Former European Central Bank Governing Board member Lorenzo Bini-Smaghi pleads in an FT editorial published today for EU leaders to immediately initiate a second round of bailouts for Portugal and Ireland, increase the size of the European bailout funds, and get the IMF onboard with its recovery.He writes:
It should be recognised right away that Portugal may not be able to return to the markets next year and needs an additional bailout package. If it is unable to finance itself until 2016, it will need approximately €100bn. The European Financial Stability Facility has sufficient capability to provide these funds.
Second, the same could be done for Ireland, which requires an additional €80bn. The procedure to allocate these funds should be started right away by the national and European authorities.
Bini-Smaghi argues that this is the only way of saving Europe from repeated debt restructurings like that which just occurred in Greece. The current strategy, he writes, is just a sham that helps no one:
This means helplessly observing the widening of credit default swap spreads on sovereign bonds until it becomes obvious that the country in question will not be able to refinance itself in the markets; then publicly denying that restructuring is even an option, but privately considering involving private creditors and even discussing the details with some market participants; finally, hastily putting in place an additional package and asking the various countries’ parliaments for approval, which they might be willing to consider… but only in exchange for debt restructuring.
Unless this approach is quickly abandoned, Greece will turn out not to be an exception after all. Markets would turn to the next prey, like in Agatha Christie’s 10 Little Indians. Who will be next? Ireland? Spain? Italy? Where would the process stop?
He closes by suggesting that if EU leaders don’t commit to immediate action, then they’re not truly committed to keeping the area alive:
Only by acting forcefully, in anticipation of what the markets will focus on next rather than under their pressure, can European authorities convince us that Greece was an exception and prove their commitment to do all that is needed to preserve the euro as a currency.
While Bini-Smaghi had been considered an activist member of the central bank’s Governing Board, this editorial is surprising when compared with the current, cautiously optimistic outlook being expressed by an ECB that has not hesitated to act.
At the very least, it suggests that many at the ECB remain frustrated over EU leaders’ unwillingness to act, even if those ECB-ers refrain from making this point publicly. However, this column may also be an attack on those ECB members who have disagreed with the bank’s activist policy action of late.