Tag Archives: International Monetary Fund

European Crisis Not Contagious – Banks Are

The International Monetary Fund (IMF) have released a stack of reports and papers over the last couple of days, including the one stating that the Greek bailout operation has been more or less – a fiasco, so far. But there’s more: New research indicates that the international banking  is continuously increasing their risk taking and that more any more trouble with the European banks may have severe spillover effects on  financial institutions outside Europe,

“Both German and French banks mostly transmit/receive shocks to other European banks, especially in the UK. French and U. banks pre-crisis also appear to have strong spillover to Russia. Outside of Europe, spillover are largely confined to the US.”

Hélène Poirson/Jochen Schmittmann


The average sensitivity to European risk, specifically, has been steadily rising since 2008. Banks that are reliant on wholesale funding, have weaker capital levels and low valuations, and higher exposures to crisis countries are found to be the most vulnerable to shocks. The analysis of bank-to-bank linkages suggests that any globalization of the euro area crisis is likely to be channelled through UK. and US banks, the research paper says.

The report “Risk Exposures and Financial spillover in Tranquil and Crisis Times: Bank-Level Evidence” provided by Hélène Poirson and Jochen Schmittmann was released yesterday in the shadow of IMF’s Greek audit report.

(Transcript of IMF press briefing on Greece here.).

This report is not necessary reflecting the official IMF view, but provides some interesting details on who will influence who if more trouble occur.

The researchers have discovered a clear pattern of interconnectedness between European banks.

“French and German banks co-move strongly only with selected US financial institutions, while UK banks are connected strongly with both Asia (pre-crisis only) and the US (in both periods).”

“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”

12579631569zN4br“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”

Moreover, the researchers have mapped the connections between the individual institutions.

“The estimation framework allows us to highlight the presence of “clusters” of interconnected banks that tend to co-move together more strongly than with other banks, either due to inter-bank linkages (counterparty relationships, interbank-lending) or the exposure to common vulnerabilities.”

A few examples

german spillover


french uk spillover


  • Large German banks appear to co-move strongly either with other German banks or with other European banks.
  • Spillover from German banks to other European banks are most pronounced in the case of French and U.K. banks and, to a lesser extent, in the case of Dutch, Belgian, and Swiss banks.
  • During the subprime crisis and in the post-crisis period, a Franco-German cluster can be detected comprising Deutsche Bank and BNP Paribas and a UK-German cluster comprising Commerzbank, Barclays, and RBS.
  • None of the banks from peripheral crisis European countries (GIIPS) are found to co-move in a significant way with the largest German banks.
  • Spillover from German banks to other regions appear limited to the US: prior to the subprime crisis, two of the large German banks seem to co-move significantly with banks in the U.S. (namely, Deutsche Bank with Lehman Brothers and Hypo Real Estate with Goldman Sachs)25; during and following the subprime crisis, Freddie Mac and Fannie Mae have synchronized returns with the largest German financial institutions (Deutsche Bank, Commerzbank, and Allianz), which in turn can be traced back to the latter’s sizeable holdings of subprime portfolios and related exposures to US real estate.


“Similar to German banks, the spillover of French banks to other regions are largely limited to U.S. financial institutions and can only be detected since the onset of the subprime crisis.”

“The financial spillover of U.K. banks, by contrast, reach beyond Europe in both periods. Pre-crisis, there is empirical evidence of strong co-movement of US, Indian and Chinese banks with U.K. banks; during the subprime crisis and post-crisis, spillover to U.S. banks are dominant and the analysis does not detect any co-movement with banks in other regions.”

“In summary, we can tentatively conclude from the analysis of bank-level spillover that direct financial spillover from the EA banking and sovereign debt crisis transmitted through the equity markets outside of Europe are likely to be confined to US banks and financial institutions. Indirectly, however, given the role of the US as a global financial hub, such spillover – if they were to intensify – could potentially transmit more widely to systemic banks in other regions (Asia, Latin America, and Middle East).”

“The analysis in this study leaves unspecified the channels of transmission of financial spillover both within countries and across borders. While this undertaking is beyond the scope of this paper, it would be an important avenue for further research.”


(Download the full report here.)


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Filed under International Econnomic Politics, National Economic Politics

Greece: Bloodbath & Beyond

This may very well be another case of wishful thinking. On the other hand – if these experts are right – there may be a light in the end of the tunnel for the people of Greece after all. This analysis is provided by three high-profiled London-professors and syndicated by http://www.eurointelligence.com. They conclude that a new government in Greece may be able to do what Papandreou never managed – create confidence in the nations economic recovery.

” If political forces miss this opportunity, they should be held individually and collectively accountable by the Greek population for the collapse of their financial sector, the destruction of productive forces, and the wealth reduction and re-distribution (from the poor to the rich) that inflation and a return to the Drachma would entail.” 

Michael G Jacobides/Richard Portes/Dimitri Vayanos  

“Time is running out fast for Greece. This is the last opportunity to use the crisis as an occasion to change the structure of the Greek economy and allow Greece to enter the growth path of which it is capable. A cross-party government should not have a narrow mandate on securing the restructuring deal; rather, it should seek consensus to engage in far-reaching reforms that no party alone would dare to initiate,” the three professors writes.

Well, the quote above is quite obvious…

However, the rest of the article, including arguments, suggestions and  proposals, are interesting.

Anyone involved in the current  “Greek Tragedy” should read this piece:

The dramatic political developments in Athens have focused international attention on Greece. Papandreou’s ill-fated initiative to hold a referendum was partly an effort to increase popular support for the bailout and reform package. A new interim government with a strong mandate to engage in far-reaching reforms could achieve exactly that.

That the biggest bailout plan in history has become unpopular among its supposed beneficiaries may seem paradoxical. But this is not only the result of a populist stance from the opposition and of lopsided coverage by the media.

It is also because the plan’s implementation, as run by the government and monitored by the Troika (IMF, EC, ECB), has focused disproportionately on fiscal targets, as opposed to structural reforms.

Over the last eighteen months, fiscal discipline has been limited to reducing capital and discretionary expenditure,  cutting public-sector wages uniformly with no relationship to productivity, and raising tax rates to unsustainable levels.

We have not seen real progress on tackling tax evasion or on a far-reaching rationalization of the public administration.

While there have been some steps in the right direction, effecting real change has been slow.  But deep institutional change is necessary for popular acceptance and hence success of debt relief, to avoid an eventual default and disastrous exit from the euro.

Greece must not waste this opportunity. Structural reforms, including the aggressive pursuit of tax offenders, would reduce the need for unpopular austerity measures.

More important, they would restore faith in the government by reducing the feeling of inequity and cutting waste, corruption and rents held by interest groups, whether in the private or public sector.

Creditors and the IMF should consider whether the proposed debt relief is sufficient for sustainability and growth.

The focus in Greece, however, should now change from fiscal targets and debt restructuring to operational restructuring.

Politically difficult but often economically evident decisions need to be made.

The debt overhang in Greece is the symptom and indeed consequence of the underlying inefficiencies of Greek public administration and of the current economic model. Without addressing the causes, any debt reprieve will surely be temporary.

Three weeks ago, we hosted a meeting at London Business School where former ministers and current MPs of both major parties met with senior policy makers, bankers, regulators and academics from Greece and abroad.

It is sobering to note that this was the first event of its kind, whether inside or outside Greece. Very positively, despite the range and diversity of the participants, a remarkable consensus emerged on the way forward.  

We are thus convinced that a set of bold structural reforms can be supported by many parties, if only they take the courageous step of severing their own ties to practices which led to the onset of the problem.

Our report, informed by the meeting, focuses on four key areas: tax evasion, public administration, privatizations, and the financial sector.

Reform in the public administration is essential for the better functioning of the state and hence for the success of all other reforms.

The main directions of reform are to make the public administration more independent from the politicians, while also introducing greater accountability and incentives.

In the area of tax collection, for example, lack of accountability and incentives have generated a highly inefficient and corrupt system, which strongly resists change.

  • We propose to abolish the current tax collection offices – which would result in minimal loss of tax revenue – and move tax assessment and collection to a new independent authority.
  • This authority should have an arm’s-length relationship with the Ministry of Finance, and its staff should be hired on limited-term contracts and be evaluated based on Key Performance Indicators (KPIs).Independent Authorities with  tight governance and accountability could be useful in other areas as well.
  • We propose three additional such authorities:  one charged with the overall monitoring of structural reforms, one on healthcare procurement (a big expenditure item, where waste is rife), and one on corruption reduction. These authorities may help jump-start the change effort throughout the Greek government and its associated institutions.
  • All authorities should be staffed by competent technocrats and be accountable to the Parliament as opposed to the government.
  • An additional measure, which would bring technocratic skills, continuity and accountability, would be to reinstate Permanent Undersecretary of State, appointed for periods longer than a parliamentary term, accountable to Parliament.
  • We argue that the privatization process has been hastily designed: targets are unrealistic and the mandate does not, as it should, include the increase in value of the assets for ultimate disposal. The resources of the Privatization Fund must increase, and its mandate should be the increase of long-term value of formerly state-owned assets.
  • We propose that the programme’s focus shift from immediate sales to a scheme supported by a moderate amount of debt financing using the assets as collateral. This would provide an incentive to the government to increase the value of assets to be sold, while also avoiding fire-sales.
  • We further point to the risk of increased political interference in banks as an unwanted side-effect of their recapitalization process. Such interference has been common in the past, and has harmed the corporate governance and efficiency of the affected banks, as well as their sound supervision.
  • We suggest ways to promote good corporate governance during the recapitalization process, and we emphasize the need to  strengthen financial supervision.

Time is running out fast for Greece. This is the last opportunity to use the crisis as an occasion to change the structure of the Greek economy and allow Greece to enter the growth path of which it is capable.

A cross-party government should not have a narrow mandate on securing the restructuring deal; rather, it should seek consensus to engage in far-reaching reforms that no party alone would dare to initiate.

Anything short of this will quickly lead to Greece being marginalized and expelled from the euro zone.

A caretaker government with a weak mandate, focusing on elections, will send the ultimate wrong message and risks losing the waning creditor and EU partner support.

It is thus critical to launch a concentrated effort now, and not just a caretaker government.

If political forces miss this opportunity, they should be held individually and collectively accountable by the Greek population for the collapse of their financial sector, the destruction of productive forces, and the wealth reduction and re-distribution (from the poor to the rich) that inflation and a return to the Drachma would entail.

Download: Greece Looking Ahead White Paper

Michael G Jacobides, holds the Sir Donald Gordon Chair for Innovation and Entrepreneurship.

Richard Portes  is Professor of Economics at the London Business.

Dimitri Vayanos is Professor of Finance at the London School of Economics and Political Science.



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EU: Summit, Summa, Samarium

The top EU leaders are now dressing up for another countless crisis summit in Brussels. Over the next two days the elected representatives are going to try to agree on….on something. The single most important issue however – how the new bailout fund, EFSF is going to work – is most likely to be postponed, due to a slightly difference of opinion between Angela Merkel and Nicolas Sarkozy.

“It is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”


Ms Christine LAGARDE, Managing Director of the International Monetary Fund, Mr Evangelos VENIZELOS, Greek Minister for Finance

I believe I agree with the analyst at www.eurointelligence.com when they characterize the already pronounced postponement of the EFSF issue as “hopeless but not serious.” There are too many loose threads in that ball, and it would probably not be safe to put it in play. But during the two-day extraordinary meeting is expected that the EU leaders comes up with something – at least some credible statements with a bit of substance.

On Thursday, France and Germany decided that they will not able to bridge their difference over the role of the EFSF by Sunday, and need more time to work out a deal.

It is not serious in the sense that there will be an agreement a few days later – in any case before the G20 summit, the Eurointelligence points out.

Adding: “But it is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

The postponement  is due to a combination of two factors: Nicolas Sarkozy’s diplomacy, and the German Bundestag’s insistence that it needs to give a mandate to the chancellor ahead of the summit.

Merkel would not have had a mandate to negotiate anything beyond the minimalist insurance solution that was recently under discussion.

She now has to crawl back to the Bundestag each time where she gets on a plane.

Merkel and Sarkozy will hold another bilateral summit on Saturday night, and will discuss the issue on Sunday. However no decisions will be taken.

In their joint communiqué, Thursday, they pretends that everything is fine.

But it did not persuade financial markets, which reacted with an increase in bond spreads.

Italy’s spread is now back at 4%, a level as we keep on point out is not consistent Italy’s sustained membership of the euro zone.

“From a market point of view, there is too much disappointment and disunity coming out of the EU right now. A further example has been the dispute between the IMF and the EU about Greece, as the IMF challenges the EU’s optimistic projections for Greek growth,” www.eorointelligence writes.

Mr François BAROIN, French Minister for Finance and Economic Affairs - Ms Elena SALGADO, Spanish Vice-President of the Government and Minister for Economic Affairs and Finance.

It also emerged that the bank recapitalization programme will fall in the too little, too late category of responses – now likely to be below €100 billion.

If you think that undercapitalized are the core of the problem, then this will not help. If you think that recapitalization will damage growth, a weak recapitalization may very well be better than a strong one –  but it will still be negative for growth.

When it comes to the EFSF, the debate is circling around the method of leveraging.

The Germans want to continue down the route the discussions had been going until Wednesday, by using a primary market insurance scheme that would allow the EFSF to insure up to €1 trillion in new debt issuance.

On the other side: The French say this is not sufficient, favoring a banking license for the EFSF.

Reuters reports that bond market experts are severely critical of the insurance schemes because it creates a two tier bond market.

If an Italian government bond was issued under this scheme, investors would no longer classify it as a sovereign bond, but as a structured product.

Another Summit on Wednesday

A follow-up summit is now scheduled for next Wednesday, according to  Frankfurter Allgemeine Zeitung.

Since there was no political agreement, chancellor Merkel was unable to deliver her speech in front of Bundestag today and to seek a negotiating mandate by the deputies as is now required after the constitutional court rulings and the legislation about the parliament’s involvement in EU decisions with budgetary implication.

So Merkel intends now to go to parliament in the beginning of next week to deliver what she could not bring to the deputies today.

Meanwhile, Wolfgang Schäuble have explicitly ruled out that the EFSF will be refinanced via the ECB as Sarkozy wants.

Damn! I would love to see some surprises for a change!

Green Light for More Money To Greece

The first thing to come out of the summit on Friday evening, was the statement about approval of the sixth trace of financial aid for Greece.

“Ministers of the euro area, meeting in Brussels on 21 October, agreed to endorse the disbursement of the sixth tranche of financial assistance to Greece. The disbursement is foreseen for the first half of November, following approval by the Board of International Monetary Fund (IMF),” the statement says.

The Eurogroup took the decision having examined the results of the fifth review of the economic adjustment programme for Greece, on the basis of a compliance report by the European Commission and a recent analysis of the sustainability of the Greek debt by the “Troika” (European Commission, IMF and European Central Bank).

The ministers also noted that the macroeconomic situation in Greece has become worse since the fourth review , but they welcomed Greece’s “substantial fiscal consolidation efforts”, especially the austerity package that the Greek parliament approved on 20 October.

Full text of the Eurogroup Communiqué,

The Eurogroup invites the Greek authorities to continue implementing structural reforms and their privatisation programme.

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