Protagon: What Eurobond?
Since the crisis, European leaders responded to the proposals for a Eurobond with a characteristic sequence of spasmodic reactions. The first reaction was absolute denial and the attempt to ignore the proposers. Then came the turn of angry rejection... More recently followed by depression until it finally became obvious that there is no chance of overcoming this crisis with the current policy and no Eurobonds. Last week we had an unusual reaction: The creation of a caricature of the Eyrobond aiming to humiliate it.
Given these chain reactions, which are reminiscent of the behavior of five year olds instead of leader's interventions, can the inevitable acceptance of the Eurobond come before the collapse of the euro? That is the question of the day.Wolfgang Munchhau, from the Financial Times, believes that they probably will not "make it". Personally, I refuse to believe that the train is lost and that the euro has already entered the lobby of the mortuary. This is why I will try to clarify, so as not to create misunderstanding and allow room for manipulation, what kind of Eurobonds can help and what not.
The existing Eurobonds of EFSF (European Financial Stability Fund)
Many are unaware that Eurobonds already exist and circulate, issued months ago by EFSF (European Financial Stability Fund) to finance the Memoranda of Ireland and Portugal. The reason they are not considered "real" Eurobonds is that each one of them consists of slices of debt. For each of these "pieces" a single state guarantees. The size of each slice of it is proportional to the size of the national income of the guarantee state. In this sense, the loans of EFSF to each bankrupt state are almost binary, like those of any non-bankrupt state lending the bankrupt state individually.
The problem with this construction, as I have already written about in the past, is that it contains the "seed of evil," the dynamics of the chain reaction that is about to arrive in Italy and France, with inevitably disastrous results. For this reason, some suggest the conversion of the Eurobond EFSF to "real" Eurobonds which are are homogeneous rather than composed of slices, . In other words, guaranteed in whole (not slices) by all Member States together.
The wrong Eurobonds
In recent days, Mrs. Merkel, supported by terrified French and Spanish leaders (who do not dare to say something other than what comes from the mouth of the German Chancellor), asserts that such Eurobonds are not a solution. The day before yesterday Mr. Moritz Kraemer, the CEO of EMEA (debt rating agency) , more or less said that such Eurobonds will be evaluated as rubbish. You know what is the best thing about all this? That both Mrs. Merkel and Mr. Kraemer are right!
Let's see why: Suppose three students want to rent an apartment together. If the lease says the rent will be payed by all three of them together but everyone is legally obliged to pay only his third of the rent, then the chances the 100% of the rent not to be payed is proportional to the confidence (and financial standing ) of the most unreliable (and poorest) of the three students. Something similar will apply to a bond issue of EFSF who will be issued by the joint member states but each one is responsible only for the part that concerns him. That is why Mr. Kraemer said (correctly) that a common Eurobond issue will have the same assessment as the weakest link (presumably Greek).
Of course, things change if the contract states that each of the three is legally responsible for every last euro of the rent. In this case, if Kostas is unable or refuses to pay his share, then the other two students are forced to pay those. In this case the evaluation of the credibility of the group of three students converge somewhere in the average reliability of each of them. The equivalent in the case of Eurobond is when a member state fails to pay the corresponding share of public debt, the rest are obliged to repay. Then, the evaluation and rates of these Eurobonds tend to average the ratings and interest rates in the eurozone. This refers to Ms Merkel say that the Eurobond is not the answer: The fact that such a Eurobond will raise interest rates in Germany without a decreasing at the same time those of Greece enough.
Ms Merkel is absolutely right . Which means, the idea of such a Eurobond issue of EFSF is a very bad idea. That the ESFS can not be the solution to the debt crisis we already knew, and we re saying it again and again since the foundation of this toxic foundation. Ms Merkel just created a flimsy caricature of the Eurobond and then ... defeated it. Our proposal for at leats a year is a Eurobond issue of the European Central Bank (ECB) without any guarantee by any member state.
Eurobond issued by ECB: The solution
Because viewers have read repeatedly on protagon.gr our proposal on this, and as I have argued extensively in a variety of accents and languages, let me confine myself to a summary of it before answering any practical issues raised by my readers: To reduce the total debt of the eurozone without any guarantee or loan from the German or Dutch taxpayer, the service of the Maastricht-statutory debt of each country (ie bonds of equal value to 60% GDP) should run from tomorrow to the ECB. How? The bondholders may subscribe to a specific service of the ECB rate for bonds of each member-state holding equal to 60% of the GDP of the country. These bonds are now served by the ECB (ie payed off when in time but not bought from before). To do this, when the time comes for the repayment the ECB itself will issue its own 20-year or even 30-year bonds (Eurobonds, or e-bonds) of sufficient value to serve the particular debt. The government of this country owes money to the ECB but given the option to repay them over time with interest rates that reflect those obtained by the ECB selling its Eurobonds (interest rates in the range below 3%). In practice, the ECB will open a debit account to the government of each country eurozone in which each member state will pay half-yearly repayment amounts such that the cost of this substantial restructuring of debt of the eurozone to be zero for the ECB in the long run.
Two reader technical questions
Question 1: Since a bond that is transferred to the ECB remains property of the bondholders, what stops it from being traded to the secondary bond market? And if not handled in this market, doent it become a dead asset, which would create problems for the bondholders?
Answer: Indeed, the bond remains the property of the bondholders. But it is the later's option if he wants to guarantee the repayment of the ECB at a rate of 100%, that the bond be withdrawn from the bond market (and thus no longer be evaluated by known brands - which so weakened). The bondholder can now consider his money fully secured and thus be protected from fluctuations in the bond market. If he wantsto participate again he can buy new buys bonds, by assuming more risk.
Question 2: When you say that the ECB will open a debit account such in Italy where the Italian government slowly repays its debts to the ECB by the Maastricht servicing debt in Italy, this does not violate Article 123 of the Lisbon Treaty on the Functioning of the European Union, which expressly forbids the creation of the ECB loans and credit accounts (overdraft facilities) to the Member States?
Answer: Do not confuse debt with credit accounts. Get a credit card (eg Visa) and compare it with a debit card. Both serve a payment but it gives you the opportunity to borrow and the other not. Our proposal is that the ECB raises debt accounts for Member States. Meaning accounts on which Italy makes deposits without the possibility of commitment. This is not prohibited at all by the Treaty of Lisbon.
The last hope of the euro is a Eurobond issue of the ECB, without guarantees from member states. The money collected in this way can, and should, allow the euro to reduce debt over the mountain without a cent charge for the German taxpayer. Ms. Merkel knows well all that. She simply describes the Eurobond in a way that, indeed, if implemented will create new problems rather than solve existing ones. Why do it? For two reasons. First, because it is not ready to commit Germany in the euro area and is causes distraction to save time. Second, because the Social Democratic Party SPD has already accepted our proposal to issue Eurobonds ECB and Ms. Merkel, speaking for other Eurobonds, distracts its citizens with a view to convince them that all Eurobonds are the same (and destructive) and that, therefore, the SPD proposes something dangerous. But I close with a question. I understand Ms Merkel. But Mr. Papandreou who has vaguely assigned to the euro bond in general, why doesnt he express how he imagines the Eurobond, Why not allign to the only kind of euro bond, which gives hope (but no guarantees now that we got here) of rescue to the eurozone?
PS. For a more technical and more comprehensive expression of this Article (in English) click here.
By Giannis Varoufakis
(Monday, September 5, 2011)
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