miércoles, 5 de agosto de 2015

miércoles, agosto 05, 2015

We Need a Plan for the Next Euro Crisis

Recent events highlight the need for a credible rule for handling insolvent governments.

By Christoph M. Schmidt

July 29, 2015 2:55 p.m. ET

   
Photo: Getty Images/Ikon Images


With the Greek Parliament’s recent vote in favor of much-needed reforms, the immediate threat that for the first time a member might leave the eurozone has abated. But it will still take some time before Athens reaches a final deal with its partners about a new aid package.

Meanwhile, after a standoff lasting six months, the rest of the eurozone needs a break to tend to itself. Governments should use the time to forge ahead with further reforms to make the single currency more resilient against future economic shocks.

Investor reaction to the most recent Greek crisis showed what strides the eurozone has made since the first Greek crisis in 2010. Unlike five years ago, the recent developments did not trigger panic selling across the euro area.

This is due in part to important reforms carried out in response to the crises in Greece and elsewhere in recent years. Leaders have created a backstop by instituting the European Stability Mechanism (ESM), capable of providing member countries with emergency funding.

Eurozone governments have sought to improve adherence to the existing rules on fiscal management through new sets of regulations on budgeting, the so-called two- and six-packs.

Yet to date these measures have done little to improve the budget balance in important euro members. Earlier this year, France requested a delay in achieving the deficit ceiling under the Stability and Growth Pact, and Italy failed to make sufficient progress toward compliance with the debt criterion.

Meanwhile, questions abound about the credibility of the no-bailout clause of the treaties governing the euro. This prohibition on fiscal transfers to profligate governments was supposed to be a core principle for instilling fiscal discipline and preventing the costs of national policy decisions from being reallocated to the eurozone as a whole.

The European Central Bank helped undermine the no-bailout principle by appointing itself a crisis manager. With his pledge to do “whatever it takes” to save the euro, ECB president Mario Draghi thrust the central bank into a gray area between monetary and fiscal policy.

The ECB’s ultralow interest rates and its program to purchase sovereign bonds have reduced the pressure on governments to balance their budgets by reducing the cost of funding deficits.

Too many governments are now following that path instead of exploiting easy monetary conditions to cushion the effects of real budget reform.

It’s time to instill budget discipline by restoring the meaning of the no-bailout clause. The disciplining force of markets needs to be brought back into play. This can only happen if bondholders are forced to realize that neither the ESM nor the ECB will shield them from losses should the next debt-burdened euro member get into trouble. One way to achieve this is by introducing an explicit insolvency mechanism for governments in the eurozone.

The mechanism would force bondholders to share the burden if an overleveraged country enters into crisis. Knowing this, investors would look more closely at the prudence of government fiscal policies and demand an appropriate risk premium. Market discipline would reward or censure policy makers ex ante.

Different designs of such a mechanism are possible. Ideally, an insolvency mechanism in case of crisis would kick in to impose debt restructuring at a certain ratio of public debt to gross domestic product. However, given the high public-debt ratios across the eurozone, this approach could lead to financial instability and therefore does not appear practicable for now.

Instead, a long transition period could be set, during which euro members could reduce their debt. During this period, a debt assessment—conducted perhaps by the ESM—would guide the decision on whether the insolvency mechanism is invoked in context of a crisis: If the ESM assesses public-debt repayments to be too high, ESM financing would be conditional on a maturity extension for private bondholders. This would also help reduce the financing needs and thus the volume of the needed ESM loan. This mirrors a proposal currently under discussion at the International Monetary Fund.

If a country has consistently flouted the rules of the Stability and Growth Pact that is supposed to limit budget deficits, ESM assistance would be granted only after a debt reduction by private bondholders. There should be no doubt that if debt is considered excessive, private bondholders should be expected to take a haircut. European taxpayers cannot be expected to absolve sovereign-bond holders of their entire risk.

Eurozone members should initiate work now on an orderly insolvency mechanism. The improved crisis backstops and low rates need to be harnessed to create fiscal space and reduce public debt. This would make it easier for the euro area to introduce an explicit insolvency mechanism to restore the credibility of the no-bailout clause. Getting there might be tough.

Let’s not waste any more time.


Mr. Schmidt is chairman of the German Council of Economic Experts.

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