Germany Seeks ‘Orderly’ Insolvency Option for Euro Members
(Bloomberg) Germany is proposing that the European Union create the option of an “orderly state insolvency” for countries using the euro, according to a Finance Ministry document. That would set incentives for governments to follow “solid” fiscal policies and for “responsible” behavior by investors, the document said.
This is a very critical issue. Germany doesn’t want to have to write the check for other euro member’s debt.
An ‘orderly state insolvency’ would mean the lenders would lose their investment rather than get bailed out.
The main problem with this is that by making insolvency a viable option, euro members become subject to increased liquidity risk. And, in the case of actual insolvency and legal debt write downs, euro bank assets are written down as well, subjecting them to increased liquidity risk as well.
Category Archives: Germany
Merkel’s Coalition Steps Up Calls for EU ‘Orderly Insolvencies’
It doesn’t get any more ominous than this.
This would insure an orderly default of the entire currency union.
Which is already in progress.
Germany is concerned that the Greek situation resulted in larger deficits for the other members, and wants something in place so defaults don’t result in this type of fiscal expansion for the rescuers.
If they are in fact looking seriously at this new proposal for a default friendly institutional structure its all coming to an end in a deflationary debt implosion, accelerated by their desire for the pro cyclical fiscal policy of smaller national government deficits.
The next event should be the bank runs that force a shut down of the payments system.
It’s a human tragedy that doesn’t have to happen. I’ve proposed two obvious and constructive fixes that are not even being considered. It’s almost like ‘they’ want this to happen, but I now have no idea who ‘they’ are or what ‘their’ motives are.
As always, feel free to distribute.
Merkel’s Coalition Steps Up Calls for EU ‘Orderly Insolvencies’
By Tony Czuczka
May 4 (Bloomberg) — German Chancellor Angela Merkel’s coalition stepped up calls for allowing the “orderly” default of euro-region member states to avoid any repeat of the Greek fiscal crisis.
The parliamentary leaders of the three coalition parties agreed in Berlin today to put a resolution to parliament alongside the bill on Greek aid calling for the European Union to revise rules for the euro to put pressure on countries that run deficits.
Merkel said in an interview with ARD television late yesterday that it’s time to learn lessons from the Greek bailout and raised the option of “an orderly insolvency” as a way to make sure creditors participate in any future rescue.
“We want to move from crisis management to crisis prevention,” Birgit Homburger, the parliamentary head of Merkel’s Free Democratic coalition partner, told reporters in Berlin after the coalition leaders meeting. “We have to do everything we can to ensure we never get into such a situation again.”
Volker Kauder, the floor leader of Merkel’s Christian Democrats, said that the European Commission, the EU’s executive body, must be able to better examine the finances of member states to avert any rerun of what happened in Greece.
“We quite urgently need something for the members of European Monetary Union that we also didn’t have during the banking crisis two years ago,” Finance Minister Wolfgang Schaeuble told reporters yesterday. “Namely the possibility of a restructuring procedure in the event of looming insolvency that helps prevent systemic contagion risks.”
Text of Greek Deal
As before, this is in fact another statement that indicates no checks are to be written.
The purpose is probably the hope that it be read as a statement of support which will facilitate continued funding of Greek debt.
It is a clear statement that no funding is available until Greece fails to find funding elsewhere. However, understood but unstated, is that the process of finding funding is necessarily that of price discovery. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity.
This makes no sense at all, of course. The statement is in fact a statement that Greece must first drive rates to infinity before euro zone member loans are available. In other words, it’s a statement that says Greece is on its own, and that they will stand by without taking action as observers of the standard market default process of Greek funding rates going into double and then triple digits as happens to all failed borrowers of externally managed currencies, including nations with fixed exchange rates.
“In this context, Euro area member states reaffirm their
willingness to take determined and coordinated action, if
needed, to safeguard financial stability in the euro area as a
whole, as decided the 11th of February.
As part of a package involving substantial International
Monetary Fund financing and a majority of European financing,
Euro area member states, are ready to contribute to coordinated
bilateral loans.
This mechanism, complementing International Monetary Fund
financing, has to be considered ultima ratio, meaning in
particular that market financing is insufficient. Any
disbursement on the bilateral loans would be decided by the euro
area member states by unanimity subject to strong conditionality
and based on an assessment by the European Commission and the
European Central Bank. We expect Euro-Member states to
participate on the basis of their respective ECB capital key.
The objective of this mechanism will not be to provide
financing at average euro area interest rates, but to set
incentives to return to market financing as soon as possible by
risk adequate pricing. Interest rates will be non-concessional,
i.e. not contain any subsidy element. Decisions under this
mechanism will be taken in full consistency with the Treaty
framework and national laws.”
Euro finance ministers to agree on Greek aid: source
Without an interest rate and a credible quantity pledged, the agreement is grossly deficient.
The way Greece obtains funding is by offering ever higher rates until there is a taker.
So let’s say they offer securities at 5%, then 6, then 7, then 10, then 15, then 20 with no takers. How high do they go before they tell the EU group they have failed to obtain funding?
And then what rate does the EU charge them if they agree?
The process makes no sense.
The way to do it is for the EU group to offer funding at some rate, giving Greece some amount of time to try to find a better rate.
Euro finance ministers to agree on Greek aid: source
By Jan Strupczewski
March 13 (Reuters) — Euro zone finance ministers are likely to agree on Monday on a mechanism for aiding Greece financially, if it is required, but will leave out any sums until Athens asks for them, an EU source said on Saturday.
Policymakers have been debating possible financial support for the heavily-indebted European Union member state for more than a month, but have provided only words of support. Germany, key to any deal, has resisted appeals to promise aid.
British newspaper The Guardian on Saturday quoted sources as saying Monday’s meeting of the currency zone’s 16 finance ministers would agree to make aid of up to 25 billion euros available.
But a senior EU source with knowledge of preparations for Monday’s meeting told Reuters no numbers were likely at this stage.
“I think we should be able to agree on principles of a euro area facility for coordinated assistance. The European Commission and the Eurogroup task force would have the mandate to finalize the work,” the source said.
“It would be the principles and parameters of a facility or mechanism, which then could be activated if needed and requested.
He said no figure had been agreed.
“You would have a framework mechanism and you would have blank spaces for the numbers because there has been no request (from Greece) yet,” the source said.
Greece has announced steps to reduce its budget deficit this year to 8.7 percent of GDP from 12.7 percent in 2009, triggering street protests and strikes but also reducing market concern over whether the country would be able to service its debt.
That helped Athens sell its bonds with ease on debt markets earlier this month, but policymakers are still searching for ways of making its cost of borrowing — still far above that of other Europeans — more sustainable.
They are also concerned that the problems in Greece could undermine confidence in the euro and spread to other heavily indebted eurozone countries such as Portugal or Spain.
CUTBACKS
The EU source said that among the instruments considered to help Greece were both bilateral loans and loan guarantees.
“The preparations have been done under the Eurogroup by member states and the Commission. The Commission has done much of the technical work,” the source said.
“The aim of the exercise so far has been to do the technical preparations, so that the political decision could be possible on Monday. Germany holds the key at the moment.”
Polls show that public opinion in Europe’s biggest economy Germany is strongly opposed to bailing out Greece, which has for years provided unreliable statistics about the true size of its deficit and debt, breaking EU budget rules.
In a move that is likely to alleviate German concerns about spending money on Greece, the Commission has said it would soon make a proposal for stronger economic cooperation between euro zone countries and tighter surveillance of their performance.
French Economy Minister Christine Lagarde told the Wall Street Journal she believed Greece’s austerity moves were behind the improvement in its situation on markets and negated the need for a bailout.
“”There is no such thing as a bailout plan which would have been approved, agreed or otherwise, because there is no need for such a thing,” she said.
But she added that “technical experts” at the EU have been working on a contingency plan, so that if the need arose “all we would have to do is press the button.”
The Guardian quoted a senior official at the European, the EU executive, official as saying the euro zone members had agreed on “coordinated bilateral contributions” in the form of loans or loan guarantees if Athens was unable to refinance its debts and called on the EU for help.
The agreement has been tailored to avoid breaking the rules governing the operation of the euro currency which bar a bailout for a country on the brink of bankruptcy, and to avoid a challenge by Germany’s supreme court, the official said.
A German ministry spokesman said he could not believe the newspaper’s report on the bailout plan was correct.
“We are not aware that this is being planned,” he said, adding that Greece had not requested any aid. “Greece is implementing its (savings) program and we expect that it will manage it alone.”
(Additional reporting by Tim Pearce in London, Pete Harrison in Brussels and Volker Warkentin in Berlin, Writing by Sarah Marsh and Jan Strupczewski; Editing by Patrick Graham)
The Eurozone Solution For Greece Is A Very “Clever Bluff”?
The Eurozone Solution For Greece Is A Very “Clever Bluff”?
The Guardian is today reporting that, after weeks of crisis, the Eurozone has agreed to what appears to be a multibillion-euro assistance package for Greece that will be finalized on Monday. Member states have apparently agreed on “coordinated bilateral contributions” in the form of loans or loan guarantees to Greece, but only if Athens finds that it is unable to refinance its soaring debt and asks for help. Other sources said the aid could total €25bn (£22.6bn) to meet funding needs estimated in European capitals that Greece could need up to €55bn by the end of this year.
Once again, however, since funding is a function of interest rates, this proposal has the appearance of a very “clever bluff”. It says nothing about how high interest rates for Greece would have to go before the Greek government is somehow declared unable to refinance, and asks for additional help. The member nations probably structured the loan package and terms this way hoping to try to draw in lenders who would rely on this member nation as a back stop when making their investment decisions. However, if this ploy fails, Greek rates will go sky high in an attempt to refinance, and as Greece asks for more help, the spike in rates will make it all the more difficult for the entire Eurozone monetary system to function. Additionally, the prerequisite austerity measures will subtract aggregate demand in Greece and the rest of the Eurozone, and, to some extent, the rest of the world as well.
I have a very different proposal. It is designed to be fair to all, and not a relief package for any one member nation. It is also designed to not add nor subtract from aggregate demand, and also provide an effective enforcement tool for any measures the Eurozone wishes to introduce.
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.
The 1 trillion euro distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria. Furthermore, making this distribution an annual event greatly enhances enforcement of EU rules, as the penalty for non compliance can be the withholding of annual payments. This is vastly more effective than the current arrangement of fines and penalties for non compliance, which have proven themselves unenforceable as a practical matter.
There are no operational obstacles to the crediting of the accounts of the national governments by the ECB. What would likely be required is approval by the finance ministers. I see no reason why any would object, as this proposal serves to both reduce national debt levels of all member nations and at the same time tighten the control of the European Union over national government finances.
Eurozone buying time
Looks like behind the scenes they may be getting their banks to fund Greece and, by extension, any other national govt. this which will buy time, though longer term it depreciates the currency, which they may want to happen as well.
As long as the banks can carry their eurozone bonds at par and book the interest as earnings and fund themselves based on implied govt guarantees there is no operational limit to how long they can continue.
The limits would be the extent to which the banking laws restrict this practice, and the political tolerance for any inflation that may get imported through the fx window should the euro continue to fall.
The other problem is the downward pressure on aggregate demand of the prerequisite ‘fiscal consolidation’ is likely to result in increased social unrest as living conditions further deteriorate.
And this could be accelerated if the fiscal consolidation were to include reductions of transfer payments.
to say Rogoff is weak on monetary operations is a gross understatement
He clearly doesn’t distinguish the difference between Germany and the US with regards to interest rate determination and solvency risk:
Harvard’s Rogoff Sees ‘Bunch’ of Sovereign Defaults
“It’s very, very hard to call the timing, but it will happen,” Rogoff, co-author of a history on financial calamities, said in the speech. “In rich countries — Germany, the United States and maybe Japan — we are going to see slow growth. They will tighten their belts when the problem hits with interest rates. They will deal with it.”
EU Daily | German Investor Confidence Falls for a Fifth Month
Yes, ‘incentives’ are running out and will be nearly impossible to reinstate with their fiscal policies now being market constrained, as per what’s happening with Greece and Portugal.
The US, Japan, UK, etc. will never be market constrained. And while their misguided political constraints are capable of doing much the same damage they don’t have the funding risk of the eurozone.
Highlights
ECB Says Loans Harder to Get for Small Firms in Second Half
European bond tensions hurt lending
European exporters see boost from weak euro
European Car-Market Growth Slows as Incentives Are Phased Out
German Investor Confidence Falls for a Fifth Month
German Economic Recovery Remains on Track, Ministry Says
German Companies Plan to Take on More Staff
Eurozone tells Greece to ready new cuts, taxes
Eurostat to Look Into Greece’s Debt Swaps
Spanish government struggles with crisis message
Spanish unions protest austerity
Germany Said to Consider Greek Aid Beyond Loan
They have to be very careful as all the national govts are subject to a liquidity crisis.
If all the national govts had started with zero debt when they formed the union, the markets never would have let them get beyond maybe 20% debt to GDP.
(Note that Lux never did have its own currency and never did get that high.)
Instead they came in at the 60-100+ debt to GDP ratios they got to when they had their own currencies when it didn’t matter for liquidity/funding purposes, as with their own currencies liquidity and solvency wasn’t an issue, and whether they knew it or not their deficits were simply offsetting the economys’ nominal savings desires at the then current exchange rates.
So all (except Lux) came into the new single currency with highly problematic debt ratios, and a ‘promise’ of bringing them down. This promise had enough credibility to get them through, but markets are telling us the recession has cast serious doubts on the current institutional structure being able to bring its debts down and get itself out of ponzi.
Germany lending to Greece does not reduce the overall debt to GDP of the Eurozone. In fact arguably the introduction of ‘moral hazard’ issues make it worse as there’s a reasonable chance with this kind of implied umbrella Greece and others will feel they’ve called the union’s bluff and not adjust their finances accordingly. And, worse yet, markets are coming to understand that fiscal austerity can backfire and cause deficits to increase as it causes the economies weaken further, making it a lose-lose scenario.
So yes, the announcement of aid beyond loans will buy some time, but without sufficient real growth driven either by exports or domestic credit expansion (which is also not sustainable longer term) all the same issues will probably return.
And one of the reasons for the weak euro has been that their deficits have gotten large enough to make euro financial assets sufficiently ‘more plentiful’ to weaken the currency. This kind of help doesn’t change that.
And it could be that one of their goals is a policy that weakens the euro in an attempt to improve exports, while at the same time not triggering a liquidity crisis. Seems like an impossible tightrope to try to walk.
The easiest/safest way to do that is for the ECB to buy fx, but their ideology doesn’t allow that.
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> (email exchange)
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> On Wed, Feb 10, 2010 at 6:14 AM, Dave wrote:
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> Bunds off almost a point on this story
> Curve bear steepening
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> DV
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Germany Said to Consider Greek Aid Beyond Loan Guarantees
2010-02-10 10:10:02.560 GMT
By Brian Parkin
Feb. 10 (Bloomberg) — German Finance Minister Wolfgang Schaeuble told lawmakers that options for helping Greece extended beyond loan guarantees, said an official who attended a briefing today at the Parliament in Berlin.
Officials were told that European Union rules on aid were more flexible than the government originally thought, according to the lawmaker who spoke on the condition of anonymity because the discussions were confidential.
Lawmakers were briefed on the legal aspects of an EU member state providing financial help for another and were told to digest the information quickly, the lawmaker said. The German parliament must back any move to help Greece, he said.
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Germany Considers Loan Guarantees for Greece, Other Euro Partners
Looks like another trial balloon.
Might mean German CDS gets hit.
All the national govs are subject to liquidity risk.
Just like the US States
Except the eurozone debt ratios are over 10 times worse.
If the world economy is improving at a fast enough rate all they probably need to do is buy some time.
No visibility on how this gets resolved.
Germany is considering a plan with its European Union partners to offer Greece and other troubled euro zone members loan guarantees in an effort to calm market fears of a default, according to people familiar with the matter.
The proposed plan would be done within the EU framework but led by Germany. German Finance Minister Wolfgang Schaeuble has discussed the idea in recent days with European Central Bank President Jean-Claude Trichet. Greece is the hardest hit of several countries, including Spain, Portugal and Ireland, that have recently seen their bonds come under pressure amid concerns that they will have difficulty repaying their debts.
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