Monthly Archives: June 2011

Greece, Germany, Ireland…its a cultural thing

Over the last number of months there has been an increasing flow of stories and rhetoric on Greece, that they are lazy, feckless and generally not fit for the Euro. (see herehere , here, here) While Greek economic governance, to be at the most generous, requires a lot of work to come up to modern standards, this represents to me a different issue that we have tended to gloss over in the crisis debate.

Economists are familiar with the concept of an optimal currency area, and most would agree that the Eurozone is not one (probably if truth were told neither is the USA but they have offsetting fiscal mechanisms that allow the system to work).  However, what of culture? Culture is one of those things that is easy to speak on, but harder to define. Economists, in my experience, tend to like things that are concrete, measurable, quantifiable, and culture is not one of those. In International Business however, and creeping into finance, we see increasing efforts to quantify and then analyze dimensions of national culture. Two main threads or schools of measurement have prominence. The first is the World Value Survey, the second the work of Geert Hofstede. Neither are perfect but buth provide a workable model of quantifing that which is probably unquantifiable.

The World value survey is a survey, conducted on irregular but reasonably frequent bases, which is more fully explained here while the orginal Hofstede work which was based on MNC managers has been updated and extended over the years. It is explained here. What emerges from the World Value Survey is, among other things, a series of measures of how countries see themselves. Two dimensions, it turns out, explain 70% of the cross-country variation in a statistical analysis of ten other indicators of national values: these are Traditional/ Secular-rational and  Survival/Self-expression values. As the survey itself states

“The Traditional/Secular-rational values dimension reflects the contrast between societies in which religion is very important and those in which it is not. A wide range of other orientations are closely linked with this dimension. Societies near the traditional pole emphasize the importance of parent-child ties and deference to authority, along with absolute standards and traditional family values, and reject divorce, abortion, euthanasia, and suicide. These societies have high levels of national pride, and a nationalistic outlook. Societies with secular-rational values have the opposite preferences on all of these topics.The second major dimension of cross-cultural variation is linked with the transition from industrial society to post-industrial societies-which brings a polarization between Survival and Self-expression values. The unprecedented wealth that has accumulated in advanced societies during the past generation means that an increasing share of the population has grown up taking survival for granted. Thus, priorities have shifted from an overwhelming emphasis on economic and physical security toward an increasing emphasis on subjective well-being, self-expression and quality of life.”

The Hofstede variables are somewhat different, being four for many countries but with some recent work extending these. The four are explained by Hofstede himself as

“Power Distance
Power distance is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society’s level of inequality is endorsed by the followers as much as by the leaders. Power and inequality, of course, are extremely fundamental facts of any society and anybody with some international experience will be aware that  “all societies are unequal, but some are more unequal than others”.

Uncertainty Avoidance
Uncertainty avoidance deals with a society’s tolerance for uncertainty and ambiguity. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, different from usual. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth:  “there can only be one Truth and we have it”. People in uncertainty avoiding countries are also more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of opinions different from what they are used to; they try to have as few rules as possible, and on the philosophical and religious level they are relativist and allow many currents to flow side by side. People within these cultures are more phlegmatic and contemplative, and not expected by their environment to express emotions.

Individualism on the one side versus its opposite, collectivism, is the degree to which individuals are integrated into groups. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after her/himself and her/his immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty. The word collectivism in this sense has no political meaning: it refers to the group, not to the state. Again, the issue addressed by this dimension is an extremely fundamental one, regarding all societies in the world.

Masculinity versus its opposite, femininity, refers to the distribution of emotional roles between the genders which is another fundamental issue for any society to which a range of solutions are found. The IBM studies revealed that (a) women’s values differ less among societies than men’s values; (b) men’s values from one country to another contain a dimension from very assertive and competitive and maximally different from women’s values on the one side, to modest and caring and similar to women’s values on the other. The assertive pole has been called masculine and the modest, caring pole feminine. The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are more assertive and  more competitive, but not as much as the men, so that these countries show a gap between men’s values and women’s values.”

As measured, higher scores on power distance indicatethat top and bottom in society are further apart, on individualism that people are more individual and less collective, on masculinity that people on average are more gender stratified and are more assertive and material orientated, and higher scores for uncertainty avoidance indicates less tolerance for ambiguity and a greater desire for order and rules.

Now, there is a wealth of research on these issues, including a review in Journal of International Business Studies, the top ranked journal in its field (as of 2006) of the impact of Hofstede on International Business (see here). For some details of research in the finance field and how these dimensions matter see Lucey, Brian M. and Zhang, Qiyu (2010), ‘Does Cultural Distance Matter in International Stock Market Comovement? Evidence from Emerging Economies around the World’, Emerging Markets Review, 11 (1), 62-78, downloadable.

What is interesting however is if we graph the value survey dimensions. A world graph of these looks like the following (Source: Ronald Inglehart and Christian Welzel, “Changing Mass Priorities: The Link Between Modernization and Democracy.” Perspectives on Politics June 2010 (vol 8, No. 2) page 554.)

WVS Cultural Map of the World

What happens if we superimpose the EU on this? Then we get the following

WVS Cultural Map Plus EU

Its clear that the EU as it presently is constituted while having a core based around the old Catholic Europe is also very very widely spread. Based on the WVS data we have at one extreme Portugal, at another Sweden, at another Estonia, then other poles at Ireland and Germany. Its no wonder there is cultural confusion.

If we look at the Hofstede data we also see significant differences

 Individualism  Masculinity  Power Distance  Uncertainty Avoidance
GERMANY           67           66           35           65
GREECE           35           57           60         112
IRELAND           70           68           28           35
ITALY           76           70           50           75
PORTUGAL           27           31           63         104
SPAIN           51           42           57           86
UNITED KINGDOM           89           66           35           35

Clearly Germany and Greece are vastly different from each other and from other countries. Compared to Germany Greece is much more individually orientated, much less tolerant of uncertainty than Germany, Germany has a lower power distance (indicating closer working relations between top and bottom) than Greece . Ireland is almost the same as Germany, apart from issues around uncertainty, where we are much less concerned about uncertainty than even the Germans – perhaps its the weather.

All in all, the cultural dimensions of this crisis are worth considering in some more depth.

Greek crisis may be Irish opportunity

This is  a longer version of an opinion piece published in the Irish Examiner, P13, 21/June/2011. It doesnt seem to be online, but examiner210611_crisis is a scan (2mb) of the article.

The opening words of the great Russian novel Anna Karenina ” All happy families resemble one another, each unhappy family is unhappy in its own way “ could serve as a metaphor for the European debt crisis. The countries in the spotlight, Greece center stage, Ireland and Portugal hanging on the edge of the llight, Spain and Italy in the wings,  all share very different characteristics as to how they have ended up with the potential to bring down the euro experiment. In the case of Ireland we have a situation where we ran up a catastrophically large sovereign debt, composed however of two very distinctly different elements: the government debt run up by a gap between tax and expenditure and the debts of the banks taken onto the state in 2008. Greece on the other hand is quite different, with gargantuan sovereign debt as a consequence of a combination of poorly performing export economy, very poor tax collection, and an extremely bureaucratic, rigid, and crony-based approach to doing business internally. In many ways the Greek economy now resembles, albeit superficially and with a lot more sun, the Irish economy of the 1980s. Here are links to two interesting papers on the Irish and Greek crises.

The Greek taxpayer and economy cannot, under any feasible set of circumstances which would be acceptable in a modern democratic country, tax and cut its way out of the hole into which it has dug itself, albeit with the tools provided foolishly by German and French banks. The IMF and Greek government forecasts for debt to GDP suggests that it will peak at between 150% and 170% and even at the end of the adjustment program, in 2015, will still be between 140% and 160%.

(source for figure: this  excellent blog )

This is well beyond sustainability, and is nearly double that which is suggested by Reinhart and Rogoff as the death zone area. It is very clear that Greece is going to require not more debt but less debt, and in that context the recent EU decision to consider another round for the bailout, as if piling more debt on top of the existing Greek debt would allow them to get out from under the mountain of debt is unwelcome, as is the decision to do all this out of a drip feed basis, kicking the financial can down the road in the hope that the something will turn up. We’ve seen this approach tried in Ireland over government of 2007-2010, with disastrous consequences.

If Greece cannot, as most people believe it cannot, extract itself from its position then we face into a very serious political economy crisis over the summer. The ramifications of Greek default, whether forced from the outside or emergent from the domestic political situation, are complex and I will revisit these later. However a crisis can also be an opportunity. It is very clear that in the negotiations around the bailout in November 2010 the Irish negotiating team was either outgunned or outfoxed. The full story of what happened around that time will take decades to emerge, but the consequence is very clear. These consequences include we have an interest rate on our bailout which is seen by many, including crucially the EC Commission,  government and the IMF, as being to high and requiring reduction, as well as a seeming ban on cutting payments to senior bondholders. Indeed this was the second time around for that government to find itself emerging from a negotiation having sold the store, with the new original sin of Irish economic policy, the banking bailout of 2008, been a consequence of the government not being able to negotiate effectively with the bankers. The Irish situation is not nearly as powerless as that of Greece, but it is to a great extent a matter of degree rather than kind. We too, like Greece, are in a financial death zone. We have a better chance than Greece of climbing out of it, but this is by no means certain, and the benign external factors upon which our climbing out is predicated are looking less and less likely to be realised.

That Ireland needs to restructure its domestic government finances is undisputed. That doing so would be much easier, and at the risk of any potential default would be greatly reduced, almost to nil if we were to be able to remove the albatross of the Irish banking debt is undisputed. By undisputed I mean that all players, government, IMF, ECB, European commission, all agree. Where they do not agree is when, how fast and how this should be achieved.

The Irish banking crisis now consists of two elements: there is liquidity and a solvency problem. The liquidity problem for the Irish banks is that they are massively dependent on money from the ECB, as well as money from the Irish Central bank, to keep their day-to-day activities ongoing. The threat, not so subtly implied (see here ,and here ) , from the ECB is at the Irish government were to take any form of unilateral action in terms of dealing with, a.k.a. a imposing glasses/haircuts/burning on the senior bondholders and the ECB would withdraw this funding. This is palpable nonsense, as this funding for the most part consists of well-collateralised assets which the Irish banks are swapping, albeit on a relatively short-term rates, with the ECB. There is no possibility whatsoever that the ECB will withdraw, for Irish assets, this facility. Even were they minded to do so the consequences for the ECB, and for the euro, of deliberately creating an existential liquidity crisis in a Eurozone country would be sufficient to demonstrate the ECB as being unfit to manage the euro, with the consequences we can well imagine.

The solvency issue for the banks, intertwined with that of the government, revolves around the fact that Irish banks hold a number of forms of financial liabilities by which they fund themselves. Banks like any other company finance themselves in a number of ways.  A large part of bank financing is the deposit base, the savings of people placed on deposits with the banks, which is then lent out in order to make a return. In general banks lend out more money than they have on deposits. Anybody who seen the Jimmy Stewart movie “it’s a wonderful life” is aware of this. This is why bank runs are so dangerous: there is simply never enough money in the bank for all people to withdraw all savings at once. Banks also finance themselves, like any other company, by borrowing money on the open market from investors. There are two main kinds of this borrowing. The first add the “subordinated” bonds, financial instruments, bonds, issued by banks which pay a higher return. This higher return is an explicit recognition of the fact that these are riskier than other forms of investment in the bank. They are especially riskier than deposits, and the returns on these bonds to the investors are higher than the returns, which would be made by placing funds on deposit.  Paying, at least in principle, a higher return again is shares in banks. The whole concept of a limited liability company is that you invest a certain amount of money in order to take partial ownership of a company but you may lose all of this. In between deposits and subordinated bonds, we find other forms of bonds. These are the so-called “senior” bonds. This now is where the action lies in relation to whether or not the Irish government should, could, or must continue to pour money into the Irish banks. The capital structure of banks therefore consists of, in increasing order of likelihood under normal circumstances to be eroded by losses, shares then subordinated debt then senior debt then deposits. It is agreed by all that deposits should be protected, if not in hold them in substantial part. This is where deposit protection, at whatever level set by the government comes into play.

But do we have to pay these bank bonds?   It’s clear that Minister Noonan is now intent on pushing the issue, to allow some burning of the bondholders take place. Even if we save a single cent it is worth it, for the moral justification alone of not bailing out investors when we are cutting domestic expenditure is in my view insurmountable. Every penny we save by not paying off foreign investors in failed banks is a penny that can be deployed to more rapidly bringing the Irish government finances into the balance they need to be brought into.

In 2008 the then government either decided on its own, or had decided for it by the European Central bank, that a very large proportion of the bonds in issue would be guaranteed by the state. Only a small part of the subordinated bonds were excluded.  This guarantee has subsequently been amended and extended over the years. The arguments about “burning the bondholders” have revolved around whether or not this guarantee, once given, can or should be eliminated and the bondholders exposed to what would be normal convention, that as losses are  recognized the capital structure (senior and junior bonds plus the shares of the company) is progressively eroded. The degree to which this guarantee, and subsequent government decisions, backed by the ECB, have subverted the normal rules of finance is evidenced by the fact that we still, in theory, have value in Anglo Irish bank. Not a peep has been heard regarding the assessor whose job it is to determine, as if any determination more than a moments consideration is required, whether or not there is value left in Anglo Irish bank.

Earlier on this spring the central bank, in what it claimed to be a one-off exercise, published details of the outstanding bonds issued by the Irish banks. In addition to guarantees, in this case guarantees given by the Irish state that the taxpayer will make good the losses of this private investors, bonds may also be secured. Anybody who has a mortgage should be familiar with this; the banks loan to you  is secured upon your house. If you do not pay your mortgage then your  house can be taken sold and the proceeds used to pay off the debt which you owe. Similarly banks issue secured bonds. These bonds are secured on assets. If the bank finds itself unable to pay either the interest or the outstanding amount on these bonds then the people who hold the bonds can take possession of the underlying assets, and either sell them run them as going concerns, in the same way as a bank would take somebody’s home. In other words secured bonds are already secured on assets. The superlative NAMAwinelake blog has updated and analyzed the Irish banking figures, continuing a tradition of deep detailed analysis of the banks which makes it required reading for anyone serious about the Irish situation   The table below is taken from there

There are some €20 billion worth of these secured, unguaranteed, senior bonds outstanding, mostly in bank of Ireland and AIB.  There is some €20 billion additional of unguaranteed but secured senior debt. There are some €16 billion outstanding of un guaranteed but unsecured bonds, €3.1 billion in Anglo and €600 million in Irish nationwide building society. While one might in principle think that as these are not guaranteed by the state and are not secured on anything then these bankrupt institutions would not repay one would have to think again. A couple of weeks ago Anglo Irish bank paid back in full some €200 million of these unsecured unguaranteed senior bonds.   It is likely based on this precedent that the state via the banks would in normal course of events pay off the entirety of the senior debt.   The majority of these bonds will be paid back over 2012-2013 period.   Finally we still retain in all of the banks nearly €7 billion worth of subordinated bonds. Great trumpeting has been made of the decision to offer to redeem this outstanding subordinated debt at very deep discounts.  But one would have to wonder again as the morality of paying 1% or 10% or 20% of the face value of these bonds when in fact under normal rules of capitalism they should be worth precisely 0. Of course the only way in which they could be valued at zero would be for the state to have wiped out the total shareholdings of the banks, and the previous government set its face firmly against the consequences of forcing bank investors to take the losses until it was too late and we ended up in this mess.

There is a deeply immoral action in the state continuing or even contemplating to continue to pay out on these bonds. The banks exist at the moment only under the protective umbrella of the state. They are in fact creatures of the state. The state has no money other than that which takes off the taxpayer.  We have an enormous hole in our budget. This will have to be filled. It will only be filled by the state cutting back on its spending and increasing the tax base. Inevitably in cutting back on expenditure there will be painful decisions made. But one would have to think that there is something plain wrong about choosing to first payoff investors in failed institutions, while simultaneously cutting back on services to the most needy. We may well have to cut back on incontinence pads for the elderly or condem our children to remain in leaky prefabs, but this should not be because we have decided to pay private debts first.  The Irish taxpayer should not be expected to pay for any secured debts. Let investors who lend the money to Anglo and Irish Nationwide and AIB go and exercise the security which they have been given. The reality is of course that the assets upon which these loans are secured may no longer be the same as the the value of the loans. But that is capitalism. Taking the security for the loans might also have the advantage of assisting in the shrinkage of the irish banks loan books, something that will have to be done anyhow.

There is an argument that senior debt ranks “pari passu” with deposits. This may well be the case, or it may not, but the reality is that there are longer any deposits in Irish Nationwide or in Anglo. Therefore there is absolutely no need to be concerned about the effect upon these deposits of requiring these senior unguaranteed unsecured bondholders to take their place in the queue for orderly liquidation. There may well be a case that this senior guaranteed bondholders have some legitimate expectation of repayment consequent to the decisions made to guarantee. Some form of debt for equity swap might well be worth considering here. 100 days into its hundred days the coalition has an opportunity to take a bold step. This bold step would be to take the Irish taxpayer off the hook for as much money as possible. This is not a sovereign default, nor would it be treated as such. The sooner we can remove the albatross of the Irish banking losses from the states shoulders the sooner the state can get on with the unpleasant but eminently doable task of restoring order to the public finances.In doing this it would show that it places the moral argument front and center, and regain and restore trust in its task.

Michael Noonan represents a constituency which is at the heart of Munster rugby, known for its uncompromising defence. Might we suggest that he now take a leaf out of their book, and use this crisis as an opportunity for the Irish? Eurozone finance ministers have once again decided to kick the can down the road, until mid-July, when they will make a final final final decision as to how to proceed with the Greek situation. Minister Noonan should consider vetoing any final Greek proposal, until three issues are resolved to the satisfaction of the Irish government. The ECB needs to put in place a medium-term strategy for the liquidity needs of the Irish banks, a strategy which it itself has said is required but which has not proceeded. We need a reduction, towards 3%, in the blended interest rate on the Irish bailout. And we need the ECB to accept that the Irish government, acting on behalf of the Irish people, will not put a penny into un-guaranteed senior bonds of any bank, pillar or otherwise, and will convert guaranteed bonds into equity in the banks. Nations, Lord Palmerston told us, do not have friends, only interests. It’s time to look after our own interests. While there is no doubt that this approach would enrage our european partners, it should come as no surprise to them that after subjecting ireland to a regime of threats, and after having forced us to take on board debts whose taking on subverts the basic tenets of capitalism as well as threatening to submerge the state, the Irish governmental worm turned. And, they will get over it. After all, if faced with the prospect of Greece melting down (earlier than it might anyhow) or Ireland being fobbed off, they will have no choice..will they?

Thoughts on Tutoring in TCD

Trinity College operates a system called College Tutors. Apart from the general academic mentoring of students, which is quite properly part of the normal expected duties, the notion of a tutor is significantly more expansive than that. It encompasses a range of what might be called pastoral or mentoring duties, and can be both rewarding and draining. In my time as a tutor I have seen most things, apart from murder, come through the door; suicidal students, students who have become drug addicted, been flung out of home because their parents thought the facial stud/haircut/clothes were whatever, been abused and had to run, students lost and bewildered by the transition from the structured and ordered life of secondary school, students with undiagnosed debilitating degrees, students who had missed a deadline and who literally worried themselves sick, etc etc. It’s a rewarding but eye-opening role. And, according to a 2007 external review

“The Panel was of the view that the Tutorial Service was unique in their experience of higher education in Ireland and the UK. It provides an exemplary standard of support for students and was held by staff to be an integral part of Trinity’s student experience. The dedication of the tutors and the staff of the Senior Tutor’s Office was unfaltering and showed a clear commitment to the values that are inherent to the service aims”.

They further state

“Students experience a wide range of pastoral and academic issues, to a varying degree, and the Service provides an effective method of the College providing support to manage them.”

The Tutorial system is thus a mixture of academic and pastoral care. And as a consequence of the additional duties over and above the academic those, like myself,  that manage a full chamber (100 students) get €255.83 extra per month (before tax).

Many persons have found that the tutor system, where experienced academics can act as an advocate and as a non-judgemental champion, can guide and direct a stressed young person to the right mode of intervention, can provide a confidential and sympathetic ear, where it is made abundantly clear that the primary concern if the system is that the person be and remain a happy and healthy human and the college rules and regs can be and are flexible  enough in interpretation and application to achieve that, that that system is a large part of what kept them in education. And much more importantly, as a tutor one quickly finds that the psychological and physical problems of students are vastly easier to deal with and integrate when they are addressed early than later.

TCD has now proposed a radical change to this exemplary system. I quote below the proposal

“In the first instance, the Planning Group recognizes the importance of Tutorship to the Trinity student experience and wishes to retain this significant aspect of student life at Trinity. However, noting the difficulty in securing ongoing Department of Education and Skills approval for the payment of allowances to Tutors, the Planning Group recommends that payment of an allowance be discontinued, and that I and Staff Secretary work with you on revised arrangements, which would be developed in accordance with the following principles:

All academic staff is (sic) liable to undertake Tutor duties, if required  

Service as a Tutor will be considered explicitly in assessment of applications for promotion  

Service as tutor will be taken into account within the workload allocation model

A portion of the savings achieved through withdrawal of allowances will be made available to the Senior Tutor to strengthen the tutorial service.”

This raises several problems, which are examples of the kind of issues that universities will be grappling with over the next number of years.

In the first instance, its not at all clear that the role of the tutor as now constructed is one that should or could be seen as an integral part of all academic staff. People opt into the pastoral nature of the tutorship. In fact, there is no great shortage of volunteers, with more applicants than can be taken on, and being a tutor is not for life, it is reviewed every five years. Not all academic staff have the interest, time, temperament, perspective or empathy to deal with the pastoral and counseling elements that are integral to and a central plank of the TCD tutorial system. Many would in fact be disastrous. That does not make them worse academics – it is to simply recognize that people have different portfolios of skills and treating all as interchangeable misses a fundamental point of academic institutions, that the core academic staff are specialists and that implies strengths and weaknesses. In fact, I would argue that this conceptualization, that all staff can at a pinch do a particular task, demonstrates a significant misunderstanding of how organizations work. What the proposal suggests is that a part of how TCD should work, the coordination mechanism as Minzberg titled it, is that academics should standardize their work processes. While that may seem sensible at the outset, it is more characteristic of a machine bureaucracy than the organizational form and structure known as the professional bureaucracy where work is coordinated by standardization of skills. To ensure that all academic staff who are now to be liable to become tutors would be appropriately skilled in their pastoral and academic and organizational knowledge would require large scale training, screening and reskilling, as well as marking a fundamental change in the type of faculty to be appointed. In fact, it’s arguable that the professional bureaucracy is itself flawed as a model of how universities work, with an adhocracy or a missionary form more appropriate, but that is a thought for another day. What is clear is that this is part of a tendency – there is within the ether the concept that universities are really hard secondary schools and as such, at a pinch, all academics are interchangeable. That concept represents the dominance of what Minzberg calls the strategic apex, the top management, whose natural tendency in organizations (be they individual universities or the post-secondary system as a whole) is to accrete power to themselves via changing the structures in such a way as to buttress their power.

Second, there is great lack of clarity as to whether this proposed change is (within TCD) allowable under the statutes, and in any case it represents a change in existing contracts where a degree of compulsion is now possible. It will be interesting to see how this plays out. Flexibility is a good thing but it does make sense that the flexibility might be useful. There are many more pressing organizational rigidities within TCD as there are in any large organization that could be removed before tinkering with something that is as close to the core of the organizations ethos and spirit as the tutorial system.

Third, the cost savings are (while welcome) minuscule, about 1/10 of a percentage point per annum, 440k out of 330m,  and will impact disproportionally on the lower echelons of college academics. Fully 2/3 of the tutors are at the lecturer grade. A cut in take-home pay of some €250 p month will impact significantly more on someone on the fifth point of the lecturer scale than on the top of the senior lecturer scale. Add to this the effective bar on promotions; the realization that a further cut in public sector pay is probably inevitable; the massive and unnecessary uncertainty about almost everything that has emerged from the meddling of the HEA under the Employment Control Framework; the severe cutbacks in research and related funds; and you have a situation where it will become increasingly difficult to attract and retain internationally competitive staff. And this is at a time when Irish universities, led by TCD, are making enormous strides in becoming and remaining world class.  Recent rankings for TCD rank Chemistry 36 worldwide,  Physics 49th,  Mathematics 15th,  Philosophy, Medicine, Modern Languages, and Biological sciences were ranked in the top 100, Psychology 48th, English language and literature 32nd,  history 39th and so on. As more and more subject areas are ranked its clear that TCD is, across the board, world class, truly exceptional in some areas. We cannot have world-class universities without world-class academics, and we cannot retain these if we continue to make their working environment less and less attractive. The option to be a tutor,  with some recognition that this involves going above and beyond the norm of academic mentoring, is actually an attraction to TCD. Making it (potentially) compulsory, in an environment where no college wide workload model exists to ensure that the lack of monetary compensation is made up for by the promise of (possibly non existent) promotion, that is not attractive.

What this shows is how university administrators and managers, working in ever increasingly constrained financial environments, under the usual pressures of an organization,  and striving to do their best by all stakeholders, can and will begin to take decisions that are shortterm cost saving but which run a risk of longterm damage. Universities need to be given the financial and organizational freedom, and the concomitant responsibility that goes with that, to determine their own path to world class excellence.

Default: its not (necessarily) the end of the world

One of the things about sovereign debt defaults, whether they be hard or soft, is that there is a meme around them. A meme is a sociological equivalent of the gene. Coined by Richard Dawkins it is defined as “an idea style or behavior that spreads in a population”

One popular meme around sovereign debt is that a default is an enormously damaging event.  We are told that countries that defaults will be cut off from international capital flows, will be locked out of the market, that it would lead to vast falls in national income, we are all but told that the dead shall rise and that  a plague of locusts will swarm o’er the land.   As the song says however,  it ain’t necessarily so. When we hear dire warnings from bond traders and international financial markets, its well to remember the musings of James Carvill, the Democratic strategist.  “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

Default should, like any other economic tool, never be ruled out ex ante. Like any other tool its a banace between costs and benefits. The meme is that the costs are, by definition, so large, as to make the concept itself ludicrious. We have a dearth of evidence based thinking in ireland. But, in ay case,  let’s have a look at some of the recent evidence. In looking at this evidence we need to be conscious of two things. First the majority of this research pertains to emerging markets. Right now neither Ireland not Greece is an emerging markets…   it is not clear exactly what we can be classified as, perhaps a demerging market,  but the researches are typically around countries which would generally have a lower level of development and national income than either Ireland or Greece. Secondly the majority of the instances that researchers examined have been for countries which have had a greater degree of freedom over their exchange rates than the case is with either Ireland or Greece.  Thus the findings below cannot necessarily be taken as being likely to map to the Irish, or Greek, case should a sovereign default emerge. Nonetheless they do serve to give some counter to these mimetic  arguments .

A 2004 IMF working paper  took a look at  instances of default, restructuring, and assorted changes to sovereign bond payoffs, for 60 countries over 20 years, and finds “the probability of market access is not strongly influenced by default in the previous year“, and they say this is robust.  In other words, default once done does not appear to automatically lock a country out of the markets even in the next year. This is consistent with the argument that the markets look forward, not back, and that they look back only in so far as it gives a guide to likely future performance. They do not punish per se.

Gelos, Gaston, Sahay, Ratna and Sandleris, Guido, Sovereign Borrowing by Developing Countries: What Determines Market Access? (November 2004). IMF Working Paper No. 04/221 

 A 2006 Bank of England paper suggest that there is some increase in the cost of borrowing after a default, but also suggest that the total losses in terms of reductions in national income and the total time it takes to get out of the crisis are lower for countries that actually do restructure. This suggests that countries that reschedule their debts and start afresh with creditors face  lower cost of finance and quicker renewed access to this finance.  Like so often, Shakespear (Macbeth, Act 1 Scene 7) got it right “If it were done when ’tis done, then ’twere well it were done quickly”

De Paoli, Bianca Glenn Hoggarth and Victoria Saporta, Financial stability Paper Number One, July 2006, Costs of Sovereign Default

A 2008 IMF working paper subsequently published looked at 200 years of sovereign defaults, and suggests  that there are four kinds of cost. Reputational costs, trade exclusion costs, costs to the domestic economy in terms of reduced national income, and political costs. The find these reputational costs, basically being increase in interest rates/changes in the ratings of the country are “significant but short lived”, that the other costs are also significant but shorter lived, but that the political costs are “dire for incumbent government and finance ministries” they further state “the most robust and striking finding is that the effect of default is short lived as we almost never can detect defects beyond one or two years” .  They do find some effect on bilateral trade, but again this is concentrated in the years around the default. This is consistent with the arguments by Andrew Rose.

Borensztein, Eduardo and Panizza, Ugo, The Costs of Sovereign Default. IMF Staff Papers, Vol. 56, No. 4, pp. 683-741, 2009. 

Rose, Andrew (2005), “One Reason Countries Pay their Debts: Renegotiation and International Trade”, Journal of Development Economics, 77:189-206.

 A paper published in 2010 in  Journal of development economics by researchers from the Central Bank of Chile finds  “we do not find evidence that countries. shut their doors to  defaulters investments abroad” . In other words, a country that defaults does not find that it encounters difficulties in itself making investments abroad. There is no evidence that investment by residents of countries which default find these investments barred or seized by those defaulted upon. They do find some effect on foreign direct investment, with declines (but concentrated on the year immediately around the default) in FDI by the countries defaulted upon.

Miguel Fuentes, Diego Saravia, Sovereign defaulters: Do international capital markets punish them?, Journal of Development Economics, Volume 91, Issue 2, March 2010, Pages 336-347,

A 2010 IMF authored paper by the same team as the  2004 paper and in effect updating and refining it finds “the probability of market access is not influenced by countries frequency of default and that defaulters resolved quickly does not reduce significantly the probability of tapping the markets” they  do find that there is a period of lockout, but this is on average less than two years. This finding of relatively short lockout is also found in a paper by other researchers  who note that 50% of defaulters regain at least partial access within a year. Indeed, the time to regain access seems to be dropping, with some finding suggesting that access can take place within a few months and others suggesting that it takes longer.

Gelos, Gaston, Sahay, Ratna and Sandleris, Guido  Sovereign borrowing by developing countries: what determines market access  Journal of International economics, 83, page 243-254 

Dias, Daniel  and Richmond, Christine Regaining Market Access: What Determines Duration of Exclusion?”  (Working paper, UCLA) 

Papers such as the Borensztein  paper noted above typically find that there are declines in output in the year of the default episodes. More recently again a 2011 Journal of development economics paper by researchers from UNCTAD finds that far from defaults leading to declines in output defaults actually seem to be associated with output rising.  They use quarterly data, not the annual data of other researchers. The 2010 “the negative effects of the default  on output are likely to be driven by the  anticipation of default, independent of whether or not the country ultimately decides to validate it”. In other words if you’re been punished anyway you may as well go ahead and do it. A similar finding for unemployment is also evident in their paper.

Levy-Yeyati, Eduardo and Ugo Panizza  the elusive costs of sovereign defaults, Journal of Development Economics, volume 94, page 95-105


So why then do we find this meme? As ever, Rabo, the “straight talking bank” may provide an answer. In a recent economic note they state ” More specifically, the economic costs of sovereign default, as estimated by scholars, are found to be less drastic than most believe possible. The political costs of default, on the other hand, are non-negligible. The expected time of remaining in office is sharply reduced after a government throws in the towel.” This finding is from the Borensztein paper noted above. Perhaps therefore when we discuss default we should remember that we are dealing with political economy, and the two elements of that are equally as important.