Proving that America has no monopoly on good ideas, the impending collapse of Greek finances is revealing, strand by strand, that whatever shenanigans and subterfuges might have been pioneered by the Enrons of this world, the sovereign nations of Europe will have perfected and taken to scale.  As reported in the Wall Street Journal (Arial):

Proving the capital markets know more than governments do: Greece has big default spreads

Concerns that Greece and other struggling European nations may not be able to repay their debts are focusing investor attention on another big worry: Economies across the Continent have used complex financial transactions—sometimes in secret—to hide the true size of their debts and deficits.

Actually, nearly always in secret, as we shall see.

Investors long turned a blind eye to European governments’ aggressive bookkeeping, aimed at meeting the euro zone’s fiscal ceilings. Countries using the euro currency have a rich history of exotic maneuvers aimed at meeting rules requiring members to cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%.

‘Meeting’ is a euphemism for ‘avoiding while giving lip service to.’

Blow in my phone and I’ll borrow you anywhere

Despite criticism, European leaders deemed many of these moves acceptable as they sought the long-planned currency union.

While efforts will now be made to blame Wall Street or City of London bankers for taking these bets, you can’t cheat an honest man:

As my dear old grandfather Litvak said (just before they swung the trap), he said:

You can’t cheat an honest man.

Never give a sucker an even break

Or smarten up a chump.

By Larsen E. Whipsnade

Nobody made Greece do these trades, the Greeks were trying to get away with skullduggery.  Whose fault is it that the money was lost – the bookie who took the bet, or the punter who wanted to put it down?

To try to meet the targets, which were aimed at building trust in the stability of the euro, governments over the years have:

Translation: To build trust, we had to bamboozle you.  Doing what we promised would have been too hard.

Sold state assets

Bundled expected future payments into securities to hawk

Even, in the case of Greece, insisted to the Eurostat statistics authority that large portions of its military spending were “confidential” and thus excluded from deficit calculations.

I can’t see you, therefore I’m invisible!

I’m invisible – see?

In 2000, Greece reported that it spent €828 million ($1.13 billion) on the military—about a fourth of the €3.17 billion it later said it spent.

“I lied.”

Greece admitted to underreporting military spending by €8.7 billion between 1997 and 2003.

A billion here, a billion there, soon you’re talking about real money.

A man who spent so many billions they’ve named a Senate office building for him: Dirksen

Portugal classified subsidies to the Lisbon subway and other state enterprises as equity purchases.

Hey, if I spend it on myself, isn’t an investment, isn’t it?

After learning that, Eurostat made Portugal redo its accounting in 2002.

If I have this right, Eurostat is a toothless CBO.  They can observe the truth – if people tell it to them – but they have no ability to compel anyone to accept the truth.

I’m from Eurostat and I’m here to enforce against you

The country revised its 2001 deficit from €2.76 billion, or 2.2% of GDP, to €5.09 billion, or 4.1%—well over the limit.

Ever go out to dinner with more than eight people?  Everybody orders dessert – because everybody realizes that for the incremental dessert they eat, their friends will pay seven-eighths.

The Euro was a club and all the kids wanted to join; so they all sucked in their belts, wriggled into their trusses, and here they are. 

I’ve dropped two deficit sizes already!

It’s a classic tragedy of the commons-currency, and the British must be thankful they are not in it.

France arranged a deal with the soon-to-be privatized France Telecom in 1997 under which the company paid the government a lump sum of more than €5 billion. In return, France agreed to assume pension liabilities for France Telecom workers. The billions from France Telecom helped narrow France’s budget gap to around €40 billion in 1997; it reported a deficit for that year of 3% of GDP—right on the target, and helping it to join the euro.

Totally cockamamie, of course – but in the context, I’d have looked the other way. 

Just bring the truck back undamaged, okay? – and I don’t know anything about any bananas.

One-offs are acceptable; structural gorging is not.

Adding to the difficulties, EU regulators have few tools for forcing euro-zone countries to adhere to fiscal requirements.

Few?  Try ‘none,’ particularly as the EU has never enforced any of its rules against any of its larger members, and rules you don’t enforce are worse than useless.

Last week, such worries exacerbated market jitters over Europe’s debt woes and could complicate Greece’s plan this week to sell more debt, bankers and investors say.

Gee, do you think the revelation of widespread cooking of the books will make it harder to sell more IOUs?

In recent weeks, countries’ use of currency swaps has drawn attention. In such transactions, often benign –

Translation: Not always corrupt and malignant.

– countries might borrow in a currency not their own, for example, and use a derivative to offset the risk of currency fluctuations.

Okay, Vice President of Common Sense – why would a nation borrow money in a currency not its own, and then hedge back to its own currency?  Why not just float bonds in your own currency?  Sounds awfully fishy to me.

It’s a trap!

Investors paid little attention to the often-opaque derivative deals until concern of a Greek default began to rattle markets.

Why should they?  After all, they had a sovereign guarantee.

Oh, wait …

The closer scrutiny also comes against the backdrop of exploding budget deficits in many European countries and fears about the stability of the euro.

The evidence is overwhelming – the Euro is teetering on the edge of kaput, because the European countries have been living beyond their means ever since the single currency was introduced.

About those pension liabilities …

Had America continued to produce above-inflationary returns, Europe’s yield starvation would have been assuaged.  We did not, and as our yields come back to reality, Europe’s pension liabilities crash.

Governments across Europe pumped hundreds of billions of euros into their economies to combat the financial crisis, sending national debt levels soaring.

There should be little consolation in the knowledge that however bad the American economy may be, Europe’s is worse.

The Portuguese finance ministry declined to comment on whether Portugal has used currency swaps such as those used by Greece, but said Portugal only uses financial instruments that comply with EU rules.

Mo-om, we only did what the Greeks did!

I warned you, young lady, no complex derivative trades until you’re at least eleven

And if the Greeks flung themselves into the seas, would you do it too?

European officials said last week that EU regulators didn’t know about a particularly controversial “off-market” currency swap structured in 2001 by Goldman Sachs for Greece. Officials say they believe the problem isn’t widespread –  

How would they collectively know, since it’s evident they individually went to considerable lengths to hide what they were severally doing?

– but a number of prominent European politicians, including German Chancellor Angela Merkel, have called on authorities to have a closer look at the transactions and whether banks helped governments distort their books.

A 2008 Eurostat report, however, says questions about how to account for off-market swaps like the one used in Greece were raised as early as 2007. The report said it provided detailed guidance about how to handle some forms of them. Eurostat didn’t respond to a request for comment.

You just stay small and inconspicuous, okay?

At the moment, Eurostat’s in an impossible position – having provided the clearest advice, having seen it ignored, with having the consequences now surfacing.

We warned the Greeks, and what did it get us?

Eurostat tried for years to change the rules on use of swaps.

As we saw in 3% altruistic, if governments inadvertently create a program liable to extreme misuse, not only will it expand rapidly, it will also be fiercely defended and hence prove enormously hard to kill.

“Feed me!  Feed me!”

European finance ministries in 2000 overruled Eurostat, arguing that they needed as much flexibility as possible to manage debt loads.

Should one blame the pharmacist if the junkies broke into the dispensary?

In 2001, Goldman and Greece came up with a now-controversial solution: a new off-market swap. It agreed in the future to convert yen and dollars into euros at an artificially favorable rate.

In other words, the parties agreed to a future transaction with a built-in bargain for Greece: a “pay me later” that offered many years of vaporware – the ability to book a transaction on a false basis:

Greece could use that [Artificially favorable – Ed.] rate when it recorded its debt in the European accounts—pushing down the country’s reported debt load by more than €2 billion, according to people familiar with the matter.

Everything’s exactly as it seems

In exchange for the good deal on rates, Greece had to pay Goldman. The amount wasn’t revealed.

A payment would count against Greece’s deficit, so Goldman and Greece came up with another twist. Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time.

But the two sides structured the loan as another kind of swap. Treated as a swap, the deal didn’t add to Greece’s debt under EU rules.

So they created an artificial trade, then hid the fee, then hid the loan that hid the fee, then hid the swap that hid the loan that hid the fee.

Gikas Hardevoulis, a former advisor to the then-prime minister of Greece, said the trade should not have been done. “It was done to dress up the debt figures by some smart idiot in the finance ministry” he said.

Lenin called them “useful idiots.”

He also expected capitalists to sell Communists the guns to overthrow them …

… and look what it got him!

It wasn’t until 2008—a decade after the deals became popular—that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations.

Transparency is always the first step to reform.

Greece’s remaining exposure to the complicated arrangement remains unclear.

The more the veils unravel, the worse will be what we see.

Europe is headed for a very ugly landing.

Financial drugs make you financially ugly

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[Continued from yesterday's Part 1.]

Now they know how many holes it takes to fill the Albert Hall

– The Beatles, A Day in the Life

If all you took from the February 11 Economic Times of India were the clips we highlighted yesterday, one could be forgiven for being depressed about India’s potential – so it’s time to look on the bright side of things.

Ahmedabad home-sales billboard: February, 2010

4. The Economic Times on loan pricing

Finance is the engine of housing improvement, and transparent information is the handmaiden of finance:

MUMBAI: Borrowers can now look forward to a more transparent pricing of their loans, with the Reserve Bank of India (RBI) proposing to introduce a new benchmark from April that will more accurately reflect movement in interest rates.

The Bank is also trying to remove barriers to banks going down-market:

At the same time, banks have been granted the freedom to price loans below Rs 2 lakh [$4,000 – Ed.], which effectively paves the way for their entry into microfinance at commercially-viable rates. 

That’s a start, and the Rs 200,000 floor is significant because a great many semi-formal houses can be purchased in roughly this price range, but it will take more than merely small-loan permission to get the banks to move down. 

SEWA Bank in Ahmedabad, February 2010

The central bank plans to introduce a so-called ‘base rate’, which will be computed on a cost plus basis by each bank and which will now be the floor price for all lending by it. The ‘base rate’ system seeks to replace the prime lending rate (PLR), the present benchmark used by banks. 

The RBI on Wednesday announced that the new base rate system would be made applicable from April 1. The guidelines are not yet finalised, but a draft circular issued on Wednesday evening has the broad contours of the new regime. 

“All categories of loans should henceforth be priced only with reference to the base rate. The base rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates,” the RBI said in its circular. 

If a bank chooses to base its floating rates on external benchmarks, it should ensure that the external rate is equal to or above the base rate at the time of sanction or renewal of the loan. 

Although there’s a long way to go — as in lending for home improvement, not just on new-build with mortgageable title – it’s a step in the right direction.

Nancy with Indian girls at Chittaugarh, Rajasthan, February 2010

5. The Times of India on development of accurate slum data

NEW DELHI: Aiming to meet ambitious target of making India slum-free, the government has embarked on a plan of remote mapping to get a ‘‘reliable figure’’ of people living in slums by collecting foolproof data on both notified and non-notified slums across the country. 

As I’ve posted before, among the many definitions of a slum is when the physical reality and legal records are wildly at odds.  Thus, when they are brought into harmony, the place is no longer a slum, it’s not merely a low-income neighborhood.  Moreover, in reconciling the two, it is always the law that moves, not the physical reality.

While the current estimate of slum dwellers is based mostly on surveys of notified slums, most non-notified slums have been left out. 

Notification is a legal process both granting rights (to slum dwellers) and giving powers (to government).

Local office of SAATH, Ahmedabad: February, 2010

Serving about 2,000 households on government’s behalf

Maps of cities prepared through remote sensing would give a clearer and more authentic picture of slums in a city and would include non-notified slums.

It’s critical; knowing where the people are is a first step both to enumeration and citizenship, and also to providing financial and physical dimensions on the problem. 

Housing minister Kumari Selja

Housing minister Kumari Selja said: “Most of the time the plans are based on projections rather than hard data. We plan to map the entire country so that we know about slums in each town and city. This would also include non-notified slums which are usually not accounted for.” 

Once you have counted them, you cannot ignore them.

The ministry, which has set a target of making India slum-free in the coming five years with the launch of the Rajiv Awas Yojana (RAY), expects to get the exact figure by GIS mapping and including non-notified slums too.

The GIS mapping will have to be supplemented by on-the-ground enumeration, but when the two are combined, the findings will be well-nigh indisputable.

With involvement of Isro in this project, the land-mapping and slum surveys are being done through remote sensing with GIS-enabled software. 

I read this with encouragement and no small sense of recognition, since two weeks earlier, at the beginning of my trip, I participated in a two-day a World Bank sponsored workshop on Rajiv Awas Yojana (RAY).

The ministry has also asked states to develop a Slum Information System and the Centre has provided them funds for the purpose. “We want the mapping to be completed in two years,” Selja said. 

Riverfront slums, Ahmedabad, February, 2010

As we saw when reviewing The Ghost Map and The Blackest Streets, ever since we created modern urban sums – which I date from the Industrial Revolution – they have been corrected with a combination of tools, including liberal social reformers, enumeration and surveys, vote power, and eminent domain.  India is harnessing twenty-first century technology to accelerate its addressing of a nineteenth-century problem.

However, the ministry says it is facing delays in implementing its plans due to slow response from the states to its draft guidelines for which their opinion has been sought. The ministry has sanctioned more than 1.4 million houses for the poor. As many as 1,327 projects of affordable housing and basic amenities to the urban poor with an outlay of more than Rs 34,791 crore have been approved. 

That’s $7 billion in funding – a meaningful sum, even for massive and populous India.

As further explained in an accompanying DNA India story:

The ministry of housing and urban poverty alleviation (Hupa) will do satellite mapping of all slums in the country under the slum-free cities initiative of the government. Indian Space Research Organisation (Isro) will be collaborating in the project.

Any resemblance to the Star Fleet logo?

Mumbai will be among the four metros to be mapped first.

Hupa believes mapping will help governments find new slums taking shape and prevent their illegal spread.

That I doubt – but it may accelerate their remediation.  Evidently the article’s author shares my skeptical optimism (that revealing ‘besides’):

Besides, it will be effective in analysing slum communities, providing them sanitation and other amenities, and relocating them to suitable locations.

This I believe.

A similar satellite mapping done by Indian Institute of Remote Sensing on Dehradun’s slums showed that the number of slums in the city had increased from 75 in 1996 to 113 in 2000.

Less important than the number of slums – which, after all, can grow and meld into one another – is the overall scale, particularly including the number of people living in them.

Toward the future: Chittaugarh, February, 2010

Hupa is working with experts for a model legal regulatory framework for according property rights to slum dwellers.

I would love if it we at AHI were part of that activity.

A total of 5,161 towns are being surveyed to prepare a profile of household poverty and livelihoods of the slum dwellers. According to data available, Maharashtra has the highest number of slums in the country (32%), followed by West Bengal (15%) and Andhra Pradesh (15%).

Undoubtedly this directly correlates with the rate of urbanization.

The expanding blue city of Jodhpur: February, 2010

6. The Times of India on binding Public Sector Undertaings (PSU’s) into corporate social responsibility

Norms to bind PSUs with social duty in a month 

The department of public enterprises (DPE) will soon come up with norms on corporate social responsibility (CSR) for central public sector enterprises (CPSEs). 

This is how it begins; when government creates what the Economist calls quangos – quasi-non-governmental organizations, in effect state enterprises – it imbues them with unique powers, resources (such as large sums of money) and responsibilities.  Over time, as the PSU’s and CPSE’s become large and successful, government is within its rights to charge Rumpelstiltskin’s fee, and demand that the corporation take some of its profits – all of which derive ab initio from government largesse – and redeploy them into further expanding their social mission.

As per the proposal, cleared by the committee of secretaries (CoS), profit-making PSUs may have to set aside up to 2-5 % of their net profits for CSR activities.

Indian CSR is about to grow teeth.

 
The new norms will be formulated within a month and there will be no escaping from CSR, which will no longer be a photo opportunity for the chairman, said DPE secretary Bhaskar Chatterjee. “I would put a timeline of two to three weeks,” he added. 

Chatterjee looks implacable and inescapable

I love the phraseology, and the implicit political capital behind it.  Will there be follow-through, I hope?

There ought to be, as these are government entities, not purely private companies.

New construction residential: metropolitan Ahmedabad, February 2010

Even though most CPSEs earmark funds for CSR activities, most of them are on a voluntary basis.

Allowing them to arbitrage visibility against cost to maximize the headline-to-rupee ratio –

The CSR would no more be confined to organising blood donation camps or some charity event.

– which is less cost-effective than maximizing the impact-to-rupee ratio.

The proposal is now awaiting approval by heavy industries and public enterprises minister Vilasrao Deshmukh.

Deshmukh is the decider

The CPSEs with net profit of more than Rs 100 crore may be asked to contribute up to 2% of the amount, Mr Chatterjee said.

In other words, roughly $450,000 annually.  That’s enough for each CPSE to undertake initiatives of some reasonable municipal or local scale.

Of the 244 PSUs, 160 earned a net profit of Rs 91,083 crore in 2007-08, 2% of which amounts to Rs 1,821 crore. 

 
Based on their 2007-08 results, PSUs would have to spend at least Rs 1,500 crore.

Or $300,000,000 – enough to represent a major set of flows, structured in a manner similar to the so-far-stillborn housing trust fund intended to be funded with GSE profits.  [You remember alleged GSE profits, don't you? – Ed.]

The CPSEs would be obliged to take up specific projects to help people affected directly or indirectly by their businesses. This would be their primary obligation, out of the profits that they make. “You (CPSE) must recycle it to help the society,” the DPE secretary said.

For these enterprises, housing is a natural.  They have a vast pool of employees, for whom better quality employer-assisted housing is an employee loyalty and employee productivity issue.

 
Chatterjee said the guidelines would provide for measurement of the CSR. “This is happening not just in India but across the world,” he said. These obligations would be set in the memorandum of understanding, which sets targets for an individual CPSE.

Echoes of South Africa’s Financial Sector Charter.

Community organization, Ahmedabad-style: February, 2010

The performance evaluation would also have CSR as one of the parameters. 

The world’s largest democracy is serious about tackling its challenge of slums.  That’s heady stuff.

Bikaner, February 2010: I command the PSUs to dance to my tune

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I read the news today, oh boy

– The Beatles, A Day in the Life

One day’s newspaper clippings – in this case, The Times of India, Thursday, February 11 – represent an info-montage of the world’s largest democracy muscling its way into the twenty-first century, and along the way the world’s largest and most urgent national affordable housing and slum upgrading challenge.

Ahmedabad retail street, February, 2010

[Recently Nancy and spent three weeks in India, a week of it for AHI at the South Asia Housing Finance Forum (Delhi; two days), a World Bank sponsored workshop (Udaipur) on India's new slum upgrading initiative Rajiv Awas Yojana (RAY), and then (z) in Ahmedabad with our customer SEWA Housing Finance and our working partner the Ashoka Foundation. 

Listening with interest at the SAHF Forum, January 27

Along the way and afterwards, we went all over Rajasthan, the old Rajputana or the India of princely states.  I will have a post forthcoming on the range of Indian housing alternatives, complete with pictures – truly remarkable.]

Boy musician, Jaswand Tanda, Jodhpur, February, 2010

India will overwhelm you – at least, it overwhelmed us.  It’s too large, too rambunctious, too cacophonous, too pungent to be absorbed into any totality in any short interval.  I can see why people hate the place, and I can also see why people become enraptured by it. 

Downtown Jodhpur, rush hour, February, 2010

What follows are representative clips from one day’s Economic Times of India.  They are related an unrelated, consistent and contradictory, serious and silly.  All of them are India, and all of them are now.

Start with the challenges:

1. The Economic Times on the housing deficit in homes and rupees

NEW DELHI: The government on Wednesday said the country needs investment to the tune of Rs 3,61,000 crore [Roughly $7.0 billion – Ed.] to meet the shortage of nearly 25 million housing units. 

That’s called paying the piper!

“There was approximately housing shortage of 24.7 million dwelling units at the beginning of the 11th Five year plan…”

Government bodies love quantifying a housing ‘deficit,’ if only to give a macro scale to the problem.  Personally, I think the deficit has to be even larger than this, since it must include people living in inadequate housing, people living in too little housing, and people who are moving to India’s cities at an unprecedented rate.

“The investment requirements would be to the tune of Rs 3,61,000 crore for overcoming this massive housing shortage,” Minister of State for Urban Development Seagate Roy said at the CII real estate concave here. 

Ray thinks it’s 3.6 lakh crores of rupees

Of the total housing requirement, about 99% is constituted by the economically weaker section and the low income groups, he added. 

Housing demand being elastic, as these people become less poor, they will want more housing, so even if India magically conjured up 25,000,000 homes tomorrow, the nation would need an equal number the day after.

“The massive urbanisation in the past few decades has led to severe housing shortage for the urban poor… providing affordable housing is one of the most formidable challenges that our country faces today,” Roy said. 

As I said in my World Bank presentation, I’ve previously hypothesized that not only are slums economically rational, they may be an inevitable phase in urbanization, a phase that governments and cities escape by investing their way out.

Pushing a bicycle carrying petroleum, Jodhpur, February 2010

He said availability of land at cheap rates is the greatest challenge in providing affordable housing in the country. 

We know that the value of urban land is a residual, so as India urbanizes (today it is only 28% urban), those land prices will only rise – unless something is done to head them off.

Measures like increasing density by [a] hiking the floor-area ratio and [b] encouraging public-private partnership, should be considered in fulfilling the housing need of the country. 

It’s important to distinguish the potential utility and impacts of these two. 

A. Floor-to-area-ratio (FAR) and its close Indian cousin the floor space index (FSI) are the principal means by which India controls its formal development.  The effect, not necessarily a desirable one, is that developable urban land rises dramatically in price.  Tweaking the FSI and FAR can add value to selected land – in the right location, almost as much value as one wants – while at the same time inflating the value of all other land.  (And on the third hand, managing the preservation of open space for municipal infrastructure such as highways, urban rail lines, and even public green space.)

Good thing Lord Ganesha has four hands

B. Public-private partnership is merely a means by which the public sector can get technical functions – land development, construction, ownership – performed faster, cheaper and better.  Public-private partnership cannot conjure up subsidy or value from thin air, nor will the private sector embrace and internalize essentially governmental functions – like owning public-policy imperatives – unless it is very well paid to do so.

“The government has sought to create an enabling and supportive environment for expanding credit flow to the housing sector and increasing home ownership in the country,” Roy said.

Absolutely, creation of the enabling environment is one of government’s four essential roles.

Schoolgirls on a field trip: Jodhpur, February 2010

2. The Economic Times on land grabbing

Her Excellency’s husband a land grabber?

You’re just electing me, not my brother

NEW DELHI: In a major embarrassment to President Pratibha Patil, her husband Devisingh Ransingh Shekhawat has been asked to return over two acres he grabbed from a poor Dalit  [Untouchable – Ed.] farmer in Amravati of Maharashtra. 

She’s India’s first woman president

The president, the First  Gentleman, and the Queen

The farmer, Kishore Bansod, had last year found that most of his land had been transferred to Mr Shekhawat in the government records. The President’s spouse was accused of forging papers to grab 2.5 acres near the highway in Chandrapur two years ago. The farmer went to court in June, 2009. The Daryapur court gave its verdict in the case in December stating that the land belonged to Kishore Madhav Bansod and not Mr Shekhawat and that it be returned to the farmer. However, Mr Bansod got the copy of the judgement only earlier this week. 

Later that day, I read elsewhere that Mr. Shekhawat vigorously disputes the characterization of his land transaction.  All I know is what I read in the newspapers …

The President’s husband took the help of local revenue officers. An inquiry by local officials revealed that five others — all his relatives — colluded with him. 

Though the Rashtrapati Bhavan [The Indian White House – Ed.] has refrained from commenting saying that the President’s husband is a private citizen and enjoys no special privileges, the allegations against him are bound to haunt the President. 

Government buildings, Rajpath, Delhi, Republic Day, 2010

Following the farmer’s complaint last year, SDM Ashok Amankar had issued notices to Shekhawat and seven others, including his nephew Bhanwarsingh Lalsingh Shekhawat and brothers Kishorsingh, Omsingh and Raghusingh. The then revenue inspector was also served a notice. 

The farmer had said that officials who went for land measurements had told him that his land was in the name of the Shekhawat family. The three-acre farm was purchased by his father Mahadevrao in 1985-86 from a Bapurao Chaudhary, he had said.

Indian land use records are an infinitely recursive tangle of documents.  At the India RAY conference, Bimal Patel of HCP Design in Ahmedabad gave a superlative presentation illustrating the land-use and legal history of Jadibanagar in Ahmedabad, a public infrastructure project of our customer SEWA Bank.  It would have been hilarious had it not been so real.  Because land history is inevitably lost in the mists of time, land-use disputes are common. 

Informal neighborhood with municipal infrastructure (streets) added, Ahmedabad, February, 2010

Mr Shekawat is a member of the Congress and has also served as the Mayor of Amravati. This is not the first time that the President’s family has come under a cloud over financial dealings. 

In 1973, [President Patil] had set up a co-operative bank named Pratibha Mahila Shahkari Bank to empower women but its license of the bank was revoked in 2003 by the RBI over alleged financial irregularities. According to reports, one of the reasons listed by RBI for cancellation of the license was the faulty loan policy of the bank and waivers on loan interests given, among others, to Ms Patil’s relatives.

Everyone I talked with bemoans corruption in India.

A new currency created to try to shame people into refusing bribes

3. The Economic Times on the black-market economy

11 Feb 2010, 0542 hrs IST, Mythili Bhusnurmath , ET Bureau

Can you see her tongue in her cheek?  Mythili

The Great Recession might have laid mightier economies than ours struggling but the Indian economy has emerged relatively unscathed. Yes, you’ve heard that before. But chances are that as the global economy lurches from one crisis to another while the Indian economy gathers speed, you will hear that repeated in many quarters, especially in official fora. 

To hear it from government sources, there are many reasons for the Indian economy’s resilience: the Goldilocks fiscal stimulus, monetary easing, our large domestic market, demographic dividend, calibrated opening up of the economy, and so and so forth. But before we pat ourselves on the back, could there be another, no-so-happy reason why the Indian economy has been less affected by the Great Recession? 

If research by Deutsche Bank economists is to be believed, yes, our black economy! 

Doors for sale, Ahmedabad, February, 2010

A vast portion of India’s economy and employment is informal – meaning in cash transactions.

Paper money has no memory

Now, black money has long been regarded the bane of our development process. It results in huge wastage of resources , lowers the rate of growth, leads to criminalisation in society and breakdown of institutions, undermines the capacity of Indian businesses to face the challenge of globalisation, jeopardises our security, leads to poor governance, in short, to every conceivable ill we can think of. 

But there just might be something to be said for it. According to researchers at Deutsche Bank, empirical analysis shows countries with a very high or very low share of activity in the shadow economy appear to be much less affected by growth fluctuations in the world economy than countries that have an average-sized shadow economy. 

Because they have a much larger economy, and its financing is countercyclical.  Thus the formally conducted economy – the one we can observe – may be only the tip of the iceberg of economic activity.

What’s under the surface is more important

Alas! Countries where ‘the population cannot really decide whether it wants to offer its labour ‘honestly’ in the official economy or rigorously off-record are hit particularly hard’ . So, countries such as Germany, Ireland and some Scandinavian ones whose shadow economies are around 15% of GDP, saw their GDP plunge by around 5% in 2009, and in the case of Ireland and Finland, by over 6.5%. 

The report does not include India, but there’s no disputing which end of the scale we occupy when it comes to the share of the black economy. At close to 40% of GDP, i.e., $400 billion, according to Arun Kumar, professor of economics at the Capital’s Jawaharlal Nehru University, who has done a great deal of work on black money, black money vitiates every aspect of our life. 

Kumar tracks the black economy

I’ve posted extensively that lack of electronic – hence, formal and reported – financial activity is a huge barrier to bringing the poor into the formal city – and hence to enabling them to claim their economic citizenship. 

Self-employed food vendor, Ahmedabad, February, 2010

So, is the report a vindication of the rampant corruption and growing scourge of black money? Not at all! The downside of black money far exceeds any possible upside. To the rhetoric question of where would we have been without the black economy shoring up growth, the answer could well be, like the Scandinavians, perhaps! With a growth rate far lower than our present 7-8%, but guess what! I have a feeling that given a choice, most ordinary Indians might happily swap their present lot for that of the Scandinavians, 9% growth be damned! 

If urbanization is a process, and housing formalization is a process, then too the visible manifestation of money is a further process. 

From Nancy’s and my India trip: Friendly tuk-tuk driver and passenger, Ahmedabad

[Continued tomorrow in Part 2.]

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Am I allowed to gloat?

Not gloating, just celebrating

Back in early December, I posted about Dubai World’s default announcement, calling it ‘a shock of the first magnitude, with consequences that will reverberate for years if not decades.’  In the days that followed the financial press was fully of it-ain’t-that-bad stories as various observers whistled past various potential economic graveyards.  The Gulf financial markets were unimpressed – they tanked.  Then the government of Dubai poured some oil on the turbid waters, and the markets calmed.

For about six weeks, though, when the inevitable happened, as Abu Dhabi made crystal clear that it has no intention of covering the debt fully.  As reported in The Wall Street Journal:

Dubai’s Aid Estimate Is Halved

DUBAI—A $10 billion bailout for Dubai from oil-rich Abu Dhabi, announced in December, is actually half that size, a Dubai government spokeswoman said Monday [Mid-January – Ed.], raising questions about the United Arab Emirates’ plans for paying down Dubai’s mountain of debt.

As we’ll see, Abu Dhabi’s done a fine job of letting out the bad news drip by drip, running out the clock until April. When the next bond payment is due, and gradually lowering creditors’ expectations, in a process that for two decades I have called ‘a bowling ball falling slowly downstairs,’ one heavy thud at a time, followed by a few moments’ peace, then another loud thud.

You don’t want to be on the receiving end

It is unclear how the reduction in funding will affect Dubai’s finances or its plans to restructure debt.

Hint: It’s going to be worse!

Dubai and its advisers are discussing a proposed debt standstill and restructuring agreement with lenders, who are holding some $22 billion of debt issued by Dubai World, the emirate’s corporate flagship.

Dubai is engaging in classical borrower-leverage negotiations.  The creditors, you see, think they have the whip hand, but the reality is that Dubai World’s assets have negligible recovery value.  Consisting of immovable real estate properties, purpose-built to focus on industries – leisure and travel – that depend on a healthy and expanding global economy, the Dubai World portfolio has value only if it continues running.  This being the case, Dubai’s creditors have basically no choice but to negotiate with Dubai World to keep operating and maximizing revenue.  In other words, the creditors have to grit their teeth and realize that their only hope of recovering some of the money they lost by listening to smooth-talking developers and bankers is … those same smooth-talking developers and bankers who lost them the money in the first place.

Just give me more money, you’ll feel better

Dubai has been criticized for a lack of transparency around the debt restructuring.

Treat ‘em like mushrooms, goes the saying, keep ‘em in the dark and keep ‘em crap.  That motto doesn’t work when there is a huge power imbalance – that is, individual borrowers who are small compared with a major institution should adopt a strategy of transparency, honesty, and diligence.

When the power dynamics are more nearly equal – as they are here, whether Dubai World’s creditors like it or not – the first step is bringing mutuality to perceptions.  In plain language, demonstrate their downside, a mantra I preach when representing delinquent but honorable borrowers against implacable but unthinking creditors.  Show them what they have to lose.  One such approach – crude, but effective – is to choke off information flow, leaving the creditors gradually to realize that if they threaten the managers, then the managers will go silent, and then you’ll really be up the creek.

What you’re going to lose is for me to know and you to find out

In response, it announced earlier this month a new media office to coordinate the emirate’s communications strategy.

Dubai World doesn’t need a media office, it needs to deal with its creditors.  This is just another shuck and jive.

Ahmed Al Shaikh, director of the new office, wasn’t reachable for comment Monday.

Way to go, media office!

I say nothing, nothing I say!

A spokesman for the federal government in Abu Dhabi was unable to comment on the matter.

How’s that new media strategy thingy working out for you?

On Monday, a spokeswoman for the Dubai Department of Finance said the $10 billion funding—described in December as coming directly from the government of Abu Dhabi—includes $5 billion in funds separately announced in November by two Abu Dhabi-controlled banks.

Double counting money – already you’re learning from the Westerners J.

Abu Dhabi and Dubai are two of seven semi-independent emirates that make up the UAE

As I pointed out before, this is a bit like being semi-cross-collateralized and semi-pregnant:

To tell the truth, I’m more than semi-pregnant

Dubai, struggling under total debt estimated as high as $80 billion, announced in February last year that the UAE federal government would buy $10 billion of bonds issued by Dubai. The proceeds would go to pay down debt and unpaid bills.

Obviously they saw the trouble a year ago, and I missed it.

Then, in late November, Dubai announced the two Abu Dhabi banks would subscribe to another $5 billion worth of bonds. Hours later, however, Dubai shocked global investors by announcing its corporate flagship, Dubai World, would request a debt standstill from lenders.

Classic good copy/ bad cop routine.  Let the credulous continue to believe, even as you dribble out the facts necessary to be able to say later, Hey, stop complaining, we told you long ago.

Mixing signals is very effective for paralyzing your creditors — at least in the short term – but really bad in that it also paralyzes the markets.

I ain’t gonna invest ’til you tell me some facts, son

Investors, suddenly worried that Abu Dhabi wasn’t willing to step in and rescue its indebted neighbor, sold off Dubai-related bonds. Investors also bid up the price of insuring against other highly indebted governments, from Greece to Russia.

A market panics quicker if it’s already pre-panicked.   And we know that Greece’s problems are structural, unresolved, and heading for serious unpleasantness.

Even cash-rich governments in the region, such as Saudi Arabia and Abu Dhabi, saw sharp rises in the prices of insuring against a default of their sovereign debt, making it more difficult and expensive for them to borrow on international markets.

Sovereign risk came to Islamic finance.  Islamic finance is now required to invent the jurisprudence of a sharia-compliant international bankruptcy.  This will be difficult.

In December, Dubai announced that Abu Dhabi had agreed to extend another $10 billion to help shore up finances, easing investor worry. Dubai said $4.1 billion of that would go to pay off a bond maturing that same day –

Just press ‘do not pay’ and see what happens

It sounded good – and kept Dubai World out of immediate monetary default.

– and the rest to provide interest expenses and working capital for the company through April 2010.

In other words, Abu Dhabi paid $10 billion to buy itself six months.

The disclosure Monday cuts by 20% the funds that analysts had assumed Abu Dhabi, the capital of the UAE and its financial powerhouse, had committed to Dubai over the course of last year. While both governments have disclosed little about the series of bailouts, analysts had widely interpreted the total funding commitment from Abu Dhabi and the federal government to Dubai at $25 billion. Dubai’s disclosure Monday reduces that to $20 billion.

One should never gloat about the misfortunes of others, and so I am not doing so.  But I am allowed to say I told you so.

You think you can say that?

My December sovereign-bankruptcy post said that a deep restructuring was required:

Dubai World, the real estate development arm of the Government of Dubai, unilaterally suspended payments on its debts.  As reported in the New York Times:

LONDON — The government of Dubai, in a blunt acknowledgment of the severity of its financial position, said on Wednesday [November 26, 2009 – Ed.] that it had asked its banks for a six-month stay on its schedule of debt repayments.

Though it is not yet being reported as such, this is a shock of the first magnitude, with consequences that will reverberate for years if not decades. 

1. It will bring us directly into the realm of sovereign bankruptcies, a fiscal plague that we have avoided for just under thirty-five years.

Back when we were trying to Whip Inflation Now

2. It will write new laws concerning the efficacy of Islamic finance, and in the process, hold a global financial referendum on whether Islamic finance moves forward, bringing with it the economies of the Islamic world, or collapses, with economic and political fallout none of us can know.

Last week [February 16 – Ed.] the bowling ball fell another step with this bitter announcement, also reported in The Wall Street Journal:

Dubai Debt Talks Hit Markets

Don’t, you’ll rattle him!

DUBAI—Dubai stocks fell again, though only slightly, and the price of insuring against a default in the city-state rose on Monday, on the second day of market upheaval following news that flagship corporation Dubai World may offer creditors just 60% of the money they are owed as part of a deal to reschedule $22 billion in debt.

People familiar with the matter told Zawya Dow Jones that one potential offer being considered in debt-restructuring talks was a repayment offer of 60 cents on the dollar, paid back after seven years, and backed up by government guarantees

Sounds very much like the recapitalization that happened 225 years ago in England, when Parliament settled the Prince of Wales’s debts:

I’m a man of words and deeds

The free-spending prince was not merely a trial to his parents, he was a positive burden to the state, running up mountainous debts:

The problem of the Prince of Wales’s debts, which amounted to the extraordinary sum of £630,000 in 1795, was solved (at least temporarily) by Parliament. 

From 1787 onward, there was a dalliance of convenience between the Prince of Wales and the Whigs, with political support by the former traded for economic support by the latter, and in a move worthy of Silvio Berlusconi or Jacques Chirac he used his position of power for crass personal advantage.

Charles James Fox: what are a few IOUs if I can form the government?

Being unwilling to make an outright grant to relieve these debts, it provided him an additional sum of £65,000 per annum.   

In effect, Parliament converted the Prince’s obligations into a long-term bond, thus on the one hand backing him in full but on the other making creditors wait years for repayment.  What with the inflation that always attends upon a war, Parliament was economically settling the Prince’s debts for some number of pence in the pound. 

I finished [December 8, 2009 – Ed.]:

One can easily imagine a similar solution being imposed on Dubai World’s creditors by a combination of blandishments and a little additional capital from Abu Dhabi.

Is it too soon for a victory lap?

A – H – I!  A – H – I!

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[Editor's note: As the memory of Haiti's devastating earthquake fades, we are able to see that much of the tragedy was preventable – not the quake itself, but the toll in human lives.  And we can therefore see this cautionary tale from Shanghai as not merely comic but tragicomic. – Ed.]

A building at the Lotus Riverside complex in Shanghai’s Minhang district collapsed, nearly intact, on Saturday morning (Imaginechina via AP Images)

To be stable, how far down must a building go?  As seen dramatically in this story from last June in The Wall Street Journal’s China Reality Report, that depends partly on what happens to the ground on either side of it.

In the weekend’s more bizarre news, a nearly finished, newly constructed building in Shanghai toppled over, killing one worker.

Fortunately, no one else, as the building was unoccupied.

As can be seen in the photo below, the 13-story apartment building collapsed with just enough room to escape what would have been a far more destructive domino effect involving other structures in the 11-building complex.

Good thing the adjacent lot was vacant – or was it a good thing at all?

The development, known as “Lotus Riverside,” has a total of 629 units, 489 of which have already been sold. Now buyers are clamoring to get their money back, and authorities are making efforts to reassure them.

That’s hardly reassuring

Although the Lotus Riverside property was somewhat more substantial than Monty Python’s Mystico Towers, which stood so long as its inhabitants believed in it, the developer’s credibility has now vanished as if disappeared by El Mystico himself.

I can make your credibility … disappear!

The assets of the project’s developer, Shanghai Meidu Property Development Co., have been frozen and the city officials said the developer’s ability to repay homebuyers was secure, according to a statement on the municipal government’s Web site (in Chinese).

Oh really?  I hope they have really good insurance.

A hotline has been set up for Lotus Riverside buyers, and by Sunday afternoon, more than half of them had met with a group of lawyers and officials organized to help them negotiate with the developer, according to the statement.

‘Negotiate with a developer’ is an ominous phrase.  What’s to negotiate? 

Defense of property rights is an intrinsic function of government.  If government’s doesn’t defend my property rights – against fire, against robbery, against vandalism, and against shoddy or fraudulent construction – then what is it for?  What are building permits for? 

What are taxes for, if not to provide services on which consumers can rely?

Property rights are Tocquevillean – that is, they promote the development, strengthening, and integrity of civil and democratic institutions – because (a) their defense requires an equitable and honorable government, and (b) they are expected by demanding middle-class customers.  The clamor for restitution is a promising sign; so is its focus on the city government.

Meanwhile, the cause of the accident is under investigation and nine unidentified people from the developer, contractor and management company have been detained.

Have they fallen over too?

A representative of Shanghai Meidu could not be reached for comment.

There’s nobody here!

Particularly as the building which toppled appears to be no different from the adjacent buildings, whose apartments I presume have already been sold and are now being occupied.  Wouldn’t you want out of a condominium with some zero of falling over?

According to Shanghai Daily, initial investigations attribute the accident to the excavations for the construction of a garage under [They have to mean adjacent to and lower-grade than – Ed.] the collapsed building.

An underground garage was being dug on the south side, to a depth of 4.6 meters

It takes some never to decide to build a major subsurface garage after you’ve already put up a multi-story tower, for anyone with a fourth-grade knowledge of construction knows that vertical force translates into horizontal force when it is not properly and symmetrically buttressed.  That’s the sole purpose of buttresses and flying buttresses – to deflect lateral force and brace against it squeezing the cathedral walls out, collapsing the roof.

A decade or so ago, when Boston was excavating up and down the Central Artery in the Big Dig, those with property abutting the excavation areas demanded – and got – comprehensive and well collateralized indemnities against the possibility their building would shear, subside, or crack in consequence.

The excavated dirt was being piled up on the north side, to a height of 10 meters

Large quantities of earth were removed and dumped in a landfill next to a nearby creek; the weight of the earth caused the river bank to collapse, which, in turn, allowed water to seep into the ground, creating a muddy foundation for the building that toppled.

Any real estate person knows that water is property’s greatest enemy.  Aside from roof and building-envelope leaks, it rearranges the land, shifting buildings on their buildings.

The building experienced uneven lateral pressure from south and north

(I still remember a UDC affordable housing property in upstate New York that had an Edward Durrell Stone design – Howard Roark designing for the masses – that might have been fine on level ground, but was a catastrophe on a hillside.  Heavy snow plus melting plus grade meant that over a very few years, the buildings began glaciating off their pads, costing millions to fix.  You’d think somebody would have connected the dots.)

This resulted in a lateral pressure of 3,000 tons, which was greater than what the pilings could tolerate.

You absolutely cannot have a massive load-bearing structure that you then undermine on one side and overpress on another – the shear forces will be massive, and unrelenting.

As a result, the building fell over.

The South China Morning Post noted that the pilings used in the Lotus Riverside development, made of pre-stressed, precast concrete piles, are outlawed in Hong Kong because they aren’t strong enough to support the kind of ultra-high buildings that are common in Hong Kong.

And concrete, though immensely strong against compression, is immensely brittle.  The pilings appear to have had no steel reinforcing, as would be mandatory in a US development – or, for that matter, in Hong Kong, which – returning to our Tocquevillean theme – has a much sterong orientation to consumer protection.

Looking like nothing so mulch as rotted piers, all snapped off at the same place.

In mainland China, they are often used because buildings there are typically much shorter (subscription required).

Also because mainland China is still the land of the quick-buck real estate developer.

Not a developer in sight

The disaster could reveal some uncomfortable facts about lax construction practices in China, where buildings are put up in a hurry by largely unskilled migrant workers, and developers may be tempted to take shortcuts.

Oh, you think?

Holes where rebar should be

In the US, as in most developed nations, buildings will have a design architect – with professional liability insurance to cover just such design omissions as this – and then a supervisory architect, independent of the contractor, who makes sure that what is build conforms to the plans and specifications, and that there are no substitutions of cheaper/ inferior materials.  All those checks on developer short-term profit-taking appear absent in the Lotus Riverside.

The air costs nothing – and supports nothing

Quality problems have long plagued construction in China, though they seem to be more apparent in rural areas and smaller cities, not in major metropolises such as Shanghai and Beijing.

When school buildings were flattened by last year’s massive Sichuan earthquake, a number of parents faulted shoddy construction for creating “tofu buildings” that fell while other nearby structures were able to withstand the impact of the quake.

Disaster vulnerability reduction is thus not just an exercise in consumer protection, it’s also national risk mitigation. 

This couldn’t happen in San Francisco

We may grumble about earthquake reinforcement, or high-rise sprinkler systems, or lead-based paint/ asbestos removal – but each time these features are added to the building codes, we incrementally de-risk our cities, and that strengthens society.

More recently, state media reported that several new dams along the Yellow River are in danger of collapse, a situation attributed to:

Shoddy construction practices

Embezzlement and

Unqualified workers.

A winning trio!

We’d have been in fat city except for you unqualified worker!

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