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Greece: Just Do It!

One might certainly wonder how long the stage managers in Brussels will let the Greek tragedy run, before they finally close down the show. It seems like the top leaders of EU are afraid of the consequences of a Greek default and a restructuring of the nations debt. But the consequences of doing nothing may be far worse.

“We therefore urgently need a thorough assessment of the systemic implications of a Greek debt restructuring.“

Guntram Wolff

As Guntram Wolff points out in a syndicated column by eurointelligence.com,  the opinions are divided whether or not a Greek debt restructuring would undermine the financial stability of the euro area . But, as Wolff also indicates, the current strategy of doing nothing may cause far worse problems.

In fact, no one can say for sure what will be the result of a Greek default and a restructuring of the nations debt.

But one thing is for sure; the longer the EU and IMF wait to come up with a solution, the longer we have to wait for our economy to recover.

And most important of all: we have to get all the facts regarding Greek debt on the table.

As this blogger has stressed a thousand times, market confidence will not return before a transparent financial system is in place.

Mr. Wolff makes an additional good point about this being a natural task for the  newly established European Systemic Risk Board (ESRB) to take on.

Here’s the full article:

Among the most vocal opponents of a restructuring, ECB’s board member Bini Smaghi has argued that a restructuring would severely undermine the stability of the Greek banking system and euro area financial stability as a whole.

He may be right.

Others, however, argue that a sovereign restructuring is manageable, pointing out to the low exposure of German and French banks to Greek debt.

The Greek banking system could even be restructured and taken over by foreign banks.

Moreover, they dismiss the idea that a restructuring would lead to contagion beyond the countries that are already under EU/IMF assistance. Hence they argue that this would not be comparable to a second “Lehman Brothers”.

Given this uncertainty in the assessment of what a restructuring of debt with private sector involvement means, European decision makers have so far erred on the side of caution, preferring to commit significant amounts of tax payers’ money instead.

However, the election success of the True Finns has shown that such a policy has limits.

We therefore urgently need a thorough assessment of the systemic implications of a Greek debt restructuring.

The ESRB is the institution uniquely placed to make such an assessment.

First, it has probably the best access to the kind of data needed to make such an assessment.

The ECB – providing a large part of the infrastructure of the ESRB – knows which banks use Greek bonds as collateral for the open market operations and should therefore have a good picture of exposure to Greek bonds.

The ECB should also have fairly detailed information on the interbank market, from which contagion across banks can be assessed.

Last but not least, the ESRB has the legal authority to request data from the national and European supervisors needed for such an assessment.

The assessment would obviously have to take into account the possible contagion effects.

Second, the ESRB is the European institution with the legal mandate to warn about systemic risk..”

A warning from the ESRB that a Greek debt restructuring undermines the stability of the financial system of the EU would enjoy great credibility since its General Board includes among its members central bank governors, national supervisors and the chairs of the European Supervisory Authorities.

To further increase the credibility of the warning, the ESRB could choose to publish its warning.

Publication would also help convincing voters that a bail-out is in their own best interest if, indeed, a systemic risk exists.

Conversely, in the absence of a warning from the ESRB, EU decision makers as well as voters should rightly assume that a restructuring would not constitute a systemic risk and would not undermine the financial stability of the euro area.

They could then confidently move to the task of involving the private sector in the restructuring.

Could the ESRB have a different opinion than the ECB’s current opposition against restructuring?

The ESRB is of course dominated by central bankers and might therefore be similarly risk averse as the ECB.

However, in the ESRB central bank governors of all 27 member states are present.

Already now, one can see substantial differences in the assessment of some of the central banks of the euro zone.

As regards the central banks outside the euro area, little is known to date as regards their opinion on the issue.

Moreover, one should not underestimate the importance of the other members of the board, including the non-voting members, who will voice their opinion.

At the end of the day, the decision will crucially depend on how convincing the analysis prepared by the ESRB staff will be.

Different degrees of risk aversion will only play a role if the analysis does not allow for a clear decision. In that case, the ESRB may opt to be risk averse, not least because it will fear to lose its reputation.

Whith respect to timing, the second half of 2011 would be the right time for the ESRB to undertake such an assessment.

This is important in particular for Greece.

Greece will have to return to the market on a large-scale in 2012.

If the market refuses to provide finance, Greece will either need a new program or it will need to reduce its debt burden through a restructuring.

Clearly, a decision will have to be made earlier to avoid further risks.

Guntram Wolff

A clear communication strategy would help mitigate short-term risks.

In the absence of a contagion warning, EU decision makers should move ahead with restructuring not to strain the financial stability of the euro area any further.

It is time to act for the ESRB.

By Guntram Wolff

Mr. Wolff is a scholar at Bruegel in Brussels.

Article syndicated by www.eurointelligence.com

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Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics, Uncategorized

EU’s New Watchdogs Warns of Crisis Being Far From Over

The European Union’s new economic super-watchdogs warns that “many risks” remain to the stability of the EU’s financial system and that the global crisis will last for many more years to come. Will someone please inform EU president Manuel Barroso?

“Reform of our financial system – both its structure and regulation – is essential if we are to avoid another crisis.”

Mervyn King


The two deputy chairs of the new European Systemic Risk Board (the bloc’s new Frankfurt-based supervisor of supervisors tasked with oversight of the financial system within the Union) gave a quite frank assessment of the state of capitalism in Europe in their first hearing before the European Parliament’s economics committee.

“There are still many risks to the recovery of the European economy,” says Mervyn King, the ESRB’s first vice-chair and head of the Bank of England.

“The economic challenges will last for many years … The financial crisis is very far from over and the impact will be felt for many years to come.”


He and his fellow vice-chair, Andrea Enria, also the head of the European Banking Authority, says  that the eurozone’s sovereign debt crisis is not the only danger present, according to the EUobserver.com.

Enria also warns that systemic risk still lies outside regulated areas and that financial innovation is happening so rapidly these days that even in the case of appropriate regulation, capital is already able to pick up stakes and move on to another, unregulated area.


Here’s the formal statement by Mr. Mervyn KIng:

Mrs. Bowles, and members of the Committee, let me thank you for the opportunity to appear before you and to make a brief opening statement.

The recent banking and financial crisis has had a devastating impact on the European economy. Total output is around 5-10% below where it would have been had output followed its pre-crisis trend. And the European banking system is still in need of further repair. Reform of our financial system – both its structure and regulation – is essential if we are to avoid another crisis.

An efficient and competitive financial sector is a crucial ingredient of a successful economy. But one of the main lessons of the crisis is that the balance sheet of the banking system expanded to the point where it became a source of fragility and led to greater volatility of the real economy. So one of the aims of the new European Systemic Risk Board (ESRB) is to look beyond individual institutions to the system as a whole.

The ESRB has taken some significant first steps. As you know, the General Board has already met twice this year and will meet again next month. A Steering Committee, on which I sit, has been established and is guiding the work to be presented to the General Board. To assist with that, the Advisory Technical Committee is up and running and the members of the Advisory Scientific Committee have been appointed.

Going forwards, the ESRB faces three main challenges.

First, to consider and make warnings and recommendations. There are still many risks to the recovery of the European economy. The sovereign debt crisis and the associated imbalances within the European economy, and the unsustainable patterns of demand resulting from very low long-term real interest rates, are among the most important. I am optimistic that the ESRB will not shy away from these problems, and I have been struck by the positive and determined commitment of so many senior policy-makers evident in the meetings to date.

Second, the range of policy instruments of the ESRB needs to be defined. Since the ESRB does not have binding powers, the analysis and arguments that it deploys must be of the highest standard if the principle of ‘comply or explain’ is to be effective. But it is important that the ESRB is not unduly constrained in its recommendations to national authorities. Take one example. Under the current proposed Capital Requirements Regulation maximum harmonisation would not only limit the countercyclical buffers that could be imposed, but would also limit the number of instruments at the ESRB’s disposal. In certain situations such a toolkit could be too weak or too restricted to prevent a build-up of excessive risk and leverage. It would be peculiar if one European body inadvertently prevented another from carrying out its remit.

Third, the ESRB will have to co-operate closely with the three European Supervisory Authorities, and my colleague Andrea Enria will say more on this.

Let me conclude by saying that, in my role as vice Chair of the ESRB, I am fully committed to assess the risks to EU financial stability and, more importantly, to act upon them. And I stand ready today to answer any questions you have about the work of the ESRB.


Introductory Statement by Andrea Enria.

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Filed under International Econnomic Politics, National Economic Politics