1 Navigation note
1.1 Each separate idea has its separate line
1.1.1 Additional clarification or specifics are made in sub-lines
1.1.2 Sometimes the sub-lines will contain argumentation underlining or undermining the above statement
1.2 If you feel that the you are comfortable with the idea or do not care for additional clarification you may continue rearing the next numerical consequence
1.3 Sometimes correspondence to other ideas laid down in the paper (1.1.1.) may be given
1.3.1 Those are supposed to make stronger argument
1.3.2 or explain mutual dependencies
2 Th!nk3: Sustainable Development and Global Cooperation, focus on the Developing World
2.1 It is blogging competition, which will focus on the former topics
2.2 I am interested in joining it, because
2.2.1 The issue is challenging mainly because if its apparent impossibility
2.2.2 If I am the only entrée I may get the chance to travel to a developing country
3 This blog post will try to put a frame around the issues I will explore in the following 20 posts, because
3.1 First the issues are many and complex
3.2 Secondly the solutions of one problem is most likely going to exacerbate other (creating more jobs fast will impact negatively the environment)
3.3 Thirdly the parties willing to take the bill are in a very short supply
3.4 I have always liked structured texts
3.5 My perspective readers (both of them) should have an idea where the entire blog is going
4 Technological challenges – the first thing we need to solve is creating and transferring technologies
4.1 Technology is the cornerstone of our lifestyle since the invention of fire
4.2 To be realistic it would be unthinkable to talk about any king of sustainability if the technologies we developed and use are unsustainable
4.3 I will concentrate in three areas that need urgent technological solutions diverging decisively from the current trend
4.4 Energy
4.4.1 Currently the vast majority of energy needs are met by fossil fuels
4.4.2 The available alternative energy sources are either unreliable or inefficient
4.4.3 In any case the need for energy will grow in the next decades
4.5 Transportation
4.5.1 As for now humanity is almost exclusively reliant on internal combustion engines
4.5.2 That requires lots and lots of oil or ethanol, produced by deforestation
4.5.3 Alternatives based on electricity will increase the demand for the latter and the supply will fail
4.6 Food production
4.6.1 Despite the statistical data provided by the U.S. Department of Agriculture I will go along with the World Food Programme and argue that there is not enough food to go around
4.6.2 The production capacity of various nations is seriously hampered y the lack of liquidity in the sector, due to the world economic crises (which is far from over by the way)
4.6.3 The use of genetically modified crops in their current form is not the best answer as illustrated by the experience of Andhra Pradesh and Maharashtra (part of the so called India suicide belt)
4.6.3.1 Intellectual property of genomes is not helping bankrupt farmers produce more
4.6.3.2 Higher yield and draught resilient crops are hard to find, so global warming is at least one step ahead in the game
5 Financing the solutions
5.1 I intend to pay special interest to the monetary side of the issues.
5.2 As previously said (3.3.) those with deep pockets are not enthusiastic enough to part with their cash
5.2.1 One reason being the very poor state of public management and almost certain waste of public funds (6)
5.2.2 The state of western economies is intensively bad – economic stagnation, accounting irregularities, structural unemployment, large deficits, over-leverage of financial institutions, capital and stock market disfunctionalities are only some of the problems
5.3 The developing countries will need to pay for the bulk of measures with their own resources
5.3.1 That usually means environmental degradation
5.3.2 The cost of keeping environment intact has human dimension (7)
5.4 Financing also contains the issues of cash-flow, wage control and economic models
5.4.1 Even if a project – lets say cold fusion – is promising and if realised may bring enormous returns there might still be lack of funding in the present moment.
5.4.2 Wage control is closely tided with inflation control mechanisms in general. Those are difficult to apply by developed nations in the best of times. We have already lived through those.
5.4.3 The economic model reflects the freedom of the market in general, including freedom of establishment, government regulations, etc.
5.5 I will try to explore the financing aspects of the listed problems and proposed solutions in the next posts
6 Managing the implementation
6.1 The quality of public management and administrative capacity are often referred as the Achilles' heel of the developing world
6.2 In my post I will try to concentrate on the right of good governance and the mechanisms for its application
6.2.1 It is clear that structural instruments – such as the proposed mechanisms – are not a solution by themselves and specific conditions for their implementation are needed
6.2.2 Key factor for good governance is also the will of both the executive and the judiciary – both creating substantial pressure to block reforms
6.3 Furthermore I will look at education and its role towards building trustworthy administrative bodies
6.4 As well as the mechanisms the role of trade arbitrages (court and out-of-court settlement process) is basic for the public management and deserves some attention.
7 Keeping biodiversity diverse
7.1 The main problem with the current model of economic development – most goods and services are based on resources diggd out or harvested away from the environment. In some cases both.
7.2 Hence if the economy grows (what is rest of) the environment shrinks
7.3 To make it even more challenging deforestation, climate change and over-farming of rural land are conducive to economic calamities
7.4 My following posts will describe possible theoretical ways out of that situation. However I should warn my kind readers I am not optimistic on that issue.
8 Jobs and demographics
8.1 The general observation over new technological solutions is that they increase automatism and reduce direct employment in the field they are realised
8.2 Even more so in the next decade or two, where innovations are created in market conditions of high labour costs
8.3 The demographic of the developed world worries me since the medium age is 25 and below.
8.3.1 Lots of disfranchised, unemployed teenagers and young adults may create dangerous instability in the entire social structure
8.3.2 The large part of the population has not yet reached fertile age, when they do the overcrowding will become real problem. If not manages carefully (with respect to human rights I still think of Singapore style birth control) that may cause bloody conflicts and civil wars.
8.4 Creating jobs and maintaining high living standard for millions of young adults will require resources (7.2) and there is only one place those may come from.
8.5 New jobs on mass scale would require either super-centralised state (8.5.1) or excellent public management, plus good supply of liquidity (8.5.2)
8.5.1 China quasi-market model dictatorship appears to manage reasonable well its citizens and resources. There are some severe drawbacks naturally
8.5.1.1 Cheap, fast and seizable economic growth comes at the cost of great environmental degradation
8.5.1.2 Their export-driven and carefully structured semi-government controlled economy is more prone to bubbles and busts
8.5.1.3 The political centralization may create hidden frictions with hard to contemplate effects
8.5.1.4 Cultural specificities make the model hard to export
8.5.2 In market economies the key for creating jobs fast is creating the right conditions
8.5.2.1 Those include stable legal framework
8.5.2.2 Equality in the implementation of the former and
8.5.2.3 Just commercial disputes resolutions
8.5.2.4 Access to capital by entrepreneurs is also needed, so they can develop their ideas
8.6 Last, but not least the quality/quantity of jobs will be relative to education and technology penetration levels in the specific society
9 Tracking paths away from consumption society
9.1 It appears that in order to protect the environment we need to distance ourselves from the consumption habits of the past
9.2 That will not be easy nor fast, however if every human enjoys the goods and services the average westerner does, we will need 8 to 10 more planets.
9.3 Though I have not researched that issue in great detail yet, I could hint at Baudrillard
10 Moral responsibility, financial responsibility and collateral damage
10.1 So are we trying to safe some people from themselves, just because we know what's better for them?
10.2 If my money are used to alleviate someone from poverty, who will be accountable for misuse or embezzlement? Would my money be used in effect to destroy what is left from the natural environment?
10.3 When outside intervention is applied it tends to shift the established balance and stablishments are usually well-organised
11 The point of my blog is to bring more clarity to the aims of the development and their side-effects
11.1 Just framing problems that everyone knows about is likely not going to help a big deal
11.2 Though I will be trying to speculate on realistic solutions, and despite my great arrogance it is unlikely I will be able to find all of them in the course of my posts.
11.3 What is important in my view is to abandon the search for the philosophical stone – artefact that creates gold and elixir of life simultaneously. Many problems are paradoxical in their nature, simply because they have been framed with incompatible terms.
11.4 Talking about what we want to do, have the ability to do and actually would do can contribute greatly in clarifying a strategy for dealing with the problems – hence reduce waste, uncertainty, mixed signals and most importantly unnecessary suffering.
12 Millennium development goals
12.1 In general those are lost. There is no realistic chance they will be realised in the next decade, yet alone in 5 years.
12.1.1 End poverty and hunger – the World Food Organization is suggesting the people needing food aid will dramatically increase in the next few years. With commodities inflation (5.2.2) on the horizon it is not getting any better.
12.1.2 Universal education – the medium age of people in Africa is 20 years, South East Asia 24, India 25. That presents great many pupils in areas where the basic educational infrastructure is not in place.
12.1.3 Gender equality – in Europe men receive higher compensation than women for the same jobs.
12.1.4 Child health – most of the children mortality appears in Africa and SE Asia. Despite the progresses archived lack of financial resources restricts preventive care and the gaols will not be achieved.
12.1.5 Maternal health – again not enough money and poor living conditions are proving much harder to fight, despite the valiant efforts of many people.
12.1.6 Combat HIV/AIDS – in my opinion that is achievable goal.
12.1.7 Environmental sustainability – no way. The greenhouse emissions are rising, Brazil is cutting down its forests, slums are getting poorer and sustainability is far off dream.
12.1.8 Global partnership – on that issue I have only one comment - the Copenhagen summit
12.2 Despite the evident frustration of the failure, there is a necessity to asses the main reason for it. I will try to give my interpretation.
13 Ending on optimistic note
13.1 I think we are simply destined to succeed
13.2 Failure will be destructive for both the developed and developing world, so we do not have much of a choice
13.3 The precise manner in which sustainability will be achieve may differ, but at the end we will get there
14 Thank you for reading my blog
2/15/2010
Concerning the Bulgaran candidacy for the ERM II
1 Background
1.1 “The ERM (European Exchange Rate Mechanism) is based on the concept of fixed currency exchange rate margins, but with exchange rates variable within those margins. This is also known as a semi-pegged system....A currency in ERM II is allowed to float within a range of ±15% with respect to a central rate against the euro”(Please find more information at http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism )
1.2 Bulgaria's economy is driven mostly by services (64.9% of the GDP1). The population is old with medium age of 42 and the small workforce of 4.6 million provides for the 7 million inhabitance. The total value of the GDP is relatively low – Euro 34 billion2
1.3 After the 2009 elections the new (incumbent) government expressed its strong desire to join the Euro-area as guarantee for fiscal and financial stability3. This is the number one priority of the economic policy and ERM II is popularly perceived as the “Euro-zone waiting room”.
2 Convergence criteria
2.1 “Each Member State must meet all of the criteria in order to participate in the third stage of Economic and Monetary Union (EMU). These are specified in the "Protocol on the convergence criteria" referred to in Article 121 of the Treaty establishing the European Community. They reflect the degree of economic convergence which the Member States must attain to be able to introduce the euro.”4 Due to the significance of the criteria I would like to discuss the compatibility of the Bulgaria economy concerning each criteria.
2.2 Inflation rates - no more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) Member States
2.2.1 Inflation is measured through statistical index (HCPI) composed by the prices of specific products for general use
2.2.2 That index is measured by the statistical agencies of the Member States and Eurostat (with some methodological differences) and the Bulgarian one is directly subordinated to the government
2.2.3 Although the inflation index for 2009 is down to 2.5% (from 12% in 20085) it is significantly higher than the 0.3% average for the EU.
2.2.4 The Bulgarian statistical agency estimates for the inflation differ from those of Eurostat with 0.9%6 which naturally makes eyebrows move upward.
2.2.5 It should be quite obvious that Bulgaria does not cover this specific criteria.
2.3 Annual government deficit: the ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding financial year.
2.3.1 The main problem in Bulgaria is to establish the exact budget deficit- this will be discussed in more details later on.
2.3.2 In any case the government argues that the deficit is less than 0.5% and it has substantial stability due to decade of budgetary surpluses.
2.3.3 In the 2010 the budget of the central government is with deficit of 250 million Euro, however there is defined uncertainty about the tax income.
2.4 The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding financial year. This is clearly the case where the government debt is just about 17% and is perhaps the only undisputed criteria.
2.5 The Member State must have participated in the exchange-rate mechanism of the European monetary system without any break during the two years preceding the examination of the situation and without severe tensions.
2.5.1 The exchange rate is fixed by an inflexible currency peg for over a decade, which in practice gives the exchange stability required by the rule.
2.5.2 It could be speculated though that the longer term stability of the peg depends on the inflow of capital in the country. Such inflow is highly volatile and the statistics suggest problems ahead (more detailed analysis below).
2.5.3 Unless the competitiveness of the Bulgarian economy is not increased in short to medium term the sustainability of the peg (hence the exchange rate) may be endangered.
2.6 The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states
2.6.1 According to the statistics of ECB7 the average interest rate in Bulgaria for 2009 is above 7%. The country with highest interest rates in the Euro-zone was Greece – around 5%.
2.6.2 However the Member States with lowest inflation – Belgium, Holland and Germany have longer term interest rates 3 to 4% lower than the Bulgarian one.
3 Budgetary reporting
3.1 Budgetary reporting stays as a great problem for any independent analyst – it is recorded on the cash bases only.
3.1.1 When the government actually makes the payment it is recorded as such, while if it only takes the liability there is no trace in the budget reports
3.1.2 This practice was used by the last government (and by the current one) to take large liabilities and report budgetary statistics far better than the actual results.
3.2 The budget is getting dangerously unstable due to lack of political will to disclose the real amount of liabilities taken by the taxpayer.
3.2.1 With only limited resources the Ministry of Finance will need to delay payments and damage its reputation as reliable borrower
3.2.2 The presumable large amounts that are payable to the business, but not forecasted in the budget (according to the Association of Employers that sum is close to Euro 0.75 billion) can create serious liquidity problems for the budget account.
3.2.2.1 Recently the government revised its GDP growth forecast to 0.3% from -2%. In my opinion this is extremely optimistic, but even if a miracle happens and Bulgaria gets out of the recession in late 2010 I can not see how this will increase the willingness of the population to fill the state coffers.
3.3 It is important to mention the inability of the government to sell its treasury bills to the central bank under the rules of the currency peg, which gives only two actual choices for substantial fund-raising:
3.3.1 Sell bonds to external investors (with Greece in bad shape and BBB rating of the country that may prove though act). This will also be reported as one time income which will likely cause moral hazard in the budget analysis.
3.3.2 Sell T-bills to the local market. Though such idea has many advantages having in mind the budget instability and liquidity crises (see the following section) it may prove impossible
3.4 I am afraid that unless the government cleans its act about the actual size of public debt (and its reporting standards) there could not be sustainability in the budget planing and execution.
4 Economic policy – liquidity crises with large reserves
4.1 The government states that it has more than Euro 3.5 billion as fiscal reserve raised by budget surpluses from previous periods.
4.1.1 The National Bank has the above sum on its balance sheet
4.1.2 The government is thought to have enough support to change the budgetary regulation concerning the fiscal reserve
4.2 There is not substantial cash in the budget for all the payments due. The government is clearly experiencing liquidity crises.
4.2.1 That is the official position of the Minister of Finance8
4.2.2 There are various officially recognized central budget liabilities (like those to the winter road maintenance companies) not settled for months
4.2.3 In the end of 2009 the payments to the judicial authority were not honered by the Ministry of Finance and the issue was resolved in early 2010. The explanation – the money in the government settlement system were “not actually there”
4.3 I will explore two plausible and one quite unlikely explanations for such contradictory behaviour
4.3.1 The official position (and the most unbelievable case among the three I explore) is that the government needs to sustain high reserves to boost its application for ERM 2
4.3.1.1 In this line of thinking the suppression of expenses in 2009 was just an accounting trick to beef up results
4.3.1.2 Naturally the question of honesty in reporting (especially after the Greek statistical fiasco) is cornerstone towards any evaluation procedure – hence the drive of official to explain the official accounting deception is hard to believe
4.3.1.3 What is more the suppression of expenses is causing liquidity problems to the hardest hit by the global crises business field – construction. Driving large number of employers into bankruptcy is hardly an economic policy any government would conduct willingly.
4.3.2 Further speculations suggest that the government expects high net (cash-flow) deficit for the first half of the year, hence it will need more money to meet its financial obligations.
4.3.2.1 Most certainly this is realistic scenario. The government would expect around 12 billion Euro in revenues in 2010, with good half of them due in the first six months.
4.3.2.2 There are some inconsistencies however – the economic revival in the second half of 2010 could be soured by liquidity problems and there is no real need to suppress expenses
4.3.2.3 From political point of view it is also problematic why the deficit induced by the previous government is transferred in the new fiscal year.
4.3.3 The third option concerns the quality of the reserves – or should I say their solidity
4.3.3.1 I must underline that this option is entirely speculative and although it fits the observable facts quite well there is not a single proof to validate it
4.3.3.2 The fiscal reserve (and the currency reserve) are managed by the National Bank. They are stored in low-risk securities – what precisely is not public information.
4.3.3.3 Supposing that the reserves have been involved in transactions with much higher risk and the resulting profit has been banked privately (the interest of 12 billion Euro – the reserves - is considerable)
4.3.3.4 The next step is the involvement of the world economic crises where the high risk investments go bust.
4.3.3.5 Resulting in, with elegant inevitability, not only sizeable loses that can not be admitted, but also considerable solidity of the investments. Hence the government may not use its fiscal reserves simply because they may not pull them out from their current investment.
4.3.3.6 I must underline once again the pure speculative character of this option. The National Bank publishes information about its balance sheet every week, where there are over 1 billion Euro in cash, 1 billion in gold and 10 billion in securities.
4.3.3.7 To give further information (undermining my speculation) I would note that in the mids of the recession the cash position in the balance sheet was closer to 2 billion, further information you may find at http://bnb.bg/Statistics/StBNBBalances/StBalancesIssueDepartment/StBIDMonthly/index.htm?periodAndRatesStartMonths=01&periodAndRatesStartYear=2008&periodAndRatesEndMonths=01&periodAndRatesEndYear=2010&active=306&active=309&active=310&active=314&downloadOper=&selectPeriod=true&search=search&toLang=_EN
4.4 Whichever option is the correct one – there conclusion is the certain. Bulgaria is not in the necessary economical shape to be part of the ERM2.
5 Banking system
5.1 I will start this section with a news from the National Bank. As from December 2009 the reported loans (overdrafts excluded) are 19.7 billion Euro. Out of those the non-performing are 2.1 billion or the looping 10.8%9.
5.2 It is still unclear if all those loans will need to be liquidated and what would be the collateral liquidation price, however it is inevitable that large loses will be made.
5.3 A deposit war between bank institutions is raising the long-term interest rates 3 and more percent above the EU average. What is more it is unlikely to drive the difference down in near future.
5.4 If the economic recession persists and the non-performing loans increase (as expected) the banks may have cash-flow problems – pretty much like the government itself. The only difference being the government may refuse payments.
5.5 Due to the relatively recent bank crises of 1996 the general population is considered prone to bank runs. Therefore the government will need to bail-out any bank that finds itself in serious trouble.
5.5.1 Following the rules of the currency peg the government may not print its way out of such situation
5.5.2 Furthermore public action in the bank sphere may cause public anxiety
5.6 In case of a banking crises the currency peg is likely to experience severe challenge. Currently it is based on the National Bank reserves, however if a bail-out is needed of the tune of few billion (in result to bank run) it is unclear if any international institution will pump enough liquidity in time.
6 Predictions
6.1 Legal notice
6.1.1 According to the Penal Code of Bulgaria anyone who undermines publicly the financial system is criminal liable to up to 5 years in prison.
6.1.2 In respect to the above nothing of this post may be considered as undermining of the Bulgarian financial system. I think it IS stable and WILL endure all challenges.
6.1.3 Naturally even if I do not think it I am obligated to say it.
6.2 ERM 2 and my recommendation
6.2.1 Bulgaria is effectively answering only two of the convergence criteria
6.2.2 Even though there are not set entrée rules for ERM2 it is implicit that one needs to cover the convergence criteria and stay in the mechanism to prove sustainability
6.2.3 I think Bulgaria is not ready
6.2.4 It would appear that the ECB has the same opinion, since after the European Council in February the Bulgarian PM suggested the ERM2 is “few years away”
6.3 I feel like Cassandra.
6.3.1 Sometimes I also feel like Cassandra. You know the one who used to say: “I told you so”
6.3.2 I think there is NO problem in the banking system (see legal note)
6.3.3 I think the government HAS easy access to all of its reserves, well and safely managed
6.3.4 I think the currency peg is STABLE
7 Thank you for reading....
1.1 “The ERM (European Exchange Rate Mechanism) is based on the concept of fixed currency exchange rate margins, but with exchange rates variable within those margins. This is also known as a semi-pegged system....A currency in ERM II is allowed to float within a range of ±15% with respect to a central rate against the euro”(Please find more information at http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism )
1.2 Bulgaria's economy is driven mostly by services (64.9% of the GDP1). The population is old with medium age of 42 and the small workforce of 4.6 million provides for the 7 million inhabitance. The total value of the GDP is relatively low – Euro 34 billion2
1.3 After the 2009 elections the new (incumbent) government expressed its strong desire to join the Euro-area as guarantee for fiscal and financial stability3. This is the number one priority of the economic policy and ERM II is popularly perceived as the “Euro-zone waiting room”.
2 Convergence criteria
2.1 “Each Member State must meet all of the criteria in order to participate in the third stage of Economic and Monetary Union (EMU). These are specified in the "Protocol on the convergence criteria" referred to in Article 121 of the Treaty establishing the European Community. They reflect the degree of economic convergence which the Member States must attain to be able to introduce the euro.”4 Due to the significance of the criteria I would like to discuss the compatibility of the Bulgaria economy concerning each criteria.
2.2 Inflation rates - no more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) Member States
2.2.1 Inflation is measured through statistical index (HCPI) composed by the prices of specific products for general use
2.2.2 That index is measured by the statistical agencies of the Member States and Eurostat (with some methodological differences) and the Bulgarian one is directly subordinated to the government
2.2.3 Although the inflation index for 2009 is down to 2.5% (from 12% in 20085) it is significantly higher than the 0.3% average for the EU.
2.2.4 The Bulgarian statistical agency estimates for the inflation differ from those of Eurostat with 0.9%6 which naturally makes eyebrows move upward.
2.2.5 It should be quite obvious that Bulgaria does not cover this specific criteria.
2.3 Annual government deficit: the ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding financial year.
2.3.1 The main problem in Bulgaria is to establish the exact budget deficit- this will be discussed in more details later on.
2.3.2 In any case the government argues that the deficit is less than 0.5% and it has substantial stability due to decade of budgetary surpluses.
2.3.3 In the 2010 the budget of the central government is with deficit of 250 million Euro, however there is defined uncertainty about the tax income.
2.4 The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding financial year. This is clearly the case where the government debt is just about 17% and is perhaps the only undisputed criteria.
2.5 The Member State must have participated in the exchange-rate mechanism of the European monetary system without any break during the two years preceding the examination of the situation and without severe tensions.
2.5.1 The exchange rate is fixed by an inflexible currency peg for over a decade, which in practice gives the exchange stability required by the rule.
2.5.2 It could be speculated though that the longer term stability of the peg depends on the inflow of capital in the country. Such inflow is highly volatile and the statistics suggest problems ahead (more detailed analysis below).
2.5.3 Unless the competitiveness of the Bulgarian economy is not increased in short to medium term the sustainability of the peg (hence the exchange rate) may be endangered.
2.6 The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states
2.6.1 According to the statistics of ECB7 the average interest rate in Bulgaria for 2009 is above 7%. The country with highest interest rates in the Euro-zone was Greece – around 5%.
2.6.2 However the Member States with lowest inflation – Belgium, Holland and Germany have longer term interest rates 3 to 4% lower than the Bulgarian one.
3 Budgetary reporting
3.1 Budgetary reporting stays as a great problem for any independent analyst – it is recorded on the cash bases only.
3.1.1 When the government actually makes the payment it is recorded as such, while if it only takes the liability there is no trace in the budget reports
3.1.2 This practice was used by the last government (and by the current one) to take large liabilities and report budgetary statistics far better than the actual results.
3.2 The budget is getting dangerously unstable due to lack of political will to disclose the real amount of liabilities taken by the taxpayer.
3.2.1 With only limited resources the Ministry of Finance will need to delay payments and damage its reputation as reliable borrower
3.2.2 The presumable large amounts that are payable to the business, but not forecasted in the budget (according to the Association of Employers that sum is close to Euro 0.75 billion) can create serious liquidity problems for the budget account.
3.2.2.1 Recently the government revised its GDP growth forecast to 0.3% from -2%. In my opinion this is extremely optimistic, but even if a miracle happens and Bulgaria gets out of the recession in late 2010 I can not see how this will increase the willingness of the population to fill the state coffers.
3.3 It is important to mention the inability of the government to sell its treasury bills to the central bank under the rules of the currency peg, which gives only two actual choices for substantial fund-raising:
3.3.1 Sell bonds to external investors (with Greece in bad shape and BBB rating of the country that may prove though act). This will also be reported as one time income which will likely cause moral hazard in the budget analysis.
3.3.2 Sell T-bills to the local market. Though such idea has many advantages having in mind the budget instability and liquidity crises (see the following section) it may prove impossible
3.4 I am afraid that unless the government cleans its act about the actual size of public debt (and its reporting standards) there could not be sustainability in the budget planing and execution.
4 Economic policy – liquidity crises with large reserves
4.1 The government states that it has more than Euro 3.5 billion as fiscal reserve raised by budget surpluses from previous periods.
4.1.1 The National Bank has the above sum on its balance sheet
4.1.2 The government is thought to have enough support to change the budgetary regulation concerning the fiscal reserve
4.2 There is not substantial cash in the budget for all the payments due. The government is clearly experiencing liquidity crises.
4.2.1 That is the official position of the Minister of Finance8
4.2.2 There are various officially recognized central budget liabilities (like those to the winter road maintenance companies) not settled for months
4.2.3 In the end of 2009 the payments to the judicial authority were not honered by the Ministry of Finance and the issue was resolved in early 2010. The explanation – the money in the government settlement system were “not actually there”
4.3 I will explore two plausible and one quite unlikely explanations for such contradictory behaviour
4.3.1 The official position (and the most unbelievable case among the three I explore) is that the government needs to sustain high reserves to boost its application for ERM 2
4.3.1.1 In this line of thinking the suppression of expenses in 2009 was just an accounting trick to beef up results
4.3.1.2 Naturally the question of honesty in reporting (especially after the Greek statistical fiasco) is cornerstone towards any evaluation procedure – hence the drive of official to explain the official accounting deception is hard to believe
4.3.1.3 What is more the suppression of expenses is causing liquidity problems to the hardest hit by the global crises business field – construction. Driving large number of employers into bankruptcy is hardly an economic policy any government would conduct willingly.
4.3.2 Further speculations suggest that the government expects high net (cash-flow) deficit for the first half of the year, hence it will need more money to meet its financial obligations.
4.3.2.1 Most certainly this is realistic scenario. The government would expect around 12 billion Euro in revenues in 2010, with good half of them due in the first six months.
4.3.2.2 There are some inconsistencies however – the economic revival in the second half of 2010 could be soured by liquidity problems and there is no real need to suppress expenses
4.3.2.3 From political point of view it is also problematic why the deficit induced by the previous government is transferred in the new fiscal year.
4.3.3 The third option concerns the quality of the reserves – or should I say their solidity
4.3.3.1 I must underline that this option is entirely speculative and although it fits the observable facts quite well there is not a single proof to validate it
4.3.3.2 The fiscal reserve (and the currency reserve) are managed by the National Bank. They are stored in low-risk securities – what precisely is not public information.
4.3.3.3 Supposing that the reserves have been involved in transactions with much higher risk and the resulting profit has been banked privately (the interest of 12 billion Euro – the reserves - is considerable)
4.3.3.4 The next step is the involvement of the world economic crises where the high risk investments go bust.
4.3.3.5 Resulting in, with elegant inevitability, not only sizeable loses that can not be admitted, but also considerable solidity of the investments. Hence the government may not use its fiscal reserves simply because they may not pull them out from their current investment.
4.3.3.6 I must underline once again the pure speculative character of this option. The National Bank publishes information about its balance sheet every week, where there are over 1 billion Euro in cash, 1 billion in gold and 10 billion in securities.
4.3.3.7 To give further information (undermining my speculation) I would note that in the mids of the recession the cash position in the balance sheet was closer to 2 billion, further information you may find at http://bnb.bg/Statistics/StBNBBalances/StBalancesIssueDepartment/StBIDMonthly/index.htm?periodAndRatesStartMonths=01&periodAndRatesStartYear=2008&periodAndRatesEndMonths=01&periodAndRatesEndYear=2010&active=306&active=309&active=310&active=314&downloadOper=&selectPeriod=true&search=search&toLang=_EN
4.4 Whichever option is the correct one – there conclusion is the certain. Bulgaria is not in the necessary economical shape to be part of the ERM2.
5 Banking system
5.1 I will start this section with a news from the National Bank. As from December 2009 the reported loans (overdrafts excluded) are 19.7 billion Euro. Out of those the non-performing are 2.1 billion or the looping 10.8%9.
5.2 It is still unclear if all those loans will need to be liquidated and what would be the collateral liquidation price, however it is inevitable that large loses will be made.
5.3 A deposit war between bank institutions is raising the long-term interest rates 3 and more percent above the EU average. What is more it is unlikely to drive the difference down in near future.
5.4 If the economic recession persists and the non-performing loans increase (as expected) the banks may have cash-flow problems – pretty much like the government itself. The only difference being the government may refuse payments.
5.5 Due to the relatively recent bank crises of 1996 the general population is considered prone to bank runs. Therefore the government will need to bail-out any bank that finds itself in serious trouble.
5.5.1 Following the rules of the currency peg the government may not print its way out of such situation
5.5.2 Furthermore public action in the bank sphere may cause public anxiety
5.6 In case of a banking crises the currency peg is likely to experience severe challenge. Currently it is based on the National Bank reserves, however if a bail-out is needed of the tune of few billion (in result to bank run) it is unclear if any international institution will pump enough liquidity in time.
6 Predictions
6.1 Legal notice
6.1.1 According to the Penal Code of Bulgaria anyone who undermines publicly the financial system is criminal liable to up to 5 years in prison.
6.1.2 In respect to the above nothing of this post may be considered as undermining of the Bulgarian financial system. I think it IS stable and WILL endure all challenges.
6.1.3 Naturally even if I do not think it I am obligated to say it.
6.2 ERM 2 and my recommendation
6.2.1 Bulgaria is effectively answering only two of the convergence criteria
6.2.2 Even though there are not set entrée rules for ERM2 it is implicit that one needs to cover the convergence criteria and stay in the mechanism to prove sustainability
6.2.3 I think Bulgaria is not ready
6.2.4 It would appear that the ECB has the same opinion, since after the European Council in February the Bulgarian PM suggested the ERM2 is “few years away”
6.3 I feel like Cassandra.
6.3.1 Sometimes I also feel like Cassandra. You know the one who used to say: “I told you so”
6.3.2 I think there is NO problem in the banking system (see legal note)
6.3.3 I think the government HAS easy access to all of its reserves, well and safely managed
6.3.4 I think the currency peg is STABLE
7 Thank you for reading....
6/19/2009
post concerning some aspects of language education
a. This post is inspired by a school language test by made the Educational ministry. The question being which couple of words co-relate with each other as the words truth-lie, and the answer (I did look at the key) was order-chaos.
b. Hence should you have the patience to read me trough you will understand why this made me extremely angry with the ministry and its language experts.
c. This post will therefore look at how different the co-relation between
truth-lie and
order-chaos are.
d. Lets start with the easy one – chaos is by principle lack of order and I intend to leave it there. What I am enthusiastically against is to call a lie lack of truth.
e. The question what is true has been haunted people for at least 10'000 years and there is no universal answer.
e1. while to call an object/subject which name has been linguistically codified by different name is incorrect that does not make it untrue. e.g. frog incorrectly mistaken to be a toads – the difference is not on taxonomic bases.
e2. many statements of personal believe could not be verified at this stage (e.g. I believe that there are alien civilizations somewhere in the galaxy) or not at all (e.g. Reincarnation)
e3. many statements may be untrue, but that to be unknown to their authors (e.g. when Ptolemy says that the Earth is the centre of the universe) or to us.
e4. in many cases truth is subjective (e.g. It's cold outside)
e5. my kind reader could continue the list, but the point is the inherent uncertainty about the truthfulness of any statement/fact/observation.
f. Second important point I wish to underline is the difference between untrue and lie.
f1. every lie is created for the attention of someone, hence its purposeful. The Middle-ages' believe that stench keeps illnesses away is untrue, but it is not purposefully incorrect.
f2. because the lie is purposeful it needs to be plausible, hence it is (more or less) structured to take the environment under account. Untrue statements (as well as the true ones) need not be (e.g. All sheep in Scotland are white)
g. So far I have suggested that lies are purposeful structuring of fact, where the resulting statement/conclusion is untrue (would be ironic if I lie to you at the moment, wouldn't it), therefore it is not at all chaotic - with lack of order.
g1. Evidently lie is not lack of truth as well (e., f.)
g2. Should I explore the possibility of order-chaos (lack of order) relation to resemble lie (structured) – truth, I should note the truth is not necessary unstructured (lack of structure), nor it is necessary green, or heavy. Therefore such approach is linguistically illogical.
i. In my opinion the experts in the ministry have decided that lie is lack of truth. What they do is replicate one-sided, narrow-minded approach to both language and the truth itself. Developing and encouraging oversimplifications in speech and thinking among children is not in their best interest. The arrogance of the language experts who take nominative determinism approach toward the language, try to change it and teach it this way in schools is infuriating.
j. thank you for reading this one-sided, narrow0minded post that tries to replicate my approach in others.
b. Hence should you have the patience to read me trough you will understand why this made me extremely angry with the ministry and its language experts.
c. This post will therefore look at how different the co-relation between
truth-lie and
order-chaos are.
d. Lets start with the easy one – chaos is by principle lack of order and I intend to leave it there. What I am enthusiastically against is to call a lie lack of truth.
e. The question what is true has been haunted people for at least 10'000 years and there is no universal answer.
e1. while to call an object/subject which name has been linguistically codified by different name is incorrect that does not make it untrue. e.g. frog incorrectly mistaken to be a toads – the difference is not on taxonomic bases.
e2. many statements of personal believe could not be verified at this stage (e.g. I believe that there are alien civilizations somewhere in the galaxy) or not at all (e.g. Reincarnation)
e3. many statements may be untrue, but that to be unknown to their authors (e.g. when Ptolemy says that the Earth is the centre of the universe) or to us.
e4. in many cases truth is subjective (e.g. It's cold outside)
e5. my kind reader could continue the list, but the point is the inherent uncertainty about the truthfulness of any statement/fact/observation.
f. Second important point I wish to underline is the difference between untrue and lie.
f1. every lie is created for the attention of someone, hence its purposeful. The Middle-ages' believe that stench keeps illnesses away is untrue, but it is not purposefully incorrect.
f2. because the lie is purposeful it needs to be plausible, hence it is (more or less) structured to take the environment under account. Untrue statements (as well as the true ones) need not be (e.g. All sheep in Scotland are white)
g. So far I have suggested that lies are purposeful structuring of fact, where the resulting statement/conclusion is untrue (would be ironic if I lie to you at the moment, wouldn't it), therefore it is not at all chaotic - with lack of order.
g1. Evidently lie is not lack of truth as well (e., f.)
g2. Should I explore the possibility of order-chaos (lack of order) relation to resemble lie (structured) – truth, I should note the truth is not necessary unstructured (lack of structure), nor it is necessary green, or heavy. Therefore such approach is linguistically illogical.
i. In my opinion the experts in the ministry have decided that lie is lack of truth. What they do is replicate one-sided, narrow-minded approach to both language and the truth itself. Developing and encouraging oversimplifications in speech and thinking among children is not in their best interest. The arrogance of the language experts who take nominative determinism approach toward the language, try to change it and teach it this way in schools is infuriating.
j. thank you for reading this one-sided, narrow0minded post that tries to replicate my approach in others.
5/31/2009
5/30/2009
Concerning one's choice to be unhappy – part 2
a. This is the second part of my largely unsuccessful attempts to reflect on one's choice of being unhappy.
b. So -far in the previous posting I have suggested to the kind reader that
b1. faced with a crises one may choose to accept one's situation and find a way out of it (arguably through downgrading ones style of life), or to transport the blame (and solution) to third party;
b2. opting for the second choice he/she inevitably chooses to be unhappy (extrapolating important choices to third uninterested party tends to produce that result)
c. There were several suggestions of to why this happened with the ex-workers of Kremikovci, including
c1. cultural explanation suggesting that the ex-workers either have no capacity (should I say habit) to prioritize their expenses, or their expenses are social norm from which they may not escape
c2. psychological explanation underlining the concept of “freedom run”, where people prefer not to take responsibility, because there are afraid of the unexpected results.
d. Anyone with critical viewpoint could argue that I am over simplistic by actually suggesting direct link between unhappiness and expenses
d1. to those readers I would like to point out that the ex-workers demands are monetary – jobs and subsequent salaries, hence in this example the connection is unquestionable
d2. furthermore I am over simplistic
e. Now lets try to answer the question.
e1. the definition of unhappiness in this post does not suggest that individuals can not take certain pleasure – hence I could suggest that all ex-workers are hidden masochists ; though convenient I would pass this possibility.
e2. the cultural explanations also suggest that one strives to be like one's roll model (middle class citizen). This is possible, but the ex-workers were not at the top of the ladder while working, nor is the Bulgarian social landscape so uniformed. Should I remind the poverty of pensioners and the underdeveloped regions? Those are my arguments to suggest that there is no so strong social element to push for the unhappiness choice.
e3. therefore I will look closer in the psychological explanation, to remind they were
e31. non-linear rationality patterns prevent them from realizing the choice hence they can not act on it
e32. they realize a psychological need to be victimized and feel morally superior
e33. “freedom run” where the ex-workers are uncertain what they should do and leave union leaders to take decision, so they would not have to.
f. I will rather promptly dismiss the latter two (e32 and e33), without much of arguments.
f1. the freedom run is important, but the unhappy history of the labour union negotiations and government aid, plus the aggravated financial situation of Kremicovci make me feel much more sceptical about the chance that anyone would trust this could be viable solution (hence does not comply with the choice description in the previous post)
f2. the victimization of the ex-communist factory workers were carried out for about a decade and after all that time one needs to be fed up being morally superior and wishing being on the winning side for once.
g. I am ready to proclaim a winner in the contest of most ridiculous reasons – the non-linear rationalization. Lots of you (and I) though may not be entirely certain what that may mean.
g1. let me start with rationalization – usually it works like that: action A, realized in environment B will lead to result C, where A, B and C are explicitly, coherently and empirically connected in causal line.
g11. naturally miscalculations and wrong expectations may occur, usually due to incorrect valuation of factors (such as human irrationality). However the linear rationality is calculable and omissions are explainable.
g12. however there is an attempt to put the action in its context and predict the outcome, including through considerations about the others' motives and behaviour.
g2. non-linear rationalization on the other hands suggests that action A` will lead to result C`, without taking into account the environment. Such behaviour is observable in quiet many cases (unfortunately enough in this blog as well)h. Well now I suggest that all the ex-workers have chosen to be unhappy because their logic pattern tends to make short cuts from action to desired result without evaluating all data at hand. Please note that this is quite cynical view since with one brash-stroke I diminish them as intelligent individuals and appropriate this to their free choice.
i. I do not know how comfortable I feel with such a conclusion, but it is a fact and I will let the kind reader make his/her own morals.
k. Thank you for taking the time and reading this post.
5/15/2009
Concerning one's choice to be unhappy - part 1
This blog entry starts by the news of a big and completely insolvent metallurgical factory being closed (Kremikovci)
From economical point of view it's been a long due decision
Naturally the ex-workers are grumpy and are protesting. However they do it in quite emotional style, describing scenes of complete desperation.
The issue I will attempt to discuss is why people choose to be unhappy, using the Kremikovci ex-workers as example
To make a reasonable blog the first order of businesses is to create definitions that will be used herein. Therefore
Choice will be the situation where individual has two or more possible, credible and viable lines of coherent action that would lead to specific predictable outcomes.
Unhappiness is used in this post as psychological condition where the subject experiences lack of motivation for daily activities, discomfort, anxiety over unfinished tasks (usually of monetary character), inability to influence key events in his/her life.
People are biological units belonging to homo sapience sapience sub-species.
As pointed above (1.3.) it is my observation that the ex-workers have chosen to be unhappy.
To illustrate it I will describe two mind sets toward the problem faced by the ex-workers (4 and 5).
The economic and emotional problem which they are facing in many cases is painted as struggle to make ends meet.
One manner to face up to the problem starts with denial and continues with exportation of the action in third party. The monetary problems make it difficult to meet daily expenses. Hence the short cut “someone else is to blame – I am the victim”. The result is unhappiness.
I have always liked the line attributed to Socrates walking through the market - “How many thing I do not need...”, which is the essence of the second mindset. Being able to leave one's attachment to property (real estate or other) and concentrate one's efforts on important issues such as health (or lack of stress), good nutrition and flexible solutions search is beneficial. Should one decide not live over one's means quite many expenses become redundant (restaurants, mortgage/debt payments, transportation, et
c.). This post is not to advocate any Buddhist view of detachment, but to understand why would people choose to stay attached to things despite evident disadvantages of such choice.
I actually feel the need to underline that the previous point (5) suggest balance between attachment to property and financial resources availability, not detachment.
In the case of the ex-workers the great majority evidently has chosen to shift the main action outside them and wait someone to come and solve their individual problems (in this case the government, which they feel obligated to act to redress their gravenesses)
So to answer the question there are several option to choose from
Inertia of routine life prevents ex-workers to prioritize their expenses, or
Cultural issues (consumer society, nanny state) frame a model of over-excessive basic requirements (expenses), which the ex-workers try to cover, or
Non-linear rationality patterns prevent them from realizing the choice hence they can not act on it, or
They realize a psychological need to be victimized and feel morally superior, or
We can observe “freedom run” where the ex-workers are uncertain what they should do and leave union leaders to take decision, so they would not have to.
Solutions may appear in the second part of this post. But that will come in a while....
Thank you for your interest.
5/14/2009
blog 1: Concerning my disappointment with the Union, my three reasons to vote and my three reasons not to.
1.This blog will try to be above all short and to the point. There will be three points of this first posting
2.The first point is why I am disappointed with the EU
2.1. The Common market is not working properly.
2.1.1. There are still many problems in administrative convergence among different countries. The impediments of tax, cross-border service provision and market regulation are preventing the single market to work with its full efficiency.
2.1.2. The regulation in the common market concerning financial transactions is lacking (obviously there is financial crises in over-regulated sector).
2.1.3. There are still inappropriately transported or implemented rules by the member states and lack of effective control on the application by the EC (they overemphasise on transportation).
2.2. The Commission is not able to deliver on its ambitious EU goals
2.2.1. The Lisbon strategy is far, far away from completed
2.2.2. The carbon-trading schemes are ill-managed by member states (Bulgaria among others) and there is loose control by the EC
2.2.3. So far there is not great deal of common action in the fiscal policies among Member states, unlike the ambitious statements from last autumn.
2.3. The policy-decision process is vastly exclusive
2.3.1. Most policy decisions are made by the Council behind close doors. I do not claim that it is bad thing as such, but it is not transparent
2.3.2. On the other hand everybody is trying to assure us (the citizens) that the policy decisions are transparent.
2.3.3. Thirdly the access to the Commission agenda is based on national policy considerations and not European-wide policy goals.
3.The second is three reasons why I should not vote for European Parliament
3.1. Corruption and conflict of interests
3.1.1. Last summer there was an internal corruption report by the EP. It was not published, but swept under the carpet.
3.1.2. The amount of money regional governments and industries pay for lobbing (official figures), together with the huge number of lobbyists (the payroll alone is possibly larger then the EP budget) suggests that citizens and their groups would need to pay (over the tax euros) for their interests to be heard.
3.2. Marginalized role
3.2.1. The EP majority hasn't got single EU-wide policy that is different from the position of the Council. Evidently the EMPs are more interested in their national party positions.
3.2.2. The control over the Commission activities is fragmented and lacks vision about the desired results
3.3. No one back home (Bulgaria) is interested in my interests
3.3.1. The last time around all the candidates were campaigning under the banner of protection of national interests
3.3.2. The national interests is defended by the Government in the Council. I am interested in someone who would defend my interests on EU-wide issues (green energy, market regulations, etc.) - there wasn't anybody.
4.The third issue I wish to discuss with my kind reader is three reasons why I should vote in the elections
4.1. The EU cares about the well being of its citizens
4.1.1. In my opinion this isn't the case in my country, hence I am more affiliated with the Community and its institutions that the national ones.
4.1.2. United we stand (rich and helpfully prosperous), divided we fall
4.2. There are quite important decisions concerning the economy pending to the new EP
4.2.1. With the global economic crises upon us there would be various regulation that need to be implemented concerning derivatives. short selling, tax evasion, etc.
4.2.2. Using the dialogue instruments with the ECB the EP may serve as additional deterrent to exotic quantitative easing practices.
4.2.3. The EU Budget though modest should make progress towards more transparancy and helpfully the stamp of the Court of Auditors.
4.3. I hope (fools' hope that is) that this time the EMPs may change for the better
4.3.1. I hope they will make a stand to the other EU institutions and develop backbone
4.3.2. I hope they will make progress (real action, not PR) over their sleazy public image
4.3.3. I hope they will regulate the financial sphere reasonably.
5.Thank you for reading my blog
2.The first point is why I am disappointed with the EU
2.1. The Common market is not working properly.
2.1.1. There are still many problems in administrative convergence among different countries. The impediments of tax, cross-border service provision and market regulation are preventing the single market to work with its full efficiency.
2.1.2. The regulation in the common market concerning financial transactions is lacking (obviously there is financial crises in over-regulated sector).
2.1.3. There are still inappropriately transported or implemented rules by the member states and lack of effective control on the application by the EC (they overemphasise on transportation).
2.2. The Commission is not able to deliver on its ambitious EU goals
2.2.1. The Lisbon strategy is far, far away from completed
2.2.2. The carbon-trading schemes are ill-managed by member states (Bulgaria among others) and there is loose control by the EC
2.2.3. So far there is not great deal of common action in the fiscal policies among Member states, unlike the ambitious statements from last autumn.
2.3. The policy-decision process is vastly exclusive
2.3.1. Most policy decisions are made by the Council behind close doors. I do not claim that it is bad thing as such, but it is not transparent
2.3.2. On the other hand everybody is trying to assure us (the citizens) that the policy decisions are transparent.
2.3.3. Thirdly the access to the Commission agenda is based on national policy considerations and not European-wide policy goals.
3.The second is three reasons why I should not vote for European Parliament
3.1. Corruption and conflict of interests
3.1.1. Last summer there was an internal corruption report by the EP. It was not published, but swept under the carpet.
3.1.2. The amount of money regional governments and industries pay for lobbing (official figures), together with the huge number of lobbyists (the payroll alone is possibly larger then the EP budget) suggests that citizens and their groups would need to pay (over the tax euros) for their interests to be heard.
3.2. Marginalized role
3.2.1. The EP majority hasn't got single EU-wide policy that is different from the position of the Council. Evidently the EMPs are more interested in their national party positions.
3.2.2. The control over the Commission activities is fragmented and lacks vision about the desired results
3.3. No one back home (Bulgaria) is interested in my interests
3.3.1. The last time around all the candidates were campaigning under the banner of protection of national interests
3.3.2. The national interests is defended by the Government in the Council. I am interested in someone who would defend my interests on EU-wide issues (green energy, market regulations, etc.) - there wasn't anybody.
4.The third issue I wish to discuss with my kind reader is three reasons why I should vote in the elections
4.1. The EU cares about the well being of its citizens
4.1.1. In my opinion this isn't the case in my country, hence I am more affiliated with the Community and its institutions that the national ones.
4.1.2. United we stand (rich and helpfully prosperous), divided we fall
4.2. There are quite important decisions concerning the economy pending to the new EP
4.2.1. With the global economic crises upon us there would be various regulation that need to be implemented concerning derivatives. short selling, tax evasion, etc.
4.2.2. Using the dialogue instruments with the ECB the EP may serve as additional deterrent to exotic quantitative easing practices.
4.2.3. The EU Budget though modest should make progress towards more transparancy and helpfully the stamp of the Court of Auditors.
4.3. I hope (fools' hope that is) that this time the EMPs may change for the better
4.3.1. I hope they will make a stand to the other EU institutions and develop backbone
4.3.2. I hope they will make progress (real action, not PR) over their sleazy public image
4.3.3. I hope they will regulate the financial sphere reasonably.
5.Thank you for reading my blog
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