The Mosler Plan for Greece

The Mosler Plan, as previously posted on this website, is now making the rounds in Europe as an alternative to the French Plan that is currently under serious consideration:

Abstract
The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms.

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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286 Responses to The Mosler Plan for Greece

  1. Talvez... says:

    OK, I searched this post just to add this information:

    Government bonds in Portugal are usable to pay taxes.
    Yes interests also went through the roof.

    Reply

    Talvez... Reply:

    @Talvez…,
    OK, been asking some more, and it’s not accepted at face value.

    Reply

  2. Tom Hickey says:

    RSJ takes on Mosler Bonds in Arbitrage and Non-Arbitrage at windyanabasis.

    Reply

    WARREN MOSLER Reply:

    Cheap shots and no comment section?

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,

    Warren, there’s a comment section, and Steve Waldman is the first to comment.

    Reply

    Matt Franko Reply:

    @Tom Hickey,
    WM: “Issue bonds that can be used to extinguish Greek tax liabilities upon default”

    SRW: “it has lots of subtle characteristics”

    ???????, Resp,

    PS from SRW’s latest blog: “I’m short long-term US Treasuries, and have been for years” :o

    Tom Hickey Reply:

    @Tom Hickey,

    Matt, SRW said he is still thinking this through. Maybe he’ll post his conclusions at Interfluidity when he figures out the implications of the “subtle characteristics” he mentions seeing. I hope so.

    WARREN MOSLER Reply:

    link?

    Matt Franko Reply:

    @Tom Hickey,
    Sorry Warren I was paraphrasing your proposal. SRWs full comments at RSJ’s blog here:
    http://windyanabasis.wordpress.com/2011/07/09/arbitrage-and-non-arbitrage/
    Resp,

    WARREN MOSLER Reply:

    good comments!

    JKH Reply:

    @Tom Hickey,

    my comment left there:

    I agree with the thrust of the post, and said essentially the same thing repeatedly in earlier comments at Mosler’s.

    Redemptions of bonds for taxes are non-cash transactions. Such redemptions must be matched by new debt issuance for cash, in order to fund the budget where cash taxes are no longer forthcoming.

    If the required redemption refinancing mechanism uses M bonds, that creates an M bond float that by construction cannot be redeemed in total for taxes, over ANY time period.

    That being the case, there is always residual default risk prevailing for M bonds holders – the fact that it is physically impossible for all to redeem in any given period means that the effective exercisability of the redemption option cannot be guaranteed for all bond holders over any given period – no matter how long that period. This means buyers of M bonds in such refunding operations (and all other holders) are taking on that risk of non-exercisability. That risk must be compensated with a premium interest rate.

    I referred to this in my comments at Mosler’s as Ponzi-like. It is not Ponzi in the sense that funding is required to pay interest. It is Ponzi in the sense that new buyers of M bonds must take on residual default risk in order to facilitate that some subset of M bond holders will be able to exercise their par redemption option successfully.

    This is essentially the same thing as your feedback loop idea.

    The relevant risk will increase due to an additional dimension, which is the size of the M bond float as a proportion of total debt float and as a multiple of some periodic tax revenue measure. The larger the M bond float measured in these terms, the greater the risk that bond holders will get left out in the cold and not be able to get par for their bonds.

    The ultimate, extreme case is where M bonds eventually become the entire bond float. Other things equal, the default risk that existed pre-M bond still exists. The government’s promise to pay par on M bonds is essentially a promise not to default, which in this extreme case becomes as useful as such a promise might be on a pre-M bond basis. This is a case of total risk feedback, in which there is nothing left to transfer the risk to (i.e. no non-M bond holders).

    There is a way around this problem. That is to issue M bonds whose tax redemption is only refunded with non-M debt.

    This would define an M bond portfolio that declines over time to zero.

    Only in this way can the default risk be transferred fully (or nearly fully) from the M bond portfolio component to the non M bond portfolio component.

    Note that in this latter sense, the Mosler plan could be effective as a temporary bridge financing mechanism, allowing for the possibility of other favourable developments. However, this essentially creates a two-tier senior/junior government debt structure that I doubt could be approved from a constitutional perspective.

    WARREN MOSLER Reply:

    M bonds can always be used to pay one’s own taxes

    And if you can own them on a leveraged basis at a positive spread to funding,
    there is no limit as to how many you’d like to own and taxes you owe go up lock step with the bonds you own, etc.
    Yes, there are limits, and all I’m saying is those limits are a lot higher than current debt levels

    And your suggestion serves to not remove as much risk for the bond holder.

    Imagine you are the bond holder and the decide which you would rather have. Current Greek bonds, your m bonds, or my m bonds?

    It’s obvious to me mine would be most investors first choice.

    Therefore mine would command the lowest rates for Greece as well

  3. Tom Hickey says:

    Seems to me that the only way to resolve the issue in any kind of a permanent way is to recognize that a common currency and national bonds are unworkable since it brings to the fore the asymmetry that affects/infects the currency area. There there is going to be a common currency, there has to be a common bond, too. Otherwise, the present arrangement will be permanently unstable in the absence of a common fiscal authority in addition to a common monetary authority.

    While I am more positive about the Mosler bond than some here, I don’t see it turning the EZ into an optimal currency area. Until the underlying asymmetry is addressed, instability will persist.

    Simon Johnson: Italy Could Be The Next European Domino

    Reply

    Max Reply:

    The euro system can only be stable if Germany runs a trade deficit. Germany doesn’t need to stockpile euros because they control the ECB. The peripheral countries do.

    Reply

    Neil Wilson Reply:

    @Max,

    Yep. Germany hires more civil servants.

    In other news, hell freezes over.

    :)

    Reply

    PZ Reply:

    @Max,

    Germany’s need to run trade surpluses is somewhat of a mystery. They must have some kind of a system of “forced savings”, probably pensions. I wonder if any work has been done on the subject. This goes straight to the core of the problems in the euro area.

    Reply

    WARREN MOSLER Reply:

    Just under 20% of paychecks goes to pension contributions

    WARREN MOSLER Reply:

    i don’t see it doing anything apart from allowing greece to fund itself at lower rates.

    Reply

  4. Max says:

    The Greek government needs euros. If they accept bonds instead of euros, they will have less spending power for any given level of taxation. The motive to default on the ‘default provision’ is essentially the same as the motive to default on the bonds.

    The only way I see to make Greek bonds safe is to back them with the ECB (as German bonds are [implicitly] backed).

    Here’s another way of looking at it. Suppose that Greece accepted its bonds as payment for taxes always (not just as a ‘default provision’). What would happen? There would be a rush to trade in the bonds and Greece’s tax revenue would drop to zero. It would be equivalent to buying back the bonds at par. If Greece could do that, then nobody would be worried about default risk in the first place. Since they can’t, any pledge along those lines is non-credible.

    Reply

    WARREN MOSLER Reply:

    with the bonds issued under eu law, they can’t deny the use of defaulted mosler bonds for tax payment
    they would have to leave the euro and the eu, and then somehow sidestep the law as well

    Reply

    Max Reply:

    The EU can make it a crime to default on regular bonds. No need for special type of bond.

    But how do they enforce it? Invade Greece?

    As an investor I trust bonds that are backed (even if only implicitly) by central banks. Anything else has credit risk. Layering on more promises doesn’t fundamentally change anything.

    Reply

    WARREN MOSLER Reply:

    If you use tender the defaulted bonds for payment of taxes, Greece won’t be able to prosecute you for non payment of taxes

    Max Reply:

    They can prosecute if you live in Greece. If you flee, then they confiscate the property you left behind.

    WARREN MOSLER Reply:

    EU law would prevent said prosecution.

    Max Reply:

    EU law and what army?

    Reply

    WARREN MOSLER Reply:

    It’s pretty much like federal law vs state law over here.

  5. rvm says:

    I hope the EU accepts the Mosler Plan for Greece – it will be the best publicity for the MMT paradigm ever. Warren won’t handle the interview requests from all over the place. :-)

    Reply

  6. Pingback: The Mosler Plan for Greece Fits Ireland too – Smart Taxes Network | scwilliam.com

  7. Will Richardson says:

    There’s far more money in any economy than taxes that need paying in any year.

    But the money’s still accepted as payment even though only a fraction of it is ‘needed’ or used to ‘pay’ taxes.

    So why’s the amount of bonds relative to tax such an ‘issue’?

    Reply

    ESM Reply:

    @Will Richardson,

    The difference is taken up by what MMT calls “savings desire.”

    Any money above savings desire plus the tax burden tends to be spent quickly and converted to another form, which will drive down the value of the monetary unit against real goods and services (inflation) or other currencies and assets (depreciation), until once again there is balance (assuming depreciation leads to increased nominal savings desire).

    In the case of Greece, its deficit spending has been made possible by artificially enhanced (i.e. by the Eurozone structure) savings desire. Now that political support in the Eurozone for facilitating Greece’s deficit spending is waning, it is obvious that the value of Greece’s IOUs must depreciate. That will come in the form of a steep decline in the market value of Greece’s bonds, followed by a default, either through principal haircut or through forced conversion to the Drachma.

    Reply

    WARREN MOSLER Reply:

    That’s what’s been happening.

    My proposal both kicks the can 20 years down the road via enhanced credit quality and reduced interest expense.

    Yes, as previously discussed, if their deficit happens to increase dramatically from here the bonds could trade down some without a tax increase

    Reply

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  11. By way of flying a kite, here’s a slightly different idea to Warren’s.

    Any monetarily sovereign country can wipe out its debt simply by printing money and buying it back (perhaps by ceasing to roll over). If that’s too stimulatory, no problem: just raise taxes by whatever is needed to ensure that the deflationary effect of the tax equals to inflationary effect of the buy back. Bill Mitchell said that creditors need indebted countries more than the latter need their creditors. He was right.

    The Eurozone as a whole could do a “buy back”. But I don’t see Europe letting just ONE country, e.g. Greece do that. Other countries would want to do the same. But the latter would be beneficial: it would reduce EVERY Euro country’s debt, which in turn would at least help Greece a bit. The losers would be banks and those with money deposited in banks: they’d get less interest.

    The above idea would not deal with PIGS’ lack of competitiveness, but it would buy time.

    Reply

    WARREN MOSLER Reply:

    right, the ecb would have to do that. functionally identical to my per capita distribution proposal

    Reply

  12. JKH says:

    @JKH.Mosler,

    On initial reflection, I’m growing slighter warmer on the proposal, but still considering some of the detail. That said, I’ve no reason yet to change my mind on a number of points I’ve made.

    The first such point has to do with this:

    Warren M:

    “quite the opposite.

    ponzi is when the govt has to issue more bonds/borrow more to get the euro for the bondholders to get paid.
    currently all the euro members are in ponzi, for all practical purposes

    in the case of my proposal, all the govt. has to do is levy taxes for the bond holder to get paid.

    that is, the govt gives the bondholders value by levying taxes, which it can legally do, and, without limit.

    the govt doesn’t have to collect taxes to pay bond holders, only levy taxes.

    so ponzi no longer applies.”

    Disagree.

    The Ponzi in question continues:

    Every bond that is redeemed for taxes requires that a new replacement bond be issued for cash. That’s because tax payments made with bonds provide no cash to fund budget expenditures.

    And maturing bonds that aren’t used to pay taxes still require a cash roll.*

    Therefore, the net cash requirement for the government is the same, whether bonds with remaining duration are redeemed for taxes, or maturing bonds are rolled for cash without having been redeemed for taxes.*

    And of course the ongoing deficit still requires that new bonds be issued for cash.

    That means the net cash requirement for the government is the same, with or without the Mosler plan.**

    Therefore, to the degree that Ponzi is operative pre-Mosler plan, it is operative with it**.

    * Note that the risk that holders of maturing bonds may not be able to find demand for those bonds for the purpose of paying taxes prior to maturity is a real one. All it requires is that the face amount of the total supply of maturing bonds exceeds the amount of taxes that need to be paid in the current period. That lapse in required demand is a structural risk that needs to be explored – more on this later.

    ** That is to say that the same Ponzi funding dynamic continues at a fundamental level, because the same funding requirement continues. But I don’t mean that to suggest necessarily that the Mosler plan won’t change the government’s cost of funds and thereby influence the compounding of the debt over time. That’s where I become warmer on the plan.

    Reply

    Ramanan Reply:

    @JKH,

    Very nice points JKH. And I too think the Ponziness is due to the intrinsic construction of the Euro Zone itself.

    This is mainly due to the accumulated current account deficit (which is related to the budget deficit by the sectoral balances identity).

    The only way Euro Zone nations can prevent the public debt/gdp and yields on bonds from blowing up is by deflating demand and reducing the current account.

    Here is a file I created on the international nature of the crisis. http://dl.dropbox.com/u/16533182/Euro%20Zone%20Stock-Flow%20Ratios.xls You can see PIGS on the graph (if you read from the right).

    Back to the topic …

    “Every bond that is redeemed for taxes requires that a new replacement bond be issued for cash. That’s because tax payments made with bonds provide no cash to fund budget expenditures.”

    Warren here will argue that but thats only on default and the offer is too lucrative for default to take place! Difficult to convince him of the default ;)

    Reply

    JKH Reply:

    @Ramanan,

    R.,

    Thanks.

    I’m only highlighting one of numerous points to be made about the M plan.

    That is, that the M plan can’t change Ponzi status based on the reasoning provided in the quote.

    That’s because the quote is incorrect in any context.

    The M proposal does not change the principal funding requirement for government. Therefore, a change in the principal funding requirement can’t be the explanation for a change in Ponzi status.

    That’s really all I’m saying as a first point.

    I’m not even saying that Ponzi status might not change or evolve at the margin. I’m just saying that it won’t change for the reason given. Any predicted change must be for more robust reasons than what is provided here.

    Reply

    WARREN MOSLER Reply:

    all the bond holders care about is the ability to give them nominal value

    and that reduces the risk to the rest of the budget, as bond holders are what funds it

    JKH Reply:

    @Ramanan,

    R.,

    BTW, the following is very much up your alley for sure. A very, very heated European discussion on TARGET that I got involved with. Many, many links over several weeks if you explore it.

    http://olafstorbeck.com/2011/06/25/the-dirty-tricks-of-hans-werner-sinn/#comment-820

    Reply

    Ramanan Reply:

    @JKH,

    Thanks.

    Lots of links there! Will check them out.

    Ramanan Reply:

    @JKH,

    Just browsed through the links for a while without going into details. Seems like Sinn is viewing money as exogenous/fixed and is trying to argue that if Bundesbank has claims on other NCBs, it will be able to lend less to local banks and this leads to credit contraction or something like that. As in Martin Wolf’s words

    “By shifting so much of the eurozone’s money creation towards indirect finance of deficit countries, the system has had to withdraw credit from commercial banks in creditor countries.”

    But Storbek seems clearer on these things and says the ECB does not control the money stock etc.

    Its possible that he is misinterpreting Sinn.

    I believe what Sinn is saying is the following:

    There are frequent claims that the so-called “sterilization” is not possible beyond a point. (as the name implies, it it supposed to sterilize the money supply growth through the neoclassical money-multiplier process).

    So while there are large capital flows into Germany, whats happening is the item “Claims on Banks” keeps reducing from the Bundesbank’s balance sheet. At some point this becomes zero. After that Bundesbank loses its ability to target short term rates or something along those lines. “That would make inflation inevitable.” partly supports my attempt to read Sinn’s mind.

    However, there is a way out – Bundesbank issues bills etc which Sinn doesn’t talk about.

    WARREN MOSLER Reply:

    any ‘money shortage’ would be evidenced by elevated interest rates somewhere

    Ramanan Reply:

    @JKH,

    ““Claims on Banks” keeps reducing from the Bundesbank’s balance sheet. At some point this becomes zero.”

    As in .. in Sinn’s extrapolation.

    However in reality, this may stop because when there is a transfer of deposits cross-border, banks in the peripheral countries will run out of collateral to provide to their NCBs and this itself will lead to issues for the peripheral countries’ banks.

    JKH Reply:

    @Ramanan,

    He’s saying capital flight in Euros from Ireland to Germany increases Euro deposits with German banks, which increases German bank reserves with the Bundesbank. That’s reflected further as Bundesbank net TARGET claims on the ECB.

    This allows the Bundesbank to unwind refinancing with the German banks, which draws down the excess reserves. He refers to that unwinding of refinancing as “crowding out”. But it’s really demand driven, since the German banks don’t need that level of CB refinancing, because they’ve gained deposits from the periphery (e.g. Ireland).

    Ramanan Reply:

    @JKH,

    Yeah, strange he refers to the unwinding of refinancing as crowding out!

    Ramanan Reply:

    @JKH,

    Here’s Buiter Part 2 on the Sinn episode. http://www.nber.org/~wbuiter/originalsinn2.pdf

    JKH Reply:

    @Ramanan,

    thanks, Ramanan

    i’ll have a look

    JKH Reply:

    @Ramanan,

    P.S.

    I find Buiter’s approach to this stuff to be excessively laborious.

    The important ideas don’t require all those academic equations and chicken scratch.

    He was that way in his discussions of CB capital on his old blog, as well.

    Ramanan Reply:

    @JKH,

    Yeah I too skipped the part with the painful notations.

    But I think he is clear about money being endogenous and no money stock being targeted which is good (which he mentions in Part 1, upfront).

    He can directly use simple numbers like EUR100 being transferred etc or empirical numbers such as EUR350 Billion on Bundesbank’s balance sheet.

    JKH Reply:

    @Mosler,

    “the govt doesn’t have to collect taxes to pay bond holders, only levy taxes”

    no idea what it means to levy taxes without collecting taxes

    Reply

    JKH Reply:

    @Mosler,

    i.e. the plan is not a (levied) tax only payable in bonds; it’s a plan for an option to pay tax in bonds; the tax is always collected, in bonds or otherwise

    Reply

    WARREN MOSLER Reply:

    first taxes are passed into law, and then later get paid

    Reply

    WARREN MOSLER Reply:

    “Every bond that is redeemed for taxes requires that a new replacement bond be issued for cash.”

    that’s not the bond holder’s problem. as long as he knows he can get full nominal value he’s happy. (remember, be the bond holder, etc.)

    the net cash requirement for the govt to fund it’s other expenses may be the same, but there is no cash required to return value to the bond holders

    Reply

    JKH Reply:

    @Mosler,

    “all the bond holders care about is the ability to give them nominal value”

    Every time I point out a nuance about the plan, you hit me over the head with this baseball bat.

    I sort of get that point, you know? I understand that if you hold a bond that you know somebody can use to pay taxes, your value is guaranteed. I’ve never questioned that – hopefully I’m not a total idiot, at least not yet. And none of the points I’ve raised questions that.

    Anyway, here’s a point which I’ve already alluded to:

    The size of the debt relative to projected taxation matters. Suppose the entire Greek debt consists of M bonds. It increases every year by the size of the deficit.

    The M bonds do not guarantee the ability to get par value through exchange for tax liabilities.

    They only guarantee the ability to get par value when the option of exchanging them for tax liabilities can be exercised. Such exercise is not guaranteed, which means par value is not guaranteed.

    The reason such exercise is not guaranteed is that some holders of bonds may not be able to find taxpayers with the tax liability necessary to use the bonds in exchange.

    As I already noted, this could happen for example if taxpayers have already paid their current period taxes, with bonds or cash, but there are holders of outstanding bonds that mature in the current period.

    The plan per se does not guarantee those holders their par value.

    Similarly, from a macro perspective, in order for all bondholders to be guaranteed their value by the plan, there must be a mapping effectively of all outstanding bonds into an annuity of projected tax payments that can use those bonds.

    The more the debt grows, or the greater the related debt/tax ratio becomes, the long in duration that annuity may have to be.

    Long story short, it would be wise to ensure that the debt is sufficiently long duration to allow bondholders in aggregate to map their bond holdings into their tax planning – or implicitly into somebody else’s tax planning.

    If this condition is violated sufficiently, the market as a whole will see through it.

    Another obvious point of course is that there may be a critical mass of bond/tax coverage that may not be 100 per cent in order for the desired pricing effect to take hold for the bond market as a whole.

    The question becomes, what is that critical mass. And that’s where the macro numbers for outstanding debt and tax projections matter.

    Reply

    JKH Reply:

    @JKH,

    meant critical coverage in the sense of duration coverage as described

    Reply

    WARREN MOSLER Reply:

    I think all you are saying is that market value can fluctuate. I agree.

    I never said par value is guaranteed at all times. Only that the investor won’t ultimately lose money.

    Tax planning will not be a factor. They will be bought and trade just like any other high quality bonds.

    And yes, there is some debt to GDP presumption where the bonds would trade at a discount

    Just like there is some debt GDP ratio that makes the yen go down.

    And if Greece at some point has trouble selling bonds they may need to raise taxes.

    Which they are planning on doing anyway.

    Reply

    ESM Reply:

    @WARREN MOSLER,

    “I never said par value is guaranteed at all times. Only that the investor won’t ultimately lose money.”

    Good grief. How can an experienced bond trader like you say something like that Warren?

    You don’t believe in the time value of money perhaps? Would you like to buy some principal protected S&P index products? Or perhaps you’d just like to buy some 10 year zero-coupon Treasuries at par?

    Look, allowing bondholders to pay taxes with defaulted bonds is no different from issuing drachmas and allowing drachma-holders to pay some or all of their tax bill in drachmas. Because the amount of “tax credits” outstanding vastly exceeds the tax burden plus savings desires, the value of the “tax credit” (whether a drachma or a defaulted Greek Euro bond) will fall to some level (I predict approximately 50 cents on the Euro) well under par.

    The defaulted Greek bond tax credit should be roughly equivalent to a drachma tax credit, in terms of price at least. I guess you can argue
    that the defaulted bond would accrue interest arrears (maybe), so perhaps it would trade a little higher, if drachma interest rates were held low. Of course, if the greek bond interest rate was 4%, and the drachma interest rate was 8%, and the bonds traded down to 50 cents on the dollar in default, then there would be no difference in the carry.

    WARREN MOSLER Reply:

    never owned a cmbs that extended with an above market coupon?

    if attempted funding gets too large for savings desires, with drachma the currency goes down. with euro the market clearing interest rate goes up.

    however, savings desires are substantially enhanced by the new default language. and by the austerity measures

    ESM Reply:

    @WARREN MOSLER,

    “if attempted funding gets too large for savings desires, with drachma the currency goes down. with euro the market clearing interest rate goes up.”

    With Greek Euro govt bonds, the price goes down, just like with Drachma.

    I’m not sure the added default language is meaningful at all (e.g. a Greek court might allow people to net off credits and debits against the government under current law anyway), but even if it does afford bondholders another way to get value for their bonds, all that will happen in the event of a default is the following:

    1) Nobody will pay Greek taxes in Euro; and
    2) Everybody will pay Greek taxes in defaulted Greek Euro bonds; and
    3) Greek Euro bonds will become essentially Greek Drachma.

    The Euro will of course have much more value than a defaulted Greek Euro bond because it can be used to pay taxes of more substantial countries, as well as satisfy savings desires for those who are risk-averse and need liquidity.

    The bottom line is that there is no coupling mechanism between the value of a defaulted Greek government Euro bond and the Euro. There is no reason why the value of one has anything at all to do with the other.

    WARREN MOSLER Reply:

    no, with one’s own currency rates are a function of cb settings and anticipated settings. hence, japan’s term structure of rates with much higher debt to gdp than greece

    if japan had a problem of excessive deficit spending the yen would fall and rates only rise to the extent markets anticipated boj hikes

    WARREN MOSLER Reply:

    Greek taxes are payable in euro.
    if you’re a greek bank making a 30% roe with these bonds you are also accruing a tax liability payable in euro.
    Why would that change in a default? only if greece leaves the euro
    And if that does change, and Greece switches to another currency, the euro value of the bonds can be used based on spot fx rates when the tax is paid.
    the bonds don’t every functionally become drachma

    JKH Reply:

    @WARREN MOSLER,

    Here’s another interpretation that would seem to support ESM’s argument that the bonds for taxes plan would have no effect on the market price of bonds or on the risk of default:

    Consider:

    a) The Mosler plan, where the government guarantees that bonds can be valued at par for purposes of making tax payments

    b) An alternative “plan”, which is a simple announcement that the government guarantees the repayment or redemption of bonds at par, for cash

    These two “different” guarantees have an identical Euro cash consequence for the government budget. The government’s Euro cash balance with its central bank will be short an amount of cash equivalent to the nominal value of the bond redemption/repayment at par – an identical amount for the same bond in case a) or case b):

    In case a), the cash shortfall shows up as budgetary expenditures in cash that aren’t yet financed with cash.

    In case b), the cash shortfall shows up as debt repayments in cash that aren’t yet financed with cash.

    In either case, the government must cover the cash shortfall by issuing new debt.

    (A variation is that the government can cover the cash shortfall by levying new taxes for cash. This applies to both cases. But it can’t levy new taxes for bonds to do this, because that doesn’t cover the cash shortfall.)

    Then, comparing a) and b):

    If the government’s guarantee in case b) were credible, nobody would be worried about default. That’s obviously a contradiction.

    Default risk is fundamentally a cash flow risk.

    Therefore, given the identical cash flow implications of a) and b), there’s no reason to believe that the government’s guarantee in a) is any more credible than in b).

    This seems to support ESM’s argument that the bonds for taxes plan would have no effect on market price of bonds. It would seem to suggest, as he suggested earlier, that it accomplishes nothing.

    And there I thought I was warming up to it.

    ESM Reply:

    @WARREN MOSLER,

    Yes, JKH, that’s a very clever way to look at things. Essentially a proof by contradiction by showing the cash flows are identical in the two scenarios.

    I like to think of the Drachma analogy because I think the following two options are equivalent for Greece:

    (1) Default, stay in the Euro, and restructure the debt with a 50% nominal (and real) principal haircut;

    (2) Default, leave the Euro, and restructure the debt by converting to Drachma with no nominal haircut;

    I think in both cases the bonds will trade around 50 cents on the Euro immediately after default. Either way, the value of a Greek government IOU (or tax credit, if you will) is fundamentally determined by the ability of the Greek government to levy and collect taxes and the willingness of other countries/entities to extend grants and loans. Based on the total amount of IOUs outstanding, and the ability of the Greek government to tax, I can’t see how a Euro-denominated Greek government IOU can be worth anywhere near par without outside support.

    One thing I think Warren is missing is that if you allow people to pay their taxes either in Euro or something that is worth less than a Euro (say US dollars on a 1:1 basis), nobody in his right mind will pay his taxes in Euro. It is an arbitrage to pay the taxes in the something else. Sure, this leads to an arbitrage bid for the something else (in this case, US dollars), and the arbitrage condition holds as long as the something else is worth less than a Euro. But just because the arbitrage condition provides a ceiling for the value of the something else (i.e. par Euro), it doesn’t follow that the value will actually reach the ceiling or even come close. The value of the US dollar, for example, would not be materially affected if the Greek government allowed payment of Greek taxes in dollars.

    WARREN MOSLER Reply:

    It’s not about being allowed, it’s about being demanded

    If Greece defaults and goes back to drachma, and when you go to pay your Greek taxes with defaulted MOSLER bonds,
    And at that time if the market for drachma-euro is ten to one, each euro worth of bonds will extinguish ten
    Drachma of tax liability. Etc.

    And why would anyone holding a defaulted bond paying euribor +300 sell it at 50 when it can be used to extinguish
    Taxes at par?

    ESM Reply:

    @WARREN MOSLER,

    “I like to think of the Drachma analogy because I think the following two options are equivalent for Greece:”

    Meant to say that the two options are equivalent for bondholders.

    I think the 2nd option is better for Greece in the long run.

    WARREN MOSLER Reply:

    Greece can’t restructure MOSLER bonds in default. They are issued under eu law, not Greek law, which means if you
    Use then to extinguish Greek taxes the eu recognizes those taxes as paid no matter what the greek gov tries to say

    MamMoTh Reply:

    It seems to me there are two different ways of looking at the plan.

    Warren says his bonds will never default nominally for the payment of taxes, hence bond buyers will see them as safe savings and Greece will never need to default.

    ESM and JKH look at the plan from the moment of default, and say that in that case it achieves nothing. Not sure whether their conclusion is right, but it seems to me the right thing to do is to look at the actual case of default, otherwise the added default clause would be just a trick to fool lenders?

    WARREN MOSLER Reply:

    I didn’t say it that way

    Yes, look at the actual case of default. The bonds continue to accrue interest and they can be used for tax payment
    At any time. Much like a premium cmbs that extends

    MamMoTh Reply:

    @WARREN MOSLER,

    OK, maybe the fact that bonds continue to accrue interest has been overlooked? Sure if there are that many more bonds than tax liabilities, bonds will trade at a discount, but by how much is anyone’s guess.

    Still, in this whole thread and other discussions about your plan, the only criticism I’ve found is that it would be ineffective. I have yet to see anyone pointing out that it will worsen the situation for the Greeks.

    So I don’t see any reason not to implement your plan if only as a real life experiment of your ideas. It’s a pity it is not likely to happen.

    pebird Reply:

    “Consider:

    a) The Mosler plan, where the government guarantees that bonds can be valued at par for purposes of making tax payments

    b) An alternative “plan”, which is a simple announcement that the government guarantees the repayment or redemption of bonds at par, for cash

    These two “different” guarantees have an identical Euro cash consequence for the government budget.”

    First of all, isn’t plan b) the current situation Greece finds itself under?

    The whole point of the Mosler plan is that the bond holder now has an active right that can be executed in the case of default – the bond holder does not need the government to do anything.

    Whereas in plan b), you are depending on the government to make the bond good. I don’t see how in the case of default that plan b) would have any value whatsoever.

    The risk in Mosler bonds is not only would Greece have to default, but also that Greece would have to eliminate taxation.

    The too-many bonds consequence is the same in either plan a) or b), except that the lower interest rate of the Mosler bonds would reduce overall debt, assuming the same government spend and macro conditions.

    They don’t have identical Euro consequences because the lower risk in the Mosler plan will result in lower interest rates.

    JKH Reply:

    @Mosler,

    JKH:

    “Why is the power to tax any less important in the case of bond paid taxes than it is the case of cash based taxes?

    If it’s equally important, why not just increase cash taxes to get the job done?”

    WM:

    “but from the bond holder’s point of view should current bonds default, say, next week, you could wind up with nothing even though they continue to levy taxes, and even if they increase them, and even if they soon run a budget surplus. they can just either outright reneg or force a restructure and you just have to take it.

    but if they were mosler bonds, should greece default, say, next week, you would still get full nominal value as long as they continue to levy taxes. and if you do use them to pay taxes they can’t say they don’t count and chase you for tax evasion, as under eu law that act of tax collection won’t be enforceable.

    let’s put it this way, if current bond holders had the option to ‘convert’ to mosler bonds with the same maturity and interest rate, would any turn down that offer?”

    I’d like to understand more about the range of scenarios, with corresponding structure and dynamics, for a two tier market of Mosler and non-Mosler bonds.

    E.g. a relatively small new Mosler bond issue on its own does little to support pricing or default risk in the rest of the market. That’s different than an assumed Mosler conversion of the entire market.

    In any event, current non-Mosler bonds are priced for the current risk of default, which means at a deep discount, given the risk of default and the level of old coupons.

    When you say conversion to new Mosler bonds at the same interest rate, I assume you mean conversion to a bond with the same (old) coupon, but which presumably based on your argument will open up trading at par, so the yield equals the old coupon rate (roughly).

    I think you’ve acknowledged that the Mosler bonds require supportive tax policy to some degree.

    This may depend on the relative size composition of a two tier market.

    In any event, whatever supportive tax policy is assumed to be supporting the Mosler bonds also affects the rest of the market, to some degree.

    Back to a hypothetical conversion:

    Since the Mosler bonds and the non-Mosler bonds will be priced according to their perceive risk characteristics, there should be an indifference to holding either. Those who convert from non-Mosler to Mosler are giving up substantial yield according to current pricing.

    That begs the question again as to the effect of the supportive tax policy that underlies a Mosler bond issue on the rest of the market. If the government comes in and offers a 100 per cent conversion option to the entire market, based on the assumed pricing above, that mass conversion option would have to carry with it a very supportive tax policy, indeed, in order to be credible.

    Rephrasing my question, if the existing bond holder expects taxes will be supportive of Mosler bonds, why wouldn’t he expect taxes will be supportive of his existing bond at their prevailing yields, and more so possibly?

    Put another way, if the expected tax policy is supportive enough to make Mosler bonds truly “risk free” under a mass conversion, why shouldn’t it support the convergence of existing bonds at their current juicy yields to that same eventual “risk free” status? Why shouldn’t that alone price out default risk on existing bonds? So why give up that yield? After all, the bond holder will be giving up substantial current yield, if my assumption about pricing the new ones is correct.

    The guarantee attached to Mosler bonds is in effect also a commitment to tax policy. Why wouldn’t that commitment give strength to existing bonds? In which case, as I said, why not just make that tax policy commitment directly, without Mosler bonds?

    Reply

    JKH Reply:

    @Mosler,

    I know – be the bond holder.

    :)

    Reply

    Ed Rombach Reply:

    @JKH,

    Warren – We’re trying to arrange a phone interview. Can you e-mail me your tel #?

    ESM Reply:

    @JKH,

    I think that adding the Mosler option to Greek bonds will not change their value materially, but I agree that it would add some non-zero amount to their value. It is, after all, an option, and just as allowing payment of Greek taxes in dollars 1:1 would create an additional bid for the dollar, so would allowing payment of Greek taxes in defaulted Greek bonds (although I’m still not convinced you couldn’t do this already under current arrangements, making it explicit does add value by reducing uncertainty and hassle).

    So the following question naturally arises (and indeed was asked by somebody here): Why not do it?

    Well, there is a reason. The bond obligor – bondholder game is zero sum. If Greece grants a free option to bondholders, then it is hurting itself (and therefore Greek citizens in aggregate) financially to the same extent. In fact, this is somewhat of a regressive policy because it will benefit rich Greek taxpayers (they can extinguish their Euro tax burdens at 50 cents on the Euro) at the expense of poor Greeks who net/net pay negative tax.

    If you were going to do this, perhaps it would be better to allow bondholders to bid for the option to convert (which then travels with their bonds).

    There is an interesting and somewhat analogous situation with Japanese government bonds. It is little known, and the market basically ignores the issue, but Japanese bonds are all callable at par. Many of these bonds trade much higher than par, and it wasn’t that long ago that there were bonds trading at prices of 130. Japan has implicitly promised not to call their bonds even though it has the legal right to do so. Should Japan offer to remove the callability clause for free? Should it allow bondholders to pay a small fee to remove the clause? Should it start issuing new bonds which are not callable? Or should it just ignore the whole issue as it has done for decades now?

    Reply

    WARREN MOSLER Reply:

    glad you agree it is credit enhancement.

    my proposal is only for new bonds, and in my humble opinion this credit enhancement will be sufficient to get them sold at very reasonable rates.

    and yes, better for the borrower to borrow entirely non recourse, with no collateral, so you can just walk away.
    problem is finding lenders to take the other side.
    so designing bonds so the bond holder can walk without obligation isn’t ever the point.

    if greece, or anyone else wants to borrow, it has to attract lenders.

    and if you think deficit spending is regressive because it rewards lenders, that’s an entirely different issue.
    in fact, my 0 rate policy is designed to minimize rentier incomes.
    and selling mosler bonds reduces interest earned by lenders as well.

    and to say the mosler default clause helps rich greeks pay taxes also pretty much falls wide of the mark as they would still have to buy the bonds to then surrender them.

    either greece wants to borrow or it doesn’t. and if it does, mosler bonds are sufficiently credit enhanced to substantially reduce borrowing costs.

    the difference between borrowing and taxing is that borrowing includes repayment

    Ramanan Reply:

    @ESM,

    Have any link for the Japanese bond callability ?

    JKH Reply:

    @ESM,

    New M bonds are effectively senior government debt, ranking ahead of all other outstanding bonds:

    a) They can be put back to the government at par

    b) They are insured against default events or restructuring events that may affect the rest of the debt outstanding

    This option structure is embedded in the fact that M bonds can be used to pay taxes at par.

    But the tax aspect is not essential for this option structure to be offered.

    Buyers of M bonds pay for this option, to some degree, by accepting a lower rate.

    But the holders of the rest of the debt would seem to pay for part of it as well by bearing an increasing per bond burden of the existing default risk.

    WARREN MOSLER Reply:

    the rest of the bond holders are better off because they know greece has a better chance of paying them via the sale of new M bonds over time

    JKH Reply:

    @Mosler,

    The rest of the bond holders incur disproportionate default risk while waiting, as well as the uncertainty of sufficient tax demand as the M bond population increases

    WARREN MOSLER Reply:

    I don’t see it that way. their risk is greece can’t raise the cash to pay them at reasonable rates, forcing default

    JKH Reply:

    @ESM.Mosler,

    Quick thought suggests that the introduction of a senior ranking bond might be unconstitutional

    WARREN MOSLER Reply:

    checking on that as well with greek law firm.

    for legal purposes, it’s more like coming out with a collateralized bond

    JKH Reply:

    @Mosler,

    Other quick thought:

    Any way such a roll out of M bonds could be linked to and conditioned on some formulaic increase in taxes, to buttress longer term demand?

    WARREN MOSLER Reply:

    Growing economies generate higher taxes

    MamMoTh Reply:

    @ESM,

    If the Mosler plan was effective and reduced interest rates also on outstanding bonds as Warren suggests, then it is not clear that granting the privilege to Mosler bondholder would hurt the Greek taxpayers, even if it is a zero sum game.

    What I see as the main risk for the Greeks is if the plan were not succesful (enough) in lowering rates, and Greece is eventually forced to leave the Euro, the it would have to bear a Euro denominated debt on which it could not default in any way.

    ESM Reply:

    @ESM,

    @Ramanan

    “Have any link for the Japanese bond callability ?”

    Hmmm, surprisingly hard to find via google search. Here is one of the first things that popped up:

    http://pages.stern.nyu.edu/~rwhitela/papers/benchmark%20jfi91.pdf

    Look to page 5 of the PDF (which is actually page 56 of the excerpted Journal of Fixed Income).

    Ramanan Reply:

    @ESM,

    Thanks ESM, but it just says bonds are callable :(

    Hugo Heden Reply:

    I wonder if the following is roughly what people are thinking:

    1) Greece can default even though issuing Mosler bonds. However, “default” would mean something else for Mosler bond holders than for regular bond holders, because Mosler bond holders still possess Greek tax extinguishers.

    2) Mosler bonds would probably be considered safer than regular bonds — the “Moslerness” is a credit enhancer. Therefore, they should be cheaper for Greece to issue than regular bonds. The motivation is pretty clear from Warrens comment (July 5th, 2011 at 10:16 pm):

    …but if they were mosler bonds, should greece default, say, next week, you would still get full nominal value as long as they continue to levy taxes. and if you do use them to pay taxes they can’t say they don’t count and chase you for tax evasion, as under eu law that act of tax collection won’t be enforceable.

    let’s put it this way, if current bond holders had the option to ‘convert’ to mosler bonds with the same maturity and interest rate, would any turn down that offer?

    3) Since Mosler bonds are cheaper, the likelihood of Greece “defaulting” should be less if Mosler bonds are used. This would in turn make the market consider lending to Greece yet safer, which would make it even cheaper for Greece to borrow.

    Something like that?

    Now, replying to @MamMoTh (July 6th, 2011 at 12:54 pm)

    MamMoTh said: What I see as the main risk for the Greeks is if the plan were not succesful (enough) in lowering rates, and Greece is eventually forced to leave the Euro, the it would have to bear a Euro denominated debt on which it could not default in any way.

    Right, this looks like foreign currency debt (as noted by Warren in July 5th, 2011 at 7:15 pm)

    But I’m not sure.

    Look: If Greece leaves the Euro (and introduces the drachma), that would mean Greece has “defaulted” (wouldn’t it?) So these Mosler bonds would enter its “quasi-defaulted” state of being able to pay Greek taxes.

    But remember that they would not be otherwise redeemable — a bond holder will not be able to get euros from the Greek government. Therefore, these “quasi-defaulted” Mosler bonds are not like regular foreign currency debt.

    In fact, when such a bond is used to pay Greek taxes, the face-value (plus accrued interest) in euros will be converted to drachma (at the fx spot price at that point in time).

    Basically, this debt is “redeemed in drachma”, not euro. Again, this is fundamentally different from regular foreign currency debt.

    The quasi-defaulted Mosler bonds will pretty much be regular sovereign currency bonds — except that it’s face value is denominated in Euro, so the drachma value of the bond will fluctuate with the fx spot conversion rate between the drachma and the euro.

    WARREN MOSLER Reply:

    not bad, thanks!

  13. Ming33 says:

    A fascinating conversation. You’ve just kept me up past my bedtime, but thank you. The “Mosler” bonds sound like a good, simple, straightforward idea. Perhaps the new “Brady” bonds for a 21st century Europe.

    Could they become too successful? When I see the discussion of two side-by-side money-things I wonder if old Gresham’s law might apply? Or is that invalid here?

    Could the banks take Mosler bonds and spin off various assorted derivatives? The “Mosler” bonds and their derivatives then drive the euro into the mattress, or vice versa? It seems like it could get complicated. If other countries follow Greece and issue “Mosler” bonds then the investment banks get involved, because well, we have a big pile of money. Creative people will want do stuff with them. Should there be some clause to limit their use (perverse use)?

    Reply

    beowulf Reply:

    @Ming33,

    Much like a defense contractor, Warren stands ready to offer both weapon systems and their countermeasures. :o)

    Reply

    WARREN MOSLER Reply:

    probably not. won’t be any more problematic that ‘real’ govt bonds from the likes of the US, Japan, UK, etc.

    Reply

  14. Jose says:

    The Mosler plan is simply brilliant.

    Now, the key question is, would it be legal under existing EU law? Can a eurozone member state decide today that it will accept its own bonds for payment of taxes?

    If there is no legal obstacle to this, then Greece should implement this plan immediately, to get a “feel” on its real-life consequences.It has nothing to lose by adopting it.

    Maybe interest rates on newly-issued Greek “Mosler” debt will fall dramatically, to rates well below the current EU “aid”. At this point Greece would be in a strong position to require better terms and demand re-negotiation of the EU package.

    And, yes, this seems like the creation of a new, parallel currency that would co-exist alongside the official euro. A partial return to monetary sovereignty for Greece.

    Fascinating…

    Reply

    Rodger Malcolm Mitchell Reply:

    @Jose, Warren’s plan is no different from (but perhaps more complex than) issuing drachmas along side of the current euros, eventually phasing out the euros. Read Warren’s plan, and wherever you see the word “bonds” substitute “drachmas.”

    So long as Greece and the other euro nations cling to euros, we forever will be inventing brilliant plans to overcome the fundamental deficiency of the euro system: The euro nations cannot control their money supply.

    Rodger Malcolm Mitchell

    Reply

    Jose Reply:

    @Rodger Malcolm Mitchell,
    I agree on the bonds = new drachmas question.

    My point is – would this be legal under existing EU law?

    Because, if it is indeed legal it means there is a loophole under which any eurozone member State can issue any time it wants what in practice would amount to a parallel currency.

    And if one single country decides to do just that this would mean the end of the “single currency” system in Europe.

    Also – all this could be done without violating any EU disposition.

    Truly amazing stuff! And no one had thought about this before?..

    Reply

    WARREN MOSLER Reply:

    drachmas don’t pay euros for interest and they don’t pay euro at maturity

    Reply

    Hugo Heden Reply:

    @WARREN MOSLER,

    Ok, so these Greek “M-bonds” would be denominated in euro and pay interest in euro. There would also be a clause saying that in the event of Greece defaulting … 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. (Quoted from the blog-post).

    But, in the case of default, what happens if Greece leaves the Eurozone and introduces a new currency, the “drachma”?

    I guess the idea is to still accept the bonds for tax-payments (or else they would not work as intended today).

    However, the bonds would be denominated in euro. At the point of tax-payment (in drachma), the value of a bond (face value plus accrued interest) would have to be converted from euro into drachma. What conversion rate would be used? The market exchange rate (between the euro and the drachma) at that time?

    This could be a real winner for the bond holders. 100 euros today does not extinguish much Greek tax liabilities. But if Greece leaves the euro and introduces its own currency, I guess these 100 euros could soon be worth quite a lot (in Greece).

    And as the Greek government would have to accept these euro denominated bonds as tax-payments, it would essentially amount to Greece being indebted in a foreign currency. Right?

    And being indebted in a foreign currency means Greece can indeed default. I.e, the bonds would not be “safe” from defaulting.

    Or is it implied in the proposal that Greece promises to not abandon the euro?

    WARREN MOSLER Reply:

    yes, if greece leaves the euro these bonds would be like debt in a foreign currency.

    and remember, greece does have the ability to ‘print tax liabilities’ which keeps bondholders whole, even if they are the ones subject to tax hikes, which is a different story.

    Hugo Heden Reply:

    @Hugo Heden (replying to myself July 5th, 2011 at 6:02 pm)

    For future reference, I just realized that this is being discussed below, for example see Warrens comment on July 5th, 2011 at 2:10 pm

    MamMoTh Reply:

    @WARREN MOSLER, yes, if greece leaves the euro these bonds would be like debt in a foreign currency..

    That would be a big problem for Greece if your plan was implemented? How could the government default on a Mosler bond if they were to leave the euro?

    WARREN MOSLER Reply:

    thanks
    no legal restrictions
    not a parallel currency any more than any other bond

    Reply

    Jose Reply:

    @WARREN MOSLER,

    Ok, technically it would not be a new currency but those bonds could be used to pay taxes, would have zero default risk, etc.

    Thus, they might end up being accepted as payment for goods and services, since firms would be glad to receive the bonds and later use them for discharging their own tax obligations…

    I think something similar happened with securities issued by some of the provincial governments in Argentina, during the 2001 crisis.

    Anyway this a a truly great idea. If adopted it would likely alleviate the interest charges on the EU periphery countries and also give them more leeway to negotiate less draconian terms with the EU core.

    Reply

    Rodger Malcolm Mitchell Reply:

    @WARREN MOSLER, Warren, the MMT folks claim that the ability to pay taxes is what gives currency its value. Since these bonds would be identical with a sovereign currency, except for interest and expiration date, they effectively would be a sovereign currency.

    Issue a 100 year bond paying 0% interest and good for taxes, and voila, you have a currency. The only thing left is to name the bonds “drachmas.”

    They, in fact, would be a Monetarily Sovereign currency, which over time, could replace the euro in Greece, God willing.

    Rodger Malcolm Mitchell

    Reply

    Ralph Musgrave Reply:

    @Rodger Malcolm Mitchell,
    IMHO Roger is right to say that these bonds are in effect Euros. But I don’t agree that they are or would become Drachmas. The bonds are denominated in Euros, so they are Euros. So what this bond production would amount to would be allowing Greece to print more than its fair share of Euros. Effectively, Greece would be stealing from other Euro countries – something Greece would be totally averse to, I don’t think.

    WARREN MOSLER Reply:

    agreed.

    but the presumption of overspending assumes they willingly violate the stability and growth pact, and don’t purse austerity.

    that’s what keeps all of europe from ‘over printing’ (along with the current marketing issues)

    NeilW Reply:

    The Germans have been stealing from the rest of Europe since the Euro started. That’s what a persistent export surplus with no balancing transfer payments does.

    WARREN MOSLER Reply:

    I’d call that donating to the rest of Europe, if you measure things in real terms?

    Neil Wilson Reply:

    But stealing the Euros from Greece et al means the periphery run out of money before they run out of productivity and then their real output then goes to waste.

    It’s only donating if its in addition to what would be there naturally. Otherwise its nearer to pollution.

    RSG Reply:

    @Rodger Malcolm Mitchell,

    drachmas don’t pay euro at maturity

    ESM Reply:

    @Rodger Malcolm Mitchell,

    @RSG,

    “drachmas don’t pay euro at maturity”

    Neither do defaulted Euro bonds.

  15. Tom Hickey says:

    Edward Harrison has a competing plan up at Credit Writedowns.

    The Harrison Plan for Greece

    Reply

    MamMoTh Reply:

    @Tom Hickey,

    That’s a more complex plan, maybe it’s simple to bond traders but not to me.

    I think Warren’s plan strongest point is its simplicity, easy to understand, easy to implement.

    We might argue whether it could achieve what Warren intends it to. I think a more important point is to see how it could hurt the Greek economy even if the plan didn’t achieve anything. If there are no obvious drawbacks, why not give it a try?

    Reply

  16. albert says:

    I make the same questione that I have done on NEP, someone could help me undertand this matter?
    thanks

    If banks in USA (for example) buy securities from the government and so, reserves to purchase these securities come from the FED, and so every deficit spending is in HPM, what’s the difference in Europe?

    States sells securities and primary dealers buy , but reserve to buy securities come from ECB, no?

    what’s the difference?

    Reply

  17. ESM says:

    I certainly feel like we’ve been around the block once or twice before on this “in case of default, use for taxes” idea. Bottom line is it accomplishes nothing, as JKH and Ramanan have hinted at. After a default, the bonds will trade at the same price as they would have without the tax/default language, and that level will be around 50 cents on the dollar.

    Most Greeks probably already think that they would be allowed to net out money owed to them by the government and money they owe to the government.

    Reply

    WARREN MOSLER Reply:

    ok, don’t buy any…
    :)

    Reply

    pebird Reply:

    @ESM, As long as people need currency to pay taxes, then the bonds are money good. As soon as you extinguish one tax liability, a new one starts up.

    These are default-resistent financial vehicles – if Greece decides not to pay a bond holder, then the bond holder basically needs to incur some Greece tax liability (like a capital gain or income) and pay the tax with the bond. Or sell the bond (at a discount) to someone who has tax liabilities to pay. I’ll take that bet. Or you think Greece is going to eliminate all taxes?

    Remember that new economic activity generates new tax liabilities. So, to make your bonds good money, all you have to do is create some economic activity to generate your tax liability.

    Worrying about if Greece has too many bonds around to pay taxes is like worrying if Greece has too many Euros around to pay taxes. Sure if a quadrillion bonds were sold you might have a problem, but there isn’t demand for a quadrillion anyway, so they wouldn’t get sold.

    The main thing is to get the portfolio interest rate down below the GDP growth rate + inflation, then you can have as much debt as you want.

    Reply

    ESM Reply:

    @pebird,

    Suppose Greece decided tomorrow that taxpayers could pay their taxes 1:1 in US dollars. That is, $1 US could extinguish 1 Euro of Greek tax liability. By your argument a dollar would be worth a Euro.

    I think you know that’s not true. Maybe the dollar would get a small bid and rally a few cents against the Euro, but it wouldn’t move terribly much.

    Now, after default, a Mosler bond will trade to a price determined by supply and demand. It will not trade at par in Euro, for the same reason that the dollar wouldn’t in the previous scenario. There would be too many Mosler bonds (I’m assuming that all Greek govt bonds would be Mosler bonds, since I can’t imagine it is legal to grant special redemption privileges to a new bond when all govt bonds are supposed to be pari passu), and not enough tax liability. The Mosler option really changes nothing, because the fundamental problem was that there were too many bonds and not enough tax liability.

    Default causes a Mosler bond to turn into something that has absolutely nothing to do with the Euro except that par plus accrued in Euros represents an absolute ceiling on value. Default turns a Mosler bond into a new type of currency, which I claim is indistinguishable from a Drachma.

    Think about it this way. If Greece started paying government workers in Drachmas (say, at the rate of 2 Drachmas for each Euro they used to be paid), and then allowed tax liabilities to be paid 1:1 in Drachmas, would 1 Drachma be worth anywhere near 1 Euro.

    I don’t think so. You know why? Because the Drachma still wouldn’t be a Euro. It couldn’t be used to extinguish French or German tax liabilities. The same holds for defaulted Mosler bonds.

    Reply

    pebird Reply:

    @ESM, As I said, I could sell the bonds at some discount, or incur a tax liability through some transaction and pay the liability with the bond. I have the ability to generate a new tax liability – and if I the ability to do so, then so do others.

    You assume that a default would be because of too many bonds in relation to tax liabilities. But I think the bonds would be reduced in value to the extent that there are no economic transactions that generate tax liabilities. In other words, new bonds are not necessary to generate new tax liabilities.

    I think you overestimAte the potential discount.

    ESM Reply:

    @ESM,

    “I have the ability to generate a new tax liability – and if I the ability to do so, then so do others.”

    If you have the ability to generate tax liabilities any time you want to, then it means that you have the ability to earn income any time you want to. I don’t see why you think this is such an wasy thing to do in a country with double digit unemployment.

    “But I think the bonds would be reduced in value to the extent that there are no economic transactions that generate tax liabilities.”

    Yes, but this is exactly the same situation for Greek govt bonds without the Mosler option too. The reason why the recovery value in a default would be so low (and indeed, the reason why default would happen in the first place) is that the ability of the Greek govt to raise tax revenue is small in relation to the obligations it has oustanding.

    It helps to consider a Greek govt bond to be a fiat currency of the Greek govt already. It really is actually. It is an IOU of the government, and if the government issues too many relative to its ability to extinguish them through levying and collecting a tax (and relative to private sector savings desire), then the value goes down. Just like with a fiat currency. The Mosler option would make the analogy a little cleaner. The only difference with a real fiat currency, however, is that the value of a Greek govt bond is capped at (par plus the sum of its coupons) Euros.

    WARREN MOSLER Reply:

    i never said that greece has an unlimited ability to sell mosler bonds at reasonable levels.
    i did say it can support a whole lot more of the under current circumstances than regular Greek bonds.

    WARREN MOSLER Reply:

    if they took dollars for taxes, one to one, the govt would get dollars as taxes are paid which they would have to sell to buy euro to spend.
    and the econ would borrow dollars to pay taxes and get them back when the govt spent them

    so it would be a tax cut without much of anything else changing.

    if mosler bonds default, yes, market prices could fall or rise, depending on the coupon.

    meanwhile over time some mosler bonds would be used for tax payment, but once it’s clear they are accepted for tax payments
    it would make more sense to hold them and get the yield than to use them for payment

    MamMoTh Reply:

    Good points ESM, but as mentioned before the fact that many more bonds will be issued than there are tax liabilities to extinguish does no necessarily mean the plan will have no effect. After all Japan has been issuing more yen without its value going down for that reason, neither in the fx market nor because of inflation.

    Reply

    Ramanan Reply:

    @MamMoTh,

    a. Japan (all sectors combined) is a net creditor of the rest of the world

    b. Most Japanese Govt debt is held internally, I suppose and is not reliant on foreign funding.

    c. The BoJ can take care.

    d. If the currency devalues, they become more competitive and a bigger creditor of the rest of the world.

    WARREN MOSLER Reply:

    For a currency issuer resident vs non resident ‘funding’ makes no difference

    It’s just a reserve drain

    ESM Reply:

    @MamMoTh,

    Japan has been issuing more yen relative to … what?

    More yen than Greece has been issuing Greek govt bonds (i.e. “Drachma”)?

    Well, yes, but as Ramanan points out, Japan is different from Greece.

    A priori, it is very difficult to know how much fiat currency is too much for any given country/economy. MMT sort of tells us that. It tells us to look to inflation and unemployment to determine when how much is too much (or too little). The economic numbers tell us that 200% debt/GDP in Japan does not currently cause inflation there or depreciation of the yen abroad. I suspect that the reasons have to do with all of the points Ramanan has made, which MMT might wrap altogether under the rubric of “savings desire.”

    Greece is different from Japan. The amount of Greek govt bonds (“Drachma”) vs GDP/taxing ability/savings desire is already too much, at least at the current level of Greek govt bond equals par Euro. It is only being held there by the EU and ECB with chewing gum and baling wire. The equilibrium point is 0.50 Euro, and eventually it will go there unless France and Germany decide to subsidize Greece forever. The Mosler option simply doesn’t change this. It merely makes the fiat currency nature of Greek govt bonds (and the fact that they are not worth par Euro) more explicit.

    Neil Wilson Reply:

    @Ramanan,

    Japanese government debt is held by residents because they are a trade surplus country. Trade deficit countries debt is held more by non-residents.

    It is the trade imbalance that determines who holds the currency, therefore it is obvious that will determine who holds the replacement bond debt.

    WARREN MOSLER Reply:

    i’d put the causation differently.

    Dollar Monopoly Reply:

    @MamMoTh,

    change the language change the game is my new motto. The government debt of Japan and Greece are not remotely analogous. The Japan is a currency issuer and Greece is a currency user. Government debt of a currency issuer is the currency user’s savings as a matter of double entry accounting. It’s just a digital account corresponding to all currency users’ savings in banknotes, deposits, and treasuries.

    comments courtesy of a warrior of the KC Tribe

    Ramanan Reply:

    Neil,

    My comment didn’t have any causality attached.

    Neil Wilson Reply:

    @Ramanan,

    ‘reliant on foreign funding’ is a causal statement.

    Ramanan Reply:

    Neil,

    Yes Greece is highly reliant on foreign funding. Any doubt ?

    Ramanan Reply:

    Neil,

    Also note Germany is a huge creditor of the rest of the world… because of having run surpluses on the current account of international balance of payments but …

    http://www.bundesbank.de/download/statistik/sdds/stat_auslandsvermoegen/sdds_auslandsvermoegen_quartal.en.pdf

    says around €700-800b of German government bonds is held by foreigners (German public debt is around €2,100b)

    So a surplus in the external sector doesn’t necessarily imply that government bonds will be held domestically.

    Neil Wilson Reply:

    @Ramanan,

    (a) Macro is about aggregate values. (b) Germany is in a currency union.

    (i) That is like suggesting that Japanese bonds not held by residents of Honshu implies aggregate non-domestic holdings.

    (ii) Taking the phrase ‘Japanese Government Bonds’ to mean ‘All Japanese Government Bonds’ is an excluded middle argument.

    WARREN MOSLER Reply:

    Right, but you can carve out any ‘sector’ for sector analysis

    Ramanan Reply:

    Neil,

    I knew that was coming my way :)

    “(a) Macro is about aggregate values.”

    Yeah I was talking about aggregate .. German sectors as a whole

    “(b) Germany is in a currency union.”

    Yeah, so ?

    Sorry couldn’t understand your point (ii)

    But what exactly is your causality on current account balance/imbalance and government bonds ?

    Are you claiming that a country like Japan with more exports than imports will necessarily imply more government bonds held by residents ?

    Its likely I agree but not the reason.

    Ramanan Reply:

    Neil,

    Btw, there are various examples I can provide but may hear the argument that the institutional setup is different.

    Norway is one example where the currency floats but a lot of government debt is held by foreigners even though it runs external surpluses.

    http://www.ssb.no/intinvpos_en/tab-2010-10-12-01-en.html

    The gdp is around 2.3T NOK. Public debt is around 50% so government debt is 1.15T NOK.

    http://www.ssb.no/english/subjects/09/04/brutgjeld_en/tab-2011-06-07-01-en.html

    0.6T NOK of government bonds issued is held externally.

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