Can the Eurozone be Saved?
A Way Out for Greece and the
Eurozone
Austin, November 4-5, 2013
Kunibert Raffer
http://homepage.univie.ac.at/Kunibert.Raffer
© K. Raffer 2013
Is the European Crisis Over?
No!!!!
It might well get worse –
the effects of neoliberal
austerity policies are likely
to last for quite some time
No need to save the Euro or the Eurozone
- cf. US and its bankrupt States
Neoliberal Crisis excellent pretext for
further enhancing neoliberalism ▬►
Predator State (JKG)
Demands to undo present euorzone heard;
i. e. Kawalec, & Pytlarczyk (2013, Working
Paper no. 155, National Bank of Poland) or
“European Solidarity Manifesto“ by group
of European economists
DANGERS AHEAD & WAYS OUT
Calls for „eurobonds“ – most recently G. Soros
▬► institutionalising the very problem that
led to the crisis UNLESS one subjects
governments and parliaments to authoritarian
control by EU (=abolishing democracy for
good – IMHO rather: for bad)
Danger to democracy and strengthening of
neoliberal re-distribution policies
No doubt: „EU Recovery Programme“ (EuRP)
needed against austerity policies and their
effects (IMF: fiscal multiplier)
State Insolvency or at Least
Reproducing Iceland
After crisis in 2008: Capital controls; referenda; fiscal
policy NOT tightened during first year of the programme
▬► return to capital markets 2011
IMF Press Release No.13/300 August 7, 2013:
 GDP growth:
2.9% (2011);
1.6% (2012)
 Unemployment 5.1% (May)
9.2% (Sept 2010)
 Inflation
3.3% (June)
18.6% (Jan 2009)
 Ratio gross reserves/short term debt (projected) well
above 100% over the medium term
Yellow = peak values
BUT: „downside risks prevail, including from disorderly or
delayed capital account liberalization, weaker fiscal consolidation, and possible adverse euro area developments.“
Iceland‘s Budget Problem - seen by the IMF
“Fiscal consolidation is facing headwinds. On current
trends, the 2013 budget deficit target will be missed owing
to slower than projected growth, expenditure overruns,
and lower-than-budgeted dividend payments and asset
sales. The existing target of a balanced budget in 2014 may
also come under pressure from costly electoral promises—
including those to lower taxes and to increase household
debt relief—the financing for which remains uncertain.”
(ibid., stress KR)
“Private creditors ended up shouldering most of the losses
relating to the failed banks, and today Iceland is experiencing a moderate recovery.”
IMF Survey online, 3 November, 2011
“Iceland set an example by managing to preserve, and
even strengthen, its welfare state during the crisis.”
Ibid.
“First, how far, if at all, the state should be forced to
shoulder the responsibility for debt created by private
banks. Or, to put it differently: Should ordinary people,
the nation, be responsible for bad management of private
financial institutions, especially if the potential losses are
due to operations in foreign countries? Should we have a
banking system which privatises the profits but socialises
the losses and turns private failures into sovereign debt?
The second dilemma goes to the heart of our democracies:
if a conflict arises between the interests of the financial
markets and the will of the people, which should reign
supreme: the market or the people? “
Speech by the President of Iceland, Ólafur Ragnar Grímsson,
at the 8th UNCTAD Debt Management Conference Geneva,
14th November 2011, pp.2f
What should have been done
 1) Rule of Law – pacta sunt servanda: honouring instead
of violating the Lisbon Treaty
ART. 125: “The Union shall not be liable for or assume the
commitments of central governments, regional, local or
other public authorities, other bodies governed by public
law, or public undertakings of any Member State, without
prejudice to mutual financial guarantees for the joint
execution of a specific project. A Member State shall not be
liable for or assume the commitments of central
governments, regional, local or other public authorities,
other bodies governed by public law, or public undertakings
of another Member State, without prejudice to mutual
financial guarantees for the joint execution of a specific
project.”
2) Rule of Law Based Sovereign Insolvency instead of illegal
bail-outs (Raffer Proposal)
What can be done now
 Reduce debts to a manageable level (preferably by
implementing Raffer Proposal)
 Stop inappropriate austerity policies in order to protect
eurozone economies (EuRP!!)
 Banks must pay for bailout themselves (appropriate
interest on loans; shares with voting rights - cf. TARP)
 Owners and creditors of insolvent banks must take losses
(Cyprus: first step) - protecting small depositors necessary
 No more sweeteners as in Greece
 Re-regulation
 Making „No Bailout-Clause“ credible!!!
 Disconecting creditworthiness from CRAs!!!
 Doing away with zero-capital-weights for sovereigns
 Repeal instutionalised anti-Keynesianism (Maastricht
criteria)
What is meant by sweeteners
“Bondholders were offered an exceptionally large cash
sweetener, in the form of highly rated EFSF notes—worth
15 percent of the ‘old’ bond’s face value and due to mature
in 2013 and 2014. 40 These notes turned out to be by far the
most valuable component of the securities bundle offered
to creditors, representing almost two-thirds of its value”
“40 To
our knowledge, this was the largest cash sweetener ever offered
in a sovereign debt restructuring (aside from outright cash buybacks).
According to data by Cruces and Trebesch (2013), the average cash
sweetener across 180 debt restructurings since 1975 amounted to only
3.6 percent”
(Zettelmeyer, Trebesch & Gulati, 2013, p.26)
“new bonds issued under a ‘co-financing agreement’ that
created an exact symmetry between Greece’s debt service
to the new bondholders and its debt service to the EFSF
…
shortfall pro rata between the EFSF and the
bondholders “
Ibid., p.27
“But it [= Greek restructuring, KR] did so at a cost. The timing and
design of the restructuring left money on the table from the perspective
of Greece, created a large risk for European taxpayers, and set
precedents—particularly in its very generous treatment of holdout
creditors—that are likely to make future debt restructurings in Europe
more difficult.”
(ibid., p.1)
“The Fund approved an exceptionally large loan to Greece … in May 2010
despite having considerable misgivings about Greece’s debt sustainability
… The decision required the Fund to depart from its established rules on
exceptional access. … The euro partners had ruled out debt restructuring
and were unwilling to provide additional financing assurances.”
IMF "Greece: Ex Post Evaluation of Exceptional Access under
the 2010 Stand-By Arrangement”, June 2013, p.32
“Avoiding undue delays in debt restructuring … Earlier debt
restructuring could have eased the burden of adjustment on Greece and
contributed to a less dramatic contraction in output. The delay provided
a window for private creditors to reduce exposures and shift debt into
official hands. This shift occurred on a significant scale and left the
official sector on the hook.”
ibid., p.33
Creating Phantom Debts
Interest Rate : 5 %
Stock of
Debts
Year 1 1000
Year 2 1025
Year 3 1050
….
….
Year 10 1247
Debt Service Debt Service New Stock
(as due)
(actually paid) Debts
50
51.25
52,5
….
62,35
25
26.25
26,5
….
30,35
25
25
26
….
32
Necessary debt reduction (nominal book vlaues)
After 2 ys
520 [1025 + 25 - 520 = 530]
 After 10 ys
672
152 ≡ PURE PHANTOM DEBTS
Deleting phantom debts simply acknowledges facts:
money already lost cannot be lost again, no real costs to
creditors - “generosity for free”
Greece; Losses of Private Sector
(real and counterfactual, %)
Financial press
Zettelmeyer,Trebesch, Gulati (2013)
Gros & Mayer (2010)
Raffer Propsoal (Insolvency)
75%
≈ 59-65% (on aver.,
ranging from ≥ 75%
(≤ 1 year) to ≤ 50%
(maturing after 2025)
50%
depending on results
of proceedings, but
surely ≤ 50%
Last two cases: either no taxpayers’ money lost
or presumably less than likely losses at present!
Thank You Very Much
¡Muchas Gracias!
Kunibert Raffer
http://homepage.univie.ac.at/Kunibert.Raffer
© K. Raffer 2013