David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Brussels Prepares 'Grand Bargain' to Save Broken EU Project

    The European Commission is to unveil radical plans for a eurozone fiscal union, pushing for an embryonic treasury with powers to fight economic recessions and to cope with shocks in hard-hit regions.

    The EU budget authority will be backed by a joint eurozone unemployment fund, akin to social security in the US. The proposal entails an unprecedented level of shared risk among the EU eurozone states and marks a profound shift in thinking after years of rigid austerity and lack of investment.

    Valdis Dombrovskis, the EU commissioner for the euro, said there would be a 'stabilisation fund' with resources to help blighted areas escape downturns. "We will give a bigger role to the aggregate fiscal stance of the whole eurozone in setting policy," he said at the European Business Summit in Brussels.

    It is a belated admission that the narrow focus on debt-reduction during the eurozone debt crisis led to a contractionary bias, drawing the whole currency bloc into a deflationary vortex that ended in a 'Lost Decade' and proved counter-productive even in its stated goal of controlling the debt trajectory.

    "This is something that will set alarm bells ringing in Northern Europe," said Guntram Wolff, director of the Bruegel think-tank in Brussels.

    "However you design this, it will lead to fiscal transfers. All forms of insurance lead to moral hazard and then you have to deal with it," he said.

    The Commission's long-awaited 'Reflection Paper' on how to relaunch monetary union on a better footing - due in early June - will call for a “fund for the protection of public investment during recessionary phases”, according to leaked papers obtained by the Frankfurter Allgemeine.

    It would come under the "democratic oversight" of the European Parliament, giving it crucial legitimacy at federal level. This would rein in the over-mighty Eurogroup that effectively runs the eurozone today and acts as a law unto itself, operating in total secrecy and answering to no elected body.

    While the new fund would not exactly be an EU treasury or finance ministry, it would be a major step in that direction if ever accepted by Germany and the northern creditor powers.  

    Mr Dombrovskis was careful to stress that the 'grand bargain' is not a fiscal give-away to improvident high-debt states. "Every member state is responsible for guaranteeing the stability of its public finances. Where there is risk sharing, there must also be risk reduction," he said.

    Yet the plan is a major shift in policy. It is similar to proposals made by French president Emmanuel Macron during France's election campaign and suggests that the policy elites in Brussels are lining up behind him, as are the Italians and Spanish.

    German Chancellor Angela Merkel must now move with care. She has refused to countenance 'eurobonds' or shared liability for legacy debt - and once said they would only happen over her dead body - but has now opened the door slightly to some sort of joint issuance for future debt. 

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    Global cyberattack 'highly likely' linked to North Korea group

    This article by Sherisse Pham for CNN may be of interest to subscribers. Here is a section:

    But here's the puzzling thing -- Symantec says that despite the links to Lazarus, "the WannaCry attacks do not bear the hallmarks of a nation-state campaign."

    Cyberattacks backed by governments "are usually impeccable, they don't make rookie mistakes," said Thakur. "In the case of WannaCry, we saw some of those mistakes."

    For example, early versions of WannaCry had a bug in the code that prevented victims from paying the ransom.

    While it's possible Lazarus thought they could make a lot of money with WannaCry, "they totally botched it up and got almost nothing," Thakur said.

    The ransomware has so far collected about $108,000 in ransom. Security researchers and government agencies advised businesses not to pay the ransom.


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    Euro Area Warned That Shock-Proof Markets Won't Be Forever

    This article by Alessandro Speciale for Bloomberg may be of interest to subscribers. Here is a section:

    For a start, Britain’s Brexit vote prompted a quick response from the nation’s central bank, which cut the key interest rate, revived asset purchases and pledged to act again if needed.
    “In the U.K., the Bank of England responded strongly to the outcome of the referendum, averting a tightening in financial conditions.”

    In the U.S., the financial shock stemming from Trump’s election came amid an economic upturn that cushioned the blow, and the expectation that however uncertain his policies might be, they would probably be good for companies.

    “The rally in U.S. risky asset prices reflected the strong situation of the U.S. business cycle, reinforced by expectations about business and financial sector-friendly policies from the new administration.”

    The study follows other theories over why volatility is so low, and concludes with a look at what this might mean for the euro area, should an avowed opponent of the single currency gain power, or should the debt crisis in a member country heat up again.

    “The main lesson to be learned from a euro-area financial stability perspective is that similarly large economic-policy uncertainty shocks could, in the absence of offsetting shocks, seriously tighten domestic financial conditions and raise risk premia.”

    So far this year, the currency bloc has managed to avoid anti-euro politicians coming to power in the Netherlands and France. If anything though, the region’s history has shown that the next crisis is always just around the corner. The next focal point could come as early as Monday, when euro-area finance ministers meet in Brussels to try yet again to break an impasse on lightening Greece’s debt burden.


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    Noble Group 'Fighting for Its Life' as S&P Sees Default Risk

    This article by Jasmine Ng and Denise Wee for Bloomberg may be of interest to subscribers. Here is a section:

    The Hong-Kong based trader’s troubles are deepening after two turbulent years that have been marked by losses, asset sales, and accusations of improper accounting that it has denied. Since surprising investors two weeks ago with a quarterly loss, the shares have tumbled to multiyear lows and the price of its bonds has fallen by more than half. S&P’s warning follows downgrades from Moody’s Investors Service and Fitch Ratings Ltd. in recent days.

    There’s “potential that the company will face distress and a nonpayment of its debt obligations over the next 12 months,” S&P said in a statement late Monday as it cut the company’s ratings by three steps to CCC+. “The company’s capital structure is not sustainable,” S&P said.

    The shares plunged as much as 32 percent to 40 Singapore cents, and were at 42 cents as the halt kicked in after just 36 minutes of trade on Tuesday morning. The stock has lost 75 percent this year, following a 44 percent drop in 2016 and 65 percent plunge the year before. The company’s 2020 bonds sank to an unprecedented 39.4 cents on the dollar.

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    Donald Trump's Path-Independent Theory of Mind

    Here is this interesting article on the President’s state of mind by Cathy O’Neil:

    People have been discussing how Donald Trump interacts with other humans, guessing at the extent to which he is capable of anticipating or understanding how they think. Some believe he has no such "theory of mind." I disagree: He has one, but it’s path-independent.

    Remember when he thought people would like the fact that he’d fired FBI Director James Comey? Or the multiple times when he changed his story on why he did something? Those are the tell-tale signs.

    Most people, when they try X as an explanation, won’t try “not X” afterwards, for the simple reason that they know their audience will know they were either lying before or they’re lying now. But Trump will try stuff until one of his attempts “works,” defined as eliciting approval. He's path-independent, in the sense that he's completely unconstrained by his previous words and actions. If neither "X" nor "not X" works, he'll assume that it's his audience that is being irrational.

    In a prior column, I discussed the notion that Trump behaves like a machine learning algorithm. Well, his path-independent theory of mind fits perfectly into that metaphor.

    When Google is trying some new shade of blue in the background of their ads, they will perform what’s called an “A/B test” to see what generates more clicks. If more people go for the ad with a lighter shade of blue, they will stick with it. What they won’t do, critically, is consider the possibility that their audience liked the light shade of blue only because it came after the darker shade. They will assume that the audiences are independent of each other, constantly refreshed and “new."

    The same approach might have worked well for Trump as a businessman. He probably would have encountered a wide range of scenarios: For every deal that went through, dozens might have failed. So trying X one day and Y the next would be like a real science experiment. Over time, he might develop pattern recognition, figuring out which tactic works best in certain kinds of situations. I assume that’s where he learned to put pressure on business partners for unreasonable terms and to demand oaths of loyalty from his employees.

    Similarly, when Trump was campaigning, he actually did have a fresh audience on a daily basis. He could try out new things while re-using things that worked previously in similar situations, honing his craft with the direct and immediate feedback that he craves. His audience, in the context of a rally, was being refreshed constantly, just like Google’s ad customers.

    I’d argue that Trump's path independence operates on multiple levels. It's evident at a meta-political level when he takes a stab at sweeping campaign promises that he never intends to fulfill. It's also visible at the micro level, even within a given sentence: In his very strange recent interview with The Economist, for example, he kept attempting to adjust his message to obtain approval from his interviewers. He keeps things vague, and then pokes his way into a given explanation, but leaves himself room to change direction in case he senses disapproval.

    It doesn’t always work for him. That said, he probably can’t act any other way. Consistency has no attraction for him, because he is fundamentally principle-free.

    Trump's problem now is that the audience isn’t refreshing. It’s all of us, nationwide and globally. We remember what he said and did yesterday. We notice when he changes his story, and we’re not amused. Meanwhile, he’s left truly confused as to why things aren’t working out in his favor.

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