The workshop started with Europe stating its position to the rest of the world. A worldwide solution was needed for a global problem. There was only one way, they said, to save the Euro: everyone must chip in and start to buy some Italian bonds. If they didn’t then the ECB was prepared to find the money through quantitative easing, and that would not be in anyone’s interest. This was the only way to ensure that Italy did not leave the Euro (or even the EU).
The figure below shows the options table at the start of the workshop.
As in any options table the rows represent the actions the participants could make (defined in detail on the right), and the columns the proposed solutions.
There were two future scenarios, Europe said. Firstly, if people didn’t co-operate then left hand column (the “threatened future” column) would transpire. Europe would be forced to take the huge gamble with world economic stability by playing the “print €1tn” card, representing a significant injection of liquidity into the global economy. Surely it would be better, Europe said, for everyone to adopt Europe’s position (the column with the yellow header), where foreign countries start buying up Italian bonds.
Europe was then asked about guarantees for the Italian bonds, it seemed reluctant to commit itself, implying to the world that no there would be no guarantees.
Detailed meanings of the options:
Give German / Dutch guarantees for Italian bonds. The ECB would act to safeguard purchases of Italian bonds by being prepared to swap these with China, on a one for one basis, with German or Dutch bonds. In this case, there would be a de facto mutualisation of sovereign obligation across the Eurozone.
Buy €xxx bn Italian Bonds: The countries enter the markets with the purpose of buying the specified amount of existing Italian debt.
“Print” €1tn to buy Italian bonds. Perhaps should read “Create €1tn of central bank credit to purchase Italian bonds” If other countries do not buy the bonds then the ECB will buy the Italian Bonds itself. This will be through a process of quantitative easing, known colloquially (but not entirely accurately) as “printing money”
Let Italy go; Italy would be allowed to retire from the Euro and possibly the EU if its position were to become untenable
The response of the Chinese was very clear. They would not involve themselves in the affairs of foreign countries. Europe had to solve its own problems. The explicitly stated indifference was represented by a series of dashes against every other option.
The response of the Russians was slightly more positive, they would be willing to buy the bonds (in fact they were willing to buy up to 300bn worth), but they insisted on both guarantees and a large and varied package of political demands (see box below)
The response of the Qatar team was even more positive, they would be willing to finance up to €500bn, but only with guarantees.
Russia and Qatar’s position on the printing of Italian bonds and the exit of Italy was not made clear, hence the boxes for their position remained empty. At this stage a deal looked close, as long as the Europeans could firm up on their guarantees for the bonds and if the political demands could be dealt with
Details of Russian demands
An exemption from the third energy package for their projects (or at least for the ones that have started before the package came online, e.g. South Stream). They will thus retain monopoly and control over both energy production and delivery. They also hinted they are ready to revise gas-pricing formulae to better reflect spot market prices
The investigation of Gazprom closed (it is not so easy to re-open it if the EC does not want to look stupid or weak).
Lower tariffs to the EU market without them responding in kind for a given period of time
Relaxed Schengen visa regime for their citizens & business.
The next stage was the formation of an alliance between the Qataris (GCC) and the Russians. The Qataris stated that they did not want to support the Euro without guarantees or Russian participation, although they were happy to proceed with or without the Chinese. They were not prepared to go it alone. They also asked for concessions, particularly concerning tariffs in the petro-chemical sector as well as military basing obligations in the Gulf. The demands had become tougher than the EU had expected and the options table looked as follows:
Faced with the demands from Russia and the Gulf, Europe made its final offer. Europe would be prepared to implement the bond swap offer guarantees, but felt that it could not make the additional concessions demanded (especially those from the Russian team). However, it did promise to enter talks about the bases in the Middle East, and start discussions on the reduction of tariffs. So the final situation was as follows:
Russia agreed to drop some points but stuck to its guns about others with Qatar also insisting on tariffs reduction. Europe could not meet those demands and the whole deal fell through. Qatar did not want a separate deal as Europe suggested.
So when time was called the deal fell through at the last minute, and Europe brought the Italian bonds itself in the biggest round of quantitative easing yet seen.
But was this the best possible outcome that could have been hoped for from the negotiations?
Find out how Dilemma Analysis could have helped Europe!