A TEXT POST

Netherlands nationalises SNS Reaal

Financial Times, Feb 1, 2013
By Matt Steinglass in London

The Netherlands has nationalised SNS Reaal, the fourth-largest systemically important bank in the Netherlands, at a cost to Dutch taxpayers of €3.7bn.

The bank had spent the past several weeks in a desperate search for private capital to compensate for heavy losses in its real estate holdings, particularly in Spanish assets.

Jeroen Dijsselbloem, the Netherlands’ finance minister, said in a statement he had “looked at every alternative involving private parties”, but found none that could guarantee the stability of the Dutch banking system.


With ABN Amro still in government hands after it was nationalised in 2009, the nationalisation of SNS Reaal means two of the Netherlands’ four systemically important banks are state-owned.

The nationalisation, carried out under the Netherlands’ 2012 law on bank intervention, will mean shareholders of the bank and subordinated debt holders will see their stakes wiped out. There will be a write down of the subordinated creditors to the tune of €1bn.

The state will inject €2.2bn in new capital, while forgiving €800m the bank still owed from its earlier bailout during the financial crisis. It will also write off €700m in the value of the bank’s real estate assets.

In a blogpost on FT.com on Thursday, economist Heleen Mees noted that rating agency Fitch has warned it may downgrade the debt of other Dutch and European banks if a government rescue of SNS Reaal wipes out ordinary bondholders.

A TEXT POST

Employment Situation in the U.S and Greece

On Friday, at 15:30 local time the Bureau of Labor Statistics will announce the Employment situation in the U.S in January 2013. 150,000 people are expected to have found a job during January. In all, since December of 2010, when the unemployed were 14.4 million people, 2.2 million are estimated to have found a job during the past 2 years.

Compare and contrast this number to the 1.345 million unemployed in Greece in October 2012. Since Dec 2010 when the unemployed were 694 thousand, 651 thousand more have lost their jobs, in less than 2 years.

The IMF (whose transactions with Greece date from 2010) have recently admitted “growth forecast errors

A TEXT POST

Growth Forecast Errors and Fiscal Multipliers

3 Jan 2013, IMF Researh Department, by Olivier Blanchard and Daniel Leigh

Summary: This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.

Click here for Greece’s transactions with the IMF, including the interest paid in SDR. The Exchange rate on Jan 25, 2013 was 1 SDR= 1.14 euro)

The noted international macroeconomist Jeff Frankel in a recent article titled “Monetary Alchemy, Fiscal Science" has this to say on the "multiplier effect":

That monetary policy is less effective than fiscal policy under conditions of high unemployment and zero interest rates should not be a novel position.  But many economists have forgotten much of what they knew and politicians may not have even heard the proposition. 
                Introductory economics textbooks have long talked about the Keynesian multiplier effect:  the recipients of federal spending (or of consumer spending stimulated by tax cuts or transfers) respond to the increase in their incomes by spending more as well, as do the recipients of that spending, and so on.  Again, the multiplier is much more relevant under current conditions than in the normal situation where the expansion goes partly into inflation and interest rates and thus crowds out private spending.  By the time of the 2008-09 global recession even those who believed that fiscal stimulus works had marked down their estimates of the fiscal multiplier — intimidated, perhaps, by newer theories of policy ineffectiveness.  The subsequent continuing severity of recessions in the United Kingdom and other countries pursuing contractionary fiscal policies, apparently to the surprise of the politicians enacting them, suggested that multipliers are not just positive, but greater than one, as the old wisdom had it.   The IMF Research Department has now reacted to this recent evidence and bravely confessed that official forecasts, including even its own, had been operating with under-estimates of multiplier magnitudes.
          A new wave of econometric research estimates fiscal multipliers using methods that allow them to be higher in some circumstances than others.   Baum, Poplawski-Riberio and Weber (2012) allow the estimate to change when crossing a threshold measure of the output gap.  Batini, Callegari and Melina(2012) allow regime-switching, across recessions versus booms.  Others that similarly distinguish between multipliers in periods of excess capacity versus normal times include Auerbach and Gorodnichenko (2012a2012b), Baum and Koester (2011), and Fazzari, Morley and Panovska (2012).  Most of this research finds high multipliers under conditions of excess capacity and low interest rates.  (Few of them have the courage to mention that this is what one would have expected from the elementary textbooks of 50 years ago, perhaps due to fear of sounding old-fashioned.)   Related studies confirm other conditions that matter for the size of the fiscal multiplier in precisely the way the traditional textbooks say, for example that they are lower in small open economies because of crowding out of net exports.