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.