Officially, Monday is the last day of the two, five-year terms of Ewart Williams as the Governor of the Central Bank. After spending 31 years climbing his way up the ladder at the International Monetary Fund, Williams returned to his homeland in 2002 to undertake what he described in an interview on Friday at his office with three newspaper journalists, including Guardian Media Ltd, chief editor-business, Anthony Wilson, as a “labour of love.”
Q: Should countries bail out financial institutions that get into trouble? If a bank got into trouble in the future, should a Government take taxpayers’ money and bail out that bank or should that bank be allowed to fail and the shareholders take the bounce? The questions refer to what’s happening in Spain now, what happened in Ireland two years ago and what happened in the US in 2008 so, in a sense, it is a philosophical and academic question, but it has relevance to policymaking here.
A: It is an easy decision if the only bounce is taken by the shareholders. It is an easy decision to allow the shareholders to lose their stake. It’s not so easy a decision if the failure of the bank has systemic consequences. As a realistic option, if the failure of the bank affects other financial institutions. If it affects large numbers of clients or consumers. If the failure of the bank could lead to ripple effects that are economy wide, there are very few countries in the world that would stick to the orthodoxy and say let the banks fail. Look at what the US did. The US is supposed to be the benchmark of orthodoxy. When things got tough the Government guaranteed all deposits. What the government there said was ‘I don’t care what happens, you are not going to lose money.’ That’s what’s happening in Europe now. Banking is part of political economy and political economy has to do with people and with ensuring the survival of the economy as a whole. No government would sit by and allow the failure of a financial institution to have a systemic impact, whereby the whole economy is going to be serious affected.
Q: Because there are people who argue that Clico should have been allowed to fail?
A: Clearly, that is a very simplistic kind of argument. You have to recognise the potential that a Clico failure would have had in terms of negative, systemic consequences on the economy as a whole.
The CL Financial group held a shareholding of 52 per cent in the largest commercial banking in the country. Among their major depositors were the Unit Trust, the National Insurance Board and the NGC. Clico had the largest portfolio of pension funds and credit union deposits. Clico, in one way or the other, was intimately tied in with such a significant part of economic activity in the country that there was no way in which any central bank or any government was going to let Clico fail without trying to minimise the impact.
Q: So Clico was in fact too big to fail?
A: It’s a characterisation that economists and central bankers don’t like. But it’s the hard fact of life. You could not let an institution that had such massive impact on the economy fail. You just couldn’t. You could not have a disorderly breakup of an institution that large. Clearly, you had to make sure that shareholders did not benefit from government assistance and that’s what the Memorandum of Understanding of January 2009 attempted to do. But in no country that I know would such a large institution, with systemic consequences have been allowed to fail. Look at what’s happening in Europe now. All of the market fundamentalism where you allow thinks to fail, has gone through the window because it is not real.
Q: But Iceland allowed its banks to fail, didn’t it?
A: They are paying for it now. Iceland thought that most of the depositors were not Icelandic; that they were British The arrangement was that the banks were offering high returns to non-residents so the government there thought that the banks could be allowed to fail. They are paying for it and they are paying back those depositors through sovereign arrangements.
Q: Have there been concerted efforts to address the problem of the economic decline?
A: According to the data that I saw on Thursday (last), the situation in the energy sector gets worse. For the first five months of the year, oil production is down by 13 per cent compared with the same period last year. Gas production is also down. The main producing facilities are all tied up in maintenance operations. There was an unplanned shutdown in one of the gas facilities. The energy sector is not doing well.
On the positive side, there are signs that exploration activity has picked up, but production of both oil and gas are seriously down.
The next formal assessment of the economy will take place in the next few months, but the data for the first five months are not encouraging.
Q: How is the decline in the production of oil and gas allied with the decline in the international price of oil and the softening in the price of natural gas going to impact on the fiscal realities in the upcoming 2013 budget?
A: In terms of comparing the budget, because our budget is based on a notional price of oil and gas which is invariably much lower than the actual price of oil and gas, analysis during the year shows that collections of energy revenues during the year are larger than the budget.
But that is misleading in that you are comparing the actual with the projected based on an artificial price. Really what you should be doing is that you should say: If you want to get the impact of production shortfalls, you have to use a constant price. You should say, let me assume the same price and see what has happened to energy revenue.
I can’t tell you off the top of my head what that would show. I would suspect, however, that collections are below what was estimated, simply because production of both oil and gas are down.
Of course, the oil and gas regime is a little more complicated as there are all sorts of concessions and special taxes.
The fiscal data show that the Central government operations are still in surplus, when we would have expected by now to be in deficit. That has to do in large measure because expenditures are lower than expected.
The figures I saw showed that revenue collections from October 1 to April 30, might be slightly lower that expected, notwithstanding the fact that the revenue projections were based on a notional price of US$75. If I remember well, there is a large shortfall in expenditure but also a shortfall in revenue.
It might well be that, given what’s happening with economic activity, that non-energy revenues are not as buoyant as expected. That would not surprise.
Q: Are you worried by the economy?
A: Yes, in a way. But we have significant buffers. We have a reasonable public debt burden and if we are in trouble we can afford to borrow because we have room. We have significant external reserves, We are by no means facing a balance of payments crisis.
The latest data showed that unemployment is not that much of a problem. I don’t know whether it is 5.6 per cent, but my position is that I didn’t believe the unemployment data when it was reported to be 3.8 per cent. Neither do I believe that it is now 5.6 per cent now.
I am not saying that anyone is manipulating the data. I am saying that just as there is an upward bias in our food price inflation, there is a downward bias in our unemployment data.
There is a bias in the employment data that we should re-examine
Q: Has the Central Bank done an exercise to estimate what the actual rate of inflation is now?
A: Simply on the basis of the mathematical inconsistencies with the food price inflation, and using the geometric mean as opposed to the arithmetic, our estimate was that there was a difference of around four percentage points. That was our calculation based in early 2012.
Q: If we had a situation where in June 2011, the headline rate of inflation went down to 0.8 per cent, are you saying that the rate would have been negative?
A: It’s based on a particular point in time. The four percentage point does not run straight through. The extent of the over-estimation is larger, the greater the impact of food prices.