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September 24th 2011:  10 policy options for this weekend - Time for the Mandarin Accord?

 

As IMF and global finance leaders meet in Washington for the annual meeting, there is a desperate need for solution to the Greek and Euro-zone crisis as the lack of leadership is putting the global financial sector and economy under severe strain. There needs to be an immediate boost to confidence in order to break the negative feedback loop currently engulfing the global economy and financial markets.

26 years after the Plaza Accord which agreed to devalue the dollar, maybe G20 leaders should meet at the Washington Mandarin Oriental to thrash out a new deal.  The problem is that policy action is required urgently as there is no time for EU Treaty changes and this precludes the immediate use of instruments such as  Eurobonds. Here are 10 policy options to consider:

1. Greece abandons its austerity programme and immediately announces a 50% haircut on all outstanding debt obligations.

2. Greece also announces that Euro membership will be suspended with the new drachma initially pegged to the Euro with a devaluation of 30%. The ECB will intervene if necessary to sustain this peg.

3. EU leaders announce additional support for Portugal and Ireland to keep them within the Euro-zone.

4. G7 announces target bands for the main currencies and pledge concerted intervention to prevent moves outside agreed bands. EUR/USD would be allowed to fluctuate within a 1.10-1.40 range.

 

1. The Italian government resigns and calls emergency elections with the stated aim of a national-unity government

2. The ECB announces an emergency council meeting and cuts interest rates by 0.50% to 1.00%

3. The ECB announces a new credit facility allowing increased borrowing by the EFSF and global central banks continue to provide sufficient dollar liquidity.

4. The EU announces a that the weakest banks will be nationalised if not already under state ownership and closed. State guarantees will be increased for the other banks deemed to be vulnerable and the banks will forced to seek additional private capital, for example, through deeply-discounted rights issues.

5. The IMF announces that the Chinese yuan will be introduced into the Special Drawing Rights (SDR) and that the yuan will be revalued by an additional 10%.

6. IMF announces that it will issue new global bonds and use the funds to promote global infrastructure projects.

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