Monday, 30 July 2012

An Alternative to the Greek Bailout

Don't know if you heard it but EU officials state that they plan to do another, smaller haircut to Greek bonds to make the debt level fall to about 100% of GDP thus theoretically making it more viable. This makes us understand the reasoning behind EU policymakers decisions: If one mistake doesn't fix things why not try two? Well gee guys did you have to do a PhD to learn that?

Without a doubt the Greek haircut was a mistake. All it did was make the banking system more fragile than it already was (let us not forget that it had already faced a sub-prime lending crisis which had barely finished when this started) and countries who thought had no financial problems turn to the ECB and the IMF for funding to rescue their banks. Another stupid idea is as I have mentioned in a previous article using the IMF to fund European countries. If the ECB will not act as a normal central bank then why bother with the Union and the common currency? Just make trade agreements and return to national currencies. Either we become the United States of Europe or we shut this thing up before it blows in our faces. But I am getting out of subject.

As usual, my friend Wolfgang (whom you have met here) will ask what alternative I would propose for the Greek Debt. Which is simple. Make a separate entity, like for example the EFSF, and let it buy all Greek debt. Since the entity will be funded by the ECB it will have no liquidity problems as the Greeks will slowly (as if now they are really fast in repaying it right Wolfgang?) repay their debt. The entity would control the old bonds and slowly repay the banks as the flow of cash increases with a flat interest rate for all bonds. The banks' Greek bonds would have been held in the entity without them being able to sell or otherwise use them; however this would be much better than taking losses of tens of billions of euros over a year. Ask any bank in Spain. Italy, Cyprus or Greece if you don't believe me!

What about refinancing then? Well here the idea would have remained the same. The country would have to go through severe structural changes, cuts in government spending, etc etc and the refinancing would be made by the ECB. This way the only country that would have been "punished" would have been the one which made the mistakes who led it there.

Had this occurred we wouldn't be talking about banking problems in almost any country. The only countries which might have faced that would have been Greece and Cyprus. If the banking sector problems had not occurred then the rating agencies would not have degraded most of the countries they had. Thus, with only some budget cuts the Eurozone would have been a happier place.

P.S. OK Wolfgang I admit it. The above plan has a caveat: It would essentially mean that Silvio Berlusconi (you remember him right? The bunga bunga guy!) would have remained in power. Oh well, I guess we would have to live with it. (Sorry Angela!)

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