Tag Archives: Luxembourg

EU Agree on 500 Billion Permanent Bailout Fund

Personally I can’t see why a permanent bailout fund should be considered a positive thing. Wouldn’t it be much better to fix the economy so we didn’t have to bailout anything anymore – neither banks nor nations? Yeah, yeah, I know…that’s just ignorant non-economist talk. Stupid question!

“This is a serious blow for EU taxpayers.”

Sony Kapoor

EU finance ministers in Luxembourg managed to put the finishing touches on the euro zone‘s massive permanent bailout fund, yesterday, giving it an effective lending capacity of €500 billion.

One thing is; that if the EU have to bail out Spain, Italy and perhaps also France, 500 billion euro is far from enough.

The other thing is that the EU member states is supposed to reach the full pot gradually, in five stages, from 2012 to 2017.

I thought this crisis was somewhat acute?

Does this mean that no one is allowed to default until after 2017?

It also means that the total lending capacity of the fund will increase from 440 to 500 billon euro.

60 billion more than the existing facility – okay, maybe we can squeeze in a medium sized Spanish bank, or two…

Still, I really think we should be able to find a solution that not include more   bailouts of any kind.

But that’s obviously too much to ask for.

And – of course – European taxpayers will have to pick up the bill in the end.

“This is a serious blow for EU taxpayers,” says Sony Kapoor, the head of Re-Define, an international economic think tank, based in Oslo, Norway.

The former Lehman banker, now advisor for several governments and regulators, believes that the new stabilizing mechanism, in fact, does imply even greater risk for the states involved.

The ministers have also agreed that the bonds issued by the new fund will not have a so-called “preferred creditor status.”

“Without a preferred creditor status, creditor governments will be much less willing to lend through the ESM. This will make it less effective and result in higher contagion and financial instability throughout the euro area,” he says in a commentary.

The new European Stability Mechanism (ESM), is to replace the temporary €440 billion European Financial Stability Fund (EFSF) created last year.

The EU member states will offer €620 billion in credit guarantees, and a full €80 billion in cash, according to the EUobserver.com.

A Plan B?

Sony Kappor and Re-define have provided a series of suggestions on how to deal with the financial crisis in general, and the European debt crisis in particular.

Last week Mr. Kapoor called for a “Plan B” in the struggle to manage the Greek problem.

The following post was recently published at the think tank’s web page – www.re-define.org:

EU leaders are getting their knickers in a twist over Greece, again. The facts are well-known:  

A debt spiralling up to 170% GDP, a stubborn double-digit deficit, the collapse of private investment and a shrinking economy.

Plan A – liquidity support and structural reform under an EU-IMF program- has run aground. 

Europe needs a credible Plan B for Greece.

Greece cannot repay its debt in full but a situation where EU taxpayers share the burden through a write-off is politically toxic.

Another possibility of simply restructuring debt owed to the private sector will, as the ECB rightly points out, bankrupt the Greek banking system and trigger contagion.

Other options such as increasing the size of public support to Greece make little economic sense and remain politically fraught even as Greece runs out of cash.

The constraints imposed by what is economically sensible and politically feasible mean this is what Plan B must do.

First; recognize that haircuts on Greek government bonds are arithmetically unavoidable unless EU taxpayers are willing to give almost Euro 100 billion to Greece in aid, not loans.

The timing of these haircuts is flexible with now or July 2013, when the European Stabilization Mechanism is activated, being the two dates that make most sense. 

While restructuring now will minimise uncertainty and reduce the debt overhang, July 2013 may be more realistic politically, in particular because the ESM will make the process legally and operationally simpler.

Banks can also build additional buffers.

Second: differentiate between various groups of creditors.

Though the loans provided by Member states are legally ‘pari passu’ with debt to the private sector, EU loans and ECB support provided after Greece got into trouble must be treated preferentially.

Private holders of GGBs would have been worse off without public support, so the EU/IMF and ECB debt of around Euro 100 billion should not be restructured.

In 2013 this can simply be transferred to the ESM, which will have preferred creditor status.

Another category of creditors, Greek banks that hold more than Euro 50 billion of GGBs, will also need to be protected.

Not because of fairness or political expediency but because they have no loss absorption capacity.

A haircut to their holdings will bankrupt all Greek banks imposing enormous economic costs on Greece and its foreign creditors alike and triggering contagion.

Third: swap Greek bonds held by the ECB and Greek banks for new par bonds that are excluded from restructuring.

The ECB should pass on the nearly Euro 10 billion difference between what it paid for the bonds and their face value to Greece to help reduce the debt stock.

Clear statements that these new bonds will not be haircut will maintain public faith in Greek banks and prevent the large-scale deposit flight that would otherwise occur.

Fourth: change the Greek domestic law to smoothen restructuring and target a debt stock of just below the psychologically important 100% threshold.

The burden would fall mostly on private external holders of Greek debt of which German and French banks are the biggest.

Well-capitalized French banks, such as BNP Paribas, can comfortably absorb the 50% haircut needed.

Between the poorly capitalized but publicly supported German Landesbanken, the SoFFin bad bank and the stronger private banks such as Deutsche, German banks can also handle the haircuts.

The balance of Greek bonds, held mostly by institutional investors including hedge funds and distressed debt specialists, has already been marked down by close to 50%.

Contrary to what the ECB is self-interestedly saying, the direct contagion impact of Greek restructuring will be very limited.

The main concern is that of psychological contagion to Ireland, Portugal and to a lesser extent Spain. We address this issue at the end.

Delaying restructuring till July 2013 is possible but implies that a 75% haircut will be needed to compensate for the Euro 40 billion of repayments due to non-public external bondholders by then.

However, it may be the only political compromise possible between the fiscal and the monetary authorities in the EU.

While the re-profiling being discussed will keep this Euro 40 billion in play and reduce the need for public funds, it has much of the downside of an immediate restructuring without the upside.

It will not improve the debt sustainability, nor remove the uncertainty or debt overhang. Yet, as seen from the latest downgrade of Greece to CCC by S&P, even a re-profiling will trigger ratings action and be considered to be a default.

Any significant ‘voluntary’ roll-over could only be achieved through self-defeating credit enhancements such as providing collateral, using higher coupons or issuing the new securities under UK law that will only worsen the sustainability of Greek debt. 

Both re-profiling and roll-overs will merely postpone restructuring, not avoid it.

They may allow politicians to claim that there has been private sector involvement but it will mean little as there is no effective burden sharing.

Finally: contagion to Ireland and Portugal, which is a real risk, can be minimized through the introduction of an ESM clause that allows debt restructuring only when the Debt/GDP ratio and Debt Servicing/GDP ratios exceed 120% and 6% respectively, levels that neither Ireland nor Portugal are expected to breach.

The markets recognize that Greece is in a significantly worse situation.

Greece will need to work hard to restore growth – the number one priority and a debt restructuring will at least give it a fighting chance. It also needs to cut deficits urgently.

For the hard work that Greece needs to put in, there is no Plan B though making the debt stock manageable will at least give it a fighting chance of success.

Sony Kapoor is managing director of Re-Define, an international think-tank with offices in Berlin and Brussels.

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The Masters of Lies

The Austrian daily newspaper, Der Standard, describe the eurogroup chief, Jean-Claude Juncker a “master of lies”, in the aftermath of this weekends not-so-secret meeting between the top EU leaders. The newspaper also see Juncker’s handling of the whole farce as “a fatal error that multiplies the scepticism of the citizens.”

“Juncker and his Round Table should be reminded that it was the small states in May 2010 that made the rescue package for Greece possible in the end.”

Der Standard

EU leaders, with Jean-Claude Juncker in the middle at the back.

Criticism is now mounting against eurogroup chief Jean-Claude Juncker for lying about a secret meeting last Friday of selected EU finance ministers in his native country Luxembourg to discuss the worsening Greek debt situation.

A series of furious attacks on the chair of the group of EU states that use the single currency have appeared in the European press over the last 48 hours, arguing that Mr. Juncker can no longer be trusted.

Ministers and their spokespeople across the euro zone had first denied, or refused to comment, on a report which appeared in Spiegel Online revealing that a secret meeting of senior EU officials was being held in a Luxembourg castle to consider a Greek exit from the euro.

The same officials later confirmed that the meeting took place, but that Greece returning to the drachma was never on the table.

Juncker had apparently invited finance ministers from France, Germany, Spain, and Italy, ostensibly under the aegis of the EU members of the G20 (although the UK, a G20 member, was absent), along with Greece, the European Central Bank and Olli Rehn, the EU economy commissioner.

Juncker’s spokesman, Guy Schuller, was quoted by Reuters as saying:

“I totally deny that there is a meeting, these reports are totally wrong.”

This absurd event comes just a week after the Luxembourgh prime minister admitted the that over the course of his career, despite his Catholic upbringing, he often “had to lie” in order not to feed rumours and that economic policy was too important to be discussed in public. “I am for secret, dark debates,” he quipped, according to an EUobserver report.

German press agency DAPD quoted him as saying:

“When the going gets tough, you have to lie.”

On Monday, Austrian daily newspaper, Der Standard, attacked the Luxembourg prime minister calling him a “master of lies,” also complaining that Juncker had invited the larger EU states but not the likes of Austria or Finland and describined the move as “a fatal error that multiplies the scepticism of the citizens.”

“Juncker and his Round Table should be reminded that it was the small states in May 2010 that made the rescue package for Greece possible in the end,” the paper writes in an editorial.

Germany’s Suddeutsche Zeitung states that no one can believe what the EU leaders, particularly Juncker, says any more regarding the stability of the euro zone .

“Seldom have we seen politicians acting as irresponsibly as they did on Friday evening. In Berlin, Brussels, Paris, Rome and Luxembourg, officials were silent, deceptive or just plain lied,” the paper thundered.

“Within a matter of hours, the governments of the euro countries managed to fritter away the last remaining trust the people of Europe still have in the bailout action.”

“Who in the future is supposed to believe that Greece isn’t interested in leaving the euro zone if Luxembourg Prime Minister Jean-Claude Juncker, who heads the Euro Group, is taking the lead on the deception?” the German paper writes.

A frustrated European diplomat told EUobserver the handling of the meeting was “amateur.”

Adding: “What happened is silly. How is anyone going to trust what we say now?”

Meanwhile, Greek authorities are going after Spiegel Online for reporting “false news” about Greece considering withdrawal from the euro.

The Greek prosecutor has contacted German counterparts, requesting assistance in tracking down those responsible at Spiegel Online for the initial report.

On Wednesday, European Commission President Jose Manuel Barroso is to visit German Chancellor Angela Merkel to discuss the Greek conundrum and EU Council President Herman van Rompuy will also be dropping in on the German leader to consider the next steps in the crisis.

This meetings will not take place in secret in a Luxembourg castle, but in Berlin – and will be official – at least that’s what they say…

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The Worlds Most Contagious Countries – Here's The List

I guess its about time to rewrite the old saying; “When Wall Street Sneezes – The World Catches A Cold.” Scientist have been able to map the developed countries economic interconnection, and the result is a bit surprising. It shows that some of the smallest countries, with the lowest gross national product, has in fact the greatest potential to create a worldwide financial havoc.

“These smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries.”

Antonios Garas/Panos Argyrakis/Céline Rozenblat/Marco Tomassini/Shlomo Havlin

C12 - The Most Contagious Countries In The World

According to the new research paper, the phrase “When Belgium Sneezes, The World Catches A Cold,” would be more accurate. Belgium, who has been without a government for six months and has one of the lowest GDP outputs in the world, is in fact among of the nations that easily can cause a major global financial crisis. The report by IOP Science list the 12 most economic contagious countries in the world – hereby named the C12.

The new analysis of countries’ economic interconnectedness finds that some of the countries with the greatest potential to cause a global crash have surprisingly small gross domestic production.

Using data from Bureau Van Dijk — the company information and business intelligence provider — to assess the reach and size of different countries’ economies, and applying the Susceptible-Infected-Recovered (SIR) model, physicists from universities in Greece, Switzerland and Israel have identified the twelve countries with greatest power to spread a crisis globally.

The research published on Nov. 25,  2010, in the New Journal of Physics, groups Belgium and Luxembourg alongside more obviously impactful economies such as the USA in the top twelve.

Here’s the “C12” nations:

  1. USA
  2. France
  3. United Kingdom
  4. Sweden
  5. Japan
  6. Spain
  7. Switzerland
  8. The Netherlands
  9. Italy
  10. Germany
  11. Belgium
  12. Luxembourg

Except for USA and France, they’re all  – almost – equally dangerous if a crisis occurs on a national level.

Note:  Six of the eight wealthiest nations in the world – G8 – is on the list.

“This is explained by the fact that these smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries. Countries such as Luxembourg and CH, which are the headquarters for some of the world’s largest companies and subsidiaries, interact very strongly with a large number of countries. For example, about 95% of all pharmaceutical products of the Swiss industry is not intended for local consumption but for exporting,” the scientists write.

Using a statistical physics approach, the researchers from the Universities of Thessaloniki, Lausanne and Bar-Ilan used two different databases to model the effect of hypothetical economic crashes in different countries.

The data used allowed the physicists to identify links between the different countries, by mapping the global economy to a complex network, and gauge the likelihood of one failed economy having an effect on another.

One network was created using data on the 4000 world corporations with highest turnover and a second using data on import and export relations between 82 countries.

In addition, the SIR model, successfully used previously to model the spreading of disease epidemics, is applied to these two networks taking into consideration the strength of links between countries, the size of the crash, and the economic strength of the country in potential danger.

When put to the test with the corporate data, the USA, the UK, France, Germany, Netherlands, Japan, Sweden, Italy, Switzerland, Spain, Belgium and Luxembourg were part of an inner core of countries that would individually cause the most economic damage globally if their economies were to fail.

Using the import/export data, China, Russia, Japan, Spain, UK, Netherlands, Italy, Germany, Belgium, Luxembourg, USA, and France formed the inner core, with the researchers explaining that the difference – particularly the addition of China to this second list – is due to a large fraction of Chinese trade volume coming from subsidiaries of western corporations based in China, according to the report.

The researchers write:

“Surprisingly, not all 12 countries have the largest total weights or the largest GDP. Nevertheless, our results suggest that they do play an important role in the global economic network. This is explained by the fact that these smaller countries do not support only their local economy, but they are a haven for foreign investments.”

The Big Bang of Belgium

Belgium – who now have been without a government for six months – is held up as an example.

“We find that countries in the nucleus can spread a crisis to larger parts of the world compared to countries in the outer shells, even if the crisis originates in a small country, such as Belgium.”

“Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line shows the spreading of a crisis originating in Belgium, which is one of the smaller countries that belong to the nucleus of the network. Note that a crisis originating in Belgium, as m gets larger, becomes more severe in comparison with the average case for all countries in shell 11, (e). Fraction of nodes infected by a crisis originating from different shells of the network versus its magnitude m for ITN, (f) Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line again shows the spreading of a crisis originating in Belgium.”

It’s hard to imagine, but the scientist writes that a crisis originated in Belgium has the potential to infect 95 percent of the global economy:

“Considering the example of Belgium – ranked 29th according to its total GDP – we find that a crisis originating in this country (with magnitude m = 4.5), is able to affect for CON almost 60% of the world’s countries (average result of 50 realizations), while the worst-case scenario that is given by the maximum value of the fraction of infected countries (out of the same 50 realizations) is 95% of global infection,” they write.

The Potential Impact of Belgium

This story was first published by ScienceDaily.com on November 26, based on materials provided by Institute of Physics, via EurekAlert!, a service of AAAS.

Here’s a copy of the full report, downloaded from IOP Science.com.

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