Kunibert Rafferhttp://homepage.univie.ac.at/Kunibert.Raffer

© K. Raffer 2013

Can the Eurozone be Saved? A Way Out for Greece and the

Eurozone

Austin, November 4-5, 2013

Is the European Crisis Over?

No!!!!It might well get worse – the effects of neoliberal austerity policies are likely to last for quite some time

No need to save the Euro or the Eurozone - cf. US and its bankrupt States

Neoliberal Crisis excellent pretext for further enhancing neoliberalism ▬►Predator State (JKG)

Demands to undo present euorzone heard; i. e. Kawalec, & Pytlarczyk (2013, Working Paper no. 155, National Bank of Poland) or “European Solidarity Manifesto“ by group of European economists

Calls for „eurobonds“ – most recently G. Soros ▬► institutionalising the very problem that led to the crisis UNLESS one subjects governments and parliaments to authoritarian control by EU (=abolishing democracy for good – IMHO rather: for bad)

No doubt: „EU Recovery Programme“ (EuRP) needed against austerity policies and their effects (IMF: fiscal multiplier)

DANGERS AHEAD & WAYS OUT

Danger to democracy and strengthening of neoliberal re-distribution policies

State Insolvency or at Least Reproducing Iceland

After crisis in 2008: Capital controls; referenda; fiscal policy NOT tightened during first year of the programme ▬► return to capital markets 2011

IMF Press Release No.13/300 August 7, 2013:GDP growth: 2.9% (2011); 1.6% (2012)Unemployment 5.1% (May) 9.2% (Sept 2010)Inflation 3.3% (June) 18.6% (Jan 2009)Ratio gross reserves/short term debt (projected) well above 100% over the medium term

Yellow = peak values

BUT: „downside risks prevail, including from disorderly or delayed capital account liberalization, weaker fiscal consoli-dation, and possible adverse euro area developments.“

“Fiscal consolidation is facing headwinds. On current trends, the 2013 budget deficit target will be missed owing to slower than projected growth, expenditure overruns, and lower-than-budgeted dividend payments and asset sales. The existing target of a balanced budget in 2014 may also come under pressure from costly electoral promises—including those to lower taxes and to increase household debt relief—the financing for which remains uncertain.”

(ibid., stress KR)

Iceland‘s Budget Problem - seen by the IMF

“Private creditors ended up shouldering most of the losses relating to the failed banks, and today Iceland is experien-cing a moderate recovery.”

IMF Survey online, 3 November, 2011

“Iceland set an example by managing to preserve, and even strengthen, its welfare state during the crisis.”

Ibid.

“First, how far, if at all, the state should be forced to shoulder the responsibility for debt created by private banks. Or, to put it differently: Should ordinary people, the nation, be responsible for bad management of private financial institutions, especially if the potential losses are due to operations in foreign countries? Should we have a banking system which privatises the profits but socialises the losses and turns private failures into sovereign debt?

The second dilemma goes to the heart of our democracies: if a conflict arises between the interests of the financial markets and the will of the people, which should reign supreme: the market or the people? “

Speech by the President of Iceland, Ólafur Ragnar Grímsson, at the 8th UNCTAD Debt Management Conference Geneva,

14th November 2011, pp.2f

What should have been done 1) Rule of Law – pacta sunt servanda: honouring instead

of violating the Lisbon Treaty

ART. 125: “The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.”

2) Rule of Law Based Sovereign Insolvency instead of illegal bail-outs (Raffer Proposal)

What can be done now Reduce debts to a manageable level (preferably by

implementing Raffer Proposal) Stop inappropriate austerity policies in order to protect

eurozone economies (EuRP!!) Banks must pay for bailout themselves (appropriate

interest on loans; shares with voting rights - cf. TARP) Owners and creditors of insolvent banks must take losses

(Cyprus: first step) - protecting small depositors necessary No more sweeteners as in Greece Re-regulation Making „No Bailout-Clause“ credible!!! Disconecting creditworthiness from CRAs!!! Doing away with zero-capital-weights for sovereigns Repeal instutionalised anti-Keynesianism (Maastricht

criteria)

What is meant by sweeteners “Bondholders were offered an exceptionally large cash sweetener, in the form of highly rated EFSF notes—worth 15 percent of the ‘old’ bond’s face value and due to mature in 2013 and 2014. 40 These notes turned out to be by far the most valuable component of the securities bundle offered to creditors, representing almost two-thirds of its value”

“40 To our knowledge, this was the largest cash sweetener ever offered in a sovereign debt restructuring (aside from outright cash buybacks). According to data by Cruces and Trebesch (2013), the average cash sweetener across 180 debt restructurings since 1975 amounted to only 3.6 percent”

(Zettelmeyer, Trebesch & Gulati, 2013, p.26)

“new bonds issued under a ‘co-financing agreement’ that created an exact symmetry between Greece’s debt service to the new bondholders and its debt service to the EFSF … shortfall pro rata between the EFSF and the bondholders “ Ibid., p.27

“But it [= Greek restructuring, KR] did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents—particularly in its very generous treatment of holdout creditors—that are likely to make future debt restructurings in Europe more difficult.” (ibid., p.1)

“The Fund approved an exceptionally large loan to Greece … in May 2010 despite having considerable misgivings about Greece’s debt sustainability … The decision required the Fund to depart from its established rules on exceptional access. … The euro partners had ruled out debt restructuring and were unwilling to provide additional financing assurances.”

IMF "Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement”, June 2013, p.32

“Avoiding undue delays in debt restructuring … Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output. The delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and

left the official sector on the hook.” ibid., p.33

Deleting phantom debts simply acknowledges facts: money already lost cannot be lost again, no real costs to creditors - “generosity for free”

Creating Phantom Debts Interest Rate : 5 %

  Stock of Debt Service Debt Service New Stock

Debts (as due) (actually paid) Debts

Year 1 1000 50 25 25Year 2 1025 51.25 26.25 25Year 3 1050 52,5 26,5 26 …. …. …. …. ….Year 10 1247 62,35 30,35 32

Necessary debt reduction (nominal book vlaues)After 2 ys 520 [1025 + 25 - 520 = 530] After 10 ys 672 152 ≡ PURE PHANTOM DEBTS

Greece; Losses of Private Sector(real and counterfactual, %)

 Financial press 75%Zettelmeyer,Trebesch, Gulati (2013) ≈ 59-65% (on aver.,

ranging from ≥ 75% (≤ 1 year) to ≤ 50%

(maturing after 2025)Gros & Mayer (2010) 50%Raffer Propsoal (Insolvency) depending on results

of proceedings, but surely ≤ 50%

Last two cases: either no taxpayers’ money lost or presumably less than likely losses at present!

Thank You Very Much

¡Muchas Gracias!

Kunibert Rafferhttp://homepage.univie.ac.at/Kunibert.Raffer

© K. Raffer 2013