Category Archives: Greece

Bank tax proposed to help Greece bail-out

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Gets stranger by the day as all sides seem to be struggling to merge the political with the pseudo economic.

A Greek bailout adds nothing to aggregate demand, as it doesn’t result in any increased spending from current budgeted levels.

However, and while not all that large, this bank tax both removes net euro financial assets from the private sector,which lowers aggregate demand, and raises the banking system’s overall cost of funds.

Bank tax proposed to help Greece bail-out

July 20 (FT) — A proposal to tax eurozone banks to help pay for a Greek rescue has emerged as the possible central pillar of a new bail-out programme. The plan, which advocates believe could raise €30bn over three years, could help satisfy German and Dutch demands that private holders of Greek bonds contribute to a new €115bn bail-out. It would also likely avoid a default on Greek debt. Both Berlin and The Hague are still insisting that other options for private bondholder participation be included. Officials said those proposals – which include a government-financed bond buy-back programme, a German-backed bond swap proposal, and a French plan for bond rollovers – could be included as a “menu” of options available to bondholders.

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MMT to President Obama and Members of Congress:

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Comments welcome, and feel free to repost:

MMT to President Obama and Members of Congress:
Deficit Reduction Takes Away Our Savings

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.

The Federal debt IS the world’s dollars savings- to the penny!

The US deficit clock is also the world dollar savings clock- to the penny!

And therefore, deficit reduction takes away our savings.

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Furthermore:

There is NO SUCH THING as a long term Federal deficit problem.

The US Government CAN’T run out of dollars.

US Government spending is NOT dependent on foreign lenders.

The US Government can’t EVER have a funding crisis like Greece-
there is no such thing for ANY issuer of its own currency.

US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.

The risk of too much spending when we get to full employment
is higher prices, and NOT insolvency or a funding crisis.

Therefore, given our sky high unemployment, and depressed economy,

An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.

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President Obama believes in the Confidence Fairy

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What I heard:

Deficit reduction will increase business confidence and create jobs

We need to address our infrastructure but ‘we don’t have that kind of money’

‘this is how we operate in a smart way’

As before, because we think we can be the next Greece, we continue to turn ourselves into the next Japan

(thanks to Joe Firestone for the title)

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EU stance shifts on Greece default

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Mosler bonds issued to both address current funding requirements and buy back discounted Greek govt debt would further enhance the credit worthiness of those bonds by further and substantially reducing Greek govt interest expense.

Interesting how the word now coming out on the French plan, which initially was greeted with a near celebration, is now entirely negative to the point where it’s being dismissed.

And default discussions now moving to the front burner is telling, as just last week that was proclaimed ‘out of the question’

EU stance shifts on Greece default

By Peter Spiegel and Patrick Jenkins

July 10 (FT) — European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.

The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt.

“The basic goal is to reduce the debt burden of Greece both through actions of the private sector and the public sector,” said one senior European official involved in negotiations.

Officials cautioned the new tack was still in the early stages, and final details were not expected until late summer. But if the strategy were agreed, it would mark a significant shift in the 18-month struggle to contain the eurozone debt crisis.

Until now, European leaders have been reluctant to back any plan categorised as a default for fear it could lead to a flight by investors from all bonds issued by peripheral eurozone countries – including Italy and Spain, the eurozone’s third and fourth largest economies.

Yields on Italian bonds, which move inversely to prices, rose sharply last week due to the Greek uncertainty. Senior European leaders – including Jean-Claude Trichet, European Central Bank chief, and Jean-Claude Junker, head of the euro group – are to meet top European Union officials ahead of Monday’s finance ministers’ gathering amidst growing fears of contagion.

A German-led group of creditor countries has for weeks been attempting to get “voluntary” help from private bondholders to delay repayment of Greek bonds, a move they hoped would lower Greece’s overall debt while avoiding a default.

But in recent days, debt rating agencies warned any attempt to get bondholders to participate would represent a selective default. Rather than abandon bondholder buy-ins, however, several European leaders have decided to return to a German-backed plan to push current Greek debt holders to swap their holdings for new, longer-maturing bonds.

The move essentially scraps a French proposal unveiled last month, which many analysts believed would only add to Greek debt levels by offering expensive incentives for banks that hold Greek debt to roll over their maturing bonds.

Officials said the Institute of International Finance, the group representing large banks holding Greek debt, has gradually moved away from the French plan and begun to embrace elements of the German plan.

“There’s some convergence in the banking community towards a more realistic plan than the French plan, which was out of this world,” said the senior European official. The plan criticised as being self-serving for the banks.

According to executives involved in the IIF talks, banks have pushed for a Greek bond buyback plan in return for agreeing to a restructuring programme, arguing that only if Greece’s overall debt were reduced could a sustainable recovery occur.

European officials said there was support for the proposal in government circles. The plan, originally pushed by German investors, including Deutsche Bank, could see as much as 10 per cent of outstanding Greek debt repurchased on the open market.

Since Greek bonds are currently trading below face value, such purchases would essentially be a voluntary “haircut”, since bondholders would accept payment for far less than the bonds are worth.

It remains unclear how a buyback would be financed, however. The European Commission has long pushed for the eurozone’s €440bn bail-out fund to be used for buybacks, but Berlin blocked the proposal.

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Obama Responsible for Poor Jobs Picture: Bachmann

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Couldn’t agree more, but for different reasons.
(feel free to repost)

Comments below:

Obama Responsible for Poor Jobs Picture: Bachmann

By Jeff Cox

July 8 (CNBC) — The dismal state of employment offers more proof that President Obama’s economic plan isn’t working, Republican presidential candidate Michele Bachmann told CNBC.

Agreed!

Speaking just after the government said unemployment rose to 9.2 percent last month, the firebrand Minnesota congresswoman and Tea Party leader delivered a blistering critique of the White House’s handling of the jobs picture, focusing specifically on the $800 billion stimulus that has failed to drive down the unemployment rate.

“The president’s own policies have clearly failed the American people,” Bachmann said. “The answer is not to double-down and continue to do more of the same. The answer is to work on what went wrong, to reverse course and have a pro-growth job agenda.”

The $800 billion did what it did- it added $800 billion in income and nominal savings to the economy- to the penny. It’s an accounting identity. If it didn’t add exactly $800 billion the accountants at the CBO would have to stay late and find their arithmetic mistake.

In fact, all entire deficit spending adds that much nominal savings to the economy. That’s where all the increased savings has come from. You could change the label of those deficit clocks to ‘world dollar savings’ and leave the numbers alone.

And note that treasury securities are functionally nothing more than savings accounts at the Fed.

Defying consensus estimates that the economy had merely hit a soft patch and was on its road to recovery, the latest jobs news instead shows just 18,000 jobs created in June and the unemployment rate when taking into consideration those not looking for work at 16.2 percent.

Right, the problem is the deficit is too small. I’ve proposed a full FICA suspension, federal revenue distributions to the state govts of $500 per capita, and an $8/hr federally funded transition job to anyone willing and able to work to facilitate the transition from unemployment to private sector employment.

Bachmann’s campaign has caught fire as polls show her in a virtual dead heat in Iowa with presumptive front-runner Mitt Romney.

In her live interview, Bachmann focused on the voices she has heard while campaigning and the angst among business owners about how Washington policies have hindered business growth.

“I have talked to business owners all across the nation,” she said. “They’re really paralyzed with fear right now. This won’t help hearing (the unemployment news) because it shows that Washington doesn’t have the solution.”

Agreed!

She spoke as Congress and the White House are locked in debate over whether to raise the $14.3 trillion debt ceiling. Bachmann dodged a question over whether the failure to increase the borrowing limit while drastically cutting spending would raise unemployment, but she said more taxes certainly aren’t the answer, either.

“We need to fundamentally restructure how government does spending,” she said. “We’re still operating under the principles of FDR and LBJ. We need to move into the 21st century so we embrace pro-growth policies. Unfortunately they’re tone deaf here in Washington, D.C. They think government is the answer, and the American people know it’s not true.”

I watched her explain how if they just do spending cuts to balance the budget that will create jobs in the long term. What she fails to understand is that with all of our ‘demand leakages’ and tighter lending standards, spending cuts have to be at least matched by tax cuts to not add to unemployment, and tax cuts have to be substantially larger than spending cuts to add to demand and reduce unemployment.

It’s a shame, because with the tea party standing for ‘taxed enough already’ the tea party candidates continue to propose balanced budgets that continue to grossly over tax us.

It’s also a shame that no one in the media has the knowledge of actual monetary operations to expose the gaping flaws in her logic. In fact, the have the same fundamental misunderstanding and tend to agree with her, including the entirely inapplicable analogy that we are in danger of becoming the next Greece.

So current odds have to favor her for the presidential nomination.

And only MMT stands between her and the presidency.

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The Mosler Plan for Greece

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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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Greece on the slippery slope

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First, I think there isn’t enough political or popular support to leave the euro and go back to the drachma.

As previously discussed, it’s not obvious to the population or the political leadership that there is anything wrong with the euro itself.

Instead, it probably seems obvious the problem is the result of irresponsible leadership, and now they are all paying the price.

So staying with the euro, Greece has two immediate choices:

1. Negotiate the best austerity terms and conditions they can, and continue to muddle through.

2. Don’t accept them and default

Accepting the terms of the austerity package offered means some combination of spending cuts, tax hikes, assets sales, etc. that still leaves a sizable deficit for the next few years, with a glide path to some presumably sustainable level of deficit spending.

Defaulting means no more borrowing at all for most likely a considerable period of time, which means at least for a while they will only be able to spend the actual tax revenue they take in, which means immediately going to a 0 deficit.

What matters to Greece, on a practical level, is how large a deficit they are allowed to run. This makes default a lot more painful than any austerity package that allows for the funding of at least some size deficit.

Therefore it’s makes the most sense for Greece to accept the best package they can negotiate, rather than to refuse and default.

Additionally, the funding Greece will need to keep going is probably funding to pay for goods and services from Germany and some of the other euro member nations.

In other words, if Germany wants to get paid for its stream of exports to Greece it must approve some kind of funding package.

Reminds me of a an old story Woody Allen popularized a while back:

Doctor: So what’s the problem?

Patient: It’s my brother. He thinks he’s a chicken.

Doctor: Have you tried to talk to him about it?

Patient: No

Doctor: Why not?

Patient: Well, we need the eggs

Likewise the euro zone needs the eggs, and so the most likely path continues to be some manner of ECB funding of the banking system and the national govt’s, as needed, last minute, kicking and screaming about how they need an exit strategy, etc. etc. etc. And the unspoken pressure relief valve is inflation, with a falling euro leading the march. It’s unspoken because the ECB has a single mandate of price stability, which is not compatible with a continuously falling euro, and because a strong euro is an important part of the union’s ideology. But a weak euro that adjusts the price level, as a practical matter, is nonetheless the only pressure relief valve they have for their debt issues in general. And, also as previously discussed, it looks like market forces may be conspiring to move it all in that direction.

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