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tv   [untitled]    May 17, 2012 4:00am-4:30am EDT

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actually doesn't come from direct linkages of trade or portfolios. greece is 3% of your gdp. you can barely find it. and the portfolio exposure to the greek sovereign and the -- also the big banks has moved from the private sector to the official sector, to the ecb and to the efsf and the greek loan facility. and the rest of the exposure to the sovereign has might grated back home to greece. so this is manageable. for the rest of europe. the fear is, of course, that there will be contagion of exit fear. and exit means three things. new currency, say next -- assume the market focuses on portugal as the next country most likely to exit. new currency, new escudo, elimination of all existing
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contracts under domestic law and all existing securities under law into escudo and 50% deappreciation. knowing that you have a sudden stop. not just the deposit stop, the sudden stop. no sector, private, public, banking, nonfinancial, government can fund itself. and given that, if there is no way to fund through this market blockade, a country is driven out because better print your own money than have nothing. this i think is actually easily manageable. the ecb supported by the troika bill fund the sovereigns and the banks, and the banks will be able to fund the rest until the markets believe that no country that is more or less compliant with conditionality and not
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wanting to leave, and no country in its right mind would want to leave, will exit, and therefore the pressure comes off. now how is this going to end? not with a big bazooka, right. no part of big money, no ebonds on open uncapped scale, no last-minute opening of the german wallet. it's politically and constitutionally impossible. so what will happen, and ecb will not do anything that poses a material threat to its definition of price stability. they tolerate a bit. they do now, if inflation hits 6.2% instead of 2. but we're not talking about inflating our way out. it should be a solution, but it's simply not politically feasible unless they send the tanks into frankfurt. so what will happen is a mixture, is preventing
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disorderly sovereign defaults, but arranging ordinary sovereign structuring. preventing the disorderly collapse of systematically important financial institutions, but not necessarily shirking away from the what should ultimately be the provider of capital to banks of last resort, which is not the taxpayer, which can no longer do it in many european countries, but the unsecured creditors. and i expect we'll start to see that. with much of europe we can't have banks be capitalized by say converting credit into equity because in only three other sovereign euro member states do have a resolution for banks. in addition depositors are still not senior to order unsecured creditors. you really don't want to turn depositors necessarily into shareholders. that would be a shock to grandma. so -- but these things will be remedied. the ecb is now calling for it,
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for a special resolution regime, for the 34 largest banks. national regime for the smaller banks, and indeed also very important for a euro recapitalization fund. and this isn't something that probably will be funded by ebonds, but they will be finite capped amount of ebonds issued for, quote, a project. rather than 50% of your deficit, henceforth they'll be for joint and several accounts. okay. let me also say that the greek crisis is probably going to result in another important step on the way tounion, in europe which is the necessary condition i think for them to survive in the longer term. and coming out of it, some form of euro area wide, bank deposit guarantees. clearly, the money, now --
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likely to be loaded on donkeys and shipped over to albanian border, the ecb has effective two choices. either replace the -- the disappearing deposits with other forms of funding. if you do it for the euro area. the deposits are $6 trillion. for the periphery. so that's -- that's not conceivable. and -- and looking for a way of stopping deposits from leaving. it could be provided for the ecb. in the short run there may be no alternative. ultimately i think we will see here, concessions by the euro zone to the creation again of a small fiscal pot for deposit sovereign banking, several
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depotz d depotz de deposit insurance. i expect to see that. because the the alternative would be i think so much worse, the cost of doing it, and constitutionally and legally, it is -- the beneficiaries would not be government but, private sector. there is nothing in treaty that stops, you know, the national central banks or, government providing assistance, provided, competition laws to private entities in the economy. so i think we will see this small step towards banking union as a result of the -- the currency crisis in greaece. i will stop here. >> that is terrific. overview of topics. let me take you to the orderly, disorderly exit for greece. what policy steps do you think need to be taken now, what hasn't been done to ensure that is the case?
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>> i think there must have been a lot of midnight oil burned in frankfurt, brussels and central bank of, of greece. even, no later than when -- greece exits -- and -- possibly, even before it exits, we'll see capital controls, foreign exchange controls and bank holidays, right. that's -- it's all compatible with the treaty. the first two. necessity and the law are sometimes bedfellows and necessity always wins. so that is to make it more orderly for greece. greece should provided it does not, in a national rage, and cuts off its nose to -- to spite its face. greece will remain in the european union.
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and -- will -- will continue to receive financial support from the european union. not necessarily through the esfc. structural funds, like that. they will remain on the imf program as well. that will minimize the damage in greece. it will still be horrendous. only possible upside for greece. much fame sized by american commentators who are -- take the short run, ruthlessly into -- into -- into the structural side of things -- there is a widespread belief of economists here that you can devaluate prosperity and competitiveness. i got news for you, peace its not an economy. it doesn't have rigidly downward wages and very flexible real wages. it has rigid real wages and very
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flexible upwards wages. so the 65% devaluation or more that you would get from, will indeed give greece this, this momentary, fantastic competitive advantage. they won't be able to take advantage of. because they don't hatch ve as resources. shifting is difficult. apart from that, even if there were highly mobile resources that could move from the training sectors. the greek worker and the greek shopper do know the difference between retail, domestic inflation would explode. i expect following exit by greece. unless they get material financial aid to fund their ongoing deficits -- i expect hyperinflation in greece. even if they -- effectively write off their debt. they will.
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the wipe out of their debt except, from the imf, is i think a given. if they do that they still have between 2% and 3%, gdp, that is more than can be funded at any constant rate of inflation they would get hyperinflation. the currency of a country. and paying taxes, because of contracts. and everybody will be able to use the euro -- and probably as the means of payment as well. so -- i really -- i -- so we
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will minimize the deficit. we believe that no other country wants to leave. and provided the country adheres, broad outlines of the hopefully somewhat flexiblized on the fiscal side especially memorandum of understanding, programs. as long as they are compliant in spirit, we will simply provide them with the funding that they need to stay in. it is after all, the in or out is a matter of liquidity. it is not a matter of solvency. and the liquidity they can't provide in an infinite amount. who has more euros, me or you? and this has to be winnable. if it is not winnable then
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somebody, in frankfurt, you know, needs, needs a long holiday. i don't think that is the case. they are aware of that. this is an anticipated event. there is a small chance that greece would stay in. i think, what could happen of course is they simply give in and says, okay, never mind. your debt, your debt is gone. the rest is gone. here is the money. it is possible. i think it is about as likely as me being the next pope. it is not going to happen. right? you couldn't get it past the german parliament, dutch parliament. couldn't get it past the constitutional courts. simply out of the question. they could do a deal -- the only deal i can see realistically, europe is now realizing that they have been -- excessively pro cyclical in their fiscal policies.
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and that any -- program that is a greed, following implementation, for a year or so, led to an overshoot of the deficit target had to be corrected in the original window time frame regardless when the overshoot was due to bad faith or bad luck. i think there is an intellectual readiness. prompted strongly by the imf. would argue for this. that you should at least condone and -- and we can expect the activity as long as we comply. that does require funding. otherwise it is talk. only the u.s., japan, germany can choose the amount of austerity and the timing of it. the rest of the world is stalled by the markets what to do.
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>> doctor, i want to make sure to draw you on the banking situation as well. back in november, things were on code red. came in, put a trillion euro in the system. why are we back in a banking situation again? tell, walk us through the high points? >> much of the banking sector in the euro area is -- is solvency challenged. right? and needs masses of additional 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.
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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.
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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
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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
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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 --
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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
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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.
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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,


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