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Gene Ellis

The euro crisis: Debtors' prison | The Economist - 0 views

www.economist.com/...n-more-government-debt-debtors

shared by Gene Ellis on 29 Oct 13 - No Cached
  • But the reforms often fail to work. The Spanish law is intended to promote restructuring of viable firms but in practice most insolvencies end in liquidation after lengthy court proceedings.
  • High household debt helps explain why the Netherlands, along with Italy and Spain, remained in recession in the second quarter of 2013 even as the euro area in general embarked on recovery. Dutch GDP this year will be 2% lower than in 2011 and more than 3% below its previous peak, in 2008.
  • it illustrates the malign effect of high debt when house prices fall
  • ...7 more annotations...
  • One aim of the exercise is to identify the bad debts that are fouling up euro-zone banks and preventing the flow of new credit. This is important because parts of the single-currency area are crippled not just by public borrowing but by private debt, most of which is sitting on banking books.
  • High private debt is more detrimental to growth than high public debt, according to recent research by the IMF.
  • The malign effect of high private debt becomes apparent in the busts that follow credit-driven booms. Households that have borrowed too much in relation to their income trim their spending, the main component of GDP. Overleveraged firms avoid investing and concentrate on shrinking their balance-sheets by paying off loans. As bad debts erode their capital, banks become more reluctant to lend. These adverse trends reinforce each other, increasing the overall drag on growth.
  • Other balance-sheet indicators also suggest that Italian business is in a bad way. For example, 30% of corporate debt is owed by firms whose pre-tax earnings are less than the interest payments they have to make. That share of frail companies is even higher in Spain and Portugal (40% and nearly 50% respectively).
  • Little progress has been made to lighten the private-debt burden since the crisis began. Though it eased in Spain from 227% of GDP in 2009 to 215% in 2012, it rose over the same period in Cyprus, Ireland and Portugal. In Britain, by contrast, private debt fell from 207% of GDP in 2009 to 190% in 2012 thanks to improvements by both households and firms.
  • There is an inherent contradiction between the need for debtor countries in the euro zone to regain competitiveness through lower prices and at the same time to ease excessive debt with a dose of inflation.
  • Firms that have overborrowed are reluctant to embark on new ventures, and banks are in any case reluctant to lend because their balance-sheets are peppered with bad debts. This unhappy state of affairs prevails throughout southern Europe though its precise causes vary.
Gene Ellis

"Which Eurobonds?" by Jeffrey Frankel | Project Syndicate - 0 views

www.project-syndicate.org/...which-eurobonds-

jeffrey project syndicate

shared by Gene Ellis on 16 Jun 12 - No Cached
  • Any solution to the eurozone crisis must meet a short-run objective and a long-run goal. Unfortunately, the two tend to conflict.Illustration by Paul LachineCommentsView/Create comment on this paragraphThe short-run objective is to return Greece, Portugal, and other troubled countries to a sustainable debt path (that is, a declining debt/GDP ratio). Austerity has raised debt/GDP ratios, but a debt write-down or bigger bailouts would undermine the long-term goal of minimizing the risk of similar debt crises in the future.CommentsView/Create comment on this paragraph
  • it is hard to commit today to practice fiscal rectitude tomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable.
  • The introduction of Eurobonds – joint, aggregate eurozone liabilities – could be part of the solution, if designed properly. There is certainly demand for them in China and other major emerging countries, which are desperate for an alternative to low-yielding US government securities.
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  • But Germany remains opposed on moral-hazard grounds: a joint guarantee of Eurozone members’ liabilities would strengthen individual national governments’ incentive to spend beyond their means.
  • The German Council of Economic Experts has proposed a European Redemption Fund (ERF). The plan would convert into de facto 25-year Eurobonds the existing sovereign debt of member countries in excess of 60% of GDP, the threshold specified by the Maastricht criteria and the SGP.
  • But this seems upside down.
  • it offers absolution precisely on the 60%-of-GDP margin where countries will have the most trouble resisting temptation.
  • the main explanation for the absence of US moral hazard is that the right precedent was set in 1841, when the federal government let eight states and the Territory of Florida default.
  • Ever since 1841, the market requires that US states running up questionable levels of debt pay an interest-rate premium to compensate for the default risk.
  • Had the ECB operated from the outset under a rule prohibiting it from accepting SGP-noncompliant countries’ debt as collateral, the entire eurozone sovereign-debt problem might have been avoided.
  • the expansion in the US took place at the federal level, where spending today amounts to 24% of GDP, compared to just 1.2% of GDP for the European Union budget.
  • The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds” proposed two years ago by Jacques Delpla and Jakob von Weizsäcker. Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receive eurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status.
  • The point is that the enforcement mechanism would be truly automatic: market interest rates would provide the discipline that bureaucrats in Brussels cannot.
  • Of course, the eurozone cannot establish a blue-bond regime without first solving the problems of debt overhang and troubled banks. Otherwise, the plan itself would be destabilizing, because almost all countries would immediately be in the red.
  • But one thing seems clear. German taxpayers, whose longstanding suspicion of profligate Mediterranean euro members has been vindicated, will not be happy when asked to pay still more for the cause of European integration. At a minimum, they will need some credible reason to believe that 20 years of false assurances have come to an end – that this is the last bailout.
Gene Ellis

Greece's Bogus Debt Deal by Ashoka Mody - Project Syndicate - 0 views

www.project-syndicate.org/...-sovereign-debt-by-ashoka-mody

greece debt deal project syndicate

shared by Gene Ellis on 12 Dec 12 - No Cached
  • The economist Larry Summers has invoked the analogy of the Vietnam War to describe European decision-making. “At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory.”
  • Instead of driblets of relief, a sizeable package, composed of two elements, is the way forward.
  • A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2%.
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  • The second element of the debt-relief package would be more innovative: If Greece’s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised. A formula for this could be linked to the debt/GDP ratio
  • Why bother? Because the very premise of the current deal and the expectations it sets out are wrong. First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% to 124% is fanciful. Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt will then be “sustainable” is absurd.
  • Make no mistake: policymakers’ track record on forecasting Greek economic performance during the crisis has been an embarrassment. In May 2010, the International Monetary Fund projected – presumably in concurrence with its European partners – that Greece’s annual GDP growth would exceed 1% in 2012. Instead, the Greek economy will shrink by 6%. The unemployment rate, expected to peak this year at 15%, is now above 25% – and is still rising. The debt/GDP ratio was expected to top out at 150%; absent the substantial write-down of privately held debt, which was deemed unnecessary, the ratio would have been close to 250%.CommentsView/Create comment on this paragraphIn September 2010, four months after the official Greek bailout was put in place, the IMF issued a pamphlet asserting that “default in today’s advanced economies is unnecessary, undesirable, and unlikely.” The conclusion was that official financing would carry Greece past its short-term liquidity problems. Calls for immediate debt restructuring went unheeded. Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt was substantially restructured.CommentsView/Create comment on this paragraphSuch were the errors committed over short time horizons.
  • And, again, even if Greece somehow did achieve the 124% milestone, its debt would still not be sustainable.
  • Staying the course, as Summers warns, will lead only to “needless suffering” before that course inevitably collapses, bringing Greece – and much else –­ crashing down.
Gene Ellis

The Eurocrisis Can Easily Flare Up Again - Seeking Alpha - 0 views

seekingalpha.com/...isis-can-easily-flare-up-again

shared by Gene Ellis on 03 Dec 12 - No Cached
  • It is clear for all that they will also have to swallow cuts, but for this to take place, politicians have to break promises, the ECB has to break the law, and the IMF has to do something rather unprecedented. None of this is easy, to put it mildly.
  • Recently, there was a new EU/IMF/ECB 'agreement' that won't fare any better.
  • Basically, we're lending Greece more in order for it to keep the appearance that it is servicing and paying of the debt.
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  • The International Monetary Fund will not disburse Greece's next bailout tranche until the country completes a voluntary buy back of its debt, an IMF spokesman said
  • Who will actually sell the debt at a 70% discount?
  • Most private Greek debt holders just want to hold to maturity, they've already been subjected to two haircuts.
  • Two thirds of the private holders of Greek debt are Greek banks (22 billion euro). These are certainly not going to sell because doing so forces them to realize losses on the debt,
  • There is a simple and obvious solution, which will then force itself. The official creditors should take really substantial losses on Greek debt.
  • The simple truth is that as long as Greece's economy is moribund and its debt/GDP trajectory spiraling out of control, nobody is going to invest in Greece, capital and educated people will leave in a vicious cycle, and Greece's capacity for paying back its debt shrinks by the day. Something has to give.
  • The only real alternative is Greece leaving the euro
  • This situation is basically a slow asphyxiation.
  • Gene Ellis on 03 Dec 12
     
    Exc. piece...  Eurocrisis as of Dec. 3, 2012
Gene Ellis

Europe's Irrelevant Austerity Debate by Daniel Gros - Project Syndicate - 0 views

www.project-syndicate.org/...ogoff-in-europe-by-daniel-gros

shared by Gene Ellis on 08 May 13 - No Cached
  • But the debate about austerity and the cost of high public-debt levels misses a key point: Public debt owed to foreigners is different from debt owed to residents.
  • If foreign debt matters more than public debt, the key variable requiring adjustment is the external deficit, not the fiscal deficit. A country that has a balanced current account does not need any additional foreign capital. That is why risk premiums are continuing to fall in the eurozone, despite high political uncertainty in Italy and continuing large fiscal deficits elsewhere. The peripheral countries’ external deficits are falling rapidly, thus diminishing the need for foreign financing.
  • And the evidence confirms that the euro crisis is not really about sovereign debt, but about foreign debt.
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  • By contrast, in the case of debt owed to foreigners, higher interest rates lead to a welfare loss for the country as a whole, because the government must transfer resources abroad, which usually requires a combination of exchange-rate depreciation and a reduction in domestic expenditure.
  • But austerity can never be self-defeating for the external adjustment. On the contrary, the larger the fall in domestic demand in response to a cut in government expenditure, the more imports will fall and the stronger the improvement in the current account – and thus ultimately the reduction in the risk premium – will be.
  • Second, if foreign debt is the real problem, the escalating debate about the Reinhart/Rogoff results is irrelevant for the euro crisis. Countries that have their own currency, like the United Kingdom – and especially the United States, which can borrow from foreigners in dollars – do not face a direct financing constraint.
  • But the eurozone’s peripheral countries simply did not have a choice: they had to reduce their deficits, because the foreign capital on which their economies were so dependent was no longer available.
Gene Ellis

The Eurozone's Narrowing Window by Ashoka Mody - Project Syndicate - 0 views

www.project-syndicate.org/...-becomes-harder-by-ashoka-mody

shared by Gene Ellis on 12 Dec 12 - No Cached
  • Ireland’s authorities have conducted similar recent operations, exchanging short-maturity paper for longer-term debt.
  • This strategy’s success presupposes that, in the interim, economic growth will strengthen the capacity to repay debt down the line.
  • But growth prospects remain grim. The Portuguese economy is now expected to contract by 1% in 2013.
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  • Private investors are acknowledging the reality that repayments will likely be drawn out, because insisting on existing terms could cause an untenable bunching of debt-service payments, with possibly unpleasant consequences.
  • Moreover, Irish GNP (the income accruing to its nationals, as distinct from foreign firms operating in Ireland) continues to shrink.
  • Crucially for Europe, world trade has been virtually stagnant in recent months. Global trade and economic performance in the eurozone appear to be dragging each other down.
  • Thus, the eurozone faces three choices: even more austerity for the heavily-indebted countries, socialization of the debt across Europe, or a creative re-profiling of debt, with investors forced to accept losses sooner or later.
  • Special European facilities, along with the IMF, lend money at below-market interest rates, which reduces the extent of austerity required. But the facilities’ resources are dwindling, and they certainly would not be sufficient if Spain and Italy were to seek support.
  • More ambitious pan-European efforts are embodied in various Eurobond proposals. These schemes imply socialization of debt – taxpayers elsewhere in Europe would share a country’s debt burden. These proposals, once in great vogue, have receded. Not surprisingly, the political opposition to such debt mutualization was intense.
    • Gene Ellis
      Gene Ellis on 12 Dec 12
       
      This gets at the crux of the matter.
Gene Ellis

Greece Exceeds Debt-Buyback Target - WSJ.com - 0 views

online.wsj.com/...4024004578173080175399670.html

greece target wsj com

shared by Gene Ellis on 12 Dec 12 - No Cached
  • The buyback is the latest attempt to squeeze debt relief from Greece's private creditors. But Greece may yet face a further restructuring down the road, observers and analysts say—possibly involving official-sector creditors, including other euro-zone countries.
  • Greece's official creditors—the euro zone, the European Central Bank and the IMF—now hold roughly four-fifths of the country's debt, but have been reluctant to accept losses that would hurt taxpayers.
  • The bond buyback is a central element of a plan aiming to reduce Greece's debt to 124% of gross domestic product by 2020. The IMF insists debt must be reduced to that level, and well below 110% of GDP two years later, to continue handing out loans to Greece. The buyback seeks to retire about half of the €62 billion in debt that Athens owes private creditors.
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  • However, as of last week, the country's four biggest banks had committed to sell just 67% of their total portfolio, hoping to hold on to the balance. This amount now is believed to have increased to almost 100% as they receive bonds issued by the European Financial Stability Fund—the euro-zone's temporary rescue fund—in exchange for Greek debt. "Greek banks were under pressure from the European Central Bank to take part in the buyback," said a senior official at one of the Greek banks. "Now the bonds they will use to borrow money from the ECB will be EFSF bonds, which means that the central bank is reducing its exposure to Greece."
Gene Ellis

Spain to Test Bond Markets as Economy Minister Warns on Debt - NYTimes.com - 0 views

www.nytimes.com/...daily-euro-zone-watch.html

shared by Gene Ellis on 17 Jul 12 - No Cached
  • the country’s economy minister, Luis de Guindos, warned Tuesday that European debt markets were not working properly because foreign investors were being deterred by the euro zone’s slow and complex decision-making procedures.
  • In recent weeks the interest demanded by investors on longer-term debt has crept up around 6 percent for Italy and 7 percent for Spain, close to the level that analysts say could make government finances unsustainable in the medium term.
  • In an interview in the Spanish daily La Vanguardia, Mr. de Guindos said that foreign investors were increasingly staying away from bond auctions, leaving only domestic buyers.
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  • Debt auctions in Italy at the end of last week came off better than some observers had expected and, although borrowing costs remain high, the successful debt sale has increased the prospect that the euro zone can avert another crisis during the summer break.
  • Mr. de Guindos said that debt purchases between countries within the 17-nation single currency area had virtually ground to a halt.
  • The ministers are expected to hold talks on Friday to agree to extend 30 billion euros for the rescue by the end of the month. By agreement of European Union leaders last month, the debt will go direct to banks, rather than being added to the Spanish government’s finances, once plans for a new regulatory structure for Europe’s banks is put in place.
Gene Ellis

Past Rifts Over Greece Cloud Talks on Rescue - WSJ.com - 0 views

online.wsj.com/...4441404579119180237594344.html

shared by Gene Ellis on 29 Oct 13 - No Cached
  • It included no debt restructuring, such as forgiving principal, reducing the interest rate on the debt or stretching out the payment schedule to make servicing easier.
  • That spared the holders of the debt—chiefly European banks—the losses that would have come with restructuring.
  • Some of the IMF dissenters at the meeting and some IMF staff believe the interests of the European powers were placed above those of Greece, which has seen its economy contract by a fifth since 2009 and its jobless rate reach nearly 28%.
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  • "The Greek bailout was not a program for Greece, but for the euro zone itself,"
  • "In May 2010, we knew that Greece needed a bailout but not that it would require debt restructuring," IMF Managing Director Christine Lagarde said in a June interview. "We had no clue that the overall economic situation was going to deteriorate as quickly as it did."
    • Gene Ellis
      Gene Ellis on 29 Oct 13
       
      And this is the point, is it not?
  • Ms. Lagarde was French finance minister at the time and keen to avoid losses by her country's banks, which had lent heavily to Greece.
  • "An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners," it said.
  • In retrospect, the report said, the "program served as a holding operation" that allowed "private creditors to reduce exposures…leaving taxpayers and the official sector on the hook."
  • Much of the debt was held by already fragile French and German banks, so European nations wouldn't consider it. And the U.S. feared its own trillion-dollar exposure to European banks.
  • Several IMF directors had warned of just that outcome three years earlier. The program "may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece's private debtholders, mainly European financial institutions," Brazil's executive director, Paulo Nogueira Batista, said at the May 2010 meeting.
  • now confront the prospect of a third bailout in which they would also forgive some of Greece's debt.
Gene Ellis

An interview with Athanasios Orphanides: What happened in Cyprus | The Economist - 0 views

www.economist.com/...nterview-athanasios-orphanides

shared by Gene Ellis on 29 Oct 13 - No Cached
  • Cyprus had developed its financial center over three decades ago by having double taxation treaties with a number of countries, the Soviet Union for example. That means if profits are booked and earned and taxed in Cyprus, they are not taxed again in the other country. Russian deposits are there because Cyprus has a low corporate tax rate, much like Malta and Luxembourg, which annoys some people in Europe.
  • In addition, Cyprus has a legal system based on English law and follows English accounting rules
  • This government took a country with excellent fiscal finances, a surplus in fiscal accounts, and a banking system that was in excellent health. They started overspending, not only for unproductive government expenditures but also they raised implicit liabilities by raising pension promises, and so forth.
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  • The size of the banking sector and exposure to Greece were known risks but at that time there was no banking problem in Cyprus
  • The containers were part of a shipment going from Iran to Syria that was intercepted in Cypriot waters after a tip from the U.S. The president took the decision to keep the ammunition. [NOTE: An independent prosecutor found that Christofias has ignored repeated warnings and pleas to destroy or safeguard the ammunition, apparently in hopes of one day returning it to Syria or Iran.]
  • Instead, they started lobbying the Russian government to give them a loan that would help them finance the country for a couple more years, and Russia came through, unfortunately,
  • I say unfortunately because as a result the government could keep operating and accumulating deficits without taking corrective action.
  • The next important date was the October 26-27, 2011 meeting of the EU council in Brussels where European leaders decided to wipe out what ended up being about 80% of the value of Greek debt that the private sector held. Every bank operating in Greece, regardless of where it was headquartered, had a lot of Greek debt.
  • For Cyprus, the writedown of Greek debt was between 4.5 and 5 billion euro, a substantial chunk of capital.
  • The second element of the decision taken by heads of states was to instruct the EBA to do a so- called capital exercise that marked to market sovereign debt and effectively raised abruptly capital requirements. The exercise required banks to have a core tier-1 ratio of 9%, and on top of that a buffer to make up for differences in market and book value of government debt. That famous capital exercise created the capital crunch in the euro area which is the cause of the recession we've had in the euro area for the last 2 years.
  • The Basle II framework that governments adopted internationally, and that the EU supervisory framework during this period also incorporated, specifies that holdings of government debt in a states' own currency are a zero-risk-weight asset, that is they are assigned a weight of zero in calculating capital requirements.
  • the governments should have agreed to make the EFSF/ESM available for direct recapitalization of banks instead of asking each government to be responsible for the capitalization.
  • Following a downgrading in late June 2012, all three major rating agencies rated the sovereign paper Cyprus below investment grade. According to ECB rules, that made the government debt not eligible as collateral for borrowing from the eurosystem, unless the ECB suspended the rules, as it had done for the cases of Greece, Portugal and Ireland. In the case of Cyprus, the ECB decided not to suspend the eligibility rule.
  • The governments have created risk in what before last week were considered perfectly safe deposits. This is going to have a chilling effect on deposits in any bank in a country perceived to be weak. This will mean the cost of funding will increase in the periphery of Europe and as a result, the cost of financing for businesses and households will increase. That will add to the divergences we already have and make the recession in the periphery of Europe deeper than it already is. This is really a disaster for European economic management as a whole. 
Gene Ellis

The Greek Austerity Myth by Daniel Gros - Project Syndicate - 0 views

www.project-syndicate.org/...ty-myth-by-daniel-gros-2015-02

shared by Gene Ellis on 15 Feb 15 - No Cached
  • The Greek Austerity Myth
  • Greece actually spends less on debt service than Italy or Ireland, both of which have much lower (gross) debt-to-GDP ratios. With payments on Greece's official foreign debt amounting to only 1.5% of GDP, debt service is not the country's problem.
  • The new Greek government's argument that this is an unreasonable target fails to withstand scrutiny. After all, when faced with excessively high debt, other European countries – including Belgium (from 1995), Ireland (from 1991), and Norway (from 1999) – maintained similar surpluses for at least ten years each, typically in the aftermath of a financial crisis.
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  • To be sure, one can reasonably argue that austerity in the eurozone has been excessive, and that fiscal deficits should have been much larger to sustain demand. But only governments with access to market finance can use expansionary fiscal policy to boost demand.
  • Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity.
  • Of course, Greece is not the first country to request emergency financing to delay budget cuts, and then complain that the cuts are excessive once the worst is over. This typically happens when the government runs a primary surplus. When the government can finance its current spending through taxes – and might even be able to increase expenditure, if it does not have to pay interest – the temptation to renege on debt intensifies.
  • The practical problem for Greece now is not the sustainability of a debt that matures in 20-30 years and carries very low interest rates; the real issue is the few payments to the IMF and the ECB that fall due this year – payments that the new government has promised to make.
Gene Ellis

Shinzo Abe's Monetary-Policy Delusions by Stephen S. Roach - Project Syndicate - 0 views

www.project-syndicate.org/...save-japan-by-stephen-s--roach

shared by Gene Ellis on 18 Jan 13 - No Cached
  • The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic “liquidity trap.” They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.
  • The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubbles – property and credit – fueled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repair – namely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.CommentsView/Create comment on this paragraph
  • US consumers have pulled back as never before.
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  • Central banks that buy sovereign debt issued by fiscal authorities offset market-imposed discipline on borrowing costs, effectively subsidizing public-sector profligacy.
  • Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged,
  • Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections. Household debt stood at 112% of income in the third quarter of 2012 – down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century. Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.
  • Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems. And a fragmented European banking system remains one of the weakest links in the regional daisy chain.
  • That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.
Gene Ellis

European Debt Crisis - The New York Times - 0 views

topics.nytimes.com/...index.html

european debt crisis

shared by Gene Ellis on 24 Dec 12 - No Cached
  • European Debt Crisis Navigator A list of resources from around the Web about the European debt crisis as selected by Journalist's Resource, a project of the Shorenstein Center at Harvard.
  • The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined at the Hip International Monetary Fund, November 2011
  • Gene Ellis on 24 Dec 12
     
    More resources on the debt crisis - a listing
Gene Ellis

George Soros: how to save the EU from the euro crisis - the speech in full | Business |... - 0 views

www.guardian.co.uk/...ave-eu-from-euro-crisis-speech

shared by Gene Ellis on 09 Apr 13 - No Cached
  • The crisis has also transformed the European Union into something radically different from what was originally intended. The EU was meant to be a voluntary association of equal states but the crisis has turned it into a hierarchy with Germany and other creditors in charge and the heavily indebted countries relegated to second-class status. While in theory Germany cannot dictate policy, in practice no policy can be proposed without obtaining Germany's permission first.
  • Italy now has a majority opposed to the euro and the trend is likely to grow. There is now a real danger that the euro crisis may end up destroying the European Union.
  • The answer to the first question is extremely complicated because the euro crisis is extremely complex. It has both a political and a financial dimension. And the financial dimension can be divided into at least three components: a sovereign debt crisis and a banking crisis, as well as divergences in competitiveness
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  • The crisis is almost entirely self-inflicted. It has the quality of a nightmare.
  • My interpretation of the euro crisis is very different from the views prevailing in Germany. I hope that by offering you a different perspective I may get you to reconsider your position before more damage is done. That is my goal in coming here.
  • I regarded the European Union as the embodiment of an open society – a voluntary association of equal states who surrendered part of their sovereignty for the common good.
  • The process of integration was spearheaded by a small group of far sighted statesmen who recognised that perfection was unattainable and practiced what Karl Popper called piecemeal social engineering. They set themselves limited objectives and firm timelines and then mobilised the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step.
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Excellent point!
  • Unfortunately, the Maastricht treaty was fundamentally flawed. The architects of the euro recognised that it was an incomplete construct: a currency union without a political union. The architects had reason to believe, however, that when the need arose, the political will to take the next step forward could be mobilized. After all, that was how the process of integration had worked until then.
  • For instance, the Maastricht Treaty took it for granted that only the public sector could produce chronic deficits because the private sector would always correct its own excesses. The financial crisis of 2007-8 proved that wrong.
  • When the Soviet empire started to disintegrate, Germany's leaders realized that reunification was possible only in the context of a more united Europe and they were prepared to make considerable sacrifices to achieve it. When it came to bargaining, they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement.
  • The financial crisis also revealed a near fatal defect in the construction of the euro: by creating an independent central bank, member countries became indebted in a currency they did not control. This exposed them to the risk of default.
  • Developed countries have no reason to default; they can always print money. Their currency may depreciate in value, but the risk of default is practically nonexistent. By contrast, less developed countries that have to borrow in a foreign currency run the risk of default. To make matters worse, financial markets can actually drive such countries into default through bear raids. The risk of default relegated some member countries to the status of a third world country that became over-indebted in a foreign currency. 
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Again, another excellent point!
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Not quite... Maggie Thatcher, a Conservative; and Gordon Brown, of Labour, both recognized this possible loss of sovereignty (and economic policy weapons they might use to keep the UK afloat), and refused to join the euro.
  • The emphasis placed on sovereign credit revealed the hitherto ignored feature of the euro, namely that by creating an independent central bank the euro member countries signed away part of their sovereign status.
  • Only at the end of 2009, when the extent of the Greek deficit was revealed, did the financial markets realize that a member country could actually default. But then the markets raised the risk premiums on the weaker countries with a vengeance.
  • Then the IMF and the international banking authorities saved the international banking system by lending just enough money to the heavily indebted countries to enable them to avoid default but at the cost of pushing them into a lasting depression. Latin America suffered a lost decade.
  • In effect, however, the euro had turned their government bonds into bonds of third world countries that carry the risk of default.
  • In retrospect, that was the root cause of the euro crisis.
  • The burden of responsibility falls mainly on Germany. The Bundesbank helped design the blueprint for the euro whose defects put Germany into the driver's seat.
  • he fact that Greece blatantly broke the rules has helped to support this attitude. But other countries like Spain and Ireland had played by the rules;
  • the misfortunes of the heavily indebted countries are largely caused by the rules that govern the euro.
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Well, yes, but this is an extremely big point.  If, instead of convergence, we continue to see growth patterns growing apart, what then?
  • Germany did not seek the dominant position into which it has been thrust and it is unwilling to accept the obligations and liabilities that go with it.
  • Austerity doesn't work.
  • As soon as the pressure from the financial markets abated, Germany started to whittle down the promises it had made at the height of the crisis.
  • What happened in Cyprus undermined the business model of European banks, which relies heavily on deposits. Until now the authorities went out of their way to protect depositors
  • Banks will have to pay risk premiums that will fall more heavily on weaker banks and the banks of weaker countries. The insidious link between the cost of sovereign debt and bank debt will be reinforced.
  • In this context the German word "Schuld" plays a key role. As you know it means both debt and responsibility or guilt.
  • If countries that abide by the fiscal compact were allowed to convert their entire existing stock of government debt into eurobonds, the positive impact would be little short of the miraculous.
  • Only the divergences in competitiveness would remain unresolved.
  • Germany is opposed to eurobonds on the grounds that once they are introduced there can be no assurance that the so-called periphery countries would not break the rules once again. I believe these fears are misplaced.
  • Losing the privilege of issuing eurobonds and having to pay stiff risk premiums would be a powerful inducement to stay in compliance.
  • There are also widespread fears that eurobonds would ruin Germany's credit rating. eurobonds are often compared with the Marshall Plan.
  • It is up to Germany to decide whether it is willing to authorise eurobonds or not. But it has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing eurobonds. In other words, if Germany is opposed to eurobonds it should consider leaving the euro and letting the others introduce them.
  • Individual countries would still need to undertake structural reforms. Those that fail to do so would turn into permanent pockets of poverty and dependency similar to the ones that persist in many rich countries.
  • They would survive on limited support from European Structural Funds and remittances
  • Second, the European Union also needs a banking union and eventually a political union.
  • If Germany left, the euro would depreciate. The debtor countries would regain their competitiveness. Their debt would diminish in real terms and, if they issued eurobonds, the threat of default would disappear. 
Gene Ellis

Happy 2013? | vox - 0 views

www.voxeu.org/happy-2013

shared by Gene Ellis on 26 Jan 13 - No Cached
  • Hopefully the following ten observations are less controversial in 2013 than in previous years.
  • As long known by elementary textbook readers, austerity policies have contractionary effects.
  • Debt reduction is a very long process; we're talking about decades,
  • ...20 more annotations...
  • The debt-to-GDP ratio is best reduced through sustained nominal GDP growth.
  • Besides, having been there, no one really wants to unleash inflation anymore. That leaves us with real GDP growth as a necessary condition for bringing the debt-to-GDP down painlessly.
  • But in today’s world voters are angry at everything that is called Europe and will not back a fiscal union.
  • The crisis has delivered a surprising degree of wage flexibility and labour mobility.
  • This means that the need for dissolving the euro back into national currencies at almost any cost has evaporated.
  • Sustained real growth should be the number one priority.
  • In most Eurozone countries, structural reforms are as needed now as they were before the crisis.
  • Banks are at the heart of a diabolic loop: bank holdings of their national public debts (Brunnermeier et al., 2011).
  • The long-hoped-for awakening of the ECB has produced several miracles, especially a major relaxation of market anguish.
  • For that reason, they deleverage, which leads to a credit crunch, which slows growth down.
  • The ECB is the lender of last resort both to banks and to governments.
  • This involves massive moral hazard.
  • Massive forbearance has allowed many banks to not fully account for the losses that they incurred in 2007-8.
  • Austerity policies must stop, now.
  • Growth will not return unless bank lending is adequately available.
  • The ECB may act as lender in last resort to banks and governments, but who will bear the residual costs?
  • The only remaining option is public debt restructuring, a purging of the legacy.
  • This will lead to bank failures. This means that debt reductions must be deep enough to make it possible for governments to then borrow, to shift to expansionary fiscal policies and to bail out the banks that they destroyed in the first place, in effect undoing the diabolic loop.
  • Who will lend? Even the best-crafted bank restructuring will not allow an immediate recovery of market access. The ECB is the only institution in the world that can help out.
  • There is no easy option for the Eurozone after three years of deep mismanagement. Governments will not accept drastic action unless forced to. This means that we need another round of crisis worsening.
  • Gene Ellis on 26 Jan 13
     
    Good article by Wyplosz on ten observations and five consequences of Euro policy. 4 Jan 2013
Gene Ellis

PrudentBear - 0 views

prudentbear.com/...featuredcommentaryview

GEP com nytimes nytimes com global europe GDP crisis syndicate euro

shared by Gene Ellis on 09 Jul 12 - No Cached
  • German exporters were major beneficiaries of this growth. German banks and financial institutions helped finance the growth.
  • Exports have provided the majority of Germany’s growth in recent years. Germany is heavily reliant on a narrowly based industrial sector, focused on investment goods—automobiles, industrial machinery, chemicals, electronics and medical devices. These sectors make up a quarter of its GDP and the bulk of exports.
  • Germany’s service sector is weak with lower productivity than comparable countries. While it argues that Greece should deregulate professions, many professions in Germany remain highly regulated. Trades and professions are regulated by complex technical rules and standards rooted in the medieval guild systems. Foreign entrants frequently find these rules difficult and expensive to navigate.
  • ...18 more annotations...
  • Despite the international standing of Deutsche Bank, Germany’s banking system is fragile. Several German banks required government support during the financial crisis. Highly fragmented (in part due to heavy government involvement) and with low profitability, German banks, especially the German Länder (state) owned Landsbanks, face problems. They have large exposures to European sovereign debt, real estate and structured securities.
  • Prior to 2005, the Landesbanken were able to borrow cheaply, relying on the guarantee of the state governments. The EU ruled these guarantees amounted to subsidies. Before the abolition of the guarantees, the Landesbanks issued large amounts of state-guaranteed loans which mature by December 2015.
  • While it insists on other countries reducing public debt, German debt levels are high—around 81% of GDP. The Bundesbank, Germany’s central bank, has stated that public debt levels will remain above 60% (the level stipulated by European treaties) for many years.
  • Germany’s greatest vulnerability is its financial exposures from the current crisis. German exposure to Europe, especially the troubled peripheral economies, is large.
  • German banks had exposures of around US$500 billion to the debt issues of peripheral nations. While the levels have been reduced, it remains substantial, especially when direct exposures to banks in these countries and indirect exposures via the global financial system are considered. The reduction in risk held by private banks has been offset by the increase in exposure of the German state, which assumed some of this exposure.
  • For example, the exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy is euro 918 billion as of April 2012. This exposure is also rising rapidly, especially driven by capital flight out of these countries.
  • Germany is now caught in a trap. Irrespective of the resolution of the debt crisis, Germany will suffer significant losses on its exposure – it will be the biggest loser.
  • Once the artificial boom ends, voters will discover they were betrayed by Germany’s pro-European political elite. There will be an electoral revolt and, as in the rest of Europe, a strong challenge from radical political forces with unpredictable consequences.
  • In late May 2012, French President Francois Hollande provided a curious argument in support of eurozone bonds: “Is it acceptable that some sovereigns can borrow at 6% and others at zero in the same monetary union?”
  • Political will for integration
  • In the peripheral economies, continued withdrawal of deposits from national banks (a rational choice given currency and confiscation risk) may necessitate either a Europe wide deposit guarantee system or further funding of banks.
  • A credible deposit insurance scheme would have to cover household deposits (say up to euro 100,000), which is around 72% of all deposits, in the peripheral countries. This would entail an insurance scheme for around euro 1.3 trillion of deposits.
  • Given that the Spanish Economy Ministry reports that euro 184 billion in loans to developers are “problematic,” the additional recapitalization needs of Spain’s banks may be as high as euro 200-300 billion in additional funds (20-30% of GDP)
  • A Greek default would result in losses to Germany of up to around euro 90 billion. Germany’s potential losses increase rapidly as more countries default or leave the eurozone.
  • Austerity or default will force many European economies into recession for a prolonged period. German exports will be affected given Europe is around 60% of its market, including around 40% within the eurozone. In case of a break-up of the euro, estimates of German growth range from -1% to below -10%. It is worth remembering that the German economy fell in size by around 5% in 2008, the worst result since the Second World War, mainly on the back of declining exports.
  • For example, Greece owes about euro 400 billion to private bondholders but increasingly to public bodies, such as the IMF and ECB, mainly due to the bailouts. If Greece walks away as some political parties have threatened, then the fallout for the lenders, such as Germany, are potentially calamitous.
  • But the largest single direct German exposure is the Bundesbank’s over euro 700 billion current exposure under the TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) to other central banks in the Eurozone.
  • by Satyajit Das
Gene Ellis

German and French banks call the shots - European, Business - Independent.ie - 0 views

www.independent.ie/...ks-call-the-shots-2607577.html

german french banks ireland debt

shared by Gene Ellis on 11 Jul 12 - No Cached
  • German and French banks call the shots Print Email  NormalLargeExtra Large ShareNew  0  0   Also in European Debt crisis: European shares edge lower and growth worries persist Bank of England's Tucker 'wasn't encouraged to lean on Barclays' Draghi keeps door open to further interest rate cuts Marks and Spencers sales hit by summer deluge Spain's debt tops 7pc danger level as Madrid gets more time European Home "Shocking" 2012 HoroscopeWhat Does 2012 Have In Store For You? Shockingly Accurate. See Free!www.PremiumAstrology.comExpat Health InsuranceQuick, Compare, Trusted Website Expatriate Health Insurance Quoteswww.ExpatFinder.com/Instant-Quoteshttp://www.googleadservices.com/pagead/aclk?sa=L&ai=BMEejVeb8T8fDKoSG_QaAhrTCB-q_1OYBmoqphxvAjbcB0NkREAMYAyDgw6kIKAU4AFD4gumFAmCpsL6AzAGgAairsfEDsgESd3d3LmluZGVwZW5kZW50LmllyAEB2gFfaHR0cDovL3d3dy5pbmRlcGVuZGVudC5pZS9idXNpbmVzcy9ldXJvcGVhbi9nZX
  • d, for reasons best
  • known to itself, the ECB -- in clear contravention of both previous market precedent and financial logic -- has insisted that the senior bondholders be repaid in full and has lent the Irish banks, institutions which it must have known were hopelessly insolvent, €70bn to do so.
  • ...1 more annotation...
  • Top of the list are German banks, to whom we owe €92bn with a further €38bn of other exposures. Does the fact that Irish banks potentially owe their counterparts up to €146bn explain the German government's implacable opposition to any write-down of the Irish banks' debts? After the British and the Germans, it is the French banks -- with total Irish bank loans of almost €32bn and a further €23bn of other exposures -- who have the biggest exposure to Ireland. Does this provide at least a partial explanation for French president Nicolas Sarkozy's truculence when faced with Irish requests that senior bondholders be forced to accept a haircut?
Gene Ellis

Crippled eurozone to face fresh debt crisis this year, warns ex-ECB strongman Axel Webe... - 0 views

www.telegraph.co.uk/...-ECB-strongman-Axel-Weber.html

shared by Gene Ellis on 24 Jan 14 - No Cached
  • Crippled eurozone to face fresh debt crisis this year, warns ex-ECB strongman Axel Weber
  • Harvard professor Kenneth Rogoff said the launch of the euro had been a "giant historic mistake, done to soon" that now requires a degree of fiscal union and a common bank resolution fund to make it work, but EMU leaders are still refusing to take these steps.
  • "People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can't leave this twisting in wind for another five years," he said.
  • ...8 more annotations...
  • Mr Rogoff said Europe is squandering the "scarce resource" of its youth, badly needed to fortify an ageing society as the demographic crunch sets in.
  • "If these latent technologies are not realised, Europe will wake up like Rip Van Winkel from a long Japan-like slumber to find itself a much smaller part of the world economy, and a lot less important."
  • Mr Rogoff said debt write-downs across the EMU periphery "will eventually happen" but the longer leaders let the crisis fester with half-measures, the worse damage this will do to European society in the end.
  • Mr Weber, who resigned from the Bundesbank and the ECB in a dispute over euro debt crisis strategy, said new "bail-in" rules for bond-holders of eurozone banks will cause investors to act pre-emptively, aiming to avoid large losses before the ECB issues its test verdicts. "We may see that speculators do not wait until November, but bet on winners and losers before that," he said.
  • Sir Martin said the eurozone is pursuing a reverse "Phillips Curve" - the trade off between jobs and inflation - as if it were testing "what level of unemployment it is prepared to tolerate for zero inflation".
  • Pierre Nanterme, chairman and chief executive officer of Accenture, said Europe is losing the great battle for competitiveness, and risks a perma-slump where debt burdens of 100pc of GDP prevent governments breaking free by investing in skills and technology.
  • He said Europe is falling further behind as the US basks in cheap energy and pours funds into cutting-edge technology. "A lot is at stake. If in 12 to 24 months no radical steps are taken to break the curse, we might have not just five, ten, but twenty years of a low-growth sluggish situation in Europe," he said.
  • "People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can't leave this twisting in wind for another five years," he said
Gene Ellis

Nigeria Pays Off Its Big Debt, Sign of an Economic Rebound - NYTimes.com - 0 views

query.nytimes.com/...fullpage.html

shared by Gene Ellis on 15 Jan 14 - No Cached
  • Nigeria reached a deal last October with the Paris Club, which includes the United States, Germany, France and other wealthy nations, that allowed it to pay off about $30 billion in accumulated debt for about $12 billion, an overall discount of about 60 percent.
  • Nigeria, which owed about $36 billion in overall debt, is one of the most indebted nations in the world.
  • Yet Nigeria had not been among the nations that have received write-offs or discounts on their debts, as several poor countries have. In part that is because of its reputation for corruption, earned by a succession of military governments that plundered the state treasury, and because Nigeria, with its oil wealth, is seen as being able to pay.
  • ...3 more annotations...
  • But Nigeria's debt was largely accumulated under civilian governments,
  • The World Bank president, Paul D. Wolfowitz, announced on Friday an important step toward providing $37 billion in debt relief to 17 of the poorest countries, most of them in Africa. He said he had enough votes from donor countries on the board of the International Development Association, the bank arm that provides very low interest loans, to approve the measure.
  • The 17 countries will begin receiving the relief, worth close to $1 billion a year over 40 years, on July 1. They are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia.
Gene Ellis

The Greek package: Eurozone rescue or seeds of an unravelled monetary union? | vox - 0 views

www.voxeu.org/...eeds-unravelled-monetary-union

shared by Gene Ellis on 29 Oct 13 - No Cached
  • The plan will not work.
  • The IMF has the option of suspending its disbursements and forcing a default, as it did with Argentina.
  • Once the markets realise this, they will further raise the interest that they request to roll over the maturing debt or simply refuse to refinance the debt.
  • ...7 more annotations...
  • At least, this will clarify the situation: the plan is about bailing out a Eurozone government, in direct violation of Art. 125 of the European Treaty, the so-called no-bail-out clause.
  • The next headache should be contagion.
  • What has been offered to Greece cannot be refused to other Eurozone governments
  • So, one more time, a (dwindling) group of deficit-stricken countries will have to provide money to increasingly large debtors. In fact, this process means that ultimately there is no national debt anymore, at least for the next few years.
  • An alternative to spreading mutual underwriting is debt monetisation.
  • The ECB does not buy assets outright, so the loss would be borne by the banks that used the Greek bonds as collateral for repo operations with the ECB. But banks are the ECB’s counterparties; if they default, the loss is the ECB’s.
  • Was there no other way? It would have been very easy to let Greece go straight to the IMF months ago and reschedule its debt with IMF’s assistance. This would have been a partial default, and the haircut could have been quite small. Most banks that are exposed to the Greek debt should have been able to withstand such losses. With a grace period of, say, three years, Greece would have had the breathing space that the latest plan tries so hard to organise
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