http://www.telegraph.co.uk/finance/financialcrisis/9352540/Germany-tells-Greece-to-stop-asking-for-help-and-start-cutting-budgets.html
4:20PM BST 24 Jun 2012
"In unusually blunt remarks, German finance minister Wolfgang Schaeuble said: “The most important task facing new prime minister [Antonis] Samaras is to enact the programme agreed upon quickly and without further delay instead of asking how much more others can do for Greece.”
His comments highlight Germany’s growing impatience with the eurozone’s problem nations in what is shaping up to be another significant week for the single currency bloc.
A formal request from Spain for up to €100bn (£80bn) of emergency funding for its banks is expected on Monday, while the week ends with a two-day summit in Brussels where German chancellor Angela Merkel is again expected to dig in her heels over the eurobonds championed by France’s new president, Francois Hollande. Such bonds would mutualise the debts of the 17 eurozone nations, effectively leaving Germany on the hook for more spendthrift members.
Greece’s new three-party coalition government took charge on Thursday, vowing to renegotiate the terms of its latest €130bn bail-out. It wants a two-year extension to the 2014 deadline for it to cut its budget deficit to 2.1pc of GDP from 9.3pc in 2011. Such delay would, however, require up to €20bn more foreign funding.
Mr Schaeuble added: “Greece hasn’t tried enough so far, that has to be said quite clearly… no one on Earth who has followed this issue would think that Greece has fulfilled what it has promised.”
Owing to ill-health, Greece’s new leaders will not be at the Brussels summit to hear that message personally. Mr Samaras underwent eye surgery on Saturday and incoming finance minister Vassilis Rapanos has been hospitalised with abdominal pains and dizziness. Their places will be taken by foreign minister Dimitris Avramopoulos and outgoing finance minister George Zanias. The illnesses at the top of the new Greek government have also caused the postponement of Monday’s planned Athens visit of the troika of lenders – the European Union, European Central Bank and International Monetary Fund.
In a separate weekend interview, Mr Schaeuble reiterated Germany’s implacable opposition to eurobonds, saying: “Anyone who has the chance to spend someone else’s money will do that.”
There is growing momentum, however, behind the concept of a banking union across the eurozone that would restore confidence among depositors, reduce capital flight, allow the ECB to withdraw from its firefighting responsibilities and break the damaging links between lenders and governments.
European Council president Herman Van Rompuy is expected to push for such a union at the Brussels summit, hailing it last week as one of the fundamental “building blocks” required to show “the eurozone is an irreversible project”.
Such a union was backed by the Bank for International Settlements, which said in its annual report: “The conclusion is hard to escape that a pan-European financial market and a pan-European central bank require a pan-European banking system.”
How any such banking union is constituted and regulated could potentially put the rest of the EU on a collision course with Britain, however. Treasury sources said Chancellor George Osborne saw such a union as a “logical step” for the 17-nation bloc but would fiercely oppose any extension across the entire 27-country EU. That would risk ceding more control over banking to Brussels and the replacement of the London-based European Banking Authority.
Separately, former prime minister Tony Blair told the BBC: “The only thing that will save the single currency now is... a sort of grand plan in which Germany is prepared to commit its economy fully to the single currency.”"
http://www.bloomberg.com/news/2012-06-22/ecb-loosens-collateral-rules-for-banks-to-ease-access-to-funds.html
"The Bundesbank opposition to the European Central Bank’s plan to help ailing financial institutions is its latest swipe at the crisis-fighting efforts of Mario Draghi’s central bank.
As Spanish banks scramble for collateral to use in the refinancing operations that are keeping them afloat, the Frankfurt-based ECB said it will cut the rating thresholds and amend eligibility requirements for some asset-backed securities. While the move will give stressed banks greater access to ECB liquidity, it may also increase the amount of risk on the central bank’s balance sheet.
We’re critical of this,” Bundesbank spokesman Michael Best said yesterday. In terms of collateral, “we won’t accept what we don’t have to accept,” he said.
The criticism highlights one of the fault lines dividing European officials as they struggle to end a crisis threatening to rip the currency union apart. As Draghi’s officials scramble to put together policies that will fight the latest stage of the turmoil, German policy makers are emphasizing the dangers of pursuing unorthodox policies that potentially put taxpayers on the hook for future losses.
“It’s almost the usual game: the ECB has to do something to alleviate a liquidity crisis and the Bundesbank isn’t very happy about it,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a telephone interview. “The Bundesbank being critical doesn’t fully counteract what the ECB is doing, but possibly makes it a little less effective.”
Fault Lines
Looser collateral is the latest issue to divide Europeans days before a summit that Italian Prime Minister Mario Monti said must succeed or risk a bond-market selloff. German policy makers are reluctant to put too much on the line to help debt- strapped nations before they fix their budgets and banks. French and Italian leaders are pushing for a wider range of crisis- fighting tools.Those debates have flared on the ECB’s Governing Council too. Two years ago, the German central bank came out and opposed the ECB’s unprecedented decision to buy the bonds of distressed nations as part of a broader push to stamp out a crisis that was starting to spread from Greece. While the German central bank ultimately went along with the plan, it has since been largely shelved and deemed ineffective by most ECB officials.
Weidmann Letter
In February, Bundesbank President Jens Weidmann wrote to Draghi warning of the risks the ECB is taking in lending more than 1 trillion euros ($1.3 trillion) to banks. The ECB’s Target2 system, which calculates debts between the euro region’s central banks, shows that the amount owed to the Bundesbank has soared as Germany helps fund the region’s most indebted nations.Earlier this year, the German central bank shunned another measure aimed at easing collateral requirements.
The ECB’s latest announcement is a “clear sign that the Bundesbank opposes any further increase in risks on the euro system’s balance sheet,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.
Draghi says that the money the ECB has pumped into the banking system prevented what he called earlier this month a “more serious credit crunch and possibly more serious disruptions.”
Haircuts
In its statement yesterday, the ECB Governing Council expanded the pool of securities eligible as collateral with a lower threshold.Residential mortgage-backed securities and loans to small and medium-sized enterprises rated at least BBB- at Standard & Poor’s will now be accepted with a valuation haircut, or risk premium, of 26 percent, the ECB said. The previous minimum rating on such securities was A-.
Auto loan, leasing and consumer finance asset-backed securities and those backed by commercial mortgages with a second-best rating of at least A- at Standard & Poor’s will now be eligible with a haircut of 16 percent, the ECB said.
Commercial mortgage-backed securities with a second-best rating of at least BBB- from S&P would face a haircut of 32 percent, according to the statement.
The “risk control framework with higher haircuts applicable to the newly eligible ABS aims at ensuring risk equalization across asset classes and maintaining the risk profile of the Eurosystem,” the ECB said in the statement.
“This is a case of the ECB having to do something to ensure that liquidity keeps flowing into the euro-zone banking system,” said Peter Dixon, an economist at Commerzbank AG in London. “It’s a solid reminder to those who say the ECB is not doing enough.”
To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Gabi Thesing in Luxembourg at gthesing@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net"
http://yanisvaroufakis.eu/2012/06/24/and-the-good-ship-greece-sails-on-letter-to-an-italian-colleague/
"And the Good Ship Greece Sails On: ‘Letter’ to an italian colleague
24 Jun A few weeks ago I was approached by Andrea Adriatico, a theatre director from Bologna’s Teatri Di Vita with an interesting request: Could I write a ‘letter’ to some fictional Italian economics professor, outlining on a colleague-to-colleague basis, the Greek ‘situation’ as it is experienced by a Greek economics professor. That letter would then be read out during a play, and be part of the play [entitled Cuore di… Grecia, i.e. Heart of… Greece). Well, I was intrigued and said I would do it. The ‘letter’ I ended up writing follows. The first performance is scheduled toward the end of July…Dear Colleague,
Like you, I suppose, I grew up with black and white images of movies depicting a southern Europe struggling to recover from the calamity of the mid-war era.
Like you, my mind is still full of images of struggling people whose trials and tribulations gave rise to waves of Italian and Greek migrants to far away places as well as to films like Ladri di biciclette or similar Greek ones where whole comic sequences were constructed around the yearning of a grown man for a cheese-pie or a bowl of desert. However, there came a time when it was no longer easy to recall the poverty and dispossession that gave those images and comic sequences their poignancy. As a result, our societies, Italy and Greece, drifted away from the cultural tradition of de Sica, Fellini, Koundouros and Kakoyiannis, and descended into the black hole of Berlusconi-esque vulgarity. During these years of ‘growth’ and consumerism, many of us hoped that our societies would find in themselves a capacity to rediscover the lost balance; to combine a full stomach with a preference for decent cinema over crass lifestyle shows on television.
Alas, we never got there. Before such a balance was struck (assuming that it could be struck), our generation’s 1929 hit. It happened in 2008 when, just like in 1929, Wall Street collapsed, the common currency of the era (the Gold Standard in 1930, the euro in 2010) began to unravel, and very soon our elites failed spectacularly to respond rationally to the Crisis’ triumphant march. Two short years after the Crisis hit my country, Greece, we have found ourselves, yet again, capable of relating to the comic sequences of the 1950s and 1960s movies revolving around the craving for a cheese-pie or the dream of desert.
When I was studying economics, as a young man, I recall I had serious difficulty understanding how it was that the governments of the mid-war era, from 1929 onwards, could have failed so consistently to arrest the economic malaise that led us, tragically, to the Second World War. I was reading about President Hoover’s commitment to reduce swiftly government expenditure, and to cut wages, while the US economy was imploding, and I just could not understand how he and his merry advisers could countenance such idiocy. I simply refused to believe that they were bad men wishing ill of their compatriots. But at the same time, I could not understand how they managed to convince themselves that their actions would bring relief to their suffering voters.
Well, many years passed since then and, at long last, I understood. Watching our government in Greece since the debt crisis erupted, observing Europe’s leadership dither and adopt one calamitous policy after the other, I finally got it. It is, come to think of it, not dissimilar to what happened in the United States in the late 1960s and early 1970s. Inside the Pentagon, smart generals understood perfectly well that America’s war in Vietnam could not be won. That sending more troops to fight in the jungles, unleashing more napalm bombs over Vietnamese towns, cranking up the war effort in general, was pointless. We know full well, courtesy of Daniel Ellsberg’s heroic efforts, that they knew individually, and in small groups, the error of their ways. And yet they found it impossible to coordinate with one another, to synthesise their views, so as to agree to a change of course. A change that would have saved thousands of American lives, hundreds of thousands of Vietnamese lives, not to mention a huge amount of money. Something similar is happening in Athens, in Rome, in Frankfurt, Berlin and Paris today. It is not that the members of our elites cannot see that Europe is like a train that is derailing in slow motion, with Greece being the first carriage to leave the tracks, Ireland and Portugal following, leading to the derailment of the larger carriages that follow: Spain, Italy, France and, finally, Germany itself. No, I believe that, in the eye of their mind, they can see it, at least as well as American generals could envision the final scenes in Saigon – with the helicopters airlifting the last Americans from the rooftop of the US Embassy. But, just like the American generals, they are finding it impossible to coordinate their viewpoints into a sensible policy response. None of them dare speak when they enter the conference rooms in which the important decisions are reached, lest they are accused of going ‘soft’ or of having ‘lost it’. So, they stay silent while Europe is burning, hoping against hope that the fire will put itself out, while knowing, in their heart of hearts, that it will do no such thing.
While they are dithering, fiddling as Athens, Rome, Madrid, Lisbon, Dublin are burning, our societies are descending into a mire in which hope vanishes, prospects are annihilated, life is cheapened, and where the only winners are the misanthropes, the ‘haters’, the seekers of scapegoats in the form of the ‘alien’, the Jew, the ‘different’, the ‘other’. As the lights are literally going out in my country, with families ‘choosing’ to have their electricity supply discontinued in order to put food on the dinner table, thugs ‘patrol’ the streets in search of the ‘enemy’. Nazi ideology is getting another chance, like hunger and dispossession, to infect, once again, our social fabric. And as our institutions, our trades unions, our cultural norms and organisations are turning into empty shells, little, if anything, stands in the way of the bigots, the racists, the exploiters of generalized pain and helplessness. Alas, the serpent’s egg is hatching again in Europe, and for the same reasons it did back then.
Your country and mine share a lot more of this sorry history than we care to admit. Before the war, both our societies spawned and tolerated fascist regimes. Your Mussolini and our Metaxas may have ended up waging war against one another, but they were both products of political failures and economic disasters that are eerily similar to the shared fate of our two countries today. I know that a strange and weird geography is at work in Europe today: Ireland is at pains to argue that it is not Greece, Portugal to claim that it is not Ireland, Spain screams that it is not Portugal and, of course, Italy wants to believe that it is not Spain. We must, I submit to you, cast this idiotic denial of our common malaise aside. Sure, Italy is not Greece but, nevertheless, the predicament that Italy is increasingly finding itself in as I am writing these lines cannot be usefully separated from the predicament of my country. Our disease may have resulted in a higher fever than the one you are experiencing but, believe me, it is the same virus. Your fever will rise tomorrow to the level at which ours is today.
Many people I know outside of Greece, including fellow economists, make the mistake of thinking of what Greece is experiencing as a deep recession. Let me tell you that this is no recession. This is a depression. What is the difference? Recessions are mere downturns. Periods of reduced economic activity and increased unemployment. As you and I teach our students, recessions are to capitalism that which Hell is to Christianity: unpleasant but essential for the ‘system’ to function. Periods of recession can be redemptive, in the sense that they ‘weed out’ of the economic eco-system the less efficient, the firms that should not really be in business, the products that are out of fashion, the productive techniques that are obsolete, the dinosaurs to coin a metaphor.
However, what is going on in Greece is no recession! Here, everyone is going under. Efficient and inefficient alike. Productive and unproductive. Potentially profitable and loss making enterprises. I know of factories that export everything they make to satisfied customers, that have full order books, a long history of profitability; and, yet, they are on the brink of bankruptcy. Why? Because their foreign suppliers will not accept their bankers’ guarantees in order to provide them with the necessary raw materials, as no one trusts the Greek banks anymore. But with the credit circuits well and truly broken, this Crisis is sinking every ship, wrecking every boat, ensuring that the whole of society drowns. And the more we cut wages, the more we increase taxes, the more we reduce benefits to the unemployed, the deeper the hole into which everyone is drawn. If anyone wants to explain the concept of a vicious circle, today’s Greece is a perfect case study.
Between you and I, from one economics professor to another, I need to convey to you a deep sense of shame about our profession. You know that other academics often compare us economists to seismologists, jesting that we are equally useless in predicting the phenomenon at the heart of our discipline. This is quite right. As a profession, we have never warned the world ex ante of an impending ‘earthquake’. Some isolated economists may have done so but, then again, a broken watch tells the time correctly twice a day. No, as a body of ‘scientists’ we have proven just as bad as seismologists are in telling us where, when and with what force the next earthquake will strike. Only we are much, much worse than seismologists.
Come to think of it: Behind every toxic CDO, behind all lethal financial engineering, there lurked some pristine model of one of us. Behind every economic policy that was responsible for ponzi (that is ‘pretend’) growth prior to the Crash of 2008, one can find some celebrated, some well respected economist who provided the ‘ideological’ cover for that policy to be adopted. Behind every austerity measure today, that suffocates our societies, again there stands an academic colleague of ours, whose models and theories provide the powers that be with the audacity to inflict such policies onto our peoples. In short, you and I are guilty for what our fellow Greeks and Italians are suffering. Even if we did not believe in these particular economic models, we did not do enough to alert the world to their toxicity. We are, indeed, guilty.
Last week an ex-student of mine, who is suffering from cancer, could no longer find the chemotherapy drugs that she depends on, following the collapse of the state’s agreement with pharmacists (who are in strife as a result of not having been paid, by the state, fro eighteen months). A number of her former professors (all economists) we got together and paid for the drugs to be purchased in cash. Helpful as this gesture was, it does not exonerate us. Our guilt is just as current as it was before that kind gesture. For we were the ones who taught students about the efficacy of financial markets, we had allowed the era of ponzi financialisation to become knows as The Great Moderation, we asked our students to have faith in the capacity of financial institutions to price risk properly, we sat idly by while our students read textbooks which taught them the great lie that markets are self regulating and that the best the state can do is get out of the markets’ way, letting it perform its miracle. Yes, my dear colleague, our heads should be hanging in shame. Even if individually we objected to the conventional ‘wisdom’ of our trade.
Before closing this letter, I want to evoke a lasting image by which to describe how my people, the people of Greece, are feeling right now. Do you remember Fellini’s brilliant E la nave va? Do you recall the war refugees on deck, being treated like an inconvenience by the crew? I shall not continue describing them. I am sure you recall Fellini’s masterly depiction. Well, this is how Greeks are feeling today, with good cause too, given the scapegoating that they have to suffer as the first domino to fall in a long chain of dominoes that threatens the whole of Europe with a postmodern version of an hideous, earlier era.
In sadness,
Faithfully yours
Yanis Varoufakis"
http://blogs.ft.com/gavyndavies/2012/06/22/some-unpleasant-eurozone-arithmetic/#axzz1yPQ76TeC
"Another week, another summit. Once again, we are being told, this time by Italian prime minister Mario Monti, that there is only one week left to save the euro. Yet the crisis still does not seem sufficiently acute to persuade eurozone leaders that a full resolution is necessary.
The next summit on June 28 and 29 will unveil a long term road map towards fiscal and banking union, which in better economic circumstances could appear highly impressive. But the market is currently focused on the shorter term. Unless there is some form of debt mutualisation at the summit, resulting in a decline in government bond yields in Spain and Italy, the crisis could rapidly worsen.
Debt mutualisation can come in many forms. The European Redemption Fund, proposed by the Council of Economic Experts in Germany (and discussed here) seems to have receded into the background this week but could still have an eventual role. More immediately, the main option on the table seems to be the use of the eurozone firewall (ie a combination of the EFSF and ESM) to buy secondary government debt, or inject capital directly to the banks. But the problem here is simple: a lack of money.
So far, the EFSF has lent €248bn of its original €440bn lending capacity. At the end of this month, the ESM treaty is supposed to be ratified, and the entity will become immediately operational with a maximum lending capacity of €500bn. However, there have been problems with ratification in several member states, including Germany, where the legal challenge being brought by the Left at the constitutional court could take a while to resolve.
This is not necessarily fatal, however, because the EFSF can fill the breach by undertaking new lending up to July 2013. The key is that the EFSF and the ESM together can lend an additional €500bn from now on. If the EFSF does more in the next 12 months, the ESM will have less money available later.
The first call on this money will be the €100bn which will be disbursed for the Spanish bank bail out. That €100bn will presumably need to come out of the total €500bn of new lending capacity, leaving €400bn for other purposes. Germany has been very insistent on maintaining the €500bn ceiling, because this sets a limit on its potential losses from this form of debt mutualisation. There is no sign of this changing.
If unleveraged, this €400bn looks like a very small number, compared with the financing needs of Spain and Italy in the next couple of years. It used to be said in the markets that the eurozone firewall might just be large enough to deal with a loss of market access for Spain, but would not be large enough to deal with Italy as well. That assessment could turn out to be too optimistic. The arithmetic of eurozone government refinancing needs, relative to the size of the current firewall, looks increasingly unpleasant.
In Spain, government refinancing needs up to the end of 2014 amount to around €564bn, or 52 per cent of a single year’s GDP. Of this, around one quarter stems from the budget deficit, while three quarters stems from maturing debt. Maturing debt is normally easier to refinance, because bond managers re-allocate the money they receive from redemptions back into the bond market. But that can quickly change during a crisis, when bond managers typically sit on their hands rather than reinvesting their cash. Spain has not yet lost market access, but is in danger of doing so.
Italy is different. Total refinancing needs up to the end of 2014 amount to €997bn, but 93 per cent of those needs stem from maturing debt. The primary budget surplus in Italy is a very strong defence against a market crisis, but not necessarily a sufficient defence if there are increasing fears of a euro break-up. Former prime minister Silvio Berlusconi’s flirtation with a return to the lira this week will not help scotch these fears.
Overall, the remaining €400bn firepower in the EFSF/ESM is probably inadequate to finance a bail-out programme for Spain, and would of course be dwarfed by the €1,600 bn needed for both Spain and Italy. In the near term, what this means is that there is very little spare money in the EFSF/ESM to initiate a bond buying programme in the secondary market, which was the favoured option in the G20 summit discussions this week.
If the EFSF/ESM uses its lending capacity in the near future to support Spanish and Italian secondary bond markets, it will rapidly absorb funds which might soon be needed for a Spanish debt programme. The IMF will hopefully be able to contribute to such a programme, but the attitude of the US to providing more financial support for the eurozone ahead of the Presidential election could be very hostile. Without IMF money, the arithmetic gets even more difficult. The markets can do arithmetic, and would quickly realise that a programme of secondary bond purchases would have inadequate firepower to restore confidence.
Increasing the lending capacity of the ESM, before it has even been ratified, in the current German political climate, is a non-starter. Leveraging the effective size of the EFSF/ESM by providing first tranche loss insurance to private bond investors has already been tried after previous summits, without any obvious success. That leaves one very familiar final option, which is a further use of the ECB balance sheet.
So we will probably see more debt mutualisation via the activities of the ECB. This could occur in several different flavours: outright bond purchases through the central bank’s Securities Markets Programme; allowing the ECB to provide leverage to the ESM; or further LTROs to encourage banks to hold more government debt. The ECB probably does not like any of this, but may well prefer the second and third flavours to the first.
Once again, it is all up to Mario Draghi."
The next summit on June 28 and 29 will unveil a long term road map towards fiscal and banking union, which in better economic circumstances could appear highly impressive. But the market is currently focused on the shorter term. Unless there is some form of debt mutualisation at the summit, resulting in a decline in government bond yields in Spain and Italy, the crisis could rapidly worsen.
Debt mutualisation can come in many forms. The European Redemption Fund, proposed by the Council of Economic Experts in Germany (and discussed here) seems to have receded into the background this week but could still have an eventual role. More immediately, the main option on the table seems to be the use of the eurozone firewall (ie a combination of the EFSF and ESM) to buy secondary government debt, or inject capital directly to the banks. But the problem here is simple: a lack of money.
So far, the EFSF has lent €248bn of its original €440bn lending capacity. At the end of this month, the ESM treaty is supposed to be ratified, and the entity will become immediately operational with a maximum lending capacity of €500bn. However, there have been problems with ratification in several member states, including Germany, where the legal challenge being brought by the Left at the constitutional court could take a while to resolve.
This is not necessarily fatal, however, because the EFSF can fill the breach by undertaking new lending up to July 2013. The key is that the EFSF and the ESM together can lend an additional €500bn from now on. If the EFSF does more in the next 12 months, the ESM will have less money available later.
The first call on this money will be the €100bn which will be disbursed for the Spanish bank bail out. That €100bn will presumably need to come out of the total €500bn of new lending capacity, leaving €400bn for other purposes. Germany has been very insistent on maintaining the €500bn ceiling, because this sets a limit on its potential losses from this form of debt mutualisation. There is no sign of this changing.
If unleveraged, this €400bn looks like a very small number, compared with the financing needs of Spain and Italy in the next couple of years. It used to be said in the markets that the eurozone firewall might just be large enough to deal with a loss of market access for Spain, but would not be large enough to deal with Italy as well. That assessment could turn out to be too optimistic. The arithmetic of eurozone government refinancing needs, relative to the size of the current firewall, looks increasingly unpleasant.
In Spain, government refinancing needs up to the end of 2014 amount to around €564bn, or 52 per cent of a single year’s GDP. Of this, around one quarter stems from the budget deficit, while three quarters stems from maturing debt. Maturing debt is normally easier to refinance, because bond managers re-allocate the money they receive from redemptions back into the bond market. But that can quickly change during a crisis, when bond managers typically sit on their hands rather than reinvesting their cash. Spain has not yet lost market access, but is in danger of doing so.
Italy is different. Total refinancing needs up to the end of 2014 amount to €997bn, but 93 per cent of those needs stem from maturing debt. The primary budget surplus in Italy is a very strong defence against a market crisis, but not necessarily a sufficient defence if there are increasing fears of a euro break-up. Former prime minister Silvio Berlusconi’s flirtation with a return to the lira this week will not help scotch these fears.
Overall, the remaining €400bn firepower in the EFSF/ESM is probably inadequate to finance a bail-out programme for Spain, and would of course be dwarfed by the €1,600 bn needed for both Spain and Italy. In the near term, what this means is that there is very little spare money in the EFSF/ESM to initiate a bond buying programme in the secondary market, which was the favoured option in the G20 summit discussions this week.
If the EFSF/ESM uses its lending capacity in the near future to support Spanish and Italian secondary bond markets, it will rapidly absorb funds which might soon be needed for a Spanish debt programme. The IMF will hopefully be able to contribute to such a programme, but the attitude of the US to providing more financial support for the eurozone ahead of the Presidential election could be very hostile. Without IMF money, the arithmetic gets even more difficult. The markets can do arithmetic, and would quickly realise that a programme of secondary bond purchases would have inadequate firepower to restore confidence.
Increasing the lending capacity of the ESM, before it has even been ratified, in the current German political climate, is a non-starter. Leveraging the effective size of the EFSF/ESM by providing first tranche loss insurance to private bond investors has already been tried after previous summits, without any obvious success. That leaves one very familiar final option, which is a further use of the ECB balance sheet.
So we will probably see more debt mutualisation via the activities of the ECB. This could occur in several different flavours: outright bond purchases through the central bank’s Securities Markets Programme; allowing the ECB to provide leverage to the ESM; or further LTROs to encourage banks to hold more government debt. The ECB probably does not like any of this, but may well prefer the second and third flavours to the first.
Once again, it is all up to Mario Draghi."
I need to read this again.
Martin Wolf is much plainer.
http://blogs.ft.com/martin-wolf-exchange/2012/06/22/the-g20-on-the-eurozone-and-fiscal-policy/
“Against the background of renewed market tensions, euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks. We welcome the significant actions taken since the last summit by the euro area to support growth, ensure financial stability and promote fiscal responsibility as a contribution to the G20 framework for strong, sustainable and balanced growth. In this context, we welcome Spain’s plan to recapitalize its banking system and the eurogroup’s announcement of support for Spain’s financial restructuring authority. The adoption of the fiscal compact and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs. The imminent establishment of the European Stability Mechanism is a substantial strengthening of the European firewalls. We fully support the actions of the euro area in moving forward with the completion of the Economic and Monetary Union. Towards that end, we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance. Euro area members will foster intra euro area adjustment through structural reforms to strengthen competitiveness in deficit countries and to promote demand and growth in surplus countries. The European Union members of the G20 are determined to move forward expeditiously on measures to support growth including through completing the European Single Market and making better use of European financial means, such as the European Investment Bank, pilot project bonds, and structural and cohesion funds, for more targeted investment, employment, growth and competitiveness, while maintaining the firm commitment to implement fiscal consolidation to be assessed on a structural basis. We look forward to the euro area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the euro area.”
This was the section of this week’s G20 communiqué that dealt with the eurozone.
Let us examine it closely.
“Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”The crucial word here is “necessary”. We can safely say that agreement on what this means is altogether lacking.
“We welcome the significant actions taken since the last summit by the Euro Area to support growth, ensure financial stability and promote fiscal responsibility as a contribution to the G20 framework for strong, sustainable and balanced growth.”If you believe these actions have been “significant”, given the potentially catastrophic pressures now working on both the public finances of Spain and Italy and the eurozone economy, then you are living in dreamland.
“In this context, we welcome Spain’s plan to recapitalize its banking system and the eurogroup’s announcement of support for Spain’s financial restructuring authority.”The deal to recapitalise Spain’s banks, at the expense of the solvency of the Spanish state, is almost certainly a disastrous error.
“The adoption of the fiscal compact and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs.”
The fiscal compact will do nothing to help in the current situation, unless it encourages Germany to release the purse strings (on which I am sceptical). In my view, it will also prove inoperable. As to “growth-enhancing policies”, the problem now is the weakness of demand, something that nobody who matters in the eurozone, including the European Central Bank, has the will to do much about.
“The imminent establishment of the European Stability Mechanism is a substantial strengthening of the European firewalls.”It is something, but it is also obviously inadequate and unlikely to get any bigger, as Gavyn Davies notes in a particularly important post. A firewall that is too small is useless.
“We fully support the actions of the euro area in moving forward with the completion of the economic and monetary union. Towards that end, we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance.”
This is important if something on a large enough scale is agreed soon. That seems inconceivable. A big choice has to be made between resolution, which means losses for creditors, and recapitalisation, which requires a large increase in eurozone fiscal resources. The European Stability Mechanism cannot be used for both recapitalisation of banks and financing Spain’s government: at €500bn, it is just not big enough.
“Euro area members will foster intra euro area adjustment through structural reforms to strengthen competitiveness in deficit countries and to promote demand and growth in surplus countries.”This is, once again, a repetition of the old mantra that what matters is “structural reforms”, which are supposed to deliver everything, including “demand and growth in surplus countries”. For the eurozone, which suffers deficient aggregate demand, this is not going to work over the relevant time horizon.
“The European Union members of the G20 are determined to move forward expeditiously on measures to support growth including through completing the European Single Market and making better use of European financial means, such as the European Investment Bank, pilot project bonds, and structural and cohesion funds, for more targeted investment, employment, growth and competitiveness, while maintaining the firm commitment to implement fiscal consolidation to be assessed on a structural basis.”
I cannot make head or tail of this. But it seems inconceivable that this will be more than window-dressing. The means currently available to the EU (or the eurozone) are just too small to make much of a difference to growth in the near term.
“We look forward to the euro area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the euro area.”
Good luck!
This, then, is depressing. Here is a very different succeeding paragraph:
“All G20 members will take the necessary actions to strengthen global growth and restore confidence. Advanced economies will ensure that the pace of fiscal consolidation is appropriate to support the recovery, taking country-specific circumstances into account and, in line with the Toronto commitments, address concerns about medium term fiscal sustainability. Those advanced and emerging economies which have fiscal space will let the automatic fiscal stabilizers to operate taking into account national circumstances and current demand conditions. Should economic conditions deteriorate significantly further, those countries with sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand, as appropriate. In many countries, higher investment in education, innovation and infrastructure can support the creation of jobs now while raising productivity and future growth prospects. Recognizing the need to pursue growth-oriented policies that support demand and recovery, the United States will calibrate the pace of its fiscal consolidation by ensuring that its public finances are placed on a sustainable long-run path so that a sharp fiscal contraction in 2013 is avoided.”
The section I have put in bold shows a genuine interest in fiscal policy. That is encouraging, as Jonathan Portes has noted even if too late and probably too little.
But this reconsideration of fiscal policy seems to apply to the US far more than the EU. The paragraph on the eurozone is essentially a supply-side paragraph. The following one, which refers to the US, emphasises demand.
The Atlantic remains very wide".
http://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/#more-31408
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I won’t try here to project the likely outcome of the euro crisis, since any such discussion will surely be overtaken by events. Instead, let me ask what it might take to make the euro workable even if it isn’t optimal.
One answer would be full integration, American-style – a United States of Europe, or at least a “transfer union” with much more in the way of automatic compensation for troubled regions. This does not, however, seem like a reasonable possibility for decades if not generations to come.
What about more limited fixes? I would suggest that the euro might be made workable if European leaders agreed on the following:
1. Europe-wide backing of banks. This would involve both some kind of federalized deposit insurance and a willingness to do TARP-type rescues at a European level – that is, if, say, a Spanish bank is in trouble in a way that threatens systemic stability, there should be an injection of capital in return for equity stakes by all European governments, rather than a loan to the Spanish government for the purpose of providing the capital injection. The point is that the bank rescues have to be severed from the question of sovereign solvency.
2. The ECB as a lender of last resort to governments, in the same way that national central banks already are. Yes, there will be complaints about moral hazard, which will have to be addressed somehow. But it’s now painfully obvious that removing the option of emergency liquidity provision from the central bank just makes the system too vulnerable to self-fulfilling panic.
3. Finally, a higher inflation target. Why? As I showed in Table 3, euro experience strongly suggests that downward nominal wage rigidity is a big issue. This means that “internal devaluation” via deflation is extremely difficult, and likely to fail politically if not economically. But it also means that the burden of adjustment might be substantially less if the overall Eurozone inflation rate were higher, so that Spain and other peripheral nations could restore competitiveness simply by lagging inflation in the core countries.
So maybe, maybe, the euro could be made workable. This still leaves the question of whether the euro even should be saved. After all, given everything I said, it looks increasingly as if the whole project was a mistake. Why not let it break up?
The answer, I think, is mainly political. Not entirely so – a euro breakup would be hugely disruptive, and exact high “transition” costs. Still, the enduring cost of a euro breakup would be that it would amount to a huge defeat for the broader European project I described at the start of this talk – a project that has done the world a vast amount of good, and one that no citizen of the world should want to see fail.
That said, it’s going to be an uphill struggle. The creation of the euro involved, in effect, a decision to ignore everything economists had said about optimum currency areas. Unfortunately, it turned out that optimum currency area theory was essentially right, erring only in understating the problems with a shared currency. And now that theory is taking its revenge.
REFERENCES
De Grauwe, Paul, “Managing a fragile Eurozone”, VoxEU, May 2011.
Kenen, Peter: “The Theory of Optimum Currency Areas: An Eclectic View” in R.Mundell and A. Swoboda eds, Monetary Problems of the International Economy, The University of Chicago Press, 1969
Mundell, Robert: A theory of Optimum Currency Areas, American Economic Review, 51 (4), 1961
Table 1: Labor mobility in action
MA share in US employment MA unemployment rate US unemployment rate
1986 2.70 4.0 7.0
1991 2.48 8.8 6.8
1996 2.43 4.6 5.4
Table 2: Florida and the Feds
2007 2010
Revenue paid to DC 136.5 111.4
Special unemployment benefits 0 2.9
Food stamps 1.4 5.1
Table 3: Hourly labor costs in the business sector, 2008=100
2006 2007 2008 2009 2010 2011
Estonia 73.1 87.8 100.0 98.2 96.2 100.7
Ireland 91.5 95.7 100.0 103.1 102.4 100.7
Latvia 62.8 81.7 100.0 99.9 97.1 100.3"
The last time the web felt like thid, Lehman Brothers was dying.
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