Regular readers know that your humble blogger has laid out a blueprint for saving the euro and restoring solvency to its members and their banking systems that would be politically popular with the voters and easy to achieve.
Unlike the Guardian's fantasy rescue, this blueprint is based on banks performing their safety valve function between excesses in the financial system and the real economy.
Banks would absorb these losses. This just happens to also have been the recommendation given by Professor Ben Bernanke to the Japanese when their credit bubble burst.
What dooms the Guardian's fantasy rescue is that it instead forces the real economy of the Eurozone to absorb the losses on the financial excesses.
The blueprint recognizes that banks can operate for years with negative book capital. With the advent of deposit insurance in the 1930s, depositors don't care about the bank's balance sheet. They only care that the government or entity back-stopping the government guaranteeing their deposit can make good on the guarantee.
It also recognizes the need to require banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details so that banks are not tempted to gamble on redemption while they are retaining earnings to recapitalize themselves (just look at the US Savings and Loan crisis for why this level of disclosure is needed).
Let us fantasise that this festive quiet conceals dervish-like activity by euroland policymakers, gathered in Washington, under the watchful eye of Christine Lagarde from the IMFand Tim Geithner of the US treasury. Beijing, Tokyo and Delhi are on speed dial (David Cameron gets the occasional round-robin email).
Because these elite minds surely know that the holidays are the ideal time to tie up a package of measures to be launched early on the first big day of trading. On Monday 2 January, as financiers are settling down in front of their Bloombergs they will be hit with a barrage of commitments and cash designed – and here we really are in the realms of the wishful – to save the euro. What would be inside such a bundle of policies?
First, it would have to be designed for immediate release....
Our fantasy euro rescue would also have to be clear about where the backstop is. When investors buy bonds from Italy or Spain or a growing number of governments under financial distress, they have no idea whether they are guaranteed by the eurozone or not. That goes double for banks based in Milan or Madrid; whereas in Britain anyone dealing with a big bank knows that it has a government treasury sitting behind it.
One obvious but near-impossible solution to this would be to have common European bonds issued from a eurozone treasury, with the countries with the best credit backing up those with the worst. Similarly, when dealing with a continent-wide banking system that looks insolvent in some places (Greece being the best example), our policymakers will have to come up with a common plan to take over bust banks and thoroughly stress-test others to show the world they are sound trading partners. Finally, there will need to be a series of long-range economic policies: an end to counterproductive austerity, a new mandate for the European Central Bank to encourage growth.
We could list more measures to hold the eurozone together. These are just a taster, yet it is already clear most of them would be quite beyond any policymakers attempting a last-ditch effort to save the euro. That gives some idea of the impossibility of the task, and the difficulties facing the continent in the new year.
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