5 EU options for Greece, inspired by Lehman

May 21, 2010

Don Rissmiller of Strategas looks at how the lessons of the US financial crisis could instruct policy responses for the EU and its Greece problem:

1) The TARP-like option: this is essentially spending government money to buy bad debt, and the European bailout packages have moved in this direction. The political challenge
was always getting money authorized to help those that appeared to be spending beyond their means. This still appears to be where we are now in the EU, despite some progress
with the German vote.

2) The PPIP-like option: the challenge with spending government money in the U.S. was that the authorization process was burdensome. Hence, the next suggestion was a “public private investment program” (PPIP). The challenge with PPIP (it never got off the ground) was how to get banks to sell assets in an illiquid market, which presumably would not be as large an issue with government debt. But the key features of the program – including non-recourse leverage and a sharing of profits – were indeed well thought out. No European option of this sort appears on the table currently, however.

3) The Monetization option: When the Fed finally started participating with “all available tools”, including buying mortgage securities, the U.S. market stabilized. This is certainly a politically tough option for the ECB. Should it come to it, however, the option of doing nothing certainly seems like a much worse policy mistake.

4) Cutting Spending: Greece already appears to have lost some sovereignty, as the Lisbon treaty has required sharp adjustments. These cuts can be some of the most politically challenging items, though as the governor of NJ has demonstrated, they are not impossible.

5) Europe Bank Guarantees: the risk of a “run on the bank” seems to be creating additional uncertainty, though the amount of deposits that would have to be guaranteed would presumably be quite large. The FDIC guarantee plan in the U.S. could provide some guidance for Europe, however.

And Larry Kudlow also has some thoughts on that last option of Rissmiller’s:

So it’s my contention that the Europeans must now embark on a similar program. The EU/IMF rescue plan, which consists of $1 trillion in loans and loan guarantees for government sovereign debt, must be expanded to include a blanket loan guarantee for all European bank debt, short term and long term. A Europe-wide, centralized, deposit-guarantee system should also be developed. Right now bank deposits are insured by individual countries, like Greece. This is not credible. (Hat tip to investor David Kotok for this deposit-guarantee thought.)

A loan-guarantee program to backstop the banks in Europe and sovereign debt will put an end to this crazy Greek drama that is pulling down markets everywhere and threatening the economic recovery. As a free-market advocate, I don’t like this sort of government intervention. But we’re talking emergency here. Systemic global emergency. … These bank-loan guarantees would be temporary, perhaps a year in length. And they would buy time for the essential budget restructuring necessary to slash spending and curb the welfare-state excesses in southern Europe, or perhaps all of Europe. These government-shrinking steps will free up private-sector resources to spur growth.

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