Let eurozone stew in its own juice

01 March 2012, Thursday

ASIM ERDİLEK a.erdilek@todayszaman.com

The two-year-old eurozone sovereign debt crisis reached a dubious milestone last week with the default of Greece on its debt to private investors, as part of the proposed second Greek bailout. But the European Central Bank (ECB) refused to accept losses on the Greek bonds it holds, creating a double standard.

Standard & Poor's (S&P) downgraded Greece's “CC” long-term and “C” short-term sovereign credit ratings to “selective default,” after the Greek parliament retroactively inserted “collective action clauses” into sovereign debt contracts of private creditors. They are forced to accept a “voluntary” bond swap whose terms mean highway robbery for them. S&P added that if a sufficient number of private creditors did not agree to the bond swap, Greece would face “an imminent outright payment default,” since it would have access to neither market funding nor official financing through its second bailout, which is conditioned on the successful execution of the bond swap (see my last column). Moody's Investors Service and Fitch Ratings are also expected to declare Greece in default. For the rating agencies a debtor is considered in de facto default when it fails to service its debt, i.e., pay the interest and the principal owed, in full and on time. European Union leaders are evidently upset with the recent sovereign downgrades of Greece and other troubled eurozone members. The European Parliament is considering a draft report to empower the EU Commission to ban issuance of sovereign credit ratings if they are unacceptable to EU members and to create a “fully independent public European Credit Rating Agency.” Since the outbreak of the eurozone crisis, Germany, the eurozone's dominant leader, has pushed the International Monetary Fund (IMF) into getting heavily involved in the bailouts of Greece, Ireland and Portugal. The involvement of the IMF, committing almost 60 percent of its outstanding loans to the eurozone, has been justified in terms of not only its independence and expertise in monitoring how well the bailed out countries meet their performance criteria but also the danger of global contagion from the eurozone crisis. The IMF, with the overrepresentation of Europe on its executive board and with previous as well as present managing directors of French nationality and as an international financial institution which capitalized on the global financial crisis of 2008-2009 to save itself from increasing irrelevance, has been only too eager to get involved. It has been not only too generous in the amounts of its loans but also too lenient in its surveillance of the eurozone borrowers, especially Greece, failing to ensure that they met their performance criteria. Its involvement in Greece's first bailout has been an unmitigated disaster. Why should we expect the IMF to do any better in Greece's second bailout? The eurozone, an inherently defective and rickety monetary union of economically very disparate countries, lacks a foundation of fiscal union and adequate intra-union labor mobility. Since the outbreak of its sovereign debt crisis it not only made feckless attempts to bail out its troubled members through the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), but also tried to turn the entire EU into a half-baked fiscal union under Germany's tutelage. But the future of that fiscal union is now further jeopardized by Ireland's decision to hold a referendum on the European Fiscal Compact, finalized in January and already rejected by the UK and the Czech Republic. Lately, the eurozone also began to seek salvation by the ECB through the Long Term Refinancing Operation I and II. The ECB has been bailing out troubled eurozone banks with unlimited cheap three-year loans, bypassing the ban on lending to eurozone governments directly. But not content to stew in its own juice, the eurozone is seeking more financial help through the IMF from the rest of the world, arguing that otherwise its crisis could trigger another global financial crisis. That scary argument is debatable. The eurozone and the IMF, which is eager to boost its financial firepower by $500 billion to over $1 trillion and thus play an even greater role in the eurozone's salvation, have met stiff international resistance. The G-20 finance ministers and central bank governors declared after their meeting in Mexico City last Sunday that before the G-20 agrees to boost the IMF's financial clout, the eurozone should do more to help itself through its EFSF and ESM firewalls. The German government, which received parliament's approval for the second Greek bailout but now faces a potential legal obstacle put up by the constitutional court, is opposed. Its opposition, like its resistance to the issuance of eurozone bonds to mutualize sovereign debt, is on grounds of moral hazard: That would only encourage other fiscally irresponsible eurozone members besides Greece to act even more irresponsibly. But its real reason is the growing domestic opposition in Germany to throwing more money at salvaging the increasingly doubtful eurozone in its current form. If rich Germany, the largest EU economy, unquestionable leader and major beneficiary of the eurozone, is not willing to have more of its own skin in the game, why should the less rich rest of the world help any more? Source