Greek Gunboat Diplomacy Eupdate and More ECB/EFSF

Someone who wanted to be very mean to the Germans just leaked this document, where they manage to come off as both desperate and inept. The proposal purports to address Greek failure to meet program targets by installing an EU overlord, whose job it would be among other things to pay off the foreign bondholders before funding public services in Greece.

The strategy goes back to the days when imperial gunboats took over debtors' customs houses to pay foreign bondholders, but has been considered impolite in creditor country circles for a century or so. Now it is back as an EU institutional innovation. As for the business of "absolute priority" for foreign creditors, the statement is nonsensical on its face: Greece will enact a law that would make creditors feel "de facto" senior. At best, this would be "de jure," and without a shred of credibility. The actual phrase used--"De facto elimination of the possibility of a default"--surely qualifies for an Oscar nomination.

All this innovating does follow a pattern: take a program that does not work, double down on it, and ratchet up enforcement to the point where no one would ever dream of it. Genius.

And further to my last post, it looks like Richard Barley and Felix Salmon took sides on the EFSF swap possibility a couple of days ago, except that they seem to operate on the assumption (which I shared last May) that EFSF would have to take the loss up front. Now I think that the swap would be worth it even if it only captured the discount for Greece. Phase Two happens when it does.

The Crisis of Fake Constraints: Greek Denouement Eupdate

Unless Greece and its creditors reach a deal in the next few days, Greece has no money to pay €15 Billion or so due to its bondholders in March.

From the start, this has been a crisis of fake legal and economic constraints masking very real political constraints. In 2010, Greece could have restructured its debt quicker than most sovereigns in modern memory -- or it might have been bailed out, had Europe chosen to go the route of fiscal transfers. Neither of these paths was taken because the European Central Bank was unwilling to countenance the sin of debt restructuring, but member states with money were unwilling to pay for the appearance of collective virtue.

Now that the restructuring is inevitable and the virtue bill unpayable, the fake constraints are back. The ECB holds about €50 of Greek debt, which must go into the restructuring to get enough debt and cashflow relief. But the central bank would not take losses, and remains allergic to triggering credit default swaps (which is more likely to happen if it sits out). Worse, its votes might be needed to (credibly threaten to) amend Greek bonds using retrofit Collective Action Clauses. (See latest from Gulati-Zettelmeyer here.)

There seems to be a simple fix: swap the Greek bonds held by the ECB for bonds of the European Financial Stability Facility at a price that does not cause ECB losses. Then have the EFSF go into the exchange and vote the bonds if it needs to. At a minimum, this captures for Greece the discount at which the ECB bought its bonds. If Europe is unwilling to see the EFSF take a loss from the ECB's purchase price, Greece could conceivably make up the difference with a special bond issue for the EFSF on terms that reflect the specialness of the vehicle and the circumstances.

Greek VoluntaryInvolutary DealNoDealDeal: Convolution Eupdate

Will Greece reach a voluntary deal with its creditors to write down its debt by 50% in the coming weeks? Will it default? ... or will its official patrons blink, pay up, and let the creditors off the hook? I hear at least two uber-expert Euro-watchers have taken opposite sides of the bet on that one. I bet nobody wins.

Financial Institutions Palooza at the Association of American Law Schools Annual Meeting

The Section on Financial Institutions and Consumer Financial Services will have a record four events at this weekend's Association of American Law Schools Annual Meeting in Washington, DC. The theme is rethinking and reviving the field of financial institutions on the ground and in the academy. We will take stock of reforms so far and consider the impact of the crises in the United States and Europe, but also will take a long-term view of the field from diverse theoretical, policy, and methodological perspectives.

The program begins on Saturday morning with a big-think "revival" panel featuring Jill Fisch, Howell Jackson, Kim Krawiec, Pat McCoy, Katharina Pistor, and Annelise Riles, immediately proceeding to the lunch keynote by Governor Sarah Bloom Raskin, introduced by Arthur Wilmarth. Next comes an offsite policy roundtable moderated by Adam Feibelman, with regulators and policy makers from different agencies. The weekend program  features five academic paper presentations on Saturday afternoon and Sunday morning, focusing on the state of financial reform and the way forward. Heidi Schooner will moderate the Call for Papers panel.

Full program details are here. Below are the links to the selected papers, authors, and commentators.

This-Is-It EU Summit Eupdate

A few quick thoughts as the Make-or-Break, Life-or-Death, Now-or-Never EU Summit gets going.

Previews from Merkozy earlier this week got no love, and now that Mr. Draghi has shelved the Big Bazooka idea (HT Hank Paulson), I am not entirely sure what can possibly surprise on the upside. Then again, maybe the dithering is good news--if EU policy makers had really thought this was the abyss, surely they would have done something.

I would not claim summit reading as a specialty. Besides, I am exhausted from trying to unpack decisions that have had the average lifespan of a mayfly. That is why, instead of laboring through substance, this time I will be looking for glaring signs of fecklessness. So far this week I have seen two: Private Sector Involvement and Rule Obsession.

Never Mind Eupdate, Greek Referendum Edition

No more referendum. Still my candidate for the most important moment in this crisis. The possibility of a referendum, and of exiting the Euro, stays on the table -- as well it should. The persistent fog in Europe's Plan A, and the palpable absence of anything resembling Plan B, are chilling.

Eupdate Game-Changer: The Greek Referendum

The Greek authorities' decision to hold a referendum on the new Eurozone rescue package strikes me as the most interesting and potentially consequential development in the crisis in a very long time. Yes, more consequential than last summer's breakthrough and last week's all-nighter.

I may be unduly influenced by the other European referendum experience--Iceland--where the people have now repeatedly rejected the government debt settlement deal, despite substantial improvement in the terms between the two referenda. But with the entire Greek package on the line and much to pick on, I find it hard to imagine a favorable vote. I also wonder about the implications of holding a vote when so much of the package is up in the air. One outcome of a negative vote might be to empower the government to go back and ask for more favorable terms. Even if the ultimate vote is affirmative, the interim  uncertainty must feeze all the Europrocess coming out of last week's summit. And if a better deal emerges after the first one is voted down, would that too be put to a referendum? Much to talk about in Cannes.

Regulatory Bankruptcy

My Jotwell review of Sarah Woo's last article is here. 

Call for Papers: Financial Institutions and Consumer Financial Services Section

There is still time to submit for this Call for Papers -- the extended window is closing on  September 20. In addition to the Call for Papers, the section program at the Annual Meetings of the Association of American Law Schools features a talk by Federal Reserve Governor Sarah Bloom Raskin, and a scholarly panel on reviving financial institutions, their study and regulation -- banks and beyond.

Conference on the Debt Crisis in the Eurozone

If you happen to be in Reykjavik or thereabouts in early October--or scouting the web for papers putting Europe in perspective--this looks like a wonderful conference, not least for bringing economists, finance, policy, and legal types together in one place (and my contribution notwithstanding).

Defies Credulity Eupdate

Bad news: Eupdate is back. The last big fix to the European debt crisis, quietly unraveling since its announcement on July 21, is loudly imploding over collateral.  Turns out that Finland, representing less than 2% of the Eurozone package and 37.876% of the political noise about the package, was promised Euro 500 million in cash collateral for its participation. The side deal makes little sense as an incentive to repay for Greece, or as a source of repayment for Finland. In a world where Greece is willing to default on another European state, Euro 500 million is the least of anyone's worries--the Euro is collapsing, Spain and Italy are going down, bank runs are rampant, etc. The primary purpose of the collateral trick must be political -- to assure Finnish voters that they are not in fact bailing out Greece.

Our D-Word: Ecuador, Not Greece

In the inane and insane case the United States does skip a debt payment, please let us skip the comparisons to Greece. Greece is really out of money and probably should have bitten the D-bullet (restructured, re-profiled, whatever) some time ago. We are not out of money, yet might default anyway--which makes us surreally more like Ecuador circa 2008.  Like Ecuador's recent D-dalliance, a U.S. failure to pay would be purely discretionary, a rare case of unwillingness, not inability, to pay.

Call for Papers: Section on Financial Institutions and Consumer Financial Services

Following is a call for papers to be presented as part of the section program at the Association of American Law Schools Annual Meeting next January.

The program takes place one and a half years after the Dodd-Frank Act was signed into law.  The law left many of the details of financial reform to be filled in by regulators, raising the risk of capture.  Some of the most important rule makings have begun in earnest; others have stalled as reform fatigue sets in. Meanwhile, reform efforts in Europe and international regulatory initiatives remain works-in-progress. What lessons can we draw from the implementation of Dodd-Frank so far?  What have been the greatest achievements and the greatest disappointments as the legislative process has given way to the administrative?  What devils have lain hidden in the details of the Federal Register?  What aspects of reform have been largely forgotten?  What does the path of financial reform say about legislative and regulatory process?  What lessons can be drawn from the reform efforts in Europe and elsewhere?  Does the focus on regulating institutions detract from a focus on regulating financial instruments, markets or economic functions and risks? 

Form and Substance Eupdate (Updated)

After a month spent reeling from DSK whiplash, Eupdate finds the European landscape little-changed, much noise notwithstanding.

Summarizing: Greece has gone through profound political upheaval to enact austerity measures boosting the nominal credibility of its economic program; German banks have continued quietly to unload Greek debt (unto whom?); European politicians have continued loudly to bang the table about bail-ins; and the European Central Bank has continued stoutly to reject all compromise that might reflect on its mammoth holdings of peripheral debt ... that is to say, all compromise on offer. As Adam pointed out last week, the French bank fig-leaf proposal solves none of the problems at hand, though as Wolfgang Munchau pointed out yesterday, it does apply criminal amounts of structured lipstick to the EU bank-sovereign pig.  (No, not PIIG.)

The one curious thing about this slow-motion train wreck is the extent to which the public sector is embracing crude formalism as its preferred method of treading water, while some private market participants are seizing the substantive high ground. 

Central Bank Drift: Eupdate Extra

Now that everyone agrees that Greece will engage in a figleaf operation to extend maturities without inflicting net present value losses on its creditors, it is worth mulling the institutional implications of any such operation. If a debt exchange takes place as rumored, I am most worried about two things: the cost to Greece of paying higher interest rates to kick the can down the road, and the costs to the international financial system of getting central banks formally involved in a debt restructuring (re-profiling, re-coloring, whatever). The Greece piece is a replay of the Latin American debt crisis of the 1980s: Greek debt stock and borrowing costs grow as uncertainty lingers, while its creditors build up a capital cushion to face up to reality. The central bank piece is more complicated, and perhaps more broadly important. It is the subject of today's Eupdate.

Ways of Treading Water II: Eupdate Greece

A year ago, back when the Greek government debt crisis officially became the Eurozone gestalt crisis, I speculated that Greece would not launch a debt restructuring any time soon.  I hereby officially change course.  There may well be a restructuring, and it will do no one any good.  I am skeptical not because I thought then, or think now, that Greece is solvent.  I had and have no idea, though Greek debt numbers look worrisome by most conventional metrics.  Rather, I am skeptical because the dominant proposal on the table--a lengthening of maturities with no net present value reduction (a "light dusting")--does precisely what EU politicians can do and have done perfectly all by themselves:  Tread Water.

Ways of Treading Water I: Eupdate Portugal

Every so often, I want to blog about something other than the EU debt/banking/ fiscal/political crisis, but the continuing loopiness leaves me little choice but to launch a series:  Welcome to Eupdate.

Two things have happened in the Eurozone since my last pre-Eupdate update:  Portugal has asked for and negotiated a rescue package, and Greek restructuring rumors have gotten out of control.  Both nicely fit into the dominant theme of treading water, but present interesting variations on the theme.  I elaborate on Portugal below; I address Greece in a separate post.

Portugal asked for help when its banks staged a buyer's strike at a government debt auction on April 6.  The timing was awkward, since the government in power has no capacity to make policy commitments pending an election it is likely to lose on June 5.  The day the news broke, headlines blamed greedy banks.  I poked around to see what they had been doing for the past year or so--turns out they were busy loading up on government debt, so much so that the banking system's holdings of said debt doubled since the start of the crisis.  Treading Water 1.

But wait--why the leveling-off in 2010?  A little amateur trawling of the Portuguese central bank website reveals that the leveling-off coincides roughly with the European Central Bank's securities market program.  Treading Water 2.  Sure enough, the day after-the day after, the banks blamed the ECB for refusing to take Portuguese government debt off their hands.

Euroworried, Eurohappy, Euroflummoxed

Europe has fixed its debt and bank problems --  again.  Last week's EU summit produced a term sheet charting the path to a permanent, treaty-based crisis resolution regime, the European Stability Mechanism (term sheet embedded here starting p. 21).  You may recall it all started with revelations about Greece's government debt crisis in late 2009, and proceeded to reverberate around the Euro-periphery, with banking and government debt troubles bubbling up in Ireland, Portugal, Spain ... Italy ... Belgium ...   About a year ago, after much dithering, a one-off program for Greece, and a couple of false starts, Europe came up with an arrangement to finance countries in trouble, effective 2010-2013.  Soon thereafter, the European Financial Stabilization Mechanism and the European Financial Stability Facility deployed in Ireland, in conjunction with the IMF.   This is a fine overview.  Last week's deal establishes a standing successor to this model.   The term sheet is a fascinating study in EU governance (note the respective roles of the member states, the Commission, and the European Central Bank) and potentially an important step on the path to a fiscal union.  I will limit my comments to the legal and legal-sounding tidbits.

Macroprudentially Yours: A Literature Review

"Macroprudential" (policy, outlook, regulation, zeitgeist ... whatever ...) has been so in  of late, it threatens to beat out its cousin "Systemic" for the Random Overuse Award of the Century.  Worse, it is even trite to say that no one knows what Macroprudential is, or how to do things Macroprudentially:  macroprudentialists are totally hip to this line and have their talking points lined up ...  but in the end, you are still left wondering, if a little more sheepishly.  Nonetheless, I am convinced that the quest for macroprudential meaning is essential to design and implement viable financial reform.  There seems to be no better language to talk about interconnectedness, transmission, contagion, spillovers, and all the other scary crisis business at once.  This is why I was thrilled to stumble on this literature review from the ever-helpful folks at BIS.