Just as New York turns cold, our old friend Willem Buiter goes and warms us right back up.
We posted some fairly bombastic extracts from Buiter’s sovereign debt crisis essay on November 30. And at a Citi roundtable event on Wednesday, he further elucidated his avuncular apocalypticisms.
Musing on the ‘European sovereign debt kerfuffle’, he repeated that ‘in all likelihood’ we’d see sovereign defaults in the eurozone, it’s only a question of when.
Who’s likely to fall? The usual suspects, of course, according to Buiter — Greece, Ireland, Portugal. Spain ‘might be salvageable’ but needs to deal with its ‘deep structural problems’ and the fiscal state of its sub-autonomous regions, while also recapitalising its banks by more than the paltry €10bn (about 1 per cent of GDP) it has spent thus far. Simple.
He added that even the cross-border Spanish banks – as opposed to the cajas that were so toxic that five of them even failed the stress tests – have ‘significant domestic exposure’ to troubled housing assets, and ‘large numbers of unrecognised losses’. So it’s not quite all about the banks, but they are critical.
It doesn’t stop there. Buiter argues that Italy and Belgium, too, should be covered by an expanded EFSF.
Or there. Japan and the US are also part of what is now a common ‘advanced country problem’. Though he doesn’t see the US’ ‘out of this world’ deficit driving yields much higher in the short-term.
Back to the old continent: what should EU ministers and ECB officials do when they meet in Brussels on Thursday? According to Buiter, the following:
1. Get out their ‘big bazooka’: Expand the EFSF to €1,700bn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium.
This is the amount he estimates is enough to deter speculators and to tide countries over until the ESM commences in 2013. Which is, by the way, when Buiter thinks the sovereign defaults will probably start to occur. Gulp.
2. Initiate a coordinated process of bank restructuring in the distressed periphery.
Buiter reckons that bank recapitalisation still has a way to go, and that Europe needs to stop kidding itself that senior bondholders can go much longer without a ‘short back and sides’.
But the process of bank restructuring can’t continue piecemeal as this will lead to the ‘mother of all contagions’ as bondholders dodge countries where they think haircuts are imminent.
Yowzers.
But wait, there is some good news.
Buiter believes its ‘overwhelmingly likely’ that the current eurozone members will be part of the single currency in 2015. That is unless ‘collective madness’ takes hold amongst populist politicians of course. And unless Germany et al get fed up with doling out de facto transfer payments.
OK, maybe not such good news.
Related links:
Insolvent – Greece, Ireland, Portugal and probably Spain – FT Alphaville
Spain is all about the banks – FT Alphaville
The Spanish (asset) Elimination – FT Alphaville