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sexta-feira, dezembro 02, 2011

No relief in sight for Eurozone borrowers - liquidity vs. solvency

Debt workout 101- part 4 

No relief in sight for Eurozone borrowers

Under the appalling front page image of a flaming Euro, The Economist of 26-November-2011 notes, with apparent surprise, that the Eurozone crisis has “crept from the periphery to the core” countries.  But isn’t that the first rule of bad credit? 
 “If you (the periphery/borrower)  owe 100 and can’t pay, you have a problem. If you owe  1000 and really can’t pay, the core/creditor has a problem."
And a creditor and exporter can be no better than its borrowers/clients.  We certainly hope that no one besides the journalists are surprised by this turn of events, and certainly not the decision makers in Berlin, Paris and London. 

Internal Eurozone trade imbalances in forced rebalancing
To say that the Eurozone is “showing symptons of an internal balance-of-payments crisis” is perhaps the understatement of the year. This basic creditor/borrower and exporter/importer divide is the reason we have a “two-speed Europe”, which may have come to the end of their divergence.  From here on out, trade imbalances will have to be reduced, one way or another.  

As in any rebalancing effort, borrowers need material help from creditors to recover and workout their existing debt, in the form of much more time to pay  and lower interest rates, sometimes with a clawback clause to recapture potential upsides.  Troubled borrowers also need new money loans to relaunch their export effort.  Borroweres may or may not need debt forgiveness, the terrible haircuts.  Strangely, in the Eurozone debt crisis, there has been no debt standstill, no extension of tenors, no  reduction of interest rates on existing debt, perhaps because these would be considered “credit default events” under the Credit Default Swaps. 
Instead, Eurozone creditors, presumably incluing the local savers, were invited to voluntarily forgive 50% of the sovereign debt of Greece, a non-starter if we’ve ever seen one.

Thus far, the so-called “bailouts” have mostly channelled funds through the sovereign borrowers back to the International creditors, doing little to help the troubled borrowers, except staving off formal default and protecting the CDS issuers

Without  the “orderly default option” of extending tenors and working out the debt hand-in-hand with the troubled borrowers, and in the context of severe funding shortage, Eurozone investors have been shedding assets at increasingly deep discounts. To be fair, it is always difficult to workout negotiable bond obligations, since bond investors are far more intractable than bank creditors.

As Eurozone portofolio losses have become generalized in this contexto of a “presumed disorderly default”, this has exposed the “moral hazard” implicit in many of the earlier investment decisions, which were based on the expectation that creditor countries would pay on behalf o the borrower countries.  The end of this illusion will do more permanente dammage to traditional intra-Eurozone capital flows than any forced refinancing ever would, so we are looking to a future of forced reductions of intra-Eurozone trade imbalances, smaller deficits and smaller surpluses.  

Banks in the front lines
Because of the losses resulting from these fire sales or through the mechanism of mark-to-market, the intermediating banks  have have to be recapitalized by their national authorities in order to absorb the mounting losses. The same appies to the intermediating banks from outsider of the Eurozone, including UK and US banks.  Findng new capital in the existing market is not possible, so Governments have to step up, as did the US Government with the two TARP programs.  Whether the control of existing shareholders is diluted is, ultimately, a foregone conclusion, since the alternative would be much worse.  

In the Eurozone, bank creditor recapitalization is more complitcated by the fact that there is no one single prudential regulator, and banks are subject to “home rule” by their national central banks.  Even the recently created EFSF would provide new capital only for the banks of the the countries under troika programs.  Banks based in other countries, including the UK, would have to be recapitalized from national sources, which is only fair. 


This issue of who will absorb bank losses masquerades as the  liquidity versus solvency debate.  If it were seen merely as a question of liquidity and funding, then it could be resolved by the ECB, the monetary authority of the Eurozone.  If it a question of bank solvency and asset quality, then it should be resolved by the national central banks, under home rule prudential regulation.  


The quick answer is that when Portuguese banks have to sell US or Brazilan assets because of lack of funding, it is a question of liquidity.  When German, French or British banks find themselves overexposed to troubled periphery borrowers and have to take losses on impaired assets, that's a question of solvency. 


By definition under the concept of the sovereign rating ceiling, local depositors and creditors cannot regard their own sovereign debt as impaired, so the local sovereign exposure  should be treated as a problem of liquidity  rather than a problem of solvency. 



Mariana Abrantes de Sousa 
PPP Lusofonia


See also Banks, central banks and moral hazard
Orderly default
Eurozone balance of payments crisis
Lessons from earlier balance of payment crises http://ppplusofonia.blogspot.com/2011/11/licoes-de-crises-passadas-exportar-mais.html
Distribution of bank exposure to Eurozone borrowers ´
One-armed midgets cannot rebalance Eurozone
What are CDS good for anyway? 

6 comentários:

  1. American view of Europe: Slow-moving political process versus fast-moving financial crisis

    "CDS aren't necessarily the panacea that they were once thought to be. With the bailout of Greece, private investors in Greek CDS were asked to take a 50 percent haircut, a plan that has not yet been finalized. This would through the proverbial monkey wrench into the whole idea of a debt insurance scheme because the payout simply would not be there in the case of a default. As well, since CDS appear to be a licence to print money, American banks have gone whole hog on the concept. According to the Bank for International Settlements, guarantees provided by United States' banks rose by $80.7 billion in the first half of 2011 to $518 billion, most of which are CDS on Greek, Portuguese, Irish, Spanish and Italian government debt. At the end of June 2011, United States's banks had a total exposure of $767 billion in the form of loans to the five aforementioned European countries and the accompanying exposure to CDS. "

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  2. Este texto assenta no entendimento ingénuo da economia que os financeiros alimentam.

    A razão porque os juros sobem no "core" é simplesmente porque podem - os bancos emprestam ao juro mais alto que podem; conseguir cartelização nos países pequenos é fácil mas nos grandes é mais difícil e arriscado, porque eles podem simplesmente recusar o empréstimo, como fez a Alemanha recentemente. Os grandes têm poder negocial, coisa que os pequenos não têm. E esse é que é o cerne da questão. Mas, a pouco e pouco, o cartel vai avançando para o «miolo» porque a gula financeira é insaciável...

    Este «ataque» às dívidas soberanas já estava em preparação há vários anos; eu sei disso porque fui convidado a participar dele...

    A crise não nasce por certos paises não poderem pagar a sua dívida soberana, mas é ao contrário, certos países ficam insolventes porque lhes está a ser exigido juro usuário; porque lhes está a ser aplicado o «golpe do cartão de crédito». Eu tb ficava se os juros do meu empréstimo à habitação subissem de repente para 10%; felizmente, existe legislação a proteger-me; ora acontece que no caso da dívida soberana essa legislação não existe!!

    Já viram que todos os juros estão limitados legalmente? isto significa que o «mercado» não tem qualquer efeito regulador, a única consequência do mercado financeiro é os juros dispararem.

    O dinheiro é como a energia - ou há um regulador ou os preços disparam.

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  3. Os ingénuos, que acreditam no bom regulador paternalista, não sofrem de insónias.

    Infelizmente, o bom regulador também falha.

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  4. sim, o regulador também é uma má solução... se calhar é esse o problema, nenhuma solução é boa... se o assunto tem de ser resolvido por negociação, é preciso que ambas as partes tenham poder negocial e isso não acontece com a nossa dívida soberana.

    O poder negocial dos Estados advem da força da sua economia e da capacidade de intervenção do banco central; num país como o nosso nem uma coisa nem outra. É por isso que eu defendo que devemos tratar nós mesmos de adquirir o nosso poder negocial, fazendo algo como os alemães fizeram há quase um século

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  5. Também há o risco de captura do Regulador, ou até a captura do Concedente

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  6. Houve quem ganhasse com a convergência de taxas de juro, e agora há quem ganhe com a divergência.
    A Euribor começou sendo a média das taxas inter-bancárias de 58 bancos europeus, e já vai apenas em 44 bancos. Um dia destes, quando todos os bancos europeus forem afastados do "mercado", a Euribor vai ser se resumir à média do bid-offer do Deutsche Bank.

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