Tag Archives: True Finns

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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The Grand Greek Finale

There is no other way to read it; German finance minister Wolfgang Schaeuble have practically given the Greek government an ultimatum, and if the conditions are not met in due time “further measures” must be taken. I can not imagine that these measures would involve further financial aid.

“The markets could try to force the hand of Greece and its EU partners well before this date. More volatility lies ahead.”

Gavan Nolan


Wolfgang Schaeuble, the German finance minister, was referring to Greece’s forthcoming fiscal audit by the EC/ECB, and the steps that EU would need to take if the country’s debt sustainability was called in to question.

“Of course, the markets have been doubting Greece‘s solvency for some time, and they duly took Schaeuble’s comments as a clear sign that the long-awaited debt restructuring was imminent. Never mind that Schaeuble went on to say that any restructuring before 2013 (when the ESM comes into effect) would be voluntary,” credit analyst Gavan Nolan at Markit Credit Research writes in his weekly summary.

He also points to the fact that it is hardly a certainty that “further measures” means restructuring and not more of the same austerity policies.

These caveats didn’t prevent Greece’s spreads hitting record levels on Thursday, and they continued to widen on Friday.

It will be interesting to see what happens when markets opens again after the weekend in a few hours.

Too Stressed To Test

“The sovereign’s credit curve is now steeply inverted, implying that the probability of a near-term credit event has increased. But it is uncertain that a voluntary restructuring would trigger a CDS contract.”

It is also doubtful whether private creditors would participate in such a restructuring.

“European banks, the main holders of Greek government debt, would crystallise losses on bonds held in their banking books, which aren’t marked-to-market and won’t be examined in the upcoming stress tests,” Gavan Nolan notes.

But there is little doubt in the market that Greece will restructure its debt by at least 2013, if not sooner.

Germany’s deputy foreign minister Werner Hoyer said Friday that a Greek debt restructuring “would not be a disaster”, although he made it clear that he was referring to a voluntary arrangement.

Greece has already declared that is unlikely that it will be able to access the capital markets in 2012.

“That this known means that the markets could try to force the hand of Greece and its EU partners well before this date. More volatility lies ahead,” Nolan writes.

Schaeuble’s intervention sparked some life into CDS trading on Greece, Friday.

Markit’s Liquidity Metrics show that after a significant drop from mid-March in the number of CDS quotes there was a spike upwards Thursday, though the quote numbers remain some way off March levels (see chart above).

The turmoil around Greece has taken some of the attention away from Portugal, the most recent country to request a bailout.

The sovereign’s spreads have exceeded 600 bp’s today, with Greece’s travails no doubt contributing.

The Finnish Interference

But events on the other side of Europe may also be playing a part, according to Markit Financial Information.

Finland is to hold a general election on Friday, and the outcome could have a bearing on whether Portugal will receive funds from the EU.

“The True Finns party, a eurosceptic outfit formerly on the fringes, has gained ground in recent months on the back of its opposition to bailouts. This has resonated with many Finns, who resent rescuing less prudent countries,” Nolan writes.

Finland had its own banking crisis in the 1990s and they managed without external help.

The difference in the relative credit standings of the two sovereigns can be seen by looking at the chart above.

Finland is the world’s third strongest sovereign credit, according to CDS spreads, while Portugal is in the bottom five, trading wider than even Argentina.

Aside from sovereign turbulence, the market has had to digest important inflation data. CPIs in the euro zone and China both surprised on the upside but the US core CPI came in lower than expected.

“Further monetary tightening is probable in the first two regions, though the undershoot in the US index could increase the likelihood of QE2 reaching its full maturity. Along with the unfolding earnings season and the ongoing sovereign drama, the consequences of divergent monetary policies across the world will shape sentiment on risky assets over the coming weeks and months,” Gavan Nolan concludes.

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