When you sacrifice local depositors and investors, as with the CAC-Collective Action Clauses in Greece, you WILL get capital flight. Then somebody has to finance it, and it seems that the Bundesbank is the only real LOLR-lender of last resort.
As we continue Testing the Limits of Divergence, instead of Euro-bonds or project bonds or other long term "solutions", we need a EU-wide deposit guarantee scheme, NOW.
This would go a long way to stabilize the whole European banking system, starting from the weakest link, immediately. A guarantee for local retail deposits would be surely cheaper for the Bundesbank than what they are doing now.
We have a classic situation where long term bank solvency problems have been allowed to turn into short term liquidity problems. Without an European FDIC-type desposit insurance scheme (emphasis on the Federal), the TARGET2 balances threaten to continue to diverge and the risks to accumulate.
Mariana Abrantes de Sousa
PPP Lusofonia
Source: http://ftalphaville.ft.com/blog/2012/05/23/1012581/capital-is-leaving-europe/
We first raised the importance of protecting the local depositors with an European Deposit Insurance or Guarantee Scheme in this blog in November 2010:
TERÇA-FEIRA, NOVEMBRO 30, 2010
The Euro Stability Pact, the Single Currency
and the Single Market
"...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. "
See more about Testing the Limits of Divergence http://ppplusofonia.blogspot.pt/2011/12/eurozone-crisis-tests-limits-of.html
How is Europe not like America in a Crisis http://ppplusofonia.blogspot.pt/2012/01/pas-comme-les-americains.html
Germany goes for Growth, finally ...http://ppplusofonia.blogspot.pt/2012/05/germany-to-go-for-growth.html
Quando se sacrificam os depositantes e investidores locais, como aconteceu com as cláusulas CAC-de acção colectiva na Grécia, HAVERÁ fuga de capitais. Então alguém tem que a financiar, e parece que o Bundesbank é a único verdadeiro LOLR, emprestador de último recurso.
À medida que continuamos testando os limites da divergência, em vez de euro-obrigações ou títulos de projecto ou de outras "soluções" de longo prazo , precisamos de um sistema de garantias de depósitos, nível da UE, JÁ.
Este seria um grande contributo para estabilizar o sistema bancário europeu, começando pelo elo mais fraco, imediatamente. A garantia de depósitos de retalho locais (sobretudo de particulares e pequenas empresas) seria certamente mais barato para o Bundesbank do que o que eles estão fazendo agora.
Entretanto estamos numa situação clássica em que os problemas de solvência dos bancos, de longo prazo, se transformaram em problemas imediatos de liquidez. Sem uma FDIC Europeia (ênfase na Federal), os saldos do TARGET2 continuará a divergir e os riscos de colapso a aumentar.
Como financiar um esquema de garantia de depositos a nível Europeu?
ResponderEliminarDe imediato, o financiamento tem que vir da mesma fonte que vem o TARGET2, o Bundesbank.
A prazo, a guarantia funcionaria como um seguro, com os bancos e os depositantes a contribuirem prémios
It is good to see that Germany is finally paying some reluctant attention to the growth (or lack thereof) of its trading partners. The Growth Plan is welcome but it would better start at the beginning:
ResponderEliminar1. EU-wide deposit insurance scheme, to stabilize local bank funding and stanch capital flight. Protecting local savers and investors is a necessary precondition to any sustainable solution. This would be a much better use of the bail-out and TARGET2 funds than has been done up to now. In practice, bail-out funds are like "day-traders", they hardly spend a night in Athens,Dublin or Lisbon.
2. Recapitalization of the banks so their can absorb their share of the losses. Now that the original cross-border bank creditors have pulled all their inter-bank lines and passed their exposure to ECB and the Bundesbank, the recapitalization need is concentrated in the net borrowing countries, but not exclusively.
3. New revolving credit lines focused exclusively on pre-export finance for the net borrower countries, instead of more import credits for more (luxury) imports that we don't need and can't afford.
4. Refinance of existing cross-border lending, private or official exposures, including ECB and TARGET2 credit balances. Remove the pressure of having to renegotiate roll-overs for as long as possible.
5. Help with small-country export promotion, not just by including local production in the powerful German supply chains, but also by helping smaller countries to overcome their natural deseconomies of scale.
And yes, other measures are welcome:
- Specil economic zones (like the maquilladora belt in norther Mexico)
- Privatization funds (mostly done in Portugal)
- Dual education system with a German-style apprenticeship would be welcome for young people, preferably including German language lessons and undertaken in Germany itself.
- Labour reforms along the lines of Germany's Agenda 2010
- Recapitalization of the EIB
- Taxation of financial transactions, namely the application of WHT or withholding tax on all interest payments from net borrowing countries in order to internalize the true cost of over-borrowing, etc...
...a contagion can only be avoided if the threat of capital flight is addressed via some sort of pan-eurozone deposit guarantee plus additional ECB liquidity to those banks that are affected by this capital flight (perhaps through another LTRO). In addition, the ECB may have to commit to additional QE-like bond purchases to keep sovereign funding costs down. At the same time, the fiscal pact must be kept in place but with some sort of growth plan added in to address the anti-austerity revolt that is current underway. That is a very tall order and one that policymakers may not be willing or able to provide— unless a market crisis forces them to.
ResponderEliminarHow would deposit guarantees work? It would be difficult. The U.S. has had deposit insurance for a long time via the FDIC, and in 2008 the limit was even raised to $250,000 in the wake of the Lehman Brothers failure. But, Europe doesn’t have an FDIC, and some of the banks may not be capitalized well enough to be able to provide the funding needed for an American-style FDIC. However, if the troika were somehow able to guarantee all deposits across the eurozone (probably only up to a certain limit as is the case with the FDIC), then that could significantly reduce the need for capital to flee the periphery. If at the same time the ECB continued to provide liquidity to the banks and made additional asset purchases in the peripheral debt market, then that might be enough to stop any further contagion.
All of this would come at a cost, of course, and that cost could be a weaker euro. But a weaker euro could be exactly what Europe needs to reflate its way out of trouble. The question is, are policymakers prepared to go this far? Who will pay? Would Germany rather foot the bill of bailouts or incur losses on its TARGET2 claims? There are no easy answers, which is the message that the markets are now sending us.
Germany is under the illusion that it can prosper at the expense of the impoverishment of its trading partners.
ResponderEliminarVolkswagon banks want to finance more imports of German cars into Portugal.
The more we import the more impoverished we become.
But, ultimately, a creditor can be no better than its borrowers, though it may be a long time before it feels the pain.
Ver Mariana Abrantes de Sousa na Comissão Executiva, ETV
ResponderEliminartransmitida sábado às 20h e domingo às 9h.
Ver http://tv.economico.sapo.pt/
Merkel may be forgetting the lessons of Herbert Hoover
ResponderEliminarSee
http://entreonadaeoinfinito.wordpress.com/tag/herbert-hoover/
Com um bailout, os credores conseguem ser reembolsados em vez de serem obrigados a refinanciar os seus créditos, passando a suas exposições de créditos aos credores oficiais como ECB, o FMI e os outros países da Eurozone, etc.
ResponderEliminarE ainda dizem que não querem mutualização...
The Eurozone continues to test the limits of balance of payments divergence
ResponderEliminarThe immediate cause of the Greek debt crisis is the divergence in the CAB surpluses and deficits among Eurozone members, reaching +8% of GDP in Germany and -13% of GDP in Greece (see my PPP Lusofonia blog post "Eurozone Tests the Limits of Divergence" http://ppplusofonia.blogspot.pt/2011/12/eurozone-crisis-tests-limits-of.html. Behind this, there are a lot of errors by a lot of official institutions and private economic agents including Eurostat and the misguided Maastricht criteria which encouraged de-budgeting, the Bundesbank and the National Bank of France which let their banks lend too much, Goldman Sachs, the ECB, and the local politicians who bought popularity who borrowed money, and the local companies and families who borrowed too much.
ResponderEliminarWith a financial disaster of this magnitude, there's no major cause, no single culprit. That's why, historically, in these credit bubble/crash sequence, the sacrifice must also be shared by the foolish borrowers who borrowed too much, the creditors who lend too much, the banks who intermediated too much, and the regulators who regulated hardly at all. Mariana Abrantes de Sousa
Financial Consultant
PPP Lusofonia 2011
Yes, the Single Market and the Single Currency were badly designed, but easy credit fed the monster. CAB balances are like swings of a pendulum: unscontrained they can become uncontrollable.
ResponderEliminarAs a former bank credit officer, I would emphasize the role of banks in intermediating risk between the net savers and the net borrowers, and in keeping both on a short leash. This is the unique contribution of a good financial system to economic efficiency.
It is ironic that the Bundesbank, which allowed German banks to become the most overleveraged, is now saddled with huge TARGET2 credit balances. Curiously, in Portugal, the Troika hardly talks about the T-word, Trade.
Polarization of fortunes occurs between net exporters and net importers, not necessarily north/south.
ResponderEliminarBut this divergence eventually hits natural limits, to the extent that the net importers accumulate too much external debt and become mortgaged to the net exporters.
The real problem is that the external adjustment burden is falling entirely on the borrowing countries of the Eurozone, through unilateral internal devaluations, without even being able to cut luxury imports.
It will either be a miracle ... or a disaster.
Believers can offer their prayers in Fatima ...
Non-believers seem to be voting with their wallets...
Surplus countries don't have to stop exporting, but they have to stop selling on credit. There are real limits to diverging current account balances and economic history is full of horror stories.
ResponderEliminarPredatory lending is a reality. There is no virgin conception when it comes to debt, and paternity is easy enough to trace.
After all, imprudent lending is the whole "raison-d'être" for prudential regulators, which failed to prevent some banks from reaching leverage of 49X.
In most doubtful loan situations, overextended creditors are jointly responsible with the overleveraged borrowers for the unststainable debt.
That's banking 101. Then, lenders and borrowers play lots of debt workout games trying to dump the whole loss on the other side.
See http://ppplusofonia.blogspot.pt/2011/09/debt-workout-101-games-borrowers-and_13.html
Argentina and Mexico tried, unsucessfully, to keep their exchange rates fixed, but none of the country mentioned in the article 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.
ResponderEliminarThere seem to be no case studies yet of successful external adjustments within a Single Market or Single Currency context.
As far as the existing debt, discounts and tenor extensions may help to reduce the debt stock, at great reputation costs, but do little to reduce the new debt need, except for lowering the interest bill.
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 stay in the drawer.
But small country fiscal and incomes policies cannot be expected do all the heavy lifting needed for rebalancing the Eurozone.
In reality, the peripheral midget economies are playing trade volleyball with the central European big boys. Have credit, WILL export.
In 2010, Portugal's car sales rose 38,8%, mostly imported on credit. Thus far in 2011, car sales (and imports are down -16,2% but this is still not enough the convince the markets.
As usual, banks got caught in the middle recycling these export surpluses, like modern-day petrodollars, but a good portion of the debt has been passed to official creditors such as the Central Banks.
The only 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.
Mariana Abrantes de Sousa
June 2011
O indicador de poupança APFIPP/UCP atingiu em Maio os 109,7 pontos, o valor mais alto desde meados de 2003.
ResponderEliminarO indicador, que sugere que a poupança das família, retomou a tendência crescente, tem o último trimestre de 2000 como o valor base de 100, equivalente a uma taxa de poupança de 8% do PIB, um nível muito baixo em termos comparativos. Cada 12,5 pontos do indicador representa cerca de 1% do PIB.
The excessive lending to the fragile periphery economies demonstrates the failure of "home rule" (im)prudential regulation, which allowed leading European banks to reach leverage of 49X.
ResponderEliminarThe Greek austerity program placed heavy burdens on local investors which were subjected to CAC haircuts, while external investors were able to reduce their exposures thanks to the ECB funding.
No one, depositors are voting with their wallets, with capital flight reaching unforeseen proportions.
In order to stabilize European banks everywhere, we need European deposit insurance NOW.
The critical issue is that the Target2 imbalances are an unintended and unsustainable consequence of the mishandling of the “sudden stop” or retreat phase of the tsunami of hot-money credit that inundated the borrowing countries.
ResponderEliminarOfficial national and multilateral creditors such as the NCBs and the ECB have been to ready to facilitate the withdrawal of speculative private investors, thus mutualizing their credit exposure.
The departing creditors are being paid out in cash, at par, instead of having sit down with their borrowers and workout the reckless debt.
The debit and credit balances of the various NCBs are real cross-border debts and real cross-border credits, where the NCBs having replaced the respective borrowers and lenders, regardless of what happens to the single currency.
It is TRAGIC that the same entities and the same taxpayers which are financing the retreating funding tsunami and are protecting the wholesale investors, are unwilling to fund a deposit insurance scheme to protect local retail depositors and investors though an European deposit insurance program like the FDIC.
Signs of the reversal of capital flight as some deposits return to banks in Greece
ResponderEliminarElke König head of BaFin, the German financial regulator is against creation of an European Deposit Guarantee scheme, which reflects a lack of appreciation of the impact of "convertibility risk" on capital flight and bank instability.
ResponderEliminarhttp://www.spiegel.de/international/business/interview-with-bafin-head-elke-koenig-on-changes-in-banking-regulations-a-846619.html
The opposition to the creation of a robust European Deposit Insurance Scheme shows a distressing lack of appreciation for the new convertibility risk in the Eurozone and for the disastrous impact of capital flight on the European banking system in a context of NO devaluation, NO capital controls and NO independent monetary policy.
ResponderEliminar