France Sees Budget Rules Paving Way for ECB Support Bloomberg
Posted by WARREN MOSLER on November 27th, 2011
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November 28th, 2011 at 2:22 am
Is this the sign of the rally starting soon? :)
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WARREN MOSLER Reply:
November 28th, 2011 at 11:41 am
I should retire on this last call!
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November 28th, 2011 at 6:25 am
Germany’s Schaeuble still only hammers on Discipline and again ruled out any eurobonds or increased ECB bond buying.
Austria now also announced it is in favor of eurobonds and more ecb involvement. These proposals even got support from German economist, adviser to govt, Peter Bofinger. He said Germany’s attitude is just based on fears, no rationale.
Germany becomes more and more isolated, but seems to take it all the way to the edge to get most out of it.
I wonder how much more time investors keep hanging around waiting.
Bundesbank itself seems to have German govt bonds for about 30% of gdp. If that is any guideline there is still some space for ecb to go, even to german standards, you would think.
It’s remarkable that almost nobody speaks about the 50% Greek haircut, that is by the way still not implemented, as the turning point for investors’ appetite for any european bonds, incl efsf.
Some argue that the possibility for restructuring of govt debt came in exchange for cancelling SGP fines, an agreement made between Merkel and Sarkozy during their famous Deauville walk.
It looks like the introduction of credit risk on govt bonds on top of already existing interest rate risk, currency risk and risk of inflation for investors created the current mess.
I understand that MMT signaled the credit risk as inherent to the euro set-up.
Do you think it would be a possible solution if they would cancel the Greek haircut now?
Wouldn’t markets read that as ‘there is no credit risk’ and a yield convergence would follow?
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WARREN MOSLER Reply:
November 28th, 2011 at 11:49 am
i think there is resistance to letting Greece off the hook for half what they owe.
and lots of ‘if they don’t have to pay, why do we?’ behind the scenes.
seems to me the quiet way to do it is have the ecb keep buying greek bonds at current discounts until they own most of them,
which leaves them free to restructure their holding with Greece. and based on the cost of the ecb’s purchases, the ecb would have room
to restructure such that they get, for example, 5% returns based on their cost of purchase. This would be a substantial savings for Greece,
and the investors who voluntarily sold to the ECB would be the ones ‘paying for it’. And there would be no default
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Walter Reply:
November 28th, 2011 at 1:31 pm
@WARREN MOSLER,
looks to me as a serious case of ‘misrepresentation’ , misleading investors. don’t you think so?
it also means that all people that do not sell but hold till maturity get full 100% or not?
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WARREN MOSLER Reply:
November 28th, 2011 at 4:21 pm
could be.
Chaz Reply:
November 29th, 2011 at 2:51 pm
@WARREN MOSLER,
What is the meaning of the word “default” in that context, though? There’s a technical definition, but from investors’ point of view it’s just a shorthand for a bunch of ways they could lose their capital. And from governments’ point of view, it’s only relevant as an event that can damage their reputation for future bond sales.
If you tell everyone you’re going to default, so they panic and sell your bonds at a giant loss, that accomplishes all the practical damage we associate with default. Even if you do something clever and technically don’t default (short of tracking down everyone who panic-sold and undoing those sales), the damage is already done.
As far as the “letting Greece off the hook” angle, though, I think you’re on the right track. That spite can only be satisfied with full repayment, but it probably doesn’t matter to whom those payments are made or on what terms. So you’d want to dress up the restructuring in such a way that the principle is not reduced, and the fools think they’ve gotten their blood.
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November 28th, 2011 at 2:16 pm
“it also means that all people that do not sell but hold till maturity get full 100% or not?”
Think of it as rewarding patient capital.
:o)
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roger erickson Reply:
November 30th, 2011 at 9:41 pm
@beowulf, Any investor’s capital preservation plan will work, if you can keep the patient alive long enough. :)
Meanwhile, capital investment still gets rewarded, even if the patient died.
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