Capturing The Ecb

Capturing the European Central Bank - Opinion - Al Jaze...
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Joseph E Stiglitz
Joseph E Stiglitz is a professor at Columbia University, a Nobel laureate in Economics, and author of several books.
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Capturing the European Central Bank

There are several explanations for the ECBs insistence on a "voluntary" restructuring of Greece's sovereign debt.
Last Modified: 17 Feb 2012 07:12
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The ECB's insistence on "voluntary" restructuring has placed the two sides at loggerheads [GALLO/GETTY]
New York, NY - Nothing illustrates better the political crosscurrents, special interests and shortsighted economics now at play in Europe than the debate over the restructuring of Greece's sovereign debt. Germany insists on a deep restructuring - at least a 50 per cent "haircut" for bondholders - whereas the European Central Bank (ECB) insists that any debt restructuring must be voluntary. In the old days - think of the 1980's Latin American debt crisis - one could get creditors, mostly large banks, in a small room, and hammer out a deal, aided by some cajoling, or even arm-twisting, by governments and regulators eager for things to go smoothly. But, with the advent of debt securitisation, creditors have become far more numerous, and include hedge funds and other investors over whom regulators and governments have little sway. Moreover, "innovation" in financial markets has made it possible for securities owners to be insured, meaning that they have a seat at the table, but no "skin in the game". They do have interests: they want to collect on their insurance, and that means that the restructuring must be a "credit event" - tantamount to a default. The ECB's insistence on "voluntary" restructuring - that is, avoidance of a credit event - has placed the two sides at loggerheads. The irony is that the regulators have allowed the creation of this dysfunctional system. The ECB's stance is peculiar. One would have hoped that the banks might have managed the default risk on the
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bonds in their portfolios by buying insurance. And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. But the ECB wants the banks to suffer a 50 per cent loss on their bond holdings, without insurance "benefits" having to be paid. There are three explanations for the ECB's position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency - and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers' collapse in September 2008. Finally, the ECB may be trying to protect the few banks that have written the insurance.
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None of these explanations is an adequate excuse for the ECB's opposition to deep involuntary restructuring of Greece's debt. The ECB should have insisted on more transparency - indeed, that should have been one of the main lessons of 2008. Regulators should not have allowed the banks to speculate as they did; if anything, they should have required them to buy insurance - and then insisted on restructuring in a way that ensured that the insurance paid off. Involuntary restructuring There is, moreover, little evidence that a deep involuntary restructuring would be any more traumatic than a deep voluntary restructuring. By insisting on its voluntariness, the ECB may be trying to ensure that the restructuring is not deep; but, in that case, it is putting the banks' interests before that of Greece, for which a deep restructuring is essential if it is to emerge from the crisis. In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe's taxpayers and creditors who acted prudently and bought insurance. The final oddity of the ECB's stance concerns democratic governance. Deciding whether a credit event has occurred is left to a secret committee of the International Swaps and Derivatives Association, an industry group that has a vested interest in the outcome. If news reports are correct, some members of the committee have been using their position to promote more accommodative negotiating positions. But it seems unconscionable that the ECB would delegate to a secret committee of self-interested market participants the right to determine what is an acceptable debt restructuring.
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The one argument that seems - at least superficially - to put the public interest first is that an involuntary restructuring might lead to financial contagion, with large Eurozone economies like Italy, Spain and even France facing a sharp, and perhaps prohibitive, rise in borrowing costs. But that begs the question: why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth? If the banking system were well regulated, with banks holding sovereign debt having purchased insurance, an involuntary restructuring should perturb financial markets less. Of course, it might be argued that if Greece gets away with an involuntary restructuring, others would be tempted to try it as well. Financial markets, worried about this, would immediately raise interest rates on other at-risk Eurozone countries, large and small. But the riskiest countries already have been shut out of financial markets, so the possibility of a panic reaction is of limited consequence. Of course, others might be tempted to imitate Greece if Greece were indeed better off restructuring than not doing so. That is true, but everyone already knows it. The ECB's behaviour should not be surprising: as we have seen elsewhere, institutions that are not democratically accountable tend to be captured by special interests. That was true before 2008; unfortunately for Europe - and for the global economy - the problem has not been adequately addressed since then. Joseph E Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy. A version of this article was first published on Project Syndiacte. The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.
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Source: Project Syndicate

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Tee Cho
Familiar Face
1 day ago
Europe endured by looting the world. It is not surprising that she is falling apart absent of economies and societies to exploit. ECB needs to think seriously downgrading Europe to reality, the world has change; it ain't like it use to be! ECB should quit sugar-coating the issue. Europe needs serious austerity measures. Maybe they should try that SAP (Structural Adjustment Programs) they fed the developing world, forever, collapsing their local economies as Europe continued to loot. Europe should devalue herself and F-off!
3 people liked this. Like Reply
Angry Philosopher 23 hours ago

So... if I understand what you're saying, you say that (a) Europe fed austerity to developing countries, which damaged their economies, and (b) Europe needs austerity for its own economy to function. Doublethink much? P.S. Austerity is not, and has never been, the answer in a time of crisis. Save the austerity for a time of growth.
Carmen and 4 more liked this Like Reply
JimFlavin 22 hours ago

All Austerity does is leave the perpetrators of the crimes off scott free . It was the irresponsibility of the banks and the devolopers and the tax dodging that caused this crisis - but they get off as usual . Why should the people have to pay for the crimes of the Rich . At least the Greeks have shown some fight . . It is same problem in all those who folowed the '' American Dream ''- and adopted the crazy doctrine of Monetraism . So the ionnocent pay for the crimes of the Rich - how long do they think they can get away with this everlastibg Austerity . At some point there will be a real revolution . the Greeks could have defaulted - and brought the whole shambles down - but their gutless
3 of 6
18/02/12 08:49

parliament went along with IMF / ECB thugs .
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nikkkom
Top 50
13 hours ago
> All Austerity does is leave the perpetrators of the crimes off scott free. It was the irresponsibility of the banks Wrong. If someone is in debt, it's his/her/its fault, not the lenders. Greek politicians kept borrowing like there was no tomorrow, for the sole purpose of placating and bribing its voters to vote them in the office again. And Greeks, unlike Germans, were not cool headed enough to understand where it leads, and not vote for those bastards. Newsflash! Tomorrow, contrary to all expectations, arrived. What? No one is too eager to be in Greek government right now? What a surprise :) If there is evidence that *bankers* en masse bribed politicians into excessive borrowing, then I agree with you.
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Tee Cho
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22 hours ago
While America slept last night, thousands rallied against ACTA across Europe
Tell it to the ECB who fed it to the developing world. So, suddenly, it is a bad idea!
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johnwallis42 21 hours ago

The ECB has nothing to do with the developing world.
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johnwallis42 1 day ago

Care to back that with a fact or two? All I see here is specious ranting and raving.
Angry Philosopher and 3 more liked this Like Reply
Tee Cho
Familiar Face
22 hours ago
Which part, devaluation or the F-off?

1 person liked this. Like Reply
johnwallis42 21 hours ago

The all of it part.
nikkkom and 1 more liked this Like Reply

LOL
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johnwallis42 1 day ago

": why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth?"
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Because as you note the decision as to whether CDS contracts are triggered lies with the ISDA not the ECB. Forcing a 50% haircut on the bond holders and at the same time barring a payout on CDS contracts sends a very negative signal to the banks vis a vis the European bond market. The insurance policies in question are Credit Default Swaps which are like fire insurance, but fire insurance you can buy on someone else's house and why would one settle for a 50% payout if you've bought CDSs for 200 basis points or indeed anything up to 4900 basis points? Speculate to accumulate. The ECB is clearly concerned that if the ISDA declares an event, there will be insufficient liquidity to satisfy all the contracts. Should that happen it will be 2008 all over again; but with far longer range consequences for the international credit markets because there would be no faith in the value or utility of CDSs any more and this would lead to extreme credit stratification due to risk aversion. EDIT: I should just add further that the ECB recognizes it is the the intended mark / firewall and that the banks and hedge funds fully expect the ECB to step in to resolve the liquidity issue post involuntary default. There's nothing like making a guaranteed bet. Especially if you can handicap the race.
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gorgy 0 minutes ago
From Twitter Capturing the European Central Bank - Opinion - Al Jazeera English http://t.co/3k30iv49 via @ajenglish
Allan Siegel 2 hours ago
From Twitter Stiglitz: Capturing the European Central Bank - Opinion - Al Jazeera English http://t.co/bM64PlEf via @ajenglish
Lydia Prieg 4 hours ago
From Twitter Capturing the European Central Bank - Stiglitz http://t.co/yJPcMAGT
BenHuser 6 hours ago
From Twitter helpless austerity fatcats against innovation in financial markets PRT @AJEnglish Capturing the #ECB - http://t.co/sOq3yj4M #EZ
Dhuha M. F. 7 hours ago
From Twitter Why ECB insists on a "voluntary" restructuring of Greece's sovereign debt, writes Joseph Stiglitz http://t.co/Lq0rlGEt
theaseanwatch 8 hours ago
From Twitter #FINANCE: Innovation in #financial markets has made it possible for #securities owners to be insured http://t.co/uIt17TmN VIA @AJEnglish
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macdon_chuks 8 hours ago
From Twitter Innovation in #financial markets has made it possible for #securities owners to be insured, writes Stiglitz http://t.co/aaw3H7dv"
AJEnglish 8 hours ago
From Twitter Op-ed: Innovation in #financial markets has made it possible for #securities owners to be insured, writes Stiglitz http://t.co /0tCgtTN4
sharmelsheikh 14 hours ago
From Twitter
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RT @AJEnglish: Op-ed: The #ECB wants the banks to suffer a 50 per cent loss on their bond holdings, says Stiglitz http://t.co /0tCgtTN4
AdityaVikramDas 20 hours ago
From Twitter Capturing the European Central Bank - by Joseph Stiglitz - AJE http://t.co/W3yJE7K7 via @ajenglish #eurozone #economy #CDS #democracy
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Capturing the European Central Bank - Opinion - Al Jaze...

Capturing the European Central Bank

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Capturing the European Central Bank - Opinion - Al Jaze...

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Angry Philosopher 23 hours ago

JimFlavin 22 hours ago

Capturing the European Central Bank - Opinion - Al Jaze...

jane smith and 1 more liked this

johnwallis42 21 hours ago

US intelligence 'suggests no Iranian nukes'

US intelligence 'suggests no Iranian nukes'

jane smith 9 hours ago

johnwallis42 1 day ago

Which part, devaluation or the F-off?

johnwallis42 21 hours ago

jane smith 9 hours ago

jane smith 9 hours ago

johnwallis42 1 day ago

Capturing the European Central Bank - Opinion - Al Jaze...

gorgy 0 minutes ago

Allan Siegel 2 hours ago

Lydia Prieg 4 hours ago

From Twitter Capturing the European Central Bank - Stiglitz http://t.co/yJPcMAGT

BenHuser 6 hours ago

Dhuha M. F. 7 hours ago

theaseanwatch 8 hours ago

Capturing the European Central Bank - Opinion - Al Jaze...

macdon_chuks 8 hours ago

AJEnglish 8 hours ago

sharmelsheikh 14 hours ago

One more retweet from MJMagaji

AdityaVikramDas 20 hours ago

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