For so long now the script for the eurozone has called for an orderly Greek default, the implication being that a disorderly one could set up a chain of unintended consequences, such as runs on banks and bank failures that would seize up the global financial system like the collapse of Lehman Brothers did in 2008.
Nobody wants that. But this script has also called for those who made stupid bets on the Greeks being able to repay their debt to take a haircut or make losses on their investments.
This is good capitalism. You take the risk and you get the reward. But if your bet fails it is you who carry the can, rather than the taxpayer.
As reported by the Financial Times, a stumbling block emerged this week in negotiations between the Greeks and their bondholders over the haircut. The stumbling block is the European Central Bank, an institution that, at its core, has the mandate to maintain financial stability. The largest holder of Greek bonds valued at between €35-billion and €40-billion, the bank is unwilling to take the 70% haircut under discussion.
It began buying these bonds in May 2010 when the eurozone debt crisis first exploded. It bought up the bonds cheaply and stands to make a profit of between €5-billion and €15-billion.
The Financial Times reported that “the bank’s resistance to accepting losses is just not principled. Agreeing to such a loss could be viewed as providing financial assistance to Greece — in violation of the European Union’s ban on central banks funding governments.” There you have it: keeping Europe on the edge — and the entire global financial system with it — is its own central bank and the rules that constrain it.
Immolation a worry for the IMF
The International Monetary Fund (IMF) is so worried about the Europeans and their inability to prevent their immolation that it has mooted doubling its financial resources from the present $387-billion to $1-trillion.
The Financial Times said it was thought that the extra funds would most likely be financed by voluntary ad hoc loans instead of mandatory conditions. That is a good thing — South Africa’s contribution is $2.6-billion and we would hardly want to double this.
The IMF’s proposal to double its firepower was no sooner mooted when a chorus of voices was shooting it down. Hugo Dixon of the Reuters blog Breakingviews wrote: “The eurozone, which is vastly richer than most of the rest of the world, should find the money to solve its own problems. It will be bystanders in the developing world that may need help if the euro blows up.”
The Financial Times‘s Wolfgang Munchau said the eurozone, which runs a current-account surplus with the rest of the world, has the financial capacity to help itself. He argued that the rules that constrained it at present were self-imposed and hence reversible.
The critics are right. The rest of the world is in no position to bail out the Europeans, whether through the IMF or any other way.
In our case we have our own bailouts to make, not least Limpopo (Julius Malema) and Swaziland (King Mswati).