A modest suggestion of how the Euro crisis could be solved

michaels

As the Euro debt crisis spirals out of control and starts to pull down the UK economy (contagion via banks and falling demand for exports) it is no longer possible for us to look on as 'innocent bystanders' despite the political inclination of many being to think 'told you so' and 'serves you right'.

Many can not see a solution beyond default and various countries leaving the zone in a domino effect but I would like to suggest another possibility.

Start by looking at Japan. It has Govt debt to GDP ratios off the chart even compared to Greece - possibly 200% of GDP and yet this is not currently unsustainable, the reason being that cost of servicing the debt is extremely low.

This compares to Italy and Spain (corrected from Greece) where although debt levels are not that far outside historical norms the debt is becoming unsutainable as servicing costs are so high. I have suggested elsewhere that there is a sort of unsustainable equilibrium for these countries. If servicing costs are low then they can service the debts, the debt is sustainable and there is no reason for rates to rise to cover default risk. however this becomes unstable because if rates increase (say to the postulated 7% tipping point) suddenly the cost of servicing the debt is unsustainable and thus the risk premium increase and increase in a spiral until default occurs.

So if we assume that there is actually an equilibrium interest rate where the debt could be sustainable the question is how could the market be made to move to this solution rather than the spiral to default solution?

An obvious answer presents itself, Germany is able to borrow funds at a level would be sustainable for Spain and Italy.

I propose that there is a compulsory swap whereby all holders of Spanish and Italian bonds are given German bonds of the same market value (note market value not bond face value). No bond holders will lose out on this swap as they are only being forced to accept current market value for their Spanish and Italian bond holdings.

The Spanish and Italian govts will now make the much smaller interest rate payments needed to cover the coupons on the German govt bonds (may be 2%) to the Germans who will pass this on to the bond holders and also start paying down some of the capital back to Germany using the some of savings they are making on the interest bill - say 2% pa giving a total funding cost of only 4% which is sustainable.

Spain and Italy, subject to the already agreed European fiscal compact will no longer be in a position to operate a profligate fiscal programme which would undermine their ability to repay the Germans over time.

Net result the Euro is saved, deflationary default cycle avoided and banks do not collapse.

You can PM me my economic Nobel prize here.

chewmylegoff

Isn't this just essentially the "eurobonds" idea that Germany has already said no to about 1 billion times?

Also wouldn't Germany's borrowing costs increase rather dramatically if you restructure so that it is technically responsible for repaying the debts of pretty much every other eurozone country?

michaels

Sort of, but:
It factors in an effective write down of existing Spanish and Italian bonds by buying back at current market value not face value.
It involves the compulsory exchange of all existing debt not just the issuance of new debt.

Germany is already in hock for 690bn eur through the interbank lending mechanism plus its bond yield probably already carries a premium for likely bailouts/writeoffs of debt so this would merely be formalising a liability that is already present.

chewmylegoff

thanks for the clarification - nobel prize in the post (along with that Daily Mail hamper).

CLAPTON

how does forcing swaps at current market price differ from defaulting (well a massive haircut )?

michaels

Well no one is making a further loss they are merely being told to take the current value of the asset which they should have marked to market anyway in any realistic accounting world......although I can see you point.

CLAPTON wrote: »

how does forcing swaps at current market price differ from defaulting (well a massive haircut )?

The_J

Easier solution:

All the countries in the Euro rename themselves. Lets say they call themselves Germany.

The United States of Germany (henceforth Germany) give up their sovereignty and revert all power to the Reichstag. A new leader of Europe is chosen, probably best to start with a German, they will be called Fuhrer.

They should also work on a unifying chant and salute. Something like "Hail Victory"? Clearly, one language is all that is needed. Maybe German would be easiest?

tomterm8

chewmylegoff wrote: »

Isn't this just essentially the "eurobonds" idea that Germany has already said no to about 1 billion times?

Also wouldn't Germany's borrowing costs increase rather dramatically if you restructure so that it is technically responsible for repaying the debts of pretty much every other eurozone country?

No, it is worse for Germany than euroboonds, since it makes only Germany responsible for european debt. Eurobonds result in liabilities for the entire eurozone.

It is irrelevant, Germany could never get this measure through the constitutional court.

thistledome

The_J wrote: »

Easier solution:

All the countries in the Euro rename themselves. Lets say they call themselves Germany.

The United States of Germany (henceforth Germany) give up their sovereignty and revert all power to the Reichstag. A new leader of Europe is chosen, probably best to start with a German, they will be called Fuhrer.

They should also work on a unifying chant and salute. Something like "Hail Victory"? Clearly, one language is all that is needed. Maybe German would be easiest?

I'll vote for it. Been trying to learn German for years on and off, without success. This might be just the thing for me. Ja bitte :T

The_J

thistledome wrote: »

I'll vote for it. Been trying to learn German for years on and off, without success. This might be just the thing for me. Ja bitte :T

Bitteschön! Spiegelei mit speck - bacon and eggs.

With "Hail Victory" and "Hail Fuhrer" that's all you need. The rest can be done at gunpoint or with hand signals and loud grunting.

MacMickster

The_J wrote: »

Clearly, one language is all that is needed. Maybe German would be easiest?

I'm quite certain that Call Me Dave would be able to negotiate English as the common language - but with some concessions to our European neighbours in order to help them to adjust. These may be along the lines of:

In the first year, "s" will be used instead of the soft "c".
Sertainly, sivil servants will resieve this news with joy.
Also the hard "c" will be replaced with "k". Not only will this klear up konfusion, but will be more efficient as our keyboards kan have one less letter.

There will be growing publik enthusiasm in the sekond year, when the troublesome "ph" will be replaced by "f". This will make words like "fotograf" 20 per sent shorter.

In the third year, publik akseptanse of the new spelling kan be expekted to reach the stage where more komplikated changes are possible. Governments will enkorage the removal of double letters which have always ben a deterent to akurate speling. Also, al wil agre that the horible mes of silent "e"s in the languag is disgrasful and they would go.

By the fourth year, peopl wil be reseptiv to steps such as replasing "th" by "z" and "w" by "v"

During ze fifz year, ze unesasary "o" kan be dropd from vords kontaining "ou", and similar changes vud of kors be aplid to ozer kombinations of leters.

After zis fifz yer, ve vil hav a reli sensibl riten styl. Zer vil be no mor trubls or difikultis and evrivun vil find it ezi tu understand ech ozer.

Ze drem vil finali kum tru!