I am extremely relieved that there is now finally, serious talk of allowing the IMF come into the Eurozone (EZ). Up until now, our policy efforts have been to do everything possible to avert the IMF coming into the EZ. We have even gone so far as to develop a mini-IMF within Europe (EFSF/ESM) to perform the necessary tasks without giving over control to this global institution. (Note: despite their involvement in the bailouts of Greece/Portugal/Ireland, the IMF is not in control of these programs, it is merely providing technical support and limited funding).
However, I have always thought this was a mistake. I have written to countless heads of State, Commissioners etc. expressing my disbelief that they have gone to such lengths to prevent the IMF coming in and performing the necessary tasks. They have built up mighty institutions, destroyed countless billions of wealth and worst of all wasted precious time for reform in their efforts to stave off the IMF's advances.
I can remember clearly the first person to rule out IMF involvement -Jean Claude Trichet; he said that having the IMF intervene in a Eurozone country would be a humiliation. I did not think then and I do not think now that that was appropriate language for a central bank governor to use -emotive, unengaged, and truculent. I regard it as the key mistake made at a European level. I have since written to countless people trying to highlight the absurdity and vainglory of what we are trying to do. Only Olli Rehn took the trouble to respond to me, simply saying that the IMF had insufficient funds to rescue Greece (which seems absurd, when you think about the resources we have given to the EFSF since).
The real reason for all of this dissembling, was that European leaders know, that the first thing the IMF will do is tell the countries in severe debt that they must first write down a great deal of it. This will cause losses to private investors throughout the region, many of them institutional investors such as pension funds. I fully understand the reluctance to expose these institutions to losses -however, after 3 years of this farcical dancing around the IMF, can anyone seriously say that going to the IMF would be worse? Furthermore, by now, the truly vulnerable institutions such as pension funds, deposit banks etc. have sold their stakes in these bonds and the current bondholders for the PIGS are mostly high-risk investors -such as hedge funds. Defaulting on these will not cause the cataclysm our leaders fear.
I am delighted to hear that finally, people are talking of the IMF taking control of this process, instead of this Frankfurt group which has grown up in recent months. The IMF has the expertise, the credibility (and with ECB support, the firepower) to fix these multiple crises. It will look at solving the problem and will not have to look over its shoulder at national bondholer interests or coalition partners. I hope this suggestion gathers momentum.
My father used to tell me that if you get the economics right the politics will look after itself. I have come over the years to invert this wisdom -once you get the politics right, the economics fall into line pretty quickly. We need to get rid of this dysfunctional system of politicians from other jurisdictions deciding what is economically best for the troubled countries. The IMF is no more democratic or accountable than the Frankfurt group, but at least their agenda is not set by bondholders or domestic elections. If they come in, then we can really start to work at putting all this horror behind us.
Showing posts with label EU. Show all posts
Showing posts with label EU. Show all posts
Wednesday, November 30, 2011
Eurozone crisis non-solutions
A broader mandate for the ECB is not just the most desirable resolution to this crisis -it is by now the only solution to the crisis.
The ongoing debate about the way forward to resolve the Eurozone crisis is being hampered by a series of non-solutions that are being flogged by different parties. These false solutions do not help with resolving the crisis, but instead reflect existing national bias'. It is a toxic brew of lazy thinking and flippancy.
I intend to address a few in turn. Eurobonds; closer budgetary scrutiny; treaty change.
EUROBONDS.
Many commentators have spoken for Eurobonds, claiming that they will extend the creditworthiness of the Eurozone as a whole to each country, allowing those currently locked out of the markets to borrow. There are well rehearsed and real problems with this, in particular, that it will reward the profligate at the expense of the prudent and encourage further bad behaviour. It will in fact return us to the same pattern of misaligned incentives that amplified the problem in the first place. This alone should be enough to rule this approach out of consideration (though Ireland, typically unsure what to do, is actually supporting this daftness), but it is moot as far as I'm concerned, because apart from the problems of agency -it just won't work.
The Eurobonds idea creates an ultra safe investment asset for MSs to sell, up to the value of 60% of their GDP. It also accepts that national bonds sold after this are potentially defaultable (though why it would be more acceptable for this to happen after common European debt has been issued as opposed to now is a bit of a mystery). As most of the troubled countries have existing debts far greater than 60% of GDP, as they borrow, they will be making their existing debts increasingly risky, and expendable. In effect, Eurobonds will put an end to national bonds, only Eurobonds will be sellable, and once troubled MSs have sold 60% of their GDP's worth of Eurobonds, they will be unable to issue national debt to refinance their remaining loans -we will be back to square one. Eurobonds are a red herring.
CLOSER BUDGETARY SCRUTINY
I am not opposed to closer European budgetary scrutiny. Indeed in Ireland, it would be refreshing to have any budgetary scrutiny at all. However, this plan will not help the current crisis. Firstly, it presupposes that the external controls on national budgets will prevent financial disasters such as happened in Ireland and Spain. Given the excellent fiscal status of both Spain and Ireland in the years running up to the crisis, it is difficult to see what budgetary scrutiny would have changed. Low debts, high surpluses -just what are we to believe budgetary scrutiny would have done? In Greece, the statistics were falsified to obscure the truth -what would scrutiny have achieved here? Indeed, the countries that have come through this crisis best are those which consistently ran deficits in the run up to the crisis. It may perform some political function to allow central European politicians sell the upcoming losses to their electorates, but it serves no real purpose in the current crisis. Closer budgetary scrutiny is a red herring.
TREATY CHANGE
Treaty change is quite impossible in a useful timeframe -furthermore, the ratification process will introduce a new aspect of uncertainty into an already volatile situation. In particular, the likelihood of the UK passing a referendum on closer economic cooperation with the dysfunctional Eurozone is remote. Significant treaty changes will lead us into a world of pitfalls that we must avoid. Treaty change is a red herring.
QUANTITATIVE EASING
I have been quite a fan of quantitative easing in the US and the UK. I have a long standing belief that a small amount of inflation is a very healthy thing as it prevents money hoarding and compels wealth to be invested productively and profitably. In short it prevents depressions. Quantitative easing involves the Central Bank printing money, and then using this new cash to purchase government debts. The new liquidity released into the system creates a stimulus and prevents deflation. In a highly leveraged economy (such as Ireland), deflation is the path to disaster.
Nonetheless, at present in the Eurozone, inflation is running at over 2%, so deflation is not a problem except in certain localities. This does not bode well for the consequences of QE.
However, this will not last for long as forced austerity is probably going to descend on the continent once national budgets are agreed in December. Inflation will likely tick downwards as austerity bites, and perhaps then Quantitative Easing can be used to ease the money supply and relieve the debts of Greece. Finally, it must be made clear that this is a once off, and we must convince markets, funds etc. that the next time there is a sovereign crisis in Europe, they will have to eat their losses. A first step towards this would be to prevent financial institutions from using sovereign bonds as Tier 1 capital. Increasing their risk exposure to these assets should concentrate minds.
However, that is not an end to it -Quantitative Easing poses particular problems in the Eurozone. As it is a common currency, all holders of Euros across the Eurozone will lose wealth as the supply of money expands, while all indebted persons will benefit from the reduction in the value of their debts, and the proceeds from this money printing will be used to relieve the national debts of just a handful of highly indebted countries (or probably only Greece). This is undoubtedly unfair. It rewards personal and national bad behaviour and could be seen to give encouragement to the profligate.
However, unlike the other solutions currently being discussed -it will work. It is not a red herring, it is a real solution, and therefore, for all its lack of appeal, I support this approach. Combined with a coordinated austerity drive to balance Eurozone budgets, Quantitative Easing will increase the money supply, relieve the debt burden of Greece cause only modest, controllable inflation and save the Euro.
The ongoing debate about the way forward to resolve the Eurozone crisis is being hampered by a series of non-solutions that are being flogged by different parties. These false solutions do not help with resolving the crisis, but instead reflect existing national bias'. It is a toxic brew of lazy thinking and flippancy.
I intend to address a few in turn. Eurobonds; closer budgetary scrutiny; treaty change.
EUROBONDS.
Many commentators have spoken for Eurobonds, claiming that they will extend the creditworthiness of the Eurozone as a whole to each country, allowing those currently locked out of the markets to borrow. There are well rehearsed and real problems with this, in particular, that it will reward the profligate at the expense of the prudent and encourage further bad behaviour. It will in fact return us to the same pattern of misaligned incentives that amplified the problem in the first place. This alone should be enough to rule this approach out of consideration (though Ireland, typically unsure what to do, is actually supporting this daftness), but it is moot as far as I'm concerned, because apart from the problems of agency -it just won't work.
The Eurobonds idea creates an ultra safe investment asset for MSs to sell, up to the value of 60% of their GDP. It also accepts that national bonds sold after this are potentially defaultable (though why it would be more acceptable for this to happen after common European debt has been issued as opposed to now is a bit of a mystery). As most of the troubled countries have existing debts far greater than 60% of GDP, as they borrow, they will be making their existing debts increasingly risky, and expendable. In effect, Eurobonds will put an end to national bonds, only Eurobonds will be sellable, and once troubled MSs have sold 60% of their GDP's worth of Eurobonds, they will be unable to issue national debt to refinance their remaining loans -we will be back to square one. Eurobonds are a red herring.
CLOSER BUDGETARY SCRUTINY
I am not opposed to closer European budgetary scrutiny. Indeed in Ireland, it would be refreshing to have any budgetary scrutiny at all. However, this plan will not help the current crisis. Firstly, it presupposes that the external controls on national budgets will prevent financial disasters such as happened in Ireland and Spain. Given the excellent fiscal status of both Spain and Ireland in the years running up to the crisis, it is difficult to see what budgetary scrutiny would have changed. Low debts, high surpluses -just what are we to believe budgetary scrutiny would have done? In Greece, the statistics were falsified to obscure the truth -what would scrutiny have achieved here? Indeed, the countries that have come through this crisis best are those which consistently ran deficits in the run up to the crisis. It may perform some political function to allow central European politicians sell the upcoming losses to their electorates, but it serves no real purpose in the current crisis. Closer budgetary scrutiny is a red herring.
TREATY CHANGE
Treaty change is quite impossible in a useful timeframe -furthermore, the ratification process will introduce a new aspect of uncertainty into an already volatile situation. In particular, the likelihood of the UK passing a referendum on closer economic cooperation with the dysfunctional Eurozone is remote. Significant treaty changes will lead us into a world of pitfalls that we must avoid. Treaty change is a red herring.
QUANTITATIVE EASING
I have been quite a fan of quantitative easing in the US and the UK. I have a long standing belief that a small amount of inflation is a very healthy thing as it prevents money hoarding and compels wealth to be invested productively and profitably. In short it prevents depressions. Quantitative easing involves the Central Bank printing money, and then using this new cash to purchase government debts. The new liquidity released into the system creates a stimulus and prevents deflation. In a highly leveraged economy (such as Ireland), deflation is the path to disaster.
Nonetheless, at present in the Eurozone, inflation is running at over 2%, so deflation is not a problem except in certain localities. This does not bode well for the consequences of QE.
However, this will not last for long as forced austerity is probably going to descend on the continent once national budgets are agreed in December. Inflation will likely tick downwards as austerity bites, and perhaps then Quantitative Easing can be used to ease the money supply and relieve the debts of Greece. Finally, it must be made clear that this is a once off, and we must convince markets, funds etc. that the next time there is a sovereign crisis in Europe, they will have to eat their losses. A first step towards this would be to prevent financial institutions from using sovereign bonds as Tier 1 capital. Increasing their risk exposure to these assets should concentrate minds.
However, that is not an end to it -Quantitative Easing poses particular problems in the Eurozone. As it is a common currency, all holders of Euros across the Eurozone will lose wealth as the supply of money expands, while all indebted persons will benefit from the reduction in the value of their debts, and the proceeds from this money printing will be used to relieve the national debts of just a handful of highly indebted countries (or probably only Greece). This is undoubtedly unfair. It rewards personal and national bad behaviour and could be seen to give encouragement to the profligate.
However, unlike the other solutions currently being discussed -it will work. It is not a red herring, it is a real solution, and therefore, for all its lack of appeal, I support this approach. Combined with a coordinated austerity drive to balance Eurozone budgets, Quantitative Easing will increase the money supply, relieve the debt burden of Greece cause only modest, controllable inflation and save the Euro.
Wednesday, October 5, 2011
Plan A is a sham
Since my previous entry (Final Fantasy), it has become something of an orthodoxy that the problem is not confined to just the periphery Eurozone, and in fact all countries (US included) must now start making real efforts to balance their books.
But the problems with the official line go deeper than this. Our current plan, is for the Eurozone countries to collectively borrow money and lend it to the weakest countries (Greece, ireland and Portugal), while structural and fiscal reforms take place. A classic international bailout -Plan A. This was always going to be a difficult plan that needed commitment in word and deed from both the net borrowers and the net lenders. However, it has received little from either. Now, with the downgrade of Italy's credit rating, it is no longer a viable plan.
The great kerfuffle last week at Germany's approval of the 2nd Greek bailout package misses the point completely. That Germany has agreed, at the 11th hour, to supporting Greece is no longer a useful decision. While the Germans (and others too it must be said) dithered and protested at Plan A, Italy's credit rating was downgraded, and now she is rapidly losing access to the markets. It now seems unlikely (although this reality has yet to hit home) that the Italians are going to be able to fund their portion of the 2nd Greek bailout. As a large country, their contribution is indispensible to the success of Plan A. But realistically, the idea that Italy is going to borrow money at 8%+ and then lend it to Greece at 3% while trying to reign in their own deficit is a fairy tale.
It now seems that Plan A is unworkable, it just hasn't sunken in yet. Plan B is going to be more chaotic. It could take the form of countries exiting the currency union (harmful to banks, diplomacy), a global bailout of indebted eurozone countries (unlikely), common borrowing (politically unpopular and diplomatically undesirable) or more robust action from the European institutions to support the currency.
Personally, I think Quantitative Easing is the way to go. This has been anathema to the Eurozone until now because of cultural issues about inflation -but inflation is the very thing we need. Inflation punishes money hoarders, relieves the indebted, forces the wealthy to invest/spend. It is the principle tool FDR used to lift America out of Depression and it is IMO the best solution to our current problems. If the Euro-area inflation rate was artificially boosted to around 4-5%, we would quickly see convergence between the core and the periphery. We would also see a lift in economic activity as money hoarders would be forced to spend or invest. Finally, it would deleverage the economy, relieving the indebted, the banks and even the sovereigns. Quantitative easing has the added advantage of also providing a large amount of cash as ready ammunition for the central bank to use to fight financial fires for a few years.
It will be 3 years next week since I advocated the use of inflation to fight the financial crisis. The UK and the US have followed my advice and recovered from what were far worse starting positions than Europe. However, paralysed by cultural sensitivities, Europe has refused to take its medicine. But now, the alternatives have become so terrible that I feel sure our next step (Plan B) will be Quantitative easing and inflation. Once we get on with it, we will start to wonder why we made such a fuss about it in the first place and caused so much hardship to Europeans. Stupidity, I believe.
But the problems with the official line go deeper than this. Our current plan, is for the Eurozone countries to collectively borrow money and lend it to the weakest countries (Greece, ireland and Portugal), while structural and fiscal reforms take place. A classic international bailout -Plan A. This was always going to be a difficult plan that needed commitment in word and deed from both the net borrowers and the net lenders. However, it has received little from either. Now, with the downgrade of Italy's credit rating, it is no longer a viable plan.
The great kerfuffle last week at Germany's approval of the 2nd Greek bailout package misses the point completely. That Germany has agreed, at the 11th hour, to supporting Greece is no longer a useful decision. While the Germans (and others too it must be said) dithered and protested at Plan A, Italy's credit rating was downgraded, and now she is rapidly losing access to the markets. It now seems unlikely (although this reality has yet to hit home) that the Italians are going to be able to fund their portion of the 2nd Greek bailout. As a large country, their contribution is indispensible to the success of Plan A. But realistically, the idea that Italy is going to borrow money at 8%+ and then lend it to Greece at 3% while trying to reign in their own deficit is a fairy tale.
It now seems that Plan A is unworkable, it just hasn't sunken in yet. Plan B is going to be more chaotic. It could take the form of countries exiting the currency union (harmful to banks, diplomacy), a global bailout of indebted eurozone countries (unlikely), common borrowing (politically unpopular and diplomatically undesirable) or more robust action from the European institutions to support the currency.
Personally, I think Quantitative Easing is the way to go. This has been anathema to the Eurozone until now because of cultural issues about inflation -but inflation is the very thing we need. Inflation punishes money hoarders, relieves the indebted, forces the wealthy to invest/spend. It is the principle tool FDR used to lift America out of Depression and it is IMO the best solution to our current problems. If the Euro-area inflation rate was artificially boosted to around 4-5%, we would quickly see convergence between the core and the periphery. We would also see a lift in economic activity as money hoarders would be forced to spend or invest. Finally, it would deleverage the economy, relieving the indebted, the banks and even the sovereigns. Quantitative easing has the added advantage of also providing a large amount of cash as ready ammunition for the central bank to use to fight financial fires for a few years.
It will be 3 years next week since I advocated the use of inflation to fight the financial crisis. The UK and the US have followed my advice and recovered from what were far worse starting positions than Europe. However, paralysed by cultural sensitivities, Europe has refused to take its medicine. But now, the alternatives have become so terrible that I feel sure our next step (Plan B) will be Quantitative easing and inflation. Once we get on with it, we will start to wonder why we made such a fuss about it in the first place and caused so much hardship to Europeans. Stupidity, I believe.
Friday, July 22, 2011
A plan to save Euros
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/123978.pdf
Well, I certainly can't remember a more anticipated EC. But ultimately I'm disappointed with this document.
The big headline outcomes are a new bailout for Greece, voluntary private sector involvement in Greece's debt crisis is to be pursued, extension of the loan-terms for all 3 program countries, as well as a loosening of EFSF rules to allow it provide support to countries that are not in a program.
Extending the terms of the loans was regretfully necessary. The idea that the program countries will be going back to the markets in the next couple of years has lost all credibility. This much I concede was unavoidable.
The involvement of the private sector is a good idea (if it is done with a moderate hand). European Governments (and especially the program countries) are financially exhausted and it is important to ease the pressure somewhat by shifting some of this assumed responsibility back to the original risk-takers. Besides, after 4 years of turbulence, anyone still holding Greek bonds is probably a speculator anyway and it is highly unlikely that any truly fragile financial institution is still exposed to a Greek default. We will probably find that a moderate default will have very little financial impact. However, I find the part of the document dealing with private sector involvement vague. It states that private sector involvement will be voluntary, citing willingness on the parts of investors to roll over Greek debts. But it is doubtful that they are volunteering to do anything greater than this. Rolling over debts is well and good, but frankly it doesn't really relieve the Member States.
However, my greatest problem with the deal is in its loosening of the rules of the EFSF/ESM. The idea of lending to countries that are not in a recovery program seems obviously silly -all the expense and none of the reform -who could argue that's a good idea? A reform program is the necessary exit strategy from providing support to Member States. It is indispensible. If Member States have to be bailed out, then we need to map a route for them to stand on their own feet again, or else we will end up with a proper transfer union.
I doubt that will ever be allowed to happen, neither the lenders nor the borrowers want it. So it appears to me that this is some sort of a PR stunt to reassure markets that IT and ES will be allowed access EFSF funding without having the humiliation or terms of a bailout. These countries may gain some short-term, pre-crisis credibility because of the access to credit this brings, but noone could argue this would be a good idea if we decided to do it in practice. Not only would we be sacrificing the reforms that rightly come with access to bailout money, but this change could (and I stress could) create expectations of the EFSF being used as a mechanism for some sort of transfer union.
The whole idea of the ESM was to create a mini-IMF for the Eurozone, bailing out countries on the condition of mending their credit positions. This proposal nominally drifts way beyond this. This is not rehabilitation, it is artificially cheap credit -the source of all our woes. Taxpayers may be willing to assist their neighbours to turn around their situations, but they will quickly squash any notion of paying for the indebted countries to carry on with business as usual. Frankly I'm surprised it has been even made it onto this document.
There is also provision for the ESM to dabble in secondary markets. This could be a very useful policy tool if it is used to involve the private sector in debt reductions, but seemingly it is only permissible with the agreement of each MS and the ECB. One must wonder then why it was necessary to include it in this document if it can only be used when everyone is in agreement -more spindoctoring?
Finally, the new Greek bailout. Unavoidable in my opinion, but it has to be properly funded. While the document promises big on the involvement of the private sector, I have already expressed some doubts about this. I will go further. The document also calls on the IMF to participate in the new bailout. I do not think it is incredible to suspect that the IMF may decline to involve itself without more private sector involvement. That would be a quite incredible humiliation for everyone involved, but right now, I would not rule it out.
So my verdict is that the only people that got what they wanted were the Irish. The concessions on our interest rate and also on the term of our loans, alongside the modest burning of financial bondholders, fiscal austerity and the gradual recapitalisation of our banks means that Ireland is now in a much better position than 3 years ago. Though it is not smooth sailing from here, it is likely that Ireland will begin to make a recovery in the next 2 years and recover strongly soon after. Doubtless the banks will still require more capital (even though we have sworn on our honour that we tested them properly this time), but the whole mess seems more manageable these days. Economic reforms scheduled under our bailout deal will go further to getting us out of Dodge.
But the concessions to the program countries on the terms of their loans, does not in any way compensate for the lack of hard details on the Greek bailout, or the fudging of the role of the EFSF. Though markets have reacted well today, I am not satisfied with this deal and fear it is based substantially on wishful thinking and fuzzy economics. Frankly, we need to cluck at this text and tell them all to try again.
Markets are not the measure of these deals. Markets rise and fall on the self-interest of investors. Rising markets in response to more public stimulus is unsurprising -not a true yardstick of the effectiveness of policy.
TEXT of the Deal:
Well, I certainly can't remember a more anticipated EC. But ultimately I'm disappointed with this document.
The big headline outcomes are a new bailout for Greece, voluntary private sector involvement in Greece's debt crisis is to be pursued, extension of the loan-terms for all 3 program countries, as well as a loosening of EFSF rules to allow it provide support to countries that are not in a program.
Extending the terms of the loans was regretfully necessary. The idea that the program countries will be going back to the markets in the next couple of years has lost all credibility. This much I concede was unavoidable.
The involvement of the private sector is a good idea (if it is done with a moderate hand). European Governments (and especially the program countries) are financially exhausted and it is important to ease the pressure somewhat by shifting some of this assumed responsibility back to the original risk-takers. Besides, after 4 years of turbulence, anyone still holding Greek bonds is probably a speculator anyway and it is highly unlikely that any truly fragile financial institution is still exposed to a Greek default. We will probably find that a moderate default will have very little financial impact. However, I find the part of the document dealing with private sector involvement vague. It states that private sector involvement will be voluntary, citing willingness on the parts of investors to roll over Greek debts. But it is doubtful that they are volunteering to do anything greater than this. Rolling over debts is well and good, but frankly it doesn't really relieve the Member States.
However, my greatest problem with the deal is in its loosening of the rules of the EFSF/ESM. The idea of lending to countries that are not in a recovery program seems obviously silly -all the expense and none of the reform -who could argue that's a good idea? A reform program is the necessary exit strategy from providing support to Member States. It is indispensible. If Member States have to be bailed out, then we need to map a route for them to stand on their own feet again, or else we will end up with a proper transfer union.
I doubt that will ever be allowed to happen, neither the lenders nor the borrowers want it. So it appears to me that this is some sort of a PR stunt to reassure markets that IT and ES will be allowed access EFSF funding without having the humiliation or terms of a bailout. These countries may gain some short-term, pre-crisis credibility because of the access to credit this brings, but noone could argue this would be a good idea if we decided to do it in practice. Not only would we be sacrificing the reforms that rightly come with access to bailout money, but this change could (and I stress could) create expectations of the EFSF being used as a mechanism for some sort of transfer union.
The whole idea of the ESM was to create a mini-IMF for the Eurozone, bailing out countries on the condition of mending their credit positions. This proposal nominally drifts way beyond this. This is not rehabilitation, it is artificially cheap credit -the source of all our woes. Taxpayers may be willing to assist their neighbours to turn around their situations, but they will quickly squash any notion of paying for the indebted countries to carry on with business as usual. Frankly I'm surprised it has been even made it onto this document.
There is also provision for the ESM to dabble in secondary markets. This could be a very useful policy tool if it is used to involve the private sector in debt reductions, but seemingly it is only permissible with the agreement of each MS and the ECB. One must wonder then why it was necessary to include it in this document if it can only be used when everyone is in agreement -more spindoctoring?
Finally, the new Greek bailout. Unavoidable in my opinion, but it has to be properly funded. While the document promises big on the involvement of the private sector, I have already expressed some doubts about this. I will go further. The document also calls on the IMF to participate in the new bailout. I do not think it is incredible to suspect that the IMF may decline to involve itself without more private sector involvement. That would be a quite incredible humiliation for everyone involved, but right now, I would not rule it out.
So my verdict is that the only people that got what they wanted were the Irish. The concessions on our interest rate and also on the term of our loans, alongside the modest burning of financial bondholders, fiscal austerity and the gradual recapitalisation of our banks means that Ireland is now in a much better position than 3 years ago. Though it is not smooth sailing from here, it is likely that Ireland will begin to make a recovery in the next 2 years and recover strongly soon after. Doubtless the banks will still require more capital (even though we have sworn on our honour that we tested them properly this time), but the whole mess seems more manageable these days. Economic reforms scheduled under our bailout deal will go further to getting us out of Dodge.
But the concessions to the program countries on the terms of their loans, does not in any way compensate for the lack of hard details on the Greek bailout, or the fudging of the role of the EFSF. Though markets have reacted well today, I am not satisfied with this deal and fear it is based substantially on wishful thinking and fuzzy economics. Frankly, we need to cluck at this text and tell them all to try again.
Markets are not the measure of these deals. Markets rise and fall on the self-interest of investors. Rising markets in response to more public stimulus is unsurprising -not a true yardstick of the effectiveness of policy.
TEXT of the Deal:
Greece:
1. We welcome the measures undertaken by the Greek government to stabilize public finances
and reform the economy as well as the new package of measures including privatisation
recently adopted by the Greek Parliament. These are unprecedented, but necessary, efforts to
bring the Greek economy back on a sustainable growth path. We are conscious of the efforts
that the adjustment measures entail for the Greek citizens, and are convinced that these
sacrifices are indispensable for economic recovery and will contribute to the future stability
and welfare of the country.
2. We agree to support a new programme for Greece and, together with the IMF and the
voluntary contribution of the private sector, to fully cover the financing gap. The total official
financing will amount to an estimated 109 billion euro. This programme will be designed,
notably through lower interest rates and extended maturities, to decisively improve the debt
sustainability and refinancing profile of Greece. We call on the IMF to continue to contribute
to the financing of the new Greek programme. We intend to use the EFSF as the financing
vehicle for the next disbursement. We will monitor very closely the strict implementation of
the programme based on the regular assessment by the Commission in liaison with the ECB
and the IMF.
3. We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum
extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a
grace period of 10 years. In this context, we will ensure adequate post programme monitoring.
We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments
facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost. We
also decided to extend substantially the maturities of the existing Greek facility. This will be
accompanied by a mechanism which ensures appropriate incentives to implement the
programme.
4. We call for a comprehensive strategy for growth and investment in Greece. We welcome the
Commission’s decision to create a Task Force which will work with the Greek authorities to
target the structural funds on competitiveness and growth, job creation and training. We will
mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek
economy. Member States and the Commission will immediately mobilize all resources
necessary in order to provide exceptional technical assistance to help Greece implement its
reforms. The Commission will report on progress in this respect in October.
5. The financial sector has indicated its willingness to support Greece on a voluntary basis
through a menu of options further strengthening overall sustainability. The net contribution of
the private sector is estimated at 37 billion euro.
underpin the quality of collateral so as to allow its continued use for access to Eurosystem
liquidity operations by Greek banks. We will provide adequate resources to recapitalise Greek
banks if needed.
1 Credit enhancement will be provided to 1
debt buy back programme will contribute to 12.6 billion euro, bringing the total to 50 billion
euro. For the period 2011-2019, the total net contribution of the private sector involvement is
estimated at 106 billion euro.
Taking into account the cost of credit enhancement for the period 2011-2014. In addition, a Private sector involvement:
6. As far as our general approach to private sector involvement in the euro area is concerned, we
would like to make it clear that Greece requires an exceptional and unique solution.
7. All other euro countries solemnly reaffirm their inflexible determination to honour fully their
own individual sovereign signature and all their commitments to sustainable fiscal conditions
and structural reforms. The euro area Heads of State or Government fully support this
determination as the credibility of all their sovereign signatures is a decisive element for
ensuring financial stability in the euro area as a whole.
Stabilization tools:
8. To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to
increase their flexibility linked to appropriate conditionality, allowing them to:
- act on the basis of a precautionary programme;
- finance recapitalisation of financial institutions through loans to governments including
in non programme countries ;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the
existence of exceptional financial market circumstances and risks to financial stability
and on the basis of a decision by mutual agreement of the EFSF/ESM Member States,
to avoid contagion.
We will initiate the necessary procedures for the implementation of these decisions as soon as
possible.
9. Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising
to euro area Member States from their guarantees to the EFSF.
Fiscal consolidation and growth in the euro area:
10. We are determined to continue to provide support to countries under programmes until they
have regained market access, provided they successfully implement those programmes. We
welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate
our strong commitment to the success of these programmes. The EFSF lending rates and
maturities we agreed upon for Greece will be applied also for Portugal and Ireland. In this
context, we note Ireland's willingness to participate constructively in the discussions on the
Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured
discussions on tax policy issues in the framework of the Euro+ Pact framework.
11. All euro area Member States will adhere strictly to the agreed fiscal targets, improve
competitiveness and address macro-economic imbalances. Public deficits in all countries
except those under a programme will be brought below 3% by 2013 at the latest. In this
context, we welcome the budgetary package recently presented by the Italian government
which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in
2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and
structural area. As a follow up to the results of bank stress tests, Member States will provide
backstops to banks as appropriate.
12. We will implement the recommendations adopted in June for reforms that will enhance our
growth. We invite the Commission and the EIB to enhance the synergies between loan
programmes and EU funds in all countries under EU/IMF assistance. We support all efforts to
improve their capacity to absorb EU funds in order to stimulate growth and employment,
including through a temporary increase in co-financing rates.
Economic governance:
13. We call for the rapid finalization of the legislative package on the strengthening of the
Stability and Growth Pact and the new macro economic surveillance. Euro area members will
fully support the Polish Presidency in order to reach agreement with the European Parliament
on voting rules in the preventive arm of the Pact.
14. We commit to introduce by the end of 2012 national fiscal frameworks as foreseen in the
fiscal frameworks directive.
15. We agree that reliance on external credit ratings in the EU regulatory framework should be
reduced, taking into account the Commission's recent proposals in that direction, and we look
forward to the Commission proposals on credit ratings agencies.
16. We invite the President of the European Council, in close consultation with the President of
the Commission and the President of the Eurogroup, to make concrete proposals by October
on how to improve working methods and enhance crisis management in the euro area.. COUNCIL OF
THE EUROPEAN UNION
Brussels, 21 July 2011
STATEMENT BY THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA
AND EU INSTITUTIONS
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial
stability of the euro area as a whole and its Member States. We also reaffirm our determination to
reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the
sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the
rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro
is based on sound economic fundamentals. But the challenges at hand have shown the need for
more far reaching measures.
Today, we agreed on the following measures:
Thursday, July 14, 2011
Paying the Piper
I am a europhile. I am committed to good relations between European neighbours, as well as cooperation in areas of mutual benefit -especially the Single Market and all of its offshoots.
However, I have never been seized by the Euro. Though I did not really comprehend the difficulties that could arise from a common currency (now laid bare for all to see), there was enough negative commentary to assure me that it was far from a secure venture. Most of all, the benefits of having a stable currency regime always seemed overhyped and the whole thing seemed to have been thrown together with limited vision for how it would work in practice.
Which brings us to the present day. I am living in a country which has really borne an incredible burden on behalf of this common currency. When the Irish banks began to implode, the ECB (a European institution with a mandate to safeguard Eurozone interests) forbade the collapse of any banks in Ireland -regardless of how insolvent they were. The cost of the necessary support however was to come from the Irish State and Irish taxpayers.
While I have no objection to the ECB looking after the European interest and having the power to make decisions in the interest of the currency -this becomes problematic when individual Member States end up paying the bill (in this case -a disastrous bill which has plunged us into 3 years of depression with no recovery in sight). It seems obvious that the people who make the decisions should bear the consequences. If the Eurozone has the power to make us support the banks, then the Eurozone must pay for this support. If Ireland must pay for the bailouts then the Irish authorities must have the power to decide their own policy. But instead we have a clearly broken model where the ECB decides what's best for the eurozone and individual Member States (in this case, one of the smallest Member States) bear the burden.
Since we have been forced to seek IMF/EZ assistance, we have heard a great deal from Eurozone media-hacks about "he who pays the piper calls the tune" -i.e. swingeing reforms and cuts must follow from their assistance. Apart from the bloody-minded arrogance entailed in this dismissal of our quite extraordinary cuts to vital services, there is a fundamental hypocricy. We were never allowed to call the tune when bailing out the banks, but we were forced to pay. Now, in our national bailout talks it is the same people calling the tune, and it is debatable how much they are really contributing to our recovery.
It is impossible for us to leave the Eurozone right now, but once recovery happens (if it ever does), we should leave at the first opportunity. I am still a committed europhile and wish us many years of happy cooperation with our european partners in the EU proper -but the Eurozone is not a cooperative, it is clearly a disfunctional organisation, and no place for a small Member State.
All this austerity has been for nothing.
However, I have never been seized by the Euro. Though I did not really comprehend the difficulties that could arise from a common currency (now laid bare for all to see), there was enough negative commentary to assure me that it was far from a secure venture. Most of all, the benefits of having a stable currency regime always seemed overhyped and the whole thing seemed to have been thrown together with limited vision for how it would work in practice.
Which brings us to the present day. I am living in a country which has really borne an incredible burden on behalf of this common currency. When the Irish banks began to implode, the ECB (a European institution with a mandate to safeguard Eurozone interests) forbade the collapse of any banks in Ireland -regardless of how insolvent they were. The cost of the necessary support however was to come from the Irish State and Irish taxpayers.
While I have no objection to the ECB looking after the European interest and having the power to make decisions in the interest of the currency -this becomes problematic when individual Member States end up paying the bill (in this case -a disastrous bill which has plunged us into 3 years of depression with no recovery in sight). It seems obvious that the people who make the decisions should bear the consequences. If the Eurozone has the power to make us support the banks, then the Eurozone must pay for this support. If Ireland must pay for the bailouts then the Irish authorities must have the power to decide their own policy. But instead we have a clearly broken model where the ECB decides what's best for the eurozone and individual Member States (in this case, one of the smallest Member States) bear the burden.
Since we have been forced to seek IMF/EZ assistance, we have heard a great deal from Eurozone media-hacks about "he who pays the piper calls the tune" -i.e. swingeing reforms and cuts must follow from their assistance. Apart from the bloody-minded arrogance entailed in this dismissal of our quite extraordinary cuts to vital services, there is a fundamental hypocricy. We were never allowed to call the tune when bailing out the banks, but we were forced to pay. Now, in our national bailout talks it is the same people calling the tune, and it is debatable how much they are really contributing to our recovery.
It is impossible for us to leave the Eurozone right now, but once recovery happens (if it ever does), we should leave at the first opportunity. I am still a committed europhile and wish us many years of happy cooperation with our european partners in the EU proper -but the Eurozone is not a cooperative, it is clearly a disfunctional organisation, and no place for a small Member State.
All this austerity has been for nothing.
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