Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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