Upside Down Meritocracy

There are many appalling things I have learned to tolerate over the years except one: the lack of common sense. You can correct uncivilized manners, you can control vulgar speech, you can put a stop to violence but you can never treat stupidity. Few days ago I have read in the papers something utterly outrageous. According to Gheorghe Pogea – the Romanian finance minister, “in 2015, the public sector employees’ average salary will be in excess of RON 3,400, while the private sector employees will earn 31% less, averaging around RON 2,350”. He then added that “the 25% gap between the public employees (currently earning around RON 2,200) and the private employees (currently earning around RON 1,760) will become 30% in the coming years”. Let’s all move a step back, take a deep breath and start dissecting this common sense atrocity.

The Rising Phoenix

Before jumping into the credit spread pool, I reckon it is worthwhile spending a little time crystallizing few concepts. It is universally perceived that the US treasury bonds constitute to this day the baseline for the credit space, and they have been labeled as riskless securities. Credit rating agencies (e.g., Moody’s, Standard & Poor’s) are those institutions that evaluate the credit worthiness of corporations, municipalities and governments around the world. The rating scale starts with the AAA rating – the highest credit worthiness, lowest risk and lowest probability of default, and continues with AA, A, BBB and so on and so forth. As the credit goes down on the rating scale, the default risk – the risk associated with a debtor’s capacity of meeting payments towards its creditors, increases non-linearly.

The Square Root Recession

The most important question you will hear nowadays is “How quickly will we recover?” The answer to this question can be found by analyzing the shape of the current recession. Economists tend to refer to the following four shapes: V-shaped, U-shaped, W-shaped and L-shaped recessions.
V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. These are the best-case scenarios, and they happened in 1990-1991 and 2001 recessions. U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again. The recession from 1971 through 1978 when both unemployment and inflation were high for years – is considered a U-shaped recession.

Are We Out of the Woods?

Since the global credit crisis began, banks and financial institutions have reported more than $1.5 trillion in credit losses and writedowns worldwide. Even though it seems like we passed the hardest economic period in decades, I strongly believe we are not out of the woods yet. To understand when we could reach that spot, I would pinpoint some key metrics that we should look at when judging the stage of the global economic revival. I hope that many of my readers would agree that the epicenter of the global financial meltdown will coincide with the place where the economic rebound is to occur first. By all means, that place is the US economy.

Quantitative Easing

These days, all over across the Wall Street and academia, many economists touch an extremely hot topic days: the quantitative easing policy. The world economy is facing the toughest recessionary pressure since the Great Depression and that calls for an unprecedented monetary policy from the central banks. Since June 29^th 2006, when the federal target rate reached 5.25 percent, Federal Reserve has engaged into a monetary easing policy that took the benchmark interest rates in the vicinity of zero. Similarly, Bank of England has reduced the benchmark rate to half a percentage point, and European Central Bank adopted a dovish stance with interest rates down to historical low levels of 1 percentage point. On top of that, Fed has injected massive amount of liquidity into the financial system through the discount window loans, term-credit loans to banks and currency swaps to foreign central banks. As an extraordinary set of measures, from the beginning of the year Federal Reserve has announced two special programs: a program to purchase up to $300 billion of longer-dated Treasury securities and a program to purchase $1.25 trillion of agency mortgage-backed securities.

Financial Meltdown in CEE

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