Felix Salmon

The politics of debt in Zimbabwe

Felix Salmon
Mar 4, 2010 14:58 UTC

It’s worth remembering, in an era where Greece and other countries are being pilloried for fudging the amount of their national debt to make it look smaller than it actually is, that there’s another group of countries which is often accused of the equal and opposite crime. Governments looking to take advantage of the World Bank’s HIPC program, in which they get classified as Heavily Indebted Poor Countries, need to demonstrate not only that they’re poor but also that they’re heavily indebted. And so they have an incentive to fudge their books to make it look as though they owe more than they actually do. If they’re successful, the World Bank, Paris Club, and even private creditors are likely to more or less wipe out the debt entirely.

But if there’s one country which is pretty much guaranteed to look at the economically obvious thing to do and then fight and shout to do exactly the opposite, it’s Zimbabwe. And Zimbabwe’s ambassador to China, Christopher Mutsvangwa, has a hugely entertaining 1,500-word rant about exactly why Zimbabwe should not want to achieve HIPC status at this “most propitious time for the country”. I’ll quote the beginning, you can take it from there:

Harare — HIGHLY Indebted Poor Country status is not the answer to the Zimbabwe debt problem.

Zimbabwe is not Haiti.

The country does not suffer from inherent incapacity that would require outside management of its resources for it to get out of the debt, which was exogenously induced.

For a start, Zimbabwe has much-valued assets. The modern industrial revolution added more than mere gold to its treasure trove of mineral riches.

Zimbabwe has diamonds, platinum and chrome — minerals that feature among the creme-de-la-creme of international mineral Olympics. Zimbabwe also has coal, methane, iron ore, limestone, lithium and a bevy of other minerals in abundance.

Add to these mineral resources, the fertile, well-watered soils that can support flourishing agro-industrial activity.

Top this all with one of Africa’s most developed human resources base that is a product of post-independence’s educational policy.

Be wary of Spartans bearing gift gourds

Maybe Europe could have benefited from Zimbabwe’s post-independence educational policy: the Zimbabweans are clearly more “wary of Spartans” than the people at Eurostat were.

(Thanks to Matthew Tubin for the find)


The expropriation and expulsion of what was by far the most productive portion of Zimbabwe’s “human resources base” by a chief executive with multiple degrees from Western universities bears testimony to the limitations of “education.”

Recolonization seems to be their only hope at this point.

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Felix Salmon
Mar 4, 2010 05:26 UTC

Citi on sovereign CDS: “You Can’t Blame the Mirror for Your Ugly Face” — Scribd

Fed seeks limit on credit card penalty fees — Reuters

EMSI comes down on my side of the cost-per-job debate — Economic Modeling

Paris Hilton thinks her SUV is a bicycle — TMZ

How on earth can you have a 26-foot wave in the Mediterranean? — CNN

Factoid from the SABEWs: FT.com is a “Mid-sized Web site” while The Orange County Register counts as Large — Business Journalism

I think the Salmon Protocol is a very good idea indeed — Salmon Protocol

Felix Salmon: What I Read — Atlantic Wire

Bloggers get NYPD press passes, finally! Only took them five years — Gothamist


Four 10 foot swells merging gives you a 40 foot wave, so…

Posted by UncleBillly1 | Report as abusive

Did Rubin really say that?

Felix Salmon
Mar 4, 2010 01:04 UTC

This Huffpo article has no byline, and the quote is mostly an indirect one, but if Bob Rubin said anything like this he deserves all the pillorying that he’s getting, and more:

Much of the blame for the current crisis falls on the shoulders of the fiscal policy decisions of the Bush administration, Rubin said, under which “we lost a decade to some extent.”

Rubin, here, is conflating three different issues to make himself look good. It’s true that the Bush administration made bad decisions from a fiscal-policy perspective, cutting taxes massively just as it was about to spend trillions on going to war. And it’s also true that the Bush decade was a lost one. But it’s simply not true that the Bush administration can or should shoulder the blame for the crisis. Frankly, Rubin himself is much more blameworthy in that regard than Bush or any of his appointees.

There’s a lot of blame to go around when it comes to this crisis, of course. But let’s see who deserves huge chunks of it:

  • Traders at investment banks, who levered up and started making so much money that they ended up ousting the investment bankers who had historically run them.
  • Arbitrageurs who made enormous sums of money by making leveraged bets that something with a 95% chance of happening was, indeed, going to happen.
  • Senior management at investment banks, who urged their traders to take on ever more risk and leverage.
  • Senior US politicians who urged the deregulation of the derivatives industry over the objections of, among others, Brooksley Born.
  • Senior US politicians who were responsible for dismantling Glass-Steagal.
  • Senior US politicians who ran US fiscal policy for the benefit of Wall Street, while asking for nothing but cheap debt in return.
  • Bankers-turned-politicians-turned-bankers who institutionalized the revolving door between Wall Street and Washington, making it clear that if you did the banking industry’s bidding during your tenure in DC, you’d be rewarded on the other side with a highly remunerative job.
  • Senior executives at big commercial banks who had no idea what risks they were running.
  • Senior executives at big commercial banks who urged their fixed-income departments to take on ever-increasing amounts of risk.
  • Board members at big commercial banks who failed to implement any kind of succession strategy should their CEO suddenly have to leave.
  • Grandees who bullied lesser mortals into doing what they wanted just because everybody assumed they knew what they were talking about and because they were paid eight-figure salaries to just sit around and be grand.
  • People so blind to their own weaknesses that even after the crisis happened, they refused to admit any responsibility for it at all.

You’re probably getting the picture by now: Robert Rubin, Goldman Sachs arbitrageur and chairman, US treasury secretary, and Citigroup grandee, was the Forrest Gump of this crisis, turning up in all the key places at all the key times. The fact that he’s still trying to deflect blame off himself and onto the hapless George W Bush is simply pathetic. There’s more than enough bad stuff to pin on Bush that he really shouldn’t blame the crisis on him as well. Especially not when he’s so personally culpable for the crisis. Indeed, there’s probably no one individual, with the possible exception of Alan Greenspan, who deserves more blame for this crisis than Rubin does. Let’s not lose sight of that.

Update: The byline was originally left off by mistake: credit for the HuffPo article goes to Grace Kiser.


Are the bullet points cut off at the right side for anyone else?

Posted by ishmaeldaro | Report as abusive

The silly Greek CDS investigations

Felix Salmon
Mar 4, 2010 00:32 UTC

When the US Justice Department and the European Commission both announce investigations into the dastardly ways of hedge funds making bets against the euro, less than a week after the meme broke, you can be sure that you’re looking at pure politics and zero substance. The closest thing to a smoking gun here is a dinner:

The U.S. Department of Justice is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests sent to managers who attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. on Feb. 8.

Now in theory, it’s entirely possible that a bunch of hedge fund managers talked about the euro on February 8 and decided that they were going to conspire to short both the euro and Greek debt, in the theory that a panic in Greece would drive up the value of their shorts there, and also drive down the value of the euro.

Except if that actually happened, they were spectacularly unsuccessful. Remember this chart?


To a first approximation, February 8 was pretty much the point at which Greek spreads were at their all-time high, and the smart money was going long Greek debt, not short it. As for the euro, it basically hasn’t moved since that date: it closed on Feb 8 at 1.3643, and it closed today at 1.3695.

These investigations will cost US and EU taxpayers a large amount of money, and will probably generate a multi-million-dollar windfall for the hedge funds’ lawyers. And they will achieve absolutely nothing in terms of results. But hey, at least politicians look as though they’re being tough on financiers. That’s got to make it all worthwhile.


I would like to speak about the CDS prices. I have been monitoring the Greek CDS prices since the onset of the Greek fiscal shock. It is true that the month of Feb 2010 witnessed a brutal price volatility, however, the it was more of a downward volatility. On Feb 8 2010, the 5Y Greek CDS stood at 420.69 bps. Since then it has watered down to little over 300 bps.

Hence, there is no tangible and material evidence that after the Dinner summit hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co, the traders have shorted the 5Y Greek CDS brutally.

I wonder why most of the times regulators look at CDS from the prism of suspicion. After all not all features of CDS are detestable.

Posted by smanjrekar | Report as abusive

How monoculture is like triple-A CDOs

Felix Salmon
Mar 3, 2010 22:37 UTC

Tom Laskawy, of Beyond Green, writes asking for a bit more detail about this bit of my locavorism article:

If you only grow one crop, the downside of losing it all to an outbreak is catastrophe. In rural Iowa it might mean financial ruin; in Niger, it could mean starvation.

Big agriculture companies like DuPont and Archer Daniels Midland (ADM), of course, have an answer to this problem: genetically engineered crops that are resistant to disease. But that answer is the agricultural equivalent of creating triple-A-rated mortgage bonds, fabricated precisely to prevent the problem of credit risk. It doesn’t make the problem go away: It just makes the problem rarer and much more dangerous when it does occur because no one is — or even can be — prepared for such a high-impact, low-probability event.

The point here is that a disease-resistant crop is a lot like a triple-A-rated structured bond: they’re both artificially engineered to be as safe as possible. That would be a wonderfully good thing if no one knew that they were so safe. But if you’re aware of a safety improvement, that often just has the effect of increasing the amount of risk you take: people drive faster when they’re wearing seatbelts, and they take on a lot more leverage when they’re buying AAA-rated bonds.

The agricultural equivalent is the move to industrial-scale monoculture, “safe” in the knowledge that lots of clever engineers in the US have made the crop into the agribusiness version of a bankruptcy-remote special-purpose entity.

But the problem is that bankruptcy-remote doesn’t mean that bankruptcy is impossible: just ask the people running Citigroup’s AAA-rated SIVs. If and when the unlikely event eventually happens, the amount of devastation caused is directly proportional to the degree to which people thought they were protected. When something like that goes wrong, it goes very wrong indeed: artificial safety improvements have the effect of turning outcomes binary.

Essentially, you’re trading a large number of small problems for a small probability that at some point you’re going to have an absolutely enormous problem.

And on a long enough time line, even a small probability is bound to happen sooner or later. Which is something that the likes of Bob Rubin would do well to remember.



What, you don’t like the idea of caribou for breakfast, lunch, supper?

Posted by MaggiesFarmboy | Report as abusive

The FT’s mini-payments

Felix Salmon
Mar 3, 2010 20:11 UTC

The way that the FT’s meter-model subscription works, you have a certain number of stories you can read for free each month; after that, you have to cough up something in the region of $200 a year to read any more.

But that’s going to change: the FT will start selling one-day and one-week passes, via PayPal, in the next few months. So when you approach the end of the month and you run out your monthly quota, you then have the option of buying a daily or weekly pass to get you through the rest of the month until your monthly free allocation reappears.

This will both increase the total number of paid online subscribers (if you include in that number people who subscribe at any point over the course of the year) while at the margin reducing the likelihood that someone who’s reached their monthly limit will end up becoming a fully-paid annual subscriber. And even if it doesn’t increase total FT.com subscription revenues, it might well help the bottom line by making the site more attractive to advertisers, who love enormous paid-subscriber numbers.

It’s also interesting that the FT is using PayPal for its smaller payments; it’s unclear whether PayPal will be an option when it comes to paying for annual subscriptions as well. It’s also unclear whether the cost of a daily or weekly subscription will be refundable in the event that the reader converts to an annual subscription — that would certainly be the user-friendly thing to do.

I also assume that the FT’s decision to use PayPal is an indication that they failed to persuade Apple to open up its iTunes payment system for web-based micropayments. Paying is still going to be a relatively laborious process, involving being sent over to the PayPal site, logging in there, making the payment, and then being sent back to the FT — at which point it will almost certainly have forgotten which page you were trying to get to in the first place. I don’t know when things are going to get easier, but the day can’t come soon enough.


I’ve never quite understood why Paypal don’t create plugins for the major browsers so you don’t have to go through the site. I assume it’s to do with security risk, but you’d have thought there’d be a way. It’s not like Paypal’s website approach is super secure either. It’s vulnerable to keyloggers and to the usual password hacking approaches.

Posted by GingerYellow | Report as abusive

Why a prudential regulator can’t house the CFPA

Felix Salmon
Mar 3, 2010 15:25 UTC

Listening to Robert Johnson, a Roosevelt Institute fellow, talk at his institute’s conference this morning helped drive home to me exactly why it doesn’t make sense to house a Consumer Financial Protection Agency inside the Fed, or other bank regulators. And the reason is that those regulators are consumer financial protection agencies already: the banks are the customers of the Fed and of the other regulators, and it’s the regulators’ job to protect the finances of their customers the banks.

Elizabeth Warren was at the conference too, and did a great job of explaining what she called “the bank industry’s complexity machine”. Regulators and regulation always evolve in the direction of complexity and away from the simplicity that real consumers — individuals with mortgages and credit cards — need. “The banks want to make reform very complicated, so that only the experts can understand it,” said Warren — and it’s inevitable that a CFPA housed at the Fed or at any existing institution would gravitate towards the kind of regulatory complexity which is a ubiquitous symptom of regulatory capture.

In 1980, noted Warren, Bank of America’s credit card agreement was one page and 700 words long; today it’s 30 pages of dense legalese. Banks will never willingly return to a world of 700-word credit card agreements, not when their profits from consumer finance are almost entirely a function of forcing consumers into paying hidden fees they don’t understand at the outset.

Essentially, the CFPA, by its nature, is going to have to have an adversarial relationship with the banking industry, at least at the outset. The prudential regulators, meanwhile, exist to make those banks healthier: they like anything which generates income and profits, and have historically not cared in the slightest if such products are only profitable because they rip off consumers with moderate financial literacy. If they end up housing the CFPA, the CFPA will never be allowed to force the banks into the world of simplicity and honesty that we financial consumers so desperately need.



It’s axiomatic that government agencies wind up serving their largest constituencies, and your comments reflect that. Margaret Thatcher once described the UK Foreign Office as ‘looking after foreigners’…

What Warren and everyone else is saying is that there needs to be an agency who’s constituency is the consumer, the man/woman on the street, rather than the ‘system’ or the commercial institutions.

And, just as an aside, your statements about safeguarding the system are, quite frankly, disturbing. As a government official, your first duty should be to country (aka, “We, the people”), not to the banking system. Your view neatly encapsulates why we wound up in the mess we are in.

Posted by ChrisMaresca | Report as abusive

Eurozone crises: the bigger picture

Felix Salmon
Mar 3, 2010 14:44 UTC

Charles Forelle and Stephen Fidler have a really good front-page overview of the eurozone’s fiscal situation in the WSJ today. There’s not a lot of new news here, but as a lucid explanation of how we got to our present sorry state (and possible future even sorrier state), it’s vastly superior to sensationalist conspiracy theories about euro-shorting hedge funds.

So in the wake of the latest announcements from Greece promising fiscal rectitude in present and future — announcements which the market seems to like quite a lot — it’s worth bearing in mind two questions. The first, on which the market is currently fixated, is whether Greece can roll over its maturities in the next three months or so, tapping some combination of public bond markets, state-owned European banks, and EU loan guarantees. On that front, things are indeed looking pretty hopeful, partly thanks, as Sam Jones notes, to those very hedge funds which shorted Greece a few months ago, are making substantial profits by covering those shorts, and are now driving spreads tighter as opposed to wider.

The second question, which is much less tractable, is whether we can have any faith in eurozone government finances more generally, and this is where today’s WSJ article is so helpful, showing clearly that the truth has a tendency to come out very slowly and unpredictably, and that currency swaps through the like of Goldman Sachs are the least of the problem: governments hide much bigger debts by doing things like excluding defense expenditures or reclassifying subsidies as equity investments.

It’s worth remembering the famous convergence trade of the 1990s, whereby the wide spreads on what we now think of as PIGS debt all converged to something near zero as the euro approached: the idea was that simply adopting a single currency would mean an end to idiosyncratic credit risk between countries. In hindsight, that doesn’t make a lot of sense, since it was based on what Willem Buiter calls the “paper tiger” of the Maastricht treaty — the idea that somehow, after signing that piece of paper, sovereign governments would change the habits of decades or even centuries.

Of course it didn’t seem that way at the time. Because the PIGS were funding themselves in domestic currency, their credit risk pre-euro was very low, since they could and did always just print money to repay their debts. The result was high nominal interest rates to make up for high expected future inflation and/or currency depreciation. When those countries moved to the euro, the risks of inflation and currency depreciation were massively and credibly reduced — but no one seemed to worry overmuch about the fact that those risks didn’t simply disappear, they were just being transformed into medium-to-long-term credit risk.

Even at 400bp over German sovereign bonds, Greece’s nominal borrowing costs today are much lower than they were in the era of the drachma: the markets are requiring less compensation for Greek credit risk than they ever did for drachma depreciation risk. Maybe that’s because they have more faith in Greece’s fiscal rectitude today than they did in the early 1990s. And maybe that faith is well placed: the Greeks certainly seem pretty serious, these days, about cutting spending and increasing revenues. More serious than they ever were in the 90s.

But the fact is that the changes in nominal PIGS funding costs are not perfectly correlated with the fundamental faith that markets have in those countries’ fiscal sustainability, especially now that they’ve spent the past decade with no real control over monetary policy. So while the ouzo crisis might be waning, I’m sure that we’ll see more, similar, crises in future. Because southern Europeans can’t become Germans just by signing a treaty in Holland.


The Scots hate the English, the Flemish hate the Waloons, the Southern Italians hate the Northern Italians, the Catalonians hate the Spaniards, the Bosnians hate the Serbs and of course the French hate everyone. Then along came the “let’s all play nice together folks” and they made a European Union. The idea that a bunch of out of touch bureaucrats could get dozens of nations marching in the same direction was utter nonsense and doomed from the start!

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Felix Salmon
Mar 3, 2010 03:37 UTC

My sister’s tsunami tale. You’ll want to be sitting down for this one — Smiling Footprints

OK Go do a shorter, poppier version of Fischli & Weiss’s The Way Things GoYouTube

Me, on All Things Considered, talking locavorismWNYC

Sam Jones returns to the blogosphere with a great rant on Greek CDS — Alphaville

Manhattan’s 34th Street will be transformed into a crosstown transit-way in Sadik-Khan’s biggest move yet — Streetsblog

Mickey Kaus for California Senate. Doomed — Slate

Greece in No Rush to Sell Bonds, Debt Chief Says — BW

Bloomberg columnist Reilly returns to WSJ “Heard on the Street” team — Talking Biz News


Re. Smiling Footprints: Wow. Glad she’s okay, Felix! That must have been a scary few hours for you.

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