM, problem much much smaller. Consolidation will req. Delicate mix of exit from fis. And mon. Policy. Doug XXXX has nice ppt on multipliers, and mon. Pol. Makes a big difference in effectiveness of fiscal policy.
Coordination Issue: was essential when world facing collapse when faced with son of great depression:) it is not as critical now as less than a year ago (I need to expand on that).
Then, he discussed Israel: lesson: we were in strong position when crisis began. Not that fiscal policy doesn't matter but how you go in determines how rapidly you go out. I hope Fund goes to help put fiscal houses in order...

CANADA MOF:
We have boring fin system, was criticism, now compliment.
Will discuss how we got fiscal sustain ability.
Do budget annually on January
Moved quickly from surplus to deficit: reduce taxes, spending for job losing people, workshare programs.
Our lesson: 70sa we had deficit spending and public debt, accepted by public until noticed that tax money was going to interest.
Discipline and we had balance budgets. They use private sector forecasts for growth- has brought credibility to projections, now changing because hardly a consensus.
Use it or lose it policy to funding to regions,Temp measures to unemployed: half of deficit. For two years then we depend on growth, if growth less, we cut spending.
I encourage you to contain spending (advice to PM).

RWANDA minister or economic planning:
Not many notes as a result of massacre of Shakespearian and my own Inonu-like hearing problems. sorry:(....
What to do with limited needs?

Alejandro (MEXICO, ex-IMF)
I will talk about general fiscal policy, exit strategies and Mexico.
Key Idea in stimulis frameworks to concentrate on hardest-hit. Put this in programs right now so to be ready for next crisis.
Calculate steady state debt dynamics- measure fiscal adjustment, how we'll reach new steady state. Put adjustment ASAP. Optimal design. Frontload these because 1. political will to sustain these, sooner we cut, better 2. Credibility effects for LR adjustments. 3. Uncertainty of adjustment will effect private sector decisions. So accelerate design and discussion of programs- exit strategies. Mexico: severely hit by recession, gdp contraction like TR (keske bizde de boyel adam olsaydi). We were liq,but had solvency issues. We face fiscal problem associated with decline production of oil. So we have temporary and permanent shocks. Transitory will be done with deficit and nonrecurrent revenues. Permanent by increase in non-oil revenues, so increase income tax. We protect anti-poverty and infrastructure problems to compensate effects of recession.

Q: PM complaining about CBT independence. Gov does MTFR, fiscal rule? Is priority fiscal rule or creating jobs. Questioner CHP MP, I think.
A.SF:I don't follow Turkey closely anymore. Current priority is to get out of recession.

Q. What policies should be used by G-20?
A. Canada: coordination.

Q: what about exit? Are there objective criteria for exit.
A. Canada: when is when we see recovery for sure- sustained growth for a couple of quarters before implement exit strategy. Mexico: country-specific, need to balance out.
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Liveblogging: WB ECA Press Briefing

PLH is ECA VP Philippe Le Houreou. I'll is chief economist for the region.

PLH: Tough times. Global loosening of mon fis policy. Signs of recovery. Families under stress as breadwinner lose jobs+ food and oil price hikes made hh go deep in pockets. U going up, poverty growing. Danger is weak and jobless recovery. Financing needs highest in ECA by widest margin.
1. Clean up banking
2. Improve business climate
3. Make public exp. Efficient
4. Continue inv. In infrastructure.
I will share this message with Fin Min in next few days.

IL:
Bad news- crisis not close to over in ECA, esp. For workers and families but also true for gov. Working with smaller budgets.
- good news for businesses: IP stopped falling mid-year but external debt usd 350bn due.
- bad news for families: U, poverty- stress tests bad
- tough times for gov: fiscal def from 1.5-5.5; stress tests show pension def rising to 5-6 percent GDP.

1.
IP stopped contracting in Q2. Interest rates come down for gov and firms but still twice before crisis.
Business regulations better! (TR bir bok yapmadi burada)
But huge debt obligations due
So mixed news for firms

2.
Bad news for hh
Poverty rising throughout region
Numbers do not tell you how worse people become
Surveys in TR and Montenegro says people use access to utilities
Rising job losses: TR one of hardest hit- in TR doubled. (Rise in registered u)
ISKUR data used for TR
Incomes in TR falling
Reg U tip in iceberg: survey from june: self-employed especially hard
Income losses+ fuel+ finance: difficult to pay bills
HH hit fin, product, labor markets!
HH stress tests show distress:
1. Many poor hh insolvent before crisis (find graph for Turkey).
2. XXX
3. If public many used , it should be targeted at poor hh

3. GOV:
- countries making small progress in fiscal until crisis. Em changed 2008, 2009 for rest. This year all deficits.
Most countries did not save in goof times
- asked to do more with less!
- social assistance for needy
- soc second for elderly
Social assistance programs good in region and well-targeted (compare graphs for TR).
- reforms needed for social second, but possible: adjust pensions to COLAs, improves a lot! Increase retirement age, even more (purple line)

Messages:
Good news for firms, no good shoots for workers!!!
Tighter money ahead (lowe growth, higher deficit)- smaller deficits for government.
So need fiscal consolidation, not indis. cuts. More efficiency of spending. But not easy, so we are helping out.
Last slide shows how they are helping out.

QUESTIONS:
Q. Speed up reforms says reports. Are they doing well?
A. Difficult to generalize, but look at Doing Business report, region doing well. Risk is reforms stopping, don't forget EE convergence was mainly due to private. debt inflows. Now none so make sure there is rollover.

Q. Is EC doing well?
A. Yes, and coordination mechanism working as well.

Q. Can you talk about Baltics?
Baltics hit but they got demand inc. With inflows from Scandinavian, so important that these banks do not withdraw. IL: these are very small economies, so they needed to integrate markets. They did very well before crises, are giving back gains, but not all. On EU: I think done well in helping integrate markets, institutions. Q is whether this integration can continue. Key is strong institutions. Anecdote: german consumers bought cars in poland, this is well designed program, not national.
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Where are we in the crisis?

Dr. Doom, aka Nouriel Roubini, is giving a speech in his beautiful city of birth. Here is me live blogging from the beautiful "river" of Bosphorus, to quote Axl Rose:

I'll give my current outlook. 6 questions:

1. Current Outlook: shape of the recovery: V, U (like me), W.
2. ROW. Bottoming out- light at the end of the tunnel in Asia? Can china and EM be new locomotive.
3. Financial institutions in the US.
4. Whether inflation or deflation?
5. Exit strategies from monetary and fiscal stimulus. If too soon, back to recession, if too long and monetize deficits, uppppps....
6. What's been happening in mkts since March? How much of recovery by fundamentals? How much too quick, too fast?

1.
1st observation: first we had freefall. Fall last year PM that had been in denial looked at freefall and decided to act with full force. Different degrees but most did. That stopped free fall, in Q2 rate of decrease. Close to bottom now. What is shape of recovery:
US: anemic, well before potential. Why? Job condition awful. Compared to january better, but still high compared to previous recession. Firms cuts hours, reduction wages etc, so impact on con. Bad
2nd obs: this was a credit of excessive debt, leverage. Develeraging is not occurring right now- massive releveraging of public sector.
5 reasons why recovery weak:
1. Consumer in trouble- it makes much of gdp.
2. Financial system still in trouble. Also destruction of shadow banking- SIVs, securitization, delevearing by priv. Eq, hedge funds.
3. Corporate sector: we have with so much debt they are lucky the don't shut down. Even others will not do much cap reasons because there is glut of capacity and because there won't be rapid growth in profitability.
4. We need fiscals stimulis. But large deficits crowd out private sector.
5. In last decade, we had imbalances.

Other advanced:
I am more worried because:
1. Potential growth lower
2. Productivity will not improve by much.
EM:
More bullish because;
1. Did not have as much leverage
2. Good financial systems.
3. Potential growth rate higher. Already
Recovery in some.
4. Have room for countercyclical policy.
But could they be locomotive of growth? No. China not big enough!
Could they fully de couple? No. There is already some decoupling, but if growth weak in main, they won't go to rates before.
Turkey:
Was a sound econ. at eve of crisis. Corporate sector stopped capex. Reversal of capital flows. But since banking sector robust, no baling crises like other EM.
Prospects for TR: 1.since open econ. If eurozone robust, good for TR
2. Fiscal consolidation very important. Is the mt fiscal sustainability OK? IMF will be + for investors-confidence. Does not need IMF money, but signalling effects will be important.
TR will also do reforms, taxation reforms, flexibility in labor markets, liabilities in social security and healthcare. You need to diversify exports.

INFLATiOn DEFLATION: in short ruin deflation because 1.firms do nor have much pricing power. 2. Slack in labor markets. Slack in good and labor markets imply deflation. We have deflation today in many countries. In world more def than inf pressure. Wall of liq: not inflationary because lack of velocity. This liq go to assets, but not to goods. But next year inf risk because 1. If mon deficits, expected inflation could get out of control 2. Wall of money chasing commodities. 3. Usd main currency of carry trade, could lead to inf because of FX, through inverse relationship with comm. prices

V. EXIT STRATEGY; 2 edged shitty stick:)!!! If you don't if difficult to inc taxes, the bond mkt vigilantes will be worried- 8:52:18 PM bond yields inc- stagflation! Very narrow and razor-edged. Double dip risk is here.

VI. ASSET MKTS: Rally since march. Some warranted by fundamentals. Because L was being priced; that tail risk has been reduced by mon fis easing and backstopping of fin. Sector. There is now light at end of tunnel. 3. Risk aversion lower, so moving to more risky assets. Why do I worry about relapse? If recovery weak, 3 reasons for mkt correction in risky assets.
1. If U rather V, will be worse than expected.
2. Surprise on downside on earnings and profits. If rec anemic, quantity not growing, curring prices, so revenue anemic. Better results because slashing costs, but can't go on forever.
3. If high U, weakness of fin system bigger. Real estate prices lower, credit card losses.

CONCLUSION: either V shaped recovery or markets adjust (something's gotta give).If I am right, after new year, weaker than expected, than commodity prices, stocks, credit will correct. EM risky because money rushing to EM- they increased more than developed. But will not be as in March.

ED: so the light at the end of the tunnel is the train!

Q: where will liq. Go to?
A: still very easy, O rate, sharp increase in money. Chinese bank credit one third went to real estate, commodity. IN my view, USD70 too high for oil. USD 100 next year will have same impact next year as USD 145 last year.

Q: what would happen to USD?
A: this is long-run; will be gradual process if us does not fix econ and fiscal, if uses inflation tax to fix debt problem. But a gradual fall of dollar is necessary. Most of usd adjustment can not be EUR YEN. Others, and this is necessary and beneficial.

Taylan: Q: are you concerned it will be business as usual now assets have rallied?
A: definitely. Agency problems, etc. G20 list has to be immediate sooner than later. More liq, more cap, less lev, imposing higher cap charger in sys important fin inst, broader cooperation in regulation. If you are too large and interconnected you have to be supervised. G20 agreed we'll see if implemented. Definitely risk of complacency.
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EconNews Roundup

CBT: Slowing down?

The shoe incident: Part Deux

The IMF's GFSR and WEO, and the IMF talking Turkey.

The same-old tangent and IMF debates.

The bigwigs talk: While Zoellick sees slow recovery, DSK urges regulation.

The unresistable fall of Turkish exports.

My Notes on IMF Managing Director Dominique Strauss-Kahn Press Briefing

Again, mostly for my archiving purposes, but the real thing is on the IMF site. Feel free to email me with questions. As for my impressions of him, I had never understood why he is often termed ebullient or jovial. But he is indeed quite a likable chap. Anyway, I believe that he was the right person at the right time for the Fund. I mean, I doubt that the IMF would have benefited as much from the crisis under a different leadership. I am planning to elaborate on this issue in my last Daily column on Wednesday or Thursday, before I again resort to the Daily schedule....


DSK remarks: is worried about unemployment a lot. 1.We have to make sure exit strategy is too early. He is happy fin. Min. Arer aware of this. 2. We have to make sure financial sector fixed. 3. We have had econ. cooperation in the last few months. In Pittsburgh, we got very firm will form economic cooperation.

3 principles which I will elaborate later in the day:
1. We need sustained econ. Cooperation., same with all IMF members as in Pittsburg.
2. We absolutely ned to improve financial stability- means better supervision and regulation.
3. IMF itself: we need stable financial mon. System for IMF to be lender of lasr resort. Imbalances come from reserves- very costly- which was at the founders of IMF (ED: this is related to FCL). How can we provide credibility and legitimacy to IMF for being lender of last resort? This was in the minds of the institution.
This is necessary for peace and democracy!!!
This won't be solved in a couple of days, but this meeting will be the starting point of new IMF- you can tell your grandchildren one day.

Q: what about Tobin tax?
A: very old idea. I don't think it will work for technical reasons- difficult to implement.But we will prepare a report on some modified version. Lipsky: we need to look more broadly than deposit insurance.

Q: IMF has been unable to discipline largest member.
A: 65 years you are right, 65 days no. It was possible because we were right. If what we say is true, we can the convince. That's what happened with stimulus.

Q: you said IMF will be machinery for Implementing G-20. How will you deal with FX?
A: 2 points. 1.cooperation is also about imbalances. I was impressed by collective problem solving. We need to solve q together.2. G-2O understands that connections between countries is complicated.

Q: Serbia
A: we no longer advocate same program everywhere. We need to adapt programs. But fiscal deficits is a common factor in all countries.

My Notes on World Bank President Zoellick Press Briefing

I am not sure what good this will do, but I am posting it anyway, as I might have to refer to it in a column:


Meeting comes at very important point after G-20- to make sure poor countries are heard this is G-186!

It is important G-20 support developing countries.

Q. Are you getting money from rich countries? What is money runs out?
A: For IBRD, we came to crisis well-capitalized.

Q. Biggest challenge for global, Turkish economy.
Global: fall into complacency. Referred to IMF WEO. Cycle of recovery: stimulus spending in us comes in 2009 2010- will there be spillover from public to private sector. There will be differences: china will face challenge because high credit growth. You are getting signs of inf. In east asia. If they wait for us, inflation risk, if they don't, will have capital rushing in. Trade and protectionism risk as well.
Turkey: MTEP loolks sound to us. Issue with jobs and employment. We reposnded by focusing on SMEs.

Q:
A:Trade: opportunities for south south trade.
How can we help trade facilitation?- we work on that.

Q: U is growing. What is WB point of view?
A: I agree. U will continue to go up, slow in down. We got lessons from 97 crisis that it is important to focus on safety net support.

Daily Hurriyet Column: Seven years in slump

Hurriyet Daily News asked me to write daily rather than weekly during the meetings, which I gladly obliged. The unedited version of my fist column is below; you can read the final version at the Daily News web site. As you can see, I managed yet another cheesy title; I wonder I'll be able to keep it up for a week:) Anyway, enjoy:


As an unofficial kickoff to the IMF-World Bank Annual Meetings in Istanbul, the IMF disclosed the main chapters of its Global Financial Stability Report (GFSR) and World Economic Outlook (WEO) on Wednesday and Thursday.

Main takes from the GFSR…

First, the Fund notes that credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey, with the credit demand expected to increase as the economy recovers, the result will be similar, as the private sector is likely to hit credit constraints in 2010.

In the Turkish context, with the private sector lending crowded out by banks' appetite for Treasuries, a consequence of the high rollover ratios, it remains to be seen if the Central Bank will start buying Treasuries to unclog credit markets directly, as rate cuts have had limited impact on market rates so far. While the Fund recommends continued support from Central Banks to alleviate credit constraints, I wonder how they would feel about quantitative easing a la Turca, as the risk that such policy will be perceived as fiscal accommodation or debt monetization hangs like a sword of Damocles.

Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates. As Turkish Treasuries are more responsive than usually believed to core market long-term rates, such a bear steepener would create upward pressure on Turkish rates, forcing the Central Bank to abandon its on-hold policy earlier than expected, in effect changing the lead-lag relationship between the benchmark and the policy rate.

Third, the report notes that Turkey's largest risk is in external debt refinancing needs, with the bulk coming from corporate rollovers. The Fund’s analysis of contributions to changes in emerging market (EM) sovereign external spreads is also worth a look: Increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed much since then, and it is safe to claim that a retraction in risk appetite is probably the single largest risk to EM assets at the moment.

And the WEO…

IMF Chief Economist Olivier Blanchard’s take on the so-called recovery was one of the most sound sum-ups of the current situation I have heard. While he did not say it in exactly this manner, Blanchard highlighted the difference between rates and levels, whether it be debt or GDP: While consumers are deleveraging and banks getting rids of toxic assets, levels are still too high to support a quick recovery.

And a very slow recovery it will be, if history could be any guide. According to the Fund’s estimates in the analytical chapters of the WEO, GDP/capita declines by about 10 percent of its pre-crisis trend after a crisis, failing to rebound seven years after the crisis.

As is the norm with such meetings, where carefully-prepared texts are read without changing a single punctuation mark, the most interesting insights came in the Q&A session that followed. For example, Blanchard remarked that a fiscal rule, without the necessary structural reforms to accompany, would not amount to much. His comments should ring bells in those introducing black-box fiscal rules, while at the same time fiercely resisting much-needed reforms.

As for the Turkey forecasts, the Fund’s projection of 6.5 percent contraction this year and a recovery of 3.7 percent in the next are almost identical to my own estimates. More interesting is the Fund’s take on the Great Turkish Contraction: Jörg Decressin, chief of the World Economic Studies Division, surprised me by attributing the large decline in Turkish growth in the first half of the year to the larger cyclicality of the economy, due to the greater share of manufacturing in GDP.

While this is a valid point, I doubt it would be enough to explain the large contraction. I maintain my view that with its healthy & unleveraged financial sector and growth not led by exports, Turkey was in a position to be one of the countries that the crisis could really pass tangent to, but ended up as one of the worst effected, mainly due to bad policy management.

Perhaps most interestingly, the Central Bank’s credibility problem has now spread to the IMF: While the Fund’s average inflation projection of 6.2 percent is line with the Bank’s end-year forecast, the Fund sees inflation heading north next year, in contrast to the Bank’s expectation of lower inflation.

IMF/WB Meetings Coverage

Thanks to my Hurriyet columns, I am following the meetings in Istanbul. For the meetings, I'll be writing a daily column (rather than my usual weekly), the first of which appeared in Daily News today. I'll be posting those columns here. In addition, I will be doing some live blogging and some summary points of the meeting that I'll attend- the first one is coming shortly.

A step in the right direction for GDP reporting

To my surprise, TURSTAT started releasing working day and seasonally adjusted GDP, going back to 1998. I know I have quite a few readers interested in growth, so I am happy to provide qoq growth numbers.

The wd and sa numbers are from TURKSTAT, whereas the trend numbers come from my friends at Turkey Data Monitor, who just apply a Hodrick-Prescott filter on the working-day and seasonally-adjusted series. You might also be wondering if the wd adjustment makes a big difference, so here are the yoy figures for the regular and wd series:

As you can see, there are only three quarters where there is a significant difference between the two series. That's why economists usually account for wd in Industrial Production, but not in GDP.

Thanks to TURKSTAT for this nice surprise, but it'd be better if such surprises were announced beforehand. Now, let's hope that they will release the GDP figures in a more timely manner.

My initial take on the GFSR

The IMF disclosed the Global Financial Stability Report this morning, with your friendly neighborhood economist present with a brand-new press badge (thanks to friends who helped facilitate the process) that arrived just an hour and a half before the meeting:)

Anyway, there is no way I could compete with the mighty FT with my one-person outfit, which sent an email update as the meeting was in progress, but where I could provide some value added is on the Turkey implications of the report:

First, the Fund notes that as credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey (my own metrics suggest there is not much pent-up demand right now), with the credit demand expected to increase as the economy recovers, the private sector is nevertheless likely to hit credit constraints hard in 2010 as well. The Fund recommends continued support from Central Banks to alleviate these constraints. In the Turkish context, with the private sector lending being crowded out by banks' appetite for Treasuries, an expected consequence of rollover rations of over 100%, it remains to be seen where the Central will start buying Treasuries to unclog credit markets directly, as direct rate cuts have so far had limited impact on market rates.

Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates, at least of history is any guide. This is risk for Turkish rates that is not discussed a lot. As Turkish Treasuries are more responsive to core market long-term rates than short-term rates, such a bear steepener would create an upward pressure on Turkish rates, forcing the Central Bank abandon its announced (but not believed) policy of on-hold policy, in effect changing the causality relationship between the benchmark and the policy rate.

As for the Turkey findings, the report notes that Turkey's largest risk is in external debt refinancing needs in 2010, with the bulk coming from corporate rollovers. However, Figure 1.19, contributions to changes in EM sovereign external spreads, should hang on the wall of all EM policymakers: The analysis shows that increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed since then, and it is safe to claim to a retraction of risk appetite is probably the single largest risk to EM assets at the moment.

Weekly Hurriyet Column: Great expectations, greater disappointments

With the hustle and bustle of the IMF/WB Annnual Meetings, it took me for days to finally post this week's column. Below is the unedited version; you can read the final version at the Daily News website. There is the usual cheesy reference, this time from literature, although it has been adapted to the silver screen numerous times.

As for the column, I am skipping the usual discussion, as I had already discussed most of the issues before the column got published, thanks to illuminating comments from Mary Stokes. But now that I think about it, I look like a fool stating that the modest expenditure cuts of 2011 do not look realistic in an election year: Maybe, 2011 is not the election year, 2010 is!!!


After a delay of roughly three months, the government disclosed the medium-term economic program (MTEP) nearly two weeks ago.

Having been late to the game, even my own rather lax standards, due to the Eid publishing break last week, I will only briefly summarize the main tenets of the program before trying to offer some value added.

The MTEP in brief…

There is mutual agreement that the strong point of the program is the realistic projections. While I find the 2010 unemployment and inflation forecasts a bit too optimistic for my taste, the rest are in line with the economic scenario I have been sketching since early in the year. In fact, the government managed to take my number of the devil projections a step further by forecasting the deficit at 6.6 percent of GDP.

But as many analysts have already noted, the fiscal side of the program does not lie on firm foundations. For one thing, almost all of the mediocre fiscal adjustment next year, which incidentally falls short of securing debt sustainability, is coming from robust revenue growth stemming mainly from the expected economic recovery. Moreover, even the modest expenditure cuts of 2011 do not look realistic in an election year.

…And the fiscal rule

In fact, the only thing that has kept sound economists even mildly optimistic is the mention of the implementation a fiscal rule sometime in 2011. Although the details are still sketchy, it seems that the government has in mind a cyclically-adjusted fiscal rule, as Turkish daily Referans went ahead and published a formula based on debt sustainability.

Such a rule that adjusts the fiscal position for the economic cycle could make sense for Germany, to which Economics tsar Babacan alluded during the unveiling of the MTEP, but I doubt it’d be the appropriate rule for Turkey, especially if it overlooks the composition of the budget. In other words, numerical policy rules do not make sense for a country with a poor fiscal track record like Turkey if they are not accompanied by procedural rules such as a cap on non-interest expenditures.

Even if the government manages to come up with the right rule for Turkey, implementation will be a huge challenge. Unless the rule is hammered into the constitution, there will always be the risk that it will share the destiny of the ill-fated borrowing limits in the fiscal control law, being cropped or even nullified with subsequent laws.

The biggest danger of the fiscal rule lies in the false hope that it will be the answer to ensuring fiscal credibility. One useful analogy is with inflation targeting: After lots of trials and errors, it is now well-understood that inflation targeting per se or even attaining the inflation targets does not make a central bank credible, with the Central Bank of Turkey being a case in point.

In fact, one general misconception about fiscal rules is the assumption that they automatically deliver fiscal credibility. Without an independent and authoritative budget monitor or fiscal council, it wouldn’t be a big surprise if the Turkish fiscal rule, even after being ironclad in the constitution, would not gain much ground.

In any case, fiscal policy experts have repeatedly been pointing at lack of full transparency and shenanigans in public accounts, which do not bode well for the implementation of a fiscal rule. So, at the end of the day, maybe fiscal policy independency for Turkey should not go beyond being an academic curiosity, especially after the PM has disclosed his distaste for central bank independency in admirable frankness.

Or, if the government is just providing opium to the masses with hopes of an IMF deal and a fiscal rule, it should also be ready for the withdrawal to come.

On tomorrow's Hurriyet column

This is a first: I am commenting on a column of mine before it has appeared in the blog or in Hurriyet Daily News:)...

Mary Stokes, one of my few loyal readers:), has left a comment on my post "Weekly Hurriyet Column: Happy Ramadan/Eid" about the fiscal rule, which is what tomorrow's column is about:

"Regarding a fiscal rule in Turkey, I think it's interesting to look at what is happening in Poland right now where legal safeguards kick in when public debt-to-GDP breaches a certain level.For me, Poland's example highlights that having a fiscal rule is not a panacea for solving the problem of fiscal deterioration. While there are many positives to the legal safeguards in Poland (eg increased investor confidence, less maneuver room for a spend-happy government), it appears to me that having the fiscal rule has also led to a number of smoke and mirrors tricks to get public finances into line.Plus, Poland will need to tighten fiscally at a time when unemployment is still rising.So I personally will reserve judgment on the fiscal rule until we learn more....the devil's in the details, as they say. I look forward to reading your coming article!"

I was going to wait until I got home to reply, but I liked what she was saying so much that I had to respond right away, on my Bberry- so apologies for the bad formatting.

Anyway, as you'll see tomorrow, I am more or less in line with Mary's line of thought. Other examples that could be relevant for Turkey are Hungary, Sweden, Chile (obviously, we do not have the equivalent of their copper, but theirs is a fine example of a fine-tailored rule for the specifics of a country rather than copycating) or the US, the latter for the CBO- I doubt the CBO would work in Turkey in copied in its entirety, but some parts of it are admirable.

Another point Mary raises is that we have to simply wait and see. I handed in my column an hour before she wrote, and now I think about it, I've been a bit too judgemental and unfair to the government. After all, this is something they are still working on, as Econ. Minister Babacan noted. We'll just have to wait for the devil:)

Anyway, thanks a lot Mary; great comments and highly-appreciated...
Sent by BlackBerry Internet Service from Turkcell

EconNews Roundup

SMEs in tourism areas hit by the crisis hard, reports Daily News Antalya representative. Note that while anecdotal, the piece implicitly contradicts the so-called research findings I was reporting on Wednesday, highlighting that it is really difficult to determine whether it is the SMEs or large guys affected more from the crisis.

The quick road to riches: Start up a mutual fund firm and invest in Turkey. I guess after March, you could have invested anywhere and would still have got extraordinary returns, but Turkey has been one of the high-fliers in terms of equities.

CBT President Yilmaz is the Central Banker of the year. I wonder who was voting- maybe Turkish banks and bond traders? The funnier thing is that this comes amidst the PM expressing his disdain for Central Bank independence in sheer frankness. BTW, maybe it is my memory playing tricks on me, but wasn't Gazi Ercel receiving similar awards in 2000 for the rapid inflation reduction in the tablita program at the time, before it all went bust with the constitutional (literally) crisis of 2000. Wasn't the same true in 2006 when failure to appoint a new governor following the applauded tenure of Sureyya Serdengecti coincided with a small EM bust. To be clear: I am in no way holding the CBT presidents of the time for the mishaps (there wasn't one in 2006 anyway), but there is an interesting correlation here, if not causation:)

New Kid on the Block

In addition to the weekly columns and special analytical pieces, I also work towards improving the Econ. section of the paper as an external (and sometimes internal) consultant. One of my short-term goals is to find quality columnists; for some time, I have been trying to get someone with significant markets experience. This is for my own benefit as well; once we have someone who concentrates on markets, I can turn on to more hard core Economics stuff I am more interested in rather than having to deal with currencies, rates and the like, issues on which I get a lot of reader (but not much writer!) interest.

I finally persuaded my friend Kaan to write a column for the paper, which appeared last week. It is a thoughtful piece on the current euphoria that should serve as a harsh wake-up call. I share thoughts with Kaan a lot and he is one of the few people that convince me that I am not insane in thinking we are living in yet another bubble, albeit a much smaller one than the one in 20o6. So I highly recommend his piece.

I am not sure Kaan will turn this into a regular weekly piece (I am sure the editorial would love him to, I am not sure he has the time), but I hope so, as I've found a guy who will more or less say what I would have said, and I don't have to lift a finger:)....

EconNews Roundup

Interesting take on the G20 meetings although I would not call it a crash course in global economics- it is was too specific to be that. In any case, I have been seeing some papers lately that relate the global supply chains as the primary reason why the supposed decoupling did not happen. Basically, the idea is that, using the examples in the article, if Lenovo suffers India, Mexico, Poland and China suffer; if Apple sells less Ipods, companies in South Korea, Taiwan, Singapore and Japan feel the strains...

Dr. Doom comes to Istanbul.