SCENARIOS-Radical solutions to the euro zone crisis
By Luke Baker
BRUSSELS | Wed Dec 1, 2010 7:05am EST
BRUSSELS Dec 1 (Reuters) - Euro zone leaders have tried a range of measures to try to contain their sovereign debt crisis, including 110 billion euros of loans for
Greece and an 85 billion euro bailout for Ireland, but nothing appears to be working.
They still have close to 700 billion euros in a pair of funds, the EU/IMF-backed European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism, but financial markets remain unconvinced that the crisis can be resolved.
EU policymakers have now begun to think of radical solutions, with ideas so far being mentioned on the sidelines of meetings, discussed informally or only sketched out.
Following are some of the possibilities being considered, an assessment of their pros and cons and a score of out of 10, looking at the likelihood of their being put into action.
MASSIVE EUROPEAN CENTRAL BANK BOND BUYING PROGRAMME
There is widespread talk in financial markets and among some European policymakers about the ECB stepping up purchases of sovereign debt issued by the more highly indebted peripheral
euro zone countries. According to fixed income specialists at Evolution Securities in London, the buying programme would need to be to the tune of 1-2 trillion euros to tackle the problem.
"The moves we've seen over the last week or so have highlighted that something pretty serious needs to be done," said Elisabeth Afseth of Evolution Securities. "The country by country approach that's been taken so far has failed to calm the markets. In the short term at least what is probably the easier option is for the ECB to step up their buying programme, buying up huge amounts of the peripherals, and the more core ...
Italy.
"It's pretty key to stem that development. Spain and Italy combined need to borrow about 500 billion (euros) next year on the sovereigns alone, let alone their banks. With the yield moves we've seen over the last few days, if that continued for a period of time, they wouldn't be able to get that done, so somebody needs to come in and help," she said.
The advantage to such a move is that it could be quickly implemented, possibly with the ECB beginning within days. However, such a programme is likely to be opposed by some members of the ECB Governing Council, and goes strongly against the mandate of the central bank.
"The ECB may well be dragged into purchases of sovereign bonds on a larger scale," said Thomas Mayer, chief economist at Deutsche Bank. "However, this would push them further off their mandate and raise concerns, especially in
Germany, about the long-term stability of the euro."
That said, given the pressing circumstances and the need to respond quickly, fixed income specialists believe the likelihood of a massive ECB bond buying programme is 8 out of 10.
ENLARGING THE EUROPEAN FINANCIAL STABILITY FACILITY
Senior euro zone finance officials have been talking for days about the possibility of enlarging the EFSF, which after
Ireland's bailout still has around 650 billion euros.
ECB Governing Council member and Bundesbank President Axel Webber has suggested an enlargement of the EFSF would make sense, and EU policymakers have hinted at anything up to a doubling in its size, to around 1.5 trillion euros.
However, politically it would be very sensitive to try to drive through a rapid expansion of the facility. Several euro zone countries were reluctant to set up the EFSF in the first place and some, such as Finland, can activate funds through the facility only with the backing of parliament, which is reluctant to authorise spending that voters oppose.
Given the extent of the crisis, and the fact the EFSF is the existing mechanism agreed on by
euro zone member states, it would at least make sense to expand an already functioning programme, that includes strong conditionality for countries that borrow, and involves strict IMF oversight.
The political risks may be high, but senior EU sources dealing with the crisis say it would be a favoured method and suggest it has a better than even chance of happening. 6/10.
ISSUING OF PAN-EURO ZONE SOVEREIGN BONDS
The idea of bonds issued on behalf of all 16 euro zone member states has been bandied around by policymakers and senior officials for months. European Commission President Jose Manuel Barroso formally proposed it earlier this year. But there is a strong reluctance in countries such as
Germany, France and others, which have well functioning, sustainable bond issuance programmes and would have to share some of their credit status with less creditable sovereign bond issuers, such as Greece, Ireland, Portugal and now Spain, as well as possibly Italy.
However, ECB President Jean-Claude Trichet, appearing before the European Parliament on Tuesday, did not dismiss a euro zone bond programme out of hand and seemed warmer to the possibility than he has done previously.
Arranging such a programme, and setting up the legal and financial structures for it would take time. It is unlikely that anything could be put together rapidly enough to tackle the pressing nature of the current crisis.
"Euro zone treasury bonds I think (are) quite likely but I think that would come some way further down the road," said Afseth. "EFSF issuance, if they increase the programme, is similar to that, even if the legal structure would be different. It could be the forerunner to joint issuance, I think, but again that would require (EU) treaty changes and huge moves of public opinion in various countries. We're not quite there yet."
CHINA BUYING VAST AMOUNTS OF EURO ZONE PAPER
Asked to suggest a radical solution to the crisis during a recent discussion, a senior EU official gave the reply: "Think about who's got the money to handle this. The only country is China. We need the Chinese to step up and buy EU debt."
The Chinese are already the biggest owners of U.S. Treasury bonds, with two-thirds of their reserves -- around $1.8 trillion -- tied up in the U.S. market. They have the resources to purchase large amounts of euro zone paper, or to lend EU authorities a vast amount of money at an interest rate of around 3.5 percent, some have suggested. This could be lent on to euro zone states with debt problems at a rate that is much more favourable than current market levels.
However, the idea is radical, is likely to face political opposition as well as opposition from EU institutions such as the ECB. 2/10.
FULL FISCAL UNION AMONG THE EURO ZONE STATES
To an extent, this is where the crisis is driving the euro zone. With a shared currency and a shared interest rate, the fact the 16 countries do not have a fiscal union creates tensions and risk differentials that are now being exploited.
Trichet referred to the need for closer budgetary union in parliament on Tuesday.
"We have got a monetary federation. We need quasi-budget federation as well. Yes, we could achieve that if there is strong monitoring and supervision of what there is. Because what exists doesn't correspond with the actual situation that we are facing. It is a situation where we need quasi-federation of the budget," he said.
But closer fiscal union is anathema to
Germany and other core euro zone member states, and is a concept for down the road. The political and legal upheaval required would be monumental and take long years. Other solutions would be quicker and easier and potentially more effective, analysts say.
"It might be that the support packages and having a de facto fiscal union will mean that the change to an actual fiscal union will be easier some years down the line," said Aspeth. "It certainly looks like that's the way it's going, but with a lot of a political opposition to come." 1/10.
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