The difference this time, comparing the Eurozone problems to earlier Latin American Debt crises for example, is that there has been no creditor stand-still. Thus the original commercial investors have used their political and market power to push their riskier exposures onto official creditors, to the ECB through bank refinancing and secondary market bond purchases and to Central Banks through the TARGET system, and thus to their respective taxpayers. These new ECB and Central Bank exposures to the net borrrowing countries are a direct reflection of the need to finance the net exports of the net surplus countries and to repay existing debt.
This “nationalization” of the intra-Eurozone cross-border exposure has certainly increased the burden for European taxpayers but has yet to provide any real debt relief to the net borrowers in Greece and Portugal. There has been no real "burden sharing" between creditors and borrowers.
Since the Euro taxpayers are being asked to bear the costs of excessive lending, a better solution would be to use such taxpayer funds to provide interest rate subsidies to bridge the gap between the returns required by real cash investors and the interest rates that would be sustainable from the perspective of the borrowers, but only for truly long term direct exposure (20+ years).
Lowering the interest bill is an essential step in debt workout, together through the reprofiling of the repayment schedules of existing debt. Debt discounts could also help to reduce the debt stock, at great reputation costs and loss of market access, but it would do little to reduce the new debt need. Registered Credit Default Swap volumes are miniscule (only about 1% of external debt in the case of Greece, so CDS pricing is almost a curiosity.
In addition, if is to survive, the Eurozone needs to develop new balance-of-payments adjustment instruments. Argentina and Mexico tried, unsucessfully, to keep their exchange rates fixed, but none of these countries are good examples for the current Eurozone problems, because they all devalued in the end. For someone with dollars, the shopping was great on Calle Florida after an exchange rate storm.
There seem to be no case studies yet of successful external adjustments within a Single Market or Single Currency context. Thus, the IMF needs to reinvent the wheel on bailouts, or better yet, find a sextant, because we are sailing into uncharted policy territory. When dealing with intra-Eurozone balance-of-payments adjustments, the usual IMF prescriptions (devaluation, tariffs, interest rate increases, capital controls) must now stay in the drawer.
It must be evident to all that small-country fiscal and incomes policies cannot be expected do ALL the heavy lifting needed for rebalancing the Eurozone.
Another clear lesson thus far is that the Single Currency requires maintainging Current Account deficits/surpluses much lower, because it does away with most of the usual adjustment tools.
We also know that existing creditors, net exporters and their banks, will always use their considerable political and market power to resist absorbing a "fair share" any of the sacrifices for their imprudent lending decisions. The excessive sovereign debt levels are themselves a clear example of the failure of market discipline. Fully protecting existing creditors from "sharing the sacrifice" in the name of "applying market-based solutions" would further contribute to "moral hazards" of new and untold proportions.
Mariana ABRANTES de Sousa
PPP LusofoniaPORTUGAL
See also
One-armed midgets can't guarantee Eurozone rebalancing
Greece and Portugal reduce Current Account CAB deficits
There is no virgin debt, there's always bilateral responsability for trade deficits
Adjustment effort to focus on blance of payments
Soluções para a crise do sobre-endividamento
DeGrauwe on Euro and Financial Crisis, 1998
Stockholm principles and best practices in public debt management
Proposal for Debt Reduction without Default
Gaming Maastricht: Capping official budget deficits, which reflect internal imbalances, is proves worse than useless if current account external imbalances are allowed to balloon on the back of overly easy cross-border credit and hot money capital flows.
We will have to have a political solution, rather than a pseudo-market solution
ResponderEliminarDear Marianna,
ResponderEliminarthe imprudent lending conditions were so permitted by the supervising authorities in the eurozone. You cannot blame the lender if the system allows him to borrow on the same cost as a much more credit-worthy borrower (Greece like Germany). This was not a private sector loan that one could do his own diligence. It based on the premise that all eurozone lending carries the same risk. Therefore, the onus is on elected leaderships to solve the problem and not on banks to shoulder the cost of sovereign defaults. Best, Vassilis
Most of the imprudent lending was mostly done by private credtiors, at least until 2008-9, with mis-priced yields.
ResponderEliminarRecent private sector lenders are getting a substantial risk-premium.
CDS volumes are so low, that CDS writers should not be a major interest group.
Official creditors, which include the ECB, the CBs, the EIB seem to have increased exposure ore recently.
The ECB indirect lending through the bank liquidity facilities was mostly since 2010.
The Central Banks allowed Target imbalances to jump from smallish amounts at end of 2007 to around €350 billion now.
Why does no one make a comparison with the bankrupt states of the USA? I should imagine that the level of the debt of California is bigger than that of Greece, Ireland and Portugal combined but I suppose it is a much smaller percentage of GDP and the problem is more political than economic.
ResponderEliminaryou have clearly adressed the issue in your article. I hope a lot of people will read it.
ResponderEliminarMy only and main comment is, that the issue of current account imbalances in the EURO-Zone is identical with the issue under the Gold-Standard or a fixed exchange rate system (in my definition a fixed exchange rate system is a system, in which exchange rates will not be changed in case of trouble). Therefore, adjustment mechanisms have been discussed during the last two centuries and libraries are full of books about it. In particular John Maynhard Keynes discussed the problem after the Worldwar I under the headline "Transfer Problem" in connection with the Versaille Pease Treaty (the economnic consequences of peace). In that time they discussed mainly the question, whether price adjustments are enough or whether also the real amounts of imports and exports have to be adjusted and with which consequenses for the exporting and importing countries. In my view nearly everything had been discussed also in that time.
If a country needs to repay external Debt, it must generate trade surpluses. This requires contraction of domestic demand, but the austerity measures can only tighten so far.
ResponderEliminarThe difference is that debt burden was politically IMPOSED on Germany by the Versailles Peace Treaty, while the current peripheral Eurozone debt was accumulated voluntarily with the commercial complicity of international creditors, whose easy credit would have frustrated even the most prudent financial management.
Even now, it is too easy to finance net imports within the Eurozone, particularly the imports of non-essential consumer durables, from iPads to BMWs.
Trade deficits are much more dangerous than budget deficits, but they get much less attention.
See IMF's 14 recommendations to the Eurozone on financial crisis management
ResponderEliminar6. Strengthening the banking sector is a top priority.
7. It will be important to get deleveraging right.
...A conditional term funding facility for private illiquid assets, possibly operated by the ECB but with the explicit backing of euro area sovereigns (e.g., via the EFSF), would smooth the transition, while protecting the ECB’s independence and flexibility and reinforcing the incentives to tackle the banking problems at their root.
http://www.imf.org/external/np/ms/2011/062011.htm
US taxpayer says:
ResponderEliminarYes, do please wind down the GSEs...
Why do US banks need Fannie and Freddie to do their mortgage credit analyses for them?
Credit underwriting is a core banking skill, it need not be outsourced, to the rating agencies, the taxpayers...
Bankers are being paid rather enough to do their own credit homework, instead they have been doing "lending by numbers": If a potential borrower has a AAA rating some non-money-down agency, it must be good for it.
If you can't do credit, do get out of the banking/intermediation business, so we, the taxpayers, won't have to keep paying for your trial-and-error mistakes.
What are CDS good for really?
ResponderEliminarHas any sovereign CDS paid out?
If you need to buy CDS coverage you shouldn't be lending to start with.
If you can't take the loss, stay out of banking.
If you can't take the heat stay out of the kitchen.
Fred Goodwin, que levou o banco RBS a perder cerca de 45 mil milhões de libras, foi despojado do titulo honorífico que recebeu em 2004.
ResponderEliminarQue pouca vergonha!
ResponderEliminarNem mais um tostão do contribuinte para o BPN, muito menos os 600 milhões de euros de que falam.
Fechar o BPN já.
O BdP não sendo o único, é o principal responsavel pelos (+-)5000M€ que foram confiscados aos contribuintes portugueses para enterrar no cemitério que dá pelo nome de BPN e do qual todos os dias aparecem mais coveiros.
ResponderEliminarPor isso, poderia e deveria, durante os anos que fossem necessários, amortizar essa dívida aos contribuintes, em vez de se autopremiarem com a isenção de austeridade que vergonhosamente reivindicam como um direito exclusivo.
Yes, banks are always at the center of any debt crisis as they intermediate between the surplus/savers and the deficit/borrowers. If the intermediating banks do too much ("recycling of petrodollars" as it was called in the 1970s), or too poor quality (financing imports of consumer products and armaments and other "subprime" lending), then it is these creditors that must take a good portion of the sacrifice.
ResponderEliminarWho's taking the hit for Europe's "subprime" lending, by banks that reached leverage ratios of 49X?
Banking is a highly regulated industry, so we must look beyond the banks to the NCBs, their (im)prudential regulators.
Moral hazard can occur when the credit bubble turns into a crash, if the taxpayer picks up the bill.
ResponderEliminarBut the taxpayer can absorb some of the sacrifice that should be borne by the creditors as well as the sacrifice that should be borne by the borrowers.
Since debtors are usually steamrolled one way or another, moral hazard is more likely to occur on the creditor side.
With so much money to recycle, German banks and investors have been implicated in a number of bubbles:
ResponderEliminar- the dot.com bubble
- the US subprime mortgage bubble
- the Eurozone periphery bubble
Will the Bundesbank reign them in?
The regulatory distinctions of risk-weighted assets were anything but "fine", they proved to be grossly oversimplified, promoting by "banking by numbers".
ResponderEliminarThe creditors who followed the "Cook ratio" blindly, got burned.
Unless they managed to mutualize their bad credit decisions in time, getting paid back out of ECB and other collectivized official bailouts.
If there's one thing worse than having NO regulation, it is to have the wrong and overly simplistic or rigid regulation. Back in the days before Basel and the Cook ratio, correspondent bankers carried out in-depth analyses of their correspondent banks and their regulatory environment and set their interbank credit lines correspondingly.
ResponderEliminarBasel proved to be a very dull instrument which promoted over-exposure to certain risks and over-leveraging of creditor banks to over 40X or 50X.
Relying excessively on Basel and on external credit ratings, many creditors and investors turned to "banking by numbers" making credit decisions while sitting in front of a computer, without the benefit of real in-house credit analysis or borrower site visits.
Who needs a bailout now?
A bank crisis can be averted with relatively small amounts of money, if the regulatory authority does not do the wrong thing - giving the banks massive and unnecessary amounts of money; but only supplies a drip feed of liquidity and guarantees the deposits. No panic is necessary - if the regulatory authorities know what to do.
ResponderEliminarWhen, and if, this European debt and banking crisis is ever behind us, after countless articles and a couple of hundred doctoral theses, who's name will be mud?
ResponderEliminarThe name of the financial regulators, national and European central banks which allowed cross-border so-called investors, aka speculators, to stray so far out of their core business and to make loans and investments which were "doubtful" from day one, feeding the cross-border credit bubble and mismanaging the crash.
As a group, the European financial regulators will be shown to have been so poorly prepared and so imprudent that they
(1) were incapable of protecting the innocent local savers and depositors, and
(2) were easily captured by the aggressive and abusive cross-border speculative creditors and investors intent on laying off their evident credit losses, in a continent-wide game of moral hazard.
And less pray that the costs remain only financial.
http://ftalphaville.ft.com/2013/04/05/1449852/cyprus-where-the-vicious-circle-stopped/