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Guest Post: The Eurozone Is Almost Out Of Options
Submitted byu Raoul Ruparel - head of economic research for Open Europe
The Eurozone Is Almost Out Of Options
Over the last few weeks, negotiations over a potential write-down of Greece’s debt have taken us here and there, and back again – and at the time of writing, they remain unresolved. But whatever the outcome of the talks between the Greek government and its creditors, let’s not forget the bigger picture – ultimately, the current approach to Greece’s enormous economic problems is failing. Another bailout along with a “voluntary” Greek restructuring cannot be put together in a way that makes it politically acceptable and/or economically viable – it simply will not return Greece to solvency. The insistence on greater austerity, despite EU leaders’ recent talk about growth and jobs, is reaching its political and civil limit in Greece. While Greece clearly needs to consolidate its budget, it cannot live on austerity alone.
Even if a deal can be agreed between the Greek government, its bondholders and the Eurozone, it will most likely fall well short of the debt reduction (or funding stream) needed to give Athens breathing space. As things stand at the moment, the immediate debt reduction under a restructuring would be minimal, leaving Greece’s debt burden hovering worryingly above 140 per cent of GDP. Furthermore, in a best case scenario, Greece would still have a 120 per cent debt to GDP ratio in 2020 and would need to find a scary €252bn (£210.24bn) before then to stay afloat (if it meets all of the targets laid down but the EU/ECB/IMF troika). All of this points to a depressing prediction: even with the haircut currently being discussed, Greece could still be forced to undergo a full default within the next few years. The numbers simply do not add up.
Apart from all the economic complications this would throw up, a full default after two bailouts and a voluntary restructuring would be political dynamite. A massive amount of Greek debt would be held by taxpayer-backed institutions – specifically the ECB, the Eurozone bailout fund (EFSF) and the IMF. Given the seniority of the IMF, most of the losses would fall on the Eurozone. Opposition to taxpayer-funded bailouts is already at fever pitch in the AAA-rated countries – how will voters in these countries respond when their money is actually lost? This is a huge unknown.
This begs the question, should the official sector accept losses this time around, to avoid potentially greater and more painful losses in a Greek default down the road? On one level, this would be the most sensible option – by far. But on another level, it’s a huge ask from the Eurozone and the ECB, since, again, it involves explaining to taxpayers that their money has gone missing.
The ECB, in particular, has got itself into a very difficult position, owing to its legally questionable government bond buying programme, which some Eurozone governments have now become dependent upon. If the ECB was to take losses, it would probably be seen as having directly financed Greece (against its statute). The ECB would instantly see its credibility and reputation as the heir to the Bundesbank demolished. Would the Germans accept this?
But don’t forget, avoiding losses could also have huge consequences. It effectively announces the ECB as senior to private bondholders, sending reverberations into the bond markets given that it owns €220bn of Eurozone sovereign debt. Is there a pragmatic solution then? Possibly.
Losses on EFSF loans would be compensated by smaller future aid to Greece and the reduction in political tensions between Greece and the rest of the Eurozone.
Meanwhile, the ECB could take a partial write-down, which will not have a material impact on its balance sheet. The ECB purchased its Greek bonds at around a 30 per cent discount. It could accept a 30 per cent write down without taking any losses, which would give Greece some additional debt relief (and would provide some good will to investors). Another option would be for the bonds to be bought by the EFSF (at cost price) and then submitted by the EFSF to the voluntary restructuring. The EFSF could absorb the losses without the legal and political fallout. Even so, the ECB would have to admit failure, since it always claimed it would hold the bonds to maturity.
Admittedly, setting a precedent of official sector losses would raise huge questions over whether Portugal and Ireland will request similar treatment. However there are now no easy options. The current course of a second Greek bailout could just as easily have knock-on effects in the form of a second round of taxpayer-backed rescues. We have always argued strongly against taxpayers taking losses but, unfortunately, this is one of the few plausible options we’re now left with.
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Moe, Larry and Curley..
Pretty soon EURUSD will be trading at penny stock levels as Armada Markets wrote in their annual client letter. Unless we get a bailout from Mars euro is going to cease to exist soon. Take cover.
Actually this is bullish for the EUR
Moe
The American Markets
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From Europe long long time ago. /sarc
If you want my view regarding this, The Fed's is preparing the nation for the biggest War in History of Mankind ... which is the collapse of this coming bubble...
Exactly right resurger...and its sooner rather than later.
The global ponzi is almost out of options....
"The Eurozone Is Almost Out Of Options"
It's easy boys: Lie, lie, lie.
Just like women telling themselves those are not gray hairs coming in. Face it, the old gray mare aint what she used to be, busted up old bankrupt has-been Europe.
Just out on FOX NEWS: Germany and Angela Merkel will save the World !
Germany will bail out Greece, Italy, Spain, Portugal, the UK and finally the US
Germany will save the World they will also pay back M-F Global losses and reimburse Goldman Sachs for Greece CDS
and everyone else that holds CDS on something no questions asked at 100% of their face value.Finally Germany will help the US and UK to resurrect the failed and outmoded Imperial british colonial e-con system of slave-trading markets and hopium wars. By taking on all the World's Debt, Germany will ensure that the entire World will prosper and grow and consume in perpetual upward motion of 10% GDP. Everyone will get their money back, no questions asked.
Love Angie
wr;)
Basel III offers no Hair cut on Soverigns
Now Germany!
Fuck! i cant wait for the NYSE toll today, am buying the whole FUCKIng MARKET
Buying Gold and Silver here in Europe is the only smart thing to do.
We'll end up in missery. Better have some light assets which you can carry across the borders when it's time to leave this dump for a better place when the time comes.
Its fucking pathetic, we can see them planning our total demise plain as day, and no one can do jack shit about it. Its like every James Bond villain put together X100, and James Bond isnt around he died in a freak gold accident during the opening music.
They still have FOFOA's "Nuclear Option" !!
i better buy my EUR puts before the eurozone runs out of them
against which currency? the dollar?
to bad I can't find any euro puts against the australian dollar, Singapore dollar, New Zealand dollar because that would be a real money maker :(
"We have always argued strongly against taxpayers taking losses but ..."
No, there is no but after a statement like that because the losses will simply continue to mount.
It is much better that it goes down now rather than later so we have some pieces to pick up rather than no pieces.
Better for the EU to allow Greece to fail use their reserves to backstop the other failing PIIG states with an implied warning that you too could incur Greece's fate short of sincere and substantive financial reforms...a PIIGS firewall and line in the sand moment...short term pain but better long term structural integrity...
Anyway they go, they are screwed.
More bailout = loss of sovereignty
Default = kaboom
They'll just be renamed 'IMF'ers'. The world is toast....bullish.
I believe, although I could be mistaken, this is what we call the moral hazard governments create. They should have stayed out of the problem and let banks know unequivically-you are on your own.
On a side note...Has this time line really been long enough to be out of options? Surely someone has a bag of pixie dust?
No, there are plenty of options left for the Eurozone. The depopulation agenda can finally commence on the continent itself.
Agenda 21, Club of Rome, yada yada yada.... Look it up, this is the plan. It's just early days. We're just witnessing the forced change from what was to what will be. Watching it slowly play out day by day.
Pretty ugly area this elite global planning stuff, eh? What does it say about "people" who created a depopulation agenda or even believe they have the right to do so?
These are the Real global terrorists. The rest? Players on the board, created to help move the agenda. Create the "problem" to generate the desired prole "reaction", then capitalize on the chaos you've created to provide your own "solution". Which in reality is just another step closer to achieving your goals.
The other term for problem reaction solution is the Hegelian dialectic. Where the elite global plotters smash thesis (what is) and the antithesis (its opposite) they create into one another to create a synthesis (the desired outcome). This is done in ongoing fashion in what some call a Stepping Stone approach. The boiling frog analogy also applies as it speaks to both the gradualism used to move things from As Is to the To Be state, as well as the endgame for the frog.
How /when from whom did the ECB buy Greek debt at a 30% discount? Did the ECB buy existing Greek debt on the open market or new debt directly from Greece? So someone - the sellers of Greek debt to the Fed - are already taking heavy losses on Greek debt? Every time I think about this stuff - especially after just waking up - it makes my head spin.
This article is hilarious. As if TPTB give a shit about rules!
I keep reading disaster and collapse comments and have been for a couple of years now. All have been wrong. So far it seems as though the central banks have made fools of those predicting collapse. Is this a new round of fool making or is Greece going to default? I can't answer that but I can say the central banks have stopped every collapse scenario thus far. Why is this new round of collapse predictions any different then the last round? Please explain.
Yeah Cole, thing is, rigged markets, neutered regulators and massive new infusions of more fiat paper backed by nothing do not constitute a recovery. What manner of fool really thinks there's solid ground under Greece, the Eurozone, UK, The US, or any part of the western "financial system"?
Has Terra Firma magically been reached and we missed it somehow?
Just b/c the "central banks" have been able to paper things over thus far is no guarantee they'll be able to much longer. Have they "stopped every collapse scenario", or just postponed a long overdue collapse and made it bigger by doing so?
They are going to let Greece be the "Lehman" of the Eurozone and create a Eurobond to prevent a disaster like greece happening in the rest of the PIIGS.
What's the fuss about? All they need to do to kick the can for another 5 years is take the Greek debts and mark them to myth like we did in the USA. If we can get by without some stinking accounting rules why can't they?
There must be some optimism given Greek bond yields today. See charts.
Greek 10 yr sovereign yields fall 680 Bps – positive signal for saving Greece?
http://confoundedinterest.wordpress.com/2012/02/08/greek-10-yr-sovereign...
http://policyandmore.blogspot.com/2012/02/krugman-and-american-high-school-wage.html
wtf ? Bankers out of options, so taxpayer must pay instead of banker?
Just go fuck yourself Raoule.
In what fucked up state of brain death do you think that is a viable option?
Idiot
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