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Can the ECB get any more explicit?

Eurointelligence: ECB RAISES STAKES ON GREEK DEBT RESTRUCTURING (15.04.2011)

Lorenzo Bini-Smaghi, the most prolific campaigner against default, told il Sole24 ore that the ECB had carried out an analysis on the potential impact of a Greek debt restructuring, and found it would imply the failure of a large part of the Greek banking system, as the Greek banks hold a large portion of the Greek sovereign debt. (Another reason is that Greeks would transfer all their deposit to foreign banks, a process that is already partially under way). At the point the Greek banks would no longer have access to ECB liquidity, and would have to end their support for the corporate sector. He said that since Greece does not have a primary balance, a default at this time would lead to the cessation of pension and other social payments. The Greek economy would collapse, with devastating economic and social consequences. He said the other countries should stop pushing Greece into a catastrophe. In what we would understand to be an indirect reference to Wolfgang Schäuble, he said that talk about restructuring had seriously negative effects on market sentiment.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 02:20:40 PM EST
[ Parent ]
Pass an emergency law saying that sovereign expenses will continue to be credited to the recipients accounts in Greek banks, who may then consider the least senior creditor's claims void in sufficient amount that the bank remains solvent. Essentially, the Greek sovereign would then first default on the sovereign debt, then default by proxy on its private sector debt.

Oh, and clamp down hard currency rationing before you begin.

If you really want to twist the knife, reorder creditor seniority by legal fiat to make - say - Deutche Bank the least senior creditor of all Greek banks. When they have no more DB interbank debt or bonds, proceed to the next major money Eurozone bank you believe is insolvent. If the ECB wants to play chicken with Greek civil society, let's see how many major Eurozone banks it's prepared to lose in the process.

Oh, and when you do it, make sure to widely publicise the amount of impairment of other €-zone banks' balance sheets. Of course, those numbers do not have to bear any but the most platonic relationship to the truth. If you can trigger a couple of bank runs with hostile rumour-mongering, then that's a fair enough payback for the ECB's attempts to murder your economy wholesale.

If you really want to have fun, void all non-bank private debt to individuals and other €-zone countries.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 04:00:49 PM EST
[ Parent ]
Would that Papandreou would do something like that, but if he would, things likely would not have gotten to this point. But, perhaps some of your analysis will have spread in Greece via Talos and other ET bloggers.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 15th, 2011 at 05:00:16 PM EST
[ Parent ]
Yes and no. Let's be quite clear that what I'm proposing here amounts to little more than economic terrorism: Deliberately causing bank runs in other people's countries is undoubtedly a hostile and unfriendly act.

Of course, that's precisely what the ECB is doing right now, which sort of relativises the ethics of the matter...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 05:17:05 PM EST
[ Parent ]
As lightly capitalized, if we can call it that, as some of the German banks appear to be, repudiation of even a $5.5 billion bond obligation, if it was leveraged 10:1 by the bank that purchased it and if it became public knowledge, could have serious consequences. Someone would want their $5 billion back and the bank's balance sheet would be down $5.5 billion from the "pray and delay" status previous to default.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 15th, 2011 at 05:10:49 PM EST
[ Parent ]
Help me with this: If Greece has currently (2010) a primary deficit of 4,5% than why would "a default at this time would lead to the cessation of pension and other social payments" and not a net cut of ~5% in all public expenses?
And how worse can this "market sentiment" be? Spreads are at over 1000 bps for 10 year bonds, the day the PM announced an extension of the auterity program complete with a sell out of most of the public sectors assets.

On another note "Greeks would transfer all their deposit to foreign banks, a process that is already partially under way" implies that when the process is completed, there won't be much of a problem. I note that the Greek taxpayer has offered the Greek banks from the start of the crisis until now, somewhere close to 110 billion euros in direct funding and (mostly) guarantees - 30 billion Euros a few days ago

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Sat Apr 16th, 2011 at 06:13:02 AM EST
[ Parent ]
On another note "Greeks would transfer all their deposit to foreign banks, a process that is already partially under way" implies that when the process is completed, there won't be much of a problem.

What is implies is that the Greek banks have for all intents and purposes already failed and the drain of cash out of Greece is impacting the current account balance. That is a process that should be stopped.

The charitable interpretation is that Bini Smaghi seems to be implying that the only eligible collateral the Greek banks have at this time is Greek debt, and were that to become worthless the Greek banks would lose access to ECB liquidity for that reason.

If either of these interpretations let alone both are correct, I think desperate corrective measures are needed, including a derogation of free movement of capital in and out of Greece. More than an outright ban, possibly a tax on outflows. This might allow Greece to restructure its banking sector without defaulting on the public debt. The situation might be hopeless, though, and then a default would follow after a complete collapse, whereas Bini Smaghi claims a collapse would follow a default.

On capital controls, see this post by Krugman and links therein.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 06:47:22 AM EST
[ Parent ]

If Greece has currently (2010) a primary deficit of 4,5% than why would "a default at this time would lead to the cessation of pension and other social payments" and not a net cut of ~5% in all public expenses?

Because the 5% is 5% of GDP, not 5% of government expenses (which are something closer to 35% of GDP - so spending would need to be slashed by 15% across the board.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Apr 16th, 2011 at 11:43:04 AM EST
[ Parent ]
My bad, I was repeating a previous calculation with the wrong numbers. The primary deficit this year is predicted according to the Greek ministry of finance's 2011 budget (a work of speculative fiction in many respects, but anyway) to be around 2 billion Euros (actually 1,7 but that has been already corrected. That is less than 5% of current expenditures, something like 3,5%.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Sat Apr 16th, 2011 at 01:31:34 PM EST
[ Parent ]
For the Greek gov't to rebalance its primary deficit from negative five percent of GDP, then the Greek gov't would need to withdraw spending to the tune of five percentage points of GDP times the tax rate and divided by the money savings rate of the people from whom it is withdrawn. So more like 15 % of Greek GDP, or around half of the government's budget.

Keynesian multipliers are just as dramatic in reverse as they are when you're doing it right...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:24:18 PM EST
[ Parent ]
Here's an ameliorated (by me, suggestions for better translation gratefully received) Google translation of what Il Sole 24 ORE makes public of Bini Smaghi's remarks (I'm presuming Eurointelligence saw more):

Bini Smaghi: l'euro non è troppo forte - Il Sole 24 OREBini Smaghi: the euro is not too strong - Il Sole 24 ORE
La cosa più frustrante nella discussione in corso è la povertà di analisi. Si rischia di prendere decisioni importanti, che avranno un impatto sulla vita di milioni di persone, sulla base di preconcetti ideologici. Una ristrutturazione del debito greco produrrebbe vari effetti, che bisogna considerare con attenzione. Il primo è una perdita per gli investitori internazionali. Nella maggior parte dei casi, questi investitori sono in grado di far fronte a tali perdite. Per molti il ragionamento finisce qui. È sbagliato.The most frustrating thing in this discussion is the poor quality of the analysis. The risk is of making important decisions that will impact the lives of millions of people on the basis of ideological preconceptions. A Greek debt restructuring would produce various effects, which must be considered carefully. The first is a loss for international investors. In most cases, these investors are able to cope with such losses. For many people, the argument ends here. That's a mistake.
Quali altri effetti vede?
Il prestito straordinario che gli altri Paesi europei hanno dato alla Grecia non verrebbe rimborsato e pertanto i contribuenti di questi Paesi perderebbero svariati miliardi di euro. Sicuramente si rafforzerebbe l'euroscetticismo dell'opinione pubblica che si oppone all'euro e chiederebbe l'uscita dei Paesi più deboli perché non rimborsano i debiti. Ma l'impatto più grave di un fallimento si avrebbe nel Paese che fallisce. Di questo molti si dimenticano, anche nella stessa Grecia.
What other effects do you see?
The extraordinary loan that other European countries have given to Greece would not be repaid and therefore the taxpayers of these countries would lose several billion euros. This would certainly strengthen Eurosceptic public opinion which is opposed to the euro and which would demand the exit of weaker countries because they do not repay their debts. But the most serious impact of a failure would occur in the country that fails. Many people forget this, even in Greece itself.
Più precisamente?
Secondo la nostra analisi una ristrutturazione del debito comporterebbe il fallimento di gran parte del sistema bancario greco, che detiene titoli di quel Paese ed è garantito in gran parte dallo Stato. Le banche greche non avrebbero più accesso al rifinanziamento presso la Bce e dovrebbero ridurre i loro impieghi a famiglie e imprese. Senza dimenticare infine l'impatto sui singoli risparmiatori, fondi pensione e altre istituzioni greche che tengono i loro risparmi in titoli pubblici. L'economia greca sarebbe in ginocchio, con effetti devastanti sulla coesione sociale e la tenuta del sistema democratico di quel Paese. In fin dei conti sta alla Grecia decidere la via da seguire, visto che le conseguenze peggiori saranno su di essa. Ma gli altri Paesi devono evitare di spingerla verso una catastrofe.
More specifically?
According to our analysis, debt restructuring would result in the failure of most of the Greek banking system, which holds bonds of that country and is largely guaranteed by the state. Greek banks would no longer have access to refinancing with the ECB and would have to reduce their lending to households and businesses. Not to mention finally the impact on individual investors, pension funds and other Greek institutions that hold their savings in government bonds. The Greek economy would be on its knees, with devastating effects on social cohesion and maintenance of the democratic system in that country. Ultimately it's up to Greece to decide the way forward, given that it will face the worst of the consequences. But other countries should avoid pushing Greece towards disaster.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:29:56 AM EST
[ Parent ]
I now see (thanks to turning Java on!) that there are further pages to the article...
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:32:44 AM EST
[ Parent ]
Bini Smaghi: l'euro non è troppo forte - Detto ciò, la Grecia riuscirà a - Il Sole 24 ORE
Detto ciò, la Grecia riuscirà a tornare sui mercati nel 2012, come previsto?
Per tornare sul mercato bisogna che gli investitori abbiano fiducia. Se si continua a ventilare la possibilità di ristrutturare il debito nessun investitore privato si prenderà il rischio di comprare titoli di Stato greci.
E se non riuscirà a tornare sui mercati?
Se non ha altre forme di finanziamento, la Grecia si troverà nella drammatica situazione di non riuscire a pagare gli stipendi dei propri dipendenti pubblici, le pensioni, ecc. In questo caso fallire o ristrutturare il debito non aiuterebbe, perché la Grecia ha un disavanzo primario e deve comunque indebitarsi per finanziare le spese correnti.
Having said this, will Greece be able to go back to the markets in 2012, as planned?
To return to the market, investors must have confidence. If you continue to air the possibility of restructuring the debt no private investor will take the risk of buying Greek bonds.
And if it cannot return to the markets?
If it has no other means of financing, Greece will be in the plight of not being able to pay the salaries of its civil servants, pensions, etc.. In this case, default or debt restructuring would not help, because Greece has a primary deficit and still needs to borrow to finance current expenditure.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:38:13 AM EST
[ Parent ]
In so many words, Greece (as an EU member state) lacks monetary sovereignty and must run its finances like a private entity because the ECB will not monetize its debt (by EU treaty prohibition and ideological opposition).

For the past 30 years politicians of the right have been using the idea of running the state like a private firm, but it mostly hasn't worked with the voters. It also was an economic fantasy. However, at least in the EU the institutional structures have been reformed in the direction dictated by Neoclassical economics and neoliberalism, resulting in a system in which operating according to the Austrian economic fantasies is the only legal possibility. This doesn't mean that macroeconomically this is less nonsensical than it ever was, but we have now managed to write this nonsense into the rules of the game whereas before it was all politics.

Now, one thing this means is that the state is in no position to provide any guarantees. Something like the restructuring of General Motors is not possible in the Eurozone (or no sensible government should attempt it, given the fiscal and monetary constraints under which it now operates). Also, bank guarantees are criminally reckless, and I have my doubts about deposit guarantees without an actual fund backing them.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 06:55:29 AM EST
[ Parent ]
bank guarantees are criminally reckless

Then surely they will expect Spain to allow banks with large exposure to Portugal to simply default and be resolved in the case that Portugal defaults. But, clearly they don't. And it is criminal to allow a default on lightly capitalized German banks.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Apr 16th, 2011 at 08:15:29 AM EST
[ Parent ]
So what does Bini Smaghi say about voters? Never mind them, the inevitable must be applied by a government of national unity or at least an agreement between government and opposition, because there is no alternative:

Bini Smaghi: l'euro non è troppo forte - Detto ciò, la Grecia riuscirà a - Il Sole 24 ORE
Intanto anche il Portogallo, in campagna elettorale, ha chiesto aiuto all'Unione. Si riuscirà a trovare un accordo che possa essere fatto proprio dal prossimo Governo, quale esso sia?
Non ci sono alternative al risanamento e alle riforme. Il problema del Portogallo è la bassa crescita. Per far fronte ad una crisi come quella che sta attraversando c'è bisogno di unità nel Paese, con un accordo tra maggioranza e opposizione su come risanare le finanze pubbliche e adottare riforme coraggiose che ripristino la competitività del Paese. Altrimenti i giochi politici interni rischiano di prevalere sull'interesse nazionale. Ciò è vero per il Portogallo, ma anche per la Grecia.
- Meanwhile, Portugal, during the election campaign, asked the Union for help. Will an agreement be found that will be accepted by the next government, whichever it may be?
BS: There is no alternative to reorganization and reform. Portugal's problem is low growth. To cope with a crisis like the one it is going through calls for the unity of the country, with an agreement between the majority and the opposition about how to return to healthy public finances and to adopt courageous reforms that restore the country's competitiveness. Otherwise, the internal political games are likely to prevail over the national interest. This is true for Portugal, but also for Greece.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 08:50:14 AM EST
[ Parent ]
Gotta love that the answers are "BS" speaking...

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Apr 16th, 2011 at 11:45:15 AM EST
[ Parent ]
Though my only concern was for brevity, of course.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 12:31:19 PM EST
[ Parent ]
The only "courageous reform" available that would let Greece "to return to healthy public finances" is for the Greek Government to default on all or part of the foreign debt, starting with the debt from those who have been talking up the risk of default. If that were followed by Portugal doing the same and Ireland providing huge haircuts on its bonds to foreign banks the ECB, IMF, Germany and France, along with the relevant EU organizations would possibly be too busy dealing with more important problems to pay much attention to Greece. Greece could help itself domestically by issuing a domestic currency, going after what ever wealth of the Greek oligarchs it could, stopping the rent seeking by the financial sector and stop worrying about the dictates of the "troika".

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Apr 16th, 2011 at 04:22:41 PM EST
[ Parent ]
Bini Smaghi: l'euro non è troppo forte - Detto ciò, la Grecia riuscirà a - Il Sole 24 ORE
Eppure, il ministro delle Finanze tedesco Wolfgang Schäuble avrebbe detto che i timori legati a una ristrutturazione del debito, oggi della Grecia, domani di un altro Paese, sono «esagerati».
Ho già sentito queste accuse, per esempio nel settembre 2008, quando alcuni sostenevano che il mercato aveva avuto tutto il tempo per far fronte al fallimento di una banca d'investimento e che i rischi di contagio sarebbero stati contenuti. Lehman Brothers è stata fatta fallire e questo è stato un errore di valutazione madornale, pagato con la più grossa crisi finanziaria dal dopoguerra, con milioni di disoccupati. Vogliamo riprovarci? Veramente non abbiamo capito nulla di questa crisi? La Bce intende dire chiaramente ai governi quali rischi prendono se si comportano allo stesso modo. Sta poi a loro decidere.
Ma l'ipotesi di una ristrutturazione dei debiti sovrani nella zona euro non si imporrà da sé nel 2013, quando verrà attivato l'Esm, il nuovo paracadute europeo per i Paesi più indebitati?
Come è stato ribadito nel recente Consiglio europeo le ristrutturazioni del debito dovranno rimanere eventi eccezionali, anche dopo il 2013, e solo in casi drammatici come quelli che in passato si sono verificati, generalmente in Paesi sottosviluppati come lo Zimbabwe o l'Ecuador, mai nei Paesi dell'Unione europea.
- Still, the German Finance Minister Wolfgang Schäuble said that fears of a debt restructuring, in Greece today, tomorrow in another country, are "exaggerated. "
BS: I've heard these accusations, for example, in September 2008, when some argued that the market had had time to cope with the failure of an investment bank and that the risk of infection would be contained. Lehman Brothers was made ​​bankrupt and that was a glaring error of assessment, paid for with the biggest financial crisis since the war, with millions of unemployed. We want to try it again? We have not really understood anything about this crisis? The ECB aims to make it clear to governments what risks they take if they behave the same way. It is then up to them to decide.
- But doesn't the hypothesis of a restructuring of sovereign debt in the euro area impose itself in 2013, when the ESM, the new European safety mechanism for the most indebted countries, will be activated?
BS: As was reiterated in the recent European Council, debt restructurings will be exceptional events, even after 2013, and only in dramatic cases such as those that occurred in the past, usually in underdeveloped countries such as Zimbabwe and Ecuador, never in European Union countries.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:46:28 AM EST
[ Parent ]
I knew there was something about 2013...
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:47:27 AM EST
[ Parent ]
As was reiterated in the recent European Council, debt restructurings will be exceptional events, even after 2013, and only in dramatic cases such as those that occurred in the past, usually in underdeveloped countries such as Zimbabwe and Ecuador, never in European Union countries.

This is such a load of drivel.

I'm going to send Mr. Bini Smaghi a copy of This Time is Different by Reinhart and Rogoff so he learns some economic history.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 04:51:14 PM EST
[ Parent ]
Greek banks would no longer have access to refinancing with the ECB

This is the policy decision that should be highlighted.

There is no law of nature, or of economics, or of the European Union that states that the ECB can not rediscount new Greek bonds that are used to recapitalise the "good bank" part of the Greek banks, after the bondholders, management, interbank loans and deposits above the guarantee limit have been destroyed. Those new bonds will be if not pristine then at least much lower risk by any rational analysis than the old Greek bonds. Refusing to rediscount the new bonds while being prepared to rediscount the old bonds is an explicit admission that at least one of the following is true:

  1. The ECB should not be holding Greek bonds now.

  2. The ECB is threatening to refuse to rediscount Greek private bank assets based on a policy decision to punish Greece in the event of a default, rather than based on a sane and sober analysis of the real default risk at the time the rediscount is granted.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:37:36 PM EST
[ Parent ]
On 1, yes they should. There is nothing to prevent the ECB from repo-ing them at a steep discount with respect to the market valuation which already are about 50% of par value.

So, if you have a Greek bond and supposedly you can sell it at a 50% discount in the secondary market, why could you not repo it at a 60% discount?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sun Apr 17th, 2011 at 02:50:47 PM EST
[ Parent ]
Of course that would be the sane and sensible view. But it is not logically impossible to believe that the central bank should only rediscount pristine bonds. The logical inconsistency is between admitting that it is proper for the central bank to rediscount dirty bonds before the default and not wanting to rediscount less dirty bonds after the default.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 17th, 2011 at 05:14:09 PM EST
[ Parent ]

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