Comments about the E.U. the Euro, Greece, the ECB and the IMF

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Comments about the E.U. the Euro,
Greece, the ECB and the IMF
Interview of Mr. Michel Clerin,
Economist (University of Chicago),
compiled by Mrs. Bernadette J. Reyntjens
BR : Mr. Clerin, how would
you describe the future of the
European Union?
Sooner or later, the euro zone crisis will be
over. Greece, Ireland and Portugal creditors, –
and perhaps Spain lenders as well, – will have
neatly trimmed hair; the banks will have to shore
up their inadequate capital. German exporters
will continue to cash the profits from the euro
their southern partners obligingly weakened,
and the eurocracy will have found other reasons
to meet. But Europe will not be the same.
It will be changed in two very important
ways. Firstly, the 27 nations of the European
Union will have broken into two separate
groups of 17 and 10 (this ratio may change
as indicated in the third part of this article).
Secondly, the economies of the foremost
group of 17 euro zone members will be centrally managed by a Franco-German coalition,
while the nations among the latter 10 "leftover" nations will fight a losing battle to
alter the policies of the EU of which they are
contributing members. Peaceful coexistence
between the Euro zone countries and the 10
is no sure thing.
The 17 euro zone countries
have made very clear the direction in which they are heading.
The felt need to prevent defaults by its overly indebted
members is leading to a more
persuasive system of central
economic management. The
Euro zone countries are to have
access to Germany’s balance
sheet, in return for which
Germany is quite properly
demanding a say in how they
manage their economic affairs
not only their budgets, but all
the factors that affect their
international competitiveness:
methods of wage bargaining,
the generosity of their welfare
states, including the timing and terms of
retirement, regulations concerning access to
various occupations and most of all, tax rates.
It’s not viable for Greece to borrow from
the stronger euro zone countries while operating loss-making, nationalized transport
systems; or for euro countries to index retirement benefits to wage rates rather than
retail prices, with Germany the payer of last
resort. Also it will not be for Ireland to maintain corporate tax rates at half the level of
the average group. It has become clear that
one-size-fits-all interest rates must be accompanied by more uniform fiscal and related
economic policies. Paris will be pleased as the
long-sought French goal of a 17 nations euro
zone "economic government "comes closer
to realization, marginalizing EU institutions.
BR : What will happen to
those "minimum 10 left
over" counties?
They will maintain or regain their own national currencies, and retain control over their own
interest rates. The value of their currencies can
fluctuate, allowing depreciation if they are over-
valued and appreciation if inflation threatens.
Their central banks can raise or lower interest
rates in response to changing economic conditions. And to some extent they are free to follow
the more liberal economic policies they prefer,
rather than hew to the line set by more anti-free
market Euro zone countries.
These differences between the 17 and
the 10 are creating a threat to the cohesion
of the 27 European Union members. The
euro zone countries are developing rules for
coordinated economic management without
consulting the excluded group of 10. Next
step: apply some of those rules to the 27 EU
nations altogether in order to prevent non
euro-currency countries from gaining a competitive advantage over euro zone members,
as France and other countries complain Britain
has achieved by allowing the pound to float,
countenancing a less regulated labor market
and keeping regulation of financial services to
an essential minimum.
BR : How will these excluded 10
countries react?
The excluded 10 are well aware of their
exclusion from meetings that set policies that
will affect them. "It really rankles that they
(Denmark and Sweden) can’t get into important policy meetings." reports The Economist.
Add Britain to the increasingly irritated as Brussels makes it more costly to employ part-time
workers and weave a new web of regulations
around the UK financial services sector. In fact,
you have a core group that just might decide
that exclusion from euro zone summits makes
membership in the EU less attractive. After all,
majority voting allows the present block of 17
to dominate rule-making in the EU.
France has a solution for the under-represented, non-euro zone countries: get rid
of your national currencies, adopt the euro,
and get to have a say – a tiny one compared
to Germany but a say nevertheless – when
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about the setup of a permanent mechanism,
the "European Stability Mechanism“(ESM) designed to replace the temporary EFSM in mid2012 is dominating the agenda of ECOFIN and
the EUROZONE GROUP.
the rules are being drafted to implement
the new European wide system of economic management. That has little appeal for
many members of the excluded 10. Britain’s
economic reasons for refusing to buy a seat
at the table by surrendering its own currency
are rooted in basic differences when compared with euro zone countries. Indeed Britain
has a more interest-rate sensitive economy,
greater reliance on financial services, the need
for a currency that adjusts to changing economic conditions. These remain as powerful a
deterrent to membership as when they were
first developed.
Meanwhile Sweden points out that its
economy is the fastest growing in the EU,
Danish voters believe they are not Ireland
because the Krone is not the euro, and euro
members Greece and Ireland are wondering
whether friends-in-need should have to pay
usurious interest rates to their friends-in-deed.
The American colonies went to war to
break away from Britain, and fought under the
banner "Taxation without representation is a
tyranny ". The excluded 10 will have to decide
just how long they want to tolerate marginalization before deciding that regulation without
representation is equally tyrannical.
BR : Could you explain the
fundamental structural reforms
which are taking place in the
euro zone?
European economic policy has the potential to be a major game-changer for the recovery and long-term macro outlook for the euro
zone. The European Financial Stability Facility
(EFSF) mechanism ensured that a protracted
treasury crisis and European contagion as
seen in the Greek financial crisis were avoided
when similar pressures hit Ireland and Portugal.
Moreover, the ECB has made clear its commitment to support banking sector liquidity and
treasury markets – a far cry from the indecision
seen in the early part of 2010. This reinforces
my belief that existential risks to the Eurozone
are overblown. In the period ahead discussions
The ESM is a very important development
that will ensure the long term commitment of
euro zone governments to an established and
well defined multilateral support mechanism. It
will help to ensure that the sort of protracted
volatility seen across Europe’s financial markets
during the Greek financial crisis can be avoided
over the long run. Indeed, the ESM is a key institutional development; it is the broader structural
issues of productivity, competitiveness, internal
euro zone imbalances and fiscal management
that ultimately determine growth potential and
the long-term recovery outlook.
The Franco-German Competitiveness Pact
is a key starting point. The pact highlights 6
key consensus agreements between both
States and is expected to be a launching pad
for wider EU discussions on: fiscal sustainability, labor markets liberalization and sovereign
debt management. Of course discussions over
productivity, imbalances and liberalization have
a long history within the EU, so any objectives
set by ECOFIN and the European Council will
need to be measured against the effectiveness
of the regulations and agreements designed to
measure achievement. Financial crisis in the periphery have emphasized the need to address
imbalances and, for the first time since euro accession, core States such as Germany maintain
significant leverage through financing mechanisms to effectively demand structural reforms.
Strong signals at the national level are encouraging, with fiscal austerity in Greece, Ireland,
Portugal and Spain. This really highlights that
for these four countries a domestic impetus
is addressing long-standing structural imbalances. However one should not be surprised
if Greece and Portugal might have to leave the
Eurozone chiefly because they did not apply a
demanding process to improve their European
and international competitiveness since they
were accepted in the Eurozone ; this is the most
blatant fault made by these two countries .
BR : What is the outlook for the
Euro zone?
Under the best case scenario, a euro zone
consensus on meaning full policies to back
broad based reform objectives will be achieved before the end of 2011, implementa-
tion over 2012 continuing in 2013. This will
proceed apace, helping to rebalance the internal euro zone economy, building productivity
and competitiveness while also encouraging
domestic growth in Germany. This could potentially lift euro zone long-term average real
GDP growth above 2.0 % and in turn buoy
equities and the euro above the present levels.
Notwithstanding the favorable developments
in Germany, several countries face headwinds
to growth via national austerity measures
and the resulting fiscal drag over the cyclical
horizon. The core economies are expected to
achieve at-or above economic growth due to
strong initial conditions of competitiveness
and a significant tailwind from emerging
markets external demand.
There is, however, a non-trivial probability
of fat tails on both ends for the second half
of 2011, depending on whether the sovereign crisis affecting Greece, Ireland and Portugal can be successfully quarantined before
spreading to Spain and Italy. But unless the
potential defaulting countries can engineer a
return to economic growth , they will continue to struggle to tap the capital markets on
anything but prohibitively expensive terms. Of
the three peripheral economies, only Ireland
stands a good chance of convincing investors
of its solvency. Assuming creditors write off
50 per cent of Irish and Portuguese public
debt and 60 percent of Greece‘s in 2013, all
three countries will have public debt ratios
of a manageable looking 60-65 percent of
GDP. But they still will have huge budget
deficits demanding ongoing budget austerity. Ireland is now running a current account
surplus so the foreign balance is not a drag
on its economy and the government is able to
finance its budget deficits domestically.
The picture is bleaker in the case of Greece
and Portugal. Investors will be rightly skeptical
of their ability to absorb the cuts needed to
bring down their still very large budget shortfalls. Both countries current account deficits
have narrowed somewhat, but will remain very
large, depressing demand and leaving them
dependent on foreign borrowing to bridge
the gap between their spending and revenues.
Unlike Ireland, Greece and Portugal will find it
very hard to generate the stimulus from exports
needed to offset the impact of continued austerity. Exports only account for a quarter of
Greek GDP and a third of Portugal’s compared
with about 100 per cent in the Irish case and
both do little trade with countries outside the
slow –growing EU. Added to this both countries
business have experienced a huge loss of trade
competitiveness within the Euro zone. Investors
will surely continue to deny Greece and Portugal market access, calculating correctly that they
cannot rely on being bailed out a second or third
time . What will happen then? As forecasted by
the chief economist of The Centre for European
Reform; Mr. Simon Tilford further bail-outs of
Greece and Portugal in the forms of loans from
the rest of the Euro zone are unlikely. Everyone
will by then recognize that adding more debt
to already unsustainable levels make little sense.
This will leave two alternatives: fiscal
transfers (the dreaded "Fiscal Union " ) or the
affected two countries’ withdrawal from the
currency union. Faced with this second possibility, one cannot rule out a shift to some kind
of transfer union. But the politics look formidably difficult. Could there be a negotiated
withdrawal from the currency union? It would
require action including emergency support
for the affected countries ‘banks and temporally capital controls. The debts of countries
leaving the Euro zone would have to be denominated into their newly introduced (and
massively devalued) Drachmas and Escudos,
inflicting further pain on foreign holders of
these two countries debts. It is impossible to
attach a probability to all this happening. But
given the obstacles to fiscal transfers between
Euro zone economies it would be unwise to
bet too much money against it .
BR : What about Greece? What is
the particular situation?
First of all the original diagnostic by the
EU, ECB and IMF of Greece was wrong. Its
fiscal malaise was too profound to be sorted
out by a bridging loan even if it is one of 110
Bn . The salve of temporary liquidity support
does not help countries with very deep fiscal,
mindset and competitiveness weaknesses.
European leaders have tried to avoid any
restructuring of the debt of Greece by sheltering the Greek debt from the markets in order
to give space to right its finance. The Greek government still stoutly denies any plan to restructure its debt. The ECB is adamantly opposed,
fearing havoc among European banks exposed
to the countries in question. But the mechanism of a restructuring are now pored over in
Europe and at the IMF. In Germany, the position of Wolfang Schaublen, the Finance Minister and Werner Hoyer, Minister of Foreign
Affairs, caused consternation by openly raising
the possibility of a debt restructuring.
The timetable set out in Greece rescue plan
in May 2010, which provided 110 billion in
support from other euro area countries and
the IMF, expects it to rise about half its financing requirements in 2012 and to return fully
to the markets in mid-2013. With yields where
they are, and Greece debt burden approaching 150 % of GDP, this looks ever more improbable. The upshots are that countries like
Germany face the prospect of another call on
funds to keep Greece afloat. That looks politically unthinkable. Never mind that German
banks benefit from Greece‘s ability to keep
paying its dues: German taxpayers hate the
idea of again bailing out "feckless" Greeks. A
new approach is therefore needed.
In theory, there is a wide array of options, from
extending maturities to imposing steep writedown on the value of the debt. In many emerging markets crises, bonds had strict safeguards
to protect international creditors who could fight
their case in Anglo-Saxon jurisdictions. In the
case of Greece, between 80 % and 90 % of the
bonds have been written under local law.
In practice, the options are more constrained. Greece is still running primary deficit
(i.e., excluding interest payments) and will
need to borrow money come what may say.
So the solution will be one that suits European policy makers. Many worry about the
effect of a haircut on banks’ balance sheets.
Mr. Smagli, a member of the ECB’s executive
board recently gave warning that such a move
could bring down a large part of the Greek
banking system, which is heavily exposed to
its own government debt.
EU leaders have also previously pledged
that private creditors will not suffer an involuntary debt restructuring until mid-2013,
when the ESM, a permanent bail-out fund,
comes into existence. The German ministers
made it clear that what they had in mind was
a voluntary deal. However the more creditors
can determine terms, the less likely it is that
Greece’s debt burden will be materially diminished. That is one reason why the idea of
retiring Greek debt through bond buy-backs
at current depressed prices seems likely to fail.
It would simply tend to drive prices back up
again, defeating its purpose. That option is no
longer on the table. But another, the "reprofiling "of bonds, is being actively considered.
Under "reprofiling“, the Greek government
would continue to pay coupons on bonds and
to redeem them when they come due, but the
maturity of each bond would be extended.
That would postpone the need for more taxpayers’ money to refinance Greek debts. As
both the interest and the principal would still
be honored, it would probably be acceptable
to creditors, especially banks whose main
concern is to avoid write-downs on bonds they
are currently holding in their banking books at
par. Reprofiling is thought unlikely to trigger
payments on credit-default swaps.
This has worked before. In 2003, Uruguay
won consent from its bondholders to extend
its debt maturity by five years, reducing the
net present value of its debt by 13%. Uruguay
tapped international markets soon after settling
with its creditors. However Uruguay’s problem
was more to do with liquidity: what is needed
was a breathing-space. Greece‘s problem is one
of solvency. When the bailout plan was conceived
in May 2010, Greek debt was thought to have
been 115% of GDP at the end of 2009. That
figure was subsequently revised up to 127%. The
ratio has since risen to 145% at the end of 2010.
Despite a stringent fiscal retrenchment in
2010, the deficit is thought to have been a
still huge 10.6% of GDP last year. After 12
months of official denials, restructuring is
no longer taboo. The politicians may prefer
the soft option of reprofiling but the economics point to harsher solutions: a very steep
write-down as part of a broader package of
reforms. The predicament of local banks could
be addressed through recapitalization via international funds, the exposures of European
banks by private equity raising.
In the last three weeks there has been an
appalling lot of commentaries some of them
very self-contradictory from the Greek Government, the Greek Opposition, the EU, the ECB
and the IMF. The most important one being
that according to the Troika (EU, ECB and IMF)
Greece missed all fiscal targets agreed under
the 2010 bailout plan. According to the Troika
the Greek Government still spends more than
agreed in the aid program. On top of that, tax
income is still lower than required. Moreover
the Greek Government has failed to win the
opposition backing for a new austerity package
of reforms. Eurozone policymakers have
warned Athens that it must have broad political
backing for debt-cutting measures, pressing for
the kind of consensus achieved in Portugal, if
they are to provide the additional cash it needs
to plug a new funding gap next year .
Another major threat is that the IMF is
threatening not to release its 3 Bn portion of
the aid on June 29 because the country’s refinancing capacity is not guaranteed for the next
12 months. The fund‘s stance also look like
an attempt to prod difficult decisions from its
squabbling partners in Europe. This is perceived
to reflect increasing IMF frustration at the
mammoth standoff between the euro zone’s
political leadership, in which a move to ease
Greece’s debt burden is gaining support, and
that of the ECB which recoils in horror at the
very notion. Crucial here is the political interest
of powerful people such as German chancellor Angela Merkel and many of her counterparts, who are deeply reluctant to expand their
support for Greece. The vulnerability of European banks to any losses on their investments
in euro zone sovereigns is another factor.
Important too is the ECB’s agitation against
anything –i.e. any hint of sovereign defaultwhich might undermine market confidence in
the euro zone‘s many weaklings or damage its
own over-extended balance sheet. The upshot
of all this is endless euro zone haggling over
the next step for Greece, very little certainty
over what actually happens and a sense of
perpetual crisis overshadowing the entire body
politic and frightening moves by the markets
against Spain, Italy and even Belgium.
Among the more vocal proponents of a
Greek debt restructuring has been jean-Claude
Junker who chairs the meeting s of the European finance ministers. To the ECB consternation, he is now advocating a re-profiling, or a
soft restructuring of Greece sovereign debt.
Even Angela merkel is insisting that post 2013
private burden-sharing mist be built into the
ESM soon to be established. The German chancellor also insists that post 2013 sovereign bond
issuance by countries in the periphery include
collective action clauses making such bonds
more susceptible to debt restructuring .
In summary the Greek debt crisis seems to
be spinning out of control. Against this background the Greek European Commissar in
charge of Fisheries Mrs. Maria Dalmnaki agitated the ghost of the exit of Greece of the euro
zone. There are many potential solutions to
the Greek crisis. Auspiciously the economists
of Bank of America –Merrill Lynch have produced a dazzling table describing the various
potential proceedings from the easiest to the
shoddier. This table is to be found hereafter.
BR : What are the risks for the
European Central Bank? Did it
make mistakes?
Greece is "not just illiquid, it is insolvent "Omar Issing, the ECB’s former chief
economist said in a contradiction of the ECB‘s
official position. The comment also highlight
the dilemma facing the ECB Mr. Issing was
always wary about the Eurozone construction
and the consequences of a monetary union
without a fiscal union He was also among
those who warned about the precipitate entry
of a country like Greece which had a track
record of many defaults the last two centuries
and which was inadequately prepared .
Understandably, Jean Claude Trichet is
apoplectic at the loose talk of debt restruc-
turing. The ECB’s president fully appreciates
the real risks of contagion from a Greek debt
restructuring to the rest of the PIIGS. He also
knows that all too much of the cumulative $
1.000 bn in sovereign debt of Greece, Ireland
and Portugal sits on the French and German
banks’ balance sheets.Mr. Trichet correctly
perceives that if European policymakers now
abandon their previous commitments to
do "whatever it takes" to prevent a Greek
debt rescheduling, markets will question the
credibility of their repeated assurances that
none of the PIIGS will default. If Greece were
allowed to defaults, why should markets
believe that Ireland and Portugal would not
follow suit.
An equally compelling justification for Mr.
Trichet‘s antipathy to any form of soft Greek
debt restructuring is how little this would
improve Greece’s fundamental fiscal policy
challenge. Stuck in the straitjacket of euro
membership, Greece is having to make a herculean effort to restore fiscal sustainability,
without the ability to resort to exchange rate
devaluation and so boost exports as a muchneeded offset to the adverse effects of fiscal
consolidation.
Less well known is that the former Bundesbank president Axel Weber critized the
ECB’s program of purchasing government
bonds issued by ailing euro member states.
It is estimated that the ECB bought around
40-45 bn of Greek debt last year under its
Securities Markets Programme which was
openly critized by Mr. Weber.In the event of
a bankruptcy or even a deferred payment,
the ECB would be directly affected. But even
greater risks lurk in the accounts of commercial banks. The ECB accepted so-called
asset-backed securities ‘(ABS) as collateral.
At the beginning of the year, these securities
amounted to 480 billion. It was precisely
such ABS that once triggered the real estate
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Different proposals to (help) solve the Greek debt crisis, ranked by likelihood (BofAML assessment)
Proposal
Description
Opinions
Likelihood
Larger
Greece to enlarge the €50bn
privatizations privatization program announced in early March, or to
front-load it (currently looking
for receipts of €11bn in 201112)
Extension
IMF aid becomes an Extended
of IMF
Fund Facility
EC, IMF, EU
leaders :
urging for it
Very high,
high
part of the
conditions
for additional
support
EU : Clearly
in favor IMF : open
to it
Very High
Increase in
bilateral
loans
Euro Area member states could
increase the amount of bilateral
loans they offer to Greece (currently €90bn out of the €11bn
EU/IMF package)
EU finance
ministers :
mentioned
by Lagarde
High, if
very strict
conditions,
size likely
< €60bn
Provision
of EFSF
package
Additional €60-80bn to cover
remaining needs in 2012-13,
either all in cash disbursements
or partly via EFSF bond purchases, potentially also requiring collateral from Greece
EU leaders :
maybe, function of the
4th review,
and only
under tough
terms
Moderate/
High,
under strict
additional
conditions
Reduction in Another reduction in the rate
interest on
charged by EU/IMF on the €11bn
loan
package, already cut by 1ppt to
4,8% in March
Extension
Voluntary exchange of bonds
of bond
for longer maturity ones, with
maturities
the same face value. Increase
participation rate with help of
ECB (no longer accepting old
bonds for repo operations) or
implying high risk of default
in 2012 if maturities are not
extended
Moderate
Moderate,
under strict
conditions
Core
politicians :
in favor of it;
ECB: strongly
against
Moderate
Moderate,
could come
in parallel
with the EU/
IMF loan
extension
Broader
Voluntary exchange, for bonds
voluntary
with lower face value and others
restructuring and others with longer maturity
/ lower coupons and same face
value. New bonds could be
enhanced with collateral (from
EFSF?) while holders of old bonds
could be penalized (ECB repo op,
other) to improve participation in
the exchange
Hard
Exchange with imposed
restructuring modification in the financial or
legal terms of bonds (change in
Greek law). Exchange for bonds
with longer maturity / lower
coupons / lower face value.
New bonds could be enhanced
with collateral (from EFSF?)
Low
EU, IMF,
ECB : against
Leaving
Eurozone
EU, IMF,
ECB : absolutely not
envisaged
Would come with hard restructuring change in Greek law
ECB : Strictly
against
Impact on
Greek Situation
Bonds
CDS
Rating
U Ài`ÕViÃÊ`iLÌʏœ>`ÉÀivˆ˜>˜Vˆ˜}ʘii`Ã
U ˆ“«ÀœÛiÃÊ`iLÌÊÃÕÃÌ>ˆ˜>LˆˆÌÞ
U «œÃˆÌˆÛiÊvœÀÊiVœ˜œ“Þʏœ˜}ÊÌiÀ“
U BUT hardly enough on its own to
cover funding needs in 2012-13,
will take time to be observed
U œÜiÀÃÊÀivˆ˜>˜Vˆ˜}Ê«ÀiÃÃÕÀiʈ˜ÊÓä£x
U ˆ“«ÀœÛiÃÊ`iLÌÊ«ÀœvˆiÊEÊÃÕÃÌ>ˆ
ˆ“«ÀœÛiÃÊ`iLÌÊ«ÀœvˆiÊEÊÃÕÃÌ>ˆnability
U BUT doesn't solve the funding
issue in 2012-13
UÊÊvœÀViÃʏ>À}iÀÊvˆÃV>Ê>`ÕÃ̓i˜ÌÉ>ÃÃiÌÊ
sales, benefiting fiscal sustainability
UÊÊVœÛiÀÃÊv՘`ˆ˜}ʘii`Ãʈ˜ÊÓä£Ó‡£Î]Ê
as they are expected small under
conditions
U BUT risks of a much deeper
recession & national support not
guaranteed
UÊÊVœÛiÀÃÊÀiiŽÊv՘`ˆ˜}ʘii`ÃÊ
in 2012-13* forces large fiscal
adjustment / asset sales, benefiting fiscal sustainability
UÊÊBUT risks of deeper recession &
national support not guaranteed
& larger tranche of future liabilities senior to GGB
U ˆ“«ÀœÛiÃÊ`iLÌÊÃÕÃÌ>ˆ˜>LˆˆÌÞ
U BUT doesn't solve the funding
issue in 2012-13
Slightly
positive
Slightly
positive
Positive
Slightly
positive
Slightly posi- Slightly
tive. 5y-10y positive
flattener
Positive for
GGBs, if
amount high
enough.
Negative for
core bonds
Positive for
1-2y Greek
CDS. Negative for core
CDS
Positive and
very much so
for 2y bonds
Positive in
Neutral
particular for
1-3y spreads
Slightly
positive
Slightly
positive
Slightly
positive
U >œÜÃÊ̜Ê`i>ÞÊ̅iÊÀi«>ޓi˜Ìʜv
>œÜÃÊ̜Ê`i>ÞÊ̅iÊÀi«>ޓi˜ÌʜvÊ
2012-13 bonds, in the hope that
market access will be possible
after an improvement of the fiscal
situation or that ESM support will be
provided after 2013
U BUT could weaken financial system
& undermine future access to bond
market & doesn't reduce the current
debt load
U ˆ“«ÀœÛiÃÊ̅iÊ`iLÌÊ«Àœvˆi
U Ài`ÕViÃÊ̅iÊ`iLÌʏœ>`Ê`ÕiÊ̜
Ài`ÕVià ̅i `iLÌ œ>` `Õi ̜
bonds with lower face value
U i>ÛiÃÊ>ÊV…œˆViÊ̜ʈ˜Ã̈ÌṎœ˜Ã
i>Ûià > V…œˆVi ̜ ˆ˜Ã̈ÌṎœ˜Ã
which do not mark to market
U BUT likely to weaken financial
system & delay access to the
bond market & no guarantee of
significant reduction in debt
Negative.
5y extension, (with
no coupon
change)
would lower
their market
value by
0-35%
Plunge in
spreads CDS
not triggered
as exchange
not binding
Downgrade,
and could be
considered
default event
(SD rating)
Not certain
whether CDS
is triggered.
Depends on
use of CACs
for international bonds
Downgrade,
and could be
considered
default event
(SD rating)
CDS credit
event
Downgrade :
default event
CDS credit
event
Downgrade :
default event
Negative.
Haircut of c,
50% on face
value or on
net present
value (less
damaging for
those with no
mark-to-market)
Very low
U ˆ“«ÀœÛiÃʈ˜Ê̅iÊ`iLÌÊ«Àœvˆi
Very negative.
prior to 2013 U Ài`ÕViÃÊ̅iÊ`iLÌʏœ>`ʈvÊÕȘ}
Haircut of c,
new bonds with lower face value 50% on face
U V…>˜}iÃʈ˜Ê>Üʏˆ“ˆÌÊ̅iʅœ`ǜÕÌ value or on
U BUT extreme collateral damage
net present
(Eurozone financial system, other
value (less
peripherals, with Spain needing
damaging)
support). Access to the bond market
rendered impossible for a few years
Extremely
UÊÊi>˜ÃÊVÕÀÀi˜VÞÊ`i«ÀiVˆ>̈œ˜]Ê
Dramatic.
low
which could potentially help
Haircut more
growth
likely to be
UÊÊ1/Ê̅iÊ`iLÌʏœ>`ʈ˜VÀi>Ãi`Ê>˜`ʈ˜Ê around 75%
addition to the collateral damage
from the restructuring, there will
be a larger deposit outflows and
assests seized
Slightly
positive
crisis in the USA. Now they are weighting on
the mood and the balance sheet at the ECB.
No expert can say how the ECB can jettison
these securities without dealing a fatal blow
to the European banking system. The ECB is
in a no-win situation now that it has become
an enormous bad bank, in other words a
dumping ground for bad loans.
I suspect that Mr. Trichet knows that
Greece is insolvent. However Mr. Trichet does
not want a default on his watch. Mr. Trichet
will be gone in October 2011 and Mr. Trichet‘s
mission is to hang on until then. The reason of
Mr. Weber leaving the presidency of the Bundesbank and his seat as a director of the ECB
is because of huge feuds with Mr. Trichet. Mr.
Weber was never in favor of the ECB’s bond
program to begin with, and that caused a
feud at the outset. Mr. Weber felt the ECB
was not only violating the Maastricht Treaty
but making unsound decisions on monetary
policy as well. Given that Mr. Weber was a
distinct minority on many decisions at the ECB
he decided to say "hell" with it.
BR : Did the International
Monetary Fund made the right
decisions?
Mr. Strauss-Kahn’s decision to treat the
Greek crisis as a matter of liquidity rather than
solvency led the IMF to eschew any notion of
debt restructuring, or exiting from the euro,
as a solution to the periphery’s public sector
and external imbalance problems. Rather he
opted for characteristic IMF draconian fiscal
tightening and radical structural reforms as
a cure all for Greece, Ireland and Portugal.
History is more likely to remember him as
the man who put the IMF on the path to be
bowed out by his ill-advised handling of the
eurozone debt crisis.
Experience with such policies in Argentina in 1999-2001 and in Latvia in 2008-09
should have informed the IMF that, under the
Eurozone, the most fixed of exchange rate
systems, such a policy was bound to produce
the deepest of economic recessions. The fund
should also have anticipated that deep recessions would erode those countries tax base
and undermine their political willingness to
stay the course of adjustment. The poor economic performance now evident in Greece
and Portugal therefore risks blackening the
IMF’s reputation in Europe in the same way
as its programmes in Asia and Latin America
rendered the fund a pariah in the 1990s. At
the same time, as indicated by Mr. Desmond
Lachman of the American Enterprise Institute,
economic programmes for Europe’s periphery
that had little chance of restoring public debt
sustainability have torn the IMF’s credibility in
the financial markets.
SCULPTURES
ET ŒUVRES
rethink of
the fund’s economic strategy for the
MONUMENTALES
European periphery and other countries.
CONSEIL, ACHAT ET INTÉGRATION
To compound matters, in supporting these
programmes with unprecedented lending, the
IMF is saddling , like the ECB, its own balance
sheet with enormous amounts of dubious
claims on " insolvent " countries that the IMF
will struggle to collect for many years to come
. A successful IMF programme is supposed to
restore a country’s balance of payments viability with a minimum cost to its growth and
prospects. It is also meant to restore market
confidence, which translate into lower borrowing costs. Yet one year after the IMF’s lead
$ 150 bn loan package, the Greek adjustment
programme is not working. Greece’s growth is
in a downward spiral, with unemployment in
excess of more than 15 percent. Tax revenues
could be $ 10 bn lower in 2011 than the IMF’s
programme has envisioned.
The programme has not restored market
confidence. Indeed, the Greek government
now has to pay more than 25 percent on
two-year borrowing, which has forced European policymakers to acknowledge that there
is little chance Athens will be able to reaccess
the financial markets in 2012 as planned.
At the heart of the IMF’s failures to date in
Greece was the prescription of a policy approach that had little chance of success within
the constraints of a fixed exchange rate
system that preclude devaluation as a means
to promote export growth, which is an offset
to radical fiscal tightening.
One could perhaps understand the IMF
making a basic policy mistake for Greece in
May 2010 in the heat of a crisis that threatened
to spread well beyond its borders. However
was is difficult to understand is why, with the
poor economic performance of Greece, the
IMF chose to to repeat the same conceptual
policy mistake to its adjustment programme
for Ireland and Portugal . What even is more
difficult to understand is why the IMF is now
also proposing that Greece should apply more
of the same policy prescriptions that have
brought its economy to its current parlous
state. One must hope that, a new leader at the
IMF’s helm might bring about a fundamental
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