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Euro Zone Strikes Deal on 2nd Greek Package, EFSF

Posted by WARREN MOSLER on October 27th, 2011

The markets like the announcement. Of course they also liked QE2…

Unfortunately, as previously discussed, without the ECB the EFSF isn’t sustainable. It’s like trying to lift up the bucket by the handle when you are standing in it.

Nor is it cast in stone yet, but all subject to details.

Also, the positive market response, if it continues, only encourages the continuing austerity measures that are weakening the euro economy and forcing already unsustainable deficits higher.

And, again, it’s a case of ‘the food was terrible and the portions were small.’

Starting with the 50% private sector loss on Greek bonds-

Presumably that ‘works’ if it indeed brings Greek debt down to 120% of GDP from 160% by 2020. But that implies the austerity measures won’t continue to reduce GDP and cause the Greek deficit to increase, as continues to be the case.

It presumes the 50% haircut will be considered sufficiently voluntary to not be a credit event that triggers a variety of global default clauses.

The rest of the ‘package’ presumes markets won’t reduce the presumed credit worthiness of member nations who fund the EFSF.

It presumes private sector funds will recapitalize the banks that lost capital on the write downs.

It presumes the EFSF won’t be needed to fully fund Portugal, Spain, and Italy.

It presumes banks and other investors required to be prudent and financially responsible to shareholders will continue to buy other euro member nation debt even after seeing the euro zone members allow Greece to default on half of their obligations.

That is, how could any bank now buy, for example, Italian debt, in full knowledge that euro zone policy options include a forced write down of that debt. And not in extreme, unforeseen circumstances, but under current conditions.

And how can prudent investors invest in the banks when they’ve just seen euro zone remove some 100 billion euro in equity by decree?

The problem is, it takes a presumption of general improvement to presume additional losses will not be incurred by investors.

And it takes a presumption of general improvement to presume the EFSF will be successful.

And that requires the presumption that continued austerity measures will result in a general improvement.

Even as all evidence (and most theory) is showing the opposite.

Euro deal leaves much to do on rescue fund, Greek debt

By Luke baker and Julien Toyer

October 27 (Reuters) — Euro zone leaders struck a last-minute deal to limit the damage from the currency bloc’s debt crisis early on Thursday but are still far from finalizing plans to slash Greece’s debt burden and strengthen their rescue fund.

37 Responses to “Euro Zone Strikes Deal on 2nd Greek Package, EFSF”

  1. Hugo Heden Says:

    So, what’s your main proposal that you want to get out there right now?

    The per capita distribution of funds to the Euro-nations? (Do you have a link to a layman style article on that?)

    The Mosler bonds?

    Reply

    WARREN MOSLER Reply:

    the per capita distribution still works.

    started here, maybe:

    http://moslereconomics.com/2009/02/17/re-proposals-for-the-eurozone-2/

    And then an expanded discussion was posted on this website at various times as well.

    i also went though it in my cnbc video.

    The annual per capita distribution to the nat govs still works to end the solvency issue.

    the ECB deficit spending and running the elr/jg program still can be done as well

    Reply

    SG Reply:

    @WARREN MOSLER,

    Warren, hoe does the EIB fit into the equation? Does the EIB have full acces to ECB funding and thus can act as a conduit betweeen the ECB and EFSF, bypassing German approval.

    Reply

    SG Reply:

    @SG,

    i.e., using the EIB bank status with the ECB to create a structure to guarantee the bank debt.

    WARREN MOSLER Reply:

    there’s no will to even consider it. if there was, they’d just use the ECB?

    WARREN MOSLER Reply:

    it doesn’t fit in.

    Hugo Heden Reply:

    @WARREN MOSLER,

    Thanks.

    The CNBC Video: http://moslereconomics.com/2010/02/16/warren-on-cnbc/

    … but according to our next guest, the answer to Europe’s problems could be as simple as printing more money .. or adding something .. on a spread sheet there .. and lots of it. Please welcome Warren Mosler! Good stuff :-)

    And I think this is pretty good as well: The Eurozone Solution For Greece Is A Very “Clever Bluff”?

    http://www.huffingtonpost.com/warren-mosler/the-eurozone-solution-for_b_497170.html

    My proposal is for the ECB to distribute 1 trillion euro annually to the national governments on a per capita basis. The per capita criteria means that it is neither a targeted bailout nor a reward for bad behavior. This distribution would immediately adjust national government debt ratios downward which eases credit fears without triggering additional national government spending. This serves to dramatically ease credit tensions and thereby foster normal functioning of the credit markets for the national government debt issues.

    Reply

  2. Dan Furlano Says:

    Anyone listening to the IMF conference? Rather interesting except for the Chamber of Commerce presentation.

    Simon Johnson is such a good speaker and has some real balls.

    Reply

  3. WARREN MOSLER Says:

    from Cliff today:

    I’d like to provide some of the background for the European Bias Fund and the Tail Hedging programs. For many years we have continually focused on the issues surrounding the debt dynamics in Europe. Here is how we see the European landscape. Virtually no one correctly articulates the European monetary problem, even at this relatively late stage. The problem: that Europe turned fiat sovereign issuers into municipalities through the Maastricht Treaty. Municipalities do not have the ability to run continuous deficits and build large debt burdens beyond what the market believes they can reasonably service. Fiat sovereigns like the U.S., UK and Japan only drain excess reserves through the issuance of securities. They are not actually borrowing the money. This dynamic has not been properly recognized or articulated by European policy makers, nor has the effective solution been seriously entertained – a return to a fiat sovereign regime through a central fiscal authority that has the simple ability to credit accounts with Euros, another way of saying the ability to actually print money. The ECB and the national central banks actually do have this ability, but there is no authority mechanism for these banks to simply credit accounts to enable desired national government spending.

    What is actually happening now though? An important interim step is being drafted. Let Greece write down debt sufficiently to be able to service the debt that remains post default. The proposal includes a 50% write down of current outstanding bond issues, but that does not include outstanding Greek Treasury bills, and it does not include ECB holdings. Thus the write down only affects about half of outstanding Greek debt. Therefore, even this measure may be quite insufficient to bring Greece towards sustainable solvency. Furthermore, the write down for the actual bondholders is greater than 50% because the 35% given back in the form of 30 year Greek bonds will not be worth anything close to par … maybe just 60-70 cents on the dollar. This large 50-60% write down may cause many financial institutions, particularly European banks, to have severe capital impairment. Thus the larger Greek write downs are being paired with a European recapitalization of banks in order to avoid systemic stresses. But even here, we do not have a clear view of the ultimate ramifications of these large write-downs. Furthermore, because of the fact that ISDA officials are currently claimingthat this write-down is not a CDS triggering event, we do not know the wider ramifications on credit markets and default swap markets.

    Nevertheless, while this plan may accomplish a Greek write down, and may support the banks through that write down process, it still does not address the central issue. The central issue is that the member states’ solvency is still the problem. Portugal, still projected to have over an 8% budget deficit next year cannot service its debt. Neither can Ireland, nor most likely, neither can almost any of the Euro member states. And this bank recapitalization, bank bailout, bank nationalization, all it does is provide a near term band aid to the situation, but in reality it adds to the burden of the states’ insolvency.

    What else is happening in Europe? Now that all member nations have approved the expanded EFSF’s capacity and powers, the EFSF will have about 440BB Euro of funds available to deal with bank and member state solvency issues. It’s not enough. Even with the leverage being afforded to the EFSF to enable it to support over 1 trillion of Euro state issuance, this is simply not enough to deal with the prospect of an insolvent Italy or Spain. And a leveraged EFSF may lose its ability to stay AAA and have investors willing to fund it. I do not believe the expanded EFSF will solve the problem.
    Right now, it is only the ECB that can fund … can fund all issuance, secondary or primary. But it’s prohibited from funding primary issuance. The newly empowered EFSF will be able to buy primary issuance … but it’s limited in scope. If the EFSF can be a bank, with unlimited lines to the ECB, that could provide the channel for unlimited funding for all states. But that is currently seen as a definitive Maastricht Treaty violation and is staunchly opposed by Germany and the ECB itself.

    So we are left with the ECB buying secondary issues, supporting the bond market, hoping primary issuance is enabled by its close support of surrounding issues, but the ECB is consequently calling the tune for fiscal austerity throughout the Eurozone and placing strict conditions on each state in return for the ECB’s willingness to come to their aid. This Greek write down will be surely accompanied by a new austerity package cutting public sector salaries, suspending employment for tens of thousands of public workers and curtailing pensions to higher income individuals. Portugal is having to increase taxes and decrease welfare payments. Spain and Italy are in the midst of substantial deficit reduction programs. And there are calls to open the Lisbon Treaty in order to be able to control all national budgets around the Euro area. Thus, the austerity continues, economic activity continues to suffer, deficit reduction remains elusive, liquidity and interbank conditions remain poor, tremendous financial and economic uncertainty prevails, and a solution that truly solves the issue is simply not discussed.

    Reply

    JKH Reply:

    @WARREN MOSLER,

    “Fiat sovereigns like the U.S., UK and Japan only drain excess reserves through the issuance of securities. They are not actually borrowing the money. This dynamic has not been properly recognized or articulated by European policy makers, nor has the effective solution been seriously entertained – a return to a fiat sovereign regime through a central fiscal authority that has the simple ability to credit accounts with Euros, another way of saying the ability to actually print money. The ECB and the national central banks actually do have this ability, but there is no authority mechanism for these banks to simply credit accounts to enable desired national government spending.”

    Nicely explained – so what you (all) have been proposing is that the ECB go into the type of emergency operating mode that has always been the implicit backstop position of the Fed as the fiat dollar issuer. That implicit backstop in the case of the US means the bond issuing US treasury as it now functions can’t be insolvent. That’s what the market understands in the case of the dollar.

    The difference here is that the ECB must now go into emergency mode (as per proposal) without having been in that implicit backstop mode in the first place, due to the dysfunctional design of the EZ monetary system. Ironically, if the proposed ECB emergency role was then executed successfully, its normal role in time could be reversed engineered back into an implicit support position relative to a properly constituted and functioning central European Treasury.

    Reply

    Luigi Reply:

    @JKH,

    LRWray says in NEP that:

    “The problem is that national central banks have to get Euro reserves at the ECB for clearing purposes. The ECB in turn is prohibited from buying public debt of governments. The national central banks can get reserves only to the extent the ECB will lend them against national government debt (or other debt submitted as collateral).”

    My doubt is, NCB are agents of the ECB, but they can’t “print money”, so why the author says that NCB have this ability?

    I’ve two doubts, anyway

    1) Euro members do not drain excess reserves because they do not create excess reserves, just change distribution of reserves, no?

    2) ECB now is buying bond in secondary market, that is functionally not really different from QE. They see this like a great innovation.
    But how they usually made open market operations or repos If ECB didn’t buy bonds in the secondary market because it could be an indirect way of financing government deficits? what they use?

    Reply

    JKH Reply:

    @Luigi,

    “national central banks have to get Euro reserves at the ECB for clearing purposes”

    I wouldn’t describe quite it that way.

    The Euro system includes the separate balance sheets of the ECB and the NCB’s. NCB’s execute policy set by the ECB by conducting market transactions for their own balance sheets, interacting with banks that clear through them in their area. In doing so, NCB’s create reserves just like any central bank. E.g. the Greek central bank lends to banks in its own system, which creates reserves.

    The ECB proper does act as a clearing bank through the “TARGET” system for reserve imbalances that might occur between NCB’s. E.g. if a Greek bank customer moves a deposit to a German bank, the Greek central bank loses reserves (which are central bank liabilities) to the German central bank. The result is that the German central bank has a credit TARGET balance with the ECB and the Greek central bank has a debit TARGET balance. But those TARGET balances are not reserves.

    That’s the general case. In the case of sovereign bonds bought by the ECB, I don’t know whether the purchases have been executed operationally by the NCB’s or not (I’m guessing yes), or whether they’re held on the balance sheet of the ECB or the NCB’s (I’m guessing NCB’s) It doesn’t really matter. In general, the risk for the assets of the system is for the account of the EZ members according to their capital participation in the ECB. The particular NCB or ECB domicile doesn’t matter. Haven’t investigated this closely so I could be wrong, but I think I’ve got the general case right above.

    Luigi Reply:

    @JKH,

    So, JKH, it seems to me that there isn’t really a big difference. The document, he says:

    “Fiat sovereigns like the U.S., UK and Japan only drain excess reserves through the issuance of securities. They are not actually borrowing the money.”

    If NCB in Europe can issue reserves, and given that Treasury has the checking account in the liability side of his NCB, every government deficit create excess reserves, and so, bond issuance drain excess reserves. Given that Treasury has the checkin account (that is similar to TGA in USA, no?), reserves that go to the Treasury (taxes and bond) are destroyed (the reflux phase, like circuitists call this).

    so what’s the difference?

    thanks

    JKH Reply:

    @Luigi,

    That’s a good question. I have an answer, but this may not be standard or accepted among MMT’ers:

    There is no fundamental difference at the operational level. The Greek central bank is set to operate not entirely unlike the Fed, in terms of basic reserve creation and government accounts. The asset mix is different, but that’s not the point in terms of money mechanics.

    My explanation includes the interpretation that the US Treasury is set up in normal operations to be a currency user, with respect to the Fed balance sheet, because it has a deposit account with the Fed. This classification is sort of consistent with the MMT view that the US as a fiat currency issuer has created unnecessary “self-imposed constraints” in its monetary operations that are more reflective of gold standard thinking.

    So I’d describe the day-to-day operational set up of the US Treasury as that of a currency user at the institutional level. But I’d still classify the US government in total as a currency issuer, due to the following argument, and this includes the difference between the US and the EZ:

    It is understood that the US government has sovereign control over the Fed. So Congress at any point could order the Fed to clear government cheques, without worrying about whether or not Treasury bonds have been sold or will be sold. It is in this sense that normal Treasury issuance drains reserves through bond issuance. I.e., in the course of regular operations, it is routinely draining what otherwise would be a build up of reserves if bonds weren’t issued. It is an effect of routine operations relative to a counterfactual operation that could be quite conceivable and allowable due to absolute US sovereignty over Fed operations. And in that counterfactual, the US Treasury is in effect a currency issuer, given its direct operational control over the Fed. So the US can be called a currency issuer, given that overall institutional set up and its potential.

    Conversely, Greece has no sovereign control over its central bank. The Greek NCB is in effect an operating arm of the ECB. It implements ECB policy. So Greece has no sovereign control over the response of the Greek central bank in the event the Greek Treasury runs into problem with debt issuance, which it has. There is no comparable, reliable Greek sovereign counterfactual in exerting ultimate control over its central bank, as there is in the case of the US and the Fed. And that’s the problem that it and the rest of the EZ faces today. Hence the MMT proposals to have the ECB backstop EZ bonds of various nations, which would in effect create a shared, multi-sovereign commitment to back stop all EZ bond issuance, similar to the way in which the Fed can backstop the US Treasury if necessary.

    JKH Reply:

    @Luigi,

    Summarizing again, the difference between my view and MMT I think is that I view the central bank in all cases as the unambiguous currency issuer and the Treasury as the currency user – at the operational level. From there, it’s about sovereign control over the ultimate relationship between the two, and the operational flexibility that implies. In the case of the US, Congress absolutely controls the Treasury/Fed relationship, so the US government is a currency issuer. In the case of Greece and the ECB, not so, so Greece is a currency user.

    WARREN MOSLER Reply:

    Agreed

    Luigi Reply:

    @JKH,

    I understand your point and I agree, but there are some consequences if we agree on “There is no fundamental difference at the operational level. The Greek central bank is set to operate not entirely unlike the Fed, in terms of basic reserve creation and government accounts.”

    Consider that usually MMTers and horizontalists in general say something that coul be summarized in this statement by LRWray in his 2004 paper :

    “We can conclude decisively that the overnight rate is exogenously administered by the central bank. What about other rates? Short-term sovereign debt is a very good substitute asset for overnight reserve lending, hence, its interest rate will closely track the overnight interbank rate. Longer-term sovereign rates will depend on expectations of future short term rates, largely determined by expectations of future monetary policy targets. Thus, we can take those to be mostly exogenous in the control sense because the central bank could announce its intended targets far into future and thereby affect the spectrum of rateson sovereign debt.”

    or by Scott Fullwiler:

    Overall, any interest rate paid on the national debt is set by the stance of monetary policy whether it is held as demand deposits (i.e., Fed accounts) of the interest-bearing variety or short-term time deposits (Treasury bills), while the expected stance of monetary policy is significant when longer-term, fixed-rate time deposits (Treasury notes and bonds) are issued. As Bernanke and others recognize, for traders to try and set bid-ask rates on Treasury securities that deviate significantly from these principals, even amid the expectation of growing future deficits, would present an arbitrage opportunity for other traders to exploit.

    etc. If you have ever read something by Parguez, Seccareccia or Lavoie, they agree on interest paid on national debt that is a monetary phenomenon etc.

    Now, take the example of Greek banks that receive excess reserves and so buy greek bonds. Greek government is draining and destroying reserves. but the point is: why they deviate so much from the overnight rate (I think in Europe is the EONIA)?

    It’s a technical reason or a political reason? I mean, why in USA there is an arbitrage opportunity and in Greek there isn’t? If we consider that CB of Greek acts in the same way, operationally, so it’s really a “perception problem”, not really a great difference in the institutional arrangement. So the exogeneity of interest rates concerns only some rates.

    What do you think?

    JKH Reply:

    @Luigi,

    That’s another great question – really getting into the nuts and bolts.

    Remember that Wray and Fullwiler are talking about fiat currency issuers – meaning in terms of my description above a government with sovereign control over its central bank policy and operations. Effectively that means the CB is always available as the backstop to fund the government if necessary, through buying government bonds, or direct reserve credit to the government, or direct reserve credit to its payees. That’s the institutional backdrop for the operation of pricing arbitrage along the term structure for a fiat currency issuer.

    If there is a scenario such as the Greek one in which bond holders may not be able to get payment for their principal or interest, then the pricing arbitrage between bond rates and expected short rates breaks down. That’s because there’s now an element of credit risk in the term bonds that doesn’t exist in bank reserves. Bank reserves already in place roll over continuously and are compensated at the overnight rate. Those who hold bank reserves as an asset are assured of the reserves remaining in place (unless they use them for a payment) and the interest rate on them being rolled over. Those who hold the bonds aren’t assured that payment in new reserves will be made for either interest or principal.

    The operation of the Fed and the Greek central bank are comparable in the normal course, but the Greek central bank may simply not be there to provide reserve credits in exchange for bonds at some point of financial stress. That is broadly speaking a matter of credit risk management by the central bank itself – it does not have the government on its “approved credit” list in that sort of disaster scenario, as it is operating under ECB policy and outside of the scope of the instruction of the Greek government in this case. Not so in the case of the US and the Fed.

    JKH Reply:

    @Luigi,

    i.e. the arbitrage fails because of the solvency risk associated with holding bonds; the success of the arbitrage depends on there being no such risk present, as in the case with a “currency issuer” government like the US

    Ramanan Reply:

    @Luigi,

    Luigi,

    Agree with everything JKH has said.

    Some points on collateral. Consider an Italian govt bond auction.

    First assume no foreigners involved. In this case among the Eurosystem institutions, only the Banca d’Italia is involved. The ECB is not involved. Other than the Italian NCB, Italian Treasury and the lender, the lender’s bank is also involved in the settlement. The funds move from the lender’s account at a commercial bank to the Italian Treasury’s account the Italian NCB after the bidding process is over. The Italian commercial bank would be the one providing collateral (to the Italian NCB) if needed.

    Now add the complication of foreign lenders say French. In this case, the ECB is involved, and again the Italian NCB isn’t providing collateral to the NCB. Neither is Banque de France providing collateral to the ECB. NCBs do not provide collateral to the ECB ever. In this case, a French commercial bank will be the one providing collateral in case it has insufficient funds at Banque de France.

    You can similarly work out or visualize what happens in case of redemption of government securities and government expenditures. (To complicate the matter further governments also bank with commercial banks but not necessary to go there for now).

    The important point is not reserves actually but the market perception that a government may not be able to roll over its debt indefinitely. If such a case arises, which is what is happening, yields start rising and something has to be done to prevent something going out of control (such as continuous auction failure and/or usurious interest costs).

    In the case of the US, the Federal Reserve has the power to keep long term rates under control by intervening in “open markets” and in the extreme, the US government has the power with itself to ask the Federal Reserve to act as a lender.

    In the case of the Eurozone, the powers are not with individual governments. All decisions are collective and usually the most powerful nation is the one deciding. Right now Germany is playing that role.

    So lender of the last resort is still available in some sense but it comes with the lender asking for a pound of flesh.

    One more point – the ECB can put an explicit ceiling on all government bond yields in principle, but here too in practice, political economy will dominate scenarios.

    WARREN MOSLER Reply:

    My understanding is the ncb’s do simply credit accounts but within the rules

    Ecb buying would be like the fed buying us states debt.

    This creates balances at the ecb after which the ecb offers term deposits which they call sterilizing

    Luigi Reply:

    @JKH and Ramanan,

    Thanks a lot.

    Ramanan, you say:

    Now add the complication of foreign lenders say French. In this case, the ECB is involved, and again the Italian NCB isn’t providing collateral to the NCB. Neither is Banque de France providing collateral to the ECB. NCBs do not provide collateral to the ECB ever. In this case, a French commercial bank will be the one providing collateral in case it has insufficient funds at Banque de France.

    Well, I understand, but what I know is that the general case is that commercial banks have to provide collateral. Assume the same example in USA, there is a foreign lender, say French that buy US treasuries. Now what happen? is ECB involved?

    Another problem is: how ECB usually made open market operations or repos If theoretically to intervene in the secondary market could be considered an indirect way of financing government deficits? what they use? private debt?

    Because if ECB use also treasuries, it’s the same to say “they are good, buy them”, no?

    Now I’m doing only tecnhical questions. I understand that the real issue is really the difference between issuer and user.

    thanks

    Reply

    Ramanan Reply:

    @Luigi,

    I’ll answer your second question first because it is easier.

    The ECB conducts refinancing operations every week in which it lends funds to the banking system for the week ahead. It also conducts LTROs (Long-Term Refinancing Operations) but they are similar so lets ignore that.

    There is a bidding process and banks allocated funds will be lent funds by their home NCB rather than by the ECB itself. In return, banks have to provide collateral.

    Government bonds can be given as collateral. Since the legal nature of repos require that the party accepting the collateral becomes the legal owner etc .. you could say that the NCB is financing the government indirectly. However, the attitude taken is that since these are not held outright, its not financing the government etc ..

    A really important point IMO is that the Eurosystem is what is called an overdraft system, rather than “asset-based”.

    Unlike the case of the Fed, the central bank(s) has little government bonds in Assets. Banks get reserves as a result of the NCB lending rather than via purchases of government bonds by the central bank. So if you see balance sheets of NCBs, you will notice they hold less government bonds. Some of it is due to historic reasons and some due to recent purchases of government debt by the NCBs.

    Even in the US, banks do get reserves from intraday credit and/or by discount window but these are extinguished soon so that the absolute level is less compared to other items in balance sheets of banks and the Fed.

    On the other hand, even in a non-crisis situation, the Eurosystem (ECB+NCBs) have a huge item called “Lending to euro area credit institutions related to monetary policy operations denominated in euro” #5 here http://www.ecb.int/press/pr/wfs/2006/html/fs061228.en.html

    which is not the case for the Fed.

    The refinancing operations in the Eurosystem are weekly and during the week, there needs to be fine-tuning because of changes in reserves and also their distribution. The reserves can change mainly due to movement of funds in and out of government’s account at the home NCB. The NCBs will then shift these government funds in and out of its books to the government’s account at commercial banks.

    There may still be some errors and the NCBs may need to do more fine-tuning via repurchase agreements. In those cases, as well, government bonds can be given as collateral. The NCB however doesn’t do the opposite/reverse and hence doesn’t need to provide collateral. Instead it can absorb funds by issuing ECB debt certificates and/or doing fx swaps.

    Taking all this into consideration, the total outstanding government bonds in NCBs’ assets is low compared to the US.

    Now to your first question …

    In the international case, depending on how many banks and intermediaries are involved, the ECB/NCBs can become involved if there needs to be settlements in domestic currency, which in this case is the Euro. However, the Eurosystem’s foreign currency assets and liabilities do not change. It’s a separate matter whether the ECB can react to this and intervene in the markets due to large transfers but it doesn’t.

    Also, I am not very sure of the following but some countries (very few Asian), it is centralized. Even international transactions go through central banks’ books but in those countries, the capital account is highly controlled.

    Ramanan Reply:

    @Luigi,

    “what they use? private debt?”

    Yes the Eurosystem has a “collateral framework” and accepts all kinds of eligible collateral – from government bonds to corporate debt to covered bonds to asset-backed securities. It even accepts non-marketable assets such as illiquid loans! and select foreign-currency denominated debt issued even by foreign organizations.

    Matt Franko Reply:

    @WARREN MOSLER, Krugman pointing out today that Iceland CDS now much lower than Ireland CDS:

    http://www.imf.org/external/np/seminars/eng/2011/isl/index.htm

    “There are not large penalties for heterodoxy”: PK perhaps trying to make the case that it is better to default?

    Resp,

    Reply

    WARREN MOSLER Reply:

    I’ve stopped reading him

    Reply

    Walter Reply:

    @WARREN MOSLER,

    I doubt whether it is correct that the remaining 50% will be paid back partially in 30 yrs GR bonds.
    GR bonds that mature 20 aug 2012 were before the deal at 44.50 and now at over 50 (ISIN GR 0114020457). How would you explain that?

    Banks for the moment apply these write offs only to bonds they hold for their own account. I have not found any bank yet that can clarify whether the write off will also apply for others than banks, in whatever minority they will be. A loop hole?

    Reply

  4. Adam (ak) Says:

    My first reaction is different and very politically incorrect. The financial aspects are a bit irrelevant and are a smokescreen. ECB can always loosen or tighten the screw a bit. If they can fix the Italian and Spanish bonds for a while why could they not fix the Greek at 4% (what would have prevented any debt crisis)?

    So this is what the whole thing is about:

    “But for Greeks, another point quietly laid out thunderous change: the leaders had decreed that European and international officials will run the Greek economy – permanently and “on the ground”.

    European and troika officials will “establish” themselves in Athens to “ensure the timely and full implementation of the reforms”. The full role of the foreign officials from the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF) will be laid out in a “memorandum of understanding”. But Greeks were left in no doubt that they would be taking control of the cash: to “facilitate the efficient use of the sizeable official loans”.
    http://www.telegraph.co.uk/finance/financialcrisis/8853908/EU-rescue-rescue-document-is-one-giant-leap-for-the-eurozone.html

    In my opinion the whole “crisis” has been facilitated only for that purpose. Yes it is a risky gamble but in the end it will pay off. As the “stagflation” and a wave of industrial disputes has been invented in the 1970ies to remove the Keynesian policies and move back to the pre-1930ies world thanks to M. Thather’s “TINA” and R. Reagan policies, the “public debt crisis” will lead to unwinding of the 19th century European nationalistic awakening in an increasingly globalised world.

    “We are Greeks, Poles, Germans no more. We are all migrants in our new homeland, the neoliberal EUSSR.” It is not that I am in favour of nationalism – I am not. I simply disagree with trampling of the principles of democracy – never anything good has come out of that.

    The initial concept of the European Community was to establish the organisation where the “market forces” (the Capital(ists) and Rentiers) would lead the countries to the economic integration so tight that a repetition of the bitter rivalry which led to WW1 and WW2 would be absolutely impossible. This could make some sense to me but the final scale of the ever evolving grand project has became visible only now.

    Bismarck unified Germany with “blood and iron”. Merkel wants to be remembered as one who unified Europe with “sound finance and austerity”.

    It is yet to be seen whether this grand project will work, whether people in the peripheral countries will rise against the new faceless bureaucratic overlords when they realise that their democratic rights as the citizens of old national countries have been stolen or whether the absurdity of throttling the aggregate demand and acting against the market forces will prevail and weaken the German and French economy to the point when after a decade or two the austerian project will become irrelevant.

    Reply

    Gary Reply:

    @Adam (ak),

    interesting quote by Chinese:

    “If we see protests and chaos all the time, then China won’t have confidence in Europe’s political ability,” Yu Yongding was quoted as saying.

    Reply

    Adam (ak) Reply:

    @Gary,

    Who needs the Chinese “confidence” and for what particular purpose would it be needed? Do you think that these guys who really pull the strings in Europe are that naive and stupid?

    Do you think that the previous German chancellor Schroeder was stupid when he signed the pipeline deals with Gas-Putin? He has been promoted to the rank of senior Russian oligarch since.

    “Soon after stepping down as chancellor, Schröder accepted Gazprom’s nomination for the post of the head of the shareholders’ committee of Nord Stream AG, raising questions about a potential conflict of interest. German opposition parties expressed concern over the issue, as did the governments of countries over whose territory gas is currently pumped.[17] In an editorial entitled Gerhard Schroeder’s Sellout, the American newspaper The Washington Post also expressed sharp criticism, reflecting widening international ramifications of Schröder’s new post.[18] Democrat Tom Lantos, chairman of the United States House Committee on Foreign Affairs, likened Schröder to a “political prostitute” for his recent behaviour.[19] In January 2009, the Wall Street Journal reported that Schröder would join the board of the oil company TNK-BP, a joint venture between oil major BP and Russian partners.”
    http://en.wikipedia.org/wiki/Gerhard_Schr%C3%B6der

    BTW one of the interesting aspects of the “new deal” in Europe is the haircut the banks have “voluntarily” agreed to take.

    Again – the new ruling euro-caste (the bureaucracy and senior politicians from Germany and France and other “core” countries) has established themselves as the prosecutors, judges and jury. It is not that the banksters and corporate managers rule (like in the US). The banksters are true overlords but the faceless distributed emperor resides elsewhere.

    What I need to emphasize is that all these maneuvers may backfire and either the fascists or hard core left may emerge from that mess. They may also accidentally wreck the global financial system if they press the wrong button. But the most likely outcome for me is a great economic stagnation. But this doesn’t bother the adopted Russian oligarchs…

    Reply

    Gary Reply:

    @Adam (ak),

    “Who needs the Chinese “confidence” and for what particular purpose would it be needed? Do you think that these guys who really pull the strings in Europe are that naive and stupid? ”

    it was from article that described Chinese response to Europe asking China to contribute to a fund to save euro.
    So – yes – guys that pull strings in Europe are stupid enough. Or simply self-absorbed enough to care about themselves before anything else – just like Schroeder.

    What was interesting to me about that quote – is that Europe is considered too far behind in enforcing “stability” by the Chinese (and I guess by the Americans too).

    “the most likely outcome for me is a great economic stagnation”

    is history is the guide – bloodbaths follow great economic stagnation.

    Robert Kelly Reply:

    @Gary,
    China is the epitome of “Do as I say, not as I do”. China holds the title of “Protests and Chaos R Us”. It’s always interesting when they put their two cents in.

    Reply

  5. Luigi Says:

    @Ramanan,

    Now I understand why they consider a great innovation to intervene in the secondary market.

    A really important point IMO is that the Eurosystem is what is called an overdraft system, rather than “asset-based”.

    This could explains really the issue. I’ve read some documents by Marc Lavoie about Canada and Australia that are overdraft systems. Is Eurosystem strictly similar?

    What I know is that there are some technical differences. in Europe there is a 2% reserve requirement and that they have a deposit facility that is an overnight deposit with the NCBs, where banks deposit excess reserves compared to reserve requirement. I don’t know if now ECB (with NCBs) pays interest on reserves, but the deposit facility seems to be functionally the same. In Canada reserves that exceed needs to settle payments are always a “surplus”, no?

    But, Ramanan, lending or purchase bond, what’s strictly the difference? A loan requires always a collateral, no? So the difference is that BC lend against private debt, but if they accept also government bonds, there isn’t a great difference. I mean, there is an element of randomness rather than a net difference. correct me if I’m wrong.

    thanks

    Reply

    Ramanan Reply:

    @Luigi,

    Yes, Marc Lavoie has made the distinction since early 80s. Canada and Australia have zero-reserve requirements which is different from the asset-based/overdraft distinction. The banking system in the two are asset-based only.

    Yes, the ECB pays interest on reserves. It has three rates – that on deposit facility, the rate on main refinancing operations and the rate on marginal lending facility.

    “But, Ramanan, lending or purchase bond, what’s strictly the difference? A loan requires always a collateral, no? So the difference is that BC lend against private debt, but if they accept also government bonds, there isn’t a great difference. I mean, there is an element of randomness rather than a net difference. correct me if I’m wrong.”

    Didn’t understand this point.

    Reply

    Luigi Reply:

    @Ramanan,

    Yes yes, my issue about reserve requirements was about differences between Europe and Canada/Australia, not ovedraft/asset-based. It was only an off topic thought.

    What I mean in the second part is that borrowing from the CB, or obtain reserves through the CB that purchases treasuries is not a net difference.
    The reasoning was that: if CB lends against collateral, and the same CB accepts treasuries, there is an element of randomness. Sometimes receives private debt, sometimes treasuries. In other words, if we see the list of collateral that Bank of Canada accepts, we see that there are also government securities, so there could be an element of randomness.

    Understand what I mean?

    Reply

    Ramanan Reply:

    @Luigi,

    I still don’t understand. The central bank gives the list of securities eligible as collateral and the terms and conditions such as haircut for each of those. The bank borrowing can give any collateral from the list for borrowing. So what is random here ?

    Luigi Reply:

    @Luigi,

    The quantity of treasuries owned by CB. So, when you say:

    “So if you see balance sheets of NCBs, you will notice they hold less government bonds. Some of it is due to historic reasons and some due to recent purchases of government debt by the NCBs.”

    I add that there is an element of randomness, given that CB accepts treasuries also in overdraft economies. So there isn’t a net difference between borrowing from the CB and repurchase agreement, in terms of collaterals.

    no?

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