The case for eurozone default

THE wisdom in the eurozone is that if the European Central Bank would only follow the lead of the Federal Reserve and move to far more aggressive monetary policy, which it is now doing, all will be hunky-dory.

Of course, drenching the single currency area in euros will help, and make it easier for banks to lend again.

It is also a brave act for the ECB’s Italian president, Mario Draghi. His promise to expand the balance sheet of the ECB by €1trillion flies in the face of historic German concerns about overexuberant monetary policy and the horrors of the Weimar Republic.

The bigger question, however, is whether the source of the eurozone’s problems is simply a lack of credit, or is it more deeply rooted?

Many euroland economies simply are loaded down with too much debt. The ‘troika’ solution offered by the IMF, European Commission and ECB to this has been austerity. But still the debt levels rise.

Even the IMF’s own internal monitoring group has questioned the wisdom of the policy. The traditional solution for countries in trouble are the double ‘D’ approach – devaluation and default. The first is impossible in a single currency area unless nations drop out, as happened in 1993 when the euro predecessor, the European Monetary System, fell-apart.

That leaves the eurozone with default. It sound horrible and irresponsible, but as Harvard’s Benjamin Friedman recently observed, the debt of the 18 countries in the single currency region is more akin to American municipal bonds, rather than national debt. And managed defaults of American state and city debt have long been a feature of the landscape.

Official Greek debt could, for instance, be restructured so that payments could be stretched out over far longer time horizons and the coupons paid slashed. This was how the Latin American debt crisis in the 1980s, and some of the problems in East Asia a decade later, were fixed.

Standing in the way of such radical answers is Germany with its economic absolutes. Sometimes, however, German leaders choose to forget the fiscal history that they want to bury. In the 1930s it essentially defaulted on debts built up in the First World War and as a result of reparations. At the London Debt Conference in 1953, the amount of debt Germany built up before, during and after the Second World War was halved and payment of principal suspended for five years and drawn out over 30 years to give a recovering and rebuilding economy breathing space.

That is the kind of precedent that Germany should be looking at now instead of insisting on hardship among its neighbours. It could also refrain from winding up friends by discouraging Brussels from presenting the UK with bills for £1.7bn in the knowledge that it would be a huge political embarrassment.

It is only by sleight of hand that the invoice has been halved.

Peace talk

THE notion that Standard Chartered’s woes stem from the fact it was unfairly targeted by New York regulators is poppycock. The 29pc decline in the bank’s share price this year is representative of a much deeper malaise.

So far Standard Chartered has paid £400m in fines, in two tranches, to US enforcers, the most recent for failing to fix problems first identified in 2012: not smart.

Badly treated? Not if compared to BNP Paribas that had to stump up £5.5bn. As for the idea that foreign banks have been singled out – that also is ill-informed. Fines levied on JP Morgan Chase and Bank of America Merrill Lynch have been in the tens of billions of pounds.

One person who is certainly not taking Standard Chartered’s sliding reputation for granted is chairman Sir John Peace. He admitted to investors in Singapore, home to its largest shareholder Temasek with 17.7pc, that it was too complex and ‘too bureaucratic’ and takes too long to make decisions.

One critical action still pending is the removal of chief executive Peter Sands, who sought to brush aside charges of Iranian sanctionsbusting and now has presided over a series of profits warnings. Temasek this week expressed its unanimous support for ‘Peter and John’. Football fans will recognise the significance of that.

Slow coach

NO ONE can question the determination of the Financial Conduct Authority to punish market offenders. But the speed at which it and the British courts deliver financial justice is farcical.

Julian Rifat, of hedge fund Moore Capital, was arrested on insider trading charges in 2010 but it was only yesterday that he was convicted of a £250,000 conspiracy as part of the Tabernula investigation involving six others.

Now we have another two month wait for sentencing.

The FCA says the probe was ‘painstaking’ but that is no excuse for a lethargic process.