THE EUROPEAN UNION – A FINANCIAL POWDER KEG

Share this
Sambata, 19/11/2011

A month ago, more precisely on October 12th, 2011, I sent to the main western chancelleries a potential solution to manage sovereign debts, which is the greatest danger the EU has had to face since its creation. This danger consists of the possibility of blowing up the European banking system, with a mere spark, through panic and later through contagion, as a result of the fact it can no longer recover the huge amounts of money it borrowed to the European states along the years. The level of these amounts reaches EUR 2,000 – 3,000 billion, spread over the future years of course, but it seems that the actual loss that has been reached is of EUR 200 billion, money that must be compensated somehow, i.e. from the European Union, more precisely from us, the European contributors. We are trying to understand the mechanism by taking the example of a bank which, several weeks ago, should have been nationalized by the Belgian government because otherwise it could have turned into the spark I mentioned above. The Dexia Bank, with Belgian, French and Luxembourg capital, 4 million customers, 80 billion Euros in deposits, 700 billion Euros exposure due to sovereign debts, a.s.o. Right after its nationalization, the Belgian state provided guarantees amounting to EUR 90 billion, wherefrom it logically follows that the level of actual losses was equal to this huge amount, i.e. larger than the amount of attracted deposits. What would have happened if this nationalization hadn’t occurred? Of course, it is said that depositors, companies or individuals, claimed and failed to receive some of their deposited amounts, according to the small level guaranteed by law. From here to the contagion of the entire banking system there was only one more step to go. Certainly, some of us may say that it’s only right that the banking system suffers for everything it has done against us, by asking huge interests, by only slightly crediting our businesses or not at all, or by enforcing debts against us when the difficulties we encountered prevented us from reimbursing our loans. Still, what should we do with this system’s function of ensuring the platform where the economic activities are carried out in a state? We usually associate banks with loans, but loans also have an extremely important function, i.e. that of ensuring the carrying out of the economic activity: we use the banks to pay our suppliers, to receive money from our customers, make other operations to pay the taxes and duties, our employees, etc. We won’t be able to do all that in cash, it’s impossible. Therefore, the banking system, in my opinion, is the vasculature of the economic system and, for that matter, it has a vital function; we must take good care of its health, as a component of our life. The plan I conceived and sent to several leaders in the EU is the following (as a matter of fact I published it on the website at the time of sending it):

SOLUTION

TO MANAGE THE SOVEREIGN DEBTS CRISIS AT THE BANKS LEVEL WITHIN THE EUROPEAN AREA

  1. The EUROPEAN AGENCY FOR SOVEREIGN DEBTS (EASD) must be incorporated;
  2. The EASD will operate under the European Commission’s command and in coordination with the European Central Bank;
  3. The banks within the European area will transfer to the EASD, by debt assignment, 3 months after the due date, the claims against the EU states that failed to pay back the contracted loans (either direct or by issue of bonds or government securities) only after such operations are approved by the European Commission and by the European Central Bank, which will declare the claims as liquidated, liquid and payable, as well as transferable to the portfolio of the specialized Agency;
  4. The EASD, as an institution specializing in the management of this kind of claims, and as the assignee, will centralize and ensure the professional and efficient management of the portfolio assigned by the banks, substituting the assigning banks for all the main and accessory rights, including the trial-related ones, in their relationship with the debtor states;
  5. The EASD, based on the claims portfolio which is going to increase in 2 or 3 years, from hundreds of billion Euros to thousands of billion Euros, will issue a kind of securities, similar to bonds, that will be purchased at a discount, mainly by the European Union, the European Central Bank, but also by other private entities acting on the global financial market;
  6. The amounts collected by the EASD as a result of purchasing the issued securities will be redistributed to the assigning European banks, whereas the EASD will pursue, in direct relationship with the debtor states, the recovery of the amounts such states owe to the Agency, after their assignment to the banks;
  7. The amounts recovered by the EASD using complex debt restructuring and claim capitalization methods at the expense of the debtor states will be consensually used to redeem the bonds from the European Commission and the European Central Bank, which is the final step of the proposed management solution.
  8. The major benefits of this approach consist of the following:

-     concentration and centralization of the sovereign debts into a single specialized institution, controlled by the EU and the ECB;

-     unitary, not composite, approach, the latter of which is completely unadvisable with this kind of claims;

-     a much more efficient management of this type of claims, the increase of the recovery probability;

-     elimination of the moral hazard by arbitrarily granting compensations from the EU depending on the strength of the lobby made by the bank asking for support;

-     direct involvement of the EASD in the debtor states in order to minify the situations in which they would be able to partly/fully repay their debts but would avoid to do so for their own benefit and against the benefit of the EU and ECB budget;

-     capitalization of the accessories of the assigned claims, as the EASD would monitor this process both in terms of real security and in terms of securities that could be formed by consensus with the debtor states (real estate assets, lands, buildings, stocks held in state-owned companies, important facilities, claims of these states against other states, particularly outside the EU, other types of assets that could be subject to capitalization).

As far as you are interested in this solution, you are free to use it without any restrictions in terms of authorship, as my only wish is to contribute, as much as my skills allow me, to the solution of a difficult issue for the EU.

 

The plan roused much interest at the European level, so several chancelleries contacted me about it; I sent them on Friday evening, November 18th, 2011, an extension of the vision I have about the management of this extremely dangerous situation caused by the sovereign debt crisis.

Here is the content of the new intervention sent to the chancelleries that contacted me directly.

“It can be easily noticed that the decisions taken in Brussels on October 26th, 2011 are very hard to implement, as the EU states have no intention of increasing the EFSF from 440 to 1,000 billion Euros, particularly as a result of the opposition of the European citizens, mostly Germans, or of canceling 50% of the amount of debts of the Greek state to European banks. The wish to support this plan does not exist at global level either, as it requires much money. Moreover, there is opposition, particularly from Germany, as regards the involvement of the ECB in solving the crisis. On top of all these, we notice that the least care in the middle of this crisis is shown for the very states that created it, that have ceased reimbursing their financial obligations to the European banks due to objective reasons, but also to subjective reasons, since the feeling of panic could emerge in their depositors at any moment, particularly through the social networks that could launch the signal “Withdraw your funds from the banks as quickly as possible, they’re in danger!” The contagion would only complete this gloomy picture and throw the European banking system and, naturally, the EU economy in the blackest phase of the crisis. Since currently the battle is fought at the psychological level, of the customer’s trust in his bank (the volatility being very high in terms of trust), this asset being extremely flammable, as it can be lost in a very short time, the EU must take a measure so that I, as a depositor at the bank, may understand that the European authorities have adopted a normal solution to give me guarantees for the funds I own, regardless of whether they belong to my company or to me as an individual, namely that they pursue the money of the states that created this state, which are the only financial resources capable to ensure the optimal solution of the created situation. Considering the major destabilization rhythm of the European banking system caused by the sovereign debts crisis through panic and contagion, it is necessary to take a historical decision at the EU level. Such decision consists of the temporary transfer of sovereignty to the European Commission from the states that created the sovereign debts crisis by failing to reimburse their bank loans when due, under all forms such states contracted them (bonds, government bonds, etc.). Based on this transfer, the European Agency for Sovereign Debts, in accordance with the algorithm contained in the letter I have already sent you on October 12th, 2011, is authorized to identify and capitalize all assets taking the form of: state companies that can be taken over, state claims against other states or private entities, partly gold reserves, various valuable real estate assets (lands, islands, etc.), other possibilities to capitalize important items, acting to that effect together with the relevant states and transferring the resulting amounts into the Agency’s accounts. The basic principle is that those who are guilty of the sovereign debts crisis must also be held responsible materially, in exchange of the European Union’s support, and not only be spectators to the financial effort of the others, i.e. of the European contributors”.

As far as new developments occur on this subject, I will readily inform the readers of this website.