As pointed out before, here at the Econotwist’s we share Mr. Munchau’s basic view of the crisis, and we always appreciate his crystal clear comments.
The risks to financial stability in the euro zone is obviously quite higher than most of us like to think.
Here’s the post:
But behind this display of unity, a war is raging over how to solve the Greek debt crisis as we enter the most dangerous phase of the crisis yet.
We have known for some time that the European Central Bank is hostile to any form of debt restructuring. This also includes a “voluntary” extension of the maturity of Greek debt.
European finance ministers have invented a new word for this: “reprofiling” – a well-known expression taken from the field of cosmetic surgery.
This was the famous super-secret meeting whose very existence had been denied by officials.
The ECB has since stepped up its rhetoric, and is now threatening to deny Greek banks access to the ECB’s refinance operations after any restructuring.
It would force Greece out of the euro zone within days. You could say that the ECB is threatening to create so much mayhem in the financial system that the monetary union would effectively collapse.
One option would be to call the ECB’s bluff – if you think it is a bluff – and order a rescheduling of Greek debt.
Then take a step back, and see what happens.
Will the ECB really destroy the euro zone?
Then again, do we really want to bring about a situation in which the ECB is faced with a straight choice between an irrecoverable reputational disaster, and an irrecoverable factual disaster?
Angela Merkel has also ruled out an involuntary restructuring before 2013.
The German chancellor is a cautious advocate of voluntary schemes of investor participation, but has not yet said what she means by that.
I think caution will ultimately prevail. There will be no restructuring in the near future. What I can see, however, is some variant of the Vienna initiative.
They also pledged to recapitalize their subsidiaries in the region. The Vienna initiative solved a collective action problem and it worked.
The situation in Greece, however, is different.
The issue here is not to maintain the capital base of EU banks operating in Greece. But one could persuade financial companies to maintain a degree of exposure to Greece as a gesture of support.
It would take a large haircut, or an extreme rescheduling, to reduce the net present value of Greek debt in any meaningful way.
The best actions euro zone governments could take at this stage would be to stop all talking at the same time, to be more careful when discussing restructuring or rescheduling, not to invent new words and to revisit an important aspect of the design of the European financial stability facility (EFSF).
That would allow the EU to launch an equivalent of a Brady bond.
The EFSF could swap its own triple-A rated securities for Greek bonds, at a discount.
That would actually provide a market-based incentive for holders of peripheral debt securities to swap.
There would be no need for unofficial threats, moral suasion or anything else that might trigger a debt downgrade.
It would cost a bit of money, but not nearly as much as any of those total default or total bail-out options.
A reprofiling may quite possibly be the worst of all options. It will not render Greek debt sustainable, yet it may trigger a potentially catastrophic credit event.
Even if you discount the dire warnings from the ECB, it is still not clear what good it will do.
Having Ms. Lagarde at the IMF might help the euro zone, but it cannot make up for disastrous and incompetent crisis management.
It is going to be one, two or three.
A nose job will not do.
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- Greece: Just Do It!
- Eurogroup Chief Wants Secret Debates on Monetary Policy
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