High time for European debt restructuring. Will Europe dare to undertake it?

Euro-zone is weighing a new plan to face the crisis, for which – after discussions at the European Summit in Brussels–Europe expects to receive support from G-20 in the next Group meeting on November 3 and 4 in Cannes, France.

The plan comes after strong demands from the U.S., emerging economies and developing countries for Europe to control its crisis once and for all, before it spreads worldwide, and amid massive street protests by people who are increasingly losing patience.

European authorities have announced that the measures under discussion, in particular, are the following:

1. An increase in private banks’ losses on their Greek debt holdings, higher than the 21% agreed by the European Union last July.

Chancellor Angela Merkel admitted in this regard, that a Greek debt restructuring cannot be excluded after carefully analyzing pros and cons.

However, Germany’s final position is uncertain. Having said that, the Chancellor’s Spokesman warned that in Brussels, the “dreams” of those who expect to leave behind the financial and economic turmoil of recent years will not be fulfilled.

2. Recapitalize the “big” banks. The terms under consideration include a new minimum capital requirement of 9 percent of their risk-weighted assets, and considering that not all banks will pass that test, the bailout for those who do would be about 300,000 million Euros, which would go in the beginning to the main banks of the large European countries, France and Germany, although there is still no sharing scheme.

3. Maintain and strengthen the ongoing adjustment programs in the troubled economies, and cuts in public expenditure in the rest.

4. Increase once again IMF resources for emergency lending with support from the G-20.

This is a controversial point, because there is no consensus among Europeans, and if any, the measure is beyond the European decision area; it must be supported by other members of the organization, and for now the United States rejects to draw once-again on multilateral funds, and urges Europe to take charge with its own funds.

Some large emerging economies have extended their support to recapitalize the Fund, to which not only the United States but also Japan and Germany are opposed, because with a greater contribution to the organization these countries would claim for greater participation in decision making, including aid conditionality.

On this, Brazil’s President Dilma Rousseff, for example, recently announced that her Government is considering increasing its contribution to the IMF, but that Brazil will use its position as Fund creditor to prevent it from imposing its traditional adjustment conditions.

5. Increase the resources of the European Financial Stability Facility (EFSF), which already has 400,000 million euros, to make the Facility the lender of last resort.

On the other hand, as part of the negotiations, a Tobin tax on financial transactions throughout the European block and/or globally, is also being discussed. The proposal is supported by France and Germany, but resisted by UK, which already has its own bill to protect its retail banking and provide leeway for investment banking operations, and because it fears London City banks to move to low-tax jurisdictions.

This tax would apparently collect about €57,000 million 2014 onwards, a substantial amount, indeed, but insignificant vis-à-vis the figures of the European debt: it is estimated that the debt of Spain + Italy + Portugal + Greece amounts to about €3,500 billion. Given this size and timing mismatch, the measure falls outside the emergency parameters, but serves as a warning to speculators. 

More disturbing than reassuring

Except for the new official acknowledgment of a bigger write-down on the Greek debt and the pressure for the overall implementation of the Tobin tax, the announcements mentioned above do not differ from previous efforts, whose results speak for themselves.

If this is all they have, then it promises to get worse. The world and its people expected more, much more than another program to recapitalize banks and lenders of last resort.

It was expected, at this point, to finally apply a negotiated restructuring of distressed debt, to prevent default and contagion, and so that resources could be used for recovery plans and not for debt payments.

So far, Europe does not seem to take note, or does not want to admit it, but it is steadily moving toward a wholesale sovereign debt restructuring.

It can do it now as an exit option, in a fairly orderly and negotiated manner, sharing the losses with those who took risks and carrying costs for those who speculated, or will have to face it then, when unavoidable, to repair the damage from bankruptcy.

By Raúl de Sagastizabal