From Saviour to Guarantor: EU Member States’ Economic Intervention During the Financial Crisis

168 Pages·2015·3.085 MB·English

by  Fabio Bassan, Carlo D. Mottura (auth.)

From Saviour to Guarantor
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C ORPORATE GOVERNANCE IN THE EUROPEAN INSURANCE INDUSTRY
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From Saviour to Guarantor
EU Member States’ Economic Intervention
during the Financial Crisis
Fabio Bassan
Professor of International Economic Law and European Law,
University of Roma Tre, Italy
and
Carlo D. Mottura
Professor of Financial Mathematics and Risk Management,
University of Roma Tre, Italy
© Fabio Bassan and Carlo D. Mottura 2015
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First published 2015 by
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ISBN 978-1-349-56135-3 ISBN 978-1-137-44156-0 (eBook)
DOI 10.1057/9781137441560
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Contents
List of Figures vii
List of Tables ix
Preface x
List of Abbreviations xv
Part I The EU’s Institutional Action 1
1 The EU Action to Face the Crisis 3
1.1 E U’s actions in support of the Member States’ public debtt 4
1.2 EU’s actions in support of the banking system 7
1.3 Eurostat public contingent liabilities 9
1.4 Differences between EU and US actions 11
2 State Guarantees and State Aid 13
Part II The Financial Valuation of a
Guarantee Contract 17
3 The Defaultable Guarantee Contract 19
3.1 The guarantee contract and credit derivatives market 20
3.2 The relevant issues 20
4 Valuation under a Standard Model 22
Part IIIA The State Guarantees in the EU: State
Guarantees for the Safeguard of the Euro 47
5 Guarantees in Favour of the ESM 49
5.1 T he financial scheme 50
5.2 M ain features of the guarantees 53
6 Effects of the Guarantees 57
6.1 Valuation and ‘model risk’ 57
6.2 The lack of effective sanctioning instruments 61
6.3 Different sovereignties for Eurozone Member States 63
6.4 The ECB and the lever of Archimedes 65
v
vi Contents
Part IIIB The State Guarantees in the EU: The State
Guarantees for the Stability of the
Banking System 67
7 The State Guarantees to Cover Bank Debt 69
7.1 The financial scheme 69
7.2 Main features of the guarantees 70
8 Effects of the Guarantees 74
8.1 L egal guarantee fee and market price 74
8.2 Moral hazard effects 80
8.3 Distortions in banking competition 80
8.4 Member State guarantees and EU coordination 81
Part IV Innovation and Crisis-Fighting
Measures in the EU 83
9 The Instruments That Triggered the Crisis in 2007–2008 85
9.1 The ‘path’ of risk: from private individuals to banks 85
9.2 The ‘path’ of risk: from banks to markets 86
9.3 T he ‘path’ of risk: from markets to States 89
9.4 C ultural sustainability of innovation in anti-crisis
public finance 91
10 The ECB’s Unconventional Measures Facing the
Challenge of Markets and National Courts 98
10.1 Characteristics of the main unconventional measures 98
10.2 T he scope of the measures as outlined by the
ECB and by the case law 103
10.3 Application of the constraints set by the BVerfG for
OMTs to other unconventional measures 117
Conclusions 121
Notes 126
Bibliographyy 151
Index 157
List of Figures
1.1 Level of public contingent liabilities (% of GDP) 10
1.2 Level of contingent liabilities in the euro area (EA18)
and the EU28 (% of GDP) 10
1.3 Dynamics of public interventions to financial
institutions (€ billion, $ billion) 12
4.1 CDS sovereign spread and CDS implied default
probabilities (average) 25
4.2 CDS bank spread and CDS implied default
probabilities (Germany) 28
4.3 CDS bank spread and CDS implied default
probabilities (France) 29
4.4 CDS bank spread and CDS implied default
probabilities (Spain) 3 0
4.5 CDS bank spread and CDS implied default
probabilities (Italy) 31
4.6 Trend of the 1Y up-front value at inception of the
guarantee (guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 38
4.7 Trend of the 3Y up-front value at inception of the
guarantee (guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 39
4.8 Trend of the 5Y up-front value at inception of the
guarantee (guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 40
4.9 Trend of the 10Y up-front value at inception of the
guarantee (guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 41
4.10 Trend of the 30Y up-front value at inception of the
guarantee (guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 4 2
5.1 ESM financial scheme 50
6.1 30Y up-front value at inception of the guarantee:
PD Debtor at 2% (guaranteed liability €100, recovery
rate 60%, G and MO models, €) 60
vii
viii List of Figures
6.2 30Y up-front value at inception of the guarantee:
PD Debtor at 6% (guaranteed liability €100,
recovery rate 60%, G and MO models, €) 60
7.1 Financial scheme of a State guarantee to cover
bank bonds 70
9.1 US real estate market trends (S&P/Case-Shiller
Composite-10 Home Price Index) 87
9.2 Prices of US mortgage-related securities (in $) 88
9.3 Development of gross public debt for selected
OECD economies (1880–2014; % of GDP) 90
List of Tables
4.1 CDS sovereign spread and implied default
probabilities (average) 24
4.2 CDS bank spread (average) 26
4.3 CDS bank implied default probabilities (average) 27
4.4 1Y up-front value at inception of the guarantee
(guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 33
4.5 3Y up-front value at inception of the guarantee
(guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 34
4.6 5Y up-front value at inception of the guarantee
(guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 35
4.7 10Y up-front value at inception of the guarantee
(guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 36
4.8 30Y up-front value at inception of the guarantee
(guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 37
4.9 Valuation cases for a 3Y inter-State guarantees
(guaranteed liability €100, recovery rate 40%,
Gaussian model, €) 43
5.1 ESM’s Member State Guarantee Amount 53
5.2 ESM’s Member State Rating 55
6.1 30Y up-front value at inception of the guarantee
(guaranteed liability €100, recovery rate 60%,
G and MO models, €) 59
7.1 Government-guaranteed bank bonds issued in
individual countries 71
7.2 Guarantee fees to government (October 2008–2009) 72
8.1 Legal fee vs mark-to-model fee (Gaussian model,
theoretical cases) 78
ix