07 November 2011

グラハム・ビショップ：ユーロにとって最大の危険はギリシャなのか、メルケルとサルコジなのか？

A great battle is underway to save the EU’s flagship “Euro” but, as in any battle, the fog of war sometimes clouds the vision of the generals. At the pivotal Battle of Deauville Beach on 18th October 2010, the mighty 'Merkozy' cannon was fired towards the enemy’s hedge. Unfortunately, the professional gunnery staff officers were out to lunch at the time and it is now clear that the Merkozy cannon was rather loose when the generals personally fired it. The huge policy projectile is hurtling forward, shattering long-standing defences, scattering dominoes to the left and to the right, and now even tearing through stout Treaty walls. However, it is now possible to calculate the trajectory of the policy projectile with some certainty. Having gone over the top of the enemies in the hedge, it now seems likely to head out to sea and score a direct hit on the flagship itself – unless urgent and bold action is taken to deflect the projectile towards the real enemy.

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For several decades, EU regulations for all sectors of the financial services industry have explicitly stated that the sovereign governments should be regarded as free of credit risk, thereby encouraging financial institutions to make government debt a core asset. In the past year, this assumption has been undermined substantially by the euro area Heads of State and Government (HoSG) – led by Chancellor Merkel and President Sarkozy (Merkozy).

That is bound to change the price that all financial institutions will charge to hold government debt where any perception of unsound polices creeps in. The timeline of the implicit regulatory changes shows an impressive speed and sweep (see detailed timeline below).

Consider the position of a European pension fund contemplating an immediate investment in bank shares:

• In October 2010, Merkozy announced at Deauville the new doctrine of “private sector involvement”. They backed this up with a commitment to introduce Collective Action Clauses (CACs) in government debt from 2013 to simplify the process of making private sector lending junior to public sector loans. At a stroke, a major asset of the bank was reduced in value.
• On October 26 2011, HoSG suddenly announced that the new capital standards, planned to be achieved by 2019, would be both higher and operational in nine months time instead. Moreover, the capital requirement would reflect a new valuation of the main assets of the bank – arbitrarily different from those used by the auditors to report the value of the bank to shareholders.
• To achieve the new capital standard quickly, the pension fund might find the bank’s dividend reduced (so being unavailable to pay its pensioners) and the cuts in bonuses would undoubtedly be proclaimed loudly by the bank’s management as de-stabilising the bank’s skill base. If this were not enough, then the shareholders would find some of the value of their asset expropriated by a compulsory and dilutive injection of public equity capital.

Shareholders are likely to encourage the management of their banks never again to hold assets that, astonishingly, can turn from risk-free to toxic in just a year. Indeed, recent results from a number of major EU banks show that holdings of doubtful government debt have now been sold, after heavy write-downs. In the new climate of culpability, senior management may not dare take the risk in the future of holding assets that can suddenly swing into such a risky category. Who will buy these bonds now?

From December 2010, Merkozy and the other HoSG repeatedly proclaimed that they would do “whatever it takes” to preserve the euro. In October 2011, they suddenly introduced limits – by declining to extend the guarantees underpinning the EFSF. The change of heart was reinforced by announcing that the general assessment of the minimum necessary size of the fund would instead be achieved by previously-ridiculed techniques of financial engineering.

So the much-vaunted firewall to stop contagion spreading to Italy and Spain was built on sand. Actually, it may turn out to be quick-sand, as the proposal to insure the first loss – perhaps 20 per cent judged by the money available and the HoSG’s desired level of leverage – pales into insignificance against the 60 per cent-ish write-downs just taken on Greek debt. If the remaining 40 per cent loss is to be amortised over the life of a ten-year loan, then even the most rudimentary analysis would suggest an extra yield of perhaps 4 per cent annually.

But the HoSG have now stated twice that there will only be credit risk in Greece and “their inflexible determination to honour fully their own individual sovereign signature”. After the abrupt about-turns in the past year and the commitment to introduce CACs, which investor is going to believe that? Moreover, one of the bulwarks of financial analysis of euro area government debt has been the complete absence in the Treaty on the Functioning of the EU (TFEU) of any exit mechanism from the euro. The only route out is to leave the whole EU – the nuclear option. Then at a post-G20 press conference, Merkozy suddenly dropped the bombshell that Greece might have to leave the euro. Most observers assume that would have to be accompanied by a massive devaluation, so inflicting a correspondingly massive loss on bond-holders.

Against this background, few investors will be surprised to see Italian yields rising above 6 per cent to reflect these sudden and various new risks. But the consequences of such interest charges could be profound: with the new commitment to a balanced budget, the squeeze on other parts of public spending could easily provoke Greek-style protests. That might lead to a demand to take the “easy way out” - leave the euro and stage a massive, and nakedly competitive, devaluation. As the third largest economy in the euro area, that would probably destabilise the Single Market, as many states would scramble to protect their voters against such unfair competition. As other states felt obliged to respond with similar devaluations, the disintegration of the euro and Single Market would poison the European Union as a whole.

So the “Merkozy policy projectile”, launched a year ago at Deauville, could easily sink the EU’s flagship – and probably the EU itself. Bold, and carefully thought–through, policies are urgently needed.

A year that re-shaped European finance

• 18 Oct 2010: Merkozy walks on the beach at Deauville and returns to announce – without consulting any economic advisers – that private creditors of Greece will have to be “bailed-in”. The decades-long assumption of zero credit risk of EU governments is exploded by the new doctrine of private sector involvement (PSI)!
• 29 Oct 2010: European Council agrees small Treaty change that may bail-in private creditors.
• November ECOFIN agreed that the ESM will take effect in 2013 and its creditor status will rank below IMF loans but ahead of the private sector. So private lenders should have no doubt about their vulnerability after 2013.
• 16/17 December 2010:
  • European Council agreed to a small Treaty change that will bail-in private creditors.
  • Summit of euro area Heads of State or Government (HoSG):
    • Rules will be adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies…
    • We restate that any private sector involvement based on these terms and conditions would not be effective before mid-2013.
    • The HoSG and the EU institutions have made it clear that they stand ready to do whatever is required to ensure the stability of the euro area as a whole. (NOTE: this statement was repeated in all Communiqués after this summit until October 2011)
• 26 October 2011 euro area summit:
  • “These measures are needed to ensure financial stability and provide sufficient ring-fencing to fight contagion; … this will be done without extending the guarantees underpinning the facility…”
  • “We agree on two basic options to leverage the resources of the EFSF:  providing credit enhancement to new debt issued by Member States, thus reducing the funding cost. Purchasing this risk insurance would be offered to private investors as an option when buying bonds in the primary market; maximising the funding arrangements of the EFSF with a combination of resources from private and public financial institutions and investors, which can be arranged through Special Purpose Vehicles.”
  • “As far as our general approach to private sector involvement in the euro area is concerned, we reiterate our decision taken on 21 July 2011 that Greece requires an exceptional and unique solution….  All other euro area Member States solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.”
  • Capitalisation of banks:
    • 4. Capital target: There is broad agreement on requiring a significantly higher capital ratio of 9 per cent of the highest quality capital and after accounting for market valuation of sovereign debt exposures … to create a temporary buffer… This quantitative capital target will have to be attained by 30 June 2012. This prudent valuation would not affect the relevant financial reporting rules.
    • 5. Financing of capital increase: Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. If necessary, national governments should provide support, and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of eurozone countries.
• 4 November G20 Summit:
  • CANNES, France (Dow Jones)--French President Nicolas Sarkozy and German Chancellor Angela Merkel Wednesday evening opened the door to Greece leaving the eurozone…
  • “The European Treaty, as it stands today, does not provide for a country to abandon the eurozone without leaving the European Union as well”, a European Commission spokesman said on Thursday during a press conference, adding that “this is the situation today. The Lisbon Treaty, which entered into effect in December 2009, introduced for the first time a provision for exodus from the EU but, on the contrary, there is no provision in the Treaty for leaving the single currency…Greece's place is in the eurozone, and the facilities exist. The agreements were reached so that this will continue to be the reality", spokeswoman Karolina Kottova said. However, the discussions in Cannes are being conducted at the highest level, she noted, indirectly leaving open the possibility of the European leaders deciding otherwise.

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© Graham Bishop