Topic: Cato Publications

Bulgaria: Liquidate KTB, Now

The long-awaited audit of the Corporate Commercial Bank’s (KTB’s) assets has been released by the Bulgarian National Bank (BNB). In its wake, a debate has arisen about the future of the KTB: Should it be recapitalized? And if KTB is recapitalized, should the Bulgarian or the European authorities be responsible? However, it is clear from the results of the audit that, once the obscurity of the technocratic arguments is stripped away, there can be no debate. KTB should be liquidated as soon as possible, and whatever proceeds can be obtained in liquidation should be used to reimburse guarantees to depositors paid from the Bulgarian Deposit Insurance Fund (BDIF).

KTB should be liquidated because it is not, and apparently never has been, a commercial bank. Had KTB been operated according to commercial banking principles, it would be virtually impossible for KTB to destroy value on the scale witnessed by the independent auditors. As of September 30, 2014, the auditors estimate that 76% of the asset value in KTB’s non-financial loan portfolio, which accounts for 80% of KTB’s assets, has been lost.

Losing 76% on a commercial loan portfolio must be put into perspective. In making loans, commercial banks generally require a senior secured position. This means that in the event of default, the bank may take collateral from the borrower and use the proceeds from selling the collateral to recover the bank’s principal, prior to any other creditor. From 2003 to 2012, Standard and Poor’s found that European lenders recovered 78% of their principal, on average, from defaulted loans with these characteristics. Even where defaulted loans were not secured by collateral, European lenders averaged a 48% recovery rate. Compare these recovery rates to KTB’s pathetic implied recovery rate of 24%, and it becomes clear that KTB was not operating as a real bank.

The KTB audit report tells a story in which KTB blatantly ignored the basic pillars of commercial lending. According to the report, there is little evidence that initial loan underwriting and subsequent credit monitoring ever took place at KTB.

If KTB’s management were just grossly incompetent, it would be bad enough. But it appears they were also criminals. The BNB is forwarding the audit results to the Sofia City Prosecutor’s Office. The auditors state that KTB lied to and misled BNB banking supervisors, and engaged in transactions with no evident commercial purpose. The suspicion of criminal activity is just another reason why KTB should be liquidated, now.

Falling Oil Prices Put Producers Between a Rock and a Hard Place

Over the last few months, the price of Brent crude oil lost over 20% of its value, dropping below $90 just yesterday and hitting its lowest level in over two years. In consequence, oil producers will no longer be able to rely on oil revenues to pay their bills. The fiscal break-even price – a metric that determines the price per barrel of oil required for a nation to balance its budget at current levels of production – puts the problem into perspective.

Using data from Bloomberg and Deutsche Bank, I prepared a chart showing the break-even prices for the world’s major oil producers and the price on Brent crude. Over the past six months, Brent crude fell far below the break-even price for eleven of the top oil producers in the world; Iran, Venezuela, Nigeria, and even Saudi Arabia can no longer finance their governments’ largess through oil revenues.

The combination of oil markets flying into a perfect storm and excessive government spending puts most of the world’s oil producers between a rock and a hard place, where they will stay for some time.

E.U. Austerity, You Must Be Kidding

The leading political lights in Europe – Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. The pols have plenty of company, too. Yes, they can trot out a host of economists – from Nobelist Krugman on down – to carry their water.

But, with Greece’s public expenditures at 58.5% of GDP, and Italy’s and France’s at 50.6% and 57.1% of GDP, respectively – one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding. Even in the Unites States, where most agree that there is plenty of government largess, the government (federal, plus state and local) only accounts for a whopping 38.1% of GDP.

As Europe sinks under the weight of the State, it’s austerity, not anti-austerity, that should be on the menu.

Bulgaria’s October 5th Elections: A Flashback at the Economic Records

Bulgarians will go to the polls on October 5th to elect new members of its parliament and thus a new government. Before casting their votes, voters should reflect on the economic records of Bulgaria’s governments since 1995.

Every country aims to lower inflation, unemployment, and lending rates, while increasing gross domestic product (GDP) per capita. Through a simple sum of the former three rates, minus year-on-year per capita GDP growth, I constructed a misery index for each of Bulgaria’s six governments since 1995 (see the accompanying table).

IPAB Case Coons v. Geithner Dismissed, for Now

Jonathan Adler has a summary at the Volokh Conspiracy.

The Patient Protection and Affordable Care Act’s Independent Payment Advisory Board has been called a “death panel,” though I’ve argued one could just as legitimately call it a “life panel.” Either way, it is the most absurdly unconstitutional part of the PPACA.

Adler’s otherwise excellent summary neglects to mention IPAB’s most unconstitutional feature. Diane Cohen and I describe it here:

The Act requires the Secretary of Health and Human Services to implement [IPAB’s] legislative proposals without regard for congressional or presidential approval. Congress may only stop IPAB from issuing self-executing legislative proposals if three-fifths of all sworn members of Congress pass a joint resolution to dissolve IPAB during a short window in 2017. Even then, IPAB’s enabling statute dictates the terms of its own repeal, and it continues to grant IPAB the power to legislate for six months after Congress repeals it. If Congress fails to repeal IPAB through this process, then Congress can never again alter or reject IPAB’s proposals…

Congress may amend or reject IPAB proposals, subject to stringent limitations, but only from 2015 through 2019. If Congress fails to repeal IPAB in 2017, then after 2019, IPAB may legislate without any congressional interference.

Like I said, absurdly unconstitutional. But that’s ObamaCare for you.

Africa: the Good, the Bad and the Ugly

Last week, President Obama hosted the U.S.-Africa Leaders Summit in Washington, D.C. He welcomed over 40 African heads of state and their outsized entourages to what was a festive affair. Indeed, even the Ebola virus in West Africa failed to dampen spirits in the nation’s capital. Perhaps it was the billions of dollars in African investment, announced by America’s great private companies, that was so uplifting.

Good cheer was also observed in the advertising departments of major newspapers. Yes, many of the guest countries paid for lengthy advertisements–page turners–in the newspapers of record. That said, the substantive coverage of this gathering was thin. Neither the good, the bad, nor the ugly, received much ink.

What about the good? Private business creates prosperity, and prosperity is literally good for your health. My friend, the late Peter T. Bauer, documented the benefits of private trade in his classic 1954 book West African Trade. In many subsequent studies, Lord Bauer refuted conventional wisdom with detailed case studies and sharp economic reasoning. He concluded that the only precondition for private trade and prosperity to flourish was individual freedom reinforced by security for person and property.

More recently, Ann Bernstein, a South African, makes clear that the establishment and operation of private businesses does a lot of economic good (see: The Case for Business in Developing Countries, 2010). Yes, businesses create jobs, supply goods and services, spread knowledge, pay taxes, and so forth. Alas, in the Leaders Summit reportage that covered the multi-billion dollar investments by the likes of Coca-Cola, General Electric, and Ford Motor Co., the benefits of the humdrum activity of business and trade were nowhere to be found. But, as they say, “that’s not the president’s thing.”

Let’s move from the good to the bad and the ugly, and focus on the profound misery in Sub-Saharan Africa. I measure misery with a misery index. It is the simple sum of inflation, unemployment, and the bank lending interest rate, minus year on year GDP per capita growth. Using this metric, the countries for Sub-Saharan Africa are ranked in the accompanying table for 2012.

Latvia, the Country Prof. Krugman Loves to Hate, Wins 1st Prize

I constructed a misery index and ranked 89 countries from most to least miserable based on the available data from the Economist Intelligence Unit. My methodology is a simple sum of inflation, bank lending and unemployment rates, minus year-on-year per capita GDP growth. The table below is a sub-ranking of all former Soviet Union (FSU) states contained in my misery index.

For these FSU states, the main contributing factors to misery are high levels of unemployment and high interest rates.

The low misery index scores in Estonia and Lithuania don’t surprise me as I helped both countries establish sound money with the installation of currency boards in 1992 and 1994, respectively. Latvia, a country Paul Krugman loves to hate, takes the prize for the least miserable of the former Soviet Union countries in this sub-ranking.

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