12 February 2012

John Dizard: Why no EU plan for default or euro exit?

In this FT View from America, Dizard writes that the real problem is that the euro area leadership seems to have learned little from the disastrous progress of the Greek insolvency proceedings.

Political leaders and their vast staff organisations have set up yet more entities, such as the European Financial Stability Facility and the European Stability Mechanism, which provide yet more opportunities for careerists, and yet more confusion about who makes decisions. It would have been much more productive to come up with two sets of clear policies; one to deal with sovereign defaults within the eurozone, the other to provide for procedures for a member country to give up the euro as a national currency.

The principal objection raised to admitting even the possibility of either contingency is that it would, inevitably, lead to market landslides and the onset of the dreaded events. This is nonsense. For example, there is a contingency plan for how the US government would fund itself after a nuclear war: a 20 per cent national sales tax. Not progressive, you could say, but easy to understand and administer.

My friends within the euro system – I do have some – tell me any discussion of contingency planning for a euro departure is streng verboten, because with so many member countries, there are bound to be leaks to the press. Also, Europeans, unlike Americans, do not like to enforce laws on the disclosure of classified information.

Come on. The trick, if you can call it that, is not to make the contingency planning secret, but to make it boring. They are very good at that in Frankfurt and Brussels.

Taking the airport-fiction-nightmares out of euro departure by putting procedures and a model schedule together would reduce the forbidden-fruit attractiveness of the idea. The markets and the public would be better able to weigh the true economic costs and benefits of euro membership. Also, from the eurocracy’s point of view, in negotiations with obdurate counterparties the blackmail of supposedly uncontrollable contagion would be much less powerful.

A consistent policy for dealing with sovereign default within the eurozone would have even more recent precedents to draw on. Charles Blitzer, a former International Monetary Fund official who worked on many sovereign debt restructurings over the past couple of decades, says the eurocracy’s fundamental mistake was to assert, against the evidence, that a default would be “unacceptable” or even “unthinkable”. Why not just make it a routine – an expensive, unpleasant, routine, like divorce?

As he asserts, from experience: “You need three things. You [the eurozone] need a clear policy. Never say never. State what you are willing to put up for, say, Portugal, if they deliver on their policy. If they follow through, support them. If they need more money due to external events, then be prepared to help, as long as they keep their word.

“Second, they need to act quickly. Very quickly.” The eurocracy has acted as if delay were its friend.

“Third, do it the way it’s been successfully done before. Exchange offers of bonded debt are not that hard to devise. You ask for enough relief to restore debt sustainability but not much more. Investors then can see an upside for new bonds and participation rates above 90 per cent are achievable.

“The question is what the country can afford. Have the IMF do the calculations; they have the experience and the data.”

Full article (FT subscription required)

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