Dr. Constantin Gurdgiev is head of research with St. Columbanus AG and an adjunct lecturer in finance at Trinity College, Dublin
The fourth year into the crisis, and all G20 meetings have evolved into predictable verbal ping-pong: the non-EU nations urging Europe to deal with the crisis and the EU representatives returning boisterous claims that “robust,” “timely,” “resolute,” “decisive” solutions are being planned. More admonitions for action follow even more “resolute” claims of Europe planning to unveil a “definitive” road map to a plan for resolving the crisis. Ad infinitum.
This weekend’s G20 summit of finance ministers failed to provide for anything different. Here are just a few points from the final comments by the participants.
French Finance Minister François Baroin: The Euro crisis “took up a little part of our dinner last night. We presented ... elements of the global and lasting package which heads of state and government will present at the Oct. 23 summit. It responds to the Greek issue, the maximization of the EFSF, on the level of core tier 1 [capital]with a calendar which will be co-ordinated by the heads of government for the recapitalization of the banks. It responds, naturally, on the governance of the euro zone... We still have a week to finalize it.”
The extraordinary vanity and vacuousness of the statement are self-evident. The idea that the euro area crisis -- pretty much the only reason for G20 gatherings nowadays -- “took up a little part” is absurdly juxtaposed by the claim that the EU presented “elements of the global… package” for resolution of the crisis. And note the language: “global package” and “lasting”. To the French finance minister, it is rather common to refer to anything that impacts France as global. In reality, of course, the “package” will have to be local to the euro zone. In other words, not even pan-European!
And then there’s that “lasting” bit. Per Reuters’ report on the summit: “The [G20]communiqué urged the euro zone “to maximize the impact of the EFSF (bailout fund) in order to address contagion.” EU officials said the most likely option would be to use the €440-billion EFSF fund to offer partial loss insurance to buyers of stressed member states' bonds in a bid to stabilize the market.”
Now, give it a thought. A “lasting” package of solutions will use temporary guarantees to buyers of distressed debt.
This begs two questions: (1) How on earth can EFSF guarantees resolve the main problem faced by over-indebted nations, namely the problem of unsustainable debts? (2) If the EFSF were to remain a €440-billion fund, how can that amount be sufficient to provide already committed sovereign financing backstop through 2015-2017, supply banks’ recapitalization funds, provide additional backstop funds for current (Greece, Ireland and Portugal) and potential future (Italy, Spain and possibly Belgium and France) borrowers, while underwriting a new tranche of CDS-style insurance on bonds? Especially since such EFSF insurance contracts will have to cover ALL of the debt issuance by the distressed sovereigns. Assigning only partial (by stressed maturities or specific issues) cover will risk destabilizing the yield curve on government bonds, inducing additional maturity profile risks.
Mr. Baroin went on to dig for himself an even deeper verbal hole: “I have to tell you in truth that the results of the European Council on Oct. 23 will be decisive… We've made good progress [on Greece]with the German finance minister. There are points of agreement which are emerging rather clearly and we will have an agreement on this point, but it would be premature to say what accord will emerge on Oct 23.” And more: The “French position [on Greek haircuts]which is quite clear: We will refuse any solution that leads to a credit event.”
In other words: there is no plan, and we might not even get one ready for the Oct. 23 summit. Meanwhile, Europe’s “central banks will continue to supply banks with necessary liquidity, we will ensure banks have the necessary capital. This is a very important message central banks are sending.”
So let’s just do more of the same: Plan for the plan, hold decisive summits and keep the cash-for-junk scheme going at the ECB. All so totally European in terms of absurdity and predictability.