Via Mark J. Grant, author of Out of the Box,
The Numbers
Our business revolves around the understanding of numbers and decisions based upon them. There is gaff, hype and fluff in great abundance, no doubt, but in the end the numbers generally tell a more accurate story. Most of us have been schooled to perform various analysis on the data presented and to draw conclusions from them but if the figures are inaccurate then, as the computer Geeks say, it is “garbage in and garbage out.”
Recently I have uncovered the fact that Spain, since 2000, has engaged in “dynamic provisioning.” This is well documented in a World Bank Report by Jesus Saurina who was the Director of the Financial Stability Department of the Bank of Spain. His paper is an academic one and makes the argument for the use of this process which is actually an admission that the books of the Spanish banks, and I would guess also the sovereign nation of Spain, have been manipulated on the basis of procyclicality. It is an interesting argument that he makes but my take is that it is little more than an academic justification for providing inaccurate data when it suits the bank or the country.
You may recall the two European bank stress tests. The first one was faulty as the data was manipulated and the second one was faulty because the methodology was manipulated. You may also remember that the Spanish banks were stated to be in good health, that Dexia was declared one of the safest banks in Europe and that the banks of Greece passed the tests with flying colors. The passage of time and the oft dreaded face of reality has proven my accusations of the time correct and it is pretty tough to argue with the actual results.
I have examined, in some detail, the actual debt of a number of European countries where only the use of simple addition and then division was employed. All that I did was count what Europe did not wish to count which were the actual liabilities, including the contingent ones, of the various nations. My work was exactly what is applied to any corporation in America which included derivative contracts, guarantees of other entities and so forth. My methodology was simple and applied the standard accounting practices of the United States to the sovereign nations of Europe. Material deviations in these practices in America would result in charges of Fraud while they are the accepted norm in Europe for the sovereign countries.
The resident institutions in the world where one thinks that accurate data may be found for Europe are Eurostat and the Bank for International Settlements. I have gone to the websites often to uncover data or to ferret out liabilities of various sorts. I have always accepted the numbers provided by these two institutions at face value but I am beginning to think this was a mistake. Spain and her official admission of “dynamic provisioning” has raised all kinds of questions in my mind and has unsettled my belief in the data provided by Europe to such an extent that I have been forced to totally re-examine the numbers that these two institutions have provided.
It is now quite apparent that the numbers for all of the Spanish banks, all of them, are inaccurate if American standards are applied. I also wonder aloud if the same is not true for the Italian Banks, the French banks as the experience of audits by the IMF has taught us that the figures for the Greek banks, the Portuguese banks and the Irish banks were not exactly Kosher. I find myself further forced to ponder whether the numbers for Spain, Italy and France also have been left to the imagination as Spain is trying every known strategy to avoid the Troika from coming in and examining the books. It may well be that the EU or the ECB could bury what may be found but it would be awfully tough for the IMF to hide any material breaches. Even when considering the IMF however, certain questions are raised. Their projections for Europe and each and every country in Europe have been wrong, dead wrong and far too optimistic. There is such a strong pattern here than I wonder if it is the methodology employed by the IMF or that the data provided by the European nations has been more fantasy than reality. Either option would provide a reason why the projections have been so incorrect and it may not be just one option or the other; but both.
I fear that the data given to us by Europe is erroneous. I know that in the case of the liabilities for the sovereign nations that it is wrong on the basis of the methodology employed. I know that the debt to GDP ratios are inaccurate because of what is not counted. I further know that contingent liabilities often become real liabilities as proven time and time again, that guarantees of bank debt, as in the case of Bankia in Spain or Dexia in Belgium, can become liabilities of the country if the bank falls by the wayside, that regional debt in many European countries is the responsibility of the sovereign, that nationally guaranteed derivative contracts, as in the case of Italy with $211 billion of such contracts, can get called upon as in the recent payment to Morgan Stanley. On a macro basis for Europe I am now forced to stop and wonder just what I am looking at and then realize that many of the financial calculations made and stamped with official by some country or the Press are exactly as stated by the Geeks; “Garbage in and Garbage out.”
A careful reading of the methodology utilized at Eurostat and the Bank for International Settlements reveals what I suspected; they accept the data from each country in Europe prima facie; nothing is checked or audited. Whatever is presented is accepted as fact. Consequently if a country, any country, has engaged in fairy tale arithmetic to protect their own national interests the financial calculations for any given nation and for Europe as a whole are inaccurate and no reliance can or should be made based upon their figures. We know, for certain, that Spain purposefully engages in fantasy accounting and so we know that we cannot rely upon their figures. This then would explain why Europe is in such trouble because if the data is not truthful then the truth, as most often happens, leaks out from underneath that which is hidden and provides the outcomes that the Europeans have tried so hard to avoid. I have wondered, many have wondered, why the crisis in Europe is so severe and I believe that I have found the answer; we have been staring at numbers that are not real and, whatever the real numbers are, they are providing the consequences that result from their actuality.