Friday's Top 10 at 10 with NZ Mint: NZ in lockstep with Australia's economy and banks; The ppproblem with PPPs'; Keynes vs Hayek round 2; Cycle powered boats; Clarke and Dawe on the wedding; Dilbert

Here's my Top 10 links from around the Internet at 3 pm  in association with NZ Mint.

I'll pop the extras into the comment stream. See all previous Top 10s here.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I will not welcome any mention of this wedding thing in Britain. Interest.co.nz is officially a wedding-free zone this week. Or at least we don't take it seriously. Reference Number number 11

1. Our Australian exposure - The IMF has published its regional economic summary for Asia Pacific with an interesting little section on how exposed Australia and New Zealand are to changes in emerging Asian (read Chinese) growth.

Australia is more exposed to China than us directly, but we are exposed indirectly through Australia and the linkage is almost 1 to 1 between New Zealand and Australia (chart below).

The note about the linkage between our banking systems is most interesting.

Hence we should be watching what happens in China with commodity prices and how the Aussie bank CEOs feel about New Zealand.

We should ignore this bloody wedding tonight in the 'mother country'.

Here's the IMF's view:

The growing integration with Asia and increasing dependence on commodity exports make growth in Australia and New Zealand more vulnerable to swings in commodity demand and prices.

New Zealand’s business cycle is exposed to emerging Asia mostly through Australia, its single most important trade and financial partner. Shocks from emerging Asia are found to have a negligible direct impact on New Zealand.

Rather, New Zealand’s GDP is most responsive to shocks from Australia, and the responsiveness has strengthened to almost “one-to-one” during the last decade. IMF staff analysis also suggests that shocks from Australia to New Zealand have been transmitted mostly through financial variables, as the financial system of New Zealand is dominated by four subsidiaries of Australian parent banks.  

Here's the chart:

2. The problems with PPPs - There seems to be growing momentum in New Zealand for using Public Private Partnerships (PPPs) to 'solve' our capital shortage problem for public infrastructure such as schools, prisons, roads and hospitals.

The theory is that one alternative to government borrowing is getting private capital involved through PPPs.

But this is not a new idea. It's been tried extensively in Britain and Australia. The history is ugly. The profits are privatised and the losses are socialised.

The borrowing costs in these deals are much higher than government borrowing costs.

They cost taxpayers much, much more in the long run.

Here's the Guardian on the latest warning from the National Audit Office in Britain against PPPs or Private Finance Initiatives (PFIs) as they're called there. HT No Right Turn.

The government's spending watchdog has issued its strongest health warning to date over the use of PFI deals to build new schools and hospitals, saying the government should urgently find alternative ways to invest in major infrastructure projects after some costs spiralled out of control.

Private finance initiatives (PFI), whereby banks and construction companies pay for public sector capital projects then lease them back for a period of up to 30 years, have become increasingly expensive since the credit crisis and the government should consider slowing down the number of new deals it enters into, the National Audit Office says.

3. Irish haircut required - London Business School Economics Professor Richard Portes argues in this VoxEu commentary that Ireland should default and restructure its debt.

Portes makes the point that the Germans are blocking any haircut because it would damage German banks. That's not sustainable or fair, he says.

Buckle up for more grief in the rolling cluster-fxxck to the poorhouse that is the European Sovereign Debt crisis.

Here's Portes:

After many subsequent capital infusions of taxpayer funds, the latest stress tests and restructuring plans are supposed to draw a line under the shocking costs of the guarantee and to launch recovery. But the burden of the debt on the sovereign is now unsustainable. The projections in the original IMF programme, endorsed by the European Commission and the ECB, see the debt-to-GDP ratio peaking at 120% in 2013. The IMF itself clearly thinks that the downside risks to the programme are high, likely to materialise, and difficult to mitigate. The government has not convinced the markets – Irish sovereign spreads are today about the same as in November before the IMF programme, and the latest actions have led the ratings agencies to downgrade the sovereign (while upgrading the banks). Yes, a couple of investment banks are now saying Irish debt is a good buy – doubtless because they are now convinced the new government will not dare to restructure the debt. The programme requires some access to market funding from next year. That is not credible unless the debt is restructured.

Debt restructuring would impose significant costs on German and British banks, as well as others. That might reduce moral hazard, going forward. But the underlying issue is even more fundamental. The European governments have in effect bailed out their own banks exposed to Ireland, transferring the fiscal costs to the Irish taxpayers through the European Financial Stability Facility, all the while maintaining the moral and political high ground of creditors. So far, there is in fact no ‘transfer union’ of the kind so castigated in Germany (no solidarity there)4. There have been no transfers from the creditor countries, just loans. The true transfers have been going from debtor countries to the banks of the creditor countries, making good their bad loans.

Yes, Ireland had more than its share of crony capitalists and reckless lenders – but there were plenty of reckless foreign lenders, too, and they are being made whole by the Irish state.

4. The death of reputation on Wall St - Steven Davidoff laments at the NYTimes' Dealbook that Wall St's banks' reputations are dying, but they continue to grow.

Today, both people and institutions seem to bear no penalty for their actions. They are rewarded. Why does reputation no longer matter?

The reason is unfortunate and partly attributable to why we got into the financial crisis. People simply don’t matter as much on Wall Street as they used to. Instead size and technology carry the day.

Reputational sanctions ensure people act appropriately and fill the gap between poor or unethical conduct and law-breaking. It ensures that people are penalized for their mistakes and inappropriate behavior. It is the most important of oils that ensures that the capital markets work.

But in the wake of the financial crisis, cynicism rules. Reputation is ignored, and we have a much diminished financial system as a consequence.

5. Biggest bank lobbyists took biggest risks - The WSJ reports the bankers who lobbied hardest for deregulation took the biggest risks and received the biggest bailouts from the US government.

Sigh

Will we ever learn. South Canterbury Finance and AMI come to mind in New Zealand.

This is the sort of reason why ACT's solutions for completely open and unfettered markets just won't fly in an era after the Global Financial Crisis.

Big financial corporates of this kind simply can't be trusted. They have to be regulated. ACT-types would say they should have been allowed to fail. Fair enough. But when they are Too Big To Fail there is a problem, particularly for financial institutions.

Three International Monetary Fund researchers said the mortgage lenders who lobbied most aggressively in Washington for less regulation took more risks and exposed themselves to worse outcomes during the financial crisis than more conservative firms that didn’t lobby.

Deniz Igan, Prachi Mishra and Thierry Tressel said these same lenders were more likely to receive money under the federal government’s bank bailout, possibly because these firms were hit harder during the crisis and had relationships with key lawmakers. (Read the full paper)

The researchers noted that Citigroup Inc., for instance, which nearly collapsed during the crisis and which required $45 billion in government support to stay alive, lobbied intensely against a 2001 bill that aimed to put tighter restrictions on lenders.

The researchers noted that, from 1999 through 2006, 93% of bills introduced in Congress that promoted tighter regulation were never signed into law. But two key pieces of legislation that paved the way for lax mortgage markets were enacted, one in 2000 and another in 2003.

6. European Crisis landmines - Wolfgang Munchau at FT.com has this sober assessment of the risks facing Europe over the next year or so, starting with Greece and talk by Finnish and German nationalist parties that Greece should be forced to default.

On my calculation, the cost of a Greek default to the German taxpayer alone would be at least €40bn ($58bn), including recapitalisation of the ECB. A bail-out would be cheaper.

A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.

Then there is the downgrade threat for French sovereign bonds. I recall asking a French official about this, and getting the smug answer that the rating agencies could hardly downgrade France if they maintained a triple A rating for the US. That was before last week. By extension, France must also now be in danger. A downgrade would destroy the logic of the European financial stability facility. It is built on guarantees by the triple-A countries. Without France, the lending ceiling of the EFSF would melt down further.

7. And then there's the US debt ceiling - Everyone seems to think the debt ceiling in America is not an issue for the financial markets because the Congress would never be so stupid as to actually allow America to default.

Ezra Klein at the Washington Post is not so sure:

Raising the debt ceiling may be economically necessary, but it’s politically lethal. Only 16 percent of Americans want the debt ceiling raised, according to an NBC/Wall Street Journal poll. Sen. Marco Rubio said he wouldn’t vote for an increase unless it included “a plan for fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment, and reforms to save Social Security, Medicare and Medicaid” — everything on the conservative agenda, basically.

And this is where things get dangerous. Republicans and Democrats both bear substantial blame for the country’s rising deficits. The Bush tax cuts and the Medicare Prescription Drug Benefit and our various wars — none of which have been paid for, and all of which are ongoing — are major contributors to our mounting debt, and all were passed by Republican majorities. The debt ceiling had to be raised seven times during the Bush years, and the policies that helped drive those increases — not to mention the financial crisis that followed them — have not been undone under Obama.

But the GOP wants to pin the debt on the Democrats, and it wants major concessions in return for its vote. Democrats, however, aren’t going to agree to the GOP’s plan to deny partial responsibility for the country’s debt and hold the country’s credit rating hostage in order to reshape the government along more conservative lines. Fear over exactly this sort of political gridlock is what led Standard Poor’s to downgrade the nation’s credit outlook to “negative” Monday.

8. Keynes vs Hayek Round Two - Remember the Rap video of John Maynard Keynes vs Frederick Hayek? The last one got over 2 million views. Who would have thunk it.

Here's the sequel: They have new microphones and new moustaches.

Just as brilliant.

The Bernanke doppelganger is the spitting image of Helicopter Ben.

HT Kristoffer via email.

9. Solution to Auckland's harbour crossing problems - We have a couple of North Shore residents in the office (Amir and Amanda) who wonder how they will be able to commute to the office once the oil price hits US$200 a barrel and the petrol price heads for NZ$4/litre.

Here's a suggestion for getting across the harbour to our offices in Herne Bay.

Some very cool ideas and I love the German commentary.

The rabbit hoppy hydrofoil boat is my favourite.

10. Here's The Onion with a panel of caged Americans giving their views on the economy. The host seems to have had a lot of work done...and a lot of hair straightening...and a lot of blondeing...

Panel Of Caged Average Americans Weigh In On Economy

11. Bonus Clarke and Dawe - John Clarke is very excited about being in London for that fricking wedding.