The crisis in Europe is systemic and multiple ( a sovereign debt crisis ,a banking sector crisis and an under-investment crisis ). It is rooted in the structural flaws of the Euro & in the malignancies of Europe's banks & Greece being a member of Euro Zone is no exception to this economic carnage .There are solutions , but those can only come from a systemic implementation.
Greece currently faces a crisis on two fronts: there has been rapid build-up of massive public sector debt due to persistently high budget deficits, and a galloping excessive external debt due to several years of massive current account deficits. Greece has been living beyond its means and must immediately cut spending and imports to check its unsustainable deficits.She has been crippled & overpowered by crony capitalist policies dictated by handful of developed countries.
The main reasons cited for its current crisis are :
- Burgeoning 124.9 % debt to GDP ratio , Short term debt (-20.8%) & Current Account Deficit (% GDP - 10.3 %)
- Destruction of countries 's 2 largest industries - Shipping and Tourism in late 2000 financial crisis.
- Budget deficit of 13.6 %.
- Excessive reliance of Greek Govt bonds to external markets .External Debt ( 77.5 % of GDP).
- Degrading of Greek debt rating which led to loss of investor confidence in Greece ability to refinance its debt.
The root cause of these economic
mess can be traced back to 2008 financial crisis with the collapse ,bailouts
& buyouts of large financial institutions & industrial
conglomerates prominent among them being Lehmann Brothers ,
erstwhile 158 yr old US 4th largest investment bank ,buyout of Merrill Lynch by
Bank of America ,Bear & Sterns ( 5th largest US investment bank) by
JPMorgan Chase & bailout of Freddie Mac & Fannie Mae ( US largest
mortgage lenders) , AIG ( US largest insurance group) ,General Motors &
Chrystler LLC ( US largest automobile corporations) by US Federal govt with a
massive 700 billion $ bailout fund arising from taxpayers money.
This economic catastrophe in USA was caused due to following reasons :
This economic catastrophe in USA was caused due to following reasons :
- Deregulation of US financial system during Clinton adminstration ( in early 2000) which allowed Banks & Financial institutions to become financially overleveraged to dangerously high levels. Result was a creation of 50 Trillion $ unregulated derivatives market .
- Development & selling of complex financial products formed during this period :
- Mortgage-backed securities (MBS) which saw heavy investment due to higher yields it offered compared to Treasury bonds which offered lower returns to investment due to the low interest rate fixed by Federal Reserve.
- Collateral Debt Obligations (CDO)'s derived from subprime MBS aided by faulty credit ratings by Credit rating agencies (S&P, Fitch & Moody's & the subsequent sale of these toxic assets by investment banks around the world .It peaked to 180 billion $ in late 2007.
- Credit Default Swaps that were bought by Banks & Financial Institutions from insurance companies so as to insure against subprime mortages which ultimately defaulted when Investment Banks ran out of cash and credit in late 2008.
The collapse of the U.S. housing
bubble, which peaked in 2007, caused the values of securities tied to U.S
real estate pricing to plummet damaging financial institutions globally. Domino
effect of this financial crash lead to failure of European banks ,reduction in
market value of equities and commodities caused by huge exposure to toxic
financial instruments ( MBS & CDO's purchased in US housing market)
bought by European banks & financial institutions.Greece did not escape
from the outcome of the financial crisis, even though its EU membership still
enabled them to borrow easily in the bond market at considerably low
rates. The burgeoning govt deficit and escalating public debts caused panic
spread across investors with worries that Greece might require a bailout if it
fails to refinance its €20 billion of loans.
This situation was taken into control & stabilized by following intiatives :
This situation was taken into control & stabilized by following intiatives :
- In May 2010 ,Europe's Finance Ministers approved a rescue package worth €750 Billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF).
- Austerity measures announced by Greek Prime minister George Papandreou by levying higher taxes, budget cuts and public sector wage freeze in February 2010.
Solutions being proposed now by
European Finance Ministers are mainly 2 folded:
- Bank Recapitalization - Injecting a fresh module of capital by European Central banks into troubled European Banks & Financial institutions & increase their safe borrowings to market & restore investors confidence into European Markets.The special purpose investment vehicle, a new propsal being contemplated would buy bonds in the primary and secondary markets which would attract outside investors and sovereign wealth funds, tapping reserves from countries like China
- ETSF guarantees - A special-purpose vehicle to be run by the IMF as a way to channel loans from countries such as China and Brazil.
Solutions to Greece in its current scenario lies in the solution to the present Euro crisis as far as it is the member of Euro Zone i.e if Euro Zone recovers ,Greece will ultimately be able pay off its debt & improve its fiscal problem with time.
Solutions focusing on 3 main problems (a sovereign debt crisis ,a banking sector crisis and an under-investment crisis) causing the Euro crisis :
Policy 1 - Stabilising the sovereign
debt crisis
Institution: The ECB (European Central Bank)
1.1 Tranche/Module transfer to the ECB
The ECB takes on its books a tranche of the sovereign debt of all member states equal in face value to up to 60% of GDP.
1.2 ECB bonds
The transferred tranche is held as ECB bonds (€-bonds hereafter) that are the ECB's own liability.
1.3 Fiscal neutrality (i.e. no fiscal transfer)
Member states continue to service their share of hitherto sovereign debt now held by the ECB. To do so, each participating member-state holds a
debit account with the ECB which it services long term at the lower interest rates attainable by the ECB as the central bank of the union.Formerly
sovereign national debt transferred to the ECB reduces the debt servicing burden of the most exposed member states without increasing the debt burden of any of the remaining member-states.
1.4 National Debt Reduction.
Policy 2 - Tackling the banking sector crisis
Institution: The European Financial Stability Fund.
2.1 Rigorous Stress Tests
Rigorous stress tests to be conducted centrally (as opposed to by national watchdog authorities) that assume an average haircut of 30% for sovereign
bonds of member-states with debt-to-GDP ratio exceeding 70% and a 90% haircut for toxic paper found in the banks' books.The degree of recapitalisation
necessary for each Eurozone bank should be computed on
the basis of these tests.
2.2 Banks seeking long term liquidity from the ECB
Funded by net issues of Eurobonds subscribed by the central banks of surplus economies and sovereign wealth funds, the ECB can make medium
term large liquidity provisions to the private banks conditional on haircuts onthe existing sovereign bonds in their portfolio.
2.3 Recapitalisation
Re-capitalisation of banks should be short-term, once off and undertaken by the EFSF(European Financial Stability Facility ) rather than a future ESM(european stability mechanism). It also should be in exchange for equity.If a bank cannot raise the necessary capital to meet the re-capitalisation
target computed above, then the EFSF (and later the ESM) should require a swap of capital for public equity in the bank. The finance for this could be
from bonds issued by the EFSF/ESM rather than national taxation. The return on the bonds should come from the dividends on the equity paid to
the EFSF.
Policy 3 European Recovery Programme
Institutions: The EIB (European Investment Bank), the ECB (European
Central Bank) and national governments
3.1 Co-financing the EIB commitment to cohesion and convergence
investments
The EIB has been remitted to contribute to both cohesion and convergence through investments in health, education, urban renewal and environment, green technology and new high tech start ups .It should maintain a safe borrowing & lending limits to these commitments.
3.2 Extension of the role of the European Investment Fund
It should offer public venture capital for small and medium firms rather than only equity guarantees.
Institution: The ECB (European Central Bank)
1.1 Tranche/Module transfer to the ECB
The ECB takes on its books a tranche of the sovereign debt of all member states equal in face value to up to 60% of GDP.
1.2 ECB bonds
The transferred tranche is held as ECB bonds (€-bonds hereafter) that are the ECB's own liability.
1.3 Fiscal neutrality (i.e. no fiscal transfer)
Member states continue to service their share of hitherto sovereign debt now held by the ECB. To do so, each participating member-state holds a
debit account with the ECB which it services long term at the lower interest rates attainable by the ECB as the central bank of the union.Formerly
sovereign national debt transferred to the ECB reduces the debt servicing burden of the most exposed member states without increasing the debt burden of any of the remaining member-states.
1.4 National Debt Reduction.
Policy 2 - Tackling the banking sector crisis
Institution: The European Financial Stability Fund.
2.1 Rigorous Stress Tests
Rigorous stress tests to be conducted centrally (as opposed to by national watchdog authorities) that assume an average haircut of 30% for sovereign
bonds of member-states with debt-to-GDP ratio exceeding 70% and a 90% haircut for toxic paper found in the banks' books.The degree of recapitalisation
necessary for each Eurozone bank should be computed on
the basis of these tests.
2.2 Banks seeking long term liquidity from the ECB
Funded by net issues of Eurobonds subscribed by the central banks of surplus economies and sovereign wealth funds, the ECB can make medium
term large liquidity provisions to the private banks conditional on haircuts onthe existing sovereign bonds in their portfolio.
2.3 Recapitalisation
Re-capitalisation of banks should be short-term, once off and undertaken by the EFSF(European Financial Stability Facility ) rather than a future ESM(european stability mechanism). It also should be in exchange for equity.If a bank cannot raise the necessary capital to meet the re-capitalisation
target computed above, then the EFSF (and later the ESM) should require a swap of capital for public equity in the bank. The finance for this could be
from bonds issued by the EFSF/ESM rather than national taxation. The return on the bonds should come from the dividends on the equity paid to
the EFSF.
Policy 3 European Recovery Programme
Institutions: The EIB (European Investment Bank), the ECB (European
Central Bank) and national governments
3.1 Co-financing the EIB commitment to cohesion and convergence
investments
The EIB has been remitted to contribute to both cohesion and convergence through investments in health, education, urban renewal and environment, green technology and new high tech start ups .It should maintain a safe borrowing & lending limits to these commitments.
3.2 Extension of the role of the European Investment Fund
It should offer public venture capital for small and medium firms rather than only equity guarantees.
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