Egypt's PM heads to Japan for TICAD 9 Africa development summit    National Council for Childhood reviews plan to combat child labour    Egypt's Supreme Organ Transplant Committee strengthens oversight, standards    Indian tourist arrivals to Egypt jump 18.8% in H1-2025: ministry data    African agribusiness market expected to reach $1tr by 2030    Price cuts underway across Egypt, says trade federation report    Zelenskyy seeks US security guarantees as Trump says he can 'end war now'    Israelis protest for hostage deal amid growing pressure on Netanyahu    Serbia's Vucic vows 'tough measures' against protesters after unrest    Egyptian pound down vs. US dollar at Monday's close – CBE    Egypt's FM, Palestinian PM visit Rafah crossing to review Gaza aid    Egypt delivers over 30 million health services through public hospitals in H1 2025    Egypt recovers collection of ancient artefacts from Netherlands    Egypt harvests 315,000 cubic metres of rainwater in Sinai as part of flash flood protection measures    Egypt, Namibia explore closer pharmaceutical cooperation    Fitch Ratings: ASEAN Islamic finance set to surpass $1t by 2026-end    Renowned Egyptian novelist Sonallah Ibrahim dies at 88    Egyptian, Ugandan Presidents open business forum to boost trade    Al-Sisi says any party thinking Egypt will neglect water rights is 'completely mistaken'    Egypt's Sisi warns against unilateral Nile measures, reaffirms Egypt's water security stance    Egypt's Sisi, Uganda's Museveni discuss boosting ties    Egypt, Huawei explore healthcare digital transformation cooperation    Egypt's Sisi, Sudan's Idris discuss strategic ties, stability    Egypt's govt. issues licensing controls for used cooking oil activities    Egypt to inaugurate Grand Egyptian Museum on 1 November    Egypt's Sisi: Egypt is gateway for aid to Gaza, not displacement    Greco-Roman rock-cut tombs unearthed in Egypt's Aswan    Egypt reveals heritage e-training portal    Sisi launches new support initiative for families of war, terrorism victims    Egypt expands e-ticketing to 110 heritage sites, adds self-service kiosks at Saqqara    Palm Hills Squash Open debuts with 48 international stars, $250,000 prize pool    On Sport to broadcast Pan Arab Golf Championship for Juniors and Ladies in Egypt    Golf Festival in Cairo to mark Arab Golf Federation's 50th anniversary    Germany among EU's priciest labour markets – official data    Paris Olympic gold '24 medals hit record value    A minute of silence for Egyptian sports    Russia says it's in sync with US, China, Pakistan on Taliban    It's a bit frustrating to draw at home: Real Madrid keeper after Villarreal game    Shoukry reviews with Guterres Egypt's efforts to achieve SDGs, promote human rights    Sudan says countries must cooperate on vaccines    Johnson & Johnson: Second shot boosts antibodies and protection against COVID-19    Egypt to tax bloggers, YouTubers    Egypt's FM asserts importance of stability in Libya, holding elections as scheduled    We mustn't lose touch: Muller after Bayern win in Bundesliga    Egypt records 36 new deaths from Covid-19, highest since mid June    Egypt sells $3 bln US-dollar dominated eurobonds    Gamal Hanafy's ceramic exhibition at Gezira Arts Centre is a must go    Italian Institute Director Davide Scalmani presents activities of the Cairo Institute for ITALIANA.IT platform    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



Brady bonds for the Eurozone
Published in Daily News Egypt on 08 - 10 - 2010

WASHINGTON, DC: Today's conventional view of the eurozone is that the crisis is over — the intense, often existential concern earlier this year about the common currency's future has been assuaged, and everything now is back under control.
This is completely at odds with the facts. European bond markets are again delivering a chilling message to global policymakers. With bonds of “peripheral” eurozone nations continuing to fall in value, the risk of Irish, Greek, and Portuguese sovereign defaults is higher than ever.
This comes despite the combined bailout package that the European Union, International Monetary Fund, and European Central Bank created for Greece in May, and despite the ECB's continuing program of buying peripheral EU countries' bonds. Heading into its annual meetings in a few weeks (followed by the G-20 summit in Seoul in November), the IMF is bowing to pressure to drop ever-larger sums into the EU with ever-fewer conditions.
Indeed, official rhetoric has turned once again to trying to persuade markets to ignore reality. Patrick Honohan, the governor of Ireland's central bank, has labeled the interest rates on Irish government bonds “ridiculous” (meaning ridiculously high), and IMF researchers argue that default in Ireland and Greece is “unnecessary, undesirable, and unlikely.”
This is disconcertingly reminiscent of the spring – when Jean-Claude Trichet, the ECB president, lashed out at a skeptical bond market and declared a Greek default unfathomable. But markets today think there is a 50 percent chance that Greece will default within the next five years — and a 25 pecent chance that Ireland will do so. The reason is simple: both Greece and Ireland are likely insolvent.
While the Greek fiscal fiasco is now common knowledge, Ireland's problems are deeper and less widely understood. In a nutshell: Ireland's policymakers failed to supervise their banks, and watched (or cheered) from the sidelines as a debt-fueled spending binge generated the “Celtic miracle,” whereby Ireland grew faster than all other EU members and Dublin real estate became some of the most expensive in the world.
By the end of 2008, Ireland's three main banks had lent more than three times the country's national income. The crash came in 2009, as Ireland's real estate boom turned to bust, leaving the country with large insolvent banks, a collapse in budget revenues, and Europe's largest budget deficit.
Ireland's banks financed their rapid growth by borrowing from other European banks, so the health of Europe's financial system has become entwined with the survival of these insolvent banks. It is no surprise that the ECB is now Ireland's largest creditor — through buying up its government bonds. In the latest data (through the end of August), despite being two-thirds the size, Ireland received more ECB financing than Greece — totaling 75 percent of Irish GNP and growing rapidly.
The quid pro quo for this easy ECB money is that the Irish government must protect European creditors who would otherwise face large losses. The ensuing massive bank bailout, plus continued budget deficits and declining nominal GNP, means that Ireland's debt is ballooning, while its capacity to pay has collapsed.
Investors naturally respond to unsustainable debt by selling bonds until interest rates become “ridiculous.” Those high interest rates strangle businesses and households, causing further economic collapse and making debt ever more unsustainable. To halt this downward spiral, Ireland's risk of insolvency needs to be put to rest. Either banks need to default on their senior obligations, or the government will need to default alongside the banks. In either case, new austerity measures are needed, and Ireland will require substantial bridge financing.
Irish and EU politicians should take the lead in making these tough decisions, but the current leadership will not. Instead, the EU, the ECB, and Ireland have reached a Faustian bargain that keeps Ireland liquid (i.e., it gets euros), but does nothing to halt the growing likelihood of insolvency (i.e., its increasing inability to pay back those euros in the future).
The IMF, which should be standing up to this dangerous bargain, instead plans to open the spigots (with Chinese, American, and other countries' funds) even more widely to insolvent nations. On Aug. 30, the Fund abolished ceilings on its “Flexible Credit Line” facility, which was introduced in 2009 to provide rapid funds to countries in temporary crisis.
Moreover, the IMF announced a new financing program called a “Precautionary Credit Line,” which will provide funds more quickly and with even fewer conditions — even to countries without “sound public finance” and “effective financial supervision.” The Fund is also hoping to establish a new “Global Stabilization Mechanism” to provide credit lines to regional groupings (like the EU).
A European politician heads the IMF, its board of directors is far more weighted towards Europe than is justified by Europe's economic relevance, and it is rushing to ease lending conditions to Europe just as EU members are suffering deep insolvency problems.
There is a better solution, pioneered after commercial banks in the United States loaned too much to Latin America in the 1970s. Sovereign debt was eventually restructured through the creation of “Brady bonds.” The trick was to offer banks the opportunity to swap their claims on (insolvent) Latin American countries into long-maturity, low-coupon bonds that were collateralized with US Treasuries.
The good collateral meant that banks could hold these debts at par on their balance sheets. At the same time, this swap reduced troubled countries' debt-payment obligations — allowing them to get back on their feet.
Europe could take this route. Rather than continuing to pile new debts onto bad debts, the EU stabilization fund could be used to collateralize such new par bonds. Creditors could be offered these par bonds, or a shorter-term bond with a higher coupon — but with debt principal marked down. The new bonds could be known as Trichet or Merkel/Sarkozy or Honohan bonds — whatever works to build consensus.
Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, http://BaselineScenario.com, a professor at MIT Sloan, and a senior fellow at the Peterson Institute for International Economics. Peter Boone, Chairman of Effective Intervention at the London School of Economics' Center for Economic Performance, is a principal in Salute Capital Management Ltd. This commentary is published by Daily News Egypt in collaboration with Project Syndicate, www.project-syndicate.org.


Clic here to read the story from its source.