Tag Archives: IMF

Of Eurozone Mice and Eurozone Men

This week was tumultuous for the eurozone, in a string of equally tumultuous weeks that preceded it. The Greek Prime Minister proposed a referendum for the new bailout package for Greece, was promptly scolded by his fellow eurozone leaders at the G20 summit, and had to arrange his exodus from the scene. Meanwhile Italy panicked and started redesigning its own austerity programme.

What all this reveals is a new incursion into political entrepreneurship, mainly by the leaders of France and Germany, to somehow solve this crisis. This is also a sign of failure of the European governance mechanism that simply does not withstand the political pressure.

The leaders of the main EU institutions play only supporting roles in this spectacle. The governments of the Member States, aided by the IMF, are once again trying to pull themselves by their own hair.

The crisis of European political leadership notwithstanding, we are experiencing the incapability of the institutional mechanism of the European Union to deliver in this difficult moment. Important decisions are taken outside the multilateral decision-making track. This brings more instability to the system and delegitimizes the decision taken. One of the reasons is the blatant disregard for European Union law.

During the dinner in Cannes Mrs. Merkel and Mr. Sarkozy reportedly asked Mr. Papandreou whether Greece wants to stay in the eurozone or not. The problem of this question is that it has not been discussed with all 26 Member states other than Greece, and to my knowledge it would take all these 26 Member states AND Greece in order to decide on its exit from the eurozone. In other words the political entrepreneurship has neglected the very structure and substance of EU law, hiding behind the veil of urgency. Urgently taken decisions often are bad decisions, though. The European Union is much more than its currency and no economic crisis of any proportion should be used as a tool to destroy what has already been built.

While we, Europeans, remain surprisingly short-sighted, our American allies have already noticed and evaluated the huge importance of our weakness. Perhaps it is time to start thinking strategically and stop shooting in the dark.

 

 

The Irish Bailout: the Details and the Bigger Picture

The details of the Irish bailout are now set:

EU countries and the International Monetary Fund will provide up to €85bn in total, which may be drawn down over a period of up to 7½ years. About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary. The Irish government itself will contribute €17.5bn towards the bank contingency fund, while the IMF will put €22.5bn towards the overall package. This will also include three bilateral loans from the UK, Sweden and Denmark, with the British contribution being around €3.8bn. Ireland will pay average interest of 5.8 percent on the loans.

More importantly, the Council agreed on speedy introduction of a permanent European Stability Mechanism (ESM). An ESM loan will enjoy preferred creditor status, junior only to the IMF loan. The most important feature are the so-called collective action clauses (CACs). These clauses allow a large majority of bondholders to agree a debt restructuring that is legally binding on all bondholders. CACs are meant to ease the process of debt restructuring. The CACS will be introduced in mid-2013.

The proposal for ESM is supported by the president of the ECB, Jean-Claude Trichet. The president of the European Council, Herman van Rompuy, will present proposals for amendment of the Treaties in December.

There is, however, a problem. The financial markets seem unconvinced. As Eurointelligence notes, the problem is that the market demand for peripheral debt is weak, and from 2013 demand for peripheral bonds may dry up completely due to the bail-in rules. And the 6% interest on bailout loans may be too high for Ireland to stay solvent.

There are some ideas how to handle this. Wolfgang Münchau proposes to separate national debt from financial debt and to turn all outstanding sovereign bonds, existing and new, into a common European treasury bond. He does admit that his proposal is not actually feasible, though.

So a more practical approach is to see whether, after all, the EU rescue system can survive the waves of uncertainty. Spiegel International does just that, and notes that of all the possible next bailouts, one is a no-brainer. If Spain falls, so does the euro.

 

 

Windless Weather for Enlargement?

There are reports that Slovenia is slowing down the accession negotiations with Croatia by preventing the chapter on freedom of movement of capitals from being closed, although Croatia has fulfilled all the necessary criteria. Macedonia’s name problems with Greece remain “in coma”.

That is why I read with great interest the report by Natasha Wunsch and Julian Rappold from DGAP about the EU accession of the Western Balkans. The authors outline two main reasons for the current enlargement fatigue: the early accession of Bulgaria and Romania, broadly viewed as a premature step, and the overwhelming focus on internal affairs that lets enlargement sink to the bottom of the list of priorities.

The authors warn that the slowing down of the accession process may lead to dangerous destabilization of the region. The economic consolidation in the region due to IMF intervention will be carried out at the cost of even the most necessary reforms. Social cuts also risk weakening the trust in the institutions. That is why according to the authors it is essential to mobilize all existing EU funds for the region and to facilitate their calling by the Western Balkan states.

The Greek Bailout: the Details

The Greek bailout is here, and we have the details:

The financial package makes available € 110 billion to help Greece meet its financing needs, with euro area Member States ready to contribute for their part € 80 billion, and the rest provided by the IMF. The first disbursements will be made available before the payment obligations of the Greek government fall due on 19 May.

Euro area financial support will be provided under strong policy conditionality, on the basis of a programme which has been negotiated with the Greek authorities by the Commission and the IMF, in liaison with the ECB.

The programme will include the following measures:

  • Greece is subject to a check by IMF/EU each quarter;
  • 5pc point reduction in fiscal deficit in 2010;
  • Goal is to drive deficit down to 3% of GDP by end-2014;
  • Debt-to-GDP ratio is forecast to grow from 115% to 140% (but these are the Maastricht numbers. Add some 10pc point to get the total debt);
  • Individual measures include, another increase in VAT from 21 to 23% (plus increase for smaller VAT rates), 10% increase in excise taxes on fuel, cigarettes and drinks, a windfall tax, a property tax, near abolition of 13 and 14th month pay in the public sector, cut of Christmas and Easter bonuses, cuts in pensions, reducing early retirement.

The shortcomings of the plan according to Eurointelligence:

  • No public sector layoffs, or change of status of public sector job;
  • No complete removal of 13/14th month salary in public sector;
  • No removal of 13/14th month salary in private sector, meaning more unemployment;
  • No immediate privatisation of state companies;
  • No change to rule that caps dismissals to 4% of workforce, and no change to firing costs;
  • No anti tax-evasion mechanism.

I would also recommend reading an interview with one of my favourite philosophers, Jürgen Habermas, on the Greek bailout, the institutional challenges, and the German intransigence.

EU to Greece: Show Us the Reforms

The European Union has asked Greece to produce detailed plans for its budget deficit reduction targets for the period 2010-2012. This should be done this week, in order for the European Commission and the ECB to provide an assessment to eurozone Member States, which must approve unilaterally the release of credit funds for Greece.

8.5 billion of Greek debt payments come due on 19 May. Now the question is whether the Greek government can produce a plan that is acceptable for the German Bundestag on time. Greek financial minister George Papaconstantinou has hinted on the opportunity of bridge loans if the procedure for release of financing is too slow. But many analysts think that debt restructuring (a polite form of bankruptcy) may be necessary.

Meanwhile the prominent American economist and Harvard Professor Kenneth Rogoff says that at least one more country in the eurozone will need help from the IMF over the next two to three years. Other problematic cases include Ireland, Spain and Portugal. Mr. Rogoff said that:

“A lot of countries have to consolidate their budgets and some may have to turn to the IMF for someone to blame”.

Wolfgang Münchau says that this is going to be “the most important week” in the 11-year history of Europe’s monetary union.

Greece Formally Asks for Help

Greece has formally asked for financial assistance under the EU-IMF joint financial package.

The Greek finance minister, George Papaconstantinou, has sent a letter to Eurogroup President Jean-Claude Juncker, EU economy commissioner Olli Rehn and European Central Bank President Jean-Claude Trichet, requesting the activation of the support mechanism.

The request for aid must first be approved by the ECB and the European Commission. Then it must be approved unilaterally by all eurozone Member States.

The Bailout for Greece: Will It Work?

We now have some details on the bailout package for Greece. The program will be managed jointly by the European Commission, the European Central Bank, and the International Monetary Fund. The program will cover a three-year period. The euro area Member States are ready to contribute up to € 30 billion in the first year to cover financing needs. Financial support for the following years will be decided upon the agreement of the joint program. In order to set incentives for Greece to return to market financing, Euro area Members States loans will be granted on non-concessional interest rates. The pricing formula used by the IMF will be used benchmark for setting Euro area Members States bilateral loan conditions with some correction. The initial price of credit will be around 5% p.a. for a three year fixed-rate loan.

But what will be the effect of this program? One thing is certain: it will alleviate current pressures on the eurozone. But at least two commentators (Wolfgang Münchau and The Pragmatic Capitalist) say that this will only kick the can down the road. Wolfgang Münchau is more specific: he believes that Greece will eventually default. He criticizes the EU for not providing a generalised crisis resolution regime.