Shadow ECB
Council opposes haircut for Greece

At the meeting of the Shadow ECB Council on 1 October 2012, 11 of the 15 members recommended a cut of the ECB’s main refinancing rate.
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Of these, two favoured a cut by 0.5 percentage points to 0.25 per cent, the others preferred a quarter-point cut to 0.5 per cent. One member argued in favour of a rate hike, three others in favour of unchanged rates.  There was a consensus that the Greek government will not be able to pay back its debt in full, but a majority of Shadow Council members was against a haircut at this time.

 

Two years of negative growth rates expected

Growth expectations for 2013 deteriorated further. They now stand on an average of minus 0.1 per cent. On the other hand, inflation expectations were revised up further. Inflation is however still expected to fall be below two per cent next year.

 

Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

 HICP-InflationGDP-Growth
20112.71.5
20122.5 (2.4)-0,5  (-0.5)
20131.9  (1.9)-0.1  (0.0)

 

Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; E. Chaney, M. Diron, G. Horn; J. Krämer, E. Nielsen, J.-M. Six

 

Lower rates needed

A large majority favoured a cut of the main refinancing rate, which the ECB last lowered to 0.75 per cent in July. While the expectations are limited that this would give a boost to the faltering economy directly, most members would expect it to contribute to a lower external value of the euro and also to improve the financial situation of banks, and in particular of banks which have to rely most heavily on ECB funding.

 

Three members favoured unchanged rates on the premise that a rate cut would not be effective in stimulating the economy and might even hurt the economy by depressing the income of savers. One member argued in favour of raising rates on the grounds that unanticipated side effects of very low interest rates for a very long time would outweigh limited positive effects on the economy.

 

Greek debt considered unsustainable but members do not support a haircut

 There was a strong consensus on the Shadow Council that the Greek government’s debt was so high, that it would not be able to pay back in full. However, a majority of members argued against a haircut at this time, due mostly to concerns about moral hazard and contagion. They argued that the Greek government and governments of other crisis countries would weaken their efforts of pushing through unpopular reforms to improve public finances if they could count on debt relief, even if they failed to make such an effort.

It was also argued, that the first haircut last year had shown that such a measure can severely damage trust in the willingness and ability of other governments to pay back their debt, pushing up bond yields of these countries.

 

A minority challenged this view, arguing that the current focus on austerity was failing and that growth could not be achieved without a reduction of the debt burden. This minority stressed the very big effort that the Greek government had made to reduce the deficit, thus challenging the assertion that the Greek government was non-cooperative and should not be rewarded with debt relief.

 

Members’ individual votes:

MemberAffiliationRate recommendation
José AlzolaThe Observatory Groupcut 0.25%
Marco AnnunziataGeneral Electriccut 0.5%
Manuel BalmasedaCEMEXcut 0.25%
Elga BartschMorgan Stanleycut 0.25%
Andrew BosomworthPimcocut 0.25%
Jacques CaillouxNomuracut 0.5%
Julian CallowBarclays Capitalunchanged
Eric ChaneyAxacut 0.25%
Janet HenryHSBCcut 0.25%
Gustav HornIMK, Düsseldorfunchanged
Merijn KnibbeWageningen Universitycut 0.25%
Jörg KrämerCommerzbankhike 0,25%
Erik NielsenUnicreditcut 0.25%
Jean-Michel SixStandard & Poor's Cut 0,25%
Richard WernerUniversity Southamptonunchanged

 

Frankfurt, 4. November, 2012

Norbert Häring

Non-voting Chair of the Shadow ECB Council

 

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Council opposes haircut for Greece

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Background information

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