The news this morning isn’t great.
Month: June 2011
One of the most disgraceful decisions of the last government was its U-turn on Assistant Secretaries’ pay. Personally, I wouldn’t blame any low-paid public servant from digging in their heels on pay and conditions when people at the top benefit from this kind of special consideration.
Guess what? They’ve gotten away with it again.
Karl posted a link to yesterday’s speech by Lorenzo Bini-Smaghi. I would focus on his theme that debt restructuring is a good idea but that it should be used as a last resort, rather than pre-emptively. Some relevant quotes:
The point I would like to make is that having the private sector actively involved in preventing and resolving sovereign crises is a good idea.
and later
This is why such restructuring should only be the last resort, i.e. when it is clear that the debtor country cannot repay its debts.
and
Where is the problem? The problem emerges when debt restructuring is carried out not as the last resort but as a preventive tool, even becoming a precondition for receiving (or providing) financial assistance, a point mentioned in some official circles since mid-October 2010. Debt restructuring would be a way to tackle not only dramatic cases of insolvency but also any difficulties countries face in accessing the financial markets.
Accordingly, the speech usefully boils down the argument to its essence – at what point should policymakers insist on private-sector burden sharing vis-a-vis sovereign debt? LBS provides reasons to argue that it is too early to close off other options; others will judge that it is better to eliminate the debt overhang now.
For something a bit different, Charlie Rose hosts an interesting round table discussion on the U.S. economy with David Walker, Jared Bernstein, Paul Krugman and Kenneth Rogoff. See here (36:38 minutes; click on the picture).
Update: Readers might also find interesting this NYT op-ed by recent Nobel winner Peter Diamond on the withdrawal of his nomination for the Board of Governors of the Federal Reserve.
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.