Download The world financial instability and the Euro zone

The world financial instability
and the Euro zone crisis Chapter 4
Jacques SAPIR
CEMI-EHESS
4
Partial remedies
• 1. The ECB new financing facilities.
• A partial change in the ECB strategy.
– An evolution toward non-orthodox policy tools was
obvious since the end of 2007.
– But the change implemented in December 2011 has been
massive.
– Is it the beginning of a new path or the end of the line?
• But the Constitutional roadblock (The Karlsruhe
Constitutional Court) is still in place.
– The political opposition of the German government is
much less a problem than it is though.
– The Constitutional argument has been ignored so far and
could be a major one.
– The new mechanism and its assessment.
– It works (at short term).
» The REPO mechanism.
» Liquidity flows (489 mlrd E and 529 mlrd E)
– But, it is transforming now quickly the ECB into a kind of
“bad bank”.
» Why banks are taking back bonds they have bought to
the ECB?
» No improvements on the corporate debt market.
– And, it is not solving the main issue that is the increasing
weight of interests burden on budgets through the rise of
interest rates. What is needed is not just a new liquidity
facility but a massive reduction of the debt burden.
• 2. The inter-governmental “agreement” of
December 9th, and its uncertain future.
• A common disciplinarian frame but no progress toward budget
federalism.
– Still no progress on budget transfers, and a German opposition
stronger than ever.
– The legal side of the agreement is to be murky (some countries
are opposing it).
– It is highly dependent of the willingness of national Parliament.
– Political oppositions is now radicalizing against this agreement.
• An agreement now partly emptied of its content through
“Exceptions” clauses.
– Several countries have made the case for exception on
“exemption” clauses.
– A possible conflict is coming with the ECB.
• 3. Commercial banks response to the crisis.
– Commercial banks are still engaged into a massive deleveraging operation.
– The situation of commercial banks is still very weak.
– The uncertainty on banks is linked to the fact that nobody knows
what is the scenario of the “next” crisis.
– The EZ has accumulated a lag in bank regulations.
– The impact on internal credit in different EZ countries.
– The de-leveraging impact on internal credit and the coming
European “credit crunch” (Corporate bonds are still at very high
interest rates).
– Uncertainty on assets.
– The problem of regional banks in Spain and Germany.
– A process of “re-nationalisation” of the sovereign debt
is threatening to ultimately destroy the EZ.
• 4. The Greek “controlled Default”
– The mechanism of “voluntary” swaps.
– The “old” Bonds and the “new” Bonds and the extension of the
swap period (till May 15th).
– -The actual interest rate and depreciation of the nominal value of
the new bonds. (From 100 to 30 and from 4% to over 13%)
– What impact on the Greek debt?
– A reduction of around 100 Mlrd Euros amounting to 28,1%
– At 124% GDP a 4% IR implies a yearly 5% GDP interest
payment.
– An end to the CDS market?
– What future for this market?
– What consequences are of disappearing CDS?
– What is the current dynamic.
• 5. A consolidation of a Ponzi scheme?
– The Ponzi mechanism of the sovereign debt has not
been modified.
– Total debt x IR > real growth x inflation: automatic budget
deficit.
– The increase of the Debt/GDP ratio is now fostering high interest
rates.
– If governments want to reduce quickly this ratio they will induce
a severe depression and then a drop in real GDP which is to
destroy the debt reduction potential.
– An internal Ponzi mechanism is now developing in
Spain.
– The central government has reduced subsidies to regional ones
but regional government are increasing the size of budget
arrears.
– The central government will have to consolidate regional
budgets. A 16% GDP deficit?
6. What lies ahead?
(a) The Euro zone recession and possible
depression induced by austerity plans.
– Strong depression in Greece and Portugal with large GDP
drop (-7% and -5% respectively).
– Deepening recession in Spain with a massive (24%)
unemployment problem (-1,7% at best/-3,5% possibly).
– Recession had already begun in Italy, Belgium and France
– A future extremely uncertain till 2015.
(b) Trade deficit reduction.
• The increase of exports is limited
• The severity of the decrease of internal demand: Greece (40%), Portugal (-26%), France (-10%), Italy (-8%)
The severity of the potential Unemployment shock.
Spain 29% (24%), Greece 52% (19%) Portugal 36% (20%), France 20% (9,7%),
Italy 16% (11%)
(c ) Short term possible catastrophe.
• Greece: the controlled default as a partial solution.
• Spain: the growing amount of unpaid bills by Local and
Regional government (Catalunia 10Y = 9,56%).
• Italy: The new government is more and more contested.
A break-up of the Euro zone is now
serious a possibility
• 7. What consequences of an Euro break-up would
be.
– The International role of the Euro.
• An asymmetric relation.
• The reduction of “other currencies” share.
• The Euro has still not achieved a dominant role versus the
USD.
– Would the USD predominance be strengthened by a
collapse of the Euro?
• There is already a process of “return to the USD”.
• But fundamentals of the US economy are not good.
• The collapse of the Euro could be the first signal of a general
collapse of the International monetary system.
Share of different currencies in Central Banks reserves
from 1995 to 2009
USD
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
59,00%
62,10%
65,20%
69,30%
70,90%
70,50%
70,70%
66,50%
65,80%
65,90%
66,40%
65,70%
64,70%
63,60%
62,20%
Euro
Deutsche
Mark
15,80%
14,70%
14,50%
13,80%
17,90%
18,80%
19,80%
24,20%
25,30%
24,90%
24,30%
25,20%
25,80%
26,40%
27,30%
French
Franc
2,40%
1,80%
1,40%
1,60%
Othe rs (inc luding
British poun d and
Yen)
22,50%
21,10%
18,60%
15,00%
10,90%
10,50%
9,10%
8,80%
8,60%
9,00%
9,20%
8,90%
9,80%
9,90%
10,70%
• What could be opportunities for the
development of regional reserve currencies
(RRC) ?
– The use of “proxies” for currency.
– Gold.
– Commodities.
– IMF SDR
– Current projects.
–
–
–
–
The Russian project of establishing the RR as a new RRC.
Latin-American projects (the Venezuela “SUCRE”).
The Australian Dollar.
What would be the future of the Yuan?
– Would the “BANCOR” (Keynes, 1944) be the
ultimate solution?
• The Crisis in Western Europe is to be
a long one.
• It is to affect Central and Eastern
Europe.
• It will certainly have an impact on the
Russian economy.
• However, this could be the prime
mover for:
- A rethinking of the Growth path of
Russia.
- The development of new monetary
instruments.