The Risk Telescope — Apollo 13
In April of 1970, the secondary oxygen tank on Apollo 13 exploded as it orbited Earth with three astronauts on board. The explosion damaged the primary oxygen tank as well as the life support systems for the ship. Astronauts evacuated to the attached lunar landing module and awaited a solution from Mission Control on the ground, while life support systems slowly depleted. Those who have seen the movie chronicling these events will remember the scene on the ground. Engineers had four days to devise a solution that would bring the astronauts back down to Earth alive. They were given a bag of spare parts, which were exact duplicates of all available components that could be stripped from the orbiting vehicle to craft a solution.
Europe’s banking system and sovereign debt markets are having an Apollo 13 moment. They are similarly stranded, as finance ministers and central bank governors depart Washington DC. Eurozone policymakers have a short amount of time to craft a solution from spare parts in order to avoid a catastrophic crash. While they negotiate with each other, liquidity (the life support system for the financial system) is depleting, creating major systemic risks and imposing serious burdens on central banks.
We know the Apollo 13 story has a happy ending. Ingenious engineers devised a solution to bring the astronauts back to Earth alive, but they were not able to complete their mission of landing on the moon. The Apollo program subsequently flew four more missions without loss of life. But manned travel to the moon ended in 1972 and the U.S. space program turned towards more modest earth-orbit based projects. We do not know yet whether or how this chapter of the eurozone story will conclude.
The IMF, the Group of Twenty (G20) and the Financial Stability Board (FSB) all met in Washington over the last few days. Four groups of policymakers (BRICS; G24; G20; IMF Development Committee; IMF’s International Monetary and Financial Committee (IMFC) each issued communiqués addressing a broader range of issues than the situation in Europe. These initiatives will be analyzed in the coming weeks. Today’s focus turns to the eurozone, since failure to find a solution now will eclipse in importance all other policy initiatives.
Therefore, this issue of The Risk Telescope in Section I analyzes the key components available to European policymakers. It provides some scenarios for consideration. Section II provides a different analysis. It analyzes the possible consequences of what some Europeans and many finance ministers globally consider to be a “positive” solution: a commitment to fiscal union and/or a second bailout program for Greece.
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