Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
For years I’ve said the euro nations have two, and only two, solutions to their economic problems:
1. Federalism (The U.S. system): The European Central Bank give (not lend) euros to euro nations
2. Monetary Sovereignty: Each nation return to its sovereign currency.
There is widespread feeling these two solutions would be too chaotic compared with austerity and loan “modification” (aka default).
Analysis: Greek default may be gift to other euro strugglers
By Mike Dolan | Reuters
LONDON (Reuters) – Greece’s tortuous debt restructuring and threat of retroactive laws to compel reluctant creditors heaps regulatory risk onto investors but may make voluntary sovereign debt revamps more attractive and likely for other cash-strapped euro sovereigns and their creditors.
Thursday could mark a climax of the Greek debt workout with private creditors due to respond to an offer that would see them effectively write off more than 70 percent of the face value of their bonds in return for new debt with a series of sweeteners.
With Greek government bonds currently trading at less than 20 cents in the euro and the risk of a total wipeout if Greece decided to unilaterally refuse all payments, a majority will likely go for it. Legally-binding majorities are another matter.
Athens said this week it aims for 90 percent acceptance but if the takeup is at least 75 percent then it would consider triggering so-called “collective action clauses” retroactively inserted into the bonds issued under Greek law — about 85 percent of the 200 billion euros being restructured.
Those clauses in practice force all affected creditors to comply.
But it’s this distinction between debt issued under domestic laws and that sold under internationally-accepted English law that some say has consequences for other troubled euro nations eyeing Greece’s so-called Private Sector Involvement, or PSI.
In essence, English-law Greek bonds, as is the case for many emerging market sovereigns, trade as if they were senior to local-law debt — at almost twice the price in fact right now. That’s because the terms of foreign-law bonds cannot be altered by an Athens parliament, and agreement for debt swaps is needed bond-by-bond, unlike local laws that aggregate majorities across all debtors and make blocking minorities more difficult to muster.
A paper released this week by Jeromin Zettelmeyer, deputy chief economist at the European Bank for Reconstruction and Development, and Duke University Professor Mitu Gulati reckons this legal gulf could well encourage other debt-hobbled euro zone countries and their creditors into mutually acceptable and beneficial debt restructurings.
This would involve an agreed switch in the legal status of the debt in return for relatively modest haircuts.
“Holders of local-law governed bonds in other euro zone countries that are perceived to be at risk might want to make a trade for English-law governed bonds,” the economists wrote. The sovereign gets a chance to reduce a crippling debt burden while bondholders get greater contractual protection in any future restructuring.
Given that the Greek precedent of retroactive legislation vastly increases the allure of foreign-law bonds, which credit rating firm Moody’s says now make up less than 10 percent of all euro zone government bonds, a window of opportunity may open up.
“Effectively, this is a large gift from the Greeks to the parts of the euro zone that face debt crises. By conducting its debt exchange in the way it did, Greece has in effect resurrected the plausibility of purely voluntary debt-reduction operations in Europe.”
Even the 10-year debt of fellow bailout recipient Ireland, which many investors reckon has the underlying economic capacity to go back to the markets next year, is still trading at less than 90 cents in the euro and many doubt its imminent market return.
“We expect that Ireland will need a second financing package beyond 2013,” economists at Citi said on Monday. What’s more, if Europe’s new fiscal pact is rejected by voters in a planned referendum there in the coming months, Ireland would lose access to the financial backstop of the European Stability Mechanism and likely unnerve many investors.
Yet voluntary debt swaps with some debt relief stemming from more modest haircuts than Greece may well be the best way to ensure these two countries avoid outright default and return to private financing in a reasonable amount of time.
And if such exchanges were wholly voluntary, it would also mean credit default swap insurance would not pay out. One danger is that the prospect of countries opting for such a swap may scare creditors in larger countries like Italy and Spain where currently no bond haircut is expected by the market, thanks in large part to the ECB’s liquidity injections.
And the upshot for many economists is that there will be a longer-term price to pay for governments for tinkering with the rules of the game, as many investors view it, via the likes of retroactive bond legislation and obfuscation of CDS markets.
“Investors will expect a premium for bearing this regulatory risk,” Morgan Stanley’s Manoj Pradhan told clients in a note, adding that only central bank liquidity floods were now obscuring the resultant higher financing costs and there would be a dangerous blurring of lines between macro and market risks.
That’s the answer? To protect monetarily non-sovereign nations, screw the private sector — the bond holders. And this convoluted, byzantine Whac-a-mole is less chaotic for the euro nations, their people and their lenders than adopting federalism or becoming Monetarily Sovereign?
Translation for all of the above: “Lenders: If you voluntarily accept a screwing now, we promise not to screw you as much next time. Otherwise, we’ll screw you worse now and even worse yet, later. What’s your voluntary choice?”
Unless the euro nations find solutions #1 or #2 (above), you can be sure that 10, 20, 50 years from now, these nations will have continued with their borrow/default/austerity convulsions. Of course, I’m dreaming when I say, “10, 20, 50 years.” There is no possibility the EU will continue to exist with its current rules. The people will wise up and revolt.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports