Three Steps to Easing Market Tension
I imagine everyone would love to take a break from the ongoing market turmoil, but as a solution from euro zone governments is still not apparent, it’s difficult to ignore. Time to cut down on the talk and move to solutions. Among the number of options available, I believe the following steps are the most practical and the best way forward when one is stuck between a rock and a hard place:
1. Announce that the EFSF —suitably increased in size to 1 trillion euros — is available to recapitalize any EU bank that needs help following a Greek default. This eases worries on another post-Lehman bank crash;
2. Accept that the Greek sovereign budget is beyond redemption, and announce an orderly default and a believable 'haircut' loss level for bondholders. Markets then move on, rather than just mark time by trending downwards;
3. Prepare for the inevitable squeeze in the inter-bank market by announcing an ECB 1-year and 2-year repo funding facility, and ask the US Federal Reservefor something similar for US dollar funding assistance for EU banks.
Post the default, governments would have to continue with restructuring their economies, particularly in the southern euro zone , in a way that reflects the new reality: lower government spending, a reduced welfare state, and reduced or frozen payroll taxes to target unemployment .
Ideally these steps would be recognized as the number one priority for the euro zone. Of course, they won’t be implemented by next week, in which case, time to change the subject perhaps and avoid sounding like a broken record?
Dr Moorad Choudhry is Head of Business Treasury, Global Banking & Markets, Royal Bank of Scotland, and Visiting Professor at London Metropolitan University