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.
It is important to stress that there is no macroeconomic or "macro-prudential" reason to continue operating KTB. Because KTB never functioned economically as an intermediary for savings, liquidation of the bank will not prevent otherwise-qualified corporate borrowers from obtaining credit. Nor will KTB’s disappearance send shock waves through the financial system, as its net position vis-à-vis the rest of the Bulgarian banking sector appears to be relatively small.
The authorities’ primary focus now should be paying KTB’s guaranteed depositors out of the BDIF and recovering those costs, to the extent possible, by seizing KTB’s assets and winding down its operations.
If KTB were operating in the United States, there would be additional legal paths to pursue for recovery. Payments made by the bank in the period immediately preceding its insolvency could be recovered, and the directors and officers of the bank could be held personally liable for negligence. The authorities would be well-advised to make use of any corresponding legal remedies available to them under Bulgarian bankruptcy and corporate governance laws. These paths may be the best way to achieve recoveries in excess of those possible on the basis of KTB’s pitifully inadequate assets.
Finally, the KTB episode should not be used as an excuse to tinker with the one transparent and faithfully functioning institution Bulgaria has: its currency board.
The best Bulgaria can do is to liquidate KTB, now.
Severe hurricanes, or tropical cyclones as they are known by those living outside the United States, are the most intense storms on the planet. Given the amount of damage they can inflict, it’s no wonder that they often are the poster children for the global warming movement—think Hurricanes Andrew, Katrina, and Sandy. Whenever and wherever they occur, you can count on some climate lobbyist telling us that storm was caused, or made worse, by global warming. Indeed, it is a green legend that carbon-induced global warming will cause more frequent or more severe tropical cyclones in the future, resulting in escalating economic damages.
Is that really so? A new scientific study addresses this topic, by Dr. S. Niggol Seo of the prestigious University of Sydney. He examined trends in tropical cyclones affecting Australia and published his results in the academic journal Environmental and Resource Economics.
Writing as background for his work, Seo states that alarming predictions of more intense hurricanes because of climate change “are of great concern,” yet he says there have been “few TC [tropical cyclone] studies in the Southern Hemisphere,” adding that there has been “no economic assessment of damages in the past.” Based on detailed reports of TCs that were generated in the Southern Ocean and hit Australia since 1970, from the Australian Bureau of Meteorology, Seo constructed damage estimates “using the reported financial loss, destruction of houses and capital goods, and losses of agricultural crops and livestock after a careful examination of the detailed individual cyclone reports,” which also included “local area income and population density where the storm hit.”
Seo’s examination of tropical cyclone data back to 1970 is important, because over that time (1970–2006) the carbon dioxide (CO2) concentration of the atmosphere rose by 55 parts per million (ppm), or more than half of global CO2 increase experienced since the dawn of the Industrial Revolution. In addition, global temperatures over this 36-year period rose by approximately 0.5°C, to levels that some (controversially) consider unprecedented in the last two millenia. If there is a period of time in which one should be able to find a CO2/temperature-induced signal in the tropical cyclone record, the years examined by Seo would seem to be it.
Despite this alignment of the stars, so to speak, Seo’s work fails to support claims that global warming is causing or will cause more frequent and severe tropical cyclones.
As illustrated in the figure below, perhaps the greatest failure comes from the Australian researcher’s discovery that “TC frequency has significantly declined over time.” Or perhaps it is the equally damning finding that “there is no significant trend over the intensity of the TCs during that time.” Beyond those realities, with respect to the financial damages, Seo reports that the “average damage per TC has significantly fallen over time since 1970 from 38 million AUD [Australian dollars] per TC in the 1970s, to 11 million AUD in the 1980s and the 1990s, and to 1 million AUD in the first half of the 2000s.”
Annual frequency of tropical cyclones, or hurricanes, making landfall in Australia over the period 1970-2006. Adapted from Seo, 2014.
The dramatic “decrease in the damage from TCs observed at the end of the twentieth century,” according to Seo, “can be attributed in part to adaptation measures such as development planning, building codes, more accurate TC tracking and forecasts, early warning systems, and full preparedness and evacuations.” But, of course, it must also be acknowledged that the significant decline in TC frequency that was found to have occurred over the course of the study period must also have played a prominent role.
Whatever the case, one conclusion from this study is certain, the unprecedented increase in the twin evils of the modern environmental movement (rising temperature and CO2) has not led to more frequent or more severe tropical cyclones hitting Australia in recent decades. There may well be a temperature/tropical cyclone/CO2 signal; it’s just not the signal climate alarmists—and Australia has plenty—have long claimed!
Seo, S.N. 2014. Estimating tropical cyclone damages under climate change in the Southern Hemisphere using reported damages. Environmental and Resource Economics 58: 473-490.
As many of us have noted lately, the federal Centers for Disease Control, known originally for their work against infectious and communicable diseases, have shifted focus in recent years to supposed public health menaces like beltless driving, gun ownership, social drinking, and suburban land use patterns. CDC director Thomas Frieden came recommended to President Obama because of his national fame as Mayor Michael Bloomberg's health commissioner, in which capacity he oversaw portion sizes and donut recipes, restaurant smoking policies and anti-salt campaigns, as well as the occasional infectious disease issue.
If national nannyism strikes you as bad enough, get ready for the international kind. As the Wall Street Journal noted the other day:
The United Nations-run WHO has long been a growing irrelevance, as director-general Margaret Chan spent the week not in Monrovia but Moscow, pontificating at a WHO conference aimed at raising global tobacco taxes. ... Since the 1990s, the WHO has gradually transformed itself from a disease fighter to what Dr. Chan calls “a normative agency” that makes international public health rules and promotes political goals like universal coverage.
The ideology behind this is driven by ideas fashionable in the West, particularly that of rolling out the "tobacco control" model to other consumer goods like food and alcohol. This summer in Nature, for example, much-quoted Georgetown law prof Lawrence Gostin outlined such an agenda under the headline "Healthy Living Needs Global Governance." According to the abstract of his article, "researchers have identified a suite of cost-effective NCD [non-communicable disease] prevention measures" and now it is time for international regulatory bodies to step forward to impose them.
Stronger global governance could spur national action by providing funding, creating stronger norms and holding states accountable. The UN’s comprehensive review on progress in NCD prevention, held in July 2014, offered an opportunity for the international community to take concrete steps in strengthening global prevention efforts. This article proposes four concrete steps for a long-term solution: creating a dedicated fund for NCD control and prevention; regulating industry to improve nutrition and restrict alcohol and tobacco marketing; altering the built environment to promote physical activity; and prioritizing prevention in all sectors of government and in the global regimes that govern NCD risk factors.
Barriers to quick adoption of such measures, Gostin laments, include "philanthropic action favoring swift wins in infectious disease control, and the framing of NCDs as an individual rather than collective problem." That second point you might be right to interpret as annoyance at libertarians and individualists who keep arguing that people choose, and should have a right to go on choosing, what they eat. But pause for a moment to take in Gostin's first point about how narrow-minded philanthropy is to favor "swift wins in infectious disease control." The rest of us may see it as inspiring, even heroic when a tech billionaire donates a zillion dollars to roll back the scourge of malaria, Ebola, or some less familiar tropical disease. If you were truly advanced, however, you would see this as a distraction from the task of organizing to regulate pretzel consumption.
Agencies like WHO promoted their mission to skeptics as a way of addressing communicable diseases that, like Ebola, can quickly jump borders. Why let it arrogate more power to itself than it would need for that purpose?
After a decade of reconstruction and over $7 billion spent on counternarcotic operations, the results are in: the United States has lost the “war on drugs” in Afghanistan, although few U.S. officials are willing to admit it. According to this report from the Special Inspector General for Afghanistan Reconstruction (SIGAR), poppy cultivation is actually at an all-time high, over 8 percent higher in 2013 than the previous peak in 2007.
And, with the United States slated to reduce its presence in Afghanistan, the problem is likely to get worse. According to the report, given the “deteriorating security in many parts of rural Afghanistan and low levels of eradication of poppy fields, further increases in cultivation are likely in 2014.”
Some observers are more optimistic, however. A letter from the U.S. embassy in Kabul states that the United States is “making good progress in building the capacity of [its] Afghan partners to design, lead, manage, and sustain over the long term strategic and tactical counternarcotics efforts addressing all stages of the drug trade.”
It’s difficult to understand their optimism. The embassy letter, which is included in the SIGAR report, admits that “poppy cultivation has shifted from areas where government presence is broadly supported and security has improved, toward more remote and isolated areas where the governance is weak and security is inadequate.”
Looking ahead, however, unless one believes—contrary to all evidence—that Afghan government control will expand into these areas as the U.S. military presence shrinks, that should translate to more poppy cultivation, not less. The embassy curiously refused to come to that conclusion.
Washington’s war on drugs in Afghanistan, like its war on drugs in the Americas, tries to defy the most basic law of economics: supply and demand. And it's having tragic effects, as my colleague Ted Galen Carpenter has observed for years (including especially here and here). So long as the world’s appetite for drugs remains high, willing sellers will be there to satiate it.
It is hardly surprising that a prohibitionist strategy didn’t work in Afghanistan. It is surprising that some thought it would, or still might, given that it has failed everywhere else.
The upcoming parliamentary election in Tunisia comes at a critical time. For a while, Tunisia was seen as a poster child for a successful transition away from authoritarianism. In Egypt, a widespread disappointment with an Islamic government resulted in a military coup last year. In contrast, when Tunisia could not get through a political impasse, the Islamic Ennahda party negotiated a handover to a caretaker government earlier this year, which has led the country to an early election.
Regardless of whether Ennahda can repeat its electoral success from three years ago or whether secular forces take over, the new Tunisian government will be in an unenviable position: it will have to address a growing security crisis in the country. In the past two years, the country has seen the emergence of political violence and terrorism perpetrated mostly by radical Salafist groups. Those violent efforts include the killings of two opposition politicians, Chokri Belaid and Mohammed Brahmi, as well as a car bomb plot foiled just last week.
Tunisia has also become a fertile ground for the recruitment of fighters of the Islamic State (ISIS). Some estimate that over 2,400 ISIS fighters are from Tunisia, which would make Tunisians the most numerous nationality fighting for ISIS. Restoring basic security, order, and rule of law—and preventing the country from descending into a full-fledged internal conflict—will have to be a priority for the new government.
The political violence may have multiple roots, but Tunisia’s poor economic performance is clearly one of them. In recent years, many strikes and protests over economic conditions have taken a violent turn and led to attacks on local police stations, for example.
While the West is confronted with problems posed by aging populations, Tunisia, like other countries in the region, faces the challenge (and opportunity) of harnessing the economic potential of an extremely young workforce. Practically half of Tunisians are under the age of 30, and many of them are struggling. Although unemployment is slowly falling, the unemployment rate among university-educated young Tunisians is over 30 percent, making their situation precarious.
Because of a vibrant tourism sector and economic links with Europe, Tunisia has relied less on government ownership and industrial planning than other Arab countries and has long enjoyed the presence of many foreign investors. Still, its economy faces significant barriers to competition and market activity. Tunisia ranks 87th on the most recent World Economic Forum’s Global Competitiveness Report, compared to 32nd in the 2010–2011 edition. Its poor performance is driven mainly by its underdeveloped goods, financial, and labor markets, which are paralyzed by heavy-handed regulation.
Tunisia’s officials are aiming to bring the deficit down to 5 percent of GDP in 2015. The essential components of reining in deficit spending will include reforms to existing entitlement programs—the government has already increased retirement age to 62 years—and curbing the growth in public-sector salaries. Given the power of public sector unions, the latter effort is extremely contentious. While the country’s labor union, the Union Générale Tunisienne du Travail, is credited with playing an important role in the political settlement that led to this election, it has also opposed economic reforms, including reductions in the growth of salaries of civil servants.
However, structural reforms that would strengthen private markets and make them competitive are essential for accelerating the country's currently anemic economic growth. Regardless of who the Tunisians elect on Sunday, the country is overdue for a deep liberalization, improving its business environment and eliminating red tape and corruption. Compared to its neighbours, Tunisia performs relatively well on the World Bank’s Doing Business project, but its performance is glaringly inadequate in the domain of obtaining construction permits—obtaining a permit requires 19 official procedures, takes 94 days, and costs almost 256 percent of the country's per capita income—and in the area of accessing credit, where Tunisia is held back by poorly functioning financial markets.
What makes structural reforms imperative is not just that deficit reduction is unlikely to yield fruit in a prolonged absence of economic growth. More significantly, the Arab Spring, which started in Tunisia, was not only about deposing corrupt dictators—although the corruption of now-deposed Tunisian president Ben Ali was legendary. The Tunisian revolution was a response to a system of governance that was systematically failing young people and denied them access to economic opportunity. In order to deliver on the promise of the event of spring 2011, the government must give Tunisians the freedom to succeed without being subject to harassment of petty bureaucrats and union bosses.
In poll after poll, parents tell us that they care about academic achievement, but that they also want schools to help instill good values. And since children are adept at drawing lessons from adults' behavior as well as from their words, it's always nice when teachers conduct themselves with decorum and sensitivity. Which begs the question, how many parents would want their children to emulate the teachers who disrupted last week's meeting of the Philadelphia School Reform Commission---the district's governing body? For that matter, how many of these teachers would want their students to behave this way in class?
All the shouting, incidentally, was over the Reform Commission's decision to require teachers to contribute for the first time to their health insurance premiums. For what it's worth, Philadelphia was one of only two districts in the state that had not yet required this.
CAIRO—“I could be arrested when I leave here,” said a journalist who I met at the tiny Marriott near Cairo’s Tahir Square. A student activist observed that he could be detained at any time.
A veteran human rights activist calmly stated: “Some of our groups will be closed. Some of us will be imprisoned. It is inevitable.”
Most foreigners travel to Egypt to play tourist. I visited with a human rights delegation, reminding me yet again about how lucky Americans—and, indeed, most Westerners—are.
Most important are the basic characteristics of a free society. The rule of law. Civil liberties. Criminal procedures. Legal safeguards. Democratic processes.
Obviously, even nations which purport to have all of these often fall short. However, few Americans or Europeans, or citizens of democratic Asian nations live in constant fear of arrest, imprisonment, and torture.
In Egypt the uncertainty began when arriving. On both of my trips the government knew our delegation was coming. Both times I was pulled aside.
On the first trip an entry guard took my passport and I waited for an hour before officials returned it and waved me on. The second time after far shorter delay security officials formally welcomed me—after asking for my phone number and hotel destination.
Of course, the U.S. occasionally stops people from entering, but not typically because they want to assess America’s human rights record. Even after leaving the arrivals area on my first trip I had to wait again while the videographer joining us unsuccessfully attempted to persuade officials to let him bring in his camera.
Both visits were filled with interviews—relating all sorts of harrowing stories. Most every society has injustice and errors are sadly common in U.S. jurisprudence. However, most Americans don’t expect a visit to a friend to turn into a stint in prison.
In Egypt for reasons of political repression and personal revenge people face arbitrary arrest, perpetual detention, fraudulent trials, and horrific imprisonment. Some of the accounts we heard could be exaggerated or even false, but reports from people in many walks of life and across the political spectrum suggested that the slightest resistance to state authority risks freedom and even life.
Students told us about classmates detained at demonstrations. Journalists discussed colleagues arrested after criticizing the regime. Attorneys reported on lawyers detained while representing defendants.
Nor is there any effective oversight or appeal to limit official abuse. If you are tortured or suffered from inhumane prison conditions, you only can complain to the public prosecutor, which rarely follows up allegations against government officials. Accountability obviously is less than perfect in the U.S., but here, at least, there are alternative channels of protest: private lawsuits, media coverage, public demonstrations.
Evidence of extreme force is everywhere. Tanks by prisons, armored personnel carriers in city squares and on city streets, barbed wire and armed sentries around sensitive government installations, and a ubiquitous mix of uniformed and plain clothes security personnel.
It is unsettling enough to be stopped by a policeman in the U.S. It is far worse in Egypt after hearing stories of dubious arrests followed by months of detention. Yet when two of us were talking after clearing passport control to leave on my second trip a border agent demanded to look at our passports for no obvious reason.
As I pointed out in the Freeman: “Despite all of the problems faced by those in the West, even imperfectly free societies offer extraordinary advantages which we should never forget. Walking the streets of Cairo I thought: there but for the grace of God go I. With my U.S. passport I could return to a society which, despite great imperfection, nevertheless generally respects people’s lives, liberty, and dignity.”