Coubertin’s principle

The marathon race is the most awe inspiring event in sports. The first man who reportedly ran the whole 26 miles from Marathon to Athens, a messenger in ancient Greece, collapsed and died after announcing victory over the Persian army.

Modern races have been less deadly but no less grueling.  Torn between a desire for glory and their own physical or mental limitations, some runners have not hesitated to cut corners, literally.

The initial winner of the 1904 Olympic marathon was subsequently disqualified when it became known that he had ridden 11 miles in a car.  The original bronze medalist at the 1896 Olympics rode part of the way in a carriage.  More recently, some runners have taken advantage of the advent of newer modes of transportation: the female winner of the 1980 Boston Marathon was disqualified for having taken the metro, others took a bus.

Nowadays, runners are equipped with race timing devices which record when they reach successive stages in a race.  From this measurement, split times and speeds are calculated and published; in the case of the New York Marathon, times are recorded every mile after mile 8.  Yet human nature having changed little, individuals remain fascinated with this mythical race and will bend principle to be recognized as successful participants.

Yesterday, we were in Manhattan to watch one of our daughters race the 2013 NY Marathon.  Afterwards, we went online to check how some friends and acquaintances had fared.  My wife by accident typed a wrong name.  To better understand, I am adding the race date on another runner whom I will call Mr. Comp. 

This is what we got:

 

The above graph shows the progress of two runners.  The left vertical axis displays their pace per mile while the bottom horizontal axis displays the length of the race.  The pace is calculated for the overall distance covered. 

The black line of Mr. Comp has a typical profile: after averaging 9 minute/mile for the first 5 kilometers, the runner slowed gradually down; by mile 14, his average pace had dropped to 10.5 minute/mile and he then maintained a 12¼ minute/mile over the last 3 miles.  Throughout the race, Mr. Comp’s electronic tag registered his splits, as evidenced by the dots in the black line.

Mr. X is a different story altogether: through mile 18, his profile is also typical as he gradually slowed down.  From mile 18 to 24, his tag didn’t record any time split.  Yet he was so fast during that portion of the race that he raised his cumulative pace to its highest level of the day.  Indeed, his "recovery" was astounding: from the mile 17 to the mile 18 marker, his pace was about 14 minute/mile; since his tag recorded his times at miles 18 and 24, it is easy to calculate that he covered that 6 mile segment at a pace of a little over 5 minute/mile!  Probably exhausted by this massive acceleration, Mr. X covered mile 24 to 25 in 12 minutes and mile 25 to 26 in 15 minutes. 

What happened?

 

The above is a partial map of the course.  It shows that the course made a narrow loop in the Upper East Side.  Indeed, after passing the mile 18 checkpoint (see red arrow), Mr. X would only need to travel 6 blocks westward to rejoin the course on Fifth Avenue, pass through the mile 24 checkpoint (black arrow) and from then on reach the finish line.  No need for a car, carriage, bus or subway.  A leisurely walk sufficed.

Of course, results are so far unofficial, but why cheat?  Mr. X was not in contention for a medal, or money prize.  He was just one of over 50,000 men and women out there, testing their own mettle and enjoying a unique moment in the most vibrant city on earth.

I perused the results of 7 runners; of these, 2 appeared to be marred by some form of cheating.  That is a lot, although my sample is so small as to be statistically non-significant.  Still, given the severity of our macroeconomic and political problems, it got me thinking.  Will principles and attitudes change away from the marathon race?

After training hard for several months, my daughter finished her first marathon in 3 hours and 35 minutes.  We are very proud of her.

Where have you been, Charlie Brown?

Charlie Brown turned 65 last year.  How time flies!  Last we saw him, he was still trying to kick that football, and Lucy was still up to her usual tricks.  Where has he been all these years?

Charlie: You would never guess, I went to college and stayed there; actually… I always knew I could make it, I just had to wait until my grades would improve as I knew they would… eventually.  I really wanted to get away from Lucy; actually, I worried too much about that, but it turned out alright.

Me: How so?

Charlie:  Lucy decided she was going to West Point, and there is no way they would have taken me there even if I had applied.

Me: How did she do?

Charlie: Well, she retired last year, as a two star general; she was the guest of honor at the Army-Navy game; that was nice of them, although I understand they had a hard time getting her off the field; they had given her the game ball and ...

Me: So what did you do after college?

Charlie:  Well I taught economics at Columbia for thirty years.  I wrote a few research papers with Linus (he was at Berkeley); he did the math part and I did the editing.  And then I went to the Fed in Washington.

Me: Really? So what do you make of it all, I mean, the taper?

Charlie: Gosh, I don’t know, I am in research, not policy-making.  In any case, and as you know, the chairman never promised to end the taper in September...

Me: But if the CEO of Goldman Sachs says on the morning of the FOMC decision that he expects a September taper, and thus gets it wrong, can the rest of us be expected to better read the Fed’s intentions?  Well maybe the Fed changed its mind at the last minute?

Charlie:  Can you ask me about Brazil, or Russia, or even Argentina?

Me:  OK, so where do we stand now?  I heard one FOMC member saying they might taper in October, and another saying that unemployment was too high and Washington pols too reckless to even think about it, and still another saying that the Fed’s perceived U turn had damaged the credibility of the institution… Charlie?  

Charlie:  Sorry, got to go, Patty and I got the grandkids for the weekend!

Latin America: an investor’s point of view

Latin American stock markets have incurred heavy losses so far in 2013; what’s more, they have underperformed developed markets by a wide margin:

Countries	Gain/loss y-t-d A	Gain/loss y-t-d in US$ B
Argentina[1]	+12%	-1.6%
Brazil	-24.2%	-31.4%
Chile	-13%	-17.6%
Colombia	-14.3%	-20.7%
Peru	-27.6%	-33.5%
Mexico	-7.5%	-7.4%

By comparison, the American S&P500 is up 17.1%.  Even much maligned Western Europe is up, with the laggards (Italy and Spain) suffering losses which are half those of the regional leader, Mexico.  What do we make of it?

Short term, the diagnostic of most observers has some validity, mainly that with the drop in commodity prices, the economic growth of Latin American countries has been decelerating which in turn has weakened their currencies.  Having been the darlings of international investors, these commodity producers are now under the same shadow as China, heretofore the main driver of commodity prices.

Another valid observation is that emerging markets got carried away in the post 2008 recovery, which resulted in very fast increases in both corporate debt issuance and stock valuations; then a series of sobering international news and fear of Fed tightening widened corporate spreads and reduced EM p/e multiples.

As usual, it is easier to construct causality links by analyzing data bases than by weighing qualitative factors.  Yet I believe that the latter are more important for the medium and long-term.

For example, despite assertions to the contrary, it is clear that Latin American markets are viewed by many investors as an asset class, so that national stock markets within that region will tend to move together, irrespective of their merits and specific characteristics.  This is best illustrated by the case of Mexico: its terms of trade have changed little in many years, its economy is more closely linked to the US than to China, its financial markets are more liquid and more free.  Its stock market performed less bad than the others, but one could have expected it to tag along the S&P500 and be in the green. 

Peru is the other example of contagion.  Yes, it is the commodity play par excellence; mining profits have suffered and the economy as a whole did slow down.  But its finances remain the best in the region with a moderate current account deficit, a small budget surplus and ample foreign exchange reserves.  More importantly, good macroeconomic management has been the trademark of successive governments rather than a recent phenomenon.  It doesn’t seem logical that it underperformed Brazil.

I have been bearish on Brazil since President Lula announced the restructuring of Petrobras and the offshore oil sector.  More than any of its neighbor, Brazil’s misfortunes are self inflicted:

1.     Disjointed monetary policy where BNDES makes long term loans at interest rates below overnight interbank rates,

2.     Heavy handed government intervention in the oil and gas, electric utility and financial sectors to the detriment of minority shareholders,

3.     Unpredictable foreign exchange policy aimed at manipulating the parity of the currency,

4.      Overly complex and arbitrary tax and regulatory system,

5.     Disconcerting government which, on the one hand, professes to stand for (somewhat) free markets while nurturing foreign alliances with regimes that stand at the polar opposite.

I don’t see the economy improving substantially and private investment returning unless and until a more centrist government is voted in.  Good center-left models would include Ricardo Lagos and F. H. Cardoso.  Presidential elections are scheduled for next year and recent popular protests in Brazil may bring about change.  If not, the future will be bleak.

There is little to say about Argentina: its institutions are in shamble, its economy is atrophied and beset by highly distorting regulations.  Besides the poor performance of its stock market in US dollar terms, one number says it all: in 2012, total foreign direct investments into Argentina totaled $3billion[2] vs. $13billion for Chile, $15 billion for Colombia, $40 billion for Mexico and $50 billion for Brazil.

Chile has perhaps been the most surprising under-performer, as its stock market losses have been double those of Mexico.  Clearly, the large weight of its mining sector in the economy and its exports has accounted for a good deal of this disappointment, but not all.  As I have written in this blog, I think that reform fatigue has set in.  This is understandable when one realizes that a generation has passed since Chile embarked on its trailblazing economic and social reforms.  The fact that other left of center regimes in the region have spent public funds with abandon has made it that much harder for Chile to steer a virtuous path.

New presidential elections will be held next November.  Former President Bachelet is the current favorite; however her discourse is more radical than her first term policies.  As I wrote in this blog, her call for scrapping the Decree Law 600 which has guaranteed a stable foreign investment regime is emblematic of a shift in the making and of the social pressures she believes she is under. 

Even under the current administration of President Piñera, there were some unsettling signs in an otherwise market-friendly framework; these included efforts to weaken the currency and unrelated attempts by NGOs and local groups to stop large scale mining projects[3].  Chile still enjoys a stable legal system and rock-solid public finances, but it is clear to this writer that the future may be different for investors, especially the foreign ones.  In a small country so dependent on exports, this is not a good sign.

Colombia is perhaps the most interesting example.  In a little over a decade, its economy and financial markets have soared. To wit: in 12 years, the market value of Grupo de Inversiones Suramericana, the largest private business conglomerate in the country, rose by a factor of 33 in US dollar terms.  This revival has been largely due to the government success in fighting guerillas and drug traffickers and in reestablishing a safe environment.  Repressed for years, economic activity blossomed, aided in no insignificant manner by the existence of a large domestic market.

However, after overheating in certain sectors, the picture has darkened.  Again, there are many obvious measurable factors to explain it: slowing global economy, comparatively weak US dollar, investor angst, etc.  But some of the wounds are self inflicted:

1.     Economists can well consult their models to prove how beneficial a “’competitive” currency can be; but to the investor, it is one more factor of uncertainty and a drag on performance when the peso loses 8% in 6 months.  It also extracts a heavy price when a company such as Ecopetrol postpones its dollar borrowing exercises, only to discover that market conditions have changed for the worse;

2.     More importantly, both the perception and reality of security in the country have worsened.  Most people are unsure of where the negotiations with the FARC will end.  President Santos is widely regarded as very shrewd, but he may play his cards too close to the vest, and this is not conducive to risk-taking by businesses and investors.

In sum, there is no doubt that world economies and market confidence are more fragile than they were some years back.  One of the costliest consequences of the so-called Great Recession is that policy makers, having lost confidence in free markets, are now convinced that they can manipulate economies and markets back to health.  What they fail to realize is that businesses and investors are more comfortable handling normal free-market dynamics than arbitrary governmental policy inputs.

Another lesson is that investors pay close attention the most basic and essential aspects of economic and political governance, and more so when risk tolerance has fallen: government meddling,  onerous tax regimes, predictable rule-making, transparency, stable and effective legal systems DO matter.

The flood of liquidity orchestrated by the main central banks of the world since 2008 did affect Latin America as it brought about a surge of portfolio investing in fixed income instruments; yet Latin America is not totally without blame:

1.     One can think of the very high short term interest rates practiced by Brazil for example, and

2.     The region could have done better promoting productive investments in infrastructure.

In sum, there is no disputing that human emotions weigh in as much as rational analysis.  Mexico and to a lesser extent Peru seem to have been overly punished by fleeing EM investors.  But the same cannot be said of others; indeed, what concerns this writer about Brazil, Chile and Colombia is a policy drift away from what made them successful in the first place, and this has little to do with China buying less copper or iron ore.

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[1]   The US dollar loss was calculating using the official exchange rate.  If one uses the exchange rate implicit in the pricing of such Argentine ADR as Telecom Argentina, then the dollar loss exceeds 49%.

[2]  What is more, this number probably overstates true FDIs as it is likely to include reinvestments by Argentines of monies held abroad.

[3]   Unfortunately, some companies such as Barrick Gold gave them good reasons to criticize environmental non-compliance.

For whom does the (Chilean) bell toll?

There are few more emblematic legal constructs in emerging market finance than the Chilean DL600.  What Michael Phelps is to swimming, the Decree Law 600 is to foreign direct investments: both defined an era and both set very high bars for their successors.

It is thus very significant that former president Michelle Bachelet, now the leading candidate to return to that office, proposed to eliminate the DL600.  Apparently, this would be part of a set of new policies, such as raising corporate income taxes, to generate more public revenues to finance greater social expenditures.

I have observed for a few years now that a sort of frugality fatigue is setting in Chile.  Chile was the first, and for decades, the only Latin American country to embrace an economic model based on budgetary equilibrium, personal financial responsibility and free enterprise.  The first signs lassitude started to appear after twenty years of effort.

One important area of friction has been the private pension system.  Another more recent has been education.  In my view, a major factor in the sentiment shift has been the change in regional politics.  Center-left moderates such as F. H. Cardoso in Brazil (1995-2003) and R. Lagos in Chile (2000-2006) and center-right A. Uribe in Colombia (2002-2010) have been replaced by N. and C. Kirchner in Argentina (2003- present), H. Chavez and N. Maduro in Venezuela (1999- present); these new populist regimes have actively promoted government interventionism, budgetary laxity and public sector expansion.  Even Brazil, under presidents Lula (2003-2011) and Rousseff  (2004-present), has returned to greater government activism in economic affairs.  Virtue is difficult enough to preserve, but all the more so when temptation is all around.

The DL600 was promulgated in 1974 by the military junta (probably another feature which doesn’t endear it to President Bachelet) and has been a landmark piece of legislation. Besides its symbolic importance which cannot be underestimated, its success stems from its unique features:

·        Foreign investments instrumented via DL600 are approved via a contract between the investor and the State.  The strength of a contract is that its terms cannot be amended except by mutual consent of the parties.  No such protection exist under general legislation;

·        The DL600 guarantees a fixed corporate income tax rate of 42%[1] for a period of 10 years, extendable for a total of 20 years; it also fixes the mining royalty tax for 10 years;

·        Other guarantees include non-discrimination vis-à-vis local companies, access to foreign exchange and freedom to remit dividends and capital (after one year), freezing of the accounting for such items as depreciation and accumulated losses.

In a country where mining is the single biggest economic activity (and thus where capital investments are both very large and long-term), the assurance that the conditions under which one invests will not change is very valuable.  The success of DL600 can be measured by three numbers: $51 billion of foreign direct investments in 10 years in a country with a GDP of $164 billion[2].

It is debatable whether Chile would get tangible financial benefits from abolishing DL600.  If anything, it would signal that a Bachelet-led government would want to preserve the right to change FDI taxation, a rather worrying sign.  It would also reduce some of the competitive edge that Chile has had compared to such rivals as Peru.  Finally, it would send a not so subtle signal that budgetary discipline would be under greater threat since the government would open the way to higher taxation.

Perhaps it takes a foreign perspective to fully appreciate the value of the DL600.  From mine, I found that while other countries often presented more favorable terms for FDI, Chile generally won thanks to the stability of its institutional framework.  DL600, if abrogated, will be missed.

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[1]  This compares with an effective tax rate of 35% assuming (1) all net profits are paid out in the form of dividends and (2) the foreign investor chooses not to avail himself of the terms of the Decree Law 600.

[2]  It is important to remember that by far the biggest mining entity in Chile is state-owned CODELCO whose investments are thus considered local and outside the DL600.

 

Quick recommendation update

As summer is approaching, it is timely to revisit some previous recommendations.

I just sold my Telecom Argentina shares for a 79% profit.  I continue to like the company’s management and its business, but the political and macroeconomic environment in which it operates (Argentina) is getting increasingly difficult.  Maybe it is the darkness before dawn, but given the gain which was to be realized and the uncertainty ahead, booking a good profit seemed appropriate.

Standard and Chartered plc, the UK international bank, has essentially been flat since our post of last August.  I maintain my negative stance: the business model, in my view, continues to be riskier than generally assessed and I am not comfortable with the bank’s corporate governance.  I am not short, I am just on the sidelines.

Finally, Apple made some important announcements, although more evolutionary than revolutionary, at its annual developers conference.  We are still awaiting the unveiling of truly eye popping devices or services.  My previous price target of $600 pending the release of new products looks a bit too high; $500-$550 is probably more appropriate.  Nevertheless, I continue to hold the stock as it looks reasonably priced at current levels and increased dividends and share buybacks are positive.

What do we do now?

This is the question that many individual and institutional investors are asking themselves nowadays. 

Bulls say that stock markets are reasonably valued by historical standards and, in any case, offer the hope of long term gains while bonds are in nosebleed territory and ready for a fall. 

Brown bears point out that central banks have distorted all asset valuations by pushing the cost of money to near zero, and that when normality returns, stocks will slip; black bears say that public finances are so weak and private businesses so frightened that economic growth is unlikely to exceed its current lethargic pace and therefore that bond yields can stay at their depressed levels for years to come.

A few charts will put the above arguments into some perspective.  Below is a chart of the S&P500 from 1982 to the present.  The red line is a linear regression of the value series while the green lines represent one and two standard deviations above and below the long term trend.

Looking at the chart, the current S&P500 isn’t cheap, but it remains within normal volatility boundaries. 

Still, even allowing for the “compression” effect due to the fact that early S&P500 values were below 400 while later ones topped 1,500, it is apparent that volatility has increased in recent years:  the biggest drop in the 1980s was 33% in 1987, followed by a 19% correction in 1990.

By contrast, we had a 42% drop in 2000-2002 and a 46% drop in 2008-2009.  As years pass by, the falls and the rebounds get steeper. 

A preliminary conclusion is that, even if stock markets are not overvalued, they are more volatile; if long term investors want to remain long, they should be ready for unsettling times.  In other words, they should carry ZERO margin loans.

The next two charts add more context to the stock markets’ past performance.  The top one graphs the yield on 10 year treasuries (GT10 Govt) and the US consumer price index (CPI) over the last 50 years.  The bottom one graphs the real yield on 10 year treasuries after deducting inflation (i.e., GT10 Govt minus CPI).

A few observations: (1) nominal and real yields as well as inflation have tapered since 1980; (2) current real and nominal yields are as low as they have ever been (except for the mid and late 70s when real yields were sharply negative as a result of an oil-driven spike in inflation); (3) nominal treasury yields have fallen faster than inflation in the last 30 years.

Unless one anticipates a Japanese-like deflation in the US, which is unlikely to happen, bond yields can’t go further down and indeed are bound to go up quite a bit.  Should they get back to the average of the past 10 years, holders of 10 year treasuries would lose 12% of their principal; their loss would deepen to 23% if yields reverted to their 1990-2013 average.

Nowhere is the risk greater than in emerging markets sovereign debt.  Yes, we have heard that Brazil, Russia and the like have better public finances, less debt relative to their GDP, etc.  But they remain economies with much promise but less robust financial, political and judicial institutions, too much poverty and immense investment needs.  Booming demand for commodities has abated lately, a clear negative for most of them.  And sometimes, these bright promises dim as fast as they arose in the first place:  the structural reforms of President F. H. Cardoso were followed by a return to government meddling and a series of scandals under President Lula, and while President Rousseff has taken a firm stand on corruption, the general economic policy remains the same.  In the span of fifteen years, Venezuela has turned from a middle of the pack emerging economy to a basket case which could explode at any moment.  Even China, which had clocked (published) economic growth rates in the 9%-10% range is now slowing down and trying to engineer a very difficult policy change.

And where do 10 year sovereign EM debt trade at?  Brazil trades at under 3.4% p.a., Colombia at 3.6% p.a., Russia at 3.2% p.a., Indonesia at 3.7% p.a., the Philippines at 3.3% p.a[1].  These rock bottom yields reflect two factors: investors/traders racing for yield (after all, these EM bonds return 60% to 80% more than US treasuries!), and their conviction that they can sell faster than the other guy when markets sell off.  Volatile stuff!

So what do we do?  Cash or stocks?  I would say some of both.  Asia may well be the future economic center of gravity of the world, but for the time being the US are.  The US also enjoy the richest domestic market (a definite advantage when the world economy stumbles along), a vast reserve of energy, and, yes, a culture and structure conducive to innovation and entrepreneurship.  Europe offers some interesting valuations, particularly in those top companies that enjoy a strong domestic base and are globally competitive.  Finally, there is Latin America, or at least parts of it…    

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[1]  All denominated in US dollars.

Apple, quick take on the latest quarterly results

Apple just published its financial results for the quarter ending March 31^st , 2013.  As expected, the gross margin has shrunk to a more reasonable 37.5% and the company expects that, in the short term, it may drop further to 36%-37%.  Net cash and equivalents stood at close to $145 billion, or almost $153/share on a fully diluted basis.

New products have been announced for the end of this year and for next.  Despite its lack of cheap iPhones and not having signed up China Mobile, Apple did rather well in China.

Significantly, its CEO Tim Cook acknowledged that the days of rocket-like growth were over but not those of product innovation.  In this context, he announced a 15% dividend increase and a more than doubling of the share repurchase program through 2015, from $45 billion to $100 billion.  Given that only $10 billion of the initial approval have been used to date, it is clear to us that the company is about to deploy a lot of fire power.

Where do we stand?  We continue to believe that the stock is undervalued, selling at a p/e of 6 times estimated 2013 earnings ($44.5/sh), adjusting for net cash holdings.  Pending the launch of new products, the price target of $600/share that we suggested last March seems realistic.  It reflects a p/e multiple of 10 times 2013 earnings and $153 in net cash.
 

Apple’s current p/e multiple of 6 compares very favorably with the Dow Jones’ and IBM’s[1] which sell at over 14 times.  While Samsung Electronics also sports a low p/e multiple of about 6.5, its free cash flows are much lower, be they measured against revenues or net profits[2].  As to gross margins, Samsung’s is below 30%, again, significantly below Apple’s.

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[1]   Adjusted for net debt.

[2]   Measuring 2012 free cash flows to net profits for the same periods and enterprise value (market capitalization + debt – cash and equivalents).

El almirante Padilla meets Captain Bligh

“Now don’t mistake me.  I'm not advising cruelty or brutality with no purpose.  My point is that cruelty with purpose is no cruelty – it’s efficiency.  Then a man will never disobey once he’s watched his mate’s backbone laid bare”. (Mutiny on the Bounty, 1962)

Until last week, Cyprus’travails looked like those of El Tite Socarras, who had been put out of the smuggling business by an overactive Colombian Navy.  By Sunday, Captain Bligh of the Royal Navy came to mind.

The weekend negotiations with the European authorities and the IMF were bruising for Cyprus, and its economic future is uncertain.  That goes for the eurozone too. 

On the positive side, the debt restructuring focused on the banks in trouble, mainly Laiki, and reverted to financial orthodoxy: insured deposits would be protected, recapitalization (of Bank of Cyprus) would involve a debt-to-equity process where losses would be assumed by shareholders, bondholders and uninsured depositors, in that order.  Laiki would be split into a good bank and a bad bank, with the former being merged into Bank of Cyprus.

Less positive was the assumption of the ECB funding of Laiki by BOC and the lack of estimates as to the extent of the losses uninsured depositors would suffer in both banks.  Laiki’s will likely lose most of their money while BOC’s may lose anywhere between 20% and 50%.

Very negative was the evisceration of the Cypriot economy.  Post crisis, its main industry, offshore banking and financial services, has been destroyed.  And it is pretty clear that this was done on purpose.  Yes, the Cypriot banking sector was hypertrophied, but isn’t Luxembourg in the same situation?  Or Switzerland?  And while it was prudent to reduce its size, did this have to be achieved overnight?

While it was legal to force uninsured depositors to take losses after junior creditors and shareholders have been wiped out, in the case of Cyprus it smacked of retribution, and of example setting Captain Bligh-style.  After all, while the Cyprus restructuring rolled on, Spain announced that the recapitalization of Bankia - which called for wiping out common shareholders, haircuts of  43% for holders of preferred shares and of 15%-40% for subordinated bondholders - would leave all depositors unscathed.

Indeed, the public flogging of Cyprus at the mast was so harsh that no country which might fear a similar fate in the future raised its voice in defense of the island.  The eurozone lives for another day, but the atmosphere on board ship is now more Bounty than Club Med.

Understandably, no country wants to quit the euro now for fear of suffering a rapid financial meltdown.  But what is the price for continued membership? 

The elaborate Euro charter, institutional design and numerous Brussels staff have been superseded by German directives; that is understandable since Germany is asked to bankroll everybody else, but is that really the European project that members had in mind?  For that matter, did Germany expect to be besieged with demands for money by its fellow Europeans when it co-founded the eurozone?

With no way to devalue their currencies, Eurozone members experiencing financial difficulties are forced to rely solely on cost cuts, which are politically difficult to enact and socially destabilizing.  A more palatable solution would be a reliance on some currency devaluation, some inflation and some fiscal/cost adjustment.  This has been the way most countries, from the Latin Americans in the 1980s to Russia in the 1990s, overcame their crises.

Mired in economic stagnation and hampered by a banking system which remains undercapitalized, Europe is gradually tackling its debt problems but is doing so on an ad hoc basis and in an increasingly destabilizing way: massive financial resources of the Union are being used up, and distressed countries are required to make adjustments which are deeper and faster than would otherwise be advisable.

Finally, it remains to be seen if smaller countries can attain and maintain the same degree of productivity as the best in class while abiding by the same EU rules: could Singapore be what it is if it were a eurozone and EU member?

For the time being, Cyprus is in the eurozone, but I wonder: longer term, wouldn’t it be better off leaving it, reverting to the lira and setting up an off-shore dollar banking zone?