End of the age of stability
12 September 2011
Frankfurter Allgemeine Zeitung
The resignation of the ECB’s chief economist, Juergen Stark, accelerates a trend that the Germans do not want to fess up to, writes the Frankfurter Allgemeine Zeitung: The end of the policy of stability at any cost to avoid state bankruptcy.
Institutions are sluggish creatures. They live by a schedule of habitual, well-worn procedures, which does indeed give rise to some confidence in what comes out at the end of the day. Loathing uncertainty, institutions find it tough to keep up with a changing environment. In most cases, changes spur debates about the meaning of the institutions. What are they actually supposed to be doing? This question was also posed by Juergen Stark, who resigned on Friday as chief economist of the European Central Bank (ECB).
The ECB has always been considered a legitimate child of the Bundesbank, dedicated solely to the stability of the currency. What Stark believes will happen if the central bank goes in for buying government bonds from highly indebted countries in a big way is clear. His contrarian stance he sets out as follows: “In the current environment one can assume that positive effects on confidence due to sound fiscal policy are considerable, and this is backed up by case studies that show that ambitious adjustment programmes are, after a short time, associated with positive effects on growth.” By “sound fiscal policy” and “ambitious adjustment programmes” Stark means “to save”, and nothing else.
In this view, the financial system is nothing more than the monetary equivalent of the real economy. Citizens save and businesses invest. Given that this were so, cutting government spending could well have positive effects over the long term.
Cutting back on this debt will lead to nothing
But are we the only ones still living on in this world? In Greece, something else is happening. The economic cycle depends on disposable incomes and investments, whether these come from the state or from firms. When everyone cuts back on their spending at the same time, this economy gets out of control and spins into a deflationary downward spiral.
The Greeks are getting poorer, and yet they still remain – and precisely because of this spiral – in debt. Greece is no longer an isolated case, either. The euro zone and the world economy are threatened by a wildfire. Everyone is trying to adapt, as Stark is appealing for them to do. But what to, exactly? Are there new technologies out there or ailing heavy industries, like the automobile and steel industries? Has China only now shown up as an overwhelming competitor?
Hardly. The problem is not the change in the real economy, but the attempt to service debts that have piled up in the financial system over the last 15 years and that have now landed in government bonds. It is the last of the bubbles in this messed-up system. States can only reduce their debt on one condition: that they do not try to service the debts of the past at the expense of the present. Old debts are in essence always replaced by new debts. That debt can be lowered only if the state spends less in growth periods – if they can get away with that.
Unfortunately, the problem isn’t restricted to Greece. All the countries of the West are already in crisis or on the verge of one. If these states all consolidate at once, they will all be pinned down in a similar situation: rising expenses due, for example, to rising unemployment, declining state revenues, and lack of investment. The whole, full-blown crisis. So just why are we doing this?
A world of make-believe
Not for any real economic structural adjustments, but because today Juergen Stark and others have discovered that the debt is much too high and we must reduce it. But cutting back on this debt will lead to nothing: it will mean not one cent is re-invested. Companies, that is, invest only if they can discover opportunities to make a profit, or if in the crisis the state steps into the picture to cover their losses. The state intends not to invest, however, but to consolidate.
In the end, the process of self-destruction eats through the entire economy. Without confidence, the system collapses too. Not very appealing prospects.
But what do Juergen Stark and many other Germans like him want? An ECB that searches for its meaning in something that got lost long ago: namely, in a policy of stability that makes state bankruptcies impossible. It’s evident that that cannot work. Those Germans like Juergen Stark live in a world of make-believe that recalls a long forgotten time. For it’s only Germany, as the largest economy in Europe, that can still ensure any confidence in Europe’s capacity to act.
A bankruptcy of Greece would be feasible only if it were also certain that bankruptcy would not await the rest of the euro zone as well. But it’s not likely, for the Germans simply lack the determination to bring it on. They prefer to believe in the meaning of an institution that has long since vanished. Bluntly put, it’s always been tough for the Germans to catch up with a changing environment.
Translated from the German by Anton Baer
Is more belt-tightening worth it?
12 September 2011
Eleftherotypia, 12 September 2011
“Cuts and more cuts, the strongest will survive,” runs a headline in Greek daily Eleftherotypia, following the government’s announcement of new budget cuts, totalling €1.7 million, aimed at bringing the deficit down to 7.6% of GDP as demanded by the troika (the European Central Bank, the European Commission and the International Monetary Fund).
The announcement, which ended 48 hours of suspense, was made at a time of a tense social and political climate and at a time when Greece’s European partners are talking more and more openly about the problem posed by remaining within the eurozone at any price and of exiting the single currency to return to the drachma, the paper says.
The new measures “show the triple failure of the government,” notes Eleftherotypia. First, it was unable to renegotiate with the troika the terms of its austerity plan in order to reduce its debt-reduction goals for 2011. Secondly, the executive recognises that it depends entirely on the demands of the troika and that it will have to adopt new austerity measures. Finally, the government’s austerity policies are unable to lead the country out of the crisis. “Adopting reforms, back against the wall, selling our sunshine to the Germans and being resigned to having a single salary per family will not suffice to contain the anger of the Greeks regarding these new, never-ending measures,” concludes the Athens paper.
Germany Readies Surrender Over Greece
Simon Kennedy and Brian Parkin, On Monday September 12, 2011, 5:14 am EDT
Germany may be getting ready to give up on Greece, as measures in the credit markets signal growing concern about the smaller nation’s ability to repay investors.
Yields on Greek two-year notes rose above 60 percent today for the first time. Credit-default swaps to insure the country’s five-year bonds and to speculate on government securities closed at an all-time high of 3,500 basis points on Sept. 9, according to CMA. The contracts are the highest in the world and more than three times the 1,134 basis points for Portuguese debt.
After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default.
“It feels like Germany is preparing itself for a debt default,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in an interview. “Fatigue is setting in. Germany could be a first mover or other countries could be preparing too.”
Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said Sept. 9. The move capped a week of escalating German threats that Greece won’t get the money unless it meets fiscal targets, and as investors raised bets on a default.
Geithner Weighs In
Protecting their banks and a hardening of rescue terms risk isolating Germany and unnerving global policy makers already fretting that the region’s political tussles are roiling markets and threatening growth. Underscoring the tone of weekend talks of Group of Seven finance chiefs, U.S. Treasury Secretary Timothy F. Geithner told Bloomberg Television that European authorities must “demonstrate they have enough political will” to end the crisis.
Lars Feld, a member of the German government’s council of economic advisers, said today that a “disorderly restructuring” of Greece may take place if the Greek government decides to get out of the euro zone.
“I don’t think this could be easily done,” Feld said in an interview with Bloomberg Television. “There are many, many technical difficulties and the contagion then would be much, much higher and much stronger than anything we observe” under an orderly restructuring, he said.
Slump in Euro
European bank credit risk has surged to an all-time high, according to the Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers, and the euro fell last week by the most against the dollar in a year. Investors have doubts about whether Greece will implement austerity moves fast enough to get a sixth payment from last year’s 110 billion-euro ($150 billion) bailout.
The euro was down 0.6 percent today against the dollar at $1.3601, the weakest level since February.
The Greek government’s top priority is “to save the country from bankruptcy,” Prime Minister George Papandreou said in a Sept. 10 speech in the northern Greek city of Thessaloniki. “We will remain in the euro” and this “means difficult decisions,” he said.
More evidence of rifts at the heart of policy making was exposed with the unexpected Sept. 9 announcement that Juergen Stark, a German, will quit the European Central Bank’s executive board over his opposition to the ECB’s purchases of bonds from debt-laden countries.
“Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” said Julian Callow, chief European economist at Barclays Capital in London. “This could complicate Germany’s involvement in additional bailout programs.”
At the G-7 gathering in the French port of Marseille, ECB President Jean-Claude Trichet and European Union Economic and Monetary Affairs Commissioner Olli Rehn said they knew nothing about the talk in Germany of the so-called Plan B to protect banks. French officials said they weren’t working on a parallel proposal and Bank of France Governor Christian Noyer said his country’s banks have the capital to withstand a Greek default.
BNP Paribas (BNP) SA, Societe Generale (GLE) SA and Credit Agricole SA (ACA), France’s largest banks by market value, may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings, two people with knowledge of the matter said on Sept. 10.
Moody’s said in June that the three banks were placed on review to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring,” and the companies’ current rating levels.
Among banks outside Greece, German lenders were the biggest holders of Greek government bonds, with a total of $14.1 billion at the end of March, according to consolidated banking statistics from the Bank for International Settlements. French banks followed with $13.4 billion. The German figure includes loans given by government-owned Kreditanstalt fuer Wiederaufbau as part of the first Greek rescue program.
The aim of the contingency plan is to shield German banks from losses from a possible Greek default, which has a more-than 90 percent chance of happening within five years, prices for insurance against default show.
The plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next portion of Greece’s bailout is withheld, said the three officials, who declined to be identified because the deliberations are being held in private. The successor to the government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.
The discussions aren’t intended to shove Athens out of the euro, said Klaus-Peter Flosbach, budget-policy spokesman of Merkel’s Christian Democratic Union and the Christian Social Union in parliament.
“It would be of central importance to keep the possibility of contagion in the euro zone as low as possible,” Flosbach said in an e-mail. “In any case, we’re not looking into pushing Greece out of the euro zone.”
Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said Germany’s concern is broader than Greece, which is in its third year of a deepening recession, and centers on how its banks and economy would cope if the debt crisis spreads.
“Germany is preparing for the worst, which is that the crisis in the euro zone is going to be much bigger for everyone,” Erixon said.
German lawmakers, who are scheduled to vote Sept. 29 on a second Greek aid package and revamped rescue fund, stepped up their criticism of Greece after an international mission to Athens suspended its report on the country’s progress two weeks ago.
“There can be no doubt” that Greece must fulfill the terms of aid to receive it, German Finance Minister Wolfgang Schaeuble said in Marseille. “Everybody must stand by the agreements.”
With a loss in her home state of Mecklenburg-Western Pomerania, Merkel’s coalition has been defeated or lost votes in all six state elections this year as voters reject putting more taxpayer money on the line for bailouts. Merkel has also antagonized markets and fellow leaders by initially holding out against aid for Greece and demanding investors pay a share of the assistance.
Fifty-three percent of Germans oppose further aid for Greece and wouldn’t save the country from default unless it fulfills terms of the rescue agreement, Bild am Sonntag reported, citing an Emnid poll of 503 respondents conducted Sept. 8.
French Budget Minister Valerie Pecresse said her nation would halt its loans to Greece if the country didn’t keep to its bail-out pledges, the Wall Street Journal reported, citing a television interview on French channel M6.
After European markets closed last week, Greek Finance Minister Evangelos Venizelos dismissed “rumors” of a default and said his nation is committed to “full implementation” of the terms of the July accord for a second aid package.
Budget measures including a special levy on real estate will be enough to meet targets set for 2011, Venizelos told reporters in Thessaloniki yesterday.
The market fallout served as the backdrop for the G-7 talks at which Canadian Finance Minister Jim Flaherty said Europe’s woes were the “number one” topic and that Greece may even need to quit the euro if it can’t consolidate its budget. Geithner said authorities “need to do whatever they can do to calm these pressures” and that rich European nations need to provide “unequivocal” support for their weak neighbors.
G-7 officials vowed to “take all necessary actions to ensure the resilience of banking systems and financial markets,” and to make a “concerted effort” to support a flagging world economy. They detailed no new policies.
Greece euro exit talk grows, but would it help?
by (Reuters) 9 Sep 2011
Dutch Prime Minister Mark Rutte provided perhaps the clearest indication yet that Greece’s 10-year euro membership might not be forever, outlining on Wednesday a plan under which a member state could leave the currency bloc if it consistently and repeatedly ignored budget deficit and other obligations.
“Countries which are not prepared to be placed under administratorship can choose to use the possibility to leave the eurozone,” he and his finance and economics ministers wrote in a proposal sent to the Dutch parliament, although it did not mention Greece or any other member state by name.
In whispers, some officials are giving a stark assessment, even if they do not yet represent the mainstream of EU thinking, where many still talk about a solution being found.
“I think the eurozone is on the verge of collapse,” said one senior official involved in analysing solutions to the crisis.
“Italy is the only country that matters now. Forget about Greece. Even if you could find a way to get Greece out of the eurozone, it wouldn’t resolve the Italian problem and it wouldn’t resolve the debt crisis.”
From the European Commission’s point of view, a country leaving the currency bloc is not only not being debated, it is not even possible, with the statutes that govern membership making no provision for members to leave the club.
“Neither exit nor expulsion from the euro area is possible according to the Lisbon treaty under which participation in the euro is irrevocable,” the Commission’s spokesman on economic and monetary affairs, Amadeu Altafaj, said on Thursday.
As one senior EU official put it succinctly: “The eurozone is not a cafe where you go in and you go out. The financial and monetary interdependence is so big, so strong… that the fate of one member creates problems for all of the others.”
Should I stay or should I go
That said, however, the options available for resolving the situation in Greece, where deficit-cutting measures and other EU/IMF-imposed targets have consistently been missed, are rapidly narrowing. And as they narrow, impatience grows.
If Greece fails to deliver on its obligations, which include raising 5 billion euros from privatisations this year, the EU and IMF have said they will not be able to release more aid to the country, which has already received one 110-billion-euro EU/IMF bailout and is expected to receive another of the same size soon.
At that point, if it were to have no further lifelines, Greece may find itself with no choice other than to consider the unthinkable — defaulting on its debts, renouncing the euro, reintroducing the drachma at a deeply discounted rate and attempting to stimulate a recovery via a painful devaluation.
Greek debt owned by private sector investors and the European Central Bank would be marked down by 50 percent or more, with the reverberations felt from Brussels to Beijing.
“Ladies and gentlemen, the situation is serious in Greece,” German finance minister Wolfgang Schaeuble , who has been at the heart of trying to resolve the crisis for the past two years, stated simply as he began a speech to Germany’s Bundestag on Thursday.
“At the moment the troika (EU/IMF/ECB) mission is suspended. There can be no illusions here. As long as this mission cannot confirm that Greece has fulfilled the conditions, then the next aid tranche cannot be paid. There is no wiggle room here.”
No one is saying it explicitly, but the Catch-22 for Athens would appear to be: “You can’t leave the eurozone, but you don’t have what it takes to stay in it either.”
Private economic analysts have begun to conclude that it is only a matter of time before a way is found to let Greece go.
“We are increasingly of the view that Greece will exit the euro,” Mark Burgess, chief investment officer of Threadneedle Investments, which has long been negative on the eurozone during the crisis, said in a research note this week.
“The question is, is it done in a coordinated fashion, accompanied by a state-funded recapitalising of the banking system, a cut in rates and a massive injection of liquidity, or is it uncoordinated?”
Breaking up is hard to do
Studies on how a country can leave or be forced to leave the eurozone have been done in the past, including a detailed examination by the European Central Bank in December 2009, which concluded that unilateral withdrawal from the euro would not be inconceivable, although it would also mean exit from the EU.
While a country might be able to find the legal grounds to quit the euro and the EU of its own accord, it wouldn’t be so possible for the eurozone or the EU to force a member out.
“Expulsion from either the EU or Economic and Monetary Union would be so challenging, conceptually, legally and practically, that its likelihood is close to zero,” the paper said.
That means that even if the rest of the eurozone were to decide Athens is no longer a viable member, they would be stuck with it for as long as Greece wants to stay in the club.
In that respect, those concerned about Greece’s ability to meet its obligations and worried about its threat to eurozone integrity may be better off focussing their attention on bigger issues threatening to fracture the bloc, such as Italy’s debt problems and the ramifications of a potential default by Rome.
With a sovereign bond market worth around 1.9 trillion euros — 120 percent of GDP — Italy is a heavy weight at the heart of Europe. Around 45 percent of its debts are held abroad, with many European banks and sovereigns major creditors.
“If Italy defaults, nearly every bank in Europe would feel the impact or go bust, either because they own debt or they are counterparties to debt,” said the official involved in analysing the ramifications of the debt crisis.
“Italy is too big to save and too big to fail. If the ECB stops buying Italian bonds, then we’re really in trouble and no one will be thinking about the problems with Greece.”
Papandreou-Van Rompuy talks in Brussels
20 Jun 2011
BRUSSELS – Prime Minister George Papandreou held talks here with European Council president Herman Van Rompuy, focusing on Greece’s mid-term fiscal strategic programme and the course of a new support package for Greece.
Speaking after a meeting with Papandreou, Van Rompuy noted that “I expressed my strong support to the prime minister and his unyielding effort for the reform of the Greek economy … I stressed the need for Greece to make further adjustment efforts to handle the current challenges, while recognising the progress achieved so far.”
According to Van Rompuy, “the package of measures agreed by the government and the troika on fiscal restructuring, privatisations and the structural reforms must be supported by the Greek Parliament. This will pave the way for the disbursement of the next tranche in mid-July.”
“We are working for a mid-term strategy, including the participation of the private sector, in the spirit of what was agreed to at the Eurogroup yesterday,” he said, adding: “given the duration, the size and the nature of the required reforms in Greece, national consensus is a precondition for success.”
On his part, Papandreou noted that he had “a creative and interesting discussion with Mr. Van Rompuy. We are in the process of an interesting negotiation with the member-states. We want to be consistent; we want to do what we must to achieve the goals. We made efforts in the previous year and we shall continue to make. I hope that Parliament will approve the programme. And I hope, however, that the Union will also have the will to handle the crisis, which is not a Greek crisis alone, with the appropriate decisions at the upcoming summit.” (ANA-MPA), Special contributor Ε. Karanasopoulou