20171113-NATIXIS-Euro_zone__How_can_crises_be_prevented_in_the_future__5页_693kb

Flash Economics Summary: Preventing Speculative Crises in the Euro Zone

Core Content

The document discusses the mechanisms behind speculative attacks in the euro zone and explores potential solutions to prevent future crises. It emphasizes the role of fiscal solvency as a critical factor in maintaining financial stability within the region.

Main Points

1. Speculative Attacks in the Euro Zone

• In the past, speculative attacks targeted national currencies, such as in 1992-93.
• Currently, speculative attacks are directed at government bonds, as seen in Charts 2A and 2B.
• Greece's yield spread on 10-year government bonds against Germany is highlighted as an example of such attacks.

2. Current Tools to Combat Speculation

• Quantitative Easing (QE): The ECB's QE programme has been effective in reducing yield spreads on government bonds by purchasing large quantities of bonds. This is shown in Table 1, which lists the ECB's bond holdings for various euro zone countries.
• However, QE is not a permanent solution and will be discontinued in 2018.

3. Alternative Solution: Debt Mutualisation

• A mutualisation of public debt would be a powerful tool to prevent speculative attacks, as it would enhance the fiscal solvency of the euro zone as a whole.
• This approach is rejected by many countries, especially Germany, due to concerns over the transfer of income and risk.

4. The Only Viable Solution

• With the end of QE and the rejection of debt mutualisation, the only viable solution is for each euro zone country to ensure strong fiscal solvency.
• Strong fiscal solvency prevents the risk of solvency crises and avoids the confusion between solvency and liquidity crises.
• It also reduces the risk of increased yield spreads (risk premia) due to expectations of debt restructuring.

5. Fiscal Solvency Status

• France and Finland currently have fiscal deficits that exceed the level needed for stable public debt ratios.
• Italy and Austria have fragile fiscal solvency, which makes them vulnerable to speculative pressures.

6. Addressing Liquidity Crises

• While fiscal solvency is essential, liquidity crises can still be managed by transforming the European Stability Mechanism (ESM) into a "euro-zone IMF", which would provide more robust financial support during crises.

Key Information

• The ECB's QE programme has played a crucial role in stabilizing the euro zone by reducing bond yield spreads.
• Debt mutualisation is a potential solution but faces political resistance, particularly from Germany.
• Fiscal solvency is the primary defense against future speculative attacks.
• The ESM needs to be restructured to function as a more effective liquidity support mechanism.
• The document is a financial analysis intended for professional and qualified investors only and is not a personalized investment recommendation.

Conclusion

To prevent renewed speculative crises in the euro zone, it is imperative that all member states maintain strong fiscal solvency. This will help avoid solvency and liquidity crises and ensure that the euro zone can effectively respond to financial stress through a reformed ESM, acting as a central liquidity provider.