The following is an outline that I proposed for a new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms. It is now making the rounds in Europe as an alternative to the French Plan that is currently under serious consideration
The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government.
By eliminating the risk of loss, Greece will be able to independently fund all required financial obligations in the market place for the foreseeable future. The immediate benefits are both reduced interest costs that substantially contribute to deficit reduction, and the elimination of the need for the funding assistance from the European Union and the IMF.
Introduction -- Restoring National Sovereignty:
Current institutional arrangements have resulted in Greece being faced with escalating interest costs when it attempts to fund itself in the market place, to the point where timely funding is not currently available without external assistance. This requirement for external assistance to avoid default has further resulted in a loss of sovereignty, with the EU and IMF offering funding only on their approval of deficit reduction plans by the Greek government that meet specific requirements. Compliance with these demands from the EU and IMF not only include tax increases, spending cuts, and privatizations, but also include aggressive time lines for achieving their deficit reduction goals. It is also understood by all parties that the immediate near term consequences of these imposed austerity measures will include further slowing of the economy, and rising unemployment.
Greece will restore national sovereignty, and regain control of the process of full compliance with the general EU requirements for all member nations, only when it restores its financial independence. Financial independence will allow Greece to again be master of its own destiny, on an equal basis with the other EU members. And the lower interest rate that result(s) from this proposed bond issue will itself be a substantial down payment on the required deficit reduction, easing the requirements for tax increases, spending cuts, and privatizations.
While this proposal restores Greek national sovereignty, and eases funding burdens, we recognize that it is only the first step in restoring the Greek economy. Even with funding independence and low interest rates the Greek government still faces a monumental task in bringing Greece into full compliance with EU requirements and restoring economic output and employment. However, it should also be recognized that financial independence and low-cost funding are the critical first steps to long-term success.
The Bond Issue -- No Risk of Financial Loss:
Market based funding at the lowest possible interest rates requires investors who understand there is no ultimate risk of financial loss, and that the promise to pay principal and interest by the issuer is credible. To be credible, a borrower must have the means to meet all contractual euro obligations on a timely basis. For Greece this has meant investors must have the confidence that Greece can generate sufficient revenues through taxing and borrowing to repay its debts.
The credit worthiness of any loan begins with the default provisions. While there may be unconditional promises to pay, investors nonetheless value what their rights are in the event the borrower does not pay. Corporate debt often includes rights to specific collateral, priorities in specific revenues, and other credit enhancing support.
The new proposed Greek bond issue, with its provision that in the event of default the bonds can be used at face value, plus interest, for the payment of taxes by the bearer on demand, gives the bond holder absolute assurance that full maturity value in euro can always be achieved. And with this absolute assurance that these new securities are necessarily 'money good' the ability to refinance is established, which dramatically reduces the risk of the default provisions actually being triggered. And, again, should there be a default event, the investor will still get full value for his investment as the entire euro value of the defaulted securities can be used at any time for the payment of Greek taxes. So while this discussion concerns the case of default, the removal of the risk of loss means there will always be demand for them at near risk-free market interest rates, and that the default discussion is, for all practical purposes, hypothetical.
These new Greek government bonds will be of particular interest to banks, which, again, encourages bank ownership, which makes default that much more remote a possibility. This is because, in the case of default, a bank holding any of these defaulted securities will be able to use them for payment of taxes on behalf of bank clients (using that bank for payment of their taxes). Under these circumstances, a bank depositor client making payment of euro would, in effect, simultaneously buy the defaulted securities from the bank and use them to pay the Greek government taxes due. Again, the fact that the bank would be fully paid for, its defaulted securities in the process of depositors paying their taxes means there will be no default in the first place, as these favorable consequences mean there will be continuous demand for new securities of this type at competitive market interest rates, to facilitate all Greek refinancing requirements.
The new 'money good' Greek bonds will be attractive to all global investors, both private and public. This will include international banks, insurance companies, pension funds, and other private investors, as well as sovereign wealth funds and foreign central banks which are accumulating euro reserves.
Fiscal Responsibility:
As a member in good standing of the European Union, Greece, like all the member nations, is required to be in full compliance of all EU requirements. Therefore, while this proposal will restore national sovereignty, financial independence, and lower interest rates for Greece, austerity measures will continue to be required to bring Greece into EU compliance. However, Greece will gain substantial flexibility with regard to timing and other specific detail, and will be able to work to achieve its goals in an organized, orderly manner, without the continued pressures of default risk and without the specific terms and conditions currently being demanded by the EU and the IMF. Nor will the ECB be required to buy Greek bonds in the market place, obviating those demands as well.
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Firstly, the interest rates Greece pays on its debts are not really the problem - it the actual size of the debt which has been allowed to build up. It is only recently that yields were pushed up which has effectively locked Greece out of the bondmarkets for new debt and so it turned to the IMF.
The interest rate Greece is paying on its debt is around 5% - not exceedinly high. However, because debt to GDP is over 150% Greece ends up paying annually 7.5% in GDP servicing its debt. Even then it is running a deficit of greater than 10% so a significant primary deficit.
Now your plan would likely make Greek debts more attractive but I'm not sure how much - after all aren't bonds effectively against taxes anyway, just not formally guaranteed? So say Greece can fund its whole debt at 3% it is still paying 4.5% of annual GDP servicing this debt and has the additional deficit on top. It doesn't seem much help
Secondly, isn't this all rather circular? As Greek debt is currently 150% (conservartively) and greek tax income to GDP 37.5% (optimistically) then if Greek defaulted on its debt, in theory it may not receive any tax revenue for 4 years as the bonds are redeemed. So it has to re-raise all that lost tax revenue anyway. All the while increasing debt as it continues to run a deficit.
Given that this is a potential solution to our most pressing problems, why don't more people read and comment on this article?
www.moslereconomics.com
You are correct that in the end of the day you would get the same amount of debt for a higher interest rate. But the point of the scheme it to keep the interest payment the in the Greek economy and not export the interest. Japan has a much larger debt ratio that Greece - but because most of the debt is finance by the Japanese people all the interest that the Japanese government pays to service the debt is directed to the Japanese economy. Meaning that the Japanese people profit from their government's debt - in foreign financed deficit - other countries benefit from the national debts, since governments have to tax their citizens to pay foreign credit holders. Foreigner would still be able to buy Greek debt but they would receive normal vs above normal interest rates. The other benefit is bringing in black market money into the mainstream economy.
But I do know that the Banksters crashed the world economy, and Greece got caught up in that.
http://en.wikipedia.org/wiki/Economy_of_Greece
We must reign in the banksters, GS in particular, or it will just keep crashing bigger and more often.
http://moslereconomics.com/2009/12/26/fixing-the-small-banks/
www.moslereconomics.com
I don't see the your small bank solution. The big "dealer" banks get the .004% free FED money, who can compete with that? The FED is the problem. Fold the FED into the Treasury where the constitution puts the power to coin money. Then the Treasury does not have to pay 8% for treasury notes to run the republic.
Right?
Thank you for you personal response. I really appreciate that.
I'm curious, If Ireland, Spain and Greece all using Mosler Bonds, defaulted, would there form a secondary bond market where people swap bonds around to extinguish tax obligations?
If I own a Greek bond but own not greek tax (a French corporation based only in France pays tax on the interest earned on the bond in France) what do I get? I assume that I get an active secondary market because I cannot deliver the bonds to Greece (no tax obligation). So the interest rate needs to compensate me for the time value (interest rate risk) and the risk that there are no willing buyers of the bonds before a PIK event (I assume I roll because the other alternative is default as the Greek government cannot print a Euro to pay me).
So the buyers of the bonds are only those individuals and corporations that owe Greek taxes. Unfortunately there is more outstanding debt than there are taxes and total receipts (taxes + revenue) is less than spending so they will increase each year until you have a balanced receipts and expenditures picture.
So, we have a larger pool of outstanding bonds than you have of uses for the bonds for tax purposes. So if I were a buyer I would offer to buy at a discount because I know that the owner has only two choices, PIK with the Greek government or take less than par from me.
So in the event that Greece doesn't pay back your euro at maturity, you have an unlimited amount of time to find some to buy your bonds to either hold or pay Greek taxes.
Additionally, a bank that holds these defaulted bonds would both earn the interest and, at any time, when any of its depositors pays their Greek taxes, uses these bonds for payment on behalf of their depositor, and keep the depositor's euro for the bank.
But I still don't understand how this changes the long term value (price in the market) of Greek debt held by foreign investors. I don't buy a bond that I know I will only exit with a discount (unless I PIK) at par so either rate paid will be higher than +3% or the price will not be par.
This solution only works if the market thinks there is credible work toward a situation where receipts will be higher than spending. Without that constraint I still don't see a secondary source of repayment other than PIK bonds from Greece, which is not a great comfort to a "risk free" investor, which should be the only buyers of government bonds.
However, they are seeking ways to avoid default, and have already implemented required austerity measures (merits of those aside for this response).
Argentina was pegged the dollar, so going the way of Argentina would mean Greece leaving the euro. However, there is no popular or political support for leaving the euro for two reasons. One is that leaving the euro means leaving the EU. And second, it's not obvious to the population or politicians that the euro is the problem. Interest rates are low and inflation is low, so the currency seems to be ok. What seems obvious to them is the problem is the result of irresponsible and corrupt leadership, and so the solution is to change leadership and 'get back into line' asap, which they are trying to do.
The Market will do all the arbitrage to ascertain "the cheapest to deliver" security.
As soon as Government Borrowing Costs begin to rise people will prefer to pay with older-issued securities rather than cash.