The Europeans are panicking

They must be, we\’ve got two entirely opposite proposals out there about the debts.

The plan splits the public debts of EMU states. Anything up to the Maastricht limit of 60pc of GDP would remain sovereign. Anything over 60pc would be transfered gradually into the redemption fund. This would be covered by joint bonds.

It\’s only a couple of days ago that someone was floating the red/blue plan, in which the under 60% of GDP bonds became joint while the over 60% remained sovereign.

They\’ve still really not grapsed the basic problems, have they?

In the short term you\’ve got plummetting money supply in the southern nations. This is not necessary but is sufficient for deep recession.

In the longer term you\’ve the basic comepetiveness problem. Neither of these will be solved by dicking about with who guarantees the bonds.

6 thoughts on “The Europeans are panicking”

  1. Which bonds would be in the under and which in the over 60% group?
    And which way would the yield jump for which countries?

  2. I’ve just realised the basic Social Justice implicit in the Euro: it guarantees equality – everyone is trading in the wrong currency.

  3. blokeinfrance

    These bonds would replace national bond issues in excess of 60%, of course. Exactly which issues would be redeemed has still to be decided. But the yield would be an average – and probably quite a bit lower than current yields on bonds from the principal culprits, because in effect Germany would be guaranteeing the debt of other nations. The effect should also be to reduce yields on the remaining national debts too.

    It all sounds wonderful but I can’t imagine Germany agreeing to it. Their credit rating would be on the line and their taxpayers would effectively be making the coupon payments, since nearly everyone else is running a fiscal deficit. It’s another disguised bailout. And the collateral requirements may prove politically unacceptable anyway.

    And as Tim says – and the article does too – it doesn’t solve the underlying problems. 60% debt can’t be maintained by countries running fiscal deficits, there are still massive competitiveness problems that will not be quick to resolve and some Eurozone states are facing deepening recession. Debt will rise considerably and Germany could well find itself in due course having to roll over the bonds to admit more unsustainable debt. It’s not a solution.

  4. Frances, tell us (or take a guess) if this scenario makes sense:

    Greek bonds at the 60% level
    + (guaranteedESFS) yields go down
    – (sovereign) yields go up, even more

    + (guaranteed EFSF) yields go UP! (ECB bankruptcy risk)
    – (sovereign) yields go up as well.

    Switch it the other way and what happens?

    same deal, which is why this won’t fly?

    Just askin’

  5. This doesnt really work either way for the truly dead – Greece, probably Portugal, maybe Spain.

    It might work for Italy and Ireland since it would allow them to keep rolling debt over while doing stuff to make their economies more competitive, and keeping borrowing costs down.

    The problem for Spain is that given their likely eventual government debt level (120% of GDP once theyve consolidated the regional stuff and paid for their banks) is that the odds of their being unable to meet redemption conditions is high, which means no one wants to lend to them which means their banks have high funding costs which means no private investment. Ergo economy never recovers from austerity = exit.

    In 25 years taking Italy’s debt down to 60% will require an average surplus of 1%ish (with lots of assumptions about nominal growth). I personally think this is about as likely to happen as Berlusconi becoming Pope. I still think this would probably just defer the problem. But it gets around legal issues in Germany and would defer it out several years. Another triumph of stupidity over experience.

  6. blokeinfrance

    In theory the joint bonds should be higher than current NL yields and quite a lot lower than current GR yields. The most significant factor in the pricing of these bonds will be the performance of Germany, not NL.

    Threat of ECB bankruptcy is really not relevant because it has seigniorage rights (can print money) – debts can always be settled. Assuming the NL sovereign remains trustworthy on its own terms, therefore, yields on its own bonds should remain as they were.

    GR is a basket case so yields on the remaining sovereign debt would be likely to remain elevated.

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