“A nose job will not do.”
Today, however, the prominent german economist almost scare us.
But behind this display of unity, a war is raging over how to solve the Greek debt crisis as we enter the most dangerous phase of the crisis yet.
We have known for some time that the European Central Bank is hostile to any form of debt restructuring. This also includes a “voluntary” extension of the maturity of Greek debt.
European finance ministers have invented a new word for this: “reprofiling” – a well-known expression taken from the field of cosmetic surgery.
What we did not know before was quite how strongly the ECB feels about this. Jean-Claude Trichet, ECB president, stormed out of a meeting with finance ministers on May 6.
The ECB has since stepped up its rhetoric, and is now threatening to deny Greek banks access to the ECB’s refinance operations after any restructuring.
Think about this for a second. Cutting Greece off from ECB liquidity would constitute a dramatic escalation of the euro zone debt crisis.
It would force Greece out of the euro zone within days. You could say that the ECB is threatening to create so much mayhem in the financial system that the monetary union would effectively collapse.
What to do now?
Then take a step back, and see what happens.
Will the ECB really destroy the euro zone?
Then again, do we really want to bring about a situation in which the ECB is faced with a straight choice between an irrecoverable reputational disaster, and an irrecoverable factual disaster?
My guess is that the ECB’s position will prevail because the ministers are themselves divided. Ms. Lagarde agrees with the ECB – or at least, she did last Tuesday.
The German chancellor is a cautious advocate of voluntary schemes of investor participation, but has not yet said what she means by that.
I think caution will ultimately prevail. There will be no restructuring in the near future. What I can see, however, is some variant of the Vienna initiative.
This was a programme created in 2009 at the behest of the European Bank for Reconstruction and Development to persuade western banks not to withdraw from the central and eastern European markets.
They also pledged to recapitalize their subsidiaries in the region. The Vienna initiative solved a collective action problem and it worked.
The issue here is not to maintain the capital base of EU banks operating in Greece. But one could persuade financial companies to maintain a degree of exposure to Greece as a gesture of support.
This will not, of course, solve the Greek debt crisis.
It would take a large haircut, or an extreme rescheduling, to reduce the net present value of Greek debt in any meaningful way.
But a Vienna-type initiative might still be a useful political gesture to help conflicted national parliaments, like Germany’s Bundestag, pass the next loan package to Greece.
The best actions euro zone governments could take at this stage would be to stop all talking at the same time, to be more careful when discussing restructuring or rescheduling, not to invent new words and to revisit an important aspect of the design of the European financial stability facility (EFSF).
They should allow the EFSF to engage in secondary market bond purchases with the explicit remit of aiding a debt restructuring.
That would allow the EU to launch an equivalent of a Brady bond.
The EFSF could swap its own triple-A rated securities for Greek bonds, at a discount.
The counterparty would suffer a loss on the transaction, but would gain a triple-A rated paper in return.
That would actually provide a market-based incentive for holders of peripheral debt securities to swap.
It would cost a bit of money, but not nearly as much as any of those total default or total bail-out options.
What about reprofiling?
The argument is that it buys time. But is this not what the European Union and IMF’s loans are meant to do?
A reprofiling may quite possibly be the worst of all options. It will not render Greek debt sustainable, yet it may trigger a potentially catastrophic credit event.
And if you really think that time would solve the problem, would it not be a lot easier simply to give them a new loan?
The whole reprofiling discussion is a sign of hypocrisy.
Having Ms. Lagarde at the IMF might help the euro zone, but it cannot make up for disastrous and incompetent crisis management.
The euro zone has essentially three options: follow the ECB, and roll over existing debt for as long as it takes; change the rules of the EFSF and accept Brady bonds; or force a full debt restructuring, and accept the consequences.
It is going to be one, two or three.
A nose job will not do.
More columns at www.ft.com/wolfgangmünchau
Related by the Econotwist’s:
- The New IMF Leader: Here Are The Candidates
- Greece Hits Strike 10, Violence Erupt Again
- EU Leaders At Non-Excisting Meeting To Discuss A Total Fantasy Which They Know Nothing About
- The Masters of Lies
- Europeans Are Too Depressed To Be Innovative
- Greece: Just Do It!
- Eurogroup Chief Wants Secret Debates on Monetary Policy
- EU Can’t Even Agree On Date For Top Leader Summit
- Europe: A Lehman Collapse in Slow Motion, Former Lehman Banker Says
- Why Europe’s Leaders Will Back Down And Not Give Greece A Debt Nose Job (businessinsider.com)
- Greeces worst enemy: The self-serving ECB (theglobeandmail.com)
- “ECB Will Make Life More Difficult for Euro” and related posts (blogs.wsj.com)
- The Time Has Come to Call the Ecb’s Bluff and End This Euro Ponzi Scheme (birdflu666.wordpress.com)
- Waking Up to Greece’s Default Position (online.wsj.com)