Home » euro (Page 2)

Category Archives: euro

Search within blog:

Subscribe RSS feed

January 2025
S M T W T F S
 1234
567891011
12131415161718
19202122232425
262728293031  

Summit after Summit

Summit after summit – this seems to be what Europeans are best at.  So are Europeans just delaying the inevitable? Europe’s Lehman moment.

Watch this insightful analysis from FT:

(click to watch the video)

Can ECB prevent an European contagion

So far, ECB has been using the wrong tools to fix a very urgent crisis.  Bailout and debt monetization won’t solve the problem.  Either way, it puts too much pressure on Euro.

(click on the graph to play the video; Source: FT)

John Cochrane at U. of Chicago thinks the right approach is to have a bailout with precondition of debt restruction.

If European governments want to bail out their banks, let them do so directly and openly—not via the subterfuge of country bailouts. Then they should face the music: How is it that two years after the great financial crisis, European banks make so-called systemically dangerous sovereign bets, earn nice yields, and then get bailed out again and again?

European bank regulators should announce that sovereign debt is not risk-free, and that their banks need capital against sovereign loans, or they need to buy insurance (credit default swaps) against sovereign exposure. Will taking this step hurt bank profits? Well, yes. Sorry. That game, at taxpayer expense, is over.

http://si.wsj.net/public/resources/images/OB-LD103_cochra_D_20101201175451.jpg

The big culprit in all of this is short-term debt. There would be no crises if governments had issued long-term debt to match long-term plans to repay that debt. If investors become gloomy about long-term debt, bond prices go down temporarily—but that’s it. A crisis happens when there is bad news and governments need to borrow new money to pay off old debts. Only in this way do guesses about a government’s solvency many years in the future translate to a crisis today.

There are two lessons from this insight. First, given that the Europeans will not let governments default, they must insist on long-term financing of government debt. Debt and deficit limits will not be enough. Second, the way to handle a refinancing crisis is with a big forced swap of maturing short-term debt for long-term debt. This is what “default” or “restructuring” really means, and it is not the end of the world.

Is Spain the next Lehman?

Country, unlike firms, can never go bankrupt. Lehman became “too big to save” for Washington, but will Spain become “too big to fail” for Europe?

Eurozone’s debt contagion

Interview of Harvard professor Nail Ferguson. Will Germany-France bail out Greece, Spain and Portugal?

Remember Milton Friedman’s prediction — “Euro can’t survive a major crisis.” Let’s watch and see.

(update 1) Rolfe Winkler writes on Reuters on the same issue. He outlined three possible outcomes.

1) The PIIGS (acronym for Portugal, Ireland, Italy, Greece and Spain) cut their budgets to pay back debt. Such austerity programs are typically very difficult to get done in democracies. Deficit spending stays high long past the point that it’s possible to work off debt over any reasonable period. To successfully dig out of the hole requires cuts so deep, voters never agree to them.

2) Europe bails them out, which is the easiest solution in the short-run. Richer European countries certainly have the wherewithal to bail out a small country like Greece or Portugal. But it’s a dangerous precedent to set. What about Spain? It’s 14% of the Euro economy compared to 6% for Portugal/Ireland/Greece combined. If economies keep spending with an eye towards a bailout from the ECB, eventually you get #3.

3) The monetary union breaks apart. The customary way out of a debt crisis is to devalue one’s currency, see Argentina in 2001. It couldn’t maintain it’s dollar peg and still service its debt, so it devalued its currency and defaulted on debt. But this locked the country out of the international capital markets and drove them into a deep, though brief, Depression. For Greece to devalue, it would have to pull out of the Euro, pass a law that it’s debts are payable in new local currency and then devalue.