Thursday, 8 December 2011

Sense and sensitivity

I have been ranting against Germany's ideological crusade and their (lack of) sensitivity to the need for immediate action to disarm the crisis NOW! According to a document leaked from the EU president Van Rompuy’s office, it is clear that at tomorrow's EU summit, a small number of reasonable initiatives will be on the agenda.

I have suggested that one element in getting the crisis to go away is to convert the highly indebted countries' short-term debt to long-term debt instead. If you read the leaked document (attached), it is clear that something is happening on this issue.

EU will discuss to 1) accelerate the process to get EFSF up running with gearing and everything, 2) accelerate the ratification of ESM for this new institution to get started on long-term lending and 3) make "deposits" in the IMF, which can then lend money to European countries with large short-term financing needs.

Importantly, EFSF and the ESM could be allowed to operate in parallel for a while, increasing their lending capacity.

If carried out, it is good news. And should be received by financial markets as such. If not it hurts the poor Germans on their sensitivity.

My checklist to find out if new initiatives are useful to resolve the crisis has the following five elements:

  • The ECB to act as a central bank
  • The banks to be recapitalised
  • Countries with huge short-term debt should have them converted to long term debt - very long term
  • Germany and other countries in a good situation stimulate domestic demand and growth
  • Structural development in the indebted countries (lend them money to build a bridge between some islands or similar)

This list can serve as a reality check: if new initiatives fit into one of those categories, then it is good news. If not, they are irrelevant or downright dangerous.

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