Monday 21 May 2007

McEnron Economics

Here’s something linking business and politics. It’s a commonplace observation that McBroon is indulging in ‘Enron Economics’ on a large scale, what with PFI and all.

I know a bit about Enron (*coughs*). Au fond, Enron went bust for the oldest reason of all: it was growing rapidly and its profits ran way ahead of its cashflow. The usual ways to avoid being dragged under by this are (a) forgoing growth (yeah, right) and (b) borrowing.

But for Enron to borrow openly would have meant losing Investment Grade status – and with it, the ability to transact its most profitable deals. So it turned to ‘off-balance-sheet’ devices. Initially these were mostly quite clever (*coughs again*) and legitimate securitisations: but the appetite was insatiable and eventually it all collapsed in circumstances of criminal farce.

Turning to Wee Gordo’s use of Enron Economics, I have these questions for those who understand such things.

1. why would a sovereign nation with a developed economy and enormous borrowing capacity bother with such fun and games? (Is anyone fooled?)

2. how and when, exactly, is it all going to come unstuck?

Let’s see how far we can get with this knotty exam question before the Slicker himself returns and puts us right.

Do not attempt to write on both sides of the paper at once.


Anonymous said...

Labour mong scum hope, when a Tory administration takes over, as it inevitably will eventually.

Labour took over a booming economy by any standard, and will give back a pretty stagnant and debt ridden one...

Will the people know or appreciate this? Maybe.

Nick Drew said...

Shotgun - It's an interesting dilemma for Brown, isn't it? He'd dearly like to be PM for a decade himself, which sort of rules out a deliberate scorched-earth strategy for the next year or so.

But if he sees the writing on the wall for 2010 - slash-n-burn is probably on the menu, wouldn't you think?

Anonymous said...

Broon simply failed to understand market economics.

Its already unstuck. PFI schools can't get a lightbulb changed without threatening legal action against the contract holders.

Electro-Kevin said...

Nick - what is considered to be 'growth', is it domestic consumer spending and activity ?

Don't we have an overseas trade defecit ?

Nick Drew said...

Kev - that might be one for Slicker to answer sur son retour. I'm keen to proceed on a sound footing in this little exercise, hence canvassing expert input.

I know what growth meant in the Enron case (and what happened next, in detail) and am hoping Slicker or someone can help me build the on analogy that is suggested by the 'Enron Accounting' label, to see if there are any helpful parallels.

Anonymous said...

I was always led to believe that 'economic growth' was a growth in GDP, I think they adjust fro inflation (using whatever figures are in fashion) but not for population/immigration or to take into account GDP that's been created through putting people on the public payroll.

I might be wrong though.

Anonymous said...

Oh, and my answers to the question:

1) To stay in power, keeping up the boast of 'record economic growth'.

2) During the next recession.

Nick Drew said...

Steven - thanks for these posts, I appreciate the input.

Can you explain your answer to 1) some more ?

My puzzle is this: McBroon could surely have borrowed as much ££ 'on-balance-sheet' as via PFI ('off-balance-sheet' per the Enron analogy), and just as cheaply - in fact probably more cheaply because the security remains the same - sovereign risk - but the operational costs would be less.

In Enron's case, when it was discovered that (some of) their borrowing technically shouldn't have been classified O-B-S, the game was up.

In McBroon's case, every bugger knows PFI is effectively sovereign risk.

So ... what has McBroon gained? And does it all only collapse when a recession comes (pace Steven) or for some 'structural' reason a la Enron?

pommygranate said...

mate - a much larger off-balance sheet item than PFI is govt pensions. Seeing as tho we now all live much longer, and public sector workers still get to retire at 60, and they still get index-linked, defined-benefit pensions, there is a mountain of liabilities awaiting the govt.

The rating agencies, Moodys and S&P, now count as part of a company's debt, its pension liabilities. they typicall take the annual cash outflow that goes toward apying pensions, multiply by six, and then add that back to the company's total debt.

I wonder what this would do to our debt/GDP ratio?

Nick Drew said...

Pom - welcome - good point, so question for you:

don't financial analysts concerned with UK Govt debt make their own estimates of such things and factor them in to the price? Is the 'benefit' of smoke-&-mirrors for McBroon that it's hard for them to do this & they'll probably under-estimate the liabilities?

The risk-management dept in your trading shop will probably take the opposite approach - if they don't have accurate figures on a counterparty, they'll assume the worst to be on the safe side. So the cost of business for that counterparty goes up!

Anonymous said...

I'm sure he could have borrowed even more than he has by issuing more gilts, apparently the treasury are fans of PFI though. I don't know why. Perhaps treasury mandarins like it because it aids their nepotistic activities.

I doubt it does actually 'collapse', just that during times of lower public spending certain parts of government are still paying back big loans and have to lay more people off, skip on more cancer treatments etc.

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