Yes, this might be exactly what the Greeks deserve, but what about the Irish and the Spanish? Their issues are different and they have been doing all the right things.
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Solution to the PIIGS debt crisis....
- Thread starter achilles28
- Start date
Quote from Martinghoul:
Huh? I bot all my bonds at par and that's the price I will demand. What you're suggesting therefore is a one-off full bailout of all the periph sovereigns (i.e., for example, you want to forgive the currently outstanding EUR 300bn worth of Greek debt)? Or did I misunderstand?
Is this type of "solution" something that I, as a German taxpayer, should feel all warm and fuzzy about? Moreover, this doesn't really solve the bigger picture issues of either Greece or the EMU.
What I mean is each Central Bank ought to bailout their domestic commercial banks individually, for the outstanding balance of Greek debt held, not at par value, but at the original price each bank bought that bond at. Or, par value, if you like. That's up to each CB'er to decide.
For example, if JP Morgan, Citi and Goldman own 50 billion in Greek debt (par), which was bought at say 42.5 Billion, those banks ought to redeem those bonds at the Federal Reserve for 42.5 Billion. The Federal Reserve would then take that Greek debt onto it's books. After all relevant Countries sterilized their domestic banks in such a fashion, all aid, loans and bailouts to Greece would end, and Greece would be left to collapse and restructure.
The point to all this is contagion risk is far worse than an actual sovereign default. By nationalizing Greek debt held by foreign banks, the risk of contagion is neutralized and the international community can cease throwing good money after bad.
To me, this approach is far less costly. As it stands today, Greek borrowing is left unchecked and contagion is left unchecked. Bankers are cajoled into lending more to Greece which will never be repaid, except by another round of bailouts. When the international community finally decides enough is enough, we'll end up exactly where we are right now, except the price tag of the "final" bailout will be hundreds of billions more than had this approach been taken to begin with.
Do you get what I mean now?
The reason I say CB's should redeem bonds only at purchase price is because if redeemed at par, it would generate moral hazard in relation to precarious sovereigns next in line (Portugal, Ireland, Spain etc). If everyone is made whole, there is no risk, so everyone would buy high risk debt, hold until an imminent default, than cash in for par at the CB. On the otherhand, if commercial banks are redeemed only for the price paid for the bond, the transaction becomes a wash, an opportunity-cost loss, which would discourage lenders from loaning to remaining PIIGS.... and therein, may lie the rub...
Then again, the same strategy would be applied to the next defaulter. Yes, it means another few hundred billion in monetization. But it's far superior to endless bailouts to finance more deficits, which require more bailouts. This approach is one bailout to all banks for one country, then that country is done. Collapse, restructure, move on.
Comments?
Quote from morganist:
It won't perpetually solve the problem it just restructures the debt a higher interest rate for the same repayment just over a longer time.
Even if the current problem is solved can you really see that level of debt being repaid even if it is, the affect to the aggregate demand cuvre will put the economy through the floor for the next twenty years.
What happens if the repayments fail to the IMF? does the IMF, ECB etc go bust too?
It doesn't really solve the problem it just postpones it and makes someone else responsible for the loss.
The problem as the international community sees it, is not whether Greece can repay her debts, it's contagion to other PIIGS, which will precipitate a wave of insolvencies even the IMF can't backstop. The infection risk largely stems from PIIGS debt held by foreign banks. That's the connection. What I suggest is the cancer be isolated, then left to die. This could be accomplished through nationalizing PIIGS debt held by commercial banks. That breaks the link. So even if Spain defaults, the impact to American, German, French, Chinese etc banks is negligible because their respective Central Banks now own that debt, and commercial banks hold none of it. Life goes on. Another credit meltdown is avoided.
Yes, it means losses get nationalized. But what's the alternative? They're doing that already, except there is no ceiling to the bailouts. It's a blank check. At least this way, losses are capped and the problem is contained, isolated, and left to collapse and die an ugly death. IOW, the "problem" is solved. Today, the problem continues heaping more exposure onto the global financial system. It makes no sense.
Well, some of the things you say make sense. In fact, that's sort of what the French want and what the Germans were refusing to even consider until recently. However, are you seriously telling me that you, as a US taxpayer, would be happy to have the Fed assume the entire Greek sovereign exposure of the US banking system? As to redeeming at the initial purchase price, that's effectively same as par. At any rate, for the moment the Germans wouldn't tolerate anything of the sort, for a whole variety of reasons.Quote from achilles28:
What I mean is each Central Bank ought to bailout their domestic commercial banks individually, for the outstanding balance of Greek debt held, not at par value, but at the original price each bank bought that bond at. Or, par value, if you like. That's up to each CB'er to decide.
For example, if JP Morgan, Citi and Goldman own 50 billion in Greek debt (par), which was bought at say 42.5 Billion, those banks ought to redeem those bonds at the Federal Reserve for 42.5 Billion. The Federal Reserve would then take that Greek debt onto it's books. After all relevant Countries sterilized their domestic banks in such a fashion, all aid, loans and bailouts to Greece would end, and Greece would be left to collapse and restructure.
The point to all this is contagion risk is far worse than an actual sovereign default. By nationalizing Greek debt held by foreign banks, the risk of contagion is neutralized and the international community can cease throwing good money after bad.
To me, this approach is far less costly. As it stands today, Greek borrowing is left unchecked and contagion is left unchecked. Bankers are cajoled into lending more to Greece which will never be repaid, except by another round of bailouts. When the international community finally decides enough is enough, we'll end up exactly where we are right now, except the price tag of the "final" bailout will be hundreds of billions more than had this approach been taken to begin with.
Do you get what I mean now?
The reason I say CB's should redeem bonds only at purchase price is because if redeemed at par, it would generate moral hazard in relation to precarious sovereigns next in line (Portugal, Ireland, Spain etc). If everyone is made whole, there is no risk, so everyone would buy high risk debt, hold until an imminent default, than cash in for par at the CB. On the otherhand, if commercial banks are redeemed only for the price paid for the bond, the transaction becomes a wash, an opportunity-cost loss, which would discourage lenders from loaning to remaining PIIGS.... and therein, may lie the rub...
Then again, the same strategy would be applied to the next defaulter. Yes, it means another few hundred billion in monetization. But it's far superior to endless bailouts to finance more deficits, which require more bailouts. This approach is one bailout to all banks for one country, then that country is done. Collapse, restructure, move on.
Comments?
Quote from Martinghoul:
Well, some of the things you say make sense. In fact, that's sort of what the French want and what the Germans were refusing to even consider until recently. However, are you seriously telling me that you, as a US taxpayer, would be happy to have the Fed assume the entire Greek sovereign exposure of the US banking system? As to redeeming at the initial purchase price, that's effectively same as par. At any rate, for the moment the Germans wouldn't tolerate anything of the sort, for a whole variety of reasons.
Politics aside, yes, I would. A lot of the TARP/TALF/Maiden Lane monies went to European banks under just such circumstances, except for American CDO's. That was done under a veil of secrecy and so likewise can this be done, if necessary.
At this point, it's a triage scenario. There is no painless solution. To me, this seems to be the most logical with the least fallout.
Quote from Martinghoul:
Ultimately, the solution is a single centralized fiscal and tax authority.
Agghh...tax without representation. That old chesnut.
Of course, it all begins with the socialist wet dream...the financial transaction tax.
Do you think they'll be holding referendums for taxes levied at an EU level anytime soon?