(APW) EU Considers Loans to Greece to Buy Back Bonds

They EU may as well buy the Greek bonds themselves and save the legal fees.

And probably get a higher rate, and, of course, the option to forgive if it ever suits them.

Amazing anything like this ‘option’ even gets this far as a trial balloon.

But it does.

EU Considers Loans to Greece to Buy Back Bonds
2011-01-28 14:20:53.271 GMT
By GABRIELE STEINHAUSER

Brussels (AP) — Lending Greece money to buy back its bonds
on the open market is “one option” under discussion as eurozone
governments overhaul their euro440 billion ($603 billion)
bailout fund, a spokesman for the European Union’s executive
Commission said Friday
Greece’s bonds are currently trading below face value,
meaning the country could buy them back at a discount and cut
its mounting debt pile.
The European Commission raised that idea in an internal
“working document” on improving the response to the debt
crisis, said Amadeu Altafaj-Tardio, spokesman for EU Monetary
Affairs Commissioner Olli Rehn.
However, he emphasized that the document wasn’t a proposal
from the Commission, adding “It will be up to the member states
to see to it that our response (to the crisis) is more
effective in the future.”
Speaking to journalists at the World Economic Forum in
Davos, Greek Finance Minister George Papaconstantinou confirmed
that the idea of bond buybacks was being discussed, but
stressed that Greece wasn’t “engaged in any official way in
those discussions.”
Greece was saved from bankruptcy with a euro110 billion
rescue loan from its partners in the euro and the International
Monetary Fund in May, after investors worried about the
country’s high government debt sent its funding costs soaring.
In the wake of that bailout, the European Commission, eurozone
governments and the IMF set up a euro750 billion fund to help
other governments in financial troubles. That fund in November
extended a euro67.5 billion emergency loan to Ireland.
Eurozone governments are currently discussing new crisis
measures, after the bailout of Ireland failed to stop concerns
over debt levels from spreading to Portugal and much larger
Spain. At the center of these discussions is the eurozone’s
euro440 billion portion of the bailout fund — the European
Financial Stability Facility — and whether it should be
expanded and given more powers.
In a paper published Monday, London-based consultancy
Capital Economics calculated that an EFSF-funded bond buyback
program based on the market price of Greek bonds last week,
could cut Greece’s debt pile from about euro260 billion to
around euro194 billion. That would mean that at the end of this
year, the country’s debt would stand at 126 percent of economic
output as opposed to 154 percent, Capital Economics estimated.
However, even that reduction might not eliminate fears over
Greece’s ability to repay its debts, Ben May, European
economist at Capital Economics, said in an interview.
On top of that, telling investors that there is a buyer for
their bonds would likely push up bond prices and there is no
guarantee that all investors would be willing to sell their
bonds at a discount. “So the savings would be much less than
the current market price would suggest,” May said.
To make the buyback effective, any loans from the EFSF
would have to come at very low interest rates, said May. For
its current bailout, Greece has to pay interest of more than 5
percent. Germany and other key funders of the EFSF have so far
opposed lowering interest rates.

Masha Macpherson in Davos contributed to this report.

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40 Responses to (APW) EU Considers Loans to Greece to Buy Back Bonds

  1. neophyte says:

    I have a couple of off topic questions: 1. How is the money that is generated for the QE1 and QE2 purchases posted accounting-wise on the books? 2. Similar to QE1 and QE2, could the Fed purchase the special Treasury securites in the Social Security “Lockbox?”

    Reply

  2. Spectre,

    Those who think “printing” money causes inflation need only to look to Japan, which still is fighting deflation.

    Unfortunately, economics is filled with words that have one connotation in everyday life and a different significance in economics. “Debt,” “deficit,” “wealth,” “credit,” “borrow” are a few examples. You might wish to review Monetary Sovereignty.

    Rodger Malcolm Mitchell

    Reply

  3. beowulf says:

    Personally, I concluded I had some understanding of MMT when I discussed with my wife how the Fed could be run by a chimp, and how to train the ChimpMaestro, and then saw Randall Wray say the same thing in a blog post the next week.

    You must be blessed with a happy marriage. Otherwise your first question would be, “why is my wife talk with Randy Wray?” :o)

    And actually the Chimpmaestro idea makes a lot of sense. Since the Fed will never tie its own hands, it would be up to Congress to do so by legislation. So what would you put in the Chimpmaestro Act of 2011?

    Reply

    Calgacus Reply:

    Looked it up and saw that http://neweconomicperspectives.blogspot.com/2010/01/will-bernanke-be-reappointed-does-it.html was before I learnt about MMT, I believe, so I must have seen it after I came up with the ChimpMaestro independently. Don’t remember much, it was all about bananas and the CM moving the so-labelled “levers of the economy” to get them. Thought he should be able to move interest rates just a few basis points now and then from a fixed rate, to give him and Wall Street something to do. And there were alarm bells which would alert the CM when the financial system looked unstable. To control excessive “human spirits” he would then press a button to launch an investigation into a major bank (and get a banana).

    See also http://neweconomicperspectives.blogspot.com/2009/08/money-as-public-monopoly.html . I am entirely convinced that in the near future, basic chimponomics will be part of the education of every budding economist.

    Reply

    pebird Reply:

    We already had a ChimpMaestro at the Fed from 1987 to 2006.

    Reply

    Calgacus Reply:

    Unfortunately, he wasn’t well trained. Maybe they didn’t give him enough bananas.

    Reply

  4. Spectre says:

    So what determines the value of “money” in the MMT sense?

    Money is just a legal record of who owes who, is it not? So, ones ability to claim resources from others in the economy is based on ones own “credit worthiness,” and perhaps interest rates. But this system depends on people issuing their own credit, not some monopolizer like the Fed, as people actually lend resources, while the Fed does not. The Fed just issues the paper for people to keep the records… presumably that would decrease the “credit worthiness” of everybody, would it not? I guess it is unclear what is the purpose of the Fed if everybody can issue their own credit?

    Reply

    Matt Franko Reply:

    Spectre,
    ” just a legal record ”

    Consider stopping right there. Dont over-think it. Warren has likened it to an NFL scoreboard. A giant spreadsheet, a finacial record.

    “people issuing their own credit” I dont understand what you mean here? Resp,

    Reply

    Tom Hickey Reply:

    spectre, where do you think money comes from?

    It comes either from banks (loans create deposits) or government deficit spending that increases nongovernment net financial assets. The Fed does not inject funds into the economy directly. The Fed creates reserves that stay in the Federal Reserve System for settlement among account holders at the Fed, like the Treasury and member banks.

    Banks exchange reserves they hold in their reserve account at the Fed for currency (notes and coins) to meet demand at their customer windows.

    All transactions are finally settled in either currency directly or indirectly through bank reserves via deposit accounts.

    Reply

    Calgacus Reply:

    Spectre, people already do issue their own credit. That’s what the IOU you give to a bank when you get a loan is. What the Fed does (ideally) is help support a system that makes what the bank gives you in return for your IOU, its bank credit, bank money, as good as government money. People don’t “lend resources”.

    Worrying too much about the Fed or legal tender laws can veer into crankishness. Personally, I concluded I had some understanding of MMT when I discussed with my wife how the Fed could be run by a chimp, and how to train the ChimpMaestro, and then saw Randall Wray say the same thing in a blog post the next week.

    What determines the value of money in the MMT sense is the same thing that determines economic value everywhere else – supply and demand. The government has enormous and ultimate control over both, by spending and taxing, and by controlling private credit in various ways.

    Reply

    WARREN MOSLER Reply:

    still haven’t read anything!

    Reply

  5. Spectre says:

    Essentially you have 2 paradigms:

    1.) We are constrained by physical matter, because the belief is that humans will/can not create “new” matter.

    -OR-

    2.) We are not constrained by physical matter, because the belief is that someday humans will be able to create “new” physical matter.

    The 2nd is the MMT position, correct? If that is the MMT position, it’s still unclear as to how you “measure,” “ascertain,” “determine,” whether an activity is a means to reaching the MMT’er end goal: infinite resources. Is there some sort of mechanism or process I’m missing here???

    Reply

    beowulf Reply:

    “Is there some sort of mechanism or process I’m missing here???”

    In economics, potential output (also referred to as “natural gross domestic product”) refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints… The difference between potential output and actual output is referred to as the output or GDP gap
    http://en.wikipedia.org/wiki/Potential_output

    Not

    Reply

    beowulf Reply:

    Sorry the “Not” was the beginning of a sentence:

    Not exactly rocket science. :o)

    Reply

    Tom Hickey Reply:

    No one holds that physical resources are unlimited but the unlimited growth crowd.

    Position 2 holds that intelligence is unlimited whereas physical resources are limited. Design science in Fuller’s sense involves doing more with less, that is, increasing efficiency and effectiveness through application of knowledge. In the past when humans have encountered physical limitations, they have consistently managed to transcend them using intelligence. Innovation involves discovery and invention that extend technological reach in previously unimagined ways. Intelligence is multifaceted and broadly based. Coordination is an aspect of intelligence, for instance.

    The view that physical resources are limited is that of those who believe that if they don’t control those limited resources, someone else will. Historically, this has almost always led to conflict and war.

    Energy is a good example. The present kerfuffle is between those holding that alternative energy sources are available technologically through innovation and those holding that petroleum is the source that is available and the better course is to struggle over who controls it. The former would invest in innovation, the latter in the military and exploration of new sources and different ways of extraction. In the final analysis, we are either going to develop new technology or have a big war over energy resources — that is, if pollution or climate change doesn’t get us first.

    Reply

    WARREN MOSLER Reply:

    and much of what we call ‘gdp’ is for all practical purposes 0 marginal cost/infinite leverage, like downloading songs and data bases

    Reply

    WARREN MOSLER Reply:

    what makes you think that is the MMT position?

    Seems you haven’t read ‘the 7 deadly innocent frauds’ or the other ‘mandatory readings’ or proposals?

    Reply

  6. Spectre says:

    Warren,

    I’m new to MMT, but I still have some reservations regarding the “conclusions” as far as using “newly printed” money to finance tax cuts or government spending…

    We still live in a world with finite resources. As I understand it, MMT defines MONEY as CREDIT (a resource lent to someone else with the expectation of it being paid back). In this sense, MONEY effectively functions like a BOND. Ok I get that.

    1.) Given the current monetary system we inhabit, if the government runs a deficit (via tax cuts or spending) and is financed via newly printed money, does that not dilute the value of all money (assuming no productivity/output gains)? Stated another way, it is not clear that government is exchanging value for value… It is not clear what value/resource government has and uses to trade for value/resources in the private economy… In this sense, one would be more inclined to conclude that government is more likely taking finite resources/value from the private economy without trading a resource of commensurate value back… If this were the case, price inflation (decrease in the purchasing value of money) would occur, no?

    Printing new money does not work, unless the government can magically create new resources/value along with it. Without having more resources/value to back newly created money that is spent, government effectively dilutes all money (claims on resources).

    2.) Isn’t it erroneous to think of the economy in terms of government and non-government? Government IS effectively the non-government sector, that is, both are still constrained by finite resources. When it comes down to it, government is constrained by the resources/value it taxes from the non-government sector – government does not have or create rssources/value in and of itself, it takes it from the non-government sector. So government in REALITY is constrained by the REAL resources it taxes from the non-government sector.

    Yes, I agree on how you state monetary operations are done, but that DOES NOT negate the FACT that real resources/value CAN NOT be printed. If the government runs a deficit, that means it has exhaused all of it’s real resources (tax revenue) and is now using somebody elses – printing new money does not change that fact, it is merely taxation via the printing press and government deficit spending. The only real resources government has are what it taxes from the non-government sector. As soon as you learn this, there is no reason for the existence of legal tender laws, and you find that running fiscal deficits is counter productive. And no, people don’t necessarily use government money because the government demands it for taxes, interestingly the tax code does not define income as having to be in terms of Federal Reserve Notes (http://www.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26_10_A_20_1_30_B_40_I.html).

    I think you mean well, but your efforts are slightly mis-directed. I’d rather you focus your efforts toward abolishing legal tender laws – as that’s the real issue. Again I agree with how you describe the operational fact of the monetary system, but your conclusion to deficit spend as a means to prosperity is logically flawed. Adjust your framework to understand that government faces the same constraint the non-government sector faces: REAL resources.

    Reply

    roger erickson Reply:

    > We still live in a world with finite resources.

    You have a fundamental misconception of reality. ~14 Billion years of estimated history indicates there is ABSOLUTELY NO LIMIT to the “return on coordination.”

    Per Luddites, we’ve been “resource constrained” for 14 Billion years. We need appeal to no higher authority when questioning the relevance of your fundamentally naive assertion.

    Reply

    Tom Hickey Reply:

    Spectre, in 1 you are thinking of money as a commodity (store of value) instead of as an idea (medium of exchange). Money needs to be elastic as a medium of exchange rather than static as it would seem to have to be to serve as store of value.

    Also, as R. Buckminster Fuller pointed out, humanity’s metaphysical wealth is potentially infinite — the ability to use knowledge is power, and there are no limits on knowledge. That’s what innovation is all about. Fuller also pointed out that through what he called “design science,” limited physical resources can be used intelligently to serve humanity as a whole in a way that would result in Utopia. It’s not the physical resources that are the problem.

    2. The MMT position is that the only constraint is real resources. Finances are never the problem for a monetarily sovereign nation with a fiat currency. As Randy Wray wrote recently here: “…whatever is technically feasible is financially affordable.” Government policy needs to ensure that there are real resources available to meet future needs of the population. It accomplishes this through well designed fiscal policy.

    Reply

    WARREN MOSLER Reply:

    for me, best not to use the word ‘money’

    the dollar is the thing demand by the US govt for payment.

    Reply

    Jim Baird Reply:

    One of fundamental conslusions of MMT is that there is no functional difference (for a sovereign currency issuer in a floating rate world) between a “bond” and “money”, except in terms (interest vs. no interest) and duration.

    Thus, there is no difference between a deficit “financed” via bond issuance and via direct monetary creation – both are “inflationary” in the sense that they add to aggregate demand, and both add net financial assets to the private sector. The “Money Printing” bogeyman is left over from the days of the gold standard, in which “money” was convertible to gold and “debt” was not.

    Real resources CAN be “printed” into existence provided there is unused capacity in the economy. If the government hires the unemployed, the work tha is done is work that would not have been done otherwise and output that would have lost forever.

    Reply

    Neil Wilson Reply:

    It’s very interesting when you ask somebody who doesn’t believe that you can create currency out of thin air, why you’re allowed to create bonds out of thin air.

    The contortions they go through are most amusing.

    Reply

    beowulf Reply:

    interestingly the tax code does not define income as having to be in terms of Federal Reserve Notes

    That’s because “income” isn’t necessarily earned in US dollars or, more to the point, in the US (American citizens owe taxes on worldwide income). However US tax payments must be in US legal tender. Of course even then, as we’ve been discussing for the past week, Federal Reserve notes aren’t the only kind of legal tender.
    http://moslereconomics.com/2011/01/20/joe-firestone-post-on-sidestepping-the-debt-ceiling-issue-with-coin-seigniorage/

    pebird Reply:

    Neil:

    But it should not be any different than how physical value is created.

    You get stuff together, some people, some equipment, add time, some hand waving and voila – the stuff that comes out has more value than what went it.

    That extra value must have come out of all that hand waving – out of thin air.

    Tom Hickey Reply:

    Value added to materiel comes from physical input (brawn) and metaphysical input (brains) — the traditional difference been labor and management. But that is increasingly becoming a false distinction since labor is now based mostly on skill instead of strength. This reveals why education is foundational for an economy.

    Comparing our lifestyle with other primates, “It’s all in the head.” More like firing neurons than waving hands — ideas and coordination. What we call culture and civilization is an idea in the sense of an intricate system of memeplexes interacting with a changing environment based on feedback (reflexivity). :)

    WARREN MOSLER Reply:

    i think you meant intellectual rather than metaphysical?

    Tom Hickey Reply:

    I am using Bucky Fuller’s terminology here as an allusion to his work.

    Calgacus Reply:

    Spectre:
    We still live in a world with finite resources. As I understand it, MMT defines MONEY as CREDIT (a resource lent to someone else with the expectation of it being paid back). In this sense, MONEY effectively functions like a BOND. Ok I get that.

    All correct, except for the definition of CREDIT, which very misleadingly uses the same word “resource” as you do in “world with finite resources”. Credit is not a pre-existing resource (a “thing”) lent to someone, as one would lend a garden hose, with the the expectation of it being paid back / returned. Credit (or money) is a social relationship. It is much better to think of it as something like a “favor” or a “duty”.

    1.) Given the current monetary system we inhabit, if the government runs a deficit (via tax cuts or spending) and is financed via newly printed money, does that not dilute the value of all money (assuming no productivity/output gains)?

    Possibly, given the parenthetical assumption invariably holding, – but it never does. Does doing someone a favor dilute the favor supply and the value of all favors?

    Stated another way, it is not clear that government is exchanging value for value… It is not clear what value/resource government has and uses to trade for value/resources in the private economy… In this sense, one would be more inclined to conclude that government is more likely taking finite resources/value from the private economy without trading a resource of commensurate value back… If this were the case, price inflation (decrease in the purchasing value of money) would occur, no?
    Printing new money does not work, unless the government can magically create new resources/value along with it. Without having more resources/value to back newly created money that is spent, government effectively dilutes all money (claims on resources).

    Since this is not what happens empirically, one should suspect a flaw in this theory. People do exchange real resources for deficit-spent dollars – and deficit spending is ultimately the only source of dollars. By this theory, nobody would every use a dollar or any money ever, because the first dollar would be just as valueless as the later ones. As Jim Baird says, one answer is that deficit spending indeed DOES magically print new real resources into being. Another is that people do need dollars because it keeps the ones who owe taxes out of jail. The upshot is that monetary economies, which can only arise through deficit spending, can mobilize their resources as a whole better than non-monetary economies.

    2.) Isn’t it erroneous to think of the economy in terms of government and non-government? Government IS effectively the non-government sector, that is, both are still constrained by finite resources.
    No, it is not at all erroneous. You can think of economies as a whole of course, but there is no practical difficulty determining whether something is governmental or non-governmental, and as money is a creature of the government, and very important to the real workings of the real economy, going from the existence of resource constraints to “Government IS effectively the non-government sector,” is a wild leap of logic, a complete non-sequitur.

    When it comes down to it, government is constrained by the resources/value it taxes from the non-government sector – government does not have or create resources/value in and of itself, it takes it from the non-government sector. So government in REALITY is constrained by the REAL resources it taxes from the non-government sector….The only real resources government has are what it taxes from the non-government sector.
    Absolutely wrong. The only real resources the government has is what it BUYS from the non-government sector, which it may use more efficiently or less efficiently than the private sector, with the efficiency concept only being meaningful near full employment. If the non-government sector is flushing real resources down a toilet, which it usually does, the government purchase preserves these resources, effectively creating these resources. There most definitely is a free lunch here. A Job Guarantee, full employment policies, are a free lunch – because they amount to not destroying the lunch you already have.

    Yes, I agree on how you state monetary operations are done, but that DOES NOT negate the FACT that real resources/value CAN NOT be printed. If the government runs a deficit, that means it has exhausted all of it’s real resources (tax revenue) and is now using somebody elses – printing new money does not change that fact, it is merely taxation via the printing press and government deficit spending. The only real resources government has are what it taxes from the non-government sector. As soon as you learn this, there is no reason for the existence of legal tender laws, and you find that running fiscal deficits is counter productive. And no, people don’t necessarily use government money because the government demands it for taxes, interestingly the tax code does not define income as having to be in terms of Federal Reserve Notes..

    I think you mean well, but your efforts are slightly mis-directed. I’d rather you focus your efforts toward abolishing legal tender laws – as that’s the real issue.
    Legal tender laws are meaningless in modern economies. It is hard to think of a less real issue. Repeal them or not, zero economic difference. China never had them, Scotland doesn’t have them. Nobody notices, nobody cares. That the tax codes do not define income necessarily in terms of Federal Reserve Notes makes dollars more desirable, makes money more tax- driven, not less – and thus makes legal tender laws more meaningless.

    Again, the idea that “The only real resources government has are what it taxes from the non-government sector.” is utterly wrong, utterly contradicted by MMT and reality, one of many well-meaning, but familiar flaws in this logic. Tax revenue is not in any way a resource to the government. If you write a trillion dollar IOU to yourself, what is that worth? Nothing.

    And again, the very existence of money and the success of monetary economies prove real resources can be printed, and have been for thousands of years.

    Reply

    WARREN MOSLER Reply:

    and mmt doesn’t ‘define money as a credit’

    it doesn’t necessarily use the word ‘money’ at all.

    mmt does point out that the dollar is a tax credit, however.

    Reply

    Tom Hickey Reply:

    “it [mmt] doesn’t necessarily use the word ‘money’ at all.”

    Randy might be surprised to hear that. :)

    L. Randall Wray, Understanding Modern Money (1999), and “Money

    But seriously, I agree that “money” is an ambiguous term that is better avoided as much as possible through specification, and I think that most MMT’ers are of this view.

    Ralph Musgrave Reply:

    Spectre, Your claim that creating new money “dilutes the value of all money” is not true, because it depends on what recipients of the new money actually do with it. If they simply hoard it (as David Hume pointed out 250 years ago) there is no effect. Indeed, there is a fair amount of hoarding going on right now by banks and corporations.

    Conversely, excess demand, and hence inflation can easily arise even given a stable money supply: e.g. an outburst of “irrational exuberance” increases demand (and possibly inflation).

    Reply

    WARREN MOSLER Reply:

    first, have you read the 7 deadly innocent frauds on this website?

    second, spending on any kind either support prices or drives them up, depending on how you actually spend. and higher prices is just another way of saying a lower value for the currency.

    taxation takes away spending power and can thereby reduce the ability to spend.

    no, it’s not erroneous to think of the economy in terms of govt and non govt sector for the purposes that division is made here.
    i would not use that dichotomy for everything.

    Reply

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  8. hbl says:

    If I’m understanding correctly, this seems like a distinct way of forcing down interest rates on Greek debt, allowing Greece to make smaller interest payments in total, and in turn reducing fears about Greece’s interest burden spiraling out of control.

    If the EU lends directly to Greece, allowing Greece to buy back and pay down its own debt, then the EU directly sets the effective interest rate of Greece’s replacement debt. (Or perhaps lets the market set it at a relatively low market EFSF rate?) And most importantly they can control the quantity/size of the intervention independently of their control of the interest rate. That may be important with respect to the politics.

    But if the EU (ECB or whatever) buys the Greek bonds directly, they are paying market rates, and to force rates down to a level of their choosing, they may need to buy a potentially unlimited quantity (i.e., quantity is outside of their control).

    Of course there is always the political factor either way, since as the article says, “Germany and other key funders of the EFSF have so far opposed lowering interest rates.”

    Your dismissiveness seems to relate to that the EU is likely to focus on the best “deal” for themselves, but I don’t think that’s the point here, is it? Have I got something wrong?

    Reply

    Tom Hickey Reply:

    I think the ultimate issue is whether the decision has been taken at the highest level to sustain the EZ whatever it takes. I believe that the decision has been taken, and now it is only a question as to whether it can be sustained politically in the various countries. The actual route taken will be determined based on what is most sustainable politically.

    Reply

    WARREN MOSLER Reply:

    that’s why i said if they buy the bonds they can ‘forgive’ interest on those bonds if they want to

    Reply

    hbl Reply:

    Thanks for explaining, Warren, now it makes sense that the approaches are reasonably equivalent. As you originally stated it, “the option to forgive if it ever suits them” was vague enough that it didn’t sink in for me what you meant. As Tom suggests it probably comes down to various approaches having differing degrees of political feasibility…

    Reply

    Tom Hickey Reply:

    hbl, I think that the political trick for them is to pull it off in such a way that they can maintain their neoliberal agenda without “getting all Keynesian.” That is going to be the hard part when austerity bites. What’s going down in North Africa now is a warning not to discount social unrest too heavily. It can ruin your whole day.

    roger erickson Reply:

    What’s “reasonable” in a given political setting often looks absolutely asinine from a pure operations point of view. That only reminds us of the dangers of even running political & policy apparatus that are far too isolated from operational reality.

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