Monthly Archives: March 2020

Redrawing the Maltese economy in the time of Corona

There seems to be no in-depth discussion on what is actually going on with Malta’s economy, so Minister of Finance Edward Scicluna can count on the obliviousness of his cabinet colleagues to draw up schemes unilaterally.

Now, I have nothing personal against depositphotos_14661611-stock-photo-learn-to-drawScicluna, and this is not meant to offend him. This is simply my analysis and personal opinion of the situation. If you don’t like it, you can move on to the next thing. It should not be considered as financial advice and you should formulate your own opinion about the situation.

The biggest problem with Scicluna is that he comes from a very different world and background to my generation, the so called “millennials”.  Scicluna has lived in a world where the stock-market has always gone up, and where the gradual inter-connectedness of the global-economy increased market opportunities, capital and jobs. Back then, if you wanted to make money you could simply put unvest in a stock-market index fund like the S&P 500 and one fine day sell it at a hefty profit. The millennial generation has lived in a period where it witnessed this mega-capitalist edifice crumbling down, first with the 2008 crisis and with the current crisis today. The millennial  generation has also experienced significant challenges to get ahead in life, especially given the fact that they have been mostly excluded from the property market. So, it is obvious, that the millennial generation has a very different perspective of capitalism from Scicluna and the boomer generation. 

The generational perspective is probably why Scicluna genuinely believes that this economic rut is temporary and everything will get back to normal after the pandemic is over. It is also probably the reason why central bankers, most of them octogenarian males and baby boomers, keep pumping liquidity into the financial system in the form of quantitative easing genuinely believing that some day this liquidity may stick and things return to normal again. 

Scicluna has drawn up a liquidity package of bank guarantees for commercial credit, despite the fact that Maltese banks still charge high interests in a negative-rate environment. The aim of this package seems to be to provide local companies with loans to survive the economic rut. But the obvious questions is, why would companies take more loans at this stage if they don’t know when the economy will start picking up? Why would anyone want to take the risk right now, especially with Maltese banks still charging high interest rates? The biggest and obvious problem right now is that companies have no revenues, and if they have existing loans to pay, they are going to get crushed. 

I am not criticisng the liquidity-package either – it may actually be useful to many companies who need quick credit-lines to keep on going, but there seems to be one very common method shared by boomers in their solutions to economic problems: debt. Debt, debt, debt and more debt. 

The Central Banking system is incentivising and encouraging this debt with its quantitative easing and low interest-rates – governments can sell bonds easily with the easy credit provided to big banks – this system ensures that both government and banks are liquid. And who is paying for and sustaining this system? In Malta’s case, the ultimate payer is us, the companies and the working people who have to pay more than 3% over our loans. In this bizarre system, which sounds like a sophisticated Ponzi-scheme, the banks get a small profit and their shareholders get an insignificant dividend-payment as their stock price keeps crashing. Meanwhile, the Euro against the US Dollar is losing its value and some predict it may keep depreciating significantly.

Admittedly, Scicluna has to work in this environment and there seems to be very little he can do as Minister of Finance of a small EU nation-state, but that doesn’t mean we should be complacent and fail to look at the bigger picture. 

One obvious solution to our problems is to halt bank-loan payments and restructure the debt, and/or provide debt jubilees to companies and individuals excluding building companies which have been grossly irresponsible in their excessive speculation and irregular construction all over the islands. Now, this may require the government to step up its ownership in local banks and take a strategic lead. Such a strategy may be unimaginable to a baby boomer who has got so accustomed to a certain perspective on capitalism to the extent that’s an equivalent to a dogmatic and a religious approach: if we have problems in the economy, we’ll simply pump liquidity into the system by increasing debt, and which we will pay tomorrow. Another big risk we are ignoring is the exposure of the local banks to a highly-leveraged construction industry. We still don’t know the extent of bad debts our local banks have. Meanwhile, we have to think about vulnerable people and we need to quickly provide them with necessities: food and shelter. There is an unprecedented number of lay-offs going on at the moment and many workers have problems paying their loans and their bills. Instant relief in the form of debt-jubilees and direct social payments are needed to help these people. 

It is not I, an insignificant soul in a miserable rock (Napoleon’s description, not mine) that is asking for radical measures to be taken. At this point of our political process in the world, there is an inevitable discussion going on about the fundamental social and economic relationships of the economy’s participants. The Republicans have turned to socialist measures as they scurry to provide helicopter money in the form of 2,000 dollar cheques to every individual – a measure which had been derided by most of the liberal technicians and economists. So, right now, the Republicans and the Democrats have come to terms with the idea that one of the ways to help ordinary people during a time of crisis is to literally hand them over some cash to spend. 

There are many things we can do in Malta to redraw our economy to ensure that everyone is protected and build a more just economy in the process. We have to survive this pandemic and this economic lock-down, but we also run the risk of waking up tomorrow with an array of problems which would cost us even more money if the current structural problems are not addressed. Once again, it is also important to stress that it is delusional to believe things will ever be the same again. These are turbulent times of historic proportions and we will be waking up to a very different tomorrow after this pandemic is over. We still don’t know where we are heading.







What will happen to the Maltese Economy?


We’re witnessing history in real-time with a world going into economic crisis. The idea of helicopter money, previously derided by the liberal technicians and academics is now mainstream politics. The global-economy is literally closing down as governments across the world try to contain the pandemic. Central banks are pumping endless supply of money into the financial system assuming all this liquidity will someday stick and stabilise the system. The Maltese government issued a liquidity mechanism providing new credit to commercial companies backed by government guarantees, tax deferrals and social payments such as quarantine leave subsidy to employers.

What’s going to happen?

No one knows. Eventually the pandemic will be contained and things will normalise but things won’t be the same again. Those who sell you the idea that things will be the same as they were before have absolutely no idea what they are talking about. The economic, monetary and financial implications of the current events are wide-ranging

What could happen?

There are various outcomes and scenarios which may probably happen. First of all, we have to assume that we are in uncharted waters. Although past historical experiences can have a lot of similarities to what we are experiencing today such as Spanish Flu and plague epidemics, debasement of currencies and increasing deflation, what we experience today has it own distinctive and particular features such as rapid economic shutdown accompanied with rapid stock market crash and despite monetary stimulus from the Federal Reserve and the European Central Bank.

One of the probable outcomes with regards to Malta is that property prices will go down significantly – this will be great for young couples who couldn’t afford to buy in the last couple of years when property prices sky-rocketed. It will also be good for renters. There is also another important aspect to this situation. How many building companies are over-leveraged and what is the exposure of the banks in case the building industry collapses? This, I think may be one of the risks ahead.

The other probable outcome is that jobs will not be as plentiful as previously and wages would go down as well. Before the pandemic broke out, the Maltese economy was by-far much more robust than it was in 2013, but we still don’t know the extent of the economic damage being done. Anecdotal evidence from foreign companies and foreign investors in Malta is very negative and they are trusted much more than the local business-class which has a strong tradition of rent-seeking and notorious for buying out both political parties with donations (disclaimer, there are also many good people in the same business-class as well, but facts can’t be denied). Anecdotal evidence from personnel of gaming companies may be different. I was once told by an igaming professional that 2008 was actually good for them since people gambled more during the crisis. Obviously, the tourism industry is devastated, as is retail, publishing and printing. Medical companies seem to be doing well. Any feedback with left in the comments are welcome.

What is happening?

There are many questions and arguments being made about government’s liquidity scheme. Some are arguing that the scheme ultimately benefits local banks. Maltese companies are claiming that the liquidity provided for new credit won’t be enough and need direct helicopter money. Social activists are arguing that helicopter money should be given directly to everyone to subsidise purchases of necessities: rent, food and other necessary expenses.

On the other hand, some argue that if the Maltese government is using the National Social Development Fund to guarantee bank loans when Maltese banks are still lending with rates of 3% and above, why doesn’t the government simply use the money from the said Fund to buy Bank of Valletta outright and issue the loans right away without having to build a complex leveraged-financial instrument? Maltese banks have given us big interest-rates compared to interest rates given in other European countries and as of now, nobody wants to own them any way.

What should happen?

Everyone wants money and people have to go on living even if the economy is shutdown. What is clear to everyone now is that the State has a very important role to protect society as a whole but especially to defend the vulnerable. The idea that Central Bankers can simply print more money to save the financial system is getting quickly outdated. Political leaders across the globe seem to be mostly incompetent in their handling of the crisis, starting from Trump who failed to recognise the gravity of the situation, to EU commissioner Ursual Von der Leyden who is completely clueless without any ideas to stem the potential ramifications of what is coming for the Euro-zone.

Clearly, the world is going into reset, but we lack strong and convincing political direction. It’s been quite a while since the world was in such a crossroads. Liberal technicians and academics have clearly failed us and their solutions will be suspicious given their track-record. There is also a very important factor which will determine the outcome of the reset. Generally, in history we see that when people were collectively experiencing a severe crisis, social solidarity increased – we’ve seen this taking place during the Second World War. It was only after the Second World War that the idea of socialism was then taken very seriously and universal health care was set up, the social and economic charter, strong pensions and minimum wage, social mobility, the right and possibility to own your own domicile, but also to do business in a free market without rent-seeking and the kleptocracy of oligarchs. Such a balanced outcome would have to be found yet again. I am rather skeptical on whether the Maltese government and the Labour Party right now is really interested in coming up with deep social and economic change, including the reforms we need to curb rent-seeking.

Edward Scicluna’s €1.8 Billion Liquidity Bomb

These are indeed interesting times. Government has recently announced a package of measures which will provide up to €1.8 billion in liquidity to the economy in what probably is the first of its kind in Maltese history. Funds for this guarantee will come from government’s piggy-bank, the National Development-Social Fund which has been funded by passport sales, and originallyFalling euros on white background meant for investments, capital and social projects.

€1.6 billion will be provided to commercial companies in the form of €700 million tax deferrals and €900 million in bank guarantees over commercial loans guaranteeing a total of €4.5 billion in commercial credit. A further €210 million will be spent directly into the economy in the form of unemployment benefits, quarantine leave and further funding for the health-care system amongst other items.

It is yet unclear how the government is structuring this funding, but it seems that we will be borrowing to 1) sustain government’s recurrent revenue to offset tax deferrals and 2) and borrowing to fund commercial debt-payments in case companies default. It is unclear how many companies are currently at risk of missing their debt payments and also unclear who will be eligible for these guarantees. Government would have to borrow against capital from the NDSF to fund these guarantees. By 2019, government claimed that the Fund had acquired up to €544 million from passport sales of which €91 had been spent on capital and social projects while up to €200 million were spent on foreign securities and local shares such as BOV and Lombard Bank.

The package looks just a fraction of our total GDP which totaled around €13 billion last year, while government debt (mostly in bonds) amounts to €5.6 billion. It is unclear how much potential debt we will incur, but the bigger problem, even if we exclude this rescue package, is that we were previously sustaining debt-levels with significant economic growth, and it is of course not clear at what levels economic growth will come back. There are also many questions which the journalists at the press conference failed to ask, yet credit to Times of Malta and MaltaToday for asking the right questions on debt and interest rates. For example, will building companies who are already highly leveraged get these guarantees as well? Last thing we want in this country is for building magnates getting a bail-out.

The Minister of Health was then on national television explaining the pandemic and the measures being taken to contain it. Unsurprisingly he then got a little bit cocky and said that when in January Trump was still saying the situation was not serious, we in Malta were stocking up on ventilators. Trust the Maltese with survival and health-care. We have been surviving epidemics, famine and wars for most of our history now, so it may be no coincidence we appreciate some good health-care. Probably we have survivor genes too.

Now, some news from where I come from. Publishers have postponed the launch of their new books so basically they have stopped printing books. Book-shop sales have completely dried up and they are running on thin ice just with online orders. For the publishing industry the situation was already bad in the best of times, but now it’s a disaster. Over-all the situation seems and feels worse than 2008.