A bad bank for the Good of Europe (ver1.4draft)
Content
A proposal to ECB A BAD BANK FOR THE EUROPEAN GOOD
Theodoros Pitikaris BAB,BSc,MSc University of Athens – State Scholarship Foundation [email protected]
Nowadays the hottest question in EU area is “how to treat the debt crisis”. Unfortunately Gordon Brown is not anymore here; in other words Europe, is suffering the lack of political leadership that will transform the question to real action towards a real resolution on the debt problem. At the beginning were the Greek Statics, accounting methods that spread the depths and deficits in such way in order to present them significantly lower than other accounting methods. Then was the turn of some populist newspapers in Germany and other northern EU member state, which incorrectly presented Greeks as lazy people that live on German’s money. Then we had the Irish case as result of the problematic Irish bank sector. Ireland was called for bailing out IMF and EU, and a few weeks later was the turn of Portugal to bow before extreme austerity measures in exchange of troikas’ financial assistance. Spain and Italy are now into the eye of the financial typhoon. The trust between European nations is broken. This deficit of trust is now the major reason o of what we face nowadays as a Greek Default. If Hellenic Republic declare bankruptcy will draw all the other European economies to dark paths, and the Eurozone will face a real threat for his own existence. One the one hand Portugal, Greece, Spain, Ireland are countries with their own weak points, points that are built into their social and economic life, and is extremely difficult to overcome them in a sort term, on the other hand Italy, UK, Germany and for sure France and Italy are too small against China or USA alone, but united under EU Flag are strong commercial and financial players. Furthermore is essential that our political leaders will keep in mind
that the European Union and Eurozone were results primarily, of common political decision. A decision to unified Europe under one federal schema and promote a strong financial and economic player that will be able to stand and against USA and China. The European Union is the vital zone for the strong European economies, a strong internal market of 700.000.000 people/ customer that allow them to keep a competitive advantage and inject inter-European development. Therefore is to our interest to, follow the right strategies that will allow the euro to survive and Eurozone to expand. The current treatment wasn’t very effective (in Greece salaries went down at 12% including inflation but deficit get bigger).
Firstly we need to make the European debt manageable, and the solution of a European bad bank seems to be a logical way. There are several source from which that, this bank can accumulate the appropriate amount of capitals to buy the whole European debt. For instance we can print new money; but this will increase the inflation in the EU, on the other hand a lower public depth means lower taxes so a lower lever of inflation, can be expected in a long term period. But this bail out is essential to be followed by a real European ministry of finance that will coordinate the national economies and guarantee that we will never again, face the same chaos again. The total debt of Greece, Ireland, Spain, Italy, Belgium, Portugal and France and Germany is 13,141 Billions of Euros. And here is the magic world: the most of EU Debt is in euro. In case we inflate the debt by 50% in 30 years period that will cost will cause cost something like 0.5 Euro of buying power for every European that his/her country belongs to Eurozone. Additionally the procedure will be transparent (nobody has to pay real cash), and will come via inflation. From ethical point of view maybe is not a fair solution, but If we start scratching wounds and debates about fairness in history, and the impact of two world wars to Greece, to Italy, to France and Germany then we will end up with a big zero. Even if we go for a 5% haircut over the nominal prices using PSI
the organization that will participate in that agreement by exchanging a bad rating coupon with a good one will take advantage from the opportunity to use leverage that this new coupon provides, to cover some of the loss
In addition the devaluation of euro should be expected and that will benefit the Eurozone exports and development outlook, we may suggest that a 5% of GDP Growth will transferred to the Bad Bank institution.
The past is past; today we are all in the same boat. Technical and monetary support is essential for a stronger Europe. In other words a band bank with a Marshal’s Plan is in great need for the good of all Europeans.
Count 2,011. ry 00 Greece Italy Spain Portug al Belgiu m Ireland
2,011. 00
GPD (Euro )
Debt/G DB
$ € 518.4 360 2,430.0 2,089.8 0 0 948.00 815.28 198.65 463.64 170.84 398.73
200 1.80 1519 1.38 1020 0.80 167.5 1.02 274 1.46 124 1.42 1917. 0.99 5 2516. 2.87 9 7,738 .90
205.02 176.32 2,217.0 1,906.6 France 0 2 German 7,224.0 8,400 y* 0 15,38 13,14 Total 0.71 1.59
Table 1 The debt in Europe source: http://money.cnn.com/; http://www.gfmag.com; OECD
*Including Hidden debt as estimated by Handelsblatt.
Figure 1 DEBT/GDP ration
**UK will follow … and will join euro in the forthcoming years since HRM treasury debt and deficit are very high and the 3brothers ready to eat the flesh of UK people.
ECB
Print Euros 1 6
Haircut 5%
4
7
5% of Eurozone GDP Growth
Bad Bank
5
Long-term loans/ Fridge/ce metery
3 Bonds in Current prices > 0.7 Nominal Value
2 Guarantees EFSM
Figure 1 : Creating a Bad Bank
Tobin –Like taxation
1.ECB will allow greater cash flow by printing extra euros , this euros will be the capital contribution of ECB to the BAD BANK s.A
2. EFSM (European Financial Stability Facility) will contribute with bonds as Guarantees to Bad Bank for the part of debt that is viable. 3.Bad Bank will buy, in voluntary base, the bonds from the markets (Nowadays this bonds have a value 50-70% of the nominal price) 4. The bad Bank will delete part of the debt, and will issue new, long term, loans in order to: • Get back as much as possible from the countries that will accept the bail out 5. Income from the Tobin-like tax would empower bad bank capitals
6. 5% haircut=657MEuros
• Every repayment will reduce cash flow and inflation prospects
Theodoros Pitikaris BAB,BSc,MSc University of Athens – State Scholarship Foundation [email protected]
Nowadays the hottest question in EU area is “how to treat the debt crisis”. Unfortunately Gordon Brown is not anymore here; in other words Europe, is suffering the lack of political leadership that will transform the question to real action towards a real resolution on the debt problem. At the beginning were the Greek Statics, accounting methods that spread the depths and deficits in such way in order to present them significantly lower than other accounting methods. Then was the turn of some populist newspapers in Germany and other northern EU member state, which incorrectly presented Greeks as lazy people that live on German’s money. Then we had the Irish case as result of the problematic Irish bank sector. Ireland was called for bailing out IMF and EU, and a few weeks later was the turn of Portugal to bow before extreme austerity measures in exchange of troikas’ financial assistance. Spain and Italy are now into the eye of the financial typhoon. The trust between European nations is broken. This deficit of trust is now the major reason o of what we face nowadays as a Greek Default. If Hellenic Republic declare bankruptcy will draw all the other European economies to dark paths, and the Eurozone will face a real threat for his own existence. One the one hand Portugal, Greece, Spain, Ireland are countries with their own weak points, points that are built into their social and economic life, and is extremely difficult to overcome them in a sort term, on the other hand Italy, UK, Germany and for sure France and Italy are too small against China or USA alone, but united under EU Flag are strong commercial and financial players. Furthermore is essential that our political leaders will keep in mind
that the European Union and Eurozone were results primarily, of common political decision. A decision to unified Europe under one federal schema and promote a strong financial and economic player that will be able to stand and against USA and China. The European Union is the vital zone for the strong European economies, a strong internal market of 700.000.000 people/ customer that allow them to keep a competitive advantage and inject inter-European development. Therefore is to our interest to, follow the right strategies that will allow the euro to survive and Eurozone to expand. The current treatment wasn’t very effective (in Greece salaries went down at 12% including inflation but deficit get bigger).
Firstly we need to make the European debt manageable, and the solution of a European bad bank seems to be a logical way. There are several source from which that, this bank can accumulate the appropriate amount of capitals to buy the whole European debt. For instance we can print new money; but this will increase the inflation in the EU, on the other hand a lower public depth means lower taxes so a lower lever of inflation, can be expected in a long term period. But this bail out is essential to be followed by a real European ministry of finance that will coordinate the national economies and guarantee that we will never again, face the same chaos again. The total debt of Greece, Ireland, Spain, Italy, Belgium, Portugal and France and Germany is 13,141 Billions of Euros. And here is the magic world: the most of EU Debt is in euro. In case we inflate the debt by 50% in 30 years period that will cost will cause cost something like 0.5 Euro of buying power for every European that his/her country belongs to Eurozone. Additionally the procedure will be transparent (nobody has to pay real cash), and will come via inflation. From ethical point of view maybe is not a fair solution, but If we start scratching wounds and debates about fairness in history, and the impact of two world wars to Greece, to Italy, to France and Germany then we will end up with a big zero. Even if we go for a 5% haircut over the nominal prices using PSI
the organization that will participate in that agreement by exchanging a bad rating coupon with a good one will take advantage from the opportunity to use leverage that this new coupon provides, to cover some of the loss
In addition the devaluation of euro should be expected and that will benefit the Eurozone exports and development outlook, we may suggest that a 5% of GDP Growth will transferred to the Bad Bank institution.
The past is past; today we are all in the same boat. Technical and monetary support is essential for a stronger Europe. In other words a band bank with a Marshal’s Plan is in great need for the good of all Europeans.
Count 2,011. ry 00 Greece Italy Spain Portug al Belgiu m Ireland
2,011. 00
GPD (Euro )
Debt/G DB
$ € 518.4 360 2,430.0 2,089.8 0 0 948.00 815.28 198.65 463.64 170.84 398.73
200 1.80 1519 1.38 1020 0.80 167.5 1.02 274 1.46 124 1.42 1917. 0.99 5 2516. 2.87 9 7,738 .90
205.02 176.32 2,217.0 1,906.6 France 0 2 German 7,224.0 8,400 y* 0 15,38 13,14 Total 0.71 1.59
Table 1 The debt in Europe source: http://money.cnn.com/; http://www.gfmag.com; OECD
*Including Hidden debt as estimated by Handelsblatt.
Figure 1 DEBT/GDP ration
**UK will follow … and will join euro in the forthcoming years since HRM treasury debt and deficit are very high and the 3brothers ready to eat the flesh of UK people.
ECB
Print Euros 1 6
Haircut 5%
4
7
5% of Eurozone GDP Growth
Bad Bank
5
Long-term loans/ Fridge/ce metery
3 Bonds in Current prices > 0.7 Nominal Value
2 Guarantees EFSM
Figure 1 : Creating a Bad Bank
Tobin –Like taxation
1.ECB will allow greater cash flow by printing extra euros , this euros will be the capital contribution of ECB to the BAD BANK s.A
2. EFSM (European Financial Stability Facility) will contribute with bonds as Guarantees to Bad Bank for the part of debt that is viable. 3.Bad Bank will buy, in voluntary base, the bonds from the markets (Nowadays this bonds have a value 50-70% of the nominal price) 4. The bad Bank will delete part of the debt, and will issue new, long term, loans in order to: • Get back as much as possible from the countries that will accept the bail out 5. Income from the Tobin-like tax would empower bad bank capitals
6. 5% haircut=657MEuros
• Every repayment will reduce cash flow and inflation prospects
