Following the recent debacle involving Greece’s fiscal disaster and its consequences on the European Union (EU) economy, Wolfgang Schäuble, the German finance minister, called for creating a European Monetary Fund (EMF), similar in form to the International Monetary Fund (IMF).
The IMF, with a membership of 186 countries, was established in 1944 to address foreign trade impasses, oversee the global currency system, and help countries during times of economic instability.
“The Euro zone seeks to resolve its internal problems on its own,” said Schäuble as quoted in the German newspaper Welt am Sonntag.
He continued, “In my opinion, the Euro countries, in accepting financial help from the IMF, would acknowledge their inability to resolve internal problems.”
Michael Hüther, a renowned German economist, does not disagree with the idea of an EMF, but he is certain that it would not be a tool that would address the problem with Greece. According to the paper, Germany’s Free Democratic Party members (or the black-yellow coalition) have so far not bought into the idea of Europe’s own EMF.
The black-yellow coalition is an alliance between the German Christian Democratic Union and the Free Democracy Party (FDP), Germany’s liberals, formed in September 2009 to win the German general elections.
Opinions about the EMF proposal differ significantly. The Welt am Sonntag’s FDP expert states that the EMF idea is moving in the wrong direction as it would set the wrong precedence. Such an action would send a strong signal to other nations about EU’s willingness to bail out countries that have lived beyond their means and were accepted into the European Union under false pretenses.
Hüther went even further, advocating a tool that would deal with members who distort budgets and provide misleading information before entry or when already a member. “Whoever provides misleading numbers and intentionally cheats should be expelled from the EU,” he said.
Advocating EMF
Angela Merkel, German chancellor, and Jean-Claude Juncker, Luxembourg prime minister, said in a published speech at a March 9 press conference that they favor the creation of an EMF.
Both agreed that the EMF is not the panacea for the Greek fiasco, nor would it be useful, as the country had accepted and embarked on an austerity program. Anyway, it is too late, as time is running out ? it takes time to set up an EMF.
“But, we want to qualify our enthusiasm for the program, by stating that the creation of an EMF is in no way an invitation to just sit back and relax. ... There will be standards and sanctions that have to be hammered out over the coming months ... and there will be an implicit understanding that the country that is asking for help cannot be involved in any decision making process,” Prime Minister Juncker said in his speech.
Duplicity in International Markets
Reports have implied that under the advice of the global investment firm Goldman Sachs Group Inc., Greece resorted to deceptive means in order to push part of its national debt into the future.
“With a little help from Goldman they could reclassify debt as a forward exchange contract and they looked okay. Now, this was a wink-wink, nod-nod sort of agreement with the Europeans,” said Richard J. Herring, finance professor at Wharton Business School, in a recent Knowledge@Wharton (KW) report.
He went on to say, “I don’t think anybody was fooled at the time because the Europeans were desperate to get Greece into the Union so that it wouldn’t fall back into the hands of a military dictatorship,”
Greece used a financial instrument called cross-currency swaps under which the U.S. dollar and yen-denominated debt were swapped for euro-denominated debt to be held for some time and changed back to the original currency later. This is an off-balance sheet transaction that either reduces or increases the debt, depending on the exchange rate used.
As the story goes, the investment bankers used fictional exchange rates, providing Greece with a higher amount than the then euro exchange rate. According to media reports, Greece had a windfall borrowing increase of roughly $1 billion.
The dilemma is that when the cross-currency swaps mature, Greece will be faced with a ballooning deficit, putting the country even more into debt.
Goldman Sachs’s intervention was not illegal per se, but leans toward the unethical. The firm’s analysts discovered how to lawfully dodge the EU’s “Maastricht Treaty and Stability and Growth Pact.”
The Maastricht Pact calls for EU members to abide by certain fiscal policies?the members’ annual budget deficit may not exceed 3 percent and national debt must be less than 60 percent of the GDP. The intent was to limit inflationary pressure on the EU economy, but did not take into consideration what to do when EU members slide into deficits.
Greece’s currency swaps venture began in the beginning of 2002, just before the Enron fiasco hit the airwaves. At the time, a certain attitude existed: “It was really sort of considered the mission of banks and investment banks to help corporations and sovereigns fool their creditors. … It was just an accepted fact—‘that’s part of what we do,’” Herring said in the KW article.
Attacking the Swaps’ Legitimacy
Merkel said during the published press briefing that credit default swaps were addressed during the G-20 process. It will take some time as expert opinion needs to be listened to, but going forward, speculations such as the currency swaps will be scrutinized and contained.
Any decision has to be acceptable to all European countries and not just the EU countries, but a 2012 deadline was proposed.
Gary Gensler, chairman of the Commodity Futures Trading Commission, said in a published keynote address that the swap market had exploded from $630 million during 2001 to $36 billion by the end of 2009, and that the majority of swaps are among financial firms.
Gensler called for more transparency, requiring that over-the-counter derivatives be traded on established exchanges, as well as regulating dealers’ actions.
“We need broad regulatory reform of over-the-counter derivatives to best lower risk and promote transparency in the marketplace. ... Only with comprehensive reform can we be sure to fully protect the American public,” Gensler said.
Neither the Americans nor the Europeans called for a ban on speculative trading, nor did they point at swaps as being the cause for the financial crisis. They considered it no more than a by-product of the financial crisis. But all are firmly committed to putting on the brakes through regulation and oversight on speculative trading.
