On Euro Area issues, MMG members broadly agreed that:
It is critical that EU governments and institutions including the ECB, as well as the international community, continue to support the adjustment efforts of the Euro Area economies with high levels of public or private sector debt. A number of these countries have already made substantial progress in reducing fiscal deficits. Nevertheless, more efforts are needed, including forcefully advancing privatization and implementing needed structural reforms to improve growth prospects.
The joint EU/IMF financial assistance program announced on November 28, 2010 reflects a decisive effort both to support Ireland and to restore stability to European sovereign bond markets. In this context, the announcements by the ECB are welcome; exceptional measures, including the bond purchase program, will continue to be needed to help contain risks. However, current market pricing, particularly of sovereign bond and CDS spreads, continues to reflect concerns about growth and debt dynamics in a number of highly indebted Euro Area economies.
It is important for market participants to differentiate among sovereign risks. As the adjustment and reform efforts being implemented take hold, such differentiation should take these efforts into account. In this context, other countries outside the Euro Area facing high budget deficits and public and private debt should move in earnest to implement fiscal consolidation plans, in order to help restore market confidence.
The November 28 Eurogroup statement on the proposed European Stability Mechanism (ESM), which emphasized that private-sector bondholder participation in any debt resolution framework would be voluntary and via the use of collective action clauses, was a step in the right direction. A number of issues regarding the role of private creditors in the process still need to be addressed and clarified. In order that any restructuring be done in a fashion that maximizes the potential for early restoration of access to capital markets, it is vital that negotiations be flexible and consultative; the guidelines set out in the Principles for Stable Capital Flows and Fair Debt Restructuring should serve as a useful model.
With respect to the losses of creditors to the Irish banks, restructuring of subordinated debt should be negotiated on a cooperative basis, so as not to exacerbate risk aversion vis-à-vis the provision of funding for banks.
Regarding accommodative monetary policies, MMG members noted that:
The accommodative monetary policies that are in place in most industrialized countries have been designed to foster growth. However, this has prompted sustained investment flows to risk assets, including many commodities and high-yield corporate bonds, but most notably to emerging market assets.
These circumstances demonstrate the clear and urgent need for more effective global coordination of economic policies, so that countries can follow coordinated and coherent policies to reduce global imbalances and sustain growth within a strong framework of global coordination; emerging market countries faced with surges of capital flows should respond as appropriate with prudential policies, adjustment of monetary policy, and, where needed, greater currency flexibility instead of resorting to capital control measures. By and large, capital controls over time have been shown to be ineffective, and distort financial intermediation and economic activity.
The MMG also discussed risks related to banks’ real estate exposure, notably a significant bunching of maturing commercial real estate loans and refinancing needs over the next few years. The group also exchanged views on the potential risks/benefits of high-frequency trading and dark pools, which call for close monitoring and efforts to improve transparency.
© IIF - Institute of International Finance
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