Papers We Read: Financial Intermediaries and Monetary Economics (bs)

In our yesterdays session, we discussed another paper of Mister Shin, this time a piece he published with Mister Adrian:

Adrian, T. and Shin, H.S. (2011), "Financial Intermediaries and Monetary Economics", Handbook of Monetary Economics, edition 1, volume 3, pp. 601-650.

Here are some key findings:

It seems to be a stylized fact that shifts in the (short-term) policy rate translate directly into shifts in the slope of the yield curve. For this to hold, longer rates must be somewhat stickier than short rates. This is empirically proven by Figure 1 (p.604, see below), which states an almost 1:1 negative relation between changes in the fed fund rate and the term spread.

A higher term spread has important implications for the banking business because it increases its profitability. Hence, the future risk-taking capacity of the banking industry is fostered and thereby credit supply increases. That is, procyclicality in loan supply is explained by the variation of the slope of the yield curve. The risk-taking channel of financial intermediaries - effective also because the banking system is financed increasingly short-term and market-based - entails the policy implication that the short-rate is an important price variable on its own. This stays in contrast to the widely held view of monetary policy that short-rates are simply an instrument to steer longer rates, ultimately the ones that are relevant for consumption and investement decisions. Incremental variations in short-rates can have detrimental effects on a wide range of transactions made by market-based institutions. As the authors argue, for SIV a difference of a quarter percent in funding costs may make all the difference between a profitable venture and a loss-making one (p.605).

It remains a puzzle why financial intermediaries haven't realized those potential funding risks prior to the crisis. It also poses the question if monetary policy was aware of the amplification mechanism that arise because of bank's active balance sheet management. I assume, it was not. Nevertheless, the FED became increasingly tighter in the run-up to the crisis - argueably practiced some sort of "leaning against the wind policy", at least from  2004-2006.

Sadly enough, this tightening did not wind up risky short-term funding or made the financial system any safer. I guess, there is more to come...

New Year's Resolutions (cps)

I'm a sucker for cheap wordplays, so here's another one: Before we all lose our sober look tomorrow (ta-taaa!, now click the link ;), take a brief moment to think about what might be coming next year... Maybe it will be negative deposit rates for European banks so as to increase the incentive to lend out instead of just carrying funds obtained from ECB LTROs. A possible implication is the reduction of TARGET2 balances and a move toward financial re-integration because of newly sparked search-for-yield behavior. Another outcome might be that solid banks just pay back 'unused' LTRO borrowings and go on about their business (or even be better off?) for a while whereas not-so-solid banks... well, let's just exercise a little more and quit smoking. Guten Rutsch!


By the way, I wonder whether 'allocation' is a euphemism or synonym for 'search-for-yield behavior' and whether all of this could be part of 'safeguarding monetary policy transmission.'

NGDP targeting - we are (almost) there (bs)

Probably not just our dear colleague amv is all excited about the FED's new conditional QE3 program. In contrast to previous rounds of QE, now the FED announced to tailor its asset purchases to explicit targets of economic activity and inflation:

 [...] the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy [...]

As popular proponents of NGDP level targeting posit (here), this step comes very close to the desired policy change.

A rough estimate of Spanish recapitalization needs (ls)

I aim to provide a rough estimate of future losses of the Spanish banking system, therey pinning down its potential need for recapitaliziation out of ESM funds.  Data mainly comes from the Bank of Spain. I do not claim to obtain estimates accounting for endogenous feedback loops, it is rather a rule-of-thumb exercise which nevertheless sheds some light on the sufficiency of current rescue packages.

Total assets of Spanish financial institutions equal some €5.2 Trillion. The stock of aggregate credit is €2.0 Trillion. Securitiy Holdings amount to €1.2 Trillion. Roughly €400 bn of government debt is held by residents and probably €300 bn from financial instutions. 

How about losses from the stock of credit? The ratio of non-performing loans currently stands at about 10%, implying that €200 billion of credit are underwater. A commonly used benchmark for recovery rates is 40 percent, however, it is reasonable to assume an inverse relation between NPL-ratios and recovery rate since a large number of NPLs implies lots of liquidations which depresses collateral prices and hence recovery rates. I therefore assume a recovery rate of 30%. Additionally, one has to account for losses which banks yet have accounted for with the help of (dynamic) provisioning. I heroically assume that 33% of future losses are covered yet.

Thus, expected losses from the credit stock are: €200 bn x 30% x 67% = 40.2€ Billion

How about losses from securitiy holdings? By assumption, about 300€ bn of securities carry exposure against the government. Spains Debt-to GDP Level is projected to rise to 90% in 2013. Returning to the Maastricht criteria would call for a 33% haircut. Admittedly, this is an unrealistic worst-case scenario but useful for illustration. In this case, losses amount 100€bn.

Note that I abstract from potential losses out of interbank exposures. I do so because I assume that removing NPL-risk and haircut risk essentially removes the two main drivers of aggegate Spanish bank risk and stabilizes the system such that no interbank defults occur.  

Hence, total projected losses add up to 140€ bn. The financial system's aggregate equity position is about €400bn. So 35% are likely to be siphoned off in the next years, leaving the system with roughly €250 bn equity in relation to total assets of five trillion Euros, i..e the system would operate with a prohibitively high leverage ratio of 19:1. In order to avoid such unfavourable outcomes, European leaders agreed to inject €100 bn into the shaken Spanish banking system.

My rule-of-thumb calculation indicates this is very likely to turn out as insufficient. Clearly, my government debt scenario is very pessimistic. But note in contrast the exterme vulnerability of expected losses from credit against worsening recovery rates and worsening NPLs. It seems as we need an additional rescue package...

Thanks for the "Invitation", Hellas! (bs)

...ehm, or should I rather say: Thank you, EFSF?! Well, I'm not really invited, anyway. But those of you, who are, just some quick notes:

1. Show your greek debt at the entrance (max 10 billion)
2. To be on the guest list, send an email until Friday, 5:00 p.m. 
3. If you are still not sure how to get there, here is the map for you, guys.

Well then, have fun!

Weidmann calls for Capital Requirements on Government Bonds (ls)

He is very right. Please find the speech here.

Teaser (unfortunately only in German, emphasis added):

Banken müssen darüber hinaus aber stärker darin gezügelt werden, sich übermäßigen staatlichen Solvenzrisiken auszusetzen. Dazu muss die Bankenunion durch weitere regulatorische Maßnahmen flankiert werden. Zwei sind mir besonders wichtig, und beide zielen letztlich darauf ab, Forderungen an den Staat nicht länger gegenüber anderen bilanziellen Aktiva zu privilegieren: Erstens sollte es eine Obergrenze, eine Art Großkreditbeschränkung, für das Engagement einzelner Banken gegenüber staatlichen Schuldnern geben; zweitens, sollten Banken Staatsanleihen oder Kredite an den Staat entsprechend deren Risiko mit Eigenkapital unterlegen.

Die Eigenkapitalunterlegung von Staatsanleihen hätte noch einen weiteren Vorteil: Sie würde dazu führen, dass frühzeitiger Preissignale gesendet würden, wenn sich eine unsolide Entwicklung der Staatsfinanzen abzeichnet – es entstünde Druck zur Konsolidierung. Zusammen mit der gemeinsamen Aufsicht würde dies verhindern, dass Staaten trotz einer Schieflage im Haushalt weiter billige Kredite erhalten und so nicht nur sich selbst, sondern auch die Banken noch tiefer in Haushaltsproblemen verstricken.

Wie wichtig es ist, hier höhere Schranken zu setzen, zeigt die gegenwärtige Entwicklung: Es gehört mittlerweile zwar zum guten Ton, die enge Verbindung von Staatsfinanzen und nationalen Bankensystemen zu kritisieren. Angesichts der Geldnöte einzelner Länder ermuntern viele dann aber doch die dortigen Banken, immer mehr Anleihen des eigenen Staates zu kaufen.

Complex systems and simple regulation (ls)

As always, the recent Jackson Hole conference has been a source of excellent contributions. I find the speech of Andy Haldane most notably.

Some teasers:

Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.

Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will. To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee by first applying Newton’s Law of Gravity.

A tremendously striking result is displayed with the following regression:

Obviously, risk-based capital ratios - even though they are calculated with state-of-the-art risk management models -  have virtually no explanatory power for the probability of bank failure. A simple rule of thumb is clearly superior, namely a combination of the unweighted leverage ratio and GDP growth. 

Super Mario and the Bazooka (ls)

Todays meeting of the ECB governing council has been eagerly awaited. ECB President Draghi fueled market expectations of a large-scale government bond purchase programme with some statements given in London a few days ago (see here). However, todays announcements are vague and disappointing. Markets expected a 'Bazooka-Solution', Draghi rather gave them a shot out of a Super-Soaker-Gun.

I  believe that the concept of central bank independence and monetary policy from the ivory tower is not suitable for a crisis of unprecedented scale as we do witness right now. While political unification of the EMU is not feasible in the short run, the ECB needs to do a dirty job. Hiding behind legal concerns and phrases such as 'ensuring the functioning of the monetary transmision mechanism' is ineffective. Our central bank is compromising itself step-by-step. Starting with the relaxation of collateral requirements we came to purchases of both covered and government bonds. In fact, the term 'unconventional policy measures' is an euphemism. The ECB is actively engaging in fiscal policy, and the established frontier between government and central bank balance sheets becomes increasingly blurred. To be clear, I am not complaining about this developements. I believe that these steps are necessary. But they should be communicated in an honest and transparent way in order to remove uncertainty and to boost market sentiment.Let me make some examples from todays press conference:

The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible. 

What is a severe malfunctioning in the price formation process? Is the ECB showing sympathy for a theory of multiple equilibria on government bond markets à la de Grauwe? Does she believe that current risk premia show signs of exaggeration? How to decompose risk premia into solvency concerns and concerns about an exit of the EMU?  And what about financial fragmentation? Maybe fragmented markets with persistent spreads are the new fundamental? It is now well known that the virtually non-existent spreads in the pre-crisis regime have to be attributed to a considerable extent to undifferentiated collateral and capital requirements. And by the way: Recent LTROs fostered fragmentation, since PIIGS-banks acquired governement bonds with a considerable home bias, thereby further intensifying potentially adverse feedback channels between government and bank solvency. All in all, the statement above lacks of guidance and leaves markets and observers puzzled.

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

Stressing conditionality again and again seems to be merely a lip service.The examples of Greece and Italy (Just remember Mr Berlusconi's reluctance to stick to his commitment to structural reforms after ECB interventions eased the refinancing pressure on his country!) show that conditionality is unrealisitic if not dynamically inconsistent. We rather witness dynamic bargaining processes which are constrained by political feasibility and the fear of disordered government defaults and their systemic implications.   

The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.

This is good news. But more details are needed. What about implicit yield targets? Any hints concerning the volume of this operations? What is meant by 'further non-standard monetary policy measures'? And seriously: It's not about ensuring price stability or repairing the transmission mechanism. It's about fixing this crisis. Quick. Let's hope that ECB communication will become more transparent and precise within the next weeks.  

Will on-tap liquidity eventually burst the bubble of fear? (bs)

In a recent post on FT Alphaville Izabella Kaminska is positive about this. She goes on explaining how the investor’s run on safe assets results in negative rates which “destroy the vital process by which economies form capital, grow and generate employment”. Skeptical on the power of monetary policy to circumvent such a bad (temporary but potentially persistent) equilibrium, Keynes envisaged fiscal policy to intervene.

"It was the government’s superior capacity to bear risk — not any inherent belief in its capacity to make better decisions — that led Keynes to advocate greater state-led investment when the economy becomes gripped by a bubble of fear."

And something else is worth noticing: financial repression, prominently criticized by the newly appointed Harvard Professor Carmen Reinhart,

“is no accident. It is the deliberate objective of a policy designed to curb the demand for liquid assets and force greater willingness to commit to less liquid forms of investment.”

So far so good!

Yet one statement struck me as pretty innovative.  Because the system is (allegedly) completely overwhelmed with capacity, we need to deploy capital by shifting demand to non-material assets like human interaction, health care, education etc. Only then, the author posits, will capital become scarce again and thus positive yields on investment will be revived.

“ Of course if that is the case, the fear bubble won’t so much burst, as eat itself out.”

Low yields - why and where? (ls)

The Economist published an excellent article on why yields in mature economies continue to be close to zero despite of rising debt ratios. Please find it here.

Key statements:

Add together the purchases of global central banks, domestic central banks (via QE) and financially repressed institutions, and well over half of British and American government bonds may be owned by investors who are relatively unconcerned about low yields. Mutual-fund and hedge-fund managers, more bothered about making a decent return, are thus hard put to play the role of vigilantes, so the state of the market is no longer the economic signal that once it was.

This division of bond markets into a premier league (of governments that can borrow at less than 2%) and the minor leagues (of those paying 6% or more) is a great advantage to those countries in the former category. America and Britain, in particular, can finance very high deficits (by historic standards) without feeling under pressure. Indeed, despite many years of current-account deficits, both countries have a surplus on their investment-income accounts, largely because foreigners earn such low yields on their dollar and sterling deposits and bonds. It is a neat trick: buy real goods and services from other countries and sell them low-yielding pieces of paper in return. And it looks like one that may have a fair bit of mileage left. Investors starved for choice may not relish yield-free bonds. But they seem likely to keep buying them.

DeLong on Knightian uncertainty and Keynesian liquidity preference (bs)

By comparing return differentials on TIPS and the S&P 500, DeLong calls for institutional reforms to mitigate The Economic Costs of Fear. Compelling argument: without efficient politics, there is no such thing as an efficient market.

Twin Premieres (cps)

In case you haven't gotten the news from anywhere else: For the first time in history (drumroll), the Fed announced an explicit inflation target, so finally, we can fill the blank space in its assumed loss function.

As to the second premiere: This is my first post on this blog (or any blog for that matter), so hello everyone. Maybe I can at some point fill in for my "predecessor" fg—let's hope it'll take me a little less than the 98 years it took the Fed to become concrete.

Are EMU-Bonds currently mispriced? (ls)

Paul deGrauwe makes this case in his article on voxeu. He argues that government bond markets in a monetary union may be subject to self-fulfilling liquidity crises and hence to multiple equilibria. He claims that the sharp widening of the periphery's spreads should be mainly attributed to adverse changes of the market sentiment. The following picture serves him as an argument:

He writes that:

It presents pooled time-series and cross-section observations of the relation between the spreads of ten-year government bond rates of Eurozone governments compared with the German bond rate between 2000 and 2011 (quarterly observations). The red line represents the regression line indicating that increasing spreads are associated with increasing debt-to-GDP ratios. This line could be called the ‘fundamental relation’ between spreads and debt ratios.

How can this regression line be a fundamental one when it is mainly derived from observations in the pre-crisis period? Valuations in the pre-crisis period weren't fundamental at all. He makes this point himself. And I would like to add that we shouldn't exclusively blame the market. Favorable collateral and captial requirements posed by the ECB and by the respective banking supervision authorities played their role as well. But back to the chart: Large deviations of periphery spreads from the fitted regression line are taken as a sign of irrationality. This seems inconsistent to me, as the fitted line itself cannot serve as a fundamental benchmark. Drastically rising spreads do not imply a deviation from fundamentals, but rather a deviation from the optimistic pre-crisis consensus how to (under)price sovereign risk. In the end, we cannot distinguish whether we witness an adequate repricing or pure exaggeration.

Thank you for your service, Mr. Bini Smaghi (amv)

Lorenzo Bini Smaghi is going to leave the ECB's Executive Board at the end of this year. This is bad news for two reasons: First, he is an "intellectual heavyweight" as the FT correctly points out (unsurprisingly, Bini Smaghi is Chicago-trained). Second, the reason why he has to exit the Board reminds us that nationality still matters in the conduct of monetary policy. Bini Smaghi must leave since France insists on a less Italian-dominated Board, given Mario Draghi's presidency since Nov 2011. Benoît Coeuré - a Frenchman, of course - will take his place. I do not argue that Coeuré is less able than the average Board member. Yet, given that Bini Smaghi was one of the Board's most able members, it seems clear that the selection process does not sort between "competent" and "less competent" decision makers, but between nationalities - evidently able to sort out the most effective policymaker, while leaving others in place.

The most interesting statements by a central banker are probably those he makes when leaving office. Accordingly, the FT took advantage and promtly interviewed Bini Smaghi. Mr. Weidmann should listen carefully to what he has to say: "[...] not deciding, or postponing decisions, is not an option and leads to worse outcomes." Decision makers shall not "hide behind lawyers to avoid taking action." Wooha! Eat this, Bundesbank.

Bini Smaghi is in favour of QE. I like that. He also favors the ECB as Lender of Last Resort (LOLR) to sovereigns. In a short policy note, I recently made the distinction between potentially insolvent and illiquid sovereign, and only supported the ECB as a LOLR to the latter group. Now this is Bini Smaghi: "If the issue is not one of insolvency but rather illiquidity, then the ECB has room for action - one could even say that the ECB has a duty of action." For the former group, I'm still in favor of haircuts and of the ECB to act as the Owner of Last Resort (OLR) to the European banking sector. I'm pretty sure that Smaghi wouldn't buy in as he still opposes Private Sector Involvement (PSI). He is quite honest: "No central bank in the world would consider the default of its sovereign desirable or possible."

I also disagree with another point he makes: "[T]he lender of last resort function is typically characterised by constructive ambiguity. Central banks try to avoid committing themselves in advance on the specific conditions in which they will intervene. [...] Central banks should use as much constructive ambiguity as possible and avoid committing to act – or not to act – at a time of high uncertainty." How can he say that? Modern monetary policy boils down to the control of market expectations. The expectation channel is key! Also when it comes to the LOLR-function. Without a credible commitment to a potentially unlimited swap line - exchanging sovereign bonds for central bank liabilities -, the ECB actually has to purchase sovereign bonds in significant amounts. Also QE will prove ineffective, if the ECB refuses to control/determine market expectations.

Nevertheless, thank you for your service!

"The hottest question in Europe" (amv)

is: "Did the ECB just pull off a Back-Door Bailout that will end the crisis?" by Simone Foxman. Reactions: Karl Smith, Modeled Behavior; Tyler Cowen, Marginal Revolution; Gareth Gore; Free Exchange (The Economist); Felix Salmon. I side with Smith and Salmon. Final update: Izabella Kaminska (FT Alphaville) resolves the issue (see also her previous post).

10 inconvenient Euro-truths by David Marsh (amv)

Excellent post by David Marsh (OMFIF):

Below are 10 key facts on the present position of the euro that many people overlook. Perhaps the most salient point concerns the direction of trade flows - the opposite of what you might expect. A classic case of ‘man bites dog’. The UK, a resolute non-member of the euro, has been busy over the past decade building trade ties with EMU. Yet Germany, in whose name and with whose currency monetary union was built, has been successfully integrating with the non-euro area – with fast-growing states in non-EMU Europe and Asia – and is doing progressively less trade with the euro bloc. Germany’s relative trade links with the peripheral countries have fallen particularly sharply. Considering these countries’ financing requires so much treasure from the taxpayers of Germany and other creditor countries, the imbalance between falling trade and rising demand for finance is at the bottom of the growing reluctance of the creditor countries to pledge more money to solve the conundrum. Confused about all this? Now read on.  

The ECB as Lender and Owner of Last Resort (amv)

I wrote a non-technical policy note on the sovereign debt crisis in the Eurozone. I argue that the only feasible as well as incentive-compatible solution to the current sovereign debt crisis in the Eurozone involves the European Central Bank (ECB)

• as a Lender of Last Resort to the Eurozone’s core countries like France, Austria, Finland, and The Netherlands, and
• as the Owner of Last Resort to the European banking system, thereby setting the stage for haircuts on the debt of potentially insolvent peripheral Member States like Greece, Italy, Spain, and Portugal.

Lars Christensen (The Market Monetarist) and Kantoos (Kantoos Economics) kindly published a summary of the paper. I am grateful to both of them.

Remark: It is argued that a proper management of NGDP-expectations would suffice to eliminate all distress on financial markets. Even though my paper argues that a shift by the ECB to an output-gap adjusted price-level-targeting regime is important to ease the debt crisis, I doubt that such a regime-change will be sufficient. One important reason is that there will be no return to the "old normal". Markets as well as regulators finally come to understand that there ain't no such thing like a "risk-free asset". The time of the zero-risk weighting rule is over. Positive risk-weights will remain, and so will higher equilibrium yields on sovereign bonds. It follows that recapitalization needs are real even in the case of perfect NGDP-expectation management.

New working paper (ls)

I'm going for some shameless self-promotion. fg and I wrote a working paper where we have set up a macro-finance model, in which policymakers have to deal with endogenously arising boom-bust cycles on financial markets and their real-economy impact. It can be downloaded here.

Abstract:

We merge a financial market model with leverage-constrained, heterogeneous agents with a reduced-form version of the New-Keynesian standard model. Agents in both submodels are assumed to be boundedly rational. The financial market model produces endogenously arising boom-bust cycles. It is also capable to generate highly non-linear deleveraging processes, fire sales and ultimately a default scenario. Asset price booms are triggered via self-ful filling prophecies. Asset price busts are induced by agents' choice of an increasingly fragile balance sheet structure during good times. Their vulnerability is inevitably revealed by small, randomly occurring shocks. Our transmission channel of fi nancial market activity to the real sector embraces a recent strand of literature shedding light on the link between the active balance sheet management of nancial market participants, the induced procyclical fluctuations of desired risk compensations and their final impact on the real economy. We show that a systematic central bank reaction on financial market developments dampens macroeconomic volatility considerably. Furthermore, restricting leverage in a countercyclical fashion limits the magnitude of fi nancial cycles and hence their impact on the real economy.

We truly welcome feedback. Our contact details can be found here.

Charles Goodhart on Investment Banking (ls)

Great piece at voxeu.org

Key statements:

So, investment banks are the main intermediaries between large-scale borrowers and lenders, and, as such, provide essential services in keeping wholesale capital markets functioning efficiently. Sometimes they even run such markets themselves, (eg dark-pools); more often they provide the channel through which almost all orders get transmitted to the market (eg derivatives markets). Such intermediation services are essential to the continued functioning of our complex modern economy. The chaos that occurred after the failure of Lehman Brothers, an investment bank without any retail banking involvement, is testimony to that. The idea that investment banks can be liquidated with far less social costs than ‘pure’ retail banks is incorrect, though alas common.

 Markets get made by participants taking positions. No one objects to agents taking positions if they bear the loss themselves. Problems arise when there are major externalities to society from such losses. It is the thesis of this note that the role of investment banks is so central to the efficient operation of our complex financial system that losses to such banks have major social externalities. The idea that, once you have carved out the ‘socially valuable’ parts of retail banking, ie the payments system and retail lending and deposit-taking, you can liquidate the rest without massive adverse effects is not only tragically mistaken but also horribly dangerous.

A really pleasant - since differentiated - view.

Bond spreads and governance (ls)

Tito Boeri worte a nice piece on voxeu. He shows how the relative underperformance of Italian government bonds compared to Spanish ones during the last four months can be attributed to the different style of politicians in dealing with the debt crisis and nervous markets. It is not surprising that the obviously bad governance of the Berlusconi administration is found to be the main driver of rising spreads.