Solution to the PIIGS debt crisis....

[benwm]

achilles28 - I think one problem with your proposal is that it ignores all of the CDS's that have used to hedge bond positions. Should these all be taken of at purchase price as well? Messy, to say the least..

The "solution" is not simple and includes a range of measures, including creeping inflation to reduce the overall debt in the system over time.

With regard to Greece, they need to default. The Greek people would not accept the kind of austerity that other countries would like them to face up to. It was not so long ago that Brazil and Russia defaulted. Now they are part of the elite superstar BRIC club. Look at Germany and Japan after WW2. Nations recover.

The banks and other PIIGS bondholders need to take the hit. If they then come running to their governments and taxpayers for more bailout money, then so be it. They will have to squirm around, come out with all the excuses, and then will pay themselves record bonuses at the end of it! So be it.

The markets will find a floor and the prudent ones with cash left over will be pick up the bargains. That is, unless the politicians have stolen their money.

 

[Debaser82]

Quote from benwm:

achilles28 - I think one problem with your proposal is that it ignores all of the CDS's that have used to hedge bond positions. Should these all be taken of at purchase price as well? Messy, to say the least..

The "solution" is not simple and includes a range of measures, including creeping inflation to reduce the overall debt in the system over time.

With regard to Greece, they need to default. The Greek people would not accept the kind of austerity that other countries would like them to face up to. It was not so long ago that Brazil and Russia defaulted. Now they are part of the elite superstar BRIC club. Look at Germany and Japan after WW2. Nations recover.

The banks and other PIIGS bondholders need to take the hit. If they then come running to their governments and taxpayers for more bailout money, then so be it. They will have to squirm around, come out with all the excuses, and then will pay themselves record bonuses at the end of it! So be it.

The markets will find a floor and the prudent ones with cash left over will be pick up the bargains. That is, unless the politicians have stolen their money.

Words of Wisdom.

There are 17000 swimming pools in Athens and 300 reported for taxes.

Trying to fix this because the ECB and Eurozone demand it is just as hopeless and questionable then say bringing democracy to Iraq but let's face it this won't stop anyone from trying anyway.

And all the while the rest of (Western) europe will bitch about how the Greeks should eat crow until the bondmarkets will turn against them but then the solution of sucking it up won't look so appealing anymore I could imagine.

 

[Martinghoul]

Quote from benwm:
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?

Well, why "w/o representation"? And surely you'd agree that tax collection in Greece is an issue that needs to be resolved somehow?

As to referenda, I don't know... It's entirely possible that the Eurozone concept, admirable though it might have been, was introduced much too early.

 

[Martinghoul]

Quote from achilles28:
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.

Well, that's exactly my point, achilles... All of this is about politics (and not economics), which means that the "politics aside" qualifier renders the discussion rather pointless.

As to TARP/TALF etc, surely there's a difference between making an O/N loan to a European bank with some assets as collateral (and it wasn't CDOs for the two big ones, DEPFA and Dexia), with collateral haircuts that increase as asset quality degrades, and outright buying a sh1t asset at a full price.

 

[benwm]

Quote from Martinghoul:

And surely you'd agree that tax collection in Greece is an issue that needs to be resolved somehow?

Martinghoul, are you in favour of EU taxes? Surely not??

I would guess tax collection in Greece needs to be resolved by the Greek people (via their Government), if they don't have the will to do so, not sure an outsider would have any impact. But it sure would mean an extra layer of taxes for those of us outside of Greece that do pay our taxes.

I think I might do a "Micheal Douglas in the film Falling Down" if we get EU wide taxes imposed on us!

 

[benwm]

Well if Martinghoul and others see the "solution" to the PIIGS crisis as more taxes for Europe, levied at a European wide level, it really does look bleak for Europeans.

Time to move to Singapore I guess...

 

[Martinghoul]

Quote from benwm:
Martinghoul, are you in favour of EU taxes? Surely not??

I would guess tax collection in Greece needs to be resolved by the Greek people (via their Government), if they don't have the will to do so, not sure an outsider would have any impact. But it sure would mean an extra layer of taxes for those of us outside of Greece that do pay our taxes.

I think I might do a "Micheal Douglas in the film Falling Down" if we get EU wide taxes imposed on us!

Well, listen, I am only in favor of EU taxes if there's an EU and you're part of it. If the Greek people and the Greek govt want to deal with their taxation issues independently (or not, as the case may be), let them do so outside of the context of the Eurozone/EMU. My point is something that a LOT of people have said: there can be no monetary union w/o a meaningful tax and fiscal union. It's really as simple as that.

 

[benwm]

Quote from Martinghoul:

Well, listen, I am only in favor of EU taxes if there's an EU and you're part of it. If the Greek people and the Greek govt want to deal with their taxation issues independently (or not, as the case may be), let them do so outside of the context of the Eurozone/EMU. My point is something that a LOT of people have said: there can be no monetary union w/o a meaningful tax and fiscal union. It's really as simple as that.

I heard that argument before the Euro was adopted and there is some logic behind it. You need political and economic union to make it work in the long term...

But nobody signed to up to political union. Taxation powers were not given to the European Union. Or so I thought. The separate nation states agreed many things but I thought state bailouts were completely out of the question.

That shouldn't change because some folk, however well connected, made some bad investments in Greek debt.

Better to let Greece default and create new incentives for the Greek people to work hard. Lower taxes, not higher taxes. Then the new funds will come to Greece, just like they came to Russia and Brazil only a few years after they defaulted on their bonds.

I'd invest in Greece if they left the EU and adopted a 10% corporate tax. Give me some small island as collateral... No problem.

Anyone else?

 

[piezoe]

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?

Regardless someone or entity has ultimately to take a hit as the Greek debt can't be repaid without debt forgiveness or monetization (or its equivalent) and Euro zone inflation, which has the appealing feature of spreading the pain and weakening the Euro (which wouldn't be much if spread evenly, as the Greek economy is miniscule compared to the entire EU). I think your suggestion is not too bad until you get to:
"... then that country is done. Collapse, restructure, move on."

I would think it is far preferable to insist on Greek debt restructuring and demand permanent changes in Greek fiscal policy, which might be accompanied by extensive privitization of assets, in exchange for ECB backing on Greek debt which would result in much lower interest rates for Greece. If Greece is hung out to dry, as you seem to be suggesting, not only will you have the sort of social chaos that Argentina experienced, but it will be extremely difficult to implement the kinds of reforms needed without the ability to borrow at reasonable interest rates in the transition period. What is the value and purpose of Greece belonging to the EU if these crises can't be handled with way less upheaval and financial bloodshed than were Greece forced to go it alone?

I am by no means suggesting that Greece be let off the hook. They must pay a price; a reasonable one that will avoid chaos and result in putting the Greek economy on a firm foundation.

 

[trefoil]

The interesting thing is that Greek debt is mostly issued under Greek law, unlike, say, Argentina's, which was under US law (and UK as well, I think).
What that means is...the Greeks could decide tomorrow to restructure by way of an act of Parliament (Why did people consent to buy Greek debt under these terms? Beats the crap out of me, but that's what happened. Personally, I think they should all be forced to take a very large haircut just for being dumb as dirt, but no one else seems to think so; too busy complaining about them lazy Greeks. Next question: if they're so lazy, why did you lend them money? Circle back to: dumb as dirt. I can't think of another explanation). If this results in the threatened downgrades and all that, they then pull out of the euro, issue their own radically lower currency, and everyone gets to stand in line and wait until they get repaid, if ever.
Greece then gets to return to the markets in a few years, just like Argentina did. What happens to the rest of the eurozone? That's the question.
Greece doesn't do this because they don't want to pull out. No one else wants them to either. But if the cost gets too high, and we're pretty close to that I think, we just may get to see this play out.
As for the suggestion around here, much of that has already happened in Germany. There was an article in the FT the other day that said most of the debt the German banks held had gone into the hands of their central bank, or maybe the government somehow, I don't remember the details. So for Germany the banks aren't in too bad a shape anymore. Their taxpayers would take the hit.
Much the same thing may have already happened elsewhere.