This week ministers europeaneens of finance and governors of central banks rewill unite for two days in Brussels. This monthly meeting is nothing special and could be routine if the situation continues to be concern on several fronts.
At the risk of aggressive reactions, I would like to establish a fundamental principle. When a State, a business or a household are over-indebted, there is only one remedy that can bring a return to fundamental balances durable reduction of debt. This may be a truism, but it is a primordial reality.
Jean-Claude Trichet, President of the European Central Bank, has seen fit to restore this principle in an interview with German newspaper Bild: it distinguishes between a “crisis of the Euro” (which is not the cause of problems of the Eurozone) and fiscal deficits of some member States. “The ECB expects the Eurozone governments to make huge efforts to reduce their debt. Some countries will restore control of their debt. ” The message is clear and hardly debatable. So in planning fiscal consolidation that is the long-term solution.
The debt crisis in Europe is of such magnitude that it could threaten the entire global balance andêbe to causing a crisis of global implications. What worries me most is a tendency to use of rescue vehicles and believe they may have salutary effects on the long term. What matters first is the creation of a true consensus on this issue. Through cost reductions by the public sector and increased private taxation, the measures will not be popular. We have seen demonstrations in all countries concerned. Some countries (particularly France) should ask themselves from their economies that should really be under state supervision.
Three types of emergency action must be considered. They seem to have unfortunately taken precedence over corrective actions funds. This does that it is important to manage both short-term upheavals and reforms.
The fact that three bond issues for Greece, Portugal and Spain have succeeded last week will undoubtedly be considered an important result. However, I fear disappointing: the fact that this “Auction” will be held as a private placement rather than a public offering allows questions about the nature of the underwriters. The most crucial question is what is the percentage supported by the European Central Bank. What was the share of sales from central banks and other sovereign funds? The rate there really was a market rate? What pressures have they been on banks to force them to subscribe to these bonds? The lack of transparency undermines the reputation of these emissions. The ECOFIN would do well to publish this information essential to restoring confidence. Nobody expects these shows are pure market transactions, but silence can only confirm that the share of public sector must be clear majority: the suspicion is not helpful.
Contrary to assertions in all directions, the increased amounts of European Financial Stability Fund is at the heart of it now. Only € 85 billion (out of 440 billion) in Ireland emanate, and the rest of the margin. It must be clear that, where appropriate, Member States are open to such an increase. For cons, the idea of enabling the Fund to subscribe for public borrowing is dangerous. It might give more the impression that these transactions are artificially boosted by the public sector, and are not real market transactions.
In addition, this would deprive the FESF its ability to make conditional interventions. What is essential is the reform of the fund so as to give the same prerogatives as the IMF. Decisions on the necessary reforms should be taken at the Board of Directors of the Fund, not in policies Areopagus. The lending community to countries in serious budget deficit is a conditionally acceptable measures to reduce the deficit and debt. This allows countries such as Portugal, who want to solve their problems themselves, not to resort to FESF. For cons, the debt restructuring is not optional in case of loan FESF.
End element: the use FESF should not be at disadvantageous interest rates. This would increase the snowball that this fund is supposed to avoid. The rate of operation will largely be financed from the Fund since its own funding is made on terms that reflect the credit quality.
Let us not forget the golden rule: in the absence of transparency, investors will always choose the worst case scenario.
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