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H.-W. Sinn
H.-W. Sinn
Th The E e European pean Balanc ance-of
- f-Paymen
ments Cris isis is
Hans-Werner Sinn May 2012
H.-W. Sinn Th The E e European pean Balanc ance-of of-Paymen - - PowerPoint PPT Presentation
H.-W. Sinn Th The E e European pean Balanc ance-of of-Paymen - - PowerPoint PPT Presentation
H.-W. Sinn Th The E e European pean Balanc ance-of of-Paymen ments Cris isis is Hans-Werner Sinn May 2012 H.-W. Sinn 1. The bubble 2. The balance-of-payments crisis 3. The loss of competitiveness 4. The cost of the rescue operations
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- 4. The cost of the rescue operations
- 1. The bubble
- 2. The balance-of-payments
crisis
- 5. Two options for Europe
- 3. The loss of competitiveness
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- 1. The bubble
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1985 1990 1995 2000 2005 2010
% Italy Greece Ireland Spain Portugal France Germany Introduction of virtual euro Introduction of euro cash Irrevocably fixed conversion rates Belgium
Source: Thomson Reuters Datastream.
5 10 15 20 25 30 40 35 EU Summit in Madrid
Net yields for 10-year government bonds
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1985 1990 1995 2000 2005 2010
% Italy Greece Ireland Spain Portugal France Germany Introduction of virtual euro Introduction of euro cash Irrevocably fixed conversion rates Belgium
Source: Thomson Reuters Datastream.
5 10 15 20 25 30 40 35 Conference of EU governments in Madrid
Net yields for 10-year government bonds
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2. The loss of competitiveness
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20 40 60 80 100
108
Slovenia
82
Slovakia
67
Greece
56
Spain
53
Ireland
51
Cyprus
47
Portugal
44
Luxembourg
40
Italy
37
Netherlands
26
Eurozone
25
Belgium
25
France
22
Finland
17
Austria
9
Germany
Price development 1995-2008
%
Source: Eurostat, calculations by the Ifo Institute.
March 2012
Trade-weighted appreciation vis-à-vis other euro countries: GIIPS: + 30% Germany:
- 22%
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Necessary real write-down in the Eurozone (Goldman Sachs)
Portugal 35% Greece 30% Spain 20% France 20% Italy 10% to 15% Ireland 0% to 5%
Source: Goldman Sachs.
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Index Q3
- 2008=100
France
Source: European Commission.
Greece Ireland Portugal Spain Italy
88 92 96 100 104 108
2005 2006 2007 2008 2009 2010 2011
Real exchange rate
(GDP deflator relative to rest of Eurozone)
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- 3. The
balance-of-payments crisis
(Sinn & Wollmershäuser, CESifo WP 3500, NBER WP 17626, 2011)
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Bundesbank
(left-hand scale)
GIPS
(right-hand scale)
- 700
- 500
- 400
- 300
- 200
- 100
100
- 600
- 100
100 200 300 400 500 700 600 April 2012 644 bn
Target balances: German claim and GIPS debt
Billion euros Billion euros
- Feb. 2012
- 671 bn
Netherlands
(left-hand scale) March 2012 157 bn
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547
146 100 45 0
- 4 -
10 - 10 - 35 - 51 - 63 - 85 - 96 - 106
- 194
- 211
- 300
300 600
(End of February 2012)
Billion euros
Target balances in the Eurozone
Source: IMF, IFS; Deutsche Bundesbank; De Nederlandsche Bank; Banco de España; Banca d‘Italia.
GIIPS: -671
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Credit and goods Balance-of-payments imbalances
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Credit flow stops Balance-of-payments imbalances
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Capital flight Balance-of-payments imbalances
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Balance-of-payments imbalances Capital flight
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Balance-of-payments imbalances Capital flight
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Reprinting the money Balance-of-payments imbalances
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What happened to the money flowing into the core?
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Why was it so easy to reprint the money?
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ECB collateral requirements
Date
Standard Until 24 October 2008 A- From 25 Oktober 2008 BBB- 3 May 2010 – 7 July 2011 Rating requirement waved for government bonds of Greece, Irleland and Portugal ELA credit Non-traded ABS created by commercial banks Company credit, national liability
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Germany and the Netherlands received for their current account surpluses in 2008-2012 only Target claims.
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Accumulated current account surplus
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Target claim and current account surplus
% of GDP
- 10
- 5
5 10 15 20 25 30 35
Target claims Germany
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Accumulated current account surplus
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Target claim and current account surplus
% of GDP
- 10
- 5
5 10 15 20 25 30 35
Target claims Germany Netherlands
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4. The cost of the rescue
- perations
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Target liabilities** (GIPS and Italy) ECB purchases
- f government bonds*
- 1. rescue plan Greece (EU)
- 1. rescue plan Greece (IMF)
Portugal (IMF, EFSM, EFSF) Ireland (IMF, EFSM, EFSF)
1269
Until now awarded Potential with preliminary ESM
* Data update: 17.5.2012 ** Data End of February 2012
The European bail-out funds (billion euros)
German exposure****
386
(without ECB)
883
671 212 77 63 120 78 30 18
- 2. rescue plan Greece (EU)
- 2. rescue plan Greece (IMF)
IMF EFSM ESM guarantees
2153
1270
(without ECB)
883
671 212 53*** 620 188 250 49
Capital contribution promised by EFSF
80 30
656
286 57 15*** 10 80 15 168 2 22
*** Credits disbursed by the end of 2011, unused resources to be released by the EFSF.
**** if GIPS countries and Italy default
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* Data update: 17.5.2012 ** Data End of February 2012
The European bail-out funds (billion euros)
*** Credits disbursed by the end of 2011, unused resources to be released by the EFSF.
**** if GIPS countries and Italy default
German exposure**** 656
286 57 15*** 10 80 15 168 2 22
Netherland´s exposure**** 141
60 12 3*** 2 17 5 35
1
5
in % of GDP (2011) 26 23
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- Fiscal rescue operation circumventing parliaments
(Europe is no nation)
- High risks for the core central banks
- Eurobonds follow with necessity
- Uniform interest despite differences in credit risk
imply interest subsidies
- Allocation of capital through a central planning agency
rather than the capital market
Why is the Target credit a problem?
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Really rescue?
- 1. Wrong asset prices are supported
artificially, capital stays away.
- 3. Wrong goods prices and wages are
supported artificially: Current account deficits are maintained.
- 2. ECB chases away the interbank
credit.
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- 5. Two options for
Europe
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Two options for Europe
- 1. Eurobonds and Target credit like
today, political debt constraints
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Two options for Europe
- 1. Eurobonds and Target credit like
today, political debt constraints
- 2. Liability, interest spreads, and
settlement of Target balances with marketable assets
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2 4 6 8 10 12
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
USA
0.1% April 2012 21 bn dollars
% of GDP (of the previous year)
Target and ISA balances
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Eurozone
April 2012 947 bn euros
USA
0.1% April 2012 21 bn dollars
2 4 6 8 10 12
10.1%
% of GDP (of the previous year)
Target and ISA balances
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A crisis procedure: insurance with deductibles
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I II III
Liquidity crisis
- Tempory help (two years)
Impending insolvency
- Piecemeal approach maturity by maturity
- Other maturities cannot be called due (CAC)
- Haircut up to 50%
- Replacement bonds, secured up to 80%
- Upper bound for guarantees and liquidity help:
30% of GDP Full insolvency Exit from the Eurozone (my proposal)
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- 6. Conclusions
- US model is better, because it has harder budget
constraints.
- ECB causes capital flight and maintains
current-account imbalances.
- Balance-of-payment crisis caused by
loss of competitiveness
- The eurozone needs an internal realignment.
- Target: 947 billion euro bailout program not
sanctioned by any parliaments
- EEAG bankruptcy procedure for help and orderly default
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