Saturday, October 29, 2011

Georges Ugeux's double standards with respect to the Euro crisis

In a previous post, we discussed Georges Ugeux's contradictions regarding EU bank recapitalization. This is a follow up in which we briefly discuss his HuffPo article, The European Agreement Offers Other People's Money, which is nearly identical to a post in his french blog. In short, while he probably correctly points at some questionable aspects of the new EU plan addressing the sovereign debt crisis, it is wrapped in moral rhetoric that is flawed, but not new coming from him.

Here's our broad understanding of the matter. The plan marks a shift in approach to the Euro crisis by European authorities whereby they recognize that shouldering the burden of Greece's public debt cannot be afforded in full. In particular, they are asking banks that hold Greek bonds to relent to voluntary take a larger haircut on the nominal value of these bonds (50%) than the one previously agreed in the July plan (21%). It should not be forgotten that this is in exchange for new bonds that would be guaranteed by the core members, one in a long line of financial assistance programs since 2008, either for banks (see, for example, here) or to help peripheral countries (see here). Georges Ugeux condemns this plan with an imbued sense of morality that is both characteristic and flawed:
And most worrying, is the fact that said [European taxpayer] will not put a single Euro of their money towards Greek debt restructuring! 
This author, indeed, has made a specialty of portraying himself as occupying the moral high ground by urging governments and the European Central Bank to comply with the rules laid forth in European treaties (See here for the ECB part), even when it is strikingly obvious that it can't be done or that emergency calls for a subtle interpretation of the law. In keeping with this agenda, he has downplayed such necessities with such nonsense as claiming that the debt crisis has nothing to do with with the 2008 crisis, pointing the finger, instead, at an alleged deeper cause, namely profligate government spending (1). See for yourself here. Naturally, he has carefully put aside the striking examples that contradict his moralistic appraisal of the crisis, particularly Ireland and Spain, who were not so long ago praised for their successful commitment to the stability and growth pact.

Two eminent economists have debunked this. See here and here. To no avail, in his case. Now, what does the law of Europe say about financial assistance:
The Union shall not be liable for or assume the commitments of central governments [...] A Member State shall not be liable for or assume the commitments of central governments[...] (article 125 TFEU)
This is also known as the no bailout clause. One would think that the new package is reason to cheer for someone who cares about enforcing the law. Not so, as we found out in the first excerpt of his article. Hence the title. But he is, however, happy about this:
Fortunately, it will not be the [European] taxpayer who will be asked to contribute to this recapitalization, but "the private sector."
Well, refer to our earlier post covering this topic.

(1)  "Il n’y a aucune connexion entre cette crise de l’endettement public et celle de la finance en 2008. Ici, les responsables sont politiques. On se demande pourquoi les sacrifices des banques ne sont pas étendus au secteur public qui détient, lui, environ 160 milliards de la dette grecque". See here. This has a long genealogy : "Les déficiences de l’Eurozone viennent d’une non-application par les Gouvernements du pacte de stabilité qui accompagnait le traitée de Maastricht, d’une absence d’intégrité de certains Etats, et sont de nature budgétaire, pas monétaire. Cette responsabilité est, dans l’Eurozone, celle des Ministres des Finances".  See here. On that note, the reader is referred to our post An economist featured in Inside job (still) lectures us: The Main Culprits are Social Security, Medicare and Medicaid as an eerily similar trail of thought.

(2) L’Europe décide que les banques vont devoir abandonner 50% de leurs créances, et la Président Sarkozy menace d’aller directement négocier avec les banques. […] Je ne suis certainement pas suspect d’etre favorable aux banques, mais faire payer à celles-ci  la facture des gestions lamentables des finances publiques reste une question. See here. In a previous post he seemed to suggest that the 21% haircut was too soft : " L’accord prévoit une restructuration de la dette grecque détenue par les banques. En clair, celles-ci perdront en moyenne 21 % de la valeur nominale des obligations qu’elles détiennent. [...] La décote est-elle suffisante ? Si on la compare aux cours des obligations souveraines grecques, 21% semble être un traitement favorable". See here. In another yet, he seemed to think, that there was a 50% haircut, already, in the July plan, but that is was a necessary evil: "Dans un cas comme dans l’autre, les obligations souveraines grecques devraient être amorties d’au moins 50%. [...] Subterfuge ou non, c’est peut êtrela seule manière de tenter de réduire l’impact budgétaire de la charge d’intérêts et de remboursement de la Grèce sans pour autant imposer aux banques des charges qui lesfragiliseraient. ". We're not 100% sure so check for yourself here.

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