The IMF program for Cyprus has been released (here and here).  Growth is projected to fall 13 percent over the next two years, though the discussion of risks implicitly acknowledges that a larger decline is likely (many private analysts expect a decline of 15 percent this year alone).  Given that the program contains 6.6 percent of fiscal consolidation measures during 2013-14, and a major deleveraging of the financial system is underway, skepticism is warranted.  The Fund also acknowledges that should these downside risks materialize, or program implementation slip, government debt (which is forecast to peak at 126 percent of GDP in 2015) becomes unsustainable. The programs have buffers, but financing looks inadequate.  Coming after a negotiation where the Troika publicly promoted one financing gap (17 billion euros) knowing that the actual gap was far larger (shortly after agreement on the program, the gap was revised to 23 billion euros) further undermines confidence in these projections.  The next review, slated for September 15, likely will have to confront these issues.

The most recent Pew Survey on European attitudes (summary table below) shows that support for the European integration project is dropping.  My colleagues at CFR are far more able than I am to address the broader political ramifications of this shift.  A few points though on the link between economic growth, public opinion, and support for the European reform agenda.

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House Republicans want to tie an increase in the debt ceiling due in September/October to a concrete process for corporate tax reform, as reported here and here.  One idea is to couple  a short-term debt limit increase to a mandate for the House to pass a tax-reform plan. The debt limit would increase further when the House passes its plan, and again when the Senate passes a plan.

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Ken Rogoff and Carmen Reinhart (R&R) have a good piece in the Financial Times today, “Austerity is not the only answer to a debt problem.” This, along with other pieces (for example, here and here), is moving the debate over their work in the right direction. On the one hand, recognition that debt still matters, and too much debt (whether the result of or the cause of low growth) is damaging to our politics and our economics. On the other hand, rejection of the idea that there is a universal growth “cliff” when debt exceeds 90 percent of GDP that is at work across countries (an idea their earlier work promoted, unfortunately).  R&R go on to argue that while fixing our debt problem is a central challenge, that doesn’t mean we need aggressive austerity today (though additional stimulus needs to be carefully decided on).

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I’d like to think that the ECB will surprise us tomorrow with a package that includes both a rate cut and measures to increase the flow of credit to the periphery.  That could produce a meaningful easing of financial conditions and a weakening of the euro, both of which are constructive for euro-area growth.

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Long-term budget forecasts are more art than economics.  Small changes in assumptions and initial conditions, extrapolated over 25, 50 or 75 years, produce dramatically different outcomes.  Should one assume current law remains in effect, producing structural improvement in the deficit over time, or rather that Congress acts as in the past in extending temporary cuts, adjusting tax brackets, and easing spending constraints as new needs arise? Will the recent slowdown in the rate of increase in health care costs persist? Your answer to these questions can swing the budget in the long term from unsustainable deficit to surplus.  Still, these forecasts matter, as a statement of principle, as a description of philosophy, and in framing the debate.

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The lawyers who understand the issues much better than me are excited (here and here) by the latest order from the NY Court of Appeals in Argentina’s long-running battle with holdout creditors.  After a hearing last Wednesday that by most accounts went extremely badly for Argentina (it’s probably not the best strategy to ask a court to overturn a ruling because you plan to ignore it, making it ineffectual), the Court issued an order giving Argentina a chance to propose alternative terms to its creditors.  By March 29, Argentina is ordered to provide “the precise terms of any alternative payment formula and schedule to which it is prepared to commit.”

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Does today feel different?  Did the earth shake?  Packing your lunch rather than buy out?

Welcome to the sequester.

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