It is, unfortunately,too early to do a post mortem on the Eurozone financial crisis while it is still raging, but some misconceptions really need to be resolved.
The recent evaluations of Jean-Claude Trichet's tenure as head of the ECB-European Central Bank,as in the Economist article of 22-October-2011, are quite off the mark:
1. For most of Trichet's term, the Euro was not stable but rather too strong, reaching USD1.60 at times, doing much damage to the weaker Eurozone exporters, who would hardly consider this "impecable".
2. The failure to "perceive the processes that culminated in the current crisis" is a continuing problem, as declining interest rates are seen to have "spurred a great deal of borrowing that fed prodigious construction booms". Someone needs to ask what spurred the corresponding lending surge, the Basel gnomes?
3. The Bundesbank, Bank of France and Bank of England, the NCBs, not the ECB, "chose to ignore the dangers in the credit surge which allowed the build-up of current account imbalances", both the "deficits on the periphery" and the corresponding surplus in the net exporting countries. The national central banks were, and still are, tasked with prudential regulation, they are the entitities that should now be responsible for recapitalization of the overextended banks, but they appear to be missing in action.
4. If the ECB "believed, wrongly, that countries within a monetary union no longer faced balance of payments constrainsts", it was not alone in this error. In its Eco Conjuncture of January 2011, the BNP Paribas Economics Research Department wrote:
"Wider current account deficits can be considered normal (sic) in a monetary union which is free from foreign exchange risk. By devloping their comparative strengths, some countries specialise .... It would make no sense to require all members of a monetary union to achieve the same performance in terms of price competitiveness and to have balanced foreign accounts.... Even so, wider external deficits...signal internal imbalances that must be financed by the exterior and that could become unsustainable"
Perhaps we need a quick refresher course in double entry bookkeeping to recall that
1. In bilateral intra-Eurozone trade, there can be no execessive trade deficit without an execessive trade surplus
2. For every irresponsable overleveraged borrower there is an equal an opposite imprudent overextended lender. That's why banks require "prudential" regulation, which continues to fail miserably, as even the responsability of bank recapitalization is now being pushed onto the ECB.
When and if the Eurozone crisis is over, in our life time we trust, economic historians will produce many verdicts on the causes and consequences, on the sins of commission and ommission. On balance, they will judge the surplus/creditor countries just as harshly as the deficit/borrowing countries, unless they suffer from their own analytical deficit, as do the articles quoted above.
Mariana Abrantes de Sousa
PPP Lusofonia
Ver também - Licões de crises passadas , and
... for every irreponsible borrower there is an equal and opposite irresponsible lender ...
The recent evaluations of Jean-Claude Trichet's tenure as head of the ECB-European Central Bank,as in the Economist article of 22-October-2011, are quite off the mark:
1. For most of Trichet's term, the Euro was not stable but rather too strong, reaching USD1.60 at times, doing much damage to the weaker Eurozone exporters, who would hardly consider this "impecable".
2. The failure to "perceive the processes that culminated in the current crisis" is a continuing problem, as declining interest rates are seen to have "spurred a great deal of borrowing that fed prodigious construction booms". Someone needs to ask what spurred the corresponding lending surge, the Basel gnomes?
3. The Bundesbank, Bank of France and Bank of England, the NCBs, not the ECB, "chose to ignore the dangers in the credit surge which allowed the build-up of current account imbalances", both the "deficits on the periphery" and the corresponding surplus in the net exporting countries. The national central banks were, and still are, tasked with prudential regulation, they are the entitities that should now be responsible for recapitalization of the overextended banks, but they appear to be missing in action.
4. If the ECB "believed, wrongly, that countries within a monetary union no longer faced balance of payments constrainsts", it was not alone in this error. In its Eco Conjuncture of January 2011, the BNP Paribas Economics Research Department wrote:
"Wider current account deficits can be considered normal (sic) in a monetary union which is free from foreign exchange risk. By devloping their comparative strengths, some countries specialise .... It would make no sense to require all members of a monetary union to achieve the same performance in terms of price competitiveness and to have balanced foreign accounts.... Even so, wider external deficits...signal internal imbalances that must be financed by the exterior and that could become unsustainable"
Perhaps we need a quick refresher course in double entry bookkeeping to recall that
1. In bilateral intra-Eurozone trade, there can be no execessive trade deficit without an execessive trade surplus
2. For every irresponsable overleveraged borrower there is an equal an opposite imprudent overextended lender. That's why banks require "prudential" regulation, which continues to fail miserably, as even the responsability of bank recapitalization is now being pushed onto the ECB.
When and if the Eurozone crisis is over, in our life time we trust, economic historians will produce many verdicts on the causes and consequences, on the sins of commission and ommission. On balance, they will judge the surplus/creditor countries just as harshly as the deficit/borrowing countries, unless they suffer from their own analytical deficit, as do the articles quoted above.
Mariana Abrantes de Sousa
PPP Lusofonia
Ver também - Licões de crises passadas , and
... for every irreponsible borrower there is an equal and opposite irresponsible lender ...
Ver a Folia dos Fiados na Taberna da Aldeia, a crise do subprime
ResponderEliminarhttp://antoniopovinho.blogspot.com/2008/10/crise-financeira-na-taberna-da-aldeia.html
PPP Lusofonia comments on the FT:
ResponderEliminarIf there's been a "massive erosion of trust", it is more in the creditor banks than in the Euro as a currency.
So let the national central banks put a safety net under their national bankings systems, like Mexico did when it nationalized Mexican banks in 1982. That should align the interests of the voters/taxpayers with each of that of the financial market.
Munchau's list is too short. Where's the fourth measure, which should in fact be the first, European and other creditors banks must be rapidly recapitalized, with their own taxpayers funds if need be, in order to withstand the losses and restore confidence in the national bankings systems?
The bankers just want the bailout without any conditions, no strings attached.
Os bancos portugueses tiveram que pagar €16 milhões a consultoras ditas independentes para a avaliação de imparidades,
ResponderEliminarque devia ser feita em continuo pelos técnicos de supervisão bancária do Banco de Portugal, o regulador prudencial do sistema bancário.
Besides the "highly paid footballers", who demonstrate comendable Euro team spirit, if the original investors have been selling at a loss, who else has been buying Eurozone assets?
ResponderEliminarSomeone is holding sizable Eurozone assets bought at deep discounts.
Been there, seen that...
The Latin Americans brought money back from Switzerland to buy sovereign paper at deep discounts, which they then used in debt-to-equity conversions at face value in the ensuing privatizations.
Good business if you have equal parts of cash and guts.
As late as March 2010... the head of the ECB boasted that simply belonging to the euro area automatically ensured balance-of-payments financing.
ResponderEliminarIt doesn't look that way now.
The ECB providing credit against financial collateral is probably liquidity-neutral at best, and may further distort the already disfunctional financial markets at worse.
ResponderEliminarAlready the Euribor interest rates are becoming less and less representative of the true European inter-bank borrowing costs, as more European banks have been excluded from the money markets and the number of quoting banks fell from the original 58 banks to the current 44 banks. At this rate, the Euribor may someday be set by Deutsche Bank alone.
And the CDS market may no longer offer any respite, as investors sell distressed assets which nevertheless do not trigger the CDS default clauses. What's the use of paying high premia for coverage which you cannot use.
When liqudity problems reflect severe solvency problems, the solutions are all about capital.
Argentina's default experience offers some lessons
ResponderEliminar(see http://viableopposition.blogspot.com/2011/11/sovereign-debt-default-learning-lessons.html)
including:
- The Current Account Deficit deserves most of the attention and prevention. A country in a currency peg simply cannot tolerate trade deficits of any size, because it lacks the adjustment tools to correct them. It should not allow them, even if they are easy to finance thanks to the flood of incoming hot money. Eventually it will stop and reverse out.
- The most critical lesson from the Argentine default is the damage done to local savings by the partial deposit freeze, el corralito.
With such experimentation turning the country into an economics laboratory, is it any wonder that Argentina has one of the highest consumptions of transquilizers in the world?
There is a lot of smoke and mirrors in the Eurozone crises. As a one-sided morality tale, it sells better in Germany than a two-sided unsustainable divergence.
ResponderEliminarIf the book by Jeffrey Friedman and Wladimir Kraus, Engineering the Financial Crisis, focus on the unintended distortions of the BASEL banking regulations and their bias towards sovereign lending, then we really should look at the combined impact of Basel norms and Maastricht criteria and its narrow definition of public debt.
ResponderEliminarBut the search for the smoking gun in the credit crisis is not that useful. With a financial disaster of the magnitude of the Eurozone credit buble and crash, we are certainly looking at sequence of failures in financial system safeguards which just could not cope with the tsunami of hot money moving freely from creditor countries to debtor countries, and now moving sharply back.
Yes, some (im)prudential regulators allowed some European banks to reach leverage ratios of 50X or 60X, lending cross-border to sovereigns reporting ever bigger budget and external deficits, just because BASEL said they were zero risk weighted.
Instead of adding more rules and regulations, we need to get away from the simplistic BASEL approach of "banking-by-numbers" done by computer programs and get back to the basics of real hands-on do-it-yourself credit analyses. Then, if a few of us are wrong, as we are bound to be, the world as we know it might not collapse.