Legal Arguments for ECB Exempted from PSI - Essay Example

? Legal Arguments to have ECB Exempted from the PSI Legal Arguments to have ECB Exempted from the PSI Introduction In the recent past, financial markets have become increasingly volatile. In particular, the inherent internal as well as external fluctuations have greatly affected the stability of a host of economies across the globe. This has significant implications on the various stakeholders that are affected in different ways by the respective trends. Over time, firms, nations and states find it difficult to maintain an upward growth with regard to economic development. This is because of the negative effects that are associated with frequent changes in the financial markets. In response to these, different bodies create liaisons in a bid to address these emergent challenges with ease. One of the most common options for countries and firms has been the creation of alliances. In this respect, countries or corporate bodies with common economic and social interests form groupings and develop viable policies to govern their operations. With the characteristic conditions, they create an environment that is supportive of economic growth and development. For instance, they provide better and mutually benefiting trade terms and conditions amongst others. To a great extent, this has been instrumental in cushioning them against the negative effects that stem from the aforementioned dynamic trends. Recent economic trends ascertain that the entire globe has been affected by incidences of inflation. One of the strategies that most countries, states and corporate entities have assumed to curb this pertains to financial borrowing. In this regard, it is worth appreciating that countries whose economies are directly influenced and controlled by the larger global economy cannot be financially independent. Put differently, their financial decisions are directly informed by the global trends. Fundamentally, nation states share intricate and augmenting relationships and due to the effects of globalization, they cannot operate singly. This can be used to explain why most countries suffer when the global economy is affected in any way. In such instances, economic instruments such as local banks, the International Monetary Fund, the World Bank and so forth offer the financial help accordingly. It is against this background that this paper explores the legal arguments that would enable the European Central Bank (ECB) to be exempted from the Public sector Involvement (PSI) debt. To ensure a harmonic consideration, it begins by presenting the history of the problem, role of PSI and the responsibility of ECB in the relative debt. Historical Underpinning From a general point of view, the Euro zone is currently grappling with sovereign debt crisis. Statistical evidence indicates that various countries including Portugal, Ireland and Greece have been adversely affected this1. In particular, their debts are very high and therefore potentially unsustainable. With particular reference to Greece, the buildup of its debt in the 2000s was influenced by increased investor confidence as well as its easy access to very cheap capital. The subsequent competitiveness presented various financial challenges that made it difficult for the country to maintain a positive economic growth2. This was further compounded by the global financial crisis that occurred between 2008 and 2008. In essence, it increased the borrowing costs of the country to unsustainable levels. Various policy interventions have been undertaken by different stakeholders to address this problem. The European Central Bank, European Union and the International Monetary Fund have all contributed directly to this good. In this respect, they all agreed that Greek’s possible default could have lasting negative impacts to the entire global financial market. They proposed the first financial aid package in 2010. Nonetheless, Haldane, Penalver, Saporta and Chin argue that this did not yield any beneficial outcomes3. The financial stability of the country still suffered significant negative effects from external financial shocks. This prompted the stakeholders to propose the second phase of assistance in 20114. Relative prepositions advised the bond holders of the country to accept losses and help the country to attain the desirable status of financial austerity. Although this policy recommendation played an instrumental role in preventing the country from defaulting from its debt, it has not been successful in addressing the crisis fully. Thus the country still grapples with economic problems such as unemployment amongst others. The contribution of the ECB to this crisis has particularly spurred a host of arguments. The decision of the ECB to buy bonds from the Greek government was informed by the relative debt whose implications were taking toll on Greek and its entire economy5. The support in this regard was accorded by the institution’s outright buying of the Greek bonds. By then, European Union was taking minimal measures to curb the scenario. Thus, the institution felt that this decision was viable and it was believed would go a long way in helping the country to address it financial crisis in a viable manner. Further, The International Monetary Fund states that the decision was informed by its mandate to maintain and uphold financial stability of the member states6. This led to the rise of the Securities Markets Program (SMP) for easy administration and effecting of the respective policy. Regardless of the preceding financial interventions, the Greek bonds did not stabilize. For this reason, ECB decided to suspend any further purchases of the bonds. Thus it was left with close to 45 billion in debt. The bonds that were acquired by this institution were equally marked at the then market price. Hence according to Jackson, they were amortized and expected to Par at maturity7. The bone of contention however stems from ECBs marking of the bonds at purchase price as opposed to the market price. To address the problem amicably, the relevant stakeholders opted for voluntary restructuring of the economy. This according to the bank was also useful in avoiding incidences of default that would undoubtedly hurt the economy. Additionally, the institution assigned a significant 100 billion Euros to be employed for bank recapitalization. At this point, it cannot be disputed that the solutions to resolve the issue need to be collective. Role of the PSI The use of PSI as an economic instrument by the Greek government dates back in 2011.The European Council in this year took practical steps that were geared towards sharing the financial burden that the Greek government was struggling with. According to the Euro Summit Statement of 2011, determined efforts were put in place to combat incidences of financial crises that Greek was grappling with. The ultimate aim of the summit was to develop deeper economic integration that would allow the countries to attain their economic ambitions and sustainable growth and development. In this respect, fiscal consolidation policy as well as structural development policies was developed8. According to Ahamed, Public Sector Involvement refers to the intentional contributions as well as efforts, either informal or formal that are pursued in case of sovereign financial distress9. The support assumes different forms ranging from softer ones like preventive talks to harder ones including debt rescheduling re-profiling, restructurings and in other cases, debt write downs. The rationale behind involvement of the private sector in instances where a debtor gets in a financial crisis pertains to the need to enhance financial responsibility. In other words, PSI instruments seek to ensure that investors and creditors shoulder the financial consequences of their decisions and activities. This goes a long way in protecting the tax payer against the relative financial burdens. Arguably, bail-out tendencies also encourage assumption of risky borrowing and lending behaviors.10 If encouraged, this ultimately has lasting implications on the entire society. Basically, Pidd cites that all debt restructurings, there is the practice of burden sharing11. In this regard, borrowers who find themselves in critical scenarios negotiate with their creditors to come up with sustainable, acceptable and mutually benefiting solutions. With respect to the PSI, the summit acknowledged that this is an important economic instrument that can be helpful in addressing the Greek debt crisis. For this reason, it supported the efforts that the country was making to involve the private sector in addressing this financial problem. In essence PSI offered the impetus for the private and public sector as well as other parties to participate in the debt reduction. The proposed measures pertained to the development of a voluntary bond exchange that had a nominal discount of about 50% on the respective Greek debt that was held up by its private investors12. In this plan, the Euro zone member states were expected to contribute a significant 30 billion Euros to this PSI package. The official sector on the other hand was willing to contribute up to 100 billion Euros. The International Monetary fund was also called upon to contribute to the program accordingly. At this point, the ‘voluntary’ aspect is noteworthy. Reportedly, this was informed by the recognition that coercive workout or restructuring would culminate in incidences of defaults. Undoubtedly, the preceding efforts were guided by the goals and objectives of the PSI. In this regard, these would go a long way in empowering the Greek government accordingly. Fundamentally, it would enable the country to address its financial problems and attain an acceptable state of stability. Then, it would be able to participate actively in the global economy and realize profits, just like the other countries that were signatory to this economic provision. This was the honorary pledge that had been made by the member countries in an effort to support each other in attaining the desirable state of financial stability. Understanding the Role of the European Central Bank in the Euro Market ECB is a public financial institution that is charged with the responsibility of managing critical monetary policies of a group of countries belonging to the European Union. It is mandated to moderate money supply, control relative interest rates and effectively manage exchange rates13. One of the important roles that this institution plays pertains to maintaining price stability. Officially, it is also mandated to support any policies within the community in a bid to enable achievement of important community objectives. In executing its duties, it is required to align its efforts with the provisions of the fundamental principle governing the open market economy. This stipulates that relative efforts should be pursued without competition favor and should promote efficient and equitable allocation of the resources. According to Atkins and Peel, the elemental role of ECB is to maintain price stability. Seventeen countries of the European Union are party to this institution14. Thus they are bound by the relative policies as well as regulations. From a financial point of view, ECB plays an important role of defining and implementing the monetary policies of the European Union. Most importantly, it is vested with the authority to authorize issuance of relative bank notes. In the recent past, Krugman notes that the mandate of the ECB has been extended to include both micro and macro lending15. In this respect, the institution has broadened its perspectives, in line with expanding market needs. This has made it to be directly involved in the emergent financial problems that are being experienced across the globe. Currently, the preceding roles are subordinate to its primal role of providing financial aid to the countries of the euro zone. The Current Status The current status of the ECB with respect to financial borrowing is marred by a host of controversies. This is particularly so regarding the aspect of financial lending to the governments of countries that are in crises. In this respect, most countries believe that the ECB has unlimited financial power and should therefore always act swiftly in the event of a financial crisis affecting member countries. The ECB on the other hand is reluctant about taking any financial responsibility of a government or country. This reluctance has had diverse implications on the investor’s trust in its performance. In other words, it has made several players in the market to doubt its credibility with respect to executing its mandate. As indicated in the case study, The ECB has proceeded to investing in the Greek bond market by buying bonds worth 40 billion dollars. This move has been questioned by financial analysts and agencies. They claim that the institution has already gone overboard. In particular, they insist that it is not supposed to make any direct investment in a country or agency. Rather, it can make investments in the open market. This is further compounded by its reluctance to actively participate in the Greek bail out. Although its decision in this regard is bound by the law, most stakeholders believe that the institution is simply taking measures to shield itself from financial liability. Currently, Murado indicates that ECB believes that European Financial Stability Facility (EFSF) should assume the responsibility of making necessary financial interventions in the bond market16. However, this is also controversial because of the fear of it amounting to monetary financing. Also, proposals have been made suggesting the affected stakeholders and shareholders to make changes to the current treaties and incorporate the current concerns. The main aim for this would be to make provisions for monetary financing of government, countries and other publicly owned agencies. Critics of this indicate that with the current volatility in the financial market, this can have adverse implications on the entire global economy. Also worth acknowledging in this respect is the recognition that just like other financial institutions, ECB needs to be the last resort with regards to assisting the burdened countries financially. For this reason, it believes that it should not be compelled to make interventions currently. The Position of ECB As aforementioned, the institution has refused to shoulder any financial liability accruing from the Greek bonds that it holds. In particular, it is unwilling to participate in the suggested bail out and maintains that it would not join the private creditors in pursuing this. In this regard, the president of the institution maintains that the reason for buying the bonds was to protect the assets of the tax payers. In addition, the decision was informed by monetary policy reasons. This according to Etkins is one of the responsibilities that the institution is charged with17. In addition, it cannot be disputed that the bond market is still very vulnerable to the market shocks that are being experience across the globe. As such, the current decision is informed by the need to take caution and keep any negative implications at bay18. This decision has triggered arguments from the market as well as from other stakeholders. Basically, they believe that it would undermine the credibility of the institution in the bond market. However, the decision is guided by informed thought and grounded on a strong legal basis. Legal Perspectives As it has come out from the preceding analysis, both PSI and ECB institutions play distinct roles in the financial market arena. Their roles are further bound by certain legal provisions that ensure that their actions yield optimal outcomes. The respective legal provisions also guide their behavior in a bid to ensure that this is within the established legal confines. Notably, this ensures that the roles that they play are effective in helping them achieve their primary goals and objectives. Besides enhancing optimal performance, these instruments contribute significantly to prevention of conflicts whose implications are far reaching. From a legal point of view, Raunch believes that ECB is right to be exempted from the PSI debt19. This position is well explained in the provisions of the Collective Action Clauses as well as in various Articles of the Treaty on the Functioning of the European Union to which it is party to. Collective Action Clauses (CACs) Collective Action Clauses that are also referred to as Majority Action Clauses were developed to play a clear and distinct function. In particular, their fundamental role was to facilitate the amendment or restructuring of important terms and conditions of any bond20. This was to be done by a simple majority of the bond holders21. In this case, the majority would shoulder the responsibility of effecting the abovementioned provisions. In light of the case under review, the majority are represented by the private bond holders. The minority factions in this regard are given an option to distance themselves or choose not to engage in the debt restructuring initiatives. From this point of view, the ECB, being a public entity has an alternative of not participating in the debt restructuring efforts, regardless of it having purchased the bonds. Moreover, CACs play an instrumental role of preventing the recalcitrant, rogue or malevolent bond holders from taking advantage of their creditors and debtors. This is important particularly for the private investors whose resource base is relatively limited. In this regard, it is worth appreciating that the financial markets can in some cases be very competitive. Unhealthy competition that is in most instances pursued by rogue and malevolent bond holders can adversely hurt other investors. As indicated earlier, the relative provisions were expected to be incorporated in sovereign bond contracts. In addition to the preceding roles, the CACs were supposed to ensure collective representation of all debt holders in case of a crisis. Furthermore, these were to allow for optimal participation of all members in the process of voting regarding the alteration of conditions as well as terms of bond contracts. Also, CACs called for sharing amongst all creditors the assets that are received from the debtors. Presumably, the respective assets would be useful for facilitating the process of resolving the any debts that could occur in future22. The CACs are legally binding to the minority facets of the population as well as the creditors. To enhance the implementation and enhancement of the abovementioned provisions, Hill indicates that coordination, dialogue and communication between the sovereigns and creditors informed the entire process23. Furthermore, members were responsible for ensuring that any disruptive legal processes by individual creditors were avoided. This is because they had the ability to undermine the process and hamper the attainment of optimal outcomes. Notably, these provisions provide a distinctive roadmap that fully supports the process of debt restructuring. The fact that it bounds all stakeholders and shareholders implies that every participant has a critical role to play in ensuring effective debt restructuring. However, this instrument exempts the ECB from participation in debt restructuring. In essence, it cites that the ECB, being a public financial entity, is not bound by these provisions24. Its participation in the relative debt restructuring scheme can therefore be purely for monetary or investment reasons. This has various legal, economic and financial implications on the wellbeing of the institution as well as on the other bond holders. This is particularly so because of the fact that the institution holds a significant percentage of the bonds as compared to private investors. Nevertheless, the exemption clause gives it an upper hand and accords it immunity from the hair cuts that other investors are bound to experience. From this point of view, ECB is exempt from the PSI debt. Legal provisions of the Treaty on the Functioning of the European Union Certain articles of this document provide useful insights that can be used as a basis for decision making with regard to exemption of the ECB from the PSI debt. Article 123 of this treaty concerns the European Union Ban on Monetary Financing or Central Bank Funding of Banks. According to Floudas, the provisions of this article also justify why the ECB should be exempted from the PSI debt25. The European Central Bank is party to the Treaty on the Functioning of the European Union. This underscores the guidelines that its signatories should adopt when dealing with financial as well as economic problems and issues. In essence, it details the nature of relationships that the respective parties share with each other as well as the extent of the respective relationships. It also outlines the responsibilities of financial institutions in assisting countries, agencies and other forms of institutions to address their financial problems. Fundamentally, the debt concerns the Greek government and its bail-out would reinstate the financial and economic performance of Greek. Basically, the provisions of this article prohibit the ECB or the central banks of the member countries from providing overdraft facilities or any other form of credit facilities to various institutions including central governments. Other bodies that are affected in this respect pertain to Union institutions, local or regional governments, offices or agencies and other public authorities amongst others26. In this respect, the European Central Bank cannot provide any form of credit facilities to Greeks’ Central government. At this point, it is worth appreciating that a bail out constitutes providing a credit facility to the suffering faction of this country. Just like the national banks, the European Central Bank is considered a private credit institution in this regard. From the legal standpoint, this provision gives the ECB an option of being exempted from the PSI debt. Thus the institution can base its exemption argument on this legal aspect too27. Equally applicable in this case are the provisions of article 124 of this Treaty. Compared to the previous article, this is restrictive in certain scenarios and requires the beneficiaries of any credit facilities to be deserving. Deserving in this regard is all encompassing comprising of the financial status of the country, its resource capacity and the interplay of other various concerns. The article stipulates that the consideration for credit facilities for union institutions, central governments, public authorities need to be based on informed thought28. These should not only be credible but they should also be prudent. Put differently, financial ECB and other central financial institutions should evaluate all factors presented by the institution or country that requires the help. These should be credible and factual in order to ensure that the relative help meets the established goals and objectives. This is important in preventing resource wastage and enhancing sustainable growth and development. Most importantly, such considerations play an important role in maintaining financial stability. The ECB is prohibited from providing any form of financial aid to institutions that do not satisfy the established provisions. Relative provisions act as a benchmark for decision making in this respect. From this point of view, The Bank of Greece argues that the country has a host of other options that it can explore to offset its debt crisis29. Put differently, the financial contribution of the ECB is not the sole place that it can source aid from. As aforementioned, the private sector provides various alternatives from which it can benefit from. Other countries that are party to the European Union are also mandated by the binding legal provisions to provide relevant financial aid to this country. Also worth appreciating is the contribution that can be made by the International Monetary Fund and World Bank to its problem. The fact that these financial institutions offer wide ranging alternatives cannot be disputed. Furthermore, it can source for additional help from the foreign investments. This can be attained through the use of economic incentives to attract foreign investments. Arguably, signatories of the CACs and PSIs would be willing to help the country shoulder its debt through various ways. They are legally bound by the provisions of these instruments to take practical measures in empowering affected countries to attain economic sustainability30. In sum, Greece has various options that it can explore in a bid to address the current financial crisis. Instead of relying on the ECB, it should take measures to explore all these. Conclusion As it has come out from the preceding analysis, the Greece debt crisis has its roots in the 2000s. Various stakeholders have taken the initiative of helping the country to address the financial challenges that it is currently struggling with. Amongst these is the European Central Bank. As aforementioned, this is responsible for ensuring the financial stability of its member states. This can be used to explain why it intervened by buying bonds from the Greek bond market. However, its reluctance to participate in the hair cut and Greek bail out has spurred arguments from the financial market. Most of the stakeholders argue that ECBs reluctance has the ability to compromise its credibility in respect to its mandate. From a legal point of view, the institution has an option of exempting itself from the PSI debt. In particular, the CACs exempt it from assuming any financial responsibility of the Greek debt. This is because it is not part of the private sector investors. The institution in this regard enjoys immunity from shouldering financial liability of countries or public agencies. 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