Münchau prescribe incumplimiento ante MEDE como vía al eurobono

Genevieve Signoret & Patrick Signoret

Wolfgang Münchau en FT escribe que la única solución a la crisis de deuda de la zona del euro deberá comenzar con uno o más países incumpliendo ante el MEDE y otros fondos de rescate.

The solution can come only from a combination of two instruments – debt monetisation through the European Central Bank and default into the European Stability Mechanism, the €500bn rescue fund that becomes operational in July.

In practice, any resolution of the crisis will involve more of the latter than the former. We have reached the limits of what the ECB will do. I agree with Paul de Grauwe, of the London School of Economics, that direct purchases of government bonds would have been more effective than the indirect route of long-term refinancing operations. But the ECB is unlikely to go that far.

Instead, the most obvious solution will come through a default by a troubled eurozone country into the ESM and the other rescue funds.

…The same result – default into the ESM – will happen in other eurozone countries. The Spanish government is considering setting up a company to manage the assets of its banking system. It would not be a bad bank. The government is not in a position to pay for the losses. But those losses will ultimately have to be funded and there is no way that the Spanish banking sector will attract new private capital on a sufficient scale. An ESM programme is thus inevitable. But ESM programmes are loans, which the Spanish government will have to repay. The best way to mutualise the losses would be to default into the ESM system, rather than set up a eurozone-wide bank resolution system.

At the point of default by Greece or Spain, the ESM would register losses. Barring a further agreement, member states would be obliged to fund these losses, which would effectively become cross-border transfers. I doubt it will come to that, however. Some member states will not be able to take part. Does anybody really believe that Italy will be in a position to pay for Spain? An alternative could be to split the ESM into a bank resolution fund and an ordinary crisis mechanism. The first would have to be funded through a joint-and-several debt liability – in other words a eurozone bond.

Let us think through the politics of all this. If the ESM is split, nobody will be asking the question: are you for or against a eurozone bond? The question becomes: do you accept a specific eurozone bond to deal with bank resolution and insurance, or would you rather honour your contractual obligations under the ESM and pay up. The latter is, literally, the default option. If nothing else happens, member states have to make up the losses of the ESM under existing rules. I predict that the Germans and Dutch would at that point want a eurobond as a means to cut their losses.