KILL THE CONSTITUTION

Whatever happens to Greece in the coming years, you can bet your bottom dollar one thing will not survive as we currently know it: the Greek Constitution. It's a cracking read; I thoroughly recommend it. Sadly, the political elite never had much respect for it and the Sainted People are already of a mind to wipe their collective ass with it; especially the bits about private property.

Amazingly, there is something very ordinary about the life of the Greek Consitution: it is conforming almost exactly to the historical patterns of constitutional survival.

How do I know? I know due to the amazing work of Tom Ginsburg of the University of Chicago. He's engaged in a massive project trying to figure out why some constitutions live longer than others. You can check out a draft of his report on this project here. The basic facts are these: the average constitution lives for about 17 years, but there are two particular rough patches: the 10-year and the 35-year itch. The 10-year threshold was crossed back in '85, and sure enough in '86 the Constitution was first amended to completely remove the last of the remaining powers of the President of the Republic. Well, guys, the Constitution turned 35 last year: the single most dangerous year in a Constitution's life. Since then, we haven't been sovereign and there's been a lot of legal stuff to get through so hey. One more year.

Now you might argue that this statporn is a little too slavish. There is no such thing as determinism and magic numbers in politics. I agree. But it is also true that Constitutions can outlive the conditions that first gave birth to them. Maybe the trends in constitutional survival are simply an indication of how quickly the political reality comes out of sync with institutions that once served it reasonably well. Stick with me on this one if you still disagree cause it gets interesting.

Turns out that, according to Ginsburg, there are factors that you can watch to see whether I'm on the right track. Turn to page 59 for a list of precipitating factors (literally, factors likely to tip you over the edge).

• Losing a war (which some people think we have in a way, as we have lost sovereignty) 
• Widespread constitutional change globally 
• Lack of constitutional change in neighbouring countries
• Transition to a more authoritarian government
• Coups
• Lack of change of the effective executive (in our case, few or no consecutive changes of Prime Minister) 
• Conflict (this is a general term including incidents such as anti-government strikes on the lower end of the scale and guerilla warfare somewhere on the higher end). 

So if you're a constitutional lawyer and you wake up one day to find that Yorgo is still clinging on despite open rebellion from his own party and the Socialists seem unlikely to be overthrown, if you find that people around the world but *not* our immediate neighbours are overthrowing their governments or forcing them to change the constitution (chances are you have), if you find that the army has taken over, or some leftist nutcase who sets the police or some rabid People's Militia after everyone he/she doesn't like, or if you find that the Government has started to really crack down on civil liberties, well, get your best MontBlanc out.

Once you've got these factors stacked up against the hapless Constitution, there are a few characteristics of the Constitution itself that can help tip it over that much faster. It's important to take note of these as our new constitution will have to steer clear of them too:

• If it was ratified by a public or constitutional convention, but under the auspices of an undemocratic regime (nope)
• If it was not ratified by a public or constitutional convention at all (nope) 
• If the country is acknowledged as being ethnically heterogenous (getting there)
• If the country is poor or underdeveloped (nope)
• If the constitution was not meant to make the system more democratic (nope)
• If the constitution is, by design, hard to review or amend (check). This is a very strong effect
• If the constitution is a short text that does not make allowance for different political scenaria or occurences (sort of; it is long, don't know about complexity; but this is one more reason to be suspicious of the half-baked indignado bullshit hatched over at Syntagma)

This is a tricky one because it suggests that structurally the Greek constitution is probably not built to last. The precipitating factors are mostly and so are many of the structural factors, but not all of them. This means, to my mind, that it will be tricky amending the constitution, and even then only specific things will be changed; we won't get a wholesale review.


Now there are many reasons why Constitutions shouldn't live forever, and they are reviewed quite thoroughly by Ginsburg. But there is one overriding imperative from where I sit which advocates in favour of a long-lived new Constitution: Foreign Direct Investment doesn't really take off until a Constitution has passed its 35-year test, perhaps not coincidentally.

A constitutional.dividend 35 years from now may not sound like much but it just might be factored in by bond markets; some in Greece are secretly hoping to borrow bilaterally from China for a few years as well, and the central planners in Beijing will sure appreciate some staying power in our institutions if they're going to take a punt.

Good luck guys!

BANKERS, UR ANSWERS ON A POSTCARD...

I've been meaning to write something on this subject for a while but I try not to discuss banks too much so it took a back seat. Eventually I got a little time to do so.

I have for some time had a professional interest in the impact of Basel III, which is probably best described as the new rulebook for bank capital and liquidity requirements; this is generally sold as (or derided as, depending on where one sits) the recipe for avoiding another financial crisis, or at least the main regulatory and supervisory ingredients of the recipe. Rest assured, this will not be the subject of this post. If you want to read up on this, I would suggest tucking into the highest-profile impact assessments to date (ping me if I've forgotten any biggies). Be sure to note the publication dates as the proposed shape of Basel III has changed over time. More on this here.

• Basel Committee / Financial Stability Board Macroeconomic Assessment Group (MAG): immediate and long term (caution: regulators)
• Institute of International Finance (caution: global bank lobbying group) 
• OECD (co-written by @bank_jasmin)
• IMF
• McKinsey & Co

Now back to our story.

I was reading the IMF impact assessment recently when I noticed something particularly iffy in the Annex, which as we all know is the Top Shelf of statporn. The authors try to model the effects of new capital requirements by looking at the past behaviour of banks and their customers in twelve countries, including in this case Greece. That's not the iffy bit. That's the jackpot.

UPDATE: One reader has correctly pointed out that the sample the IMF is working on, at least in the case of Greece, is tiny. I will happily second their argument that it's silly to try to forecast Greek banks' or their customers' behaviour based on such figures; but in fairness to the authors, that was neither their intention nor the outcome of their work; their intention was among other things to look at how the dynamics of the banking sector differ in crisis countries, of which Greece was one. That said, the small Greek sample still represents almost all of the banks in the country, so it's probably best to treat these tables as indicative of the past behaviour of Greek banks.

I was however particularly struck by Table 9, page 29, which looks at how loan demand changed in response to different variables. What one would expect is that as the cost of borrowing goes up, demand would go down. Which it does, in eight out of twelve countries. In another two, the relationship is not statistically significant. But in Switzerland and Greece, the relationship is reversed (strongly in the case of Greece, and weakly in the case of Switzerland).

Now this I do not understand. This suggests that either Greek banking was mostly sub-prime in some way (i.e. based on a model of chasing poor quality borrowers) or that Greek borrowers flocked to the more expensive lenders. The first option doesn't really sound very convincing: most Greeks own property, which means they have access to collateral. And don't get me started on family bailouts. Moreover, Table 8 in the immediately previous page shows there was no relationship between interest income - to - asset ratios (essentially the rate at which assets were producing interest) and the bank's ratio of non-performing loans. In fact what relationship there was was very statistically insignificant, whereas you would expect a positive relationship in a sub-prime-focused sector.

There is however a very strong positive relationship between the banks' interest income to asset ratio and the log size of their balance sheets. Simply put, and if I understand this correctly, the larger the bank, the more interest it got out each Euro of its assets, although with diminishing returns. This suggests to me that either large Greek banks got more of their income from interest, or they could get away with charging higher interest rates. Or both.

Doesn't sound like a thriving competitive market. Or am I getting this wrong?  Help me understand banker friends.

UPDATE: One friend of this blog suggests that banking group data may be skewing the numbers here. It makes sense that more diversified groups with assets abroad will be earning at a higher rate. I should also thank them for pointing out the embarrassing mistake on the meaning of correlations with log assets. All fixed now I think.