giub
New Membro
- SEPTEMBER 14, 2011
The euro zone is running out of road. Greece's budget problems have spun out of control to the point where there is an imminent threat to the survival of the single currency. The euro zone's strategy until now—a mixture of obfuscation, prevarication and broken promises—has comprehensively failed. The market now regards a Greek default as inevitable and unless the euro zone starts to take decisive action to prepare for this outcome, what little confidence remains in the currency block will evaporate.
Until now, the euro zone's strategy towards Greece has been simple: to keep providing it with bailout funds to cover its deficits providing it meet strict conditions to tackle the shameful culture of tax avoidance and take steps to boost its competitiveness.
So long as Greece was fulfilling its side of the bargain, the euro zone was happy to keep kicking the can down the road, putting off any default at least until Greece had achieved a primary budget surplus—before interest on its debts—at which point it would be easier to restructure its debts. And preferably until other highly indebted euro zone countries had put their fiscal houses in order and recapitalized their banks, minimizing contagion risk.
But that strategy now looks doomed to failure. The Greek government may just have done enough to avoid immediate default: Last weekend's decision to close a €2 billion ($2.7 billion) budget hole with a property tax to be collected via utility bills should persuade the Troika to pay the next installment under its bailout package so that Greece doesn't run out of money in October.
But Greece is falling so far behind its bailout targets that the Troika—as its official lenders from the International Monetary Fund, European Central Bank and European Commission are collectively known—may find it hard to ignore much longer: The budget deficit is forecast to be 2.5% of GDP higher than planned, privatization receipts are well behind the official timetable and structural reforms are off track.
Meanwhile there is anxiety that bondholder participation in the voluntary government debt restructuring program required under the most recent bailout deal with fall short of the required 90% acceptance rate.
The market is no longer fooled. It can see the default is coming. Its only concern is how large the losses will be, who will bear them and whether the euro zone has a strategy to limit the contagion. What has now become clear is that the euro-zone banking system is woefully under-capitalized to deal with a default. Much of the recent attention has focused on the French banks which are most heavily exposed to Greece. A major recapitalization of the euro-zone banking system in the next few days is now vital to provide protection from the consequences of a Greek default and to reassure markets that they could withstand further losses on other peripheral country debt.
It is simplistic to blame this capital shortfall solely on the banks themselves. They are partly victims of a dysfunctional euro-zone leadership, which initially insisted there would be no defaults, then said there would be no defaults before 2013, and then, when Greek bonds were restructured in July, insisted this would be a one-off.
Now policymakers say they mis-communicated and that they only meant that Greece was a unique case. No wonder euro-zone banks failed to prepare adequately for the latest stage of the crisis. It is rich of policymakers such as Christine Lagarde, the former French finance minister now head of the IMF, to chastise euro-zone banks for failing to raise capital to withstand risks she only recently used to insist would never materialize.
But how much capital should euro-zone banks be raising? Ms. Lagarde recently said they needed to raise €200 billion ($273 billion) of capital before withdrawing that figure under pressure from euro-zone policy makers. But even if the amount required is only half that, banks will struggle to raise it in the market or from governments. The money will need to come from the European Financial Stability Facility, assuming euro-zone governments agree to expand its role to allow it to inject capital into banks. Even the EFSF may not be large enough given it is also expected to lend to governments and buy sovereign bonds to stabilize markets. That has prompted suggestions it may need to operate like a bank, leveraging itself with loans from the ECB.
No matter how much capital banks raise, however, it won't insulate them from contagion if the Greek endgame is badly handled. The risk is that a Greek default precipitates its exit from the euro, turning the disaster of default into a catastrophe. A default now, with Athens still running a substantial budget deficit will be extraordinarily painful for Greece, particularly if the default was disorderly, prompted by the Troika withholding funds. Athens would be forced to close its deficit immediately, requiring far tougher austerity measures than anything currently contemplated, triggering an even deeper recession. But the real pain would come if the ECB stuck by its principle of not accepting defaulted debt as collateral. That would deprive the Greek banking system of funding, leading to its immediate collapse and turning a recession into a depression. At that point, Athens might conclude it had no option but to quit the euro and introduce its own currency.
The euro zone needs to avoid this outcome at all costs. A Greek exit from the euro would lead to capital flight, mass bankruptcies and hyperinflation in Greece, says Willem Buiter of Citigroup. Worse, it would undermine the euro zone's credibility, creating a domino effect as markets hunted down the next exit candidate. Even if Greece defaults, the ECB must keep the Greek banking system afloat. But will it? Political frustrations with Greece are running high, particularly in Germany. Last week, ECB Deputy President Jürgen Stark quit following a disagreement over the ECB bond-buying program; earlier this year Bundesbank chief Axel Weber resigned on similar grounds. Accepting Greek defaulted collateral would be a far clearer breach of ECB rules.
The euro zone can no longer afford to prevaricate and obfuscate. It needs to prepare now for a Greek default—and explain how it will react when it happens.
Ultima modifica:
