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A contrary opinion on the suitability of Euro-bonds.

VoxEU: E-bonds: Europe's own subprime teaser rates

The E-bonds proposal is a brilliant piece of economic reengineering in favour of the Eurozone creditor countries - especially Germany and France. It is understandable and rational that the creditor nations should seek to improve the negotiating terms in preparation for all-but-certain sovereign defaults by the "peripheral" countries (Eichengreen 2010b).

  • It is warranted and necessary that the Eurozone puts in place some orderly process for sovereign debt restructuring (Weder di Mauro and Zettelmeyer 2010, Eichengreen 2010b),
  • The E-bonds proposal seems to be an important component of such a mechanism.
  • It is also possible that the E-bonds are a first step in a long-term process towards fiscal and political union as argued by German Finance Minister Wolfgang Schäuble. 

Nonetheless, the ends do not justify the means.

  • This E-bonds proposal is somewhat similar to the US subprime's "pick-a-payment" Adjustable-Rate Mortgage low teaser rates.
  • It offers "peripheral" countries the option of picking a slightly lower E-bonds interest rate now, with much higher costs later on.

It runs counter to the principles of the Trichet proposal "Towards a Code of Good Conduct on Sovereign Debt Re-Negotiation" (Banque de France 2003).

It is a type of non-cooperative behaviour by creditor nations that invites tit-for-tat retaliation by debtor nations. Instead, Game Theory suggests that cooperative behaviour would result in higher total welfare outcomes. Therefore, let us hope that reason and mutual respect prevail.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Carrie (migeru at eurotrib dot com) on Tue Dec 21st, 2010 at 09:33:25 AM EST

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