Saving Lives through the Power of the Crowd

Posted on January 26, 2012

When someone goes into cardiac arrest, a number of different factors figure into his or her chances of staying alive. Doctors call it the chain of survival. Along with dialing 911 and administering CPR, an important link in that sequence is the use of an automated external defibrillator or AED, which restores the patient’s heart to a normal rhythm.

AEDs are easy to use — even children can be taught to operate one. But they are often hard to find. Unlike other medical devices such as pacemakers or artificial joints, there is no method for tracking where AEDs are located and when they are used. In many cases, a business may have an AED, but patrons and employees might be unaware of it, or of where it is located.

A new effort being launched by researchers from the University of Pennsylvania aims to tap into the power of crowd sourcing to create a mobile app linking the locations of all the public AEDs in Philadelphia to a person’s GPS coordinates. At the same time, they are studying the most effective ways to employ crowd sourcing as a means of furthering research.

“Our challenge as researchers is how do we improve people’s chances, or give them the opportunity to survive cardiac arrest, by improving access to these devices,” says Raina Merchant, a professor of emergency medicine at Penn’s Perelman School of Medicine. “To do that, you really have to know where they are. One approach for finding them is to hire a team of research assistants to go door to door and look and build a map. But that takes a lot of time, and the information becomes very static.”

That method can also become very expensive, notes Wharton operations and information management professor Shawndra Hill. “Basically, we’re talking about the idea of divide and conquer to the nth degree, where ‘n’ is the number of people willing to participate,” she says. “Oftentimes, people are willing to participate … at a lower cost than it would cost the researchers to participate themselves. You also get scale because so many more people are participating. And if you incentivize people correctly, you can do things faster just because there are more people.” She points to Amazon Mechanical Turk, a division of Amazon Web Services, as an example of this. The site recruits people to complete simple tasks, such as writing product descriptions or labeling documents, for relatively low fees.

Dubbed the MyHeartMap Challenge, the Penn contest is scheduled to launch January 31 and run until March 13. Contest participants will use a free app that can be installed on their mobile phones to take pictures of AED devices in public places in Philadelphia. They then send the pictures to the Penn research team through the app or via the project’s web site. Eventually, the researchers would like to expand the project to create a nationwide, crowd sourced AED registry. “In today’s networked society, it makes a lot more sense to actually use social media and social networking to collect this data, and engage the public as citizen scientists,” Merchant notes. “We thought we could probably get much better data by, for example, having people who work at a Starbucks or who are headed into the coffee shop, or the place where they work, take a picture [of the AEDs that they see]. It raises their situational awareness about their environment, and it helps us build a map so that somebody else could use that information.”

If a sufficient number of unique AEDs are identified, the person or team that finds the most devices during the MyHeartMap Challenge will be awarded $10,000. Organizers have also singled out several pre-identified “golden ticket” AEDs around the city that will net $50 for the first person to send in pictures of them. Participants are encouraged to leverage their social networks to help in the challenge, meaning the winner could turn out not to be the person who physically hits the streets to find AEDs, but the one who designs the most creative way to motivate friends and other contacts to do so. “At least one international team from outside Philadelphia is putting together a pretty sophisticated method for locating AEDs,” Merchant says. “We’re hoping a lot of different teams from across the U.S. and outside the U.S. want to [participate.]”

Structuring the contest and choosing the reward was a key part of the project: Not only do the researchers want to interest enough individuals and teams to create a comprehensive map, but they also want to find out what types of rewards incentivize crowd sourcing participants to deliver the most — and the most accurate — data. “Crowd sourcing is increasingly being used in public health, in disasters and emergency preparedness and in planning large events, with people quickly submitting information about what’s happening in those contexts,” Merchant notes. “But we need more data on how we validate the information that we get from the crowd, and how we understand what crowds are best able to answer and when that information is actually accurate.”

The Philadelphia project is meant to be a pilot that would later be expanded to other cities and other parts of the country. Organizers plan to use what they learn from the first MyHeartMap Challenge to design future contests. “We’re excited about the competition for two reasons,” Hill says. “To learn about crowd sourcing and because this particular application has the potential to provide information that could save lives.”

To learn more about the MyHeartMap Challenge, visit the project’s website: http://www.myheartmap.org.

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Japan Inc. Sees a Key Product Line – Exports — Turn Negative

Posted on January 25, 2012

The close of 2011 brought an end to an era. Japan Inc., creator and leading light of an export-led economic growth model for more than 60 years, suffered its first trade deficit since 1980. What’s more, deficits look likely to continue for the foreseeable future.

Some of the reasons for the giant shift are clear. Much of the world’s manufacturing has moved to lower-cost producers such as China, and many Japanese multinationals produce goods overseas now, which subtracts from home-country trade figures.

Nevertheless, “it is a startling thing, obviously,” says Mauro Guillen, a professor of management at Wharton and director of the Lauder Institute. “But keep in mind that two things have been going on. First, Japanese firms have shifted production offshore over the last 20 years. Second, the yen has appreciated. This means that exports have gone down and imports have gone up.”

So long as the yen and energy prices remain high, and global demand is weak, Japan will not return to surplus, says a former Bank of Japan official, Hiromichi Shirakawa, now head of economic research at Credit Suisse in Tokyo, according to a report in The Wall Street Journal. Others suggest that the yen is heading for a big fall eventually if trade deficits become a regular occurrence. While that might have the virtue of boosting competitiveness, it would also have a downside by raising import costs for manufacturing inputs.

But how likely is it that the yen will depreciate much as a result of trade deficits? Not so much, according to Guillen. That’s because the key measure regarding a currency’s value is the more comprehensive current account, which tracks not only trade, but also financial transfers, including remittances from those Japanese producers overseas. So do not expect a net outflow of cash from Japan any time soon, even in the face of ongoing trade deficits.

“What really matters is the current account,” Guillen says. That measure “includes the trade balance, income earned on capital invested abroad and net transfers.” And Japan still carries a large current account surplus “that continues to accumulate reserves in spite of the trade balance that now is becoming a small deficit.” The trade deficit is “more than compensated for by the big surplus in the other components of the current account.”

The bottom line: It is not until a country has a current account deficit that it needs overseas financing “in the form of capital transfers. That’s when your currency tends to depreciate,” Guillen adds.

Guillen also points out that Japanese firms “have become more competitive by investing abroad, not less. Still, it may not be enough to meet the challenge from the Korean and Chinese firms.”

So while one part of this story – Japan suffering a trade deficit — may not have the immediate historic impact expected on first glance, another part of the story does – the implied rise of emerging countries as manufacturing centers. “When historians examine the early years of the 21st century, they will most likely point to the rise of emerging-market multinationals as the most significant and consequential change,” Guillen recently told The Korea Times. “By comparison, the crisis of the euro or the financial implosion of 2008 will be regarded as minor events. During 2012, emerging-market multinationals will continue to rewrite the rules of global competition.”

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Can New Leadership Get RIM Back in Motion?

Posted on January 24, 2012

Two isn’t always better than one. At least that’s the line of thinking that Research in Motion (RIM) demonstrated on Sunday, when the Canadian company announced that it was replacing its co-chief executive officers — Jim Balsillie and Mike Lazaridis — with one CEO. Thorsten Heins, who has been at RIM since 2007 and was most recently a co-chief operating officer, will take on the new role.

RIM has lost significant ground in the mobile sector since the launch of Apple’s iPhone and Google’s Android-based devices. According to The Wall Street Journal, in addition to service outages and ongoing product delays, the company’s share of the smartphone market in the U.S. has fallen below 10%.

Balsillie and Lazaridis defended their joint-CEO leadership structure in the midst of the company’s well-publicized difficulties, arguing that replacing them at a critical time would only derail a turnaround. But some analysts have questioned the arrangement. In a recent Knowledge@Wharton article, Wharton management professor Lawrence Hrebiniak notes that having two CEOs could turn out to be a handicap in the long run, because it potentially muddles decision making. “When things are going well, none of this is questioned,” he adds. “When RIM was dominant, it could have had five CEOs and been fine.”

According to the Journal, Heins has a reputation for managing execution and has been training for his new role for some time. But the real issue for RIM, according to Wharton management professor Daniel A. Levinthal, is not the person — or persons — at the helm at the company, but rather where the entire ship is headed. “RIM, in my view, needs a new strategy,” he says. “The shift in leadership may help precipitate that, but a new person executing the existing strategy will continue to be disastrous.”

Heins, however, indicated during a Monday conference call with analysts that he doesn’t see the need for any “drastic” changes in strategy — instead placing an emphasis on “process discipline” and “scaling the company further.” He also said that he wouldn’t consider splitting up RIM into separate businesses. “We are strong because we have an integrated solution. We are vertical. We have our network. We have our services. We have our enterprise service out there with more than 250,000 enterprises connected to it. And we have fantastic devices and a fantastic ecosystem that we’re building. I want to build on that. ”

But if a strategy overhaul is really what’s required, what would Levinthal recommend to RIM? “My suggestion is to stop thinking of yourself as a device company — and certainly don’t bother thinking of yourself as a consumer product company.” RIM already has “a killer app,” he points out — the company’s secure email and instant messaging communication. “Let [those services] be device independent and run on Google’s Android [platform] or the iPhone. Communication would still flow through the RIM private network, and corporations will pay the ‘toll’ for that.” Doing so, he adds, would save RIM “a fortune developing and marketing devices that people increasingly don’t want to buy, and preserve [the company's] revenue flow.”

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Is Your Password “123456″?

Posted on January 23, 2012

Zappos, which reported a hack attack last week, is just the latest company to notify its customers that their names, email addresses and billing information had been compromised. The online shoe and clothing company isn’t alone. Hack attacks have recently hit government agencies, news sites and retailers ranging from the U.S. Justice Department and Gawker to Sony and Lockheed Martin, as hackers become more sophisticated in their ability to steal customers’ identities and personal information.

“It’s a human problem,” says Barry Wilson, head of Wharton’s technology security team, referring to consumers’ continual failure to follow oft-repeated password safety advice. Indeed, the most common passwords continue to be “password,” “123456” and “12345678” – all of them easy marks for hackers.

One of the reasons behind consumers’ continued laxness “is that IT people have made it difficult” to be vigilant, says Wilson. “If you go to a bank, it will have one set of password specifications. If you go to Amazon, it has another set. And some of [the requirements] are pretty bad. A number of financial companies require a short password,” but in order to comply, consumers are shoehorned into “choosing a password that is hard to remember.”

Security experts have long recommended that consumers divide their accounts into critical ones versus non-critical ones. Under this scenario, a bank password would be long and complex while passwords for a newspaper subscription, retailer or blogger site would be simpler. Wilson, however, recommends that consumers “have a unique password that is as complex as it can be for every website. Setting individual passwords is far and away the best thing you can do. Losing a password in one place is never as bad as losing it everywhere.”

As the Zappos incident shows, password and identity theft is rampant. Just a few recent examples: Valve, an online service that sells games and other software, found that its database was hacked in November, compromising credit card information and passwords. Sony’s PlayStation network was compromised twice in a six-month period. RSA, a high–level security vendor, was hacked in March and had to replace all 40 million SecurID tokens, including those used by defense contractor Lockheed Martin. Tokens are a device normally used in addition to a password; they display a number that changes every 30 seconds, says Wilson.

According to Symantec, the largest manufacturer of security software for computers (including Norton antivirus), web attacks increased 93% in 2010 compared to 2009, and the average number of identities exposed in each of the hacking incidents was 260,000. In addition, the range of prices “seen advertised in the underground economy for each ‘stolen’ credit card number” was between $0.07 and $100.

With all these and other hack attacks, is it likely that consumer confidence in online security will be shaken? Wilson doesn’t think so. “There is a tendency for people to believe it won’t happen to them,” he says. Nor does he think that such incidents will discourage online shopping. “That ship has sailed. I can’t go back to Borders. I buy books from Amazon.”

At the same time,  consumers should be aware that “companies often don’t do a good job with your password,” Wilson adds. For example, many organizations “are not storing them correctly. Passwords have to be encrypted [scrambled in such a way that they are very difficult or impossible to track] when they are stored. If you, as a user, go to an ‘I’ve forgotten my password link’ and the site mails it to you, they aren’t storing it safely. When that password gets hacked, all the passwords will be immediately known.”

But Wilson does predict that companies’ consistent failure to deal with password safety means that many will “go out of business because [repeated hack attacks] do affect people’s confidence. One of the things that hurt Sony so much was that they covered their heads for a while and tried to pretend [the compromise] wasn’t bad. As shown time and time again, you have to get in front of the problem” and describe to consumers your plan for dealing with it. Zappos is an example of a company that responded quickly and effectively to the hack, Wilson says.

Since most people can’t remember their cell phone number, let alone a series of complex passwords for individual accounts, Wilson suggests using a password manager – software that integrates with the web browser and helps users organize their passwords and PIN codes. “The best ones cost money,” he notes, adding that he uses 1Password, which charges $69.99 for a “Mac + Windows bundle” single user license. He has also used Password Safe, which is free and exists on every platform, “but is not as well-integrated and not quite as graphically well done.”

Scott McNulty, senior IT project leader at Wharton and a member of the security team, advises consumers in a recent blog post not to use words based on personal information (such as your birthday or your pet’s name) or words found in the dictionary. The longer the password the better, he writes, but most of all, don’t use the same password for all your accounts. He cites hackers’ recent success gaining access to all the emails and passwords of registered Gawker network commentators, partly because the encryption system was outdated. McNulty also reviews various password managers, including 1Password, Password Safe and LastPass. Ironically, according to Wilson, LastPass recently suffered its own hack attack, although he doubts the company will suffer much damage because it appears to have caught the potential breach quickly “and responded promptly and openly.”

If consumers weren’t aware of the rise of hackers, two articles in the press today should help remind them. A front page story in The Wall Street Journal titled, “Hackers-for-Hire Are Easy to Find” points out “just how simple and affordable online espionage has become” and notes that one site “advertises online services including being able to ‘crack’ passwords for major email services in less than 48 hours.” A front page story in The New York Times business section titled “Cameras May Open Up the Board Room to Hackers” describes the ease with which hackers can access sensitive information in videoconference rooms. As the article notes: “Businesses spend billions each year beefing up security, but they rarely consider the vulnerability of their videoconferencing equipment.”

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What Will India’s Vodafone Judgment Mean for Other Multinationals?

Posted on January 23, 2012

It was one of the most eagerly awaited judgments in recent times. On January 20, the Indian Supreme Court held that U.K.-based telecom service provider Vodafone was not liable to pay tax on a deal involving the 2007 takeover of the Indian telecom assets of Hong Kong-based Hutchison.

The issue was simple. The US$11 billion shelled out for a 67% stake in Hutchison Essar (the Indian company) was a transaction between two foreign entities. But the underlying assets were almost entirely in India. The Indian tax authorities claimed that the deal should thus attract capital gains tax in India. Vodafone was hit with the demand because it should have withheld the tax amount before paying Hutchison. Besides, Vodafone had the Indian assets; Hutchison had no significant interests left in the country.

The Supreme Court felt that the transaction was not a sham or an attempt at tax avoidance. “We hold that the offshore transaction herein is a bona fide FDI (foreign direct investment) into India which fell outside India’s territorial tax jurisdiction,” said the court. “Hence [it is] not taxable.” The Bombay High Court had earlier ruled in favor of the tax authorities. Vodafone had approached the Supreme Court and had been asked to deposit US$500 million and provide a bank guarantee of US$1.7 billion while its appeal was being heard. The deposit is now being returned with 4% interest.

 

Vodafone is understandably pleased with its victory. “We welcome the Supreme Court’s decision, which underpins our confidence in India,” Vodafone Group CEO Vittorio Colao said in a statement. “We will continue to grow our Indian business, including making significant investments in rural areas and in 3G network coverage.” In London, Vodafone Group shares rose about 1.5%.

The Vodafone judgment is obviously important for the company. But it has greater ramifications. “The verdict will bring a certainty in the minds of global investors regarding Indian tax consequences in case of sale of their investments,” says Suresh Surana, founder of the accounting and auditing firm RSM Astute Consulting. “The international community has been keenly awaiting the verdict.” Adds Rohan Shah, managing partner of law firm Economic Laws Practice: “The judgment takes a clear position on India’s territorial jurisdiction to tax. It holds that transfer of shares outside India is not taxable in India. It also supports the legitimacy of tax planning in genuine investment transactions.”

 

“This case has been highlighted in the foreign media,” lawyer Ajay Vohra of Vaish Associates had told India Knowledge@Wharton earlier. “If this goes in favor of Indian Revenue, it will become a test case for several such transactions which have taken place outside India resulting in transfer of ownership of the India piece as well. I think the international media and the international tax community are very alarmed about the prospects of this case.”

The tax authorities may have lost, but their position isn’t entirely without merit. If this be the accepted law, many multinationals would restructure their holding structures in their Indian interests. But Vodafone may be one of the last companies to escape the capital gains tax net. Meetings of bureaucrats and ministers in Delhi following the Supreme Court judgment indicated that such “loopholes” would be plugged. Vodafone and other similar deals – for example, GE’s US$500 million sale of its majority stake in outsourcing firm Genpact to private equity firms General Atlantic and Oak Hill Partners, and the US$981 million sale of Mitsui’s 51% in mining company Sesa Goa to Anil Agarwal’s U.K.-based Vedanta Group – were expected to chip in to help balance the government’s books. They won’t. But such deals in the future may well be brought under the tax net. Says Surana of RSM: “The DTC [direct tax code currently under discussion] Bill does provide for taxing such transactions if the Indian investments constitute more than 50% of the total assets of the holding company.”

 

 

 

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Digital Books: ‘Enhanced’ — But for Whom?

Posted on January 20, 2012

Forget your dusty old biology book. Life on Earth, a textbook by E.O. Wilson now available on iTunes, may soon make it obsolete.

Or will it?

Wilson’s book is an “enhanced” digital book, meaning it incorporates video, animation and other high-tech features to explain the fundamentals of biology. According to Apple, one page “lets the student choose how much detail to reveal in [a] cell interior, from empty compartments to a detailed cell completely packed with proteins and small molecules.” Another “allows the student to control the progress of cell division, with step-by-step explanations coupled to real cell footage.” Animated maps of global photosynthesis and a tour of a wild preserve in Mozambique are only topped by the author’s introduction to ecology, which takes place — where else — “[on] the edge of Walden Pond.”

Life on Earth is just one of a new lineup of enhanced e-books that are scheduled to come out from publishers such as Penguin, which plans to release 50 enhanced digital titles this year, according to The Wall Street Journal.

Publishers are banking on a success similar to what they have seen in regular digital books. “E-book sales continue to climb, with digital titles accounting for 14% of books sold in the second and third quarters of 2011, up from 4% for all of 2010,” the Journal notes, citing data from publishing industry analyst Bowker Market Research. Meanwhile, tablet sales are skyrocketing — 65 million were sold last year, according to the Journal — meaning an increasing number of readers should be able to download and enjoy enhanced digital titles.

And while the pricing might be reasonable — many enhanced titles are available for download as books or apps between $10 and $20 — it isn’t clear that the new format will ultimately lead to a publishing revolution. “While I do not have hard numbers, it appears that very few enhanced e-books have been successful to date,” says Stephen J. Kobrin, publisher and executive director of Wharton Digital Press. “The old dog dancing metaphor applies: You are blown away by seeing the dog dance, but after a few minutes you begin to ask how good it is at dancing.  There has to be a very good reason to take the reader out of the narrative — bells and whistles only seem cool for a while.”

Meanwhile, Apple has introduced software for authors interested in creating their own enhanced e-books, but Kobrin remains skeptical about how this would help the format gain traction. “Producing a good enhanced e-book is anything but easy. You need high quality video and graphics, not what comes out of a point-and-shoot.”

Life on Earth is a perfect example. “[It] looks great,” says Kobrin, “but take a look at the credits. There is a production cast of thousands.”

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Can Bajaj Auto Change the Face of Indian Public Transportation?

Posted on January 20, 2012

At the recently held Auto Expo 2012, India’s premier automotive exhibition, Bajaj Auto showcased its latest offering — the RE60. This is the first four-wheeler from the world’s largest maker of three-wheel vehicles and India’s second-largest maker of two-wheelers.

While there had been earlier rumors about Bajaj Auto foraying into the small car segment, Rajiv Bajaj, managing director, is categorical that the RE60 is not a car. “As a marketing position, we are an anti-car company,” he told the media. “Our core customers will be the ones who are users of three-wheelers.”

So what is the concept behind the RE60? Powered by a 200 cc engine, the new entrant is being positioned as a small four-seater, intra-city public transportation vehicle. Currently, there are around five million three-wheeler passenger vehicles (called auto-rickshaws) in the country. These auto-rickshaws are designed to accommodate up to three passengers, though they often carry more. They cost less than taxis and are a popular mode of public transportation.

Bajaj believes that the RE60 could be an alternative to auto-rickshaws. But Bajaj Auto itself is the leader in this space. So will the RE60 not cannibalize its own product? It well might, but Bajaj says it’s also about creating a new category and providing more options.

Abdul Majeed, leader in the automotive practice at PricewaterhouseCoopers (PwC) India, agrees. “In India, we have different kinds of customers with different needs. So from an opportunity perspective, what Bajaj Auto is doing makes a lot of sense.”

Bajaj could well have a free run for some time. A small, intra-city public transportation vehicle is a unique requirement of emerging markets. It has not yet caught the attention of the global auto makers, which have their sights set on the small passenger car segment.

But the RE60 will have other challenges. Auto-rickshaws are more flexible, easier to maneuver and require less turning radius and parking space. These features come in handy while crisscrossing through India’s narrow lanes and by-lanes. More importantly, auto-rickshaws are lighter on the wallet. “But the RE60 promises more stability, more safety and more comfort and also an elevation in status,” says PwC’s Majeed. “If Bajaj [Auto] gets the product, the pricing and the distribution right, the RE60 could well be a game changer. The important thing is to deliver on its promise.”

While the pricing of this new vehicle is yet to be revealed, it is expected to be far lower than a car. “We have tried to insist that we are not making a car but a four-wheeler, because a car borrows from the skills and cost structure of the car industry, whereas a four-wheeler borrows from the skills and cost structure of the two- and three-wheeler industry,” Bajaj told India Knowledge@Wharton. “So fundamentally, this space can be addressed by coming down — I mean [creating a] smaller car — or going up, making something bigger than a two- and three-wheeler. The two approaches are completely different.”

Rakesh Batra, national leader, automotive sector, Ernst & Young, notes that success of the RE60 will depend on the value proposition it offers to buyers. “Since the RE60 will be for commercial purpose and not for personal transportation, it needs to offer good returns to the owners. If they can earn more money out of this without significantly increasing their costs, it could be an attractive proposition.”

The last big auto product from India — the low-cost Tata Nano — was expected to create a huge wave and redefine the small car market. It has barely created a ripple. It now remains to be seen how far the RE60 will go in redefining public transportation in India.

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Europe’s Money-Go-Round Saves the Day – for Now

Posted on January 19, 2012

European Central Bank (ECB) actions taken in December to counter a potentially devastating liquidity problem in the euro zone are gaining some traction, at least for now. The key step: making $650 billion in new money available to euro zone banks over three years under the Long Term Refinancing Operation (LTRO).

This week, for example, Spain sold one-year debt at a little more than half the rates markets demanded just last month, despite a recent downgrade of its sovereign credit rating. Also, the bailed-out banks have used some of their new-found capital – though not nearly as much as was hoped for — to buy up some European sovereign debt, further easing rate pressures.

The move came just in time. European banks last month were locked in a devastating credit crunch that could have brought the continent’s economy down hard. Banks were refusing to lend to each other, mostly over fears that sovereign debt held on the banks’ books could go bad. That could have caused some bankruptcies, and bank failures could have spread quickly.

The credit situation has improved, if only for the short run, thanks to the LTRO funding. But the big picture remains risky — and in some ways confusing — because of the unusual, circular way in which funds are changing hands between banks and governments. As The Economist noted recently, banks from Spain, Greece and Italy have the deepest capital shortfalls. “Several may have to tap government bail-out funds to raise the capital, creating the circular prospect of governments bailing out their banks that are in turn supposed to bail out the government.”

Similarly, Satyajit Das notes in this piece from the website Naked Capitalism, that French President Nickolas Sarkozy has urged banks to buy euro zone government securities, to be used as “collateral to borrow unlimited funds from the ECB or national central banks.” The French President noted that “earning 6% on Italian bonds that could then be financed at 1% from central banks was a ‘no brainer’….” Das adds that “Sarko-nomics perpetuates the circular flow of funds….”

So if money is simply on a merry-go-round, why have markets responded positively, if only in the short term? Notes Wharton finance professor Franklin Allen: “… Essentially they are trying to monetize the debt.” Since the Maastricht Treaty forbids the ECB from simply printing money and buying up debt, “this is an attempt to do the same thing by allowing the banks to borrow and then buy the debt.”

In the ongoing European debt crunch saga, all sides seem willing to use more debt to continue gambling on an eventual economic recovery that can reverse the tide. But with Europe now widely believed to be heading into – or already in – recession, many economies are shrinking and so are government revenues, and thus the ability to service all of this debt.

And the LTRO approach, while relieving the private and public credit crunch in the short term, carries significant new risks, Allen points out. “First of all, the banks are taking on risk. If there is a default on the government bonds they buy, they will likely go bankrupt. This is quite possible and this why so far they have been reluctant to do this in large quantities.” The ECB also is taking a risk – “if the banks go bankrupt, they will be technically insolvent. This will cause a significant political problem.”

In this article from The Telegraph, Ambrose Evans-Pritchard and Louise Armistead cite “nagging concerns over how long the ECB itself can keep shouldering the euro zone burden, given that it has no sovereign entity behind it. The LTRO … may save the day but it also concentrates risk further for the Bundesbank and other central banks in the euro zone system, as well as private banks. The ultimate disaster could be even worse if it all goes wrong.”

So far, while the LTRO has had the effect of lowering sovereign borrowing costs for some pressed European sovereigns, it has not yet accomplished another key goal – getting banks to lend to each other in a way that increases business and consumer credit. “We see that the key refinancing markets for banks are clogged; the interbank market is basically not functioning,” European Central Bank President Mario Draghi said this week, according to Bloomberg.

Meanwhile, some debt rating agencies have downgraded credit ratings for France and Austria. Both have lost their AAA rating this week, while Spain, Portugal and Italy were dragged down two more grades recently. Portugal’s debt is now rated at a junk-bond level. Spain’s credit rating was slashed from AA- to A shortly after it announced last week that it will miss its budget deficit target by about 33%.

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