To defuse the financial crisis that threatens to affect the Eurozone, due to the sovereign debts accumulated by the weaker partners of the Eurozone, it will be necessary to resort to the reissue of the "Brady bonds", which in the XNUMXs made it possible to absorb the debt of the South American countries . First, however, the European Stability Facility, conceived as a euro-saving vehicle, must also be allowed to intervene on the secondary market for government issues, in support of weaker partners. This is the diagnosis-proposal of Mario Noera, president of AIAF (Italian Association of Financial Analysts), which does not hide the main difficulty: "Germany, together with the countries closest to its monetary policy, has so far rejected this solution that tastes like a rescue. A legitimate accusation, but I see no alternative”.
Noera reached this conclusion after long reflections, well before the precipitation of the crisis of recent days: of the Greek crisis, aggravated by Norway's refusal to lend more money to Athens; S&P's warning on Italy, grappling with an increasingly incomprehensible (and understood) political framework across the border; the outcome of the electoral consultations in Spain and in the German lands which introduced further disturbances to the mosaic of Euroland. “I like to distinguish – explains Noera, professor of Economics of intermediaries and financial markets at Bocconi – between accelerating elements and root causes. The events of recent days, including the warnings of the rating agencies or the political difficulties of the Governments, are certainly accelerators. But the underlying causes are at work". Let's try to identify these causes. “Let's start with the United States. In this case Standard & Poor's was extremely clear: the agency's warning stems from the belief that the US government is unable to take initiatives capable of reducing the imbalances in public finance. Basically, the US is at a crossroads: either an effective fiscal policy or inflation will rebalance the accounts. A solution that the USA, unique in the world, can afford”.
Let's move on to Europe. Where does the crisis come from? "In Europe,. With the birth of the euro, states with large deficits were denied the main way of monetary policy to rebalance their accounts: that is, the devaluation of the currency. In this way, countries such as Greece, Portugal or Ireland, which boast low domestic savings rates, have accumulated a growing external debt. Without, I repeat, being able to count on the relief valve of devaluation”. The result? “There is only one way left: deflation through tax increases. But it is a non-solution: to generate a growth in tax revenues sufficient to cover interest, one ends up depressing the prospects for GDP growth, or rather eliminating the possibility of generating sufficient resources from within to repay debts”. In short, a dog chasing its tail. There seems to be no solution, “the solution passes through a political choice. It is, in principle, to allow debtors to reduce their debt by lending their money at a cost close to zero. With this artifice it would be possible to reverse the trend, recreating the conditions for sustainable growth. But Germany is absolutely against solutions of this kind. On the contrary, Berlin demands that loans be made at high rates, justified by the risk". It is a tug of war that has lasted for some time: first Germany puts on a stern face, then a political process is triggered which leads to compromise solutions. Non-definitive solutions, given that for 18 months emergency conditions have been reproducing at fixed deadlines.
“It's the big difference between Europe and America. The United States possesses the weapon of devaluation and uses it with great determination. It is true that the quantitative easing 2 policy is winding down, but the liquidity injected into the system will not be withdrawn. Europe does not have this outlet. Meanwhile, due to a monetary policy that denies definitive political intervention to the benefit of structurally deficit areas, it creates the premises for a euro stronger than the dollar. Which can be useful for Germany, which has the problem of reabsorbing part of its surplus, but it is the worst condition for the weakest". And here it is worth talking about Italy. At least after the warning, “Italy has three strong points: the low level of household debt; a negligible foreign debt or in any case under control; high private wealth, equal to four times the public debt. In short, if Italy were a company, we would say that it is a well-capitalised, default-proof spa. For this reason, Italy has always been in the second row, among the possible targets of the crisis”. And yet, it seems that now we have a front row seat: why this relegation? “It is evident that the previous considerations are valid in the event of a crisis in a single country. But, if the crisis becomes systemic, the horizon changes. In the event of a euro crisis as such, all the countries in the area would be penalised. And Italy can only get a front row seat if the euro is in the crosshairs”. Anything but theoretical perspective. “For the first time, a Cerp economist has spoken in the columns of the New York Times about a possible return of Greece to the drachma. And Paul Krugman, while not sharing the results, treated the thesis very seriously. The reality is that a year ago it seemed that we were able to vaccinate ourselves against the virus of the Greek crisis. Also because, it was said, the rescue of Athens serves above all to save the big creditors, i.e. the German banks. But we limited ourselves to partial solutions with the foreseeable result that Greece ended up in recession, as well as Portugal, without therefore having the possibility to repay the new loans". In short, the cat keeps biting its tail.
It is time to proceed with a debt restructuring. Or not? “The fact is that the ECB strongly opposes the prospect of a simple restructuring of the Greek debt. For one simple reason. It was the ECB, not the governments, that lent 80 billion to Greece. And the Frankfurt bank has no intention of being the only one to take on the debt. Indeed, Jean-Claude Trichet was explicit in this regard: if you Governments take such a step, I will no longer finance the collateral of Greek banks. It is a serious threat, which is equivalent in practice to threatening to get Greece out of the euro”. It's a tough position. “But understandable. The ECB runs the risk of having to be recapitalised by governments to the detriment of the bank's independence. In any case, the situation is very delicate also because a changing of the guard is taking place in many institutions: the Strauss-Kahn affair has weakened the position of the IMF, Trichet is about to hand over the baton to Mario Draghi, in Spain and in Italy the political leadership is very weak. All of this contributes to making the search for a solution more difficult. Yet we are playing with fire because everything suggests that Europe will be the epicenter of the next crisis”. But are there no alternatives? “My opinion, purely personal, is that a solution exists, technically possible and feasible even in the short term: it is necessary to allow the EFSF, an institution financed by the Member States of the Community, to be able to intervene also on the secondary market, in support of countries risk. This would allow the ECB to get out of an awkward position while a work of soft financial recovery could be started”. How? . “ I think with interest of the experience of the Brady Bonds, commissioned by Paul Volcker in the XNUMXs to resolve the debt crisis in Latin America. The mechanism is simple: the States issue triple A bonds to be sold to the banks in exchange for Greek bonds, the latter at a discount. In this way, the items at risk, which could prove to be less toxic than expected once the recovery has begun, would be incorporated into the balance sheets of strong countries. In exchange, there would be only good paper in circulation, capable of financing the recovery”. Finally a simple proposal, even if it requires a quality: a strong and credible leadership, a rare subject in today's Europe.
