the euro: fix it or abandon it
DESCRIPTION
This is a review talk present at the 3rd Greek Public Policy Forum in Chania, Crete. A brief review of the state of the eurozone crisis countries highlights the problems created by the design of the common currency. Non-standard policies of the ECB are reviewed and their success, or lack thereof, explained. Some flawed decisions in handling the Cyprus crisis are also pointed out and the presentation concludes on how the banking union could overcome some of the current problems.TRANSCRIPT
The Euro: Fix it or abandon it
Stavros A. Zenios
University of Cyprus
Senior Fellow the Wharton School, USA
Outline
¤ Some of the flaws
¤ Some flawed decisions: Manufactured contagion
¤ Banking Union: is it enough?
Is the quest for banking union urgent and timely?
Manifestations of the flaws
Manifestations of the flaws
Manifestations of the flaws
Why? 2 + 1 mechanisms
¤ Bank-sovereign loop, Brunnermeier et al. 2011 ¤ Governments “pressure” banks to buy government debt
¤ Banks with sovereign concentration need government assistance
¤ No lender of last resort
¤ No mechanism for bank resolution
¤ Capital flight, De Grawue 2012
¤ Manufactured contagion
Leo Tolstoy: Happy families are all alike; every unhappy family is unhappy in its own way.
0 100 200 300 400 500 600 700
Ireland
Greece
Cyprus
Cyprus -post Greek PSI
Mature economies
Households NFC FINANCIAL Govt
Why? Manufactured contagion
October 18, 2010, Deauville. No bailout.
Introduced credit risk in what was considered “safe” government debt.
March 16. Brussels. Bail in.
Introduced credit risk in what were considered “safe” bank deposits.
Who paid the Greek PSI?
!! Cyprus!! Greece! Germany!! Belgium!! France!! Portugal!Losses! 4,14! 24,3! 3,6! 2,1! 5,04! 0,42!%"GDP"" 23,03" 11,65" 0,14" 0,56" 0,25" 0,25"!
The greatest carry trade ever
¤ Acharya and Steffen, May 2013
¤ Investments in periphery countries financed by ECB repos
¤ Sovereign default not in EBA stress tests!
Bank of Cyprus exposure to GGB
¤ OK! But….
¤ Ex post ¤ Arbitrary ¤ Unfair
Bail in
Bail in
• Bad Politics in the way of Good Policy
• Haircut money-laundering Russian oligarchs
Basel Institute of Governance AML Index
Cyprus 4.93
Holland 5.03
Germany 5.80
Financial Action Task Force
Who gets a haircut?
68.4 billion in Jan. 2013
26-30 billion Russian money
What does a haircut look like?
Russian “oligarchs” è Eurobankers
Wipe out wealth 30% GDP
Slash business activity 9%-25% GDP
Freeze working capital of SMEs
Massive legal problems
Emergency Liquidity Assistance worth 9.2 billion
Extended to an apparently insolvent bank for 1 year
Passed on improperly to a solvent bank
Where was ECB?
Why was the bail in unfair?
Principles for Stable Capital Flows and Fair Debt Restructuring, 2013, Washington, DC: International Institute of Finance.
1. Transparency and timely flow of information
2. Close debtor-creditor dialogue and cooperation to avoid restructuring
3. Good-faith actions
4. Fair Treatment
What does a haircut look like?
Whatever it takes! Or…. As much as we can?
What kind of banking Union
¤ Single Supervisory Mechanism -SSM
¤ Single Resolution Mechanism –SRM
¤ Single Resolution Fund -SRF
25
SSM Decision-making
Based on a new procedure known as “non-objection”
• • The Supervisory Board
will propose draft decisions to the Governing Council of the ECB. If the Governing
SRM – The mother of organizational complexity
SSM Board (24 members)
ECB Governing Council (24 members)
SRM Board (23 members)
Consultation on “specific objections” with
Commission (28 members)
Single Resolution Fund
¤ Too little -- 55 billion
¤ Too late –start 2016 and completed in 2024
¤ No backstop
¤ FDIC could borrow up to USD 30 billion from Treasury
¤ Increased to USD 300 billion during the crisis
Getting out of a debt trap
Charles Wyplosz and Pierre Pâris, 2013.
Politically Acceptable Debt Restructuring in the Eurozone: The PADRE Plan.
Joseph Stiglitz, August 1, 2014.
“a global system is needed for debt restructuring”
Kenneth Rogoff, July 7, 2014.
“it is high time for a conversation on debt relief for the entire eurozone periphery”
Eurozone debt
Conclusions
…can we?
References For the Cyprus crisis:
Zenios, S.A., The Cyprus debt: Perfect crisis and a way forward.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2233239
Zenios, S.A., Fairness and reflexivity in the Cyprus bail inhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2409284
For debt restructuring:
Consiglio and Zenios, Risk profiles for reprofiling the sovereign debt of crisis countries,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2493695
For ECB policies:
Karl Whelan, The ECB and Non-Standard Policies: Too Little Too Late?, report IP/A/ECON/NT/2014-02, June 2014.
Bruegel blog, Fact: T.L.T.R.O. is Too Low To Resuscitate Optimism, Sept. 2014