Auditing the financial crisis some afterthoughts
Download
Report
Transcript Auditing the financial crisis some afterthoughts
AUDITING THE FINANCIAL CRISIS:
SOME AFTERTHOUGHTS FROM
THE NETHERLANDS
BAS JACOBS
PROFESSOR OF ECONOMICS AND PUBLIC FINANCE
ERASMUS SCHOOL OF ECONOMICS
EUROSAI CONGRESS
NETHERLANDS COURT OF AUDIT
JUNE 18, 2014
THE CRISIS
Not a public debt crisis!
… except Greece
Introduction of Euro caused a capital flow bonanza that
led to massive build up of private debt
Risks exploded when US mortgage crisis ignited a
banking crisis in the EZ
Sudden stop capital flows triggered systemic problems
in construction of EZ
no crisis resolution insolvent sovereigns
no lender of last resort illiquid sovereigns
no banking union
CRISIS DUE TO PRIVATE DEBTS AND
CONSTRUCTION FAILURES EUROZONE
Source: Shambaugh (2012), BPEA
CRISIS FADED
Draghi saved the Euro (so far):
lender of last resort for solvent but illiquid sovereigns
Rescue funds (EFSF/EFSM) ESM:
restructure debts, reform economies
Bankingunion
supervision
crisis resolution
But, no real burden sharing and no EDGS
‘doom loop’ between banks and sovereigns not broken
Debt write downs public debts Greece necessary
PUBLIC MISMANAGEMENT CRISIS
Totally misguided focus on synchronized austerity
throughout EZ
destroyed economic growth
deepened banking crisis
triggered public debt crisis despite austerity efforts
Private debts hardly came down and still very high
Public debts did not come down at all and keep on
rising
Banks are still very weak: interventions 6 years too late
Recovery? Secular stagnation and Japanese scenarios
are most likely for EZ
WHY DID THIS HAPPEN?
Creditor countries played the blame game: crime and
punishment!
Governments hijacked by financial sector
Lack of knowledge of basic macro-economics:
it’s not a morality tale
not all sectors/countries can simultaneously deleverage
Policy device: ‘austerity above all’
CONSEQUENCES MISGUIDED AUSTERITY
Austerity policy does not pass social-cost benefit test for
all non-GIIPS EZ countries (DeLong and Summers,
2012)
GDP NL in 2015 still below 2008
Loss = 15% GDP relative to pre-crisis growth
Loss = 10% GDP structurally
Unemployment rate doubled to 9% (CBS) / 7,5% (ILO)
10% structural GDP loss = fiscal gap increase of 5%
GDP
austerity measures largely self-defeating
2011-2015: 7,5% GDP austerity, 2,2% GDP deficit
reduction
PUBLIC BUDGETS ARE GOVERNED BY
ECONOMICALLY SILLY RULES
1. Static rules of GSP ignore that GBC is inherently
dynamic
2. Exclusive focus on liabilities ignore asset side
3. Off balance liabilities are ignored
STATIC RULES OF SGP
Government budget constraint is dynamic
Example: Netherlands has no long-run sustainability
problem in the public budget
sustainability gap (fiscal gap) = approx. +1% of GDP
Public finances sustainable due to
raising retirement age
reform mortgage rent deduction
reforms long-term care
NL embarked on a massive austerity program between
2011-2017: 9% GDP
budget cuts: 5,5% GDP
tax increases: 3,5% GDP
ASSETS MATTER FOR PUBLIC FINANCES
EXAMPLE: NL GOVERNMENT HAS NET ASSETS
Assets
Public capital stock: 64%
bbp
Financial assets: 27% bbp
Gas stock: 22% bbp
Liabilities
Gross debt: 74,5% bbp
Total assets: 112% bbp
Total liabilities: 74,5% bbp
PM Tax claim future
pensions: approx. 63% bbp
PM Latent liabilities (state
pensions, health care)
PM guarantees
Source: CPB (2013) De naakte feiten over de Nederlandse overheidsschuld
GOVERNMENT AS A HEDGE FUND
Private risks were socialized
rescues banks and interbank markets
country rescues
Rescue operations required huge off-balance sheet
transactions Eurozone governments
deposit guarantee schemes
mortgage insurance
bank guarantees
guarantees for rescue funds (ESM etc)
Arbitrage off-balance transactions public/private sector
SOMETIMES SOVEREIGN NEEDS TO
INTERVENE
Correct market failure = social gain
lacking liquidity banks/sovereigns
lacking risk-bearing capital
Bailing out insolvent banks or sovereigns = social cost
insolvency banks: capital ratios SIFI’s way too low
insolvency governments: public debts unsustainable
HOW TO CONTROL EXPOSURE SOVEREIGN TO
FINANCIAL RISK?
Guarantees financial sector (DGS, mortgage insurance,
etc) are public liabilities
need to be transparant
need to be valued as liabilities on public balance sheets
use market valuations as much as possible
Valuation TBTF subsidies to banks as liability on public
balance sheet
Reduce TBTF subsidies by increasing capital
requirements banks (Admati and Hellwig, 2013)
(Also: remove tax advantages high leverage
interest deductibility mortgage rent
mortgage insurance
interest deductibility corporate income tax)
LESSONS CRISIS FOR PUBLIC AUDITORS
SGP rules should focus on long-term sustainability, not oneyear deficit measures
true measure for sustainability: fiscal gap calculations
theoretically superior, practically more difficult
SGP rules should be based on all assets and liabilities,
explicit and implicit
value all liabilities of financial sector for sovereign
Higher deficits possible if
larger assets
lower implicit debts
lower risk-exposure financial sector
LESSONS CRISIS FOR PUBLIC AUDITORS
Control public liabilities financial sector
no longer off balance: value liabilities
higher bank capital
remove tax advantages debt
stop mortgage insurance