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Bankruptcies are not the end

By Yakov Amihud

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Financial Times Germany
(C) 2012 - All rights reserved. Copyright Financial Times Germany, Hamburg.
(German to English translation)


For the survival of the euro, it does not need a bailout. Even bankruptcy can survive the common currency. That would be even billigerals the current policy.

The new rescue package for Greece, but the debate has flared up again, whether this type of assistance is the right way from the euro crisis. To a resounding no. It is true that the failure of a country should not lead to the collapse of the entire monetary union. But the commonly shared concerns that lead a payment default by individual EU countries at the end of the euro would, I think without reason. For example, would collapse the dollar, if California - its gross domestic product accounts for about one seventh of gross domestic product throughout the United States - could not pay his debts? Certainly not. No doubt the owner would suffer losses from loans in California, the U.S. currency would continue to exist though. If a European country not to pay his debts, thus helping cut and a debt rescheduling. Losers would hold in this case, the Bondholders and the holders of shares and bonds of banks and companies, the government bonds of the country concerned. The EU and the euro would continue to exist, however. There would be no need to exclude this country from the euro zone. Claims that the peace in Europe would be threatened without a parachute hit, not the case. Such claims serve the interests of the holders of government bonds of the crisis countries wishing to bring in particular the German taxpayer to pay for their losses.

The argument that a collapse of the banking system must be prevented, is basically correct: without a functioning banking system is not functioning economy. But here is worth looking into detail. It is crucial not to confuse the rescue of banks to bail out their shareholders and bondholders.

Europe should grant banks instead his unique and absolutely reliable guarantees, but only for those systems that are highly endangered and thus leave the danger of a "bank run" subject. These include deposits by private individuals or companies, demand deposits from other banks and financial institutions as well as very short-term liabilities (such as with a maturity of up to 90 days). Such systems can always be reached or not renewed, thereby bringing about the collapse of a bank. For all other types of investments - equity and unsecured debentures in particular - however, no government guarantees should be given.

Even insolvent banks can continue their business operations, such as under the auspices of the ECB - with the same management, same staff and customers. Only the shareholders and bondholders should lose their rights, as has happened in the past, for example, in Sweden. The insolvent banks will be recapitalized and then sold. In any case, such a bank rescue significantly cheaper for taxpayers than the salvation of the country that owes money to the banks.

Who are the winners, if any further rescue packages are put together?

First, taxpayers who do not have to pay for government debt. Their tax burden would be reduced, increasing the purchasing power would demand.

Second, the economy in general. Economic growth would no longer be held back by higher taxes, the willingness to invest is no longer inhibited by the continuing uncertainty about the outcome of the debt crisis. The economy would also benefit from the fact that can be used for rescue packages proposed resources now used to improve the infrastructure of less developed EU countries. Rescue packages for debt represent a shift of wealth from taxpayers, to the debtors, as well as to holders of shares and bonds of banks that hold the debt securities. The total assets and therefore generally remain unchanged, the total demand. From an economic point of view, this process would be problematic, therefore, he would not raise taxes to fund the bailout packages make it necessary. However, higher taxes affect economic growth. That there is a negative relationship between tax rates and growth rates, have shown Robert Barro of Harvard University and other researchers. Also, there are signs that reduce their consumption of private households and their investment if the government is committed to higher debt repayments in the future. All this leads to an economic cooling.

A too strict fiscal union would also have negative political consequences. Germany could soon be viewed as "economic police" in Europe, which defines the rules and punish countries that violate these rules. The citizens of these countries would be for the dwindling as a result of layoffs, benefit cuts and higher taxes, government standard of living does not make the negligent actions of their own government responsible, but the external pressure by Germany. If other states - as is currently in Greece - can not do, should abide by the rules, Germany will come up at the end for some of their debt without the underlying problem has been solved. Moreover, the political position of Germany would be weakened.

This guest post is an advance copy of the Yearbook of Frankfurt Main Finance that appears to Frankfurt Finance Summit 2012th