Grexit: G20 to the rescue again

Open Europe reports on Twitter today that the President of the European Council has apparently called for a video conference of the G20 countries, to be held in approximately 3 hours time. The topic will undoubtedly be support for a new infusion of cash into the global economy ahead of Greek elections on Sunday, as suggested by Daily Forex. Support for austerity is low, but support for leaving the euro is also low, meaning that the Grexit, if it comes, will be messy.

The G20 talks point to an expectation that the Greek election will leave the rest of Europe with an enormous problem. The key players in those talks will have to be the main central banks, which have rescued the situation before. And they will have to again if the politicians in Greece and the rest of Europe can't agree.

And now we wait.

Greek elections and capital flight

Greece is bleeding out in advance of Sunday's elections, and is in danger of dying on the operating table. And it is the Greeks who are making this happen, not the EU or the international community. News reports are that Greeks have been withdrawing an average of 800 million euros per day from the country's banks. Greek companies are doing the same. An attempt to make Greeks pay tax or have their power shut off has failed, money to pay for electricity production is running out, and Greek companies can no longer get lines of credit that are vital to the import-export business, or insurance to cover imports. The result is that imported items are disappearing from the shelves.

There is now nothing the EU or the international community can do but wait for Sunday's election results. The current behaviour of the Greeks does not yet support the idea that another infusion will be productive. Greek voters may want to stay in the euro for reasons of national pride, but membership in this euro zone, with its globally peculiar emphasis on orthodoxy and restraint, comes with responsibilities that they will either articulate a willingness to accept on Sunday.

Or not.

Bankia, Spain and the Euro Zone

Bankia in Spain has become the next institution to require a bailout in the euro zone, and as is now a familiar pattern, Bankia has been declared too big to fail. 40 billion are needed immediately, and 80 billion eventually. The IMF has already suggested that the money simply has to be spent, and reassured markets that a bailout will be coming. European finance ministers meet next. This is the last in a series of moves to use the money reserved for public bailouts for private institutions.

What Bankia does, beyond costing the EU a great deal of money, is call into question the quality of stress testing at the European Banking Authority. as the EBA says itself, the information is provided by the banks themselves:

"We have to remind you that this is a bottom up exercise, conducted by the banks in most cases using their own internal models. The estimates of risk parameters by banks are sometimes very diverse, also for exposures in the same portfolio and against counterparties in the same country. Although the EBA took action to achieve greater consistency and more rigorous estimates. More work on this issue is needed in the future."

Although the last round of stress testing revealed a high concentration of undercapitalisation at Spanish banks, Bankia was not considered one of the banks worthy of regular review (which you would expect of  banks that are too big to fail). The banks reviewed can be seen at the end of the EBA's last stress test review for 2011.

Dexia's / Belfius' Persistent Problems

Reports this week indicate that the investment and retail bank Dexia needs yet another bailout. That problem is shared by three countries: Belgium, France and Luxembourg. Something needs to be done about Dexia (now officially rebranded Belfius to avoid the stench of failure attached to its previous name) if anyone is to have confidence in the public finances of Belgium and France. Luxembourg has the money.

The Dexia case is particularly vexing because it is strongly responsible for purchasing French municipal bonds, plus Belgian municipals, and bonds for social service bodies. If Dexia imploded, so would an entire tier of government and public services in France and Belgium, which is why those governments won't let it fail.

But will it ever stop? This is another sign that the crisis for Europe is far from over.

Reading on Debt and Rescues

I was reading today on debt crises and rescue packages and thought--most of what we have had written in the past has been about debt crises in developing countries, or as they are more congenially known these days--emerging markets. Two of those I've been reading today are 'The political economy of the Bretton Woods institutions', by C. Randall Henning and another of his works: The Exchange Stabilization Fund: slush fund or war chest?  The first provides a nice history of how the IMF and World Bank developed and changed alongside private finance. As part of that history, you'll get to read how debt crises arose in Mexico particularly, and were dealt with periodically by the American government and the two Bretton Woods institutions. You'll also get to read how, after those crises, the bulk of finance to Latin America shifted from investment in bonds to investment in stock markets, and direct investment. Bond holding shifted elsewhere, particularly Europe, which is why someone ought to write about how those two eras are different.

One obvious difference is the absence of a US Government interest in funding a rescue plan. That's something one can understand, too. The United States has enough problems of its own, and money is funnelled much more easily through the IMF these days from the countries that have it.

The second work looks at the degree of discretion that the President of the United States has to spend money on stabilising the exchange rate and the international monetary system. There are some clues there to constructing a mechanism within Europe to distribute money where its needed, because it looks at the relationship between the executive branch and Congress, of how accountability could be infused into a European mechanism for sorting its internal financial affairs.

The fact that Europe now falls into a literature applied to less prosperous countries underlines a few lessons for international political economy, and comparative politics as well. The first is that advanced and emerging market countries are plagued these days by much the same problems, and should not be treated separately. That's arrogant and presuming and passe.

The second is that it should renew our interest, if it's not already sparked, in long-term decline of advanced economy countries, and the responses to that threat. There is a history of such writing on the United States and the United Kingdom in the 1980s that emphasised strong states as exacerbating decline and strong markets as reversing it. Those messages are already being reversed in contemporary analysis that looks at the crisis generally, but how does the return of the state translate into analysing Europe's choices during the current crisis? How strongly do state intervention, (neo)Keynesian economics and international cooperation factor in giving Europe a chance to deleverage without destroying the economy? Does Europe possess sufficient political coherence and direction to construct a rescue package that compensates for the lack of a European government? Is Europe's economic constitution preventing Europe from recovering?

These are questions that affect us all, and the answers look unfavourable unless Europe changes course.

Banking and the Euro Zone Crisis: the next phase

As an ongoing symptom of the interconnectedness of private finance, public finance, and the lack of infrastructure in the euro zone, the IMF has warned that banks are expected to withdraw 1.2 trillion dollars of credit from the euro zone economy over the next 18 months. That's 10 percent of the EU economy, and even more of the euro zone economy.

The IMF, which views this contraction as the natural consequence of deleveraging (destroying reliance of the financial sector on credit to the same degree as before the crisis started), suggests that the only way to avert an even greater disaster is to accept a milder one--in which banks are closed, merged and restructured across national boundaries to reflect the lower amount of money in the economy.

That, in itself, may make sense. But will national governments in the EU break from their existing pattern of saving national banks to allow such restructuring?

That would indeed be a revolution in thinking, and it's just possible that national governments haven't hit bottom yet. I'm not putting any money it.

INET talks about the crisis

The Institute for New Economic Thinking, INET, is meeting in Berlin today until Sunday to discuss the current crisis, and the state of economics and economic policy: (Paradigm Lost: Rethinking Economics and Politics). This is important and worth watching. Check out the information on the website, and most importantly, comments from folks tweeting at the conference. Just search for #inetberlin  on your twitter feed.

Early messages:

Classical economists are trying to grapple with the new recognition (new for them anyway), that human behaviour is not as rational and predictable as their theories to date would have us believe. (See @LynnParramore)

Re-working the basics of economic policy to let up on austerity measures.

And my favourite quote so far, tweeted by Megan Greene (@economistmeg)

'Gurria: Markets are like heat-seeking missiles. They go after your weaknesses, not your strengths.' #inetberlin