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Timeline of the Eurozone debt crisis

Timeline of the Eurozone debt crisis
Analysis of the main legal changes made to the EU framework
EFSF - EFSM
ESM
Fiscal Compact

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  • Alberto Alemanno
  • Alberto Alemanno
  • Alberto Alemanno

Eurodebt crisis Eurodebt crisis Presentation Transcript

  • The Eurodebt Crisis What is going on in Europe?2012 © ALBERTO ALEMANNO – Jean Monnet Professor of EU Law & Risk Regulation – HEC Paris
  • Not a crisis of the 2
  • A sovereign debt crisisof (some) Eurozone countries 3 View slide
  • i.e. 4 View slide
  • Difficulty or impossibility forGreeceIrelandPortugal to re-finance their debts 5 ALBERTO ALEMANNO - HEC PARIS
  • Let’s Contextualise the € debtFinancing needs for the eurozone in 2010 cameto a total of €1.6 trillion, while the USA issuedUS $1.7 trillion more Treasury securities, andJapan had ¥213 trillion of government bonds toroll over ALBERTO ALEMANNO - HEC PARIS 6
  • Yet it is aALBERTO ALEMANNO - HEC PARIS 7
  • ALBERTO ALEMANNO - HEC PARIS How we got where we are ? 8
  • Multi-factorial explanation• globalization of finance• easy credit conditions during the 2002-2008 period that encouraged high-risk lending and borrowing practices• international trade imbalances• real estate bubbles slow economic growth• national fiscal policies• national bail outs, assuming private debt burden or socialising losses ALBERTO ALEMANNO - HEC PARIS 9
  • Inherent limits of EMU• Since countries using the Euro as their currency have fewer monetary policy choices (e.g., they cannot print money in their own currencies to pay debt holders), certain solutions require multi-national cooperation.• The ECB has an inflation mandate not an employment mandate (unlike US Fed) ALBERTO ALEMANNO - HEC PARIS 10
  • A crisis of confidence ALBERTO ALEMANNO - HEC PARIS 11
  • Timeline2010 - today ALBERTO ALEMANNO - HEC PARIS 12
  • January 2010• Frightened investors demanded higher interest rates from several governments with higher debt levels or deficits• This in turn made it difficult for governments to finance further budget deficits and service existing high debt levels ALBERTO ALEMANNO - HEC PARIS 13
  • February 2010• Greek PM Papandreou openly admitted that Greece had failed to comply with the terms of the Stability & Growth Pact: – Excessive budget deficit ( > 3% of GDP) – Excessive public debt ( > 60% of GDP) (these rules bind Eurozone countries since 1992 when creation of the EU Monetary & Economic Union) ALBERTO ALEMANNO - HEC PARIS 14
  • To bail out or not to bail out? ALBERTO ALEMANNO - HEC PARIS 15
  • No-bail out clause• « A member state shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another member state, without prejudice to mutual financial guarantees for the joint execution of a specific project ». Article 125 TFEU ALBERTO ALEMANNO - HEC PARIS 16
  • No-bail out clause 17ALBERTO ALEMANNO – HEC Paris
  • YetProgressive pooling of risks from particular EMU states with unsound public finances and,as a result, extra risks shifted to those countries providing help and to their taxpayers ALBERTO ALEMANNO - HEC PARIS 18
  • Clash withPrinciple of National Fiscal Responsibility ALBERTO ALEMANNO HEC PARIS 19
  • February 2010• (ad hoc) Greek loan facility: – Bilateral loans – For a total of € 110 billion 20ALBERTO ALEMANNO - HEC PARIS
  • Not enoughALBERTO ALEMANNO - HEC PARIS 21
  • March 2010• EU emergency mechanism: – European Financial Stability Facility (EFSF) – European Financial Stabilisation Mechanim (EFSM) – temporary – worth €750 billion – supported (also) by the IMF 22ALBERTO ALEMANNO - HEC PARIS
  • • EFSF is a Luxembourg-registered company owned by Euro Area Member States• EFSF relies on the following instruments linked to appropriate conditionality: – Provide loans to countries in financial difficulties – Intervene in the debt primary and secondary markets – Finance recapitalisations of financial institutions through loans to governments• To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets• EFSF is backed by guarantee commitments from the euro area Member States for a total of €780 billion and has a lending capacity of €440 billion. 23
  • 2 precedents • November 2010: it financed €17.7 billion of the total €67.5 billion rescue package for Ireland (the rest was loaned from individual European countries, the European Commission (EFSM) and the IMF) • May 2011: it contributed one third of the €78 billion package for Portugal 24ALBERTO ALEMANNO - HEC PARIS
  • EFSM • This mechanism provides financial assistance to EU Member States in financial difficulties: loan or credit line granted to Member States • Memorandum of Understanding between the Member State and the Commission. European Central Bank supervises it. • The Commission is the borrower (up to € 60 billion) in financial markets • Collateral is EU budget guarantee (EU enjoys AAA) • The Commission then on-lends the proceeds to Member State • All interest and loan principal is repaid by MS VIA the Commission. • The EFSM has currently been activated for Ireland and Portugal, for € 48.5 billion to be disbursed over 3 years. 25ALBERTO ALEMANNO - HEC PARIS
  • • The EFSM and the EFSF can only be activated after a request for financial assistance has been made by the concerned Member State and a macroeconomic adjustment programme, incorporating strict conditionality, has been agreed with the Commission, in liaison with the European Central Bank (ECB). 26ALBERTO ALEMANNO - HEC PARIS
  • April 2010Amid fears of default, Standard & Poors slashedGreeces sovereign debt rating : BB+ or "junk" status 27 ALBERTO ALEMANNO HEC PARIS
  • May 2010A series of austerity measures was proposedSocial unresthttp://www.youtube.com/watch?v=nxztGzUb66U&feat! ALBERTO ALEMANNO -- HEC PARIS 28
  • December 2010 • Financial emergency support made permanent: – EFSF/ESFM will become European Stability Mechanism (ESM) – From 2013 – To complement the new framework for reinforced economic surveillance in the EU: • stronger focus on debt sustainability • more effective enforcement measures • focuses on prevention and will substantially reduce the probability of a crisis emerging in the future. 29ALBERTO ALEMANNO - HEC PARIS
  • Legal basis of ‘ESM Treaty’• Treaty Revision (simplified) : – addition of third para to Article 136 TFEU – ratification by all EMU countries – But intervention of the German Constitutional Court, then entered into force in June 2011 ALBERTO ALEMANNO - JEAN MONNET CHAIR IN EU LAW & RISK REGULATION - 30 HEC PARIS
  • in the meantime ALBERTO ALEMANNO - JEAN MONNET CHAIR IN EU LAW & RISK REGULATION - 31 HEC PARIS
  • ALBERTO ALEMANNO - JEAN MONNETCHAIR IN EU LAW & RISK REGULATION - 32 HEC PARIS
  • The ‘six-pack’• EU Commission proposed in 2010: - To strenghten economic/fiscal policy coordination and surveillance- EMU Member States agreed on: - European Semester – preventive coordination of budgetary and economic policies of € members - EUROPLUS PACT – signed by EMU members but open to non-members ALBERTO ALEMANNO - HEC PARIS 33
  • Eurosemester 34
  • 35ALBERTO ALEMANNO - HEC PARIS
  • Not enoughALBERTO ALEMANNO - HEC PARIS 36
  • June 2011Standard and Poors downgraded Greecessovereign debt rating to CCCthe lowest in the worldfollowing the findings of a bilateral EU-IMF auditwhich called for further austerity measures ALBERTO ALEMANNO - HEC PARIS 37
  • ALBERTO ALEMANNO July 2011• Additional €109 billion to Greece• Private sector agreed on debt restructuring of 21% (so called ‘hair-cut’) 38
  • Not enoughALBERTO ALEMANNO - JEAN MONNETCHAIR IN EU LAW & RISK REGULATION - 39 HEC PARIS
  • September 2011• Greek debt turned bigger than expected• Growing concern for French bank system (highly exposed to Greek debt)• Italy on the radar of the bond markets, due to its 120% debt and low economic growth ALBERTO ALEMANNO - HEC PARIS 40
  • October 2011• All EU members agreed on new Rescue Plan: – 50% debt restructuring for Greece (no 21%) to enable Greece to reach 120% GDP debt ration by 2020 – EFSF from €440 to €1000 billion – Higher core-capital ration of 9% on EU banks – Economic governace: • Golden rules in national constitutions • Euro Summit Meetings + Euro-group ALBERTO ALEMANNO - HEC PARIS 41
  • Rescue Planbuying some extra time ALBERTO ALEMANNO - HEC PARIS 42
  • A video on the Scr, ehm Rescue Planhttp://www.xtranormal.com/watch/12611732/the-e ALBERTO ALEMANNO - HEC PARIS 43
  • • Doubts about viability of Rescue Plan – EU members did not chip in into the boosted EFSF – No real banking deal yet in Greece (bank lobby conditioned the 50% haircut to a 90% voluntarily acceptance rate among its banks): why voluntary? • Only way to avoid activation of CDS contracts, what would trigger billion € claims against insurances – In any event, only 120% debt GDP ratio by 2020: the double the maximum allowed ALBERTO ALEMANNO - HEC PARIS 44
  • November 2011 ALBERTO ALEMANNO - HEC PARIS 45
  • 46ALBERTO ALEMANNO - - HEC PARIS
  • 2 scenariosALBERTO ALEMANNO - HEC PARIS 47
  • No Treaty ChangeFinding a workable solution w/o changes:Article 136 TFEU offers special powers to (only)eurozone countries to:- Strenghten coordination/surveillance budgetarydiscipline- Set out economic policy guidelines dismessed as SHORT TERM PERSPECTIVE ALBERTO ALEMANNO - HEC PARIS 48
  • We got a fan!
  • Treaty Change Fixing Euro’s birth defect: Transferring economic policy to the EU (not only monetary) Unpopular and excuse to open a Pandora’s box (UK claims for special treatment, etc) Dismissed as LONG TERM PERSPECTIVE 50ALBERTO ALEMANNO - HEC PARIS
  • We got 2 fans ALBERTO ALEMANNO - HEC PARIS 51
  • December 5, 2011 ALBERTO ALEMANNO - JEAN MONNET CHAIR IN EU LAW & RISK REGULATION - 52 HEC PARIS
  • December 8-9, 2011 ALBERTO ALEMANNO - JEAN MONNET CHAIR IN EU LAW & RISK REGULATION - 53 HEC PARIS
  • Ideas on the table • Transform the EFSF into a European Monetary Fund (EMF): – to provide governments with fixed interest rate Eurobonds at preferential rate • Eurobonds issued jointly by the 17 euro nations • Fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties; the European court of justice ensuring that countries meet their obligations  All seem to require a TREATY CHANGE 54ALBERTO ALEMANNO - HEC PARIS
  • Fiscal compact• An intergovernmental treaty which was signed by all of the MS of the EU except Czech Republic and UK on March 2, 2011• The treaty will enter into force on Jan 2 2013 if by that time 12 Member States of the euro area have ratified it 55
  • Fiscal compact• national requirement to have national budgets that are in balance or in surplus: – Balance budget rule (deficit no > 0,5 % GDP)• ECJ would fine a country up to 0.1 % of GDP if this was not done a year after ratification• Membership required to be eligible to ESM 56
  • ESM• the European Stability Mechanism will be an intergovernmental organisation under public international law• Located in Luxembourg• Permanent bail-out mechanism• Open to all Members in Fiscal Compact 57
  • 58ALBERTO ALEMANNO - HEC PARIS
  • 59ALBERTO ALEMANNO - HEC PARIS
  • A glimpse of hope“I do absolutely believe in the European project.I think it is the most noble political ideal inhuman history in a thousand years”Peter Sutherland, former WTO Director General ALBERTO ALEMANNO - JEAN MONNET CHAIR IN EU LAW & RISK REGULATION - 60 HEC PARIS