Friday, March 8, 2013

Excellent ZDF discussion!

For those who understand German, watch this video of a discussion from the German ZDF of last evening. It was an unsually qualified discussion.

The majority view (expressed by the Leftist as well as by the former FX trader) was that the bulk of the so-called 'help for Greece' so far was in actual fact a help for the lending banks and that it was sinful for politicians to lie about that. That view is correct!

The majority view also seemed to be that the Euro is the wrong currency for many EZ-countries, particularly the South, but here the majority was less clear whether they proposed a Euro-exit for the South or not.

The German Economy Minister emphasized over and over again that (a) the South had to make reforms to become competitive again; that (b) it was the exclusive responsibility of Southern governments to chose the austerity measures to meet the Troika's overall savings demands; and that (c) the German tax payers could not be overburdened. He came across as a somewhat lonely voice in the wilderness.

He also stressed that it was absolutely necessary to have saved the banks because, otherwise, bank depositors would have lost their savings. That is where he was completely wrong!

Yes, many banks (not all!) should have been saved but not indirectly via Greece but, instead, directly via partial and temporary nationalizations. Since the spring of 2010, I have been recommending the following: the Banking Supervision Authorities of each country should simply send a policy memorandum to all banks requiring them to 'mark their sovereign assets to market' within, say, 90 days. Just a one-page memorandum. No more than that!

A 'mark-to-market' would have immediately brought most banks below the minimum capital ratio; i. e. all those banks would have had to walk, with hat in hand, over to their governments and politely ask them for a bail-out. Such bail-out's would have come at the expense of shareholders of the banks (dilution) and possibly also at the expense of 'professional funders' of the banks (e. g. bond holders; interbank funders). The savers would not have been harmed. Look at Iceland, if you will. If a small island in the North Sea doesn't convince you, look at the US.

The benefit of a 'direct bail-out' is that the tax payers get something in return for their money - an equity stake in the banks which can later be sold again, hopefully at a profit (refer to AIG). To Greece, a 'direct bail-out' would have been of more or less neutral benefit. Greece still had to fund about 45 BEUR of primary deficit since then and there would have been conditions for such new funding.

However, it is one thing for the tax payers' of the lending countries to hear that 200-300 BEUR have been sent to Greece and quite another thing to hear that 200-250 BEUR have been sent to banks (via Greece) and 'only' 40-50 BEUR to Greece itself. Against that background, and in view of the misery which can be observed all over Greece, tax payers' would have undoubtedly shown sympathy for sending another few billion EUR to Greece for the purpose or reducing social hardships (in whatever form or fashion that could be structured)..

And perhaps tax payers, when seeing how much of their money went to save the banks, would have become a bit violent against those banks and would have demanded their pound of flesh from the banks in exchange for saving them!

1 comment:

  1. Reforms, what reforms?

    Like you said, the only thing that has happened so far is fiscal consolidation.

    I want to stress though that once the damage has been transferred to the real economy, private borrowing and private investment won't take place, due to wounded balance sheets and wounded demand respectively.

    So what is to happen? Public spending.

    Public spending will restore balance sheets and aggregate demand. Only then will private borrowing and private investment take place. When that happens, the government is free to retrench and do it's fiscal consolidation.

    And to not repeat the mistakes of the past, investments and borrowing should be of external (rather than internal) orientation. This is where reforms would be important.

    So here's an idea for European reform. Maastricht abandons the deficit target, and adopts a current account target. Oh boy, the Germans won't like that.