Global Macro Monitor

Provocative FT piece by Barry Eichengreen & Co.  on why the IMF and G20 need to step up and help Europe save the Euro.    The article notes Europe is in a destabilizing feedback loop,

The eurozone is caught in a vicious circle. Sovereign credit is deteriorating, reducing confidence in banking systems, which in turn increases the likelihood that governments will have to assume additional bank liabilities. This further impairs sovereign credit, which further undermines confidence in the banks.

Europe’s leaders have shown themselves incapable of breaking this vicious cycle, raising the danger of the European crisis becoming a global crisis. It is now past due time for the International Monetary Fund and Group of 20 to intervene.

The piece outlines a four point comprehensive solution for Europe’s debt crisis:

1) Consistent accounting treatment and regulatory oversight of European banks’ sovereign exposures through the European Banking Authority (EBA).   The EBA would have authority to set reserves on banks’ impaired sovereign debt, which would make it easier to provide debt relief to the highly indebted countries.

2) A TARP-like direct injection of capital into European banks from the EFSF.   A sub-facility financed by Asia to purchase preferred shares in the European banks;

3)  A larger bank liquidity facility through the expansion of the Fed’s dollar swap lines with the ECB. Asian central banks flush with dollars would also provide dollar funding to European banks;

4)  Debt reduction facility along the lines of the Brady Plan for the crisis countries.   This would also include Debt-for-equity, debt-for-environment, and debt-for-education swaps.

It’s an interesting piece, the only comprehensive solution out there, and well thought out.  We suggest you take the time and read it.    As Europe flounders, in the words of Angela Merkel, “the fall won’t be boring.”  Click here for full FT article.