The arguments between protagonists of the sovereign debt crisis crystallise the need to find rapidly a solution capable of restoring the necessary serenity to financial markets, while fully taking into account the legitimate concerns of stakeholders.
The proposal outlined hereunder builds on ideas already presented in my paper in early January but which is specifically amended to address the Greek conundrum. It aims at by-passing the damaging debate between the majority opinion that considers that Greece is facing a solvency crisis and those who, not totally without reason, view the situation mainly as a liquidity problem.
The argument revolves mainly around the value of realisable assets and the existence of the political will to implement a significant privatisation program. In this regard, those who suggest that conditionality imposed by the IMF on EMU Members seeking support should be similar to programs benefitting emerging or developing countries are clearly mistaken, as the economic and social impact of strict budgetary discipline on growth and consumption is fundamentally different in a western developed country.
Starting from the premise that there seems to be a consensus between Greek majority and opposition political parties on the need for a significant privatisation program and in view of the urgency, the proposal could be articulated as follows:
- The EFSM would issue 10 year non callable bonds on the capital markets which would benefit from an EU budget guarantee.
- The proceeds would be on-lent in successive tranches to Greece who would post collateral in the form of the shares of entities selected for privatisation (up to € 50 billion), valued at no less than 130% of amounts borrowed.
- As assets are privatised, the proceeds are reinvested by the EFSM in zero coupon Bunds (at market rates) of a face amount sufficient to meet Greece’s repayment obligations at maturity. Smaller amounts of zero coupon Bunds would cover intermediary interest payments. Excess collateral, if any, would be released to Greece.
This structure is a combination of my earlier proposal suggesting the issuance of “covered bonds” as security, combined with a “Brady Bond” structure as suggested by NYU professors Smith and Economides. The global architecture of the scheme should offer sufficient assurances so as to overcome any reticence to grant the “joint and several” guarantee of the 27 Member States, implied in the budget guarantee. The pledge of Bunds as collateral should remove the fears of the most demanding Member States.
The proposal offers several advantages:
· The privatisation program could be carried out progressively without precipitation and in the most flexible manner in order to ensure the maximising of proceeds and facilitate the internal political and social management of the process.
· The cost of borrowing to Greece could be significantly reduced and limited to the all inclusive costs of funding as well as management of the collateral by the EFSM, contributing commensurately to the restoring of the country’s creditworthiness.
· By differing principal repayment for 10 years (or more), the need for restructuring Greece’s currently outstanding debt can be avoided, protecting both EMU and its banking sector from its negative consequences.
· The 10 year maturity would bypass any recourse to the IMF, putting once again the EU in full charge of its own destiny.
· Finally, the scheme could serve as a blueprint for future issuance – on a much larger scale – of Eurobonds (see my earlier proposals).
If such an approach was envisaged, it would allow the transformation of the EFSM (and EFSF) into the ESM in June 2013 as planned, without having to have recourse to the institutional and structural contortions involved in drafting and ratifying the separate new international treaty currently under preparation. Additionally, this would avoid the vexed question of the “privileged creditor status” envisaged for the ESM, which could have adverse consequences on market perception of securities issued by other EU sovereign or supranational entities, leading to increased relative funding costs.
I certainly do not underestimate the obstacles to be overcome in adopting such a scheme, but its relative simplicity and transparency, compared to alternatives currently being considered, may make it at least deserving of consideration.
Brussels, May 31st 2011
Paul N. Goldschmidt
Director, European Commission (ret); Member of the Thomas More Institute.
© Paul Goldschmidt
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