IMO, after re-reading Soros's step by step outline on how to stop a 2nd great depression and the steps the EU needs to take, I've come to the conclusion that the October 26th EU declaration will entail Europe seeking a new treaty and possibly having the banks put uner European control. Why? Because it's actually Spelled Out in the last paragraph of the first article below.
Soros "The course of action outlined here does not require leveraging or increasing the size of the EFSF but it is more radical because it puts the banks under European control. That is liable to arouse the opposition of both the banks and the national authorities. Only public pressure can make it happen"
This could be the beginning of the end for the banks (which, by the way, protesters worldwide have been calling for) IMO, the EU .. And Very Shortly thereafter, the U.S. Banks will fall under government control and then .. IMO, we will see the IMF become the "Global Bank" that oversees all the banks. :) maybe ... kel
September 29, 2011
How to stop a second Great Depression
Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.
Three bold steps are needed.
First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone.
In the meantime, the major banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct the banks to maintain their credit lines and outstanding loans, while closely monitoring risks taken for their own accounts.
Third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debt at a very low cost. These steps would calm the markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.
This is how it would work. Since a eurozone treaty establishing a common treasury would take a long time to conclude, in the interim the member states have to appeal to the ECB to fill the vacuum.
The European Financial Stabilisation Fund is still being formed but in its present form the new common treasury is only a source of funds and how the funds are spent is left to the member states.
It would require a newly created intergovernmental agency to enable the EFSF to cooperate with Europe’s central bank.
This would have to be authorised by Germany’s Bundestag and perhaps by the legislatures of other states as well.
The immediate task is to erect the necessary safeguards against contagion from a possible Greek default. There are two vulnerable groups – the banks and the government bonds of countries such as Italy and Spain – that need to be protected. These two tasks could be accomplished as follows.
The EFSF would be used primarily to guarantee and recapitalise banks. The systemically important banks would have to sign an undertaking with the EFSF that they would abide by the instructions of the ECB as long as the guarantees were in force.
Banks that refused to sign would not be guaranteed.
Europe’s central bank would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own account.
These arrangements would stop the concentrated deleveraging that is one of the main causes of the crisis. Completing the recapitalisation would remove the incentive to deleverage. The blanket guarantee could then be withdrawn.
To relieve the pressure on the government bonds of countries such as Italy, the ECB would lower its discount rate. It would then encourage the countries concerned to finance themselves entirely by issuing treasury bills and encourage the banks to buy the bills.
The banks could rediscount the bills with the ECB but they would not do so as long as they earned more on the bills than on the cash. This would allow Italy and the other countries to refinance themselves for about 1 per cent a year during this emergency period.
Yet the countries concerned would be subject to strict discipline because if they went beyond agreed limits the facility would be withdrawn. Neither the ECB nor the EFSF would buy any more bonds in the market, allowing the market to set risk premiums.
If and when the premiums returned to more normal levels the countries concerned would start issuing longer-duration debt.
These measures would allow Greece to default without causing a global meltdown. That does not mean that Greece would be forced into default. If Greece met its targets, the EFSF could underwrite a “voluntary” restructuring at, say 50 cents on the euro.
The EFSF would have enough money left to guarantee and recapitalise the European banks and it would be left to the International Monetary Fund to recapitalise the Greek banks. How Greece fared under those circumstances would be up to the Greeks.
I believe these steps would bring the acute phase of the euro crisis to an end by staunching its two main sources and reassuring the markets that a longer-term solution was in sight.
The longer-term solution would be more complicated because the regime imposed by the ECB would leave no room for fiscal stimulus and the debt problem could not be resolved without growth. How to create viable fiscal rules for the euro would be left to the treaty negotiations.
There are many other proposals under discussion behind closed doors. Most of these proposals seek to leverage the EFSF by turning it into a bank or an insurance company or by using a special purpose vehicle.
While practically any proposal is liable to bring temporary relief, disappointment could push financial markets over the brink.
Markets are likely to see through inadequate proposals, especially if they violate Article 123 of the Lisbon treaty, which is scrupulously respected by my proposal. That said, some form of leverage could be useful in recapitalising the banks.
The course of action outlined here does not require leveraging or increasing the size of the EFSF but it is more radical because it puts the banks under European control. That is liable to arouse the opposition of both the banks and the national authorities. Only public pressure can make it happen.
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October 13, 2011
A routemap through the eurozone minefield
A group of almost 100 prominent Europeans delivered an open letter to the leaders of all 17 eurozone countries on Wednesday. The letter said, in so many words, what the leaders of Europe now appear to have understood: they cannot go on “kicking the can down the road”.
The road has been blocked by the German constitutional court which has found the law establishing the European financial stability fund constitutional, but declared that no further transfers are allowed without Bundestag authorisation. The leaders have also understood that it is not enough to ensure that governments can finance their debt at reasonable interest rates, they must also do something about the banking system.
Faced with the prospect of having to raise additional capital at a time when their shares are selling at a fraction of their book value, the eurozone’s banks have a powerful incentive to reduce their balance sheets by withdrawing credit lines and shrinking their loan portfolios. The banking and sovereign debt problems are mutually self reinforcing. The decline in government bond prices has exposed the banks’ undercapitalisation and the prospect that governments will have to finance recapitalisation has driven up risk premiums on government bonds.
The financial markets are now anxiously waiting for the leaders’ next move.
Greece clearly needs an orderly restructuring because a disorderly default could cause a meltdown. The next move will have fateful consequences. It will either calm the markets or drive them to new extremes.
I am afraid that the leaders are contemplating some inappropriate steps. They are talking about recapitalising the banking system, rather than guaranteeing it. They want to do it country-by-country, rather than for the eurozone as a whole. There is a good reason for this. Germany does not want to pay for recapitalising the French banks. While Angela Merkel is justified in her insistence, it is driving her in the wrong direction.
Let me stake out more precisely the narrow path that would allow Europe to pass through this minefield. The banking system needs to be guaranteed first and recapitalised later. National governments cannot afford to recapitalise the banks now. It would leave them with insufficient funds to deal with the sovereign debt problem. It will cost the governments much less to recapitalise the banks after the crisis has abated, and both government bonds and bank shares have returned to more normal levels.
The governments can however, provide a guarantee that is credible because they have the power to tax. It will take a new legally-binding agreement for the eurozone to mobilise that power, and that will take time to negotiate and ratify. To be clear, I am not talking about a change to the Lisbon Treaty but a new agreement. A treaty change would encounter too many hurdles. In the meantime, the member states could call upon the European Central Bank-- which already enjoys their guarantee on a pro-rata basis-- to step into the breach.
In exchange for a guarantee, the major banks would have to agree to abide by the instructions of the ECB. This is a radical step but necessary under the circumstances. Acting at the behest of the member states, the central bank has sufficient powers of persuasion. It could close its discount window to, and the governments could seize, the banks that refuse to co-operate.
The ECB would then instruct the banks to maintain their credit lines and loan portfolios while strictly monitoring the risks they take for their own account. This would remove one of the main driving forces of the current market turmoil.
The other driving force – the lack of financing for sovereign debt – could be dealt with by the ECB lowering its discount rate and encouraging countries in difficulties to issue treasury bills and prompting the banks to subscribe.
The bills could be sold to the central bank at any time, so that it would count as cash. As long as they yield more than deposits with the ECB, the banks would find it advantageous to hold them. In this way, governments could meet their financing needs within agreed limits at very low cost during this emergency period, yet article 123 of the Lisbon Treaty would not be violated. I owe this idea to Tommaso Padoa-Schioppa.
These measures would be sufficient to calm markets and bring the acute phase of the crisis to an end. The recapitalisation of the banks should wait until then. Only the holes created by restructuring the Greek debt would have to be filled immediately. In conformity with the German demands, the additional capital would come first from the market and then from the individual governments. Only in case of need would the EFSF be involved. This would preserve the firepower of the fund.
A new agreement for the eurozone, negotiated in a calmer atmosphere, should not only codify the practices established during the emergency but also lay the groundwork for a growth strategy. During the emergency period fiscal retrenchment and austerity are unavoidable. But the debt burden will become unsustainable without growth in the long term – and so will the European Union itself. This opens up a whole new set of difficult but not insurmountable problems.
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