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Almost two years ago, I was driving in my car in Germany, and I turned on the radio. Europe at the time was in the middle of the Euro crisis, and all the headlines were about European countries getting downgraded by rating agencies in the United States. I listened and thought to myself, "What are these rating agencies, and why is everybody so upset about their work?"

 Well, if you were sitting next to me in the car that day and would have told me that I would devote the next years to trying to reform them, obviously I would have called you crazy. But guess what's really crazy: the way these rating agencies are run. And I would like to explain to you not only why it's time to change this, but also how we can do it.


  So let me tell you a little bit about what rating agencies really do. As you would read a car magazine before purchasing a new car or taking a look at a product review before deciding which kind of tablet or phone to get, investors are reading ratings before they decide in which kind of product they are investing their money. A rating can range from a so-called AAA, which means it's a top-performing product, and it can go down to the level of the so-called BBB-, which means it's a fairly risky investment. Rating agencies are rating companies. They are rating banks. They are rating even financial products like the infamous mortgage-backed securities. But they can also rate countries, and these ratings are called sovereign ratings, and I would like to focus in particular on these sovereign ratings.

  And I can tell, as you're listening to me right now, you're thinking, so why should I really care about this, right? Be honest. Well, ratings affect you. They affect all of us. If a rating agency rates a country, it basically assesses and evaluates a country's debt and the ability and willingness of a country to repay its debt. So if a country gets downgraded by a rating agency, the country has to pay more in order to borrow money on the international markets. So it affects you as a citizen and as a taxpayer, because you and your fellow countrymen have to pony up more in order to borrow. But what if a country can't afford to pay more because it's maybe too expensive? Well, then the country has less available for other services, like roads, schools, healthcare. And this is the reason why you should care, because sovereign ratings affect everyone. And that is the reason why I believe they should be defined as public goods. They should be transparent, accessible, and available to everyone at no cost.

  But here's the situation: the rating agency market is dominated by three players and three players only -- Standard & Poor's, Moody's, and Fitch -- and we know whenever there is a market concentration, there is really no competition. There is no incentive to improve the quality of your product. And let's face it, the credit rating agencies have contributed, putting the global economy on the brink, and yet they have to change the way they operate.

  The second point, would you really buy a car just based on the advice of the dealer? Obviously not, right? That would be irresponsible. But that's actually what's going on in the rating agency sector every single day. The customers of these rating agencies, like countries or companies, they are paying for their own ratings, and obviously this is creating a conflict of interest.

  The third point is, the rating agencies are not really telling us how they are coming up with their ratings, but in this day and age, you can't even sell a candy bar without listing everything that's inside. But for ratings, a crucial element of our economy, we really do not know what all the different ingredients are. We are allowing the rating agencies to be intransparent about their work, and we need to change this.

  I think there is no doubt that the sector needs a complete overhaul, not just a trimming at the margins. I think it's time for a bold move. I think it's time to upgrade the system. And this is why we at the Bertelsmann Foundation have invested a lot of time and effort thinking about an alternative for the sector. And we have developed the first model for a nonprofit rating agency for sovereign risk, and we call it by its acronym, INCRA.

  INCRA would make a difference to the current system by adding another nonprofit player to the mix. It would be based on a nonprofit model that would be based on a sustainable endowment. The endowment would create income that would allow us to run the operation, to run the rating agency, and it would also allow us to make our ratings publicly available. But this is not enough to make a difference, right? INCRA would also be based on a very, very clear governance structure that would avoid any conflict of interest, and it would include many stakeholders from society. INCRA would not only be a European or an American rating agency, it would be a truly international one, in which, in particular, the emerging economies would have an equal interest, voice and representation.

 The second big difference that INCRA would make is that would it base its sovereign risk assessment on a broader set of indicators. Think about it that way. If we conduct a sovereign rating, we basically take a look at the economic soil of a country, its macroeconomic fundamentals. But we also have to ask the question, who is cultivating the economic soil of a country, right? Well, a country has many gardeners, and one of them is the government, so we have to ask the question, how is a country governed? How is it managed? And this is the reason why we have developed what we call forward-looking indicators. These are indicators that give you a much better read about the socioeconomic development of a country. I hope you would agree it's important for you to know if your government is willing to invest in renewable energy and education. It's important for you to know if the government of your country is able to manage a crisis, if the government is finally able to implement the reforms that it's promised. For example, if INCRA would rate South Africa right now, of course we would take a very, very close look at the youth unemployment of the country, the highest in the world. If over 70 percent of a country's population under the age of 35 is unemployed, of course this has a huge impact on the economy today and even more so in the future. Well, our friends at Moody's, Standard & Poor's, and Fitch will tell us we would take this into account as well. But guess what? We do not know exactly how they will take this into account.

  And this leads me to the third big difference that INCRA would make. INCRA would not only release its ratings but it would also release its indicators and methodology.

 So in contrast to the current system, INCRA would be fully transparent. So in a nutshell, INCRA would offer an alternative to the current system of the big three rating agencies by adding a new, nonprofit player to the mix that would increase the competition, it would increase the transparency of the sector, and it would also increase the quality.

  I can tell that sovereign ratings may still look to you like this very small piece of this very complex global financial world, but I tell you it's a very important one, and a very important one to fix, because sovereign ratings affect all of us, and they should be addressed and should be defined as public goods. And this is why we are testing our model right now, and why we are trying to find out if it can bring together a group of able and willing actors to bring INCRA to life. I truly believe building up INCRA is in everyone's interest, and that we have the unique opportunity right now to turn INCRA into a cornerstone of a new, more inclusive financial system. Because for way too long, we have left the big financial players on their own. It's time to give them some company.


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Sat Nov 21, 2015 9:42AM


                                            Ministers of the Gas Exporting Countries Forum (GECF) pose for a family photo in Tehran, Nov. 21, 2015. ©Shana                                    
                               Ministers of the Gas Exporting Countries Forum (GECF) pose for a family photo in Tehran, Nov. 21, 2015. ©Shana                                                                                                               

An extraordinary meeting of gas exporting countries has begun in Tehran ahead of a Monday summit which will gather several leaders, including Russian President Vladimir Putin, to discuss issues related to gas production, exports and pricing.

Iran’s Minister of Petroleum Bijan Zangeneh chaired the opening ministerial session on Saturday morning to lay out the agenda of the Gas Exporting Countries Forum (GECF) for summit negotiations and draft a declaration.

“Without a doubt, this meeting will pave the way for exchange of views and better cooperation and convergence among members and encourage other states to join the GECF,” he told the session.  

GECF ministers were to carry on with another meeting in the afternoon in which they were expected to choose a secretary general. The group’s incumbent, Iranian Mohammad Hossein Adeli, faces no contender for the post.

“I have no serious rival but we have to wait until the last moment. Certain countries have differences and political consultations are underway behind the scenes,” he told the IRNA news agency.  

Adeli was retained in the post later in the day.  

Ministers of GECF countries hold an extraordinary session in Tehran on Nov. 21, 2015. ©Shana  

Besides Putin, presidents of Venezuela, Iraq, Bolivia, Equatorial Guinea, Nigeria, Turkmenistan and the Algerian prime minister have been confirmed to participate at the summit.

This is the third summit of GECF countries, coming in the midst of changing dynamics in the global gas market and an imminent removal of US-led sanctions on Iran.


Iran possesses the world’s largest proven gas reserves, with a potential to become a top producer.

“Naturally, Iran with more than 33 trillion cubic meters of gas which it possesses will become a major player in the world gas trade,” Deputy Petroleum Minister Amir-Hossein Zamaninia said on Monday.

The country is currently among the world’s biggest gas producers with more than 173 billion cubic meters (bcm) a year but much of it goes to domestic consumption.

Officials say Iran must double production to 1.3 bcm a day by 2020 under its development plan, putting the country among the ranks of major gas exporters. 


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No Pain, No Gain for Britain?

LONDON – The economic historian Niall Ferguson reminds me of the late Oxford historian A.J.P. Taylor. Though Taylor maintained that he tried to tell the truth in his historical writing, he was quite ready to spin the facts for a good cause. Ferguson, too, is a wonderful historian – but equally ready to spin when he shifts into political gear.

Ferguson’s cause is American neo-conservatism, coupled with a relentless aversion to Keynes and Keynesians. His latest defense of fiscal austerity came immediately after the United Kingdom’s recent election, when he wrote in the Financial Times that, “Labour should blame Keynes for their defeat.”


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Ferguson’s argument amounts to that of a brutal disciplinarian who claims vindication for his methods by pointing out that the victim is still alive. In pleading on behalf of British Chancellor of the Exchequer George Osborne, he points out that the UK economy grew by 2.6% last year (the “best performing of the G-7 economies”), but ignores the damage that Osborne inflicted on the economy en route to this recovery.

There is now much agreement about this damage. The Office of Budget Responsibility, the independent agency set up by Osborne to assess the government’s macroeconomic performance, has just concluded that austerity reduced GDP growth by 2% from 2010 to 2012, bringing the cumulative cost of austerity since 2010 to 5% of GDP. Simon Wren-Lewis of Oxford University estimates that the damage might be as high as 15% of GDP. In a recent poll of British economists by the Centre for Macroeconomics, two-thirds agreed that austerity had harmed the UK economy.

Moreover, Britain is not alone. In its October 2012 World Economic Outlook, the IMF admitted that, “fiscal multipliers were underestimated across the world.” In plain English: the forecasters underestimated the extent of spare capacity and hence the scope for fiscal expansion to raise output.

Was it an honest mistake? Or was it because the forecasters were in thrall to economic models that implied that economies were at full employment, in which case the only result of fiscal expansion would be inflation? They now know better, and Ferguson should now know better as well.

A depressing aspect of Ferguson’s interpretation is his failure to acknowledge the impact of the Great Recession on government performance and business expectations. Thus, he compares 2.6% growth in 2014 with the 4.3% contraction in 2009, which he describes as “the last full year of Labour government” – as though Labour policy produced the collapse in growth. Similarly, “At no point after May 2010 did [confidence] sink back to where it had been throughout the last two years of Gordon Brown’s catastrophic premiership” – as though the Brown government’s performance caused business confidence to collapse.

The claim that “Keynes is to blame” for Labour’s election defeat is peculiarly odd. After all, the one thing Labour’s leadership tried hardest to do in the campaign was to distance the party from any “taint” of Keynesianism. Perhaps Ferguson meant that it was Labour’s past association with Keynes that had damned them – “their disastrous stewardship before and during the financial crisis,” as he puts it.

In fact, Labour’s most recent governments were determinedly non-Keynesian; monetary policy was geared to hitting a 2% inflation target, and fiscal policy aimed at balancing the budget over the business cycle: standard macro-economic fare before the recession struck. The most damning charge against their stewardship is that they embraced the idea that financial markets are optimally self-regulating – a view that Keynes rejected.

Keynes was not to blame for Labour’s defeat; in large part, Scotland was. The Scottish National Party’s crushing victory left Labour with only one seat in the country. There are no doubt many reasons for the SNP’s overwhelming triumph, but support for austerity is not one of them. (The Conservatives did as badly as Labour.)

Nicola Sturgeon, First Minister of Scotland and leader of the SNP, attacked the “cozy consensus” around fiscal consolidation in Westminster. The deficit, she rightly said, was “a symptom of economic difficulties, not just the cause of them.” The SNP manifesto promised “at least an additional £140 billion ($220 billion) across the UK to invest in skills and infrastructure.”

So if the SNP did so well with a “Keynesian” program of fiscal expansion, is it not arguable that Labour would have done better had it mounted a more vigorous defense of its own record in office and a more aggressive attack on Osborne’s austerity policy? This is what leaders of the Labour party like Alistair Darling, Gordon Brown’s Chancellor of the Exchequer, are now saying. But they seem to have had no influence on the two architects of Labour’s election strategy, Ed Miliband and Ed Balls, both now removed from front-line politics.

What the Conservatives did succeed in doing, and doing brilliantly, was to persuade English people that they were only “cleaning up Labour’s mess,” and that, but for austerity, Britain would have “gone the way of Greece” – exactly Ferguson’s view.

One might conclude that all of this is history: the voters have spoken. But it would be a mistake to accept the Conservative narrative as the last word. It is basically a tissue of propaganda, with little support in theory and destructive effects in practice.

This might not matter so much had there been a change of government. But Osborne is back as Chancellor, promising even tougher cuts over the next five years. And fiscal austerity is still the reigning doctrine in the eurozone, thanks to Germany. So the damage is set to continue. In the absence of a compelling counter-narrative, we may be fated to find out just how much pain the victims can withstand.


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'Austerity' was not nearly as harmful as...predicted. Fiscal stabilization may have contributed to a revival of confidence.

Visit article MAY 19, 2015 27

The Economic Consequences of Mr. Osborne

CAMBRIDGE – “If the facts change,” John Maynard Keynes is supposed to have said, “I change my opinion. What do you do, sir?” It is a question his latter-day disciples should be asking themselves now.

Long before the United Kingdom’s recent general election, which the Conservatives won by a margin that stunned their critics, the facts about the country’s economic performance had indeed changed. Yet there is no sign of today’s Keynesians changing their minds.


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Because I admire him as an historian, not least for his Keynes biography, I omitted Lord Robert Skidelsky’s name from my post-election commentary critiquing the contemporary Keynesian take on the UK economy. Opprobrium was best heaped, I believed, on Paul Krugman, as he makes such a virtue of heaping it on others. Unwisely, Skidelsky has leapt to Krugman’s defense.

Let me restate why the Keynesians were wrong. In the wake of the 2010 British election, Skidelsky, like Krugman, predicted that Chancellor of the Exchequer George Osborne was gravely wrong in seeking to reduce the budget deficit. In November 2010, he described Osborne as “a menace to the future of the economy” whose policies “doomed [the UK] to years of interminable recession.” In July 2011, he told the Financial Times that Osborne was “making a wasteland,” warning that financial markets might soon lose confidence in his policies.

In June 2012, Skidelsky argued that “since May 2010, when US and British fiscal policy diverged, the US economy has grown – albeit slowly. The British economy is currently contracting. … For Keynesians, this is not surprising: By cutting its spending, the government is also cutting its income. Austerity policies have plunged most European economies (including Britain’s) into double-dip recessions.” And, in May 2013, he reported that “The results of austerity had been “what any Keynesian would have expected: hardly any growth in the UK … in the last two and a half years … little reduction in public deficits, despite large spending cuts;…higher national debts… [and] prolonged unemployment.”

By this time, groupthink had taken hold. Skidelsky approvingly quoted Krugman’s claim that Britain was “doing worse this time than it did during the Great Depression.” More than once he echoed Krugman’s assertion that Osborne had been motivated by an erroneous belief that if he did not reduce the deficit, he might forfeit investor confidence (the “confidence fairy”).

Just a week before the UK voted this month, Skidelsky speculated that voters, “still wobbly from Osborne’s medicine,” might “decide that they should have stayed in bed.” Instead, the Tories won an outright majority, confounding pollsters and Keynesians alike. What could possibly have gone wrong – or, rather, right?

The last-ditch argument now put forward by Krugman is that the UK electorate was fooled into voting Conservative by a one-year pre-election boom, cynically generated by a covert Keynesian stimulus. It cannot have been easy for him to abandon his cherished macroeconomic model in favor of a conspiracy theory, especially one that two decades ago lost whatever explanatory power it ever had for UK elections.

But there is an alternative explanation: the Keynesians were wrong. “Austerity” was not nearly as harmful as they predicted. Fiscal stabilization may have contributed to a revival of confidence. In any case, nothing in modern British economic history told Osborne that he could risk running larger deficits with impunity.

There has been some sleight of hand in assessing Britain’s recent economic performance. For example, Dean Baker took International Monetary Fund data for the G-7 countries’ GDPs and made 2007 his base year. But a more appropriate benchmark is 2010, in the middle of which Cameron and Osborne took office. It is also worth including the latest IMF projections. And per capita GDP must surely be preferable to aggregate GDP.



No doubt, recovery in the UK began more slowly than in other G7 economies, except Italy. But there is also no doubt that the UK recovery picked up speed after 2012. Last year, its growth rate was the highest in the G-7. According to the IMF, only the US economy will grow faster over the next four years, with the UK then regaining the lead.

It is wrong to assume that the UK could somehow have replicated the German or American recovery, if only Keynesian policies had been followed. The UK’s position in 2010 was exceptionally bad in at least four respects, and certainly much worse than that of the US.

First, public finances were extremely weak, as a 2010 Bank for International Settlements study of trends in debt-to-GDP ratios clearly showed. The baseline scenario for the UK at that time was that, in the absence of fiscal reform, public debt would rise from 50% of GDP to above 500% by 2040. Only Japan was forecast to have a higher debt ratio by 2040 in the absence of reform.

Second, including financial-sector debt, non-financial business debt, and household debt the pre-crisis UK had become, under Labour governments, one of the world’s most leveraged economies. In 1997, Labour’s first year in power, aggregate UK debt stood at around 250% of GDP. By 2007, the figure exceeded 450%, compared with 290% for the United States and 274% for Germany. Government debt was in fact the smallest component; banks, businesses, and households each had twice as much.

Third, inflation was above the Bank of England’s target. From 2000 until 2008, the inflation rate had crept upward, from below 1% to 3.6%. Among G-7 countries, only the US rate was higher in 2008; but, whereas US inflation cratered when the crisis erupted, the UK rate remained stubbornly elevated, peaking at 4.5% in 2011.

Finally, the UK was much more exposed than the US to the eurozone crisis of 2012-2013, as its principal trading partner suffered two years of negative growth.

So the real question is this: Did Osborne successfully stabilize the UK’s public finances? If the Keynesians had been correct, he would undoubtedly have failed; growth would have turned negative and the fiscal/debt position would have worsened.

That is not what happened. Net government debt as a percentage of GDP had soared from 38% to 69% from 2007 to 2010. It rose under Osborne, too, but at a far slower pace, and is forecast to peak at 83% this year, after which it will decline. By 2020, according to the IMF, only Canada and Germany will be in better fiscal health.



Stabilization of the public debt has been achieved by a drastic reduction of the government’s deficit from a peak of just under 11% of GDP in 2009 to 6% last year. By 2018, according to the IMF, the deficit will have all but vanished. The same story can be told of the government’s structural balance, which fell from 10% of GDP in 2009 to 4% in 2014 and should be just 0.5% in 2018.



This is an impressive performance in comparative terms. The US, for example, will still have a 4%-of-GDP deficit by 2020 on either of the above measures.

To be sure, the UK did not “deleverage”; but, under Osborne, the debt explosion was contained. Among advanced economies, only Germany, Norway, and the US achieved smaller increases in aggregate public and private debt/GDP ratios from 2007 to 2014.

UK inflation was also brought under control, without the overshoot into deflation experienced by some developed countries. Osborne cannot claim direct credit for this, of course; but the choice of Mark Carney to serve as Governor of the Bank of England was unquestionably his.

Most important, no prolonged or double-dip depression occurred. Far from being worse than in the Great Depression, the economy’s performance after 2010 was better than it had been in the recessions of the early 1980s and early 1990s. Indeed, the UK outstripped the other G-7 economies in terms of growth last year, and its unemployment rate, which never rose as high as the rates in the US and Canada in the teeth of the crisis, currently stands at roughly half those of Italy and France.



Measured by job creation, too, UK performance was as good as the best, with employment increasing by roughly 5% between 2010 and 2014. As Jeffrey Sachs has noted, the UK employment rate, now at a record-high 73%, exceeds by far the US rate of 59%.



The fact is that the more Keynesians like Skidelsky and Krugman talked about the “confidence fairy,” the more confidence returned to UK business. One can argue about why that was, but it seems unlikely that Osborne’s successful fiscal consolidation was irrelevant. There is certainly no evidence to support Krugman’s repeated assertion that a country in the UK’s situation – with its own currency and with debt denominated in that currency – could borrow without constraint in the aftermath of a major banking crisis. (Perhaps the Keynesians prefer to efface from their memories the mid-1970s, when Labour politicians, encouraged by Keynesian advisers, attempted to do just that.)



And the Keynesians’ comparisons with the Great Depression were plainly risible from the outset. In terms of unemployment, even the recessions of the 1980s and 1990s were twice as painful.



Without question, the UK has endured some real pain. From 2010 to 2015, average inflation-adjusted weekly earnings fell more than under any postwar government. But the electorate has decided that the right time to draw a conclusion about the performance of Cameron’s team (now only at its likely half-way point) will be in 2020, not 2015. The good news is that since September 2014, earnings have been growing in real terms. The plunge that began under Labour took time to stop, but it is finally over.



Like Krugman (though his tone has been much less obnoxious), Lord Skidelsky has made the un-Keynesian mistake of sticking to an erroneous view in the face of changing facts. I look forward to the time when both have the intellectual honesty to admit that they were wrong – horribly wrong – about the economic consequences of Osborne’s strategy.


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