We have the master\’s solution.
Recapitalise the banks through sticking new government bonds into them.
Then get all sovereigns to default on their debt:
Instead the debt has to be acknowledged, and be acknowledged to be due as nothing else will satisfy the German public. It must also be deferred. And it must also carry an affordable rate of interest. Dealing with this last point first, the inter government debts of these countries have to carry a rate of interest no higher than ECB base rate. Indeed, 1% seems more than enough. And no roll up of the underpayment should be allowed: this rate should be what is payable. That way the liability is recognised but at such an interest rate let’s also be honest, inflation will cover the cost.
There is of course a slight problem in that the debt that we\’ve just injected into the banks becomes a great deal less valuable once we stick a 1% interest rate on it. For, note, for the bonds to actually be viable as capital (which is the intention) then they have to be valued at what someone will pay for them. A Spanish long term bond paying 1% is not, as you might note, very valuable right now.
But leave that aside: and note what it is that he\’s actually suggesting. Deferral of principle, unilateral lowering of interest rates. This is default: exactly what Greece has just done.
And, err, what happens to the ECB, the Bundesbank, even the IMF, when their €hundreds of billions and trillions of assets take a 70% dive in value as this default would mean they would?
Quite, they go bust.