Debt workout 101 - part 7
Comments on Capturing the ECB, by Joseph E. Stiglitz
To begin with,
banks which take a long position on sovereign assets are not “speculating”,
they are doing the essential function of financial intermediation between
savers and Government spenders. If they
invest in cross-border sovereign assets, whatever the currency, then they are
helping to recycle their country’s external surplus to finance the borrowing
countries' external deficit. It is never prudent
for banks to lend excessively, or speculatively, even if they buy credit insurance
to limit their net exposure.
What could be
the reasons for Germany and the ECB to be so adamantly against the D-word (Default)
and in favour voluntary debt restructuring with ultra deep (70%) discount for selective
non-official creditors?
- to discredit
the CDS-Credit Default Swaps as costly
but useless hedging instruments
- to protect
the few CDS insurers which may be highly concentrated in “institutions too big
too fail”
- to protect short term international investors, comercial
banks, pension, investment and hedge funds which were long on short-dated sovereign
bonds and have been paid out in full as this debt matures (short term "hot money" and CPLTD current portion of long term debt)
- to protect official
creditors, like the ECB itself which is buying sovereign bonds at deep discounts in
the secondary market
- to protect
the Bundesbank, the NCB and other Eurozone central banks which have growing creditor
positions in the TARGET2 payments system as they finance persistent trade
deficits and take over th reimbursement of maturing debt
By concentrating heavy losses on a small group of hapless creditors and making a sad example of Greece, an even more hapless debtor, perhaps they hope to begin to see the beginning of the end of Moral Hazard.
Another reason to avoid the D-word is the fear that a sovereign default would require exiting the Euro and could lead to the break-up of the Eurozone through contagion. In fact, a debtor default does imply the sharing of sacrifice with the creditors, and special turn-around assistance. But default itself is currency-neutral and should not require the borrowing country to exit the Single Currency, nor should it result in the end of the Euro.
The real threats to the Euro as the Single Currency come from the persistent and growing divergence of the CAB current account balances among Eurozone trading partners and the lack of effective intra-Eurozone balance-of-payments adjustment mechanisms like those you might find in the US.
Another reason to avoid the D-word is the fear that a sovereign default would require exiting the Euro and could lead to the break-up of the Eurozone through contagion. In fact, a debtor default does imply the sharing of sacrifice with the creditors, and special turn-around assistance. But default itself is currency-neutral and should not require the borrowing country to exit the Single Currency, nor should it result in the end of the Euro.
The real threats to the Euro as the Single Currency come from the persistent and growing divergence of the CAB current account balances among Eurozone trading partners and the lack of effective intra-Eurozone balance-of-payments adjustment mechanisms like those you might find in the US.
Mariana Abrantes de Sousa
PPP Lusofonia
PPP Lusofonia
ECB may forego capital gains on Greek bonds after all
ResponderEliminarSee http://ftalphaville.ft.com/blog/2012/02/08/873251/greeces-biggest-holdout-dealt-with/
8-Feb-2012 Breaktrough with ECB holdout on Greek debt restructuring
ResponderEliminarhttp://ftalphaville.ft.com/blog/2012/02/08/873251/greeces-biggest-holdout-dealt-with/
"...and, critically, national eurozone central bank holdings of Greek bonds will avoid the transfer, continuing on to par..."
Quite right, local Greek savers and investors have to be protected from any haircut, not just the local central bank. Let the other EU and non-EU central banks deal with the problems of imprudent overleveraging of the banks under their (im)prudential regulation. That's what home rule is all about.
Local savers were not part of the execess external debt problem, but they must be cultivated in order to be part of the balance of payments adjustment solution. One wonders why it took so long to arrive at this fundamental conclusion, despite various recommendations to this effect, and all the IMF experience from Latin American and Asian balance-of-payments crises,
see http://ppplusofonia.blogspot.com/2011/10/five-recommendations-to-help-resolve.html
Making a horribly sad example of Greece would do nothing to calm local investors, and without capital controls, without an EU-wide deposit insurance scheme like the FDIC, no bailout would ever be enough.
Don't look now, but Pandora's box is already open.
ResponderEliminarThe distressed midget debtor economies have already collapsed, under the burden of having to shoulder the full burden of adjustment, while the creditors fiddle...
Conversation with a Greek colleague:
ResponderEliminarSo Greece managed to negotiate some actual debt relief?
We didn't negotiate, we surrendered?
As in a trade war?