The Crisis Will Spread Without a Plan B
Continuing on the path of least resistance – a “Plan A” of official financing banking on a mix of deep fiscal cuts, inadequate structural reforms and hopes that markets will stay open, with growth doing much of the heavy lifting – is a risky bet that is very likely to fail. Already this week, financial markets and credit rating agencies have voted against this approach and started to price in a high probability that Greece will need to restructure its public debt coercively, with contagion to the rest of the eurozone periphery now a serious risk. Augmenting the programme for Greece alone – up to €100bn-€120bn as suggested by the IMF – will not work either.
Far better to move to Plan B. This would involve a pre-emptive debt restructuring for Greece; a strengthened fiscal adjustment plan in the eurozone periphery; far-reaching structural reforms; a larger IMF/European Union programme to help Greece and prevent contagion to others; further monetary easing by the European Central Bank; fiscal and domestic demand stimulus in Germany; and a co-ordinated effort to address the institutional weaknesses of Europe’s economic and monetary union.
Belgium’s successful fiscal adjustment in the 1990s is often cited in support of the current approach. But Belgium benefited then from a buoyant global economy and falling interest rates. By contrast, Greece and the eurozone periphery today face the challenges of great divergence within Europe, a loss of competitiveness, sharply rising real interest rates and a fragile recovery.
Plan A entails a brutal fiscal retrenchment to restore debt sustainability. It will lead to higher unemployment and social unrest now, but only restore competitiveness in the distant future. It will intensify deflationary and political pressures in Europe’s south and so raise real interest rates over time. If it is not seen to be working right away, real interest rates will continue to rise sharply and quickly as they have this week. It will also exacerbate market fears of subordination: the more IMF support is needed, the larger the haircut meted out to private sector creditors if restructuring is eventually required.
Thus, Plan A risks a disorderly default and financial crisis. The alternative route of a pre-emptive debt rescheduling via an exchange offer has worked where it was tried early enough and supported with enough official financing and political commitment: Pakistan and Ukraine in 1999, Uruguay in 2002 and the Dominican Republic in 2005.
Much time has been lost in denial, but if the following steps are taken it might not be too late to avoid a disorderly outcome. First, use the experience of earlier emerging market “test cases” for sovereign debt restructuring. Second, prepare an exchange offer with a menu of options for the range of private creditors. Third, use some of the planned official support to provide credit enhancements for the new public debt; use the rest to provide financing for the ongoing deficit at reasonable interest rates. Fourth, use the time lent by the stretched maturities and reduced net present value of the debt to implement a comprehensive structural reform programme to boost competitiveness.
All of this must be accompanied by a similar fiscal adjustment and structural plan for other eurozone members on the front line – Portugal and Spain in particular. Such a plan would also benefit from much larger IMF financing, conditionality and surveillance. The ECB must be on-side with refinancing to forestall a run on Greek banks; easy monetary policy to weaken the euro, thus helping to restore competitiveness and prevent deflation; and liquidity facilities for overexposed third-country banks. Ultimately, measures are required to boost aggregate demand in Germany and elsewhere in northern Europe, thereby encouraging a rebalancing of eurozone growth.
Such an approach would have a good chance of success and show that Europe can learn the lessons of the past – even if they come from emerging markets. Unfortunately, while a Plan B is increasingly urgent, it is not necessarily becoming more likely. For now, the official sector is stubbornly sticking with a failing Plan A whose underlying flaws would not be resolved with more IMF support.
Nouriel Roubini is chairman and Arnab Das head of market research at Roubini Global Economics
All rights reserved, Roubini GlobalEconomics, LLC
12 Responses to “The Crisis Will Spread Without a Plan B”
Little Saver • May 1st, 2010 at 2:25 am
Since plan A is the chosen one, resulting failure will lead to contagious raisings of interest rates, more failures, contagion all over up to the last safe haven, US dollar and Treasury securities?
blind man • May 1st, 2010 at 1:08 pm
key words: investment of capital , debt saturation , (then what?)…buy protection , short , market making in virtual space ,market making in the universe of “protection”.interests in opposition. market making at the circus. safe havendiverting capital from deteriorating money system markets into virtualmade markets. on the golf area. print moe money for moe made markets. then buy protectionin the protection rackets. bury gold back in the ground, eat lead.then buy protection. bury self in the golf area.then bail out the protection racket shorts and casino pit bosseswith spilled oil and fouled sea food. as no one can work anymorewithout doing more damage. to something sacred.a fine kettle of fish:… ongoing..http://www.swarmusa.com/vb4/showthread.php/1902-When-You-re-A-Kleptomaniac-Stealing-Looks-Normal.http://market-ticker.denninger.net/archives/2256-When-Youre-A-Kleptomaniac,-Stealing-Looks-Normal.html.When You’re A Kleptomaniac, Stealing Looks NormalThe Market Ticker ®Friday, April 30. 2010Posted by Karl Denninger in Politics at 15:18When You’re A Kleptomaniac, Stealing Looks NormalThe WSJ has an interesting article that deserves some exposition:As debate started in the Senate Thursday on the broad overhaul, some administration officials and lawmakers said they worried the amendments could backfire, steering lending and trading in complex financial instruments to hedge funds and other finance companies that are less regulated than banks. There are also fears that tight limits on U.S. banks could put them at a competitive disadvantage, because similar restraints don’t exist for their overseas rivals.Notice the weasel in here. One part (trading complex financial instruments) should be diverted to hedge funds and other unregulated – and free-to-fail, no-backstopped firms.The other part (lending) will always be done by banks – you have one on the corner, or a credit union, that will write you a loan, yes?Sens. Ted Kaufman (D., Del.) and Sherrod Brown (D., Ohio) plan an amendment that would prohibit any bank from ever holding more than 10% of the country’s deposits and put strict caps on the debt banks issue.This is the amendment that I highlighted with two Tickers, one text and one, for the “visually inclined”, in video. This amendment deserves to be law right now – one way or another.Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) have worked on an amendment that would force commercial banks to separate from investment banks—revisiting the Glass-Steagall Act of the 1930s.That plus the above would effectively BE Glass-Steagall.I like that a lot.Obama administration officials have declined to weigh in on any specific amendments, with one exception: a move by Sen. Bernie Sanders (I., Vt.) to give the government more power to audit certain operations at the Federal Reserve. Fed and administration officials have signaled they would fight to stop it at all costs. Mr. Sanders has more than a dozen co-sponsors.Why should the administration fight such a thing? What possible purpose – that doesn’t involve scams and fraud – is served by The Fed being able to operate in secrecy?”Hopefully, common sense and maturity will take control, and the hyperbole and populism, while good for the TV cameras, will be put aside,” said Mr. Gregg said.Mr. Gregg (and the rest of you) ought to read this (warning – not mine, and full of colorful language. Not suitable for children and all that:)“I’m sure you have the answer, you and Ron Paul and all the other pot-smoking libertarian do-gooders have it all figured out. But what I’m saying is, no confidence means end of the confidence game. That’s what Lehman showed. Every single player in finance suddenly had to face the fundamental problem—this whole fu!@ing economy is built on fraud and lies and garbage. So when Lehman collapsed, every single player panicked, going, ‘If Lehman was nothing but a Ponzi scheme—and I know what I’m running is a Ponzi scheme—holy shit, that means everyone else is running a Ponzi scheme too! Run for the exits!’ No one trusted anyone else, everyone pulled out, and the entire global economy collapsed just like that. And that meant your parents, my parents, every teacher, every fireman, every person in the country going into retirement, every price on every asset—wiped out.Oh. You mean that “if we scam and screw people enough, then you must let us keep doing that, lest we have riots or even civil war”?That seems to be the argument that Judd Gregg and others – including Geithner and Obama – are putting forward.Here’s the problem with the argument: It doesn’t work in the long haul.It got a lot more vicious and personal than this, but when our verbal slap-fight ended—and he paid the bill—I thought about what he said, and it made a lot more sense. Fraud has become so endemic in this country that it’s woven its way into America’s DNA, forming a symbiotic relationship that can’t be undone without killing off the host. If they push it just a little too hard, the entire American economy could crash, asset values could tank, and that means tens of millions of extremely pissed off retirees and Baby Boomers. As the Wall Streeter put it: “Whoever is responsible for bursting this latest bubble by exposing all the fraud—and tanking all the markets—will not only be out of power for at least a generation, but they’ll all have to get radical reconstructive surgery on their faces and seek political asylum somewhere remote. No one wants to be that guy, and that’s why it’s not going to happen.”That may be true, but all bubbles to eventually burst, all Ponzi schemes do collapse. The only question is when. For those of us not on the verge of retiring, the sooner we have this day of reckoning and get it over with, the better.What the author forgets is that for those who are on the verge of retiring, you’d be better off getting it over with now and choosing not to retire, than having it happen once you do and being completely and irredeemably hosed.In case you’ve forgotten, this isn’t uniquely (or even largely) the fault of one political party or the other. It’s both.But here’s the key: The party that does not put a stop to this and gets tagged with obstructing locking all these ignoble, felonious bastards up will be the one that – at best – never darkens the halls of Congress or The White House again.,……………………….,ps.people have/had temporal plans. 1 day, 1 year, 10 years.all that is gone with the advent of international protectionmarkets in the field of debt saturation of fiat currencies.confusing as virtual made markets lay claim on real deflatedassets. moving in for the “kill”. captured by bullshit,the eternal problem, the destiny of the mind of man.a sort of linear expression of the fear core of rationality.whatever….insert music here, of your choice..[ ].ppss.interesting testimony on c-span this past week. sort of likethe blind bludgeoning the blind while the blind cheat the deaf.god i love this species! we have so much……?and manage to do so little with it. a universal principle!
blindman • May 1st, 2010 at 1:53 pm
oh yea, anotherkeyword: “long in exposure”. and “closer to home”.
blindman • May 1st, 2010 at 2:23 pm
the big short and the big long….”the big short saved your rear end” c.levin..this all sounds too horrible to contemplate anyfurther..what have we come to?
Guest • May 1st, 2010 at 6:25 pm
Damon Vrabel – Goldman Sachs, Chess, and the GodfatherJust this morning I was discussing that there were obviously games being played with Goldman. According to Mr. Vrabel, that game is chess..http://www.swarmusa.com/vb4/showthread.php/1908-Damon-Vrabel-Goldman-Sachs-Chess-and-the-Godfather.
Guest..... • May 1st, 2010 at 6:57 pm
blindman • May 1st, 2010 at 9:08 pm
Guest . • May 2nd, 2010 at 1:11 am
http://news.bbc.co.uk/2/hi/americas/8656415.stm?ls.“way of life”
b.... • May 2nd, 2010 at 4:02 pm
.http://maxkeiser.com/2010/05/02/ote52-on-the-edge-with-max-keiser-david-degraw/..http://ampedstatus.com/david-degraw-interviewed-on-ring-of-fire-rt-video.here some more links …. an unavoidable wave of informationdescribing “the big fraud”. “civilization” bungled by attemptsat empire and institutional usery. language dissociated fromreality or language securitized synthetically, functioning asa cover or fraudulent representation of what it pretends todescribe, making markets? yes, there are real markets andvirtual ones, in opposition and the virtuals have no humanityat all. (doing what they were designed to do) ?
Little Saver • May 3rd, 2010 at 2:31 am
As Angel Gurria, OECD Secretary General, said this week: “This is like Ebola. When you realise you have it you have to cut your leg off in order to survive…… it is contaminating all the spreads and distorting all the risk assessment measures. It is also threatening the stability of the entire financial system.”http://www.roubini.com/euro-monitor/258818/what_a_difference_a_day_made_Big question: where, when and how will this Ebola end?
Guest b... • May 3rd, 2010 at 11:20 am
http://salsa.mydccc.org/o/30019/t/7/tellafriend.jsp?tell_a_friend_KEY=57.Do More: Contact Your FriendsThank you very much for contacting your Senators and urging them to cosponsor the Federal Reserve Transparency Amendment. We will keep a running tally of cosponsors at unmaskthefed.com – so, please, check back often to see if your Senators sign on.There’s not much time until the vote and we need to step up the pressure. Spread the word and encourage your friends and family to contact their Senators as well.I’m writing to urge you to cosponsor and vote for the Federal Reserve Transparency Amendment. This amendment will allow the American people to know to whom the Fed loaned trillions of dollars of our money. If this amendment does not pass, the Fed can continue to make sweetheart loans to whomever it wants, without telling Congress or the American people.There are a number of problems with the existing bill:1) It does not allow audits of the mortgage backed security purchase program, a $1.25 trillion program that at this point comprises the bulk of the Fed’s balance sheet. This program includes Freddie and Fannie backed debt.2) It does not allow audits of possible losses on foreign currency swap lines, of which there were more than $500 billion at the height of the crisis. This includes unlimited credit lines granted to central banks all over the world, solely through at the discretion of Federal Reserve and without the input of any elected official or the State Department.3) It does not allow audits of open market operations, where there is ample room for errors, market manipulation, and insider trading violations.4) It does not allow audits of possible losses on securities acquired through non-section 13(3) facilities. This includes looking for possible losses, seigniorage, political conflicts and costs to the Treasury.In the existing bill, all audits must remain redacted. The GAO can’t even tell Congress to whom the Fed is lending money, the amounts it is lending, or any details about collateral or assets held in connection with any credit facility. The GAO can never release a full version of any audit unless the Federal Reserve first chooses to shut down the audited credit facility.The Federal Reserve Transparency Amendment that I am urging you to support does the following:1) Requires the non-partisan Government Accountability Office (GAO) to conduct an independent and comprehensive audit of the Federal Reserve within one year after the date of enactment of the financial reform bill;2) Requires the GAO to submit a report to Congress detailing its findings and conclusion of their independent audit of the Fed within 3 months; and3) Requires the Federal Reserve within one month after the date of enactment to disclose the names of the financial institutions and foreign central banks that received financial assistance from the Fed since the start of the recession, how much they received, and the exact terms of this taxpayer assistance.4) Does not interfere with or dictate the monetary policies or decisions of the Federal Reserve.59 Senators, 320 members of Congress and two federal courts have given lip service to Fed transparency. Now is your chance to act. I urge you to cosponsor the Federal Reserve Transparency Amendment. Thank you for your time and consideration.
blind and tone deaf man. • May 3rd, 2010 at 3:01 pm
http://www.youtube.com/watch?v=SlpQc4i5RAE.Buffett Praises Lloyd Blankfein, Backs Goldman Sachs: Video.warren buffett comparing goldman’s pr problemin losing the first round/first news cycle,to the u.s.a. initially losing in the firstmonths of it’s involvement in world war II.i guess that was an off the cuff analogy , orwell conceived to associate the firm’s imagewith that of the u.s.a.(wwII savior, …ussr). pr savvy?in the analogy critical public opinion playsthe part of hitler and the nazis.that doesn’t seem legitimate at all. the derivativekool aid has taken control of his mind. maybe all ofour minds. we have accepted the worthlessness of humanlife proposition granted to us by the new breed of marketmakers and their masters, as everything is just a commoditythat can be bought or traded with unregulated/ deregulated/secretly manipulated and distributed fiat currency.not to mention the off book, enron, synthetic flea circusswaps that leverage the leverage to create the needed liquidityto drown everyone/ us in place..and he implies that the critical thinking public canbe likened to hitler?.sounds desperate to me…we started out wanting to know what it all meansand ended up not knowing what anything means.the cup was full and then it was empty..”its life’s illusions that i recalli really don’t know life, at all.” j.m..and i don’t know how a system of fiat currency,propagated via fractional reserve lending at interest,that is with interest due, laced with synthetic corporatefinancial derivatives and other releveraging typerisk reducing and producing instruments could everqualify as a system of “coining money” or serve theinterest, human, of people. house of cards, shifting sands,pyramid scheme, mathematical impossibility, musical chairswith no chairs etc.. etc….they will have to double down with otherpeoples money, maybe 7 generations into thefuture, or fold. never fold with other peoplesvalue, 7 generations into the future at yourdisposal they will conclude. audit the fed..the mess age is borrow as much as possible asoften as possible and default when needed. yourcreditor can then go for a bailout if they haven’talready bought protection on your guaranteed default.then triple down. with other peoples money……if you buy products in a market look at the labelthat says where it is made and learn that language.the slaves that can speak the language have a highersurvival probability..meanwhile savers are priced out of everything asearned dollars are nothing in comparison to theliquidity tsunami generated by synthetic fleacircus economics. i think of that image fromthe 1920′s of the tycoon lighting his cigar witha hundred dollar bill. america, you have arrived.market makers, bonuses and all. here comes the dust..againhttp://www.youtube.com/watch?v=SlpQc4i5RAE.Buffett Praises Lloyd Blankfein, Backs Goldman Sachs: Video.warren buffett comparing goldman’s pr problemin losing the first round/first news cycle,to the u.s.a. initially losing in the firstmonths of it’s involvement in world war II.i guess that was an off the cuff analogy , orwell conceived, to place those who think goldman’spractices are either illegal, treasonous, or otherwisenoxious and toxic, in his analogy, in the positionof the Nazis of that time. so the critical publicopinion is seen as the evil enemy. we should kindly approvewhen we are cheated, lied to and have our fortunesplundered, have everything commodified and traded down tothe dna of our food and ourselves. and we supply the fundingfor others to do the trading and owning of…. us.thank you market makers for providing the liquidity, more debt, necessary totransform the global human experience into a living, throbbingnear death hell bardo..or maybe dick cheney was right and debts don’t matter..until you have no credit. / debt saturation..again
