A good deal for Greece, its creditors, and Europe
Amid all the doom and gloom about Greece in the last few weeks, it is easy to overlook an important piece of good news: the debt exchange offer published by Greece on Friday with endorsement by its main private and official creditors. If implemented, this would be a major achievement and an important step toward overcoming the euro zone crisis, almost regardless of what happens next.
Under the offer, bondholders would receive 15 percent of the face value of their bonds in the form of short-term European Financial Stability Facility (EFSF) bonds, plus a set of new Greek sovereign bonds maturing between 2023 and 2042, with a 31.5 percent face value.
This agreement is a very good deal for Greece. The combination of the cut in face values, lower coupons and (in most cases) longer maturity implies a debt reduction of about 60 percent in present value terms (evaluated at a 5 percent discount rate). Assuming high participation (about €200 billion in bonds), this translates into savings of about €120 billion, or 54 percent of Greece’s 2011 GDP. This is very large. By comparison, the Argentine exchange of January 2005, the previous high-water mark, generated present value of debt relief of only about 29 percent of GDP, because although the per-dollar debt reduction was higher, the volume exchanged was much smaller.
Private creditors are also getting a good deal. Although they are being hit hard, they could have done much worse. You will see claims that the “haircut” suffered by creditors is on the order of 75 percent. These are exaggerated, because they compare the present value of the new bonds with the face value of the old bonds. But in a pre-default debt exchange, creditors never have the right to full immediate repayment. They only have the right to keep their old bonds and expect them to be serviced.
A better way to determine the value of the new bonds is to compare them with the present value of the old bonds, assuming they both are subject to the same default risk. This leads to a haircut of about 65 percent — much less than what creditors would have lost in a disorderly default. And it does not reflect two additional benefits: “GDP warrants” that may deliver extra payments beginning in 2015, depending on the level of Greece’s GDP; and an effective upgrade in creditors’ rights compared with those of the old bonds. The new bonds will be issued under English law, making them harder to restructure again in the future, and their repayments will be linked to repayments to the EFSF.
Finally, the agreement is a good deal for Europe — not because it guarantees a good outcome, but because it takes some really bad outcomes off the table. The risks of the new EU-IMF package for Greece are well-known: It assumes a large and protracted reform effort in an economically depressed country where both politicians and the “troika” are deeply unpopular and social tensions are high and rising. And even if the debt exchange is successful, Greek debt will remain very high. Yet the proposed debt exchange and the program that underlies it differ fundamentally from previous instances of “kicking the can down the road.”
Take the worst-case scenario: Following the debt exchange, the program goes offtrack in just a few months, and Greece is cut off from any further borrowing. This would aggravate Greece’s economic downturn and force it into even more austerity to avoid running a primary deficit. But it would no longer lead to a catastrophe. Assuming high participation in the exchange, Greece would face almost no net debt repayments in 2012 and just €1.25 billion in interest payments on the new bonds in 2013. Hence, it would not need to default, let alone leave the euro. Furthermore, Greece would no longer represent a contagion threat, and with a recapitalized banking system, and little or no remaining government deficit, it could likely manage its crisis on its own — at least until large repayments to official creditors begin to fall due in 2014.
from Lawrence Summers:
It’s time for the IMF to step up in Europe
By Lawrence Summers The opinions expressed are his own.
European leaders will meet today for yet another “historic” summit at which the fate of Europe is said to hang in the balance. Yet it is clear that this will not be the last convened to deal with the financial crisis.
If public previews from France and Germany are a guide, there will be commitments to assuring fiscal discipline in Europe and establishing common crisis resolution mechanisms. There will also be much celebration of commitments made by Italy, and a strong political reaffirmation of the permanence of the monetary union. All of this is necessary and desirable, but the world economy will remain on edge.
Given that Europe is the largest single component of the global economy, the rest of the world has a stake in helping to avoid major financial accidents. It also has a stake in aiding continued growth in Europe and ensuring that the European financial system supports investment around the world – particularly as cross-border European bank lending dwarfs that of banks from any other region.
Now is also a historic juncture for the International Monetary Fund. The focus of the policy response to the crisis must now shift from Brussels and Frankfurt to the IMF’s boardroom.
From the problems of the UK and Italy in the 1970s, through the Latin American debt crisis of the 1980s, the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about the precise policy choices the fund has made in the past. But, the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations. At key points the IMF has offered prescriptions, not just for countries in need of borrowed funds, but also for those whose success is systemically important for the global economy.
Christine Lagarde, the head of the IMF, highlighted the seriousness of problems in Europe to members of the international financial community assembled in Jackson Hole in August. She pointed to capital shortfalls in the European banking system and the need for adjustment to be carried on in ways that were consistent with continuing growth. Now, the IMF needs to speak and act on several fronts.
ATTENTION REUTERS
love your site! been reading for years!
HOWEVER if i see one more article by summers im going to take that as a slap in the face. im going to acknowledge that you don’t read your own articles or at the very least read the comments from your own readers.
If you did you would realize that reuters carrying a summers article does nothing but offend your readers.
Please stop posting his dribble and please tell us your not actually paying this idiot
someone please buy summers a clue
How Lagarde should be appointed at the IMF
By Mohamed El-Erian The opinions expressed are his own.
Eager to retain a historical but outmoded entitlement, European politicians seem to be coalescing around Christine Lagarde to replace Dominique Strauss-Kahn as Managing Director of the IMF. Lagarde has the qualifications to successfully lead a multilateral institution that is central to the well being of the global economy. Her ability to do so, however, may critically depend on how she is appointed.
Lagarde has considerable skills and expertise; she has gained important experience in both the private and public sectors; and, judging from her stint as France’s Minister of Finance, she has navigated well the corridors of political power at the national and European levels.
Lagarde would be the first woman to lead a Bretton Woods institution. Such an overdue appointment would send an important message to an IMF demoralized by disturbing allegations of sexual assault by Strauss-Kahn. It would also come at a time when delicate questions are being raised as to whether the institution has historically been tolerant of inappropriate behavior.
Yet Lagarde’s appointment would be controversial, not because of her qualifications but because of the circumstances. Regrettably, her name has emerged in the context of a vocal desire by European politicians to extend a feudalistic tradition that is both outmoded and harmful — that of having one of their nationals, and only their nationals, at the helm of the IMF.
This tradition is rightly opposed around the world. After all, merit rather than nationality should be the guiding principle for a critical multilateral post. And there are many non-Europeans that deserve very serious consideration, be they Africans, Asians, Latin Americans or North Americans.
It has not helped that European politicians have resorted to silly excuses to justify the appointment of yet another of their nationals. Consider the often-cited argument that this is needed because the IMF is heavily involved in resolving the region’s peripheral debt crisis.
Thank you, Mr. El-Erian;
Something that should have been said years ago.
We cannot survive as a planet unless we get rid of
feudalistic, tribal tendencies all around the globe.
DSK saga is not just a French thing
By Maureen Tkacik
Whatever transpired in Suite 2806 of the Midtown Sofitel early Saturday afternoon, it seems clearer with each passing hour that being accused of sexual assault is far from a “Black Swan” event in the life of DSK. In 2007, the journalist Tristane Banon told a TV talk show host he had wrestled her to the ground and torn off her clothes during an interview a few years earlier; the talk show host in turn allowed that he knew “fourteen” separate women with similar tales. DSK’s name was eventually edited out of the broadcast for largely legal reasons, but it surfaced the next year when the IMF was forced to launch an investigation into his affair with a subordinate.
Indeed, on Monday the phrase “Who hasn’t been groped by Dominique Strauss-Kahn?” gained wide currency, even though it was first uttered (albeit in French) years ago by the actress Danièle Evenou.
But for once, there was a perfectly obvious explanation to the vexing mystery of how such a towering public figure might have got away with such prolific predation for so many years — but of course, c’est France vee are talking about! Zee French media do not pry into zee “sex life” of politicians zee vay vee repressed Puritanical Americans feel so compelled to do.
And, okay, sure, there does seem to be a French tendency to look the other way. Banone’s own mother, a family friend and fellow Socialist party member of DSK’s, now admits, she advised her daughter against turning in the assailant (call it laissez faire parenting).
But we kid ourselves if we try to confine either the sexual behavior, or the culture that supports it, to France. Commentators seem to have missed, for example, echoes of the “loudly American” bestselling novel Freedom, in which the main character holds a decades-long grudge against her mother for essentially dispensing the same advice as Banone’s under near-identical circumstances.
In truth the DSK alleged-rape saga is as international as the bastion of the ”New Global Elite” he helmed for so long, another powerful testament to the alarming growth in the impunity accorded the typical “Davos Man” with membership in the reigning Plutocracy Without Borders. That media on both sides of the Atlantic persist in covering DSK as a uniquely “French” phenomenon — even as it competes for page views with the “shocking” new revelations of a Mitterand-esque 10-year-old love a certain serial groper managed to conceal from the press for two straight terms as California governator — simply betrays a multilateral cognitive dissonance that underscores this depressing truth.
Very interesting piece, that challenges national stereotypes. As a French woman living in the States, and having reacted to the French elite’s initial response to the DSK scandal, I do think that there is a bit of both: a specifically French ingrained cultural attitude that dismisses instances of sexual harassment and sexual agressions, and a more general, global issue of gender relations.
If you are interested, the issue is discussed (and you are quoted) here:
http://arcade.stanford.edu/french-femini sms
Strauss-Kahn allegations are consequential for the global economy
By Mohamed A. El-Erian The opinions expressed are his own.
This weekend’s detention of the IMF’s chief on allegations of sexual assault has implications that go well beyond the impact on Dominique Strauss-Kahn’s (or, as he is commonly known, DSK) international prestige. They could also impact the IMF, France, market uncertainty and the well-being of the global economy.
We must wait to make a full assessment until we know the outcome of ongoing police investigations into allegations that, according to his lawyer, DSK intends to “contest vigorously.” Having said that, some commentators are already taking the view that the IMF could lose its managing director, and that France could lose a leading candidate for next year’s presidential elections.
Should he be forced to step down, DSK would be the third successive head of the IMF to leave suddenly. Once again, this would catch the institution with a selection process for the top position that is still overly dominated by politics, horse-trading between Europe and the US and other outmoded characteristics.
The IMF, whose shareholders are 187 member countries, would have two choices if it has to replace DSK quickly: Retain its feudalistic approach, or implement an open merit-based selection process based on clear criteria and a transparent process.
The first would allow the Fund to move quickly in appointing a new head, but doing so uses a method that lacks credibility and legitimacy. The second would correct a long-standing deficiency, but slow the appointment.
The word is out ! ECB has refused de-structuring Greece”s debt ! What a good, sensible decision ! Exact words from Lorenzo Bini Smaghi “a solution for reducing debt but not paying for it will not work “. And that is how the EU solves the free-rider and moral hazard problem in one decision. Still not convinced, Mr.El-Erian ?
Strauss-Kahn scandal: presidential hopes are all but dead
By Henri Gibier The opinions expressed are his own.
PARIS — It took only a few minutes, Saturday afternoon in a hotel in Manhattan, for Dominique Strauss-Kahn’s career to be tainted by scandal. The inquiry into the allegations made against the IMF head has only just begun, but the damage inflicted to his image and reputation has already reached the point of no return. Strauss-Kahn may proclaim his innocence, and his supporters may speak of an international conspiracy – certainly their positions should be given as much attention as that of his accuser – but the damage has already been done. And the damage is obviously considerable.
First of all, the affair deals a heavy blow to the French left. The Socialist Party seemed convinced that Strauss-Kahn’s candidacy for the 2012 presidential election was a done deal, that his eventual campaign may even be unstoppable.
It is true that certain Socialist loyalists continued to harbor doubts about the 62-year-old’s capacity to embody the party’s values, about his free-market stance on the economy as illustrated by his IMF role, about his flamboyant lifestyle, or about his commitment to French political life. But his experience and undeniable skills seemed poised to largely counterbalance any of his alleged weaknesses, and his communication experts were expected to do the rest.
JULIAN ASSANGE was a Lesson for Sarkozy and his Gang. These kind of allegations get a LOT of Attention and can be Prosecuted without physical evidence and almost always destroy the accused whether proven or not.
What to expect from the IMF, World Bank meetings
By Ian Bremmer The opinions expressed are his own.
The IMF and World Bank meet this week at a delicate moment for the global economic recovery. First, the good news: Expectations for success won’t be tough to manage, because turmoil in the Arab world, the triple disaster in Japan, and Europe’s ongoing struggles have kept the meetings from grabbing much public attention. That’s a good thing, because as capital and liquidity return to the global economy and as emerging market powers begin to assert themselves with greater confidence on the international stage, the IMF and World Bank have lost some of their prominence.
In particular, the IMF is finding it increasingly difficult to play its traditional role of global surveillance body and lender of last resort, because multinational coordination is just not that effective these days. Newly enhanced voting leverage for leading emerging powers intended to better reflect the world’s true balance of power will only add to the institution’s dysfunction, as members increasingly disagree on whether and how to correct global imbalances. Expect to hear more calls from China, India, Brazil and Russia for an end to US and European dominance of these institutions, but don’t expect any “rebalancing” of rights and responsibilities to make international consensus any easier to achieve.
For example, in advance of the meetings, the IMF has produced a framework of policy options for countries now coping with large capital inflows. Several emerging states — including Brazil, South Korea, and Indonesia — have enacted capital controls in recent months. The IMF has endorsed the use of capital controls in cases where measures to strengthen banking systems and lower interest rates have already been adopted — a fundamental reversal of previous IMF policy.
Some emerging market governments have rejected the Fund’s new policy framework with arguments that the IMF should not dictate their range. The result will be animated discussion of the issue during the meetings, with little prospect that talk will lead to action. Meanwhile, the IMF’s endorsement of capital controls (as a measure of last resort) will provide political cover for some governments to use them as they see fit.
The IMF will also discuss setting up the surveillance mechanisms for global imbalances that were agreed at last fall’s G20 summit in Seoul, but here again there are deep disagreements. China, in particular, has no incentive to allow the IMF to evaluate the fairness of its currency policy — though Beijing knows that the Fund has no enforcement powers to act on what it finds.
In addition, the “internationalization” of the renminbi will likely be on the IMF agenda. China has taken some steps toward its stated goal of making the renminbi an international currency, but the near-term prospects for yuan convertibility are bleak, since such a move demands higher tolerance from Beijing for external influence on Chinese domestic economy than the leadership has ever permitted. China is allowing the yuan to appreciate gradually — in both nominal and real terms. This trend will likely continue. But Beijing will never commit to a clear timeframe for convertibility and will refuse to negotiate the currency’s value in international forums.
The delicate moment for the World Bank arises from Robert Zoellick’s stonewalling a US Government Accountability Office inquiry into transparency requested by Senators Lugar, Leahy and Bayh. Mr. Zoellick retaliates against whistleblowers intrepid enough to inform Congress and the World Bank’s Board how the World Bank’s Institutional Integrity Department interfered with the Board’s access to information. The abuses of the World Bank’s Institutional Integrity Department are now public knowledge. http://www.whistleblower.org/press/press -release-archive/484-bar-complaint-charg es-former-world-bank-official-with-ethic s-violations Leonard McCarthy, the head of the World Bank’s Institutional Integrity Department, is known for abuse of prosecutorial discretion for political aims. The former head of South Africa’s directorate of special operations led the investigation into the President of South Africa, Jacob Zuma, who was then head of the ANC. In April 2009 South African prosecutors announced that they had evidence Mr. McCarthy and Bulelani Ngcuka, a key ally of the former President Thabo Mbeki, had sought to influence the timing of the case. http://www.telegraph.co.uk/news/worldnew s/africaandindianocean/southafrica/51219 85/World-Bank-official-faces-possible-cr iminal-probe-over-Jacob-Zuma.html Congress is now requiring reform of the Bank and increased oversight before approving the proposed capital increase.
http://foreign.senate.gov/hearings/heari ng/?id=33c66777-5056-a032-525a-a0a580663 4e9 and http://kaygranger.house.gov/index.cfm?se ctionid=12§iontree=4,12&itemid=983
from James Saft:
Icelandic mulishness wins the day
Iceland's remarkable return to growth shows once again that in this crisis the best policy is often the one that will make international partners most angry.
Having been reviled and chastised when it refused to make good the outsize debts of its banks, Iceland this week capped a striking turnaround when it announced that its economy expanded by 1.2 percent in real terms in the most recent quarter, its first such rise in two years.
This is in stark contrast to Ireland, whose pliability and inability as a member of the euro zone to act unilaterally leaves it with a still crashing economy which must service ever more debt by making ever deeper cuts to public spending.
Iceland, which sailed into the crisis in 2008 as essentially a small fishing fleet with a massive hedge fund attached, looked its predicament square in the eye and followed a set of policies seemingly designed to tick off both its friends and enemies, doing its small but mighty best to beggar its neighbors by letting its currency crash, imposing capital controls and, crucially, refusing to make whole the global creditors of its three failed international banks.
While an International Monetary Fund and multilateral package was eventually agreed, and a deal with Britain and the Netherlands over debts from Icesave Bank are currently being hammered out, Iceland's leaders, at least the current ones, seem convinced that making bank creditors share its pain was the right course.
"The difference is that in Iceland we allowed the banks to fail. These were private banks and we didn't pump money into them in order to keep them going; the state should not shoulder the responsibility," Iceland's president, Olafur Grimsson, said last month, tweaking the nose of EU officials who are insisting that Ireland make good all senior creditor calls on its own distended banking system.
"Bondholders should not rely on the government stepping in and bailing them out," Iceland Central Bank governor Mar Gudmundsson said last week. "They should do their due diligence."
I doubt the Brits and the Dutch are done with Iceland. What they did is default on their debt, hardly a new thing in the world, but the limitations of what they can do in their home economy is eventually going to have them trying to talk to their neighbors again.
They will never be part of the EU, the U.S. banks won’t deal with them on anything like a favorable condition until they get that fixed, and it won’t be fixed on their terms. I suspect what you are hearing is an attempt to put a bold face on what is and will be a desperate situation.
Taxing spoils of the financial sector
If you want less of something, tax it.
That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.
The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.
More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.
In economics the concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.
In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don’t understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.
Some of the best evidence forming the intellectual underpinning of this is provided by economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, whose work found that about 30 to 50 percent of the extra pay bankers get as compared to similar professionals is attributable to rents. <http://people.virginia.edu/~ar7kf/paper s/pr_rev15_submitted.pdf>
As a long in the tooth former consultant to Central Banks & Commercial Banks, here is my “old fashioned” view.
Banks are the primary engine driving the world’s economy.
Tax the Banks and they will pass it on their customers.
More expensive money means Less economic dynamism & incidentally more unproductive public service costs to regulate.
Obama must have fools for advisers.
But what do I know, it is 20 years since I was advising governments of the world.
The global economy, films and natural disasters
– Dr. Gerard Lyons is chief economist and group head of global research at Standard Chartered Bank. The views expressed are his own. – From three films to three natural events
Last year at the IMF, I spoke about the global outlook in the context of three films. The first was ‘No Country for Old Men’, as the catchphrase of that film – “You can’t stop what’s coming” – described the imminent global recession. The second was ‘Apollo 13’, in which the head of mission control, Gene Krantz, is told, “This is NASA’s worst moment”. He replies that if the three astronauts are brought back to earth safely, it will be NASA’s best moment – and is proven right. Likewise, if the problems facing the financial sector were addressed properly and it emerged from the crisis in good shape, this would be an Apollo 13 moment for the financial industry.
The third film was ‘Singing in the Rain’, which aptly described the optimistic outlook for emerging markets at the time. But as I pointed out, while Gene Kelly did sing in the rain, he was completely soaked. And so it proved for emerging economies in the wake of last year’s crisis. While the outlook for many emerging regions looks good, they are not immune to setbacks in the West.
This year – given the general consensus, the risk of further shocks, and the fact that many countries have already used their policy tools to the full – I used three analogies related to natural events, things beyond our control: a flash of lightning, a tidal wave, and a volcanic eruption.
The U.S. recovery may be a flash of lightning
We are past the worst, and a recovery is here, but it is vital to focus on absolute levels. The world economy is just under $61 trillion in size; the U.S. economy is $14.3 trillion. If the West is not booming, emerging economies cannot boom. They can grow, but this requires self-sustained, domestically-driven demand. Although the next six months could be strong for the world economy as policy easing and inventory rebuilding feed through, beyond that, there are challenges.
Deleveraging still needs to feed through. Will this be a U-, a V-, or a W-shaped recovery? For the U.S., the recovery will more likely be a brief flash of lightning before the economy slips again. After strong near-term growth, the recovery may fade just as quickly. Firms in the West are more likely to seek out investment opportunities in the East. Thus, the West may experience a jobless recovery, prolonging the adjustment phase. International firms are more likely to invest in fast-growing markets in the East, probably adding to protectionist pressures in the West – and improving the chances of a U-shaped recovery in the East.
I bet the Trojans thought the same thing when the wily Greeks gave them a going away present in the form of a horse.