National Bank of Greece ADR (fka NBGGY)

[Jester_Vandalay]

Time for EU to Finish the Job

At last week's European Union summit, leaders agreed on a limited change in the EU's founding treaty that would allow for the creation of a permanent emergency lending facility in mid-2013. The volume and operation of the facility were left open, raising the usual doubts of whether Europe will ever take a full step toward anything.

How does this new euro-saver function? Who allocates and distributes funding, or administrates over its rule-enforcement loan processes? How independent is the decision making? Who says debt needs debt restructuring? On what terms?

Germany's Chancellor Angela Merkel promised more details by March. That would be about the limit for investors are waiting for the next steps to be convinced that the European Union is putting structures into place that, if falling short of a fiscal transfer union, ensures that there will be a newly systematized response to fiscal crisis. The hair-raising, eleventh-hour agreements with Greece and Ireland have taken their toll. With Portugal and Spain now also seen at risk, financial markets are looking for more brick-and-mortar institutional commitment.


Germany's Economy Minister Rainer Bruederle in Rome last month.
Lack of credible institutions is a prime reason why the EU has a debt crisis and the U.S. and Japan, with their bigger deficits and debt loads, don't. With a massive program of debt redemptions of new borrowing ahead next year, euro-zone member states may have only weeks, rather than months, to fill that credibility gap.

This week we've watched the euro continue to sink to record lows against the Swiss franc, sometimes fatuously referred to as Europe's new D-Mark but nonetheless the region's currency gold standard. Ratings agencies in the past two weeks have unleashed a torrent of year-ending downgrade warnings on certain euro-zone government debt.

Expectations that Greece will lose its last fingerhold on investment-grade status by mid-January haven't been improved by new reports that Athens is thinking about a future debt restructuring plan. Clearly, it's time to begin drawing up blueprints for more buttressing, and preferably in time for the next meeting of EU finance ministers on Jan. 17.

There are early glimpses.

From France we hear more talk of European economic government, details to follow. German Economics Minister Rainer Bruederle said last week's agreement on a permanent bailout facility points to something like a ØEuropean Monetary Fund. Naturally, this would be more about discipline and sanctions than transferring assets.

Then, after what might have been a calculated leak, the German finance ministry confirms a report in Germany's Sueddeutsche Zeitung newspaper a low-level ministry working group has worked up a proposal for a new, independent EU institution to oversee the fund and enforce its rules and loan conditions.

For many, that couldn't make more sense. How else to convincingly administer that facility than to give it form and structure beyond frantic late-night phone calls from Berlin to Paris? This agency, a streamlined version of the International Monetary Fund, would be the institution that oversees fiscal compliance, processes loan requests and administers over conditions set on a possible sovereign debt restructuring. And all that conducted with the same political independence as the European Central Bank—to the extent that politics can ever be removed from such issues.

And who couldn't wish for this kind of sister institution more? The European Central Bank for years has wailed lament about fiscally wayward governments that don't listen because they don't have to.

The ECB's rapture would be complete if, as the Sueddeutsche story also reports, such an institution also would assume the ECB's program of supporting weak euro-zone sovereign debt markets with purchases of government bonds. Were that to happen, the ECB would be back in business of being a central bank and not Europe's bad bank, a depository for unwanted and decomposing government bonds.

The ECB now owns more than €72.5 billion ($95 billion) of euro-zone government debt, chiefly from Greece, Ireland and Portugal, the three countries considered most likely to default, reporter Geoffrey T. Smith reports in his WSJ.Com blog. The central bank also has over €330 billion outstanding in loans to banks in the four problem countries, when adding Spain.

What has emerged in the past month is that the EU will want private-sector investors to take a hit in future debt deals for prostrated government treasuries. That makes erecting a credible and independent decision-making structure as important as the
size and function of the bailout fund itself.

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