Sunday 17 December 2017

The Eurozone debt crisis: solutions menu

1) Forcing bigger losses on Greece's bondholders


In late July, private creditors grudgingly agreed to take a 20pc hit on their Greek bond holdings. Since then, things have gotten even worse for Greece and the latest review of their bailout programme found that the country's debt was still unsustainable. The solution is forcing an even bigger 'haircut' on private bondholders, with some suggesting a 50pc hit.

Who's in favour:

Greece, for obvious reasons. The European Commission, because it wants Greece's programme to succeed. Germany has been the most vocal cheerleader for a bigger haircut, but most countries, Ireland included, accept the inevitability of changing the terms of the July deal. Countries would rather give Greece a "structured" way of reducing its debt than risk a situation where Greece went into outright default.

Who's against:

As major holders of Greek sovereign debt, French banks and German banks are particularly opposed to bigger losses. The Spanish finance minister Elena Salgado has also opposes deeper writedowns. The ECB holds about €45bn of Greek sovereign debt and is reluctant to see further losses on that portfolio.

Chances of it happening: 9/10

Almost all countries admit that Greece's debt is simply not sustainable. The question is no longer whether bigger losses need to be forced on bondholders, it's about how much bigger those losses need to be.

2) Pump more cash into the banks


The oldest trick in the book when it comes to dealing with the crisis -- put the banks through another round of 'stress tests', then stuff them full of capital to deal with the 'worst of the worst' and hope investors finally have confidence that the banks are bullet-proof.

Who's in favour:

The UK chancellor George Osborne appears quite keen, since his banks are already well capitalised. Germany too sees the benefits of getting banks to hold more capital, as does the European Commission and most European countries.

Our Finance Minister Michael Noonan came out early to say that banks across Europe would need more cash -- but our banks are unlikely to need any more money. Arriving at yesterday's meeting, the Belgian and Austrian finance ministers both spoke of the need for action on bank recapitalisation.

Who's against:

Some banks are resistant to the notion of having to raise even more cash. Nordea, the Nordic region's biggest bank, yesterday insisted it didn't need more capital.

Germany's banks have also taken exception to the suggestion they could be forced to keep more funds as capital, and are threatening a credit crunch if strict new rules are imposed.

Chances of it happening: 8/10

Broad acceptance that the market is not convinced that the banks are healthy. There's still an outside chance that there won't be another round of stress tests, but the overwhelming likelihood is that banks will be raising more capital pronto.

3) Revamp Europe's bailout fund


European countries that needed to be rescued so far tapped a bailout fund dubbed the European Financial Stability Facility (EFSF). But with only €440bn in the coffers, the EFSF just isn't big enough to rescue struggling countries like Italy and Spain, who have trillions of debt. A bailout fund may never have to rescue either country, but it would look a lot better if Europe at least had a bailout fund that was capable of rescuing them, if necessary.

Who's in favour:

There's broad acceptance that the EFSF needs to be given more oomph, but there are deep divisions around how this should actually happen. The UK is pushing for a "big bazooka" that would send a message to the market that anyone can be rescued. The most obvious way of doing this is by allowing the EFSF to borrow from the ECB, indeed France has actually suggested turning the EFSF into a bank for that purpose. There are other ideas too, such as allowing the EFSF to offer "first loser" insurance, so that when troubled countries issue new debt the EFSF guarantees to take the first losses on that debt.

An idea aired for the first time yesterday is to have the EFSF merged with Europe's 'rescue fund of the future', the European Stability Mechanism (ESM), to create a €950bn super bailout fund.

For its part, Ireland is in favour of a more flexible EFSF, provided that flexibility can be extended to us.

Who's against:

The ECB is dead set against lending to the EFSF, and has all but ruled out becoming involved in this way. Germany is also not keen. Germany isn't thrilled about first loss insurance either, but would have an easier time living with that than a previous idea of common Europe-wide bonds dubbed 'eurobonds'. All countries have concerns about pushing the EFSF too far, as if it gets too big it could lose its crucial AAA rating.

Chances of it happening:

ECB lending to EFSF: 2/10

ECB and Germany dead set against it.

First loser insurance: 6/10

Would help and not that problematic.

EFSF and ESM being combined: 5/10

No major objections yet, but €950bn doesn't look big enough to convince markets.

Another solution entirely: 8/10

Agreement that the EFSF needs to be more effective, and none of the above have the 'silver bullet' feel.

Irish Independent

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