Ponzi Economy

The owners of BAI either made wrong investments or were guilty of embezzlement. On both counts, it would be outrageous that the government should reimburse the policyholders with taxpayers’ money.

Managing a small loans company in a Boston suburb in the early 1920s, Carlos Ponzi promised his depositors that he would pay interest at the rate of, yes, 30 per cent a month!

His financial transactions went smoothly for three months as he was able to pay the high interest rates on outstanding deposits with the cash received from new depositors attracted by the proposed high rates of return. In the fourth month, however, the inflow of new money was not large enough to make the interest payments promised to the old borrowers. Ponzi did not follow the suggestions of his associates to run away with the money. Eventually he went to prison.

The Super Cash Back Gold (SCBG) of the BAI Group carried a maximum interest rate of 12 per cent per annum. There is no comparison with the interest returns associated with a Ponzi arrangement. The policyholders of SCBG were regularly paid every month, every quarter or every year, and no one made any complaint about late payment.

Contrary to a Ponzi scheme that falls outside the formal system, the SCBG has been operating in the official circuit. It was authorised by the regulator, and it has been in existence for many years. The money collected has been invested in assets. This is not so in a Ponzi case. The owners of BAI either made wrong investments or were guilty of embezzlement. On both counts, it would be outrageous that the government should reimburse the policyholders with taxpayers’ money.

What is true is that the State, through its economic and monetary policies, fosters a Ponzi economy. On the one hand, all successive governments have lacked the courage to seriously tackle the budget deficit, with the result that public sector debt stood at 62.9 per cent of gross domestic product (GDP) at the end of March 2015. On the other hand, a low interest rate environment is conducive to rising household and corporate indebtedness.

It was only after his death that practicing financiers took an interest in Hyman Minsky’s model of financial crisis. The American economist distinguished between three types of finance on the basis of the (in)ability of borrowers to service debt payments from operating income. A firm is in the hedge finance group if it is able to pay back both the interest owed and the principal due via normal cash flows. It is in the speculative finance group if it can pay only the interest expenses and needs to refinance the principal upon maturity or repay it with cash from new loans. A firm is in the Ponzi finance group when it must increase its indebtedness or sell some assets to pay interest on existing debt, the possibility of paying down the principal being nonexistent.

This distinction can be applied to public finance. Ponzi finance occurs when there is a primary fiscal deficit, that is when public expenditure exclusive of interest payments is higher than total public revenue. Figures published by the Ministry of Finance show a primary balance deficit that will increase from 0.6 per cent of GDP in 2014 to 1.2 per cent in 2015/16 and still be 0.6 per cent in 2016/17. This means that the government’s recurrent revenue will not be sufficient to pay the interest on its debt on a timely basis. Government will therefore have to borrow or to sell assets to get the necessary additional cash.

The same is true of household indebtedness which is a product of inflation. When the rising cost of living pinches family budgets, the heads of households take risks to improve their incomes. Corporate indebtedness increases too when interest goes down, luring investors into more profitable business but actually into more risky undertakings. In the eighteenth century, the Dutch developed habits of speculation because of the fall in the interest rate to 3 per cent in Amsterdam.

“When a man’s vision is fixed on one thing,” said Carlos Ponzi, “he might as well be blind.” Depositors concentrated on returns do not see risks. Likewise, a government obsessed by political mileage can blindly do whatever it takes.

“Contrary to a Ponzi scheme that falls outside the formal system, the SCBG has been operating in the official circuit. It was authorised by the regulator, and it has been in existence for many years. The money collected has been invested in assets. This is not so in a Ponzi case. The owners of BAI either made wrong investments or were guilty of embezzlement. On both counts, it would be outrageous that the government should reimburse the policyholders with taxpayers’ money. What is true is that the State, through its economic and monetary policies, fosters a Ponzi economy. On the one hand, all successive governments have lacked the courage to seriously tackle the budget deficit, with the result that public sector debt stood at 62.9 per cent of gross domestic product (GDP) at the end of March 2015. On the other hand, a low interest rate environment is conducive to rising household and corporate indebtedness…”

* * *

Dirigisme financier

Si la Banque de Maurice parle d’habitude de « market adjustment » en matière de taux de change de la roupie, en revanche elle demeure dirigiste sur le plan de la défaillance bancaire. La meilleure façon d’assainir le secteur bancaire, c’est de laisser le soin au marché de faire disparaître des banques insolvables. Dans le cas de la Delphis Bank, le gouverneur de la Banque centrale s’est donné trois mois pour trouver des repreneurs. Mais à l’égard de la Bramer Bank, le même gouverneur était peu disposé à concevoir un plan de sauvetage d’urgence.

En l’espace d’une semaine, cette banque privée est devenue un établissement appartenant entièrement à l’Etat sous le nom de National Commercial Bank (NCB). En agissant dans la précipitation sans faire une analyse avantages-coûts, on a oublié que la nationalisation pure et simple n’est pas la seule voie dans le dispositif d’interventions étatiques, d’autant que le problème est une question de liquidité, et non de solvabilité. Il est sans doute plus facile de nationaliser une petite banque locale insuffisamment diversifiée qu’un grand groupe bancaire ayant une large assise dans toute l’économie. Reste que la rapidité de l’action des autorités surprend du point de vue d’un investisseur.

Ainsi, comment une banque centrale peut-elle accorder une nouvelle licence à une banque défaillante sans que soit effectué un examen minutieux (« due diligence ») de tous ses actifs et passifs ? D’ailleurs, l’implication de la State Bank of Mauritius dans une tentative avortée de reprendre la Bramer Bank est une faute grave, mettant en cause l’indépendance de la direction et du conseil d’administration de la SBM vis-à-vis du pouvoir politique. Autre question : comment se fait-il qu’un capital additionnel de seulement Rs 200 millions aura suffi pour qu’opère la NCB sans avoir épuré les actifs légués par l’ex-Bramer Bank ? Dans de telles conditions, des banques privées auraient pu y montrer un intérêt afin de renforcer leurs parts de marché.

Car tout indique que l’ex-Bramer Bank était solvable. Le Financial Stability Report de février 2015, publié par la Banque de Maurice, ne laissait entrevoir aucun problème de solvabilité dans notre secteur bancaire, même s’il précisait que « differences remained among banks in terms of their individual capital adequacy ratio ». Dans l’ensemble, les ratios réglementaires de solvabilité, tel le ratio de fonds propres de base sur risques pondérés, présentaient à fin septembre 2014 des valeurs supérieures aux minima requis

L’ex-Bramer Bank avait, en fait, un problème de liquidité. Comme l’a confirmé le ministre des Services financiers au Parlement le 28 avril dernier, 125 retraits totalisant Rs 4,4 milliards furent effectués durant les trois premiers mois de l’année. La défunte banque fut sommée d’injecter des capitaux frais de Rs 350 millions au 31 mars, et à hauteur de Rs 3,5 milliards au 31 décembre 2015.

On dispose d’une large panoplie d’instruments qui s’adressent à des banques en crise de liquidité mais non insolvables. Face à la panique bancaire de 2008-2009, la Grande Bretagne mit en oeuvre des apports de liquidité, des refinancements bancaires et des recapitalisations. En général, les sauvetages les plus significatifs, à part l’ultime recours qu’est la nationalisation, sont une injection de capital, une assurance des actifs, des achats d’actifs et une garantie des dettes. Rien n’interdit au Trésor public de garantir des dettes obligataires émises par une banque pour consolider son passif.

Dans le cas de la Bramer Bank, il n’est pas logique de fermer une banque pour ensuite déclarer publiquement que l’Etat garantit tous ses dépôts. Une telle garantie aurait pu être apportée à la banque pour la sauver ! L’impact sur la dette du secteur public aurait été le même. Celle-ci, ayant augmenté de Rs 22 milliards entre mars 2014 et mars 2015, devra bien comptabiliser les Rs 10 milliards de dépôts de la NCB !

Tout compte fait, le gouvernement a accru le risque moral fondé sur la croyance que les épargnants sont à l’abri d’une défaillance bancaire. De plus, il a créé des distorsions du coût du capital dans le secteur bancaire, et introduit des conditions inégales de concurrence. Tels sont les effets néfastes du dirigisme financier.

Eric Ng Ping Cheun est auteur de ‘Robinson sur l’île durable’ (2013), en vente chez Bookcourt, Editions Le Printemps, Librairie Le Cygne, Le Bookstore et Jumbo Score

 

* Published in print edition on 8 May  2015

An Appeal

Dear Reader

65 years ago Mauritius Times was founded with a resolve to fight for justice and fairness and the advancement of the public good. It has never deviated from this principle no matter how daunting the challenges and how costly the price it has had to pay at different times of our history.

With print journalism struggling to keep afloat due to falling advertising revenues and the wide availability of free sources of information, it is crucially important for the Mauritius Times to survive and prosper. We can only continue doing it with the support of our readers.

The best way you can support our efforts is to take a subscription or by making a recurring donation through a Standing Order to our non-profit Foundation.
Thank you.

Add a Comment

Your email address will not be published. Required fields are marked *