In my role as president of an asset management company, my analyses have led me to believe that the rating agencies have got the right idea: in Portugal, the banks, as well as companies and individuals, need to reduce their levels of debt. This solution, which is difficult to implement, also carries the danger that the measures it requires will curb consumer spending and delay the return to growth. Portugal will probably require a cash injection before 2013, which – as is the case with Greece – points to another EU bailout, possibly accompanied by a restructuring plan involving the private sector. A debt restructuring in the form of a voluntary bond exchange, such as is currently being discussed for Greece, would entail a significant cost for bondholders. Investors, lacking confidence in the effectiveness of Portugal’s austerity plan and anticipating an inevitable debt restructuring, have exited the Portuguese bond market, causing prices to plummet and removing any possibility of an orderly refinancing.

While the situation is different in other European countries, economic agents are factoring in the probability – albeit currently low – of a costly debt restructuring, and yields have risen not only in the countries considered the weakest (Ireland, Spain), but also in others that have been largely unaffected until now, but whose debt levels are so high that the level of their interest rates overrides all their economic efforts (Italy). The increase in yields represents a deterioration in the conditions under which governments can obtain financing on the markets. This is making it harder for governments throughout the eurozone to rebalance their public finances.

More banks could default, triggering a fresh crisis on the financial markets. Contagion, which is to be avoided at all costs, has already begun.

Although the rating agencies have not created this situation, they tend, nonetheless, to exacerbate it. Michel Barnier is right to call for institutions, such as the ECB, pension funds and insurance companies, to be less dependent on the rating agencies. He is also right to suggest that ratings should not be reflected in prudential rules and, in particular, in EU regulations, and that investors should view them more critically. The recent proposals, which are moving towards a suspension of ratings for countries in receipt of IMF assistance, do not seem relevant in my opinion. Given the errors made in the past, I think it would be more useful to audit the processes followed by the rating agencies and the means they have available in order to improve the quality of their analyses. As for the establishment of a European rating agency, one has to wonder how it would be more objective than the other agencies. In my view, it would lack credibility and could be suspected of being too lenient. Also, it would only strengthen the position of such agencies when they already have too much influence. This is why I think economic agents should take more responsibility: even though our company is modest in terms of size, we feel that we are capable of analysing the public finances of European governments. But in order to do this properly, governments must provide reliable data (which has not been the case with Greece). One option would be to follow the example of the US or Swedish models: the establishment of an agency similar to the US Congressional Budget Office (CBO), which would provide reliable data, and scenario analysis tools covering various economic variables (interest rates, unemployment, growth, etc). The US understood long ago that such tools are needed to attract investors and inspire confidence. They make it possible for a real debate to take place between politicians and economic agents, based on shared and reliable information. The Camdessus report also refers to this.

It is absolutely crucial to stop this contagion in its tracks. In the same way as for a company or a bank, liquidity risk for a government is, quite simply, disastrous. It would also be disastrous for Europe. It is now apparent that we no longer have the means to contain an event whose consequences would be even more serious than those of the Lehman Brothers collapse. We therefore believe that a political decision should be taken urgently. The future of Europe should not be shaped by the political position of a few MPs from Greece or elsewhere, but by the wishes of the governments. Irrespective of the reforms needed in the medium or long term to ensure the effective operation of the eurozone, we think that there is at least one way of preventing a catastrophic contagion scenario in the short term:

We need confirmation that Europe has decided that Greece will remain in the eurozone.

We need confirmation that Europe, the ECB and the IMF believe in the austerity plan adopted by the Greek parliament, and that if this plan is implemented properly, it will enable Greece to achieve growth in the medium and long term and to rebalance its public finances. It is important to provide more effective explanations of the advantages for Greece’s people and not just the country’s creditors: less corruption, and more employment.

Liquidity risk must be separated from solvency risk.

Liquidity risk must be covered by the European bailout fund and the IMF (around €700 billion is available). Instead of a debt exchange, Greece could buy up its own bonds at a fixed price, eg 70% of nominal value. It would therefore make a considerable saving on its debt, although this would be at the expense of bondholders. This solution would not constitute a default. It would simplify the issue of solvency quite considerably and prevent contagion. Such a transaction would be popular with bondholders who would sell their securities at a price equal to or higher than the current price.

The implementation of the plan should provide solvency. Europe would have to confirm this point with the markets and the IMF. It would have to guarantee the unconditional implementation of the plan: it is unimaginable that a country could be insolvent indefinitely, without having to leave Europe. Greece must therefore be given concrete support to help it implement its austerity plan as effectively as possible: for example, by making available European officials or putting in place procedures that have worked in other countries, etc.

In conclusion, Europe must provide Greece with liquidity and ensure it implements its austerity plan effectively – it is inconceivable that a failure to implement the plan properly will be allowed to threaten the entire European system. Europe urgently needs to show it is willing to take action to prevent this new financial tsunami. Otherwise, contagion will be unavoidable since the growth of Western countries is under pressure from high debt levels, energy price rises and the absence of budget surpluses.

Failure to act would lead to the implosion of the eurozone, triggering a banking crisis, the withdrawal of life insurance policies and massive losses for savers, with consequences that are all too well-known: company insolvencies and unemployment.

Those in favour of even the temporary withdrawal of Greece from the eurozone seriously underestimate the contagion and panic that always accompany financial crises, as the collapse of Lehman Brothers so amply demonstrated.

Paris, 12 July 2011

(*) Philippe Delienne is president of Convictions Asset Management -  www.convictions-am.com

Michel Barnier is right to call for institutions, such as the ECB, pension funds and insurance companies, to be less dependent on the rating agencies