Implied Dissent

Sunday, May 23, 2010

Debt vs an Equity Like Substance

Boone and Johnson have a very good post on the problems in Europe, and I recommend that people read it. It's not too long, and you'll get a lot better understanding of the challenges facing the EU, the Euro, Greece, and so forth. I do want to add my two cents though, and offer a partial solution. I initially thought it was more novel on my part than it turns out to be, but hopefully that will mean that it will actually be implemented (ok, ok, probably delusional on my part to expect anything other than the stupid bailout to go thru, but bear with me).

Without the bailout, Greece would need to either renegotiate or default on its debts. The problem with outright default is it makes it way way harder to get financing going forward, as Greece will need to do. Renegotiation/restructuring, if done in a straight forward manner, and to the extent needed, would be nearly as bad from the standpoint of future borrowing. So, offer to take back the already issued bonds, at a discount of course (maybe a price of 70% of par?), in exchange for Greek GDP bonds. Maybe make it a timed offer, where the discount grows over time, or some such. I'm not sure how good an idea GDP bonds are for the US at this time (I don't 100% agree with Merkel as to why, but he raises some important points), but they are way cheaper in the short-run, which, combined with the discounts, should reduce the interest payment requirements on the Greek government, and so enable it to make its spending cuts of a politically acceptable size. Apparently, something very similar was done in Argentina, with good results.

Of course, independent of this idea, I still think that the European Central Bank is keeping monetary policy excessively tight. Moreso from the Greek perspective than the rest, but probably for every EU country. Loosening by the ECB would smooth the process of recovery for all of Europe, but especially for the most at risk economies (Greece, Spain, Italy, Ireland). It would probably help us over here in the US as well. They need to be careful how they do it to avoid the opposite problem and thus ignite destructive inflation (NGDP futures markets would help immensely), but they don't even seem to be aware that they're a big cause of the current difficulties.

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