Pierre Pâris, Charles Wyplosz, 6 August 2013 column for Vox.eu, titled "To end the Eurozone crisis, bury the debt forever" is a perfect referencing point for my thinking on the debt crisis. Read it here: http://www.voxeu.org/article/end-eurozone-crisis-bury-debt-forever
Synopsis: "The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis".
Can't say it better myself!
Synopsis: "The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis".
Can't say it better myself!
Yes burry it .every other avenue seems like a disaster .
ReplyDeletePut ridgit controls in place ,
This is a very well reasoned argument, and provides a good antidote to the headless chicken discussions about EZ debt, its structure, and its solutions.
ReplyDeleteWe have already surrendered the option of defaulting on our debt, so moral hazard is a moot point now (all PIIGS+F debt had high return without - as we now see - the commensurate risk of default). Lenders almost had no choice but to lend at these risk-return levels.
I would add one idea (which is mentioned in the article in pieces but not strung together), and which, if implemented, would leave the EZ in a strong position - approaching Germany's right now - especially relative to the US and China. It's an extension of option 5, but it makes the ECB a real Federal EZ bank.
As in the article, the ECB buys outstanding sovereign debt, but it offers the following deal to all 27 states:
We'll convert your debt to perpetual interest-free loans if you engage in a programme (similar but slower than the Irish troika bailout) over say 10-12 years of fiscal reform, leading to a perpetual budget surplus of 3% of GDP (averaged over a 5-year period, to allow for cyclical variations). You pay back the principal of these loans at 1% of GDP per year.
This would benefit even Germany in the mid- to long-term, as any country availing of the offer would have highly constrained fiscal freedom for a decade. Germany's banks would have their liabilities bought off them at par, so they would be saved from future haircuts. Germany's taxpayers would no longer have to approve transfers.
And moral hazard (due to the extended troika-style fiscal programmes and surplus targets) would be eliminated.
Any new entrants to the euro would have to sign up for the programme as a condition of entry, which would avoid the kind of shenanigans we now know about with Greece and Italy.
The authors note that "This calls for the adoption of a rock-solid fiscal discipline framework".
ReplyDeleteThat is impossible unless we remove the possibility of counter-cyclical stimulus, since the "cycle" is impossible to predict, even if the political reality-distortion field is removed (see Gordon Brown's golden rule).
Who wants to run a balanced budget every year? Nobody? Oh.
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