terça-feira, novembro 30, 2010

The Euro Stability Pact, the Single Currency and the Single Market

  1. As a rule, countries don’t have “liquidity problems” unless they have “balance of payments problems” left to fester, ignored and unattended. And countries don’t have persistent “balance of payments problems” unless they have underlying structural trade problems, X-M competitiveness issues, papered over by free flowing credit, usually from the surplus countries themselves, directly, or through hapless third-party fund recyclers. 
  2. The current problems within the “Single Currency” are rooted squarely in the “Single Market”, which exposed small fragile economies to the full competitive prowess with larger export-intensive economies, and permitted the accumulation of enormous credit-based (bilateral) trade deficits.  The 10-year accumulated bilateral trade deficit Portugal-Germany accounts for nearly 20% of Portugal's external debt.  If you are continuing to export on credit, it should come as no surprise when your customers are unable to pay.  
  3. Saving the EURO as the Single Currency will certainly require rebalancing the Single Market and the intra-Eurozone trade and capital flows. 
  4. The current bond market flux is evidence of the adjustment difficulty of finding some sustainable mid-point between 100% convergence, all Eurozone debt is low-risk, and 100% divergence, that is each Eurozone country can be picked off one at time.

    The answer will fall somewhere in between.

    Thus, financial markets are likely to remain volatile, until the EU resolves the underlying balance of payments problems of the unbalanced “Single Market”, not just the symptomatic stresses within the “Single Currency”.  Among other things this means protecting domestic retail depositors in the deficit countries rather than cross-border professional investors in the surplus countries, who are, even   now, enjoying the benefits of moral hazard.  
  5. If the existing international cross-border investors have made pricing mistakes in financing some of the borrowers in the past, they can surely expect to take losses.  
  6. The mistake of the proposed Euro Stabillity Mechanism may be to apply the threat of losses to New Money , issued from 2013 on, contrary to the usual practices of corporate and national debt restructurings.

    In a debt workout situtation, the "haircut" normally applies to existing debt, (those were the creditors who made the mistake of lending too much), while the New Money Debt should be highly conditional in terms of measures but generally  favoured  and senior to the existing debt.

    That's the way I remember it anyway, from the Latin American Debt Crisis of the 1980's, when large international banks recycled petro-dollars from the OPEC oil-exporting surplus countries to the net-importers in Latin America. 
  7. Reportppplusofonia | November 29 2:04pm | Permalink