Description
Book SynopsisA fact-based treatise on the Eurozone crisis, with analysis of possible solutions The Incomplete Currency is the only technical yet accessible analysis of the current Eurozone crisis from a global perspective. The discussion begins by explaining how the Euro''s architecture, the relationship between finance and the real economy, and the functioning of the Eurosystem in general are all at the root of the current crisis, and then explores possible solutions rooted in fact, not theory. All topics are analysed and illustrated, making extensive use of examples, tables, and graphics, and the ideas presented are supported by data sets and their statistical elaborations throughout the book. An extensive digital component includes numerical simulations of public debt dynamics for different Eurozone countries, evaluations of the sustainability of programmes like the Fiscal Compact, and stress tests on the ability of institutions like the ESM to cope with major liquidity crises
Table of Contents
List of Figures xi
List of Tables xxiii
Foreword xxv
Preface xxxi
Acknowledgments xxxiii
About the Author xxxv
About the Website xxxvii
CHAPTER 1 The Building Blocks of the Single European Currency 1
1.1 The Basic Concepts: Financial Flows, Risks and Probability Distribution 1
1.2 Sovereign Credit Risk, Public Debt and Inflation 12
1.3 Single Curve of Interest Rate: Euribor, Euro Swap, Eurepo 20
1.4 The Monetary Policy in the Eurozone and the Mechanisms of Transmission 28
1.5 Recognition and Management of the Sovereign Credit Risk 35
CHAPTER 2 The Eurozone Architecture and the Working Paradigms 51
2.1 Relationships within the European Financial System 51
2.2 The Transmission Mechanisms between Finance and Real Economy in the Eurozone 69
CHAPTER 3 The Single Currency Area in the Context of International Crisis 94
3.1 Before the Crisis: the Adverse Effects of the Single Currency 94
3.2 The Crisis: Divergence of the Sovereign Debt Curves and the Disintegration of the Single Interest Rate Curve 101
CHAPTER 4 Dysfunctional Mechanisms of the Eurozone 122
4.1 The Explosion of Target2 Balances and the Unsustainable Accumulation of the Structural Imbalances 122
4.2 The Nationalisation of the Public Debt: the Case of Italy 142
4.3 The Nationalisation of the Public Debt Pushed to the Extreme: the Case of Greece 150
CHAPTER 5 The Pathological Banks-Governments Relationship 173
5.1 The Spread Intermediation 173
5.2 Collateral Discrimination on the Interbank Market 182
5.3 The Divergence Mechanisms in Action: Synergies and Accelerations 197
5.4 Case Studies: the Divergence Process in Some Peripheral Countries 206
CHAPTER 6 Assessing the Risk of a Euro Break-Up 216
6.1 A Historical Perspective on the Possible Break-up of the Euro 217
6.2 The Probability of a Euro Break-up 221
6.3 Costs and Benefits Associated with the Exit from the Euro 231
CHAPTER 7 Financial Assistance and Fiscal Agreements in the Eurozone 243
7.1 The Sovereign Bail-out Funds 243
7.2 The Reforms of the Stability and Growth Pact and the Fiscal Compact 257
CHAPTER 8 The Extraordinary Interventions of the ECB 267
8.1 The Securities Market Programme and the Purchases of Covered Bonds 267
8.2 The Long-term Refinancing Operations of December 2011 and February 2012 (LTROs) 270
8.3 The Outright Monetary Transactions (OMT) 271
8.4 The Targeted Long-term Refinancing Operations (TLTROs) 272
8.5 The Quantitative Easing 272
CHAPTER 9 The European and National Interventions on the Banking Systems 293
9.1 The Banking Union 293
9.2 The Hidden Recapitalisation of the Peripheral Banking Systems 296
9.3 The State Aids to the Banking Systems of the Core Countries 301
CHAPTER 10 Mutualisation of the Public Debt and Fiscal Transfers 304
10.1 The Mutualisation of the Public Debt in the Eurozone 304
10.2 The “Fiscal Currency” and Other Theories for the Unilateral Solution of Problems for Peripheral Countries 315
10.3 The Fiscal Transfers: Proposals for Structural Balance of Financial Flows 316
CHAPTER 11 Proposals of Monetary Policy Interventions to Overcome the Crisis 324
11.1 Reforming the Statutory Objectives of the ECB: the “Zero-spread Target” 324
11.2 The Cancellation of Interests on Government Bonds Purchased by the ECB 327
11.3 The European Public Debt Refinancing Programme (EPDRP) 329
11.4 A Far More Pervasive Intervention: Partial Debt Monetisation 334
11.5 The Purchase Programme of Asset-backed Securities Guaranteed by Sovereign States and Supranational Institutions 337
11.6 A Measure of Direct Support to the Real Economy: The Cancellation of Impaired Debts of the Non-financial Private Sector 344
11.7 A Proposal for an Authentic Sustainability of the Greek Public Debt 345
CHAPTER 12 Transparency as a Tool to Prevent Excessive Risk-taking and Contrast the Crisis 348
12.1 The Need for a Market Logic as the Basis of the Financial Sector’s Regulation 348
12.2 Implications of the Lack of Transparency on Risks at a Macro Level 350
12.3 Fair Value and Probability Scenarios as a Solution to the Problem of Risk Transparency 351
ANNEX A 361
REFERENCES 463
INDEX 495
