€500B European Monetary Fund? Learn From Asia

♠ Posted by Emmanuel in ,, at 5/10/2010 12:03:00 AM
There is much huffing and puffing at the moment on how EU finance ministers are busy drawing up an emergency or stabilization fund of their own to help calm matters down. (It was supposed to be announced on Sunday, but that didn't pull through.) Some now expect it to be set up before Monday trading, but it apparently isn't settled as a new week starts here in Europa. How it will operate is ripe for speculation:
The European Union was considering a massive emergency funding facility worth as much as €500bn in loan guarantees and credits on Sunday night to stabilise the eurozone before financial markets open on Monday. EU finance ministers and top officials meeting in Brussels were racing against the clock as they tried to finalise details of the scheme.

Germany was also demanding for the loans to be tied to tough conditions. Angela Merkel, German chancellor, gathered together senior ministers and coalition partners in Berlin to comb through the details of a deal – particularly looking at its compatibility with the German constitution.

The stabilisation scheme is expected to include government-backed loan guarantees worth €440bn ($569bn, £383bn) provided by eurozone members, according to French, German and EU officials. This will come on top of a €60bn expansion of an existing balance of payments facility that the EU used in 2008 to help Latvia, Hungary and Romania, three non-eurozone countries.

The facility would be increased to €110bn with the European Commission raising money on the markets using the EU’s €141bn-a-year budget as collateral. It would be extended to cover all 16 eurozone members. Any assistance would carry conditions set by the International Monetary Fund [we'll see about this one; read below].

The eurozone’s efforts were being cheered along by Washington on Sunday with President Barack Obama urging Ms Merkel and President Nicolas Sarkozy of France to ensure that the European Union was “taking resolute steps to build confidence in markets”. A key question remained over whether the European Central Bank would unveil its own, more dramatic, measures.

The €440bn stabilisation mechanism and extra €60bn balance of payments facility will come in addition to the €110bn IMF and EU rescue plan approved by eurozone leaders for Greece on Friday and by the IMF board on Sunday. The IMF said it would make about €5.5bn available to Greece immediately. Total IMF funding for Greece will amount to about €10bn this year.
Aside from the proposed institutional form of the stabilization fund, here are some mooted measures to take the bull by the horns outside of it, most likely by the European Central Bank (ECB):
Analysts said the euro may find some relief from the expected establishment by the European Union on Sunday of a multibillion-euro stabilisation fund to protect the eurozone’s most vulnerable countries. But Mansoor Mohi-uddin at UBS said with the spread of yields on Greek and Portuguese government bonds rising to record levels over their German counterparts, investors will need more assurance that European policymakers can get ahead of the market turmoil.

“Just as counterparties were wary of dealing with other banks while losses from US subprime bonds were unknown in 2007 and 2008, the same is again affecting interbank lending markets now as investors fear their counterparties may be heavily exposed to to Greek or Portuguese government bonds,” he said.

Analysts said there were a number of additional steps that policymakers could undertake to soothe investors’ nerves. First, the European Central Bank could restart its auctions of unlimited one-year euro liquidity. Second, the ECB and the Federal Reserve could reopen their dollar swap lines so European banks could access dollars through the ECB again. Third, the ECB could buy eurozone government debt, effectively undertaking quantitative easing.
So, it's basically reactivating some measures taken during 2008 at the height of the credit crisis. And here is yet more commentary on the stabilization fund or European Monetary Fund (EMF) itself which is, again, still in the offing. A proposed feature is issuance of EU-guaranteed debt for troubled borrowers:
Few concrete details have emerged on the nature of the EU’s stabilisation mechanism. Diplomats said it was possible that the fund would be financed by the issue of EU bonds, a method that the 27-nation bloc chose to provide emergency loans for Hungary and Latvia in 2008.

These bonds would benefit from the state guarantee of all EU member-states and would therefore carry a triple-A rating, ensuring interest rates would be as low as possible. The size of the fund has yet to be determined, but some diplomats spoke of a range between €60bn and €70bn.
At any rate, something that I've long wanted to point out is that, for once, the somewhat maligned Asian countries may have their nose ahead of the European ones. This situation, of course, can be laid down to the Asian financial crisis occurring before Europe's fiscal one. Actually, the Centre for European Policy Research (CEPR) may have beaten me to the punch already via the report "Lessons from the Asian Monetary Fund [sic] for the European Monetary Fund." Not only do they make the comparison, but they also suggest that the EU should learn from ASEAN+3! For me, this is state of affairs would be something of a turnaround since it is often the latter whose institutional capacity is compared to the former in inferior terms. Here is the key graphic on how these two efforts would differ [click for larger image]:

What the above table hints at is competition between China and Japan to be the largest funder of the Chiang Mai Initiative Multilateralization (CMIM). The eventual compromise reached was they would both contribute $38.4B each, but China's share would be combined PRC and Hong Kong lending. Hence, Japan could claim that it alone was still the biggest sole contributor. Meanwhile, as Europeans are less bowled over by the prospect of contributing large sums to a prospective EMF, it would be up to countries with wayward finances to put up more emergency cash as Vox EU suggests or some similar allocative device.

Note though that this short CEPR report came before Singapore became the designated site of the surveillance mechanism, the ASEAN+3 Macroeconomic Research Office (AMRO). What AMRO does according to the Yonghyup Oh, the report's author, is make the ASEAN+3 effort a full-fledged monetary fund in its own right. A few days ago, I had a difference of opinion with an (American) IPE bigwig over the meaning of AMRO. I said it had the potential to incorporate decisionmaking of when to disburse funds as opposed to outsourcing this function to the IMF. The IPE bigwig said he'll believe it when he sees it (actual disbursal). Moreover, he pointed out that AMRO will only have 12 persons--a somewhat "skimpy" outfit by Western standards.

Still, I want to point out that lower institutionalization is a recurrent feature of Asian organizations. And, it ultimately doesn't matter if the surveillance office is staffed by many or few as long as binding decisions can be made to approve the activation of emergency funds. That is, AMRO could be staffed by one person who does nothing but play World of Warfare for years and years...but gets to decide when to put the CMIM into motion when the situation warrants it. At any rate, the European Monetary Fund will, like its Asian counterpart, be tested by its ability to quell disturbances if and when they occur. For Europe undoubtedly, that time is now.

UPDATE 1: Early signs as Asian markets open is that these measures are having the desired effect. The euro has recorded a bounce, and Swedish FinMin Anders Borg even says "We now see ... wolfpack behaviors, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart."