Friday, March 26, 2010

Conservatorship for Greece?

Although not an exact analogy, Fannie Mae and Freddie Mac - the twin towers of mortgage finance in the United States - were placed into conservatorship to ensure their survival. Why not follow that model for Greece?

Conservatorship is designed to stabilise the enterprise and keep it afloat. Debts are backed up and management is replaced. The systemic risks presented by the collapse of Fannie and Freddie necessitated government intervention going beyond the injection of money. These GSEs had been hobbled by poor leadership and even poorer oversight for years. Seizing control was the only option. Treasury Secretary Paulson's move was a bold one because Fannie and Freddie had maintained all along that they were adequately capitalized and satisfied regulatory requirements. They also had powerful backers on Capitol Hill.

Greece is not too dissimilar. Merely loaning money - bilateral or multilateral - may not be enough given what we know about the quality of governance and financial reporting in that country. Having been led up the garden path about single digit deficits only to be shocked with the 12.7% of GDP deficit figure, the EU must exercise extreme caution before crafting any rescue plan.

Read more here.