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Main messages

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  1. Charles Wyplosz, Markus K. Brunnermeier, Luis Garicano, Philip R. Lane, Marco Pagano,Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh, and Dimitri Vayanos, Steven Ongena, José-Luis Peydró, Arnoud W.A. Boot, Viral V Acharya, Matthew Richardson, Luc Laeven, Enrico Perotti, Dirk Schoenmaker, Neeltje van Horen, Ross Levine, Thorsten Beck, Harry Huizinga

  2. Main messages • Forceful and swift resolution of the Eurozone crisis, without further delay! • Disentangle banking and sovereign debt crisis • It’s all about incentives! Move beyond mechanical solutions • How can regulations (capital, liquidity, tax, activity restrictions) be shaped in a way that forces financial institutions to internalise all repercussions of their risk, especially the external costs of their potential failure? • It is the endgame, stupid! • Privatising losses, bailing in risk decision takers • Need a credible resolution framework, including on European level

  3. Resolving the current European mess • Quadruple crisis in Greece (sovereign, bank, competitiveness, political) turned into quintuple Euro crisis (+ confidence crisis) • Policy mistakes made bad situation worse • EFSF does not have not enough resources and will never have • Market-based recapitalization will not work as long as uncertainty continues • Voluntary hair-cut is an oxymoron • Need back-stop guarantee – only institution to do so is ECB

  4. A Trilemma (one of many!) • Optimal currency area? • Demographic shifts • Short- term vs. long-term crisis resolution • Time inconsistency of policies Monetary and financial stability National sovereignty over economic policy Currency union

  5. Self-fulfilling prophecies

  6. Creating a new safe asset • Jointly guaranteed Euro bonds - NO • Create a new safe asset – YES • Debt mutual fund arrangement (Beck, Uhlig and Wagner) • Debt mutual funds that buys existing government bonds (in shares relative to GDP) and issues tradable securities • Not risk-free but small risk (Greece = 2%) • Issue ESBies(Brunnermeier et al.) • European debt agency would buy on the secondary market approximately 5.5 trillion euros of sovereign debt (60% of the Eurozone’s GDP) • Would issue two securities; ESBies, senior; junior tranche would take residual risks • Gives 3.8 trillion of AAA ESBies • Advantages • Have ECB use them as collateral • Isolates ECB against sovereign risk • Forces banks to recognize losses (have to exchange current government bonds for synthetic Eurobonds) • Helps disentangle sovereign debt and banking crisis

  7. Electronic version http://www.voxeu.org/index.php?q=node/7147

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