LBS on Private Sector Involvement

With things heating up in Greece, Lorenzo Bini Smaghi today outlines his case against debt restructuring in Greece. He argues four points:

First, as I already mentioned, it would not be a way to prevent taxpayers from suffering the consequences of bad investment decisions. In our Monetary Union, given the integration of financial markets and the single monetary policy, the taxpayers of the creditor countries would suffer in any case. According to the Financial Times, for instance, a default on Greece’s debt would cost the German taxpayers alone “at least €40 billion”.

Second, this would be a way to punish patient investors, who are sticking to their investment and have not sold their bonds yet, and are confident that with the adjustment programme the country will get back on its feet. Restructuring would instead reward the investors who exited the market earlier or short-sold the sovereign bond, speculating that they would gain out of a restructuring.

Third, it would destabilise the euro area financial markets by creating incentives for short-term speculative behaviour. Given that markets are forward-looking, they would try to anticipate any difficulty faced by a sovereign by short-selling their positions, thus triggering the crisis. This would discourage investment in the euro area because of its potential volatility and perverse market dynamics.

Finally, such a measure would delay any return to the market by a sovereign, because no market participant would be willing to start reinvesting in the country for a long period if they know that this kind of investment might at some stage be penalised. This would thus discourage private sector involvement and oblige the official sector to increase its financial contribution.

These don’t strike me as very strong points.

On the first point, well yes “taxpayers” in Germany who own Greek bonds will lose out but the bonds are already trading at a huge discount to face value so, for many, the losses have already been taken and the price of the bonds factors in a restructuring.

The second point amounts to saying we should reward people who make wildly inaccurate judgments about the Greek macroeconomic situation, i.e. those who “are confident that with the adjustment programme the country will get back on its feet” should be rewarded. Should those investors who believe in Santa Claus get cheques from the EU and the IMF at Christmas?

The third point that investors would look to sell sovereign bonds of peripheral countries in anticipation of a restructuring appears to ignore that this has already happened. For example, Irish sovereign bond pricing is based on the assumption of a restructuring.

The final point, that a restructuring would delay Greece’s return to the market is debatable. Even if debt ratios stabilised over the next few years, private creditors will still see huge risks. A restructuring that restores sustainability, however, would be more likely to restore access to private bond markets.

If these are the best points the ECB have, you can see why they’re losing the argument.

57 thoughts on “LBS on Private Sector Involvement”

  1. Sadly the ECB has a more powerful argument: do it our way or watch your banking system implode.

  2. @ Karl

    As we’re all aware, i’m no fan of defaulting, but here’s how i see the always-incredible (ie not credible) LBS…

    1. Bizarre. It doesn’t actually make a lick of sense. Because German banks are state owned/backed, that automatically keeps them out of the loss impairment game? If you’d told me that in 2007 i’d have been front and centre on the nationalisation angle.

    2. Bizarre squared. This guy works in the financial markets?

    3. Fair enough on the general “destabilisation” issue, but why does he keep bringing up short selling as an issue? Again, this guy works in the financial markets, correct?

    4. Eh, again, in theory fair enough, but when does he expect, as things stand, Greece to return to a market filled with voluntary, rather than Vienna-initiative-enforced buyers?

    Seriously, this guy may be the greatest threat to any economic recovery in the periphery. He’s bizarre to the extreme.

  3. Second, this would be a way to punish patient investors, who are sticking to their investment and have not sold their bonds yet

    Oh, really – it’s based on “patience”, rather than the hope of a magical fairy paying back those debts that Greece won’t be able to? How much would they get for their bonds right now?

  4. “Second, this would be a way to punish patient investors, who are sticking to their investment and have not sold their bonds yet, and are confident that with the adjustment programme the country will get back on its feet. Restructuring would instead reward the investors who exited the market earlier or short-sold the sovereign bond, speculating that they would gain out of a restructuring.”

    What a load of specious nonsense. Are investors now to be triaged by length of time an investment is held (with their motives for so doing to be imputed to them by policymakers) and then judged worthy or unworthy by this criterion? Will there be penalty clauses invoked against “speculators” who purchased Greek bonds at record high yields in the recent past in the hopes of just such a fudge as appears likely?

    Mind you, the ECB are only blow-ins, there barely a year in Greek bonds. They don’t compare with, oh, Depfa in terms of long-term “commitment” to the Greek market. Or Commerzbank, or Dexia, or Credit Agricole, or Deutsche, or SocGen…

  5. Remind me why we’re so bothered about Dr. L B-S’s ventings? Surely this is just part of the smoke screen being laid down while the political fudge for Greece – with a sufficient (and Karlsruhe-proof) legal layer – is being concocted. And, whatever might emerge for Greece, it’s unlikely to have much of a read-across to Ireland – given the different natures of the problems.

  6. First they came for Patrick Neary
    Then they came for Eugene Sheehy
    they they came for Brian Lenihan
    Afterwards they came for Brian Cowen
    Now they are coming for Lorenzo.

  7. Some of these are good arguments …. against the earlier bailouts, since the private creditors who already exited were essentially selling to the official creditors.

  8. @Karl Whelan – “On the first point, well yes “taxpayers” in Germany who own Greek bonds will lose out but the bonds are already trading at a huge discount to face value so, for many, the losses have already been taken and the price of the bonds factors in a restructuring.”

    Not so sure that this is the case. Many European (including German) banks have shown little y-o-y change on their reported holdings of Greek bonds. I’d reckon the bulk of them are sitting in hold-to-maturity books, either at cost or, more ludicrously, amortised-to-par values. There have been no signs of any write-downs from the ECB either.

    The fabled German taxpayers are remarkably quiet about the counterbalancing benefits to them of the current crisis. Germany has a mountain of debt to refinance through to end-2012 – over €400bn – and as things stand it can look forward to raising these funds at a negative real interest rate due to its perceived benchmark status in the Eurozone. Even taking nominal rates versus the rest of the E’zone (ex Greece, Portugal and Ireland) these stand way below historic spread margins.

    And, unlike pre-euro days, Germany doesn’t have the offsetting problem of a strong currency to damage its exports (at least, not within the Eurozone).

  9. @ Paul Hunt

    “Remind me why we’re so bothered about Dr. L B-S’s ventings?”

    Because no objection is tacit acceptance.

    And Lorenzo Bini Smaghi is a member of the ECB’s executive board.

  10. @ Paul Hunt
    Agree. As I said on another thread, this is a carefully stage managed event that may be scuppered by the ratings agencies. Soft default will be regarded as a credit event with consequent downgrades for all the issuer bonds.
    Or will Tim lean on S&P?

  11. @Eoin
    “Seriously, this guy may be the greatest threat to any economic recovery in the periphery. He’s bizarre to the extreme.”
    I have to agree with you.

    Does he work in financial markets? Well, does the pope work in a brothel? No, but he has a lot to say about sex. Brother LBS is, one suspects, of a similarly theological bent. Ah, a quick dash at his CV tends to confirm http://www.ecb.int/ecb/orga/decisions/html/cvbinismaghi.en.html . How far can you go father? Well, further than that my son…

    Of all his points, the short-selling one is the most bizarre, IMO:
    “they would try to anticipate any difficulty faced by a sovereign by short-selling their positions”
    People would short-sell their own bonds? Really? They would bake in a loss to, eh, prevent a loss? It is an incredible statement to make.

  12. “Second, this would be a way to punish patient investors, who are sticking to their investment and have not sold their bonds yet”

    patient = naive, dim, badly advised

    ie just the sort of people who it is in the best interests of society to NOT be allocating capital.

    Why is it so important to reward failure?

  13. Lorenzo’s snake oil!
    He states (and gives some references from 2003 and 1993) “Empirical evidence also shows that private investors are likely to penalise a country which has a history of restructuring and to demand higher risk premia”
    Well, does it? Does it really?
    http://bit.ly/iM8ZvO gives some more recent references. In particular there is a 2008 paper that seems to say quite the opposite in fact. And then there is a Rabo paper.
    Worth thinking about

  14. The nub of the matter is where LBS says:

    “Second, this would be a way to punish patient investors, who are sticking to their investment and have not sold their bonds yet, and are confident that with the adjustment programme the country will get back on its feet. Restructuring would instead reward the investors who exited the market earlier or short-sold the sovereign bond, speculating that they would gain out of a restructuring.”

    As I posted elsewhere, this is essentially a battle between two sets of investors (gamblers). One set will win mega-billions. One set will lose mega-billions. It is a question of which will crack first. Simple as that. Apart from a few academics of noble intent and deep sincerity, all the high-minded philosophical discussion on here is simply a smokescreen to cover up the fact that most people involved in the debate have a vested interest. I have not hidden the fact that I belong (in a very small way) to the first set of investors that LBS refers to. If LBS’s view prevails, my investment (gamble) will have paid off handsomely. Most of the flak LBS is getting here comes from people who belong to the second set. They should be open and honest about it. Quite simply, if LBS’s view prevails, their gamble on Ireland defaulting/devaluing will have come a cropper. No wonder they hate him.

  15. JtO – I think I will most likely lose my job, and savings, if Ireland defaults. I simultaneously think that, if LBS isn’t an idiot, he’ll do til the idiot gets here (assuming he actually believes what he’s saying).

  16. JtO is having another “bond buying” moment. As he was forced to admit on another thread, he did not, in fact, purchase Irish Sovereign Bonds in 2007. Similarly, its fairly certain that he doesn’t own any Greek bonds either.

  17. On interest rate premia, I believe a 2-3% premium over previous lowest levels often results after an arranged default after a gap of at least two years (a vague memory from a couple of years ago, so apologies if it is inexact).

    Given the elevated levels of current Greek bonds, one wonders what a new issue could be priced at, even assuming there was no budget deficit. The existing debt load would surely attract a penal interest rate of at least 2-3%. Not every country is Japan. An increase in interest rates of this level over, say, bunds would surely be unaffordable given the current debt load. So which would be the more damning for future growth? I think it is pretty clear?

  18. Excellent points Mr Whelan. That LBS is a front runner to replace Trichet is really frightening. His arguments display his ignorance of finance, or else intellectual dishonesty (or both).

    The fact that private banks have not already marked sovereign debt to realistic values is proof of their continuing and endless corruption. LBS seems not to realize that default is really just a resolution mechanism both in the public and private sector when debt levels reach extremes. It’s the most efficient course of action in that circumstance.

    As for punishing short term speculators, all investors are speculators. For a living I trade derivatives that expire in 30-60 days. Is this somehow immoral? Should I get a reprimand for my impatience? Should I instead buy sovereign debt of nations who year after year mismanage their national finances to the point of insolvency? Should I then be “patient” while the (patronizing) central bankers layer more debt on top of existing debt as a solution to insovency?

    I wouldn’t trust that guy to manage an ice-cream shop.

  19. @DOD
    Interesting analysis. The moral of the story….don’t perform on the plan and the EU et al will give you more money which you may never be able to repay.
    Little old Ire could get another 75 b if we failed to meet targets on the basis of the purported Greek deal. Moral hazard my rear end.

  20. Moreover, it is an entirely circular argument to say that Greek should not restructure lest it prove the “patient” investors to have been wrong. These investors’ confidence in the austerity measures saving Greece from default may or may not be misplaced: we will have to await events as they unfold. To suggest, however, that a desire to vindicate these investors confidence is in itself a reason not to restructure is absurd.

  21. New York Times on LBS & Conflict of .. er .. Interest!

    ‘German and French banks are the biggest holders of Greek government debt, according to data released Monday by the Bank for International Settlements in Basel, Switzerland. German banks held $22.7 billion of Greek government debt at the end of December, while French banks held $15 billion.

    Mr. Bini Smaghi said a default would reward speculators who have bet on Greece’s failure, while punishing investors who have supported the country.

    The E.C.B. would itself suffer if Greece defaulted, because since last year it has bought the country’s debt to stabilize bond markets. The bank owns bonds valued at €75 billion from Greece, Ireland, Portugal and possibly other countries.

    But the E.C.B.’s exposure is greater than that because it also accepts the bonds from banks in the euro area as collateral for loans carrying an interest rate of 1.25 percent.

    On Monday, a British research organization, Open Europe, estimated that the E.C.B.’s total exposure to the Greek government and Greek banks at €190 billion.

    Critics say that the E.C.B.’s credibility has suffered because its stake in Greek debt creates a conflict of interest.’

    http://www.nytimes.com/2011/06/07/business/global/07euro.html?ref=global-home

  22. @gadge

    Its fairly certain that he doesn’t own any Greek bonds either

    JTO again:

    Its more than fairly certain. Its absolutely certain. I don’t own any Greek bonds. I never said that I did.

    What I have is my money invested in Ireland. I don’t actually know the precise make-up of the portfolio the bank has invested it in, any more than Wayne Rooney knows the chemical composition of the strands of hair in the hair transplant he got done this weekend. And I don’t care. Like Wayne, I am only interested in the end result, or bottom line. I have no idea as to whether LBS is the fount of all wisdom or not. My take on LBS is quite simple: if his view prevails, my investment pays off – if it doesn’t, I take a big hit. I am merely asking others to be equally forthcoming.

    @aiman

    if LBS isn’t an idiot, he’ll do til the idiot gets here

    JTO again:

    For an ‘idiot’, he seems to have a lot of qualifications and articles to his credit.

    Lorenzo Bini Smaghi
    Date of birth: 29 November 1956
    Place of birth: Florence, Italy Education 1974
    Baccalauréat, Lycée Français de Bruxelles 1978
    Licence en Sciences Economiques, Université Catholique de Louvain 1980
    MA in Economics, University of Southern California 1988
    PhD in Economics, University of Chicago
    Professional career 1982
    Summer Internship, Central Banking Department, International Monetary Fund, Washington D.C. 1983 – 1988
    Economist, International Section, Research Department, Banca d’Italia
    1988 – 1994
    Head of Exchange Rate and International Trade Division, Research Department, Banca d’Italia 1994 – 1998
    Head of Policy Division, European Monetary Institute, Frankfurt 1998
    Deputy Director General for Research, European Central Bank, Frankfurt
    1998 – May 2005
    Director General for International Financial Relations, Italian Ministry of the Economy and Finance
    Since June 2005
    Member of the Executive Board, European Central Bank
    back to top

    Other posts
    ■Vice-President of the Economic and Financial Committee of the EU (2003 – May 2005)
    ■Chairman of the Committee on Financial Markets of the OECD (2003 – June 2005)
    ■President of SACE S.p.A. (Italian Export Credit Agency) (2001 – May 2005)
    ■Member of the Boards of the EIB; Finmeccanica S.p.A; MTS S.p.A (2001 – May 2005)
    ■Chairman of Working Party No. 3 of the OECD (2005 – April 2008)
    ■G7 Deputy (since 2001)
    ■President of Fondazione Palazzo Strozzi, Florence
    ■President of University of Chicago Alumni – Italian chapter
    back to top

    Decorations
    Italy: Grande Ufficiale al Merito della Repubblica Italiana (2006)
    back to top
    Publications
    Author of several articles and books on international and European monetary and financial issues, including:

    back to top
    Books:
    L’Euro, Il Mulino, Bologna, 1998 (Third Edition: 2001)
    Open Issues in European Central Banking, Macmillan, London, 2000 (with D. Gros)
    Chi Ci Salva dalla Prossima Crisi Finanziaria?, Il Mulino, Bologna, 2000
    Il paradosso dell’euro, Rizzoli, Milano, 2008
    back to top
    Articles:
    “The Effectiveness of Monetary Policy: An Empirical Investigation for Italy (1966-1981)”, Giornale degli Economisti e Annali di Economia, pp. 679-690, September-October 1983 (with P. Tardini)
    “Have Exchange Rates Varied Too Much With Respect To Market Fundamentals?”, Giornale degli Economisti e Annali di Economia, pp. 45-54, January-February 1985
    “Dinamica dei Tassi di Cambio e Interventi”, Giornale degli Economisti e Annali di Economia, pp. 619-638, November-December 1985
    “Politica Fiscale, Debito Estero degli Stati Uniti e Tasso di Cambio del Dollaro”, Quaderni Sardi di Economia, no. 2/3, pp. 225-240, 1986
    “La Bilancia dei Pagamenti degli Stati Uniti e il Tasso di Cambio del Dollaro”, Temi di Discussione, no. 58, Banca d’Italia, January 1986
    “Le Tensioni Commerciali nello SME; il Ruolo delle Politiche di Cambio e della Convergenza Economica”, Contributi all’Analisi Economica, no. 2, pp. 7-67, Banca d’Italia, December 1986 (with S. Vona)
    “La Rivoluzione della Nuova Macroeconomia”, Quaderni Sardi di Economia, no. 1/2, pp. 15-28, 1987
    “Economic Growth and Exchange Rates in the European Monetary System: Their Trade Effects in a Changing External Environment” in The European Monetary System, edited by F. Giavazzi, S. Micossi and M. Miller, Cambridge University Press, London, 1988 (with S. Vona)
    “The Effects of Economic Convergence and Competitiveness on Trade among the EMS Countries” in Macroeconomic Policy and Economic Interdependence, edited by D. Hodgman and G. Woods, McMillan, London, 1988 (with S. Vona)
    “La Coesione dello SME e il Ruolo dei Fattori Esterni: un’Analisi in Termini di Commercio Estero”, Giornale degli Economisti e Annali di Economia, pp. 1-44, January-February 1988 (with S. Vona)
    “Target Zones vs. Real Exchange Rate Rules: Comparative Dynamics”, European Journal of Political Economy, vol. 5, pp. 501-517, 1989
    “Fiscal Prerequisites for Further Monetary Convergence in the EMS”, BNL Quarterly Review, no. 169, pp. 165-190, June 1989
    “Managing Exchange Markets in the EMS with Free Capital”, BNL Quarterly Review, no. 171, pp. 395-530, December 1989 (with S. Micossi)
    “Il Ruolo delle Esportazioni nel Processo di Crescita e Aggiustamento dei PVS” in Il Difficile Sentiero del Riequilibrio: L’Economia Internazionale negli Anni Ottanta, edited by S. Micossi e S. Vona, Il Mulino, Bologna, 1990 (with D. Porciani and L. Tornetta)
    “Le Esportazioni dai Paesi in Via di Sviluppo”, Politica Internazionale no. 1/2, pp. 101-121, 1990 (with D. Porciani and L. Tornetta)
    “Monetary and Exchange Rate Policy in the EMS with Free Capital” in The European Monetary System in the 1990s, edited by P. De Grauwe and L. Papademos, Longman, London, pp. 120-155, 1990 (with S. Micossi)
    “Progressing towards European Monetary Unification: Selected Issues and Proposals”, Temi di Discussione, no. 133, Banca d’Italia, March 1990
    “L’Unione Economica e Monetaria: il Dibattito delle Idee”, Impresa e Banca, pp. 18-22, September 1990
    “From the Werner Report to the Rome Intergovernmental Conference: the Long Road towards European Monetary Unification”, ECU Newsletter, pp. 5-7, October 1990
    “Concorrenza, Egemonia e Unificazione Monetaria”, Politica Economica, vol. VI, no. 3, December 1990 (with S. Vori)
    “Liberalizzazione Valutaria e Apprezzamento del Cambio: Ma è’ Veramente un Paradosso?”, Quaderni Sardi di Economia, no. 1/2, 1991
    “Exchange Rate Variability and International Trade: Why is it so Difficult to Find any Empirical Relationship?” Applied Economics, vol. 23, pp. 927-936, 1991
    “Monetary Institutions and Monetary Sovereignty in the EMU” in A Currency for Europe, edited by J. Driffil and M. Beber, Lothian Foundation Press, London, 1991
    “Institutional Developments toward a Single European Monetary Policy”, Greek Economic Review, vol. 3, no. 2. pp. 173-200, December 1991
    “Rating the EC as an Optimal Currency Area: Is it Worse than the US?” in Finance and the International Economy no. 6. The Amex Bank Review Price Essays, edited by R. O’ Brian, Oxford University Press, 1992 (with S. Vori)
    “Exchange Rate Dynamics and Capital Mobility”, Economic Notes, vol. 21, no. 1, 1992
    “Waiting for EMU: Living with Monetary Policy Asymmetries in the EMS”, Temi di Discussione, no. 168 Banca d’Italia, April 1992
    “Istituzioni Politiche e Debito Pubblico: un Commento, Teoria Economica e Analisi delle Istituzioni, edited by R. Artoni, Il Mulino, Bologna, 1993
    “Discussion on Economic and Monetary Union: Critical Notes on the Maastricht Treaty” in Adjustment and growth in the European Monetary Union, edited by F. Torres and F. Giavazzi, Cambridge University Press, Cambridge, pp. 28-36, 1993
    “Is there a Triffin Dilemma for the EMS?”, Open Economies Review, vol. 4, no. 2, pp. 175-188, 1993, (with S. Vori)
    “L’Unione Economica e Monetaria”, Politica internazionale, no. 1, January-March 1993
    “Aree Valutarie Ottimali e Politiche di Aggiustamento” in Unione Europea e Squilibri Regionali, edited by D. Pettenati, Il Mulino, Bologna, 1994
    “Monetary Stability, A Pre-condition for Economic Stability in the European Union”, ECU Activities, pp. 47-50, 1994
    “The Transition to EMU in the Maastricht Treaty”, Princeton Essays in International Finance, no. 194, 1994 (with T. Padoa-Schioppa and F. Papadia)
    “EMS Discipline: Did It Contribute to Inflation Convergence?”, BNL Quarterly Review, June 1994
    “The 1992-93 EMS Crisis: Assessing the Macroeconomic Costs” in European currency crises and after, edited by C. Bordes, E. Girardin and J. Melitz, Manchester University Press, Manchester, pp. 28-52, 1995 (with O. Tristani)
    “Convergence of Inflation: A Necessary Prerequisite for EMU?” in Open Economies Review, vol. 7, pp. 117-126, 1996 (with P. Del Giovane)
    “Convergence of Inflation and Interest Rates Prior to EMU: An Empirical Analysis”, Journal of Policy Modeling, vol. 18, no. 4, pp.377-395, 1996 (with P. Del Giovane)
    “L’Unione Monetaria e’ Unione Politica” in Il Mulino, no. 373, pp. 944-950, September-October 1997
    “The Democratic Accountability of the European Central Bank”, BNL Quarterly Review, June 1998
    “Financial Stability”, Kredit und Kapital, 2000 (with D. Gros)
    “Monetary and Fiscal Policy Co-operation: Institutions and Procedures in EMU”, Journal of Common Market Studies, vol. 38, no. 3, pp.375-391, September 2000 (with C. Casini)
    “Towards a Truly European Financial Market”, The International Spectator, vol. XXXV, no. 4, pp. 21-25, October-December 2000
    “Euro”, Iter Treccani (Scuola cultura società), anno IV, no. 13, pp.14-18, October-December 2001
    “Why Enlarge the EU? A Look at the Macroeconomic Implications”, The International Spectator, vol. XXXVII, no. 2, pp. 51-63, April-June 2002
    “Fiscal Discipline and Policy Coordination in the Eurozone” in Budgetary Policy in EMU: Design and Policy Challenges, The Hague, Ministry of Finance, May 2002
    “How to Improve Economic Governance. The Coordination of Macroeconomic Policies in Europe”, Aspen European Dialogue, February 2003 (with G. Tabellini)
    “The Governance of the International Financial System” in The Future of the International Monetary System, edited by M. Uzan, Elgar, 2004
    “The G8’s role in Promoting Financial Stability” in The G8, The United Nations and Conflict Prevention, edited by J. Kirton and R. Stefanova, Ashgate Publishing, pp. 143-156, 2004
    “A Single European Seat in the IMF?” Journal of Common Market Studies, vol. 42, no. 2, pp. 229-248, June 2004
    “What Went Wrong with the Stability and Growth Pact?” in Monetary Union in Europe – Historical Perspectives and Prospects for the Future, edited by P.B. Sørensen, DJOF Publishing, Copenhagen, 2004
    “IMF Governance and the Political Economy of a Consolidated European Seat”, in E. M. Truman (ed.), Reforming the IMF for the 21st Century. Special Report 19. Institute for International Economics, Washington D.C., April 2006, pp. 233-255
    “Powerless Europe. Why is the Euro Area Still a Political Dwarf”, International Finance 9:2, 2006, pp. 261-279
    “Economic Forecasting and Monetary Policy”, 80 Years of Business Cycle Studies at DIW Berlin, Vierteljahrshefte zur Wirtschaftsforschung. 75. Jahrgang, Heft 2/2006, Duncker & Humblot Berlin, 2006, pp. 54-64
    “Revisiting the European Monetary System Experience: Were Some Members More Equal than Others?” in Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 35, no. 2, 2006, pp. 151-171 (with Giovanni Ferri)
    “Global Imbalances and Monetary Policy” in Journal of Policy Modeling, 29, 2007, pp. 711-727
    “Independence and Accountability in Supervision: General Principles and European Setting” in Designing Financial Supervision Institutions, edited by Donato Masciandaro and Marc Quintyn, Elgar, 2007, pp. 41-62
    “Real and Nominal Convergence: Policy Challenges in a Monetary Union”, in Currency and Competitiveness in Europe, edited by K. Liebscher, J. Christl, P. Mooslechner, and D. Ritzberger-Grünwald, Elgar, 2008, pp. 181-194
    “Real Convergence in Central, Eastern and South-Eastern Europe: a Central Banker’s View”, in Real Convergence in Central, Eastern and South-Eastern Europe, edited by R. Martin and A. Winkler, Palgrave Macmillan, 2009, pp. 11-20
    “Conflicts of Interest and the Financial Crisis”, International Finance, 12:1, 2009, pp. 93-106
    “The Internationalisation of Currencies – A Central Banking Perspective”, in The Euro at Ten: the Next Global Currency?, edited by J. Pisani-Ferry and A. Posen, 2009, pp. 23-31
    “Inflation and Deflation Risks: How to Recognize Them? How to Avoid Them?” in Global Crisis and Long Term Growth: A New Capitalism Ahead?, edited by Luigi Paganetto, McGraw Hill, 2010, pp. 69-77

  23. It seems to me that John the optimist is using that old saw the argument from authority
    it doesn’t really matter how many degrees, publications, or other such bobbles Lorenzo has. The issue is whether not what is saying now makes sense.

  24. @JtO – all of which qualifications make his idiocy even more reprehensible if (as I qualified but you ignored) he believes what he said.

  25. @Ceteris paribus

    Yes – crazy. ECB will simply keep loading and loading and loading debt ……. in vain hope that Deauville in 2013 will somehow sort itself out. The consequences of this ‘policy’ locally will be devastating ……..

    Europe is not presently democratic – ECB is acting as feudal overlord. An illusion of democracy – and becoming more apparent locally by the week …

  26. I am reading all this a little differently than other commentators.

    In my view the meat of the article is in the conclusion. Mr Bini Smaghi started with the conclusion and worked back from there–using his own peculiar brand of logic.

    The only way to protect taxpayers in “virtuous” countries is to avoid over-indebted countries from easily getting away with not repaying their debts; the payment of debts should be enforced, through sanctions if need be. When countries go off track they can receive financial assistance only in exchange for strict adjustment programmes, including asset sales, which allow these countries to remain solvent. Respect for contracts is the one of the key principles underlying the market economy. It is also the basis of monetary union between sovereign countries.

    And there you have it. Pay up or you are out. The rest was just a reminder of nasty a regime we are dealing with.
    Not just out. Kicked out. Not just kicked out. Forcibly impoverished post exit.

    And one other point slipped in just in case anybody thought PSI was a good idea for banks. We don’t do PSI for banks. They are an ECB protected species, protected at the expense of taxpayers.

    I would define private sector involvement (PSI), for the purpose of this discussion, as intentional efforts and contributions, formal or informal, undertaken in a context of sovereign financial distress.

    The key word here is sovereign.

    How to deal with the ECB?

    We should all have learned the lesson in the school yard.

    There is only one way to deal with a bully.

  27. @JTO I’m not sure, one of the reasons I follow this blog is the discussion often avoids the Irish obsession with talking heads pushing a self interested and questionable (but eye-catching) perspective.

    And one of the reasons I despair at LBS is his arguments are exactly this kind of self interested nonsense, going to bat for the sinking ECB.

  28. “However, experience has shown that when a country requests such assistance, the national authorities tend to blame European institutions, including the ECB, for having pushed them to do so.”

    Really? And presumably there’s no truth to that Ireland’s case at all at all.

    He’s some chancer this fella.

  29. @JTO

    Thank you for what appears at first glance to a laudatory list of accomplishments of Mr Bini Smaghi.

    But lets look at the relevant period 1998-2011.

    Head of Policy Division, European Monetary Institute, Frankfurt 1998.

    Deputy Director General for Research, European Central Bank, Frankfurt
    1998 – May 2005.

    Director General for International Financial Relations, Italian Ministry of the Economy and Finance.

    Since June 2005
    Member of the Executive Board, European Central Bank

    It seems to me that in those positions Mr BS had a considerable degree of influence over the policies, the design and the workings of the euro and workings of the ECB.

    One wonders why it has all gone so wrong.

  30. @Karl Whelan

    Sensible people will agree that LBS’s arguments are weak. But are you sure he is really “losing the argument” in the sense that matters most — is the ECB retreating? I’ve seen no indication of that, but I’d appreciate a pointer if I’ve missed something.

  31. These ECB guys live in their own fantasy world. It’s like listening to statements from the old Soviet Propaganda Bureau with these guys.

    Actually, Bini Smaghi reminds me a lot of Lysenko, and the famines his ill-advised advocacy caused during the 1930s. Like Lysenko, Smaghi’s attitudes and comments would be harmless and amusing if he wasn’t in a position of such influence. As it is, he and men like him are well on their way to destroying the economic system of an entire continent.

  32. @ Karl Whelan
    What do expect. He is from bunga bungaland masked with some arty farty Florentine intellectual self regard. Soon to be Governor of that strange institution, the bank of Italy. Banco Ambrosiano anyone?

  33. @Omf
    I think you are right. It is time to look at The Bankers who Broke the World -Lords of Finance again. Might get some insights into the next stage of this fiasco.

  34. @OMF

    Actually, Bini Smaghi reminds me a lot of Lysenko, and the famines his ill-advised advocacy caused during the 1930s. Like Lysenko, Smaghi’s attitudes and comments would be harmless and amusing if he wasn’t in a position of such influence. As it is, he and men like him are well on their way to destroying the economic system of an entire continent.

    Excellent analogy of the ECB economic philosophy and experimentation, promulgated by Bini Smaghi.

  35. @ All

    I would suggest that LBS, on behalf of the ECB, is trying to win the argument with German public opinion against the “realists” in the German government who could contemplate with equanimity (i) a default by Greece followed by (ii) that country’s ejection from the euro while blithely ignoring all the economic and political consequences that this might imply. How can the following sentence be interpreted in any other way?

    “The only way to protect taxpayers in “virtuous” countries is to avoid over-indebted countries from easily getting away with not repaying their debts; the payment of debts should be enforced, through sanctions if need be”.

    The message for Ireland is also unmistakable.

    A game of very high stakes political poker is being played not just in Europe but internationally and “institutional” Europe will win because of a simple fact: those squabbling German politicians and associated advisers in the CDU and the FDP (with Sarkozy and his entourage being dragged along behind) have lost the confidence of their own electorate. This is a lucky break for Ireland as the alternative, as Dan O’Brien pointed out in a recent piece in the IT, is not that attractive. Ask the Icelanders!

    http://www.irishtimes.com/newspaper/opinion/2011/0604/1224298387313.html

    This is not just a game of two halves, it is a game of 17 players in Division 1 and 8, for the moment, in Division 2 with one large player in the latter intending to stay there. It is up to the Irish people to decide whether or not they wish to avoid relegation.

  36. Gazing to long into the Abyss of Lorenzo may be bad for the soul. Some of the criticisms are becoming a tad personal. Let me draw attention to a related issue. It’s not off-topic if you think about it. In a comment on a column by Robert Kuttner, Paul Krugman draws attention to something that’s been bothering me for a while. Kuttner and Krugman are discussing deflation in the US, but what they have to say applies mutatis mutandis to the EU and debt forgiveness. I also recall Brendan Walsh making a somewhat similar complaint about “rentier sensibilities” during the 1992-93 currency crisis. Anyway here’s the key part of Krugman’s comment:

    What explains this opposition to any and all attempts to mitigate the economic disaster? I can think of a number of causes, but Kuttner makes a very good point: everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff. Deflation is hell for workers and business owners, but it’s heaven for creditors.

    The thing is though, even for creditors deflation has a serious downside. Yes, it’s nice that the real value of my financial asset goes up as the price level falls. But if the end result is that my debtor goes bust, my asset becomes virtually worthless. All too many creditors seem to have lost sight of this fundamental point, both in Europe and in America.

  37. @ DOCM

    “This is not just a game of two halves, it is a game of 17 players in Division 1 and 10, for the moment, in Division 2 with one large player in the latter intending to stay there. It is up to the Irish people to decide whether or not they wish to avoid relegation.”

    Lost me there. It is a game of two halves, played between, or in two, er, unequal divisions of players (teams?), in which there is a promotion/relegation systems that is, um, decidable by the citizens. Ronaldo (the Brazilian one) is capable of deciding for himself where he plays. And Ireland is in the top division at the moment. Is that it?

  38. Again more heat then light …. I admit I feel better with myself when I vent my spleen but what does it achieve ?
    The ECB probably look on us as a Financial Hadrian’s wall – useful but in the end a construct / asset thats looking a bit stretched from a supply perspective.
    The absurdities of the monetarist world is indeed frightfully complicated.

    But perhaps the Pict’s of the modern world live in a formerly classical country on their south eastern flank………………
    It just does not feel right to be such wimps – it seems we have become Romanised to the point of uselessness.
    http://www.youtube.com/watch?v=Hz3OKvt1f78

  39. it seems to me that lorenzo and his fellow ECB board members are up to their eyeballs in holdings of peripherial countries sovereigne bonds and bank exposures that their main focus is to save their own position and the protection of the core eurozone countries which is why they are absolutly against restructuring debt as they will take a substantialy large hit that will ask a lot of questions about the ECB board decisions and policy over the last few years by the core

    meanwhile every euro to be repaid by the troubled countries next step asset stripping of Greece soon to be Portugal and Ireland

  40. @ Gavin Kostick

    Pleased to explain.

    First half, Ireland, in Division 1 by accident rather than design, threatens to default and leave the pitch. Second half, after serious discussion in the dressing room (not on this blog), matter reconsidered and Ireland decides to stay the course and on the pitch. Siren voices from Division 2 to join are ignored.

    If you do not know the difference between the two divisions (those countries in the euro and those not), I am afraid that you need to bone up a little on Europe.

  41. @ Karl Whelan

    “However, experience has shown that when a country requests such assistance, the national authorities tend to blame European institutions, including the ECB, for having pushed them to do so.”

    Well, if in seeking EU support the country knows that it will face punitive interest rates, then the country will delay seeking such support for as long as it can.

    “im stunned at the suggested 6.7%. I will spend today getting ridiculously drunk and may comment on this tomorrow. Maybe. Massive amounts of confusion and anger swilling through me right now…” – Bond. Eoin Bond…

  42. If Greece is going to default, Ireland and Portugal will too and the rest of Europe will be in a frightful mess .This irrespective of what M. Lorenzo Bini Smaghi thinks or says.

  43. @Kevin Donoghue
    “The thing is though, even for creditors deflation has a serious downside. Yes, it’s nice that the real value of my financial asset goes up as the price level falls. But if the end result is that my debtor goes bust, my asset becomes virtually worthless. All too many creditors seem to have lost sight of this fundamental point, both in Europe and in America.”
    Indeed and I think it is a strawman that Mr. Krugman has created. The real reason for deflation is that wages have been stagnant for many people for a long time. The rich have gotten richer and will continue to do so despite inflation. Inflation doesn’t give much to ‘ordinary’ people. Ordinary people do better out of deflation. Their small savings go a bit further, their wages drop less than the prices they pay. They are, generally, more debt averse than the well off (60% of properties in Ireland have no mortgage).

    It is the rentiers who don’t like deflation; as you say, they are likely to be unpaid and look at where rents have gone…

  44. @Joseph Ryan
    Quoting the fool on the hill:
    “Respect for contracts is the one of the key principles underlying the market economy. It is also the basis of monetary union between sovereign countries. ”
    So repect for financial contracts trumps the membership contract of membership of the euro or the EU?

    I’ve just eaten, so forgive me for not reading the full LBS piece(s). Taking pot-shots at the bits quoted here is giving me enough indigestion. Time for a dried frog pill.

  45. @ DOCM

    Thanks for the clarification.

    “If you do not know the difference between the two divisions (those countries in the euro and those not), I am afraid that you need to bone up a little on Europe.”

    I can accept being patronised by commentators who have kindness, have great economic insight, have persuasive metaphorical capacity, and/or have a comprehensive command of stastitical data. But not by commentators who show little of the first three, nor the ability to tell 8 from ten. And particularly when the commentater’s initial mistake is tactfully ignored.

  46. @Karl

    “On the first point, well yes “taxpayers” in Germany who own Greek bonds will lose out but the bonds are already trading at a huge discount to face value so, for many, the losses have already been taken and the price of the bonds factors in a restructuring.”

    If Ireland was to pay all of the coupons due on its paper and return the principal on maturity then what the market is currently pricing in today would be wrong. So to assume current holders of Irish debt have already taken pain because of where the bond is currently trading seems a bit disingenuous. Although they’ve probably suffered quite a lot emotionally!

  47. It is time for a bold statement.

    Everyone talking about the merits or otherwise of Lorenzo Bini Smaghi ‘s arguments is making a number of different mistakes, brought on in most cases by an excess of expertise and a dangerous amount of good faith. Others here are engaged in the same game as Mr Bini Smaghi – trying to distract our attention from the ECB’s and current EU establishment interests to wider questions of political philosophy and the apportioning of blame for the latest and greatest crisis of capitalism.

    Here are the four mistakes of the Smaghiologist, in ascending order of importance:

    (1) Assuming that LBS is seriously trying to explain how he thinks the economy of the EU works or what the consequences of any policy changes would be.
    (2) Spending time discussing any of the arguments LBS makes as if (1) were true.
    (3) Not immediately trying to establish why LBS is currently barking – is it a distraction, is it a threat or is he trying to divide or confuse the opposition?
    (4) Not trying to establish which set of financial and political interests LBS actually represents.

    Kevin Donoghue refered above to Saint Krugman’s argument about “rentier sensibilities” and this is the right argument to be having. There are sets of interests here, and though some intersect (a sudden collapse of the Euro hurts all the actors) some of them are directly opposed (transparent financial structures versus internationally competitive banks).

    I have always believed that LBS represents the investing classes of the EU (which includes but is not restricted to rentiers) and that he sees all other interests (unemployment, health, national sovereignty, democratic accountability, whatever) as secondary to ensuring that speculation remains, on average, a winning game. When deflation and austerity are required as now, it is those policies that we get. When in the early noughties loser monetary policy was required we got that instead.

    Sadly, for speculators as a group to always come out on top, someone has to pay when it all goes wrong – and it always goes wrong.

    Enter the newborn Irish citizen.

  48. ‘SPIEGEL reported in May that the ECB and, especially, its member national central banks don’t scrupulously examine the securities submitted by European banks. This has resulted in junk bonds worth hundreds of billions of euros on their balance sheets.

    “These errors were reviewed and corrected,” Irish Central Bank Governor Patrick Honohan told the Reuters news agency in response to the report. The reaction of the ECB was also strangely muted. What else can it do? It can’t deny the risks. If banks go bankrupt and their collateral isn’t sufficient to cover their debts, the central banks will have to cover the losses. And if the central banks’ reserves are lacking, then taxpayers will have to pick up the tab.

    Turning a Blind Eye

    The dimensions are huge: The ECB has accepted some €480 billion ($700 billion) in so-called asset-backed securities (ABS), and it has an additional €360 billion in “non-marketable financial instruments” on its books.’

    http://www.spiegel.de/international/europe/0,1518,766856,00.html#ref=nlint

  49. When I used the phrase loser monetary policy in my last posting it was an attempt to coin a new Internet meme, and not a misspelling.

Comments are closed.