domingo, outubro 16, 2011

Five recommendations to help resolve the Eurozone debt crisis

1.      1. The failure of prudential regulation, by the  national  Central Banks, has to be corrected. The Basel I, II, III etc, criteria led us to overlook the hidden overleveraging in the banks, and in the rest of the economies. Banks such as Dexia and some Landesbanken continued  to extend credit recklessly, to gain market share, well after other banks retracted and became more selective. British banks were the most imprudent after the German, and the Bank of England should step up to help bail them out. The combination of Basel and Maastricht permitted the accumulation of hidden liabilities off-balance sheet and off-budget, so this needs to be addressed too.  Bank recapitalization is a necessary but not sufficient condition to stabilize the Eurozone financial system,  bank credit and risk management practices have to be corrected as well. 

2.      2.  The Maastricht criteria,  which focus on the domestic imbalances, need to be complemented by criteria which highlight external imbalances, such as the CAB current account deficit, the balance of goods and non-factor services, and the accumulation of short term external liabilities (aka hot money inflows).  Without the  usual external policy instruments which serve as “automatic stabilizers” (exchange rate, import tariffs, interest rates and capital controls),  external imbalances among the Eurozone trading partners become more critical and  must be held low, which means lower CAB deficits AND lower CAB surpluses. 

3.      3. We urgently need long term funding instruments, for residential mortgages, but also to park some long term infrastructure assets like PPP project finance loans, etc, similar to the Infrastructure Crisis Facility funded by KfW (for developing countries only).  Portuguese and other banks are selling good long term assets at huge discounts, just because of funding problems, so a special investment fund would be very useful. This could be funded by the EIB, but with independent directors since the EIB would be conflicted. 

4.      4. We urgently need an European EXIMBANK, and/or European ECA Export Credit Agency, since small countries cannot compete in exports which require financing.  That is, how can Efacec compete with Siemens in a third market, when Siemens can offer very long term low-cost KfW financing? Export finance, both ST and LT, will be  essential if  the small and weak deficit countries are to have a real chance to turnaround their CAB deficits and to overcome their lack of competitiveness and dis-economies of scale.

5.      5. Most importantly of all, local savers have to be protected from suffering ANY “haircuts”.  The first rule of balance of payments rebalancing is to promote local savings.  The absurd 50-60% discounts   being discussed for Greece are a sure sign of a badly managed debt restructuring and disorderly default.  Perhaps they will reduce imprudent lending and moral hazard for the next few years.  But if the discounts are applied also to local savers, depositors and investors, the same ones who have to pay more local taxes,  there will  be  no solution to the crisis at all.   We urgently need to ensure that the savings instruments of local retail savers, both families and corporates, are held harmless, since local savers were never part of the problem and must be part of the solution. 

       Mariana Abrantes de Sousa 
       PPP Lusofonia, Portugal 

SE    See also the webcast of  the public audition by the European Parliament Commission on Monetary Affairs 
       Audição pública da Comissão de Assuntos Monetários e Económicos do Parlamento Europeu. Se tiverem interessados em seguir a mesma, será transmitida pela internet a partir do endereço