Bet you didn’t know that, huh?
Spotted in the Eurogroup’s May 16 aid plan for Portugal — a little bit of bank cooperation:
“At the same time, the Portuguese authorities will undertake to encourage private investors to maintain their overall exposures on a voluntary basis.”
That particular clause was apparently insisted upon by Finland — the Nordic country which caused such a furore over Portugal’s bailout. It also apes a clause that’s included in the European Stability Mechanism (ESM): “the beneficiary Member State will take initiatives aimed at encouraging the main private investors to maintain their exposures (e.g. a Vienna Initiative approach).”
So in some respects Vienna Initiative-style cooperation has already become part and parcel of the eurozone’s debt crisis. But when it comes to Greece, the idea is only just gaining traction.
As a reminder the initiative, spearheaded by Austria, saw a group of about a dozen banks promise to maintain their exposure to central and eastern Europe during early 2009. The basic idea was that these cross-border banks would very publicly maintain their lending exposure to foreign subsidiaries. In exchange, they got some liquidity support from governments and regulatory boosts. The move was widely judged to be a success and effectively stabilised the region in a relatively short amount of time.
But, as the above should suggest, there are some important differences when it comes to Greece.
Here’s UBS Justin Knight on the biggest one — incentive:
The main difference between the situation covered under the Vienna accord and the situation today in Greece arises from the type of investment involved. The banks which agreed to the Vienna Initiative had invested directly in the countries concerned via capital in subsidiary banks, which by this stage they were also funding. Had they stopped doing so and instead let their subsidiary banks fail, they would have lost their capital and a large part of the money they had lent. In that way, there was a strong incentive to work with the governments of these countries and maintain their investments there.
By contrast, most holders of a Greek bond who are about to receive maturing funds have no financial incentive to re-invest those proceeds into new Greek bonds at yields considerably lower than they might obtain in the secondary market. This does not mean that there will be no take-up of an offer to rollover maturing Greek bond proceeds into new debt, as there may be reasons outside of the normal financial risk/reward assessment for doing so. Domestic banks, which hold more than 20% of Greek debt are obvious candidates, especially if the ECB continues to fund them at the policy interest rate.
However, some foreign institutions also might wish to be involved. For example, banks and other financial institutions which have (or foresee) subsidiaries operating in Greece may participate to engender good will. Foreign banks could become especially motivated participants if the Greek government provides a quid pro quo in the sense of an easier or more liberal operating environment. European banks that do not expect to have a significant presence in Greece going forward might also be persuaded to invest in new bonds if the maturity dates of the new bonds are not too long and the local bank regulators give them flexibility to mark the bonds at face value in their books.
So far so difficult.
But setting up a Greek-style Vienna Initiative is also a politically-pleasing compromise between a painful debt restructuring (or even reprofiling) and a full-on moral hazard-laden bailout. At the very least, it pays lip service to the idea of private sector involvement in a situation in which — due to the very grim intertwining of Greece and the banking system — that’s become all but impossible.
Here’s Knight again:
The Vienna Initiative is attractive in that it involves the private sector in the solution, yet avoids the unpleasantness of “restructuring.” Greek debt sustainability is unlikely to be affected in any important sense, so eurozone taxpayers almost certainly will have to continue funding Greece in the long term if no coercive restructuring takes place. Nonetheless, implementing an approach similar to the Vienna Initiative would demonstrate private sector involvement has been explored. At that point, voters might be more amenable to the idea that public sector funds need to be deployed going forward, especially as the process could be used for every maturing bond.
Politically palatable but unlikely to do much to actually help Greek debt.
The new Vienna Initiative should fit right in with some other eurozone policies.
Update: How could we forget! Bloomberg’s Boris Groendahl reminds us that we’ve already sort of been here before. Back in the summer of 2010 some German banks started publicly pledging to maintain their Greek exposure. Guess that particular Berlin Initiative did not work out so well.
Related links:
Cosmetic surgery will not save the eurozone – Wolfgang Münchau
Hurdles to a Greek debt restructuring – FT Alphaville
Nowotny talks contagion, exit strategies - FT Alphaville