tv [untitled] May 16, 2012 10:00pm-10:30pm EDT
capital. everybody knows it. banks knows it. they don't say to each other. there hatch beve been attempts recapitalize them and has not been done on anything like the scale required. and all the ecb does -- most of what the ecb does is provide liquidity. which is the manifestation of the fear of insolvency. they only address insolvency to a very limited extent. they do at a certain extent. $1 trillion, in my estimate, involves over the three years, a net subsidy to the banks by the ecb of at least 100 billion euro. because they're giving the stuff for out over three years at a rate tied to the re-fi rate which its 100 basis points. 50 basis points by end of the year. every the threeies. 60 basis funding against any
rubbish collateral. so if they had to get that funding in the market it would be 400 basis points plus if they could get it at all. there is a massiveness to the subsidy involved. the 100 billion for the euro area, a fraction of what is required. that its what the estimates said was required. we know how good these estimates are. represent were, the spanish central bank, in -- in march 2011? right. the total capital need of the spanish banking system. estimated, $15.15. nice number. a week after this was announced. proudly, i was at the imf, meeting. and they think, i think one of their people. central bank, supervisor. the regulator. and i asked him whether this pointer was in the wrong place? they thought it wasn't funny.
but i was underestimating it greatly. right. remember all, all the even latest program for recapitalizing spanish banks, and, an additional $35 billion of provisioning brings total provisioning to 137. that still assumes, household, mortgages are safe. right. and 600 billion euro was outstanding. and a very low, low -- loan loss ratio, 2.6% for something like that. and i know spain has tough, tough personal insolvency laws. and the entire extended family. in fact, the -- the extended family, just the house pets, right. guarantee any mortgage. in a country with 24% unemployment. and rising long term unemployment, ability to pay becomes an issue. you see that in ireland.
ireland had just the mortgages. and ireland of course had also very tough personal insol veven laws. and not making them tougher. moody's, the extreme version, for ireland, get up to 35 billion of additional losses coming the bank's way on mortgages outstanding of only just over 100 billion. now, spain is not having any plans -- don't get me wrong, for changing the personal insolvency laws. there is political contagion. the greek deal, be noncompliant, and have the write down on your privately held debt. their debt.
must be rankling in portugal and ireland though they're fully compliant. similarly the irish example of getting rid of the dickensian personal insol vevency and lett people walk away will be hard to reap cyst. i think they haven't begun yet to recognize the losses. and that's what flares up -- periodically. but, there is a trigger. the trigger now is greece. see months from now the trigger may be, engaging in a short-lived dickensianexperimen the markets discipline him and force him to be back to being us aausterity. so, see, the triggers can be
anything. it doesn't really matter. because the the underlying problem its the banks are oversized and undercapitalized. with many unrecognized losses that hatch beve been systematic hidden from us. nobody trusts the authorities anymore. the problem is not being addressed. important for the spanish government. we will have an independent audit. ireland did themselves a lot of good. the oej thing they didn't anticipate was the change in personal lautz. so this loss, 35 billion. 20 to 25 billion. will come the banks way by the way of losses was not in those stress tests. but you need serious independent information. i would like to see some private entity, and the european banking authority, and only employs three people. but to go in there and, vet. because unless we have the facts, the markets will never
be, have their mind put at ease. sorry. >> okay. i will ask you one more question and then open it up to the participants here. speaking about politics for a moment. how did the french elections changed anything or not in your view? >> well, as i say -- the recognition that -- fiscal policy is -- is, what it sound like. contractionary policies. some of the programs may hatch been excessively pro cyclical, assuming you can get no market funding to prevent it. already in the pipeline well before he put -- was -- was on the presidential track. the statement was made last october or november, that, if, it were to overshoot its deficit targets, he would not go back
for additional austerity measures. this of course -- declaration of intent, not necessarily he can make true. if he doesn't get funded. >> uh-huh. >> and this is -- you cannot accept in a few blessed or -- united countries -- like -- like the u.s., germany, and -- and japan. that choose when you -- engage in austerity unless you have access to sufficient nonmarket funding. but it makes a difference that you now have him -- saying, we would look to do a little bit more. they got something out of it. they will come in. take the remaining money in the -- in the european financial stability mechanism. $2.5 billion. they do $40 billion. and .4, .3% of gdp. it's nice. not going to make difference of
day and night. but for the rest, no, i think you will, if he gets the majority, at the -- at the -- in june, i think we will have the -- the -- the dick spechens one country experiment. he will call it balanced budget. that's because it would be making wildly optimistic revenue projections. the market will rightly interpret this as an increase, in the deficit and punish him with higher yields and rating agencies will downgrade. 260,000 frenchmen will, pack and move to london. keeping up property prices there. it is fine with me. but not so much with -- with those who are still -- trying to get into the housing ladder there. so, but -- fundamentally, french
socialists of mr. mitterrand, and his ilk are strongly european. he and mrs. merck ll lemerckle, they will get their act together, and, and come up with a slightly relaxed version, slightly less pro-cyclical version of this. there will be a growth pact component attached to the, the fiscal compact, the gross compact. the stability end growth pact. but it can't be more than a statement that says, we like growth, don't you? and that will never be it. >> we'll open the floor to members with questions. we have microphones over here. if you could keep it to one question, brief. introduce yourself as the you
have the microphone. does anyone want to start? right here. >> thank you. i'm richard wineart, you made a very convincing case of why a disorderly greek exit would be disastrous. can you walk uh through what an orderly exit would look like. >> it will always be disorder lou to certain extent. you have to have capital controls in before they exit. basically you have to have a bank holiday, foreign exchange controls, rapid in production of new currency, re-elimination. de facto, writing off of remaining greek sovereign exposure. that and then continued funding. this is going to be the hard part. you kick the ecb and the -- and the european members of it, where it hurts, by effectively,
defaulting on their debt. especially for official credit. you won't call it default, right. it is basically what they -- get constant face value. z zero coupon perpetuity. worth nothing. they may by able to get away with that. so you need continued funding for 29% 3,% of gdp, primary deficit otherwise they would have to tighten, and since i dupe belie do believe that the disruption to the portfolio, wrenching will take place as a result of nomination. all exit liabilities, under domestic law, can be nominated or liability under foreign law, probably not. some maybe, whatever. this is going to be, balance sheet that looked balanced. are going to be completely mismatched there will be some doing well. others going bust. and you can't be super sol venlt.
you can't be insolvent. net result is going to be, i think a deeper recession and therefore larger deficit. they don't get funding to deal with, to fund a new -- deficit i would be a catastrophe. hopefully they will get it. the ecb has the to keep on after they are out helping them for the banks. because the the banks will still have -- euro denominated liabilities that weren't under greek laws. all the banks are insolvent again. we need continued financial assistance from the euro system and from the imf for post exit greece. and for the rest, prayer. >> okay. other questions. surely. over here. sorry. >> you're painting a picture where greece leaves the euro but
stays want european union. a cup years ago, the ecb issued a legal working payer explaning that, essentially, there is no clear way of how to do any of the two. because the it is not in treaty. but that presumably an exit from the euro area would come with an exit from the european union. now are you saying that this is a case of they're just going to make it up as they go along or something else? >> no. this is exactly what it is. remember the great thing about the european treaties is, everything that is not in it, right, can be done. right? stow there is simply no provision for exit. from the euro area. there is a provision, the first time in the -- lisbon treaty, for exit from the eu. presumably exit from eu would be exit from the euro area. i know the papers will say, the
first, the serious study of the issue. and they are going to make it up as they go along. and they will -- permit greece to exit. reintroduce a new currency. absolutely no doubt about it. europe doesn't -- if they -- if they've really -- you know -- kicked -- greece into the middle east. would not be a wise move even with totally selfish national perspective. and i -- i think there is going to be -- this is the least of our troubles. you cannot -- always hire a lawyer, they will say it is okay. >> ha-ha-ha. dangerous statement in this audience the i want to ask you a question before we talk a few more from the audience. about germany. we hear about economic
rebalancing in germany and you hinted the bank was willing to tolerate higher inflation, consumer spending is stronger, is that happening or is germany the china of europe? >> not really. germany until recent lely were overheating they have been growing at a rate that hasn't been seen since the 60s. so, in effect there were signs of overheating. in the labor market. not in prices so much. in fact -- inflation, germany, is below the area average. that is larger however, because of, because of the sudden bids. right, the peripheral countries having massive indirect tax increases. so i think the underlying rate of inflation in germany is below that. no, the bank is willing to accept. the bank has no say in the matter. the bank, the policy, and the policy is in frankfurt. for the euro area.
all that it has done is discover aarithmetic. right. no, if the target. and it is quite serious about it t 2% on average. they are above it. if you know the periphery will have to do less than 2% if it is to regain competitiveness. somebody is going to have to do more than 2%. that's not economic. that is arithmetic. germany therefore, and finland, and the other -- bigs that are not -- trying to improve their value competitive areas in the euro area will have higher inflation. whether they like it or not they can't do anything about it. they don't set interest rates. they have a little bit of discreti discretion. so, germany, in monetary policy has one vote. so it's -- national central bank president. and, technically is not speaking for germany. but if you say that, he is -- he
has a legacy there. two of 23. this is not the choice of the bank. they haven't decided to accept inflation. they decided, two plus two does indeed equal four. >> a few member questions over here. >> to what degree will media get involved? and will one country try and talk to the electorate of another country? will people in germany, or entities of some sort, advertise and, present the position of the germans to the greek voters? or to the portuguese voters? or to the french voters? will that start to happen? >> it may well. we have had examples of politicians lecturing the electorates of other countries on what they ought to do. especially -- in one of the many irish referenda, the french were
pointing out that no country that accounted for -- 2%, with 3.5 million people should hold 400 million european, and that, of course went down like a ton of bricks. right? so, if this -- there is one way you are going to get the referendum lost it is for german, french politicians to remind where their interests lie. as private entities do it. probably written in bad english. and, you know -- i can hardly mention, built, conveying, messages that would be convincing to anybody any where. it may not happen. the european yet get the effective cross border lobby
of -- of industry or groups -- it's possible. it's possible. but i think it would be a minor issue. and more likely counterproductive. >> a question over here. >> how much is this reminiscent of the situation 30 years ago in the '80s when mitterrand came into power in france, there was a bunch of disarray in the euro zone. wasn't then ape euour a euro, e zone. u.s. currency was strong, for a three, four year period do you see the phenomenon happening again and what are consequences? >> it is similar. things move a lot faster. it took mitterrand two years before realizing he couldn't have this in one country. unrestricted capital account. fairly unrestricted capital account. and it now will take three months. i think that is the difference.
so if -- he gets a -- a majority, a lasting majority. zone party or left, we will have to, simply justify to his voters -- his political existence. he will have to engage i think in this pro-growth, but unfunded policy. and it will get slapped down i think by q-4. yeah. late summer crisis. yeah. >> any other member questions, mr. soris? >> could you comment on the -- the target two euro system and the controversy of articles by zin on the liabilities incurred
by jgermany? >> yes. an economist has done a disservice to his discipline, than professor zin on the writing of the piece on target two. what is target two imbalance. condifgs ttion of the central b. every central bank has one. it is simply the stock of knelt for an exchange reserve. it is uso claims. the cumulative overall balance of payments surplus. the official sentiment balance surplus. within the euro area. and it has increased massively. because germany doesn't just run historically an overall service, it runs a surplus, data aren't very good on this, within the
euro area. and in this, had capital infloeps into germany. so the finance account -- is in surplus as well. and so the -- the central bank makes it all add up. and it has been accumulating claims on the central banks like crazy. now is that a measure, is that a measure of exposure to the euro system? no. even if you have no target two in balance. say zero, there is still, they are still responsible for a percent of the losses or profits, made by the euro system in its monetary policy operations.
right. if greece leaves the same applies. then germany pays slightly more than 28%. greece is out now. if everybody walks out and germany is the last one standing. they will simply have a bunch of bilateral claims than the two, 27% share becomes the same as the -- as the target two imbalances. these claims are not extinguished. the claim comes to collect on them. so undoubtedly --
the bank, not necessarily germ no inc., because much of the increase in target two imbalances as the crisis started is the german private sector, shoving its bad foreign assets into the bank and into the german government. because -- there has been some increase in net german exposure to the euro area since beginning of the crisis. because, the -- the cumulative current count dech sit ineuro area of germany has been positive. much more than capital inflows. much of it is simply germans taking foreign assets home. since they can't do that in the aggregate, because that decries a bigger account surplus than they had, they are simply shoving it into the public sector. so the main, exposure change has not been for germany, but was within germany that the german
taxpayer is much more exposed than the german private creditor. there is an enormous capacity in germany to forget that you can't have an irresponsible borrower without having an irresponsible lender. and of course, germany in the unup to tu run up to the financial crisis was prime example of the irresponsible lender. they were shoving money into the periphery, island, spain, and, as if there was no tomorrow. and -- as a result of course, and, reflected the massive german savings rate. and that unwillingness to invest in it because of the returns, itch they'if they're obtainable there. then they recognize that the -- the periphery was indeed in trouble they repatrioted and put their money either in, in the bad assets either into the ecb, the bank, or into the
government, kfw took some, german state bank and german facilities. so, most of the debate is actually between the german taxpayers and original german creditors. germany prefers off to think of it as a fight between the -- the mediterraneans and the virtuous german savor. only a small part of the story. >> we have a minute or two left. i just want to ask you one sort of longer-term question. you spoke earlier about a small fiscal pot. i am wondering, beyond exits, orderly, disorderly, are we going to see some point, a stable, broader fiscal union? >> not in my lifetime. and i expect to live forever. but we will see a minimal fiscal europe. which is basically a collection of pots. we will see, for instance, the, esm, the successor of the
current alphabet soup. i think ultimately, increased in its authorized capacity, to -- to multiple trillions. my view is they need something like the noninflation, and their capacity of the ecb. but even then, just as there is now, there will be a loin that says, this limit, this ceiling, can be raised with, with unanimous consent of the government. and the liquidity facility. unsure ans fa s insurance facility. significant cross border insurance. and then it has to be associated with sovereign anti-structure mechanism, and the very part of the, off the -- off of the year's end. to deal with the future --
fiscal insolvency, which i think are, are likely to occur then you have 17, i think, going down to 16, and then, then, whatever -- coming in, 18. and soon -- you know, 26 countries. in the euro area. and throwing the uk out. then 27. with scotland in. and england out. that will all work. but -- so, the banking union, right, which is a single banking regulator, do away completely with -- with national banking sector. a single resolution, single resolution fund, as well. i think since there will be serious -- serious unsecured bank debt restructuring, both, subordinate and senior, in the euro area before this is over.
for a number of years afterwards. it will be difficult for banks to get term funding unsecured. without guarantees. and then, unable to give that in most countries. it needs to be, what i call a -- unsecured -- bank debt -- guarantee facility. and a finite fiscal pot again. so, recapitalization, facility. fiscal project, the -- the -- the loan guarantee facility. loan guarantee facility. and we needy poz it in sh depos. set up a privately funded backup fun, to handle any possible run, which will be never. it has to be separately. and that, hopefully they will have nice symbolic gesture of turning every bank to incorporate, instead of the