By Orietta Qi
Germany’s leaders must recognize that the edge of the country’s banks in the euro-zone exposure on the national debt very critical condition. Their boss and voters must be allowed to believe that public funds for debt restructuring and re-injected to provide bank guarantees is a necessary condition for internal depreciation policy; since Germany urges other EU countries have adopted this strategy, it should shoulder the duty to guarantee responsibility
“It was just the Greek crisis”, “It is only in Greece and Ireland crisis”, people who did that, but now I can not, because it clearly is a crisis in the euro area. To deal with it, expect more than is usually the only easier, but also more difficult.
Economic crisis reason is quite simple. Greece’s fiscal problems. Ireland’s banking problems. Portugal’s private debt market problems. Spain, there are problems in these three areas. Although details vary, the conclusion is the same: these countries have to undergo painful cost-cutting process.
To counteract the side effects of austerity, the usual approach is to reduce domestic support and the combination of currency devaluation. Depreciation will increase export competitiveness, which is to take external demand to fill domestic demand.
However, these are euro-zone countries, which have no independent currency may depreciate, so they can only be used to replace the internal depreciation of the external depreciation. They must cut wages, pensions and other costs to increase export competitiveness, to expand the effect of external demand.
In fact, these countries tighten their belts resolve the crisis is not small. But not as an economic variable and the adjustment of other variables change, that is, public and private sector debt. The book value of accumulated debt the government has not changed, the bank debt – owed to ordinary creditors except than some of the debt, basically unchanged.
Is the simple fact that engulfs the internal situation devaluation strategy: the more cut wages and other costs, the burden of accumulated debt is relatively more important. Heavier debt burden, the more have to cut public spending, raise taxes to meet the government and its surround and protect those (such as banks) debt. This in turn requires more internal devaluation, further pushing up the debt burden, and so the vicious circle of recession will drag the economy.
Therefore, to make internal devaluation strategy worked, must find ways to reduce the debt face value. Government debt must be restructured; bank debt must pursue debt-equity swap, the bank shall be canceled when insolvency; mortgage debt must be written down.
Policy makers do not want to go this route, which is understandable. Contract sanctity. Government is concerned about dishonesty in the financial markets. If mainly from foreign creditors, especially foreign banks, to write down will only hurt the other countries.
These concerns can not say that does not make sense, but not resulting unreasonable conclusion. Way out only two: the internal or external depreciation depreciation. European heads of state must be a second election. They unanimously ruled out devaluation of the road outside. However, debt restructuring within the depreciation of the necessary requirement. Deny this, not only unreasonable, but also illogical.
Debt restructuring is simple and clear. Government can issue a number of debt with face value of the existing debt by a certain percentage discount on face value. Bondholders can choose to either uphold the hands of convertible bonds at face value, but late maturity, lower interest rates; or to accept less than the nominal value of existing bonds, discount bonds, earlier maturity, interest rates are high.
First, the new bonds to the bondholders to ensure safety. Out for these bonds have been secured. 80s of last century, according to the implementation of the Brady Plan debt restructuring in Latin America, the play “security big brother” is the U.S. Treasury. Today, the International Monetary Fund and the German government to take up this responsibility.
Finally, the debt restructuring, the bank suffered losses, their balance sheets must be consolidated. These banks need to put to the true pressure testing, rather than engage in the kind of red tape earlier this year. If the debt restructuring indicates that lack of capital, the bank debt would have on the overall debt-equity swap. If that was not enough to be out by the government to face the bank capital injection.
It also requires a unanimous action. Once the bank’s balance sheet strengthened, it is possible to re-mortgage debt, bank debt and other private sector debt and Buzhi Yu shake up the financial system.
Now, we said that the biggest difficulty. All of this requires strong leadership. Germany’s leaders must recognize that the edge of the country’s banks in the euro-zone exposure on the national debt very critical condition. Their boss and voters must be allowed to believe that public funds for debt restructuring and re-injected to provide bank guarantees is a necessary condition for internal depreciation policy; since Germany urges other EU countries have adopted this strategy, it should shoulder the duty to guarantee responsibility.
In short, Europe’s leaders, especially the consequences of Germany’s leaders have to say a little more seriously – to do so would doom. Because the fact is the case.
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