LAST CHANCE FOR THE EUROSYSTEM, by François Leclerc


Guest post. Translated from the French by Tim Gupwell

While the parties in the Greek Coalition government are trying to come to an agreement on a plan to make savings of 11.6 billion Euros over the coming two years, which is going to be painful even though they have to present it as a pledge of good faith, the European experts are working on a rescue plan, called the “last chance plan”. They are revisiting the issue from a perspective that has already been tackled. A new write-down of Greek debt is being looked into, which will be easier to sell from a political point of view than more new loans.

This time around, the suspended sentence will not be imposed upon the private banks, but upon the ECB and the central banks of the Eurosystem who had escaped hitherto. Together they hold great quantities of Greek debt securities, purchased in the context of the sovereign debt acquisition programme on the secondary markets. The objective is supposedly to reduce the country’s debt exposure in this way, something that successive governments have failed to achieve in spite of all the austerity measures adopted.

At the same time, it is tantamount to an admission that the two preceding rescue packages were badly designed and that however many delays in implementation can be imputed to the successive Greek Governments, they were both based on unrealistic assumptions.

The hair-cut which is being looked into would be more modest than the 70% which the private banks have already had to agree to, and is likely to be around 30%, which would bring the country’s total debt down to a level close to 100% of GDP. At the end of the first quarter of this year, it reached the level of 132% of GDP. But the figures are not set in stone; different possibilities are up for discussion. According to this new plan, the reduction of the debt burden could finally present a realistic possibility of getting the debt situation under control, but at the expense of another substantial effort from the Greeks, the principle of which has not been abandoned.

This begs another question: how will the ECB and the central banks be able to withstand these kinds of losses? Certain banks, like the Bank of France, may need to be recapitalized by their shareholder the State. The ECB will be in the same boat. The circle will be complete; the States will finance the plan, but indirectly and, above all, more discretely.

The Eurosystem has already become the bad bank of Europe, having agreed to become the holder of various types of assets which the commercial banks wanted to offload. The next logical step is to recognize the losses after they have been written down.

The problems encountered in the application of the European debt reduction strategy are perfectly illustrated by the example of Greece, despite this kind of sophisticated arrangements. This explains why the ECB and its money printing are increasingly regarded with a kind of yearning, unspoken love. The capacity of the states to finance or guarantee the loans from support funds (in order to help member states and banks) is nearly exhausted. Making use of the IMF is becoming a rather delicate issue, with Europe appearing to other member states to be seeking to monopolize the majority of the new resources entirely for its own benefit.

The ECB is the only real remaining option. The set-up currently being discussed is based on the principle that the ESM will be granted a banking license, the big story of the moment which risks remaining nothing more than that, unless an agreement can be made……Nevertheless, a solution needs to be found: there is no getting round the figures; once the Spanish debt has been nailed down in the Autumn, there will not be enough left to do the same for Italy, and increasing the ESM’s capital is not an option as far as the Germans are concerned.

The era of convoluted financial arrangements is coming to an end. What hypotheses haven’t we heard and seen, including some which have had to be abandoned after having been presented as the solution to the problem! The Americans are up against their wall of debt (they call it a cliff) and some Europeans would like the ECB to follow the path carved out by the Fed. They have missed the boat – the Fed has not had any more success and continues to dilly-dally about the prospect of a QE3 (a monetary injection destined to buy up financial securities), the side-effects of which cannot be known. It is one thing to finance the debt by continuing to take advantage of the privileged status of the dollar; it is quite another to try to relaunch the economy through monetary means…………..

The fact that the central banks are swaggering about bravely suits everybody, but solves nothing.

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