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Missing an European Treasury | 13 comments (13 topical, editorial, 0 hidden)
Re: Missing an European Treasury (none / 1)
European Tribune - Comments - Missing an European Treasury
  • When receiving funds issued by the European Treasury, member states shall incur in a fixed interest premium (say 1%) over the marketed interest. This extra interest could either revert to bond holders, the European budget or both

Doesn't that undermine the purpose of the exercise? The market could still extort ridiculous returns for holding bonds.

The easiest way to muddle through the crisis would be to order the ECB to enforce a maximal level of interest on Eurozone debt. But then the treaties explicitly forbid that.

by generic on Thu Mar 25th, 2010 at 12:42:08 PM EST
Precisely ... there is no need to ... (none / 1)
... market the bonds if the conditions when the bonds are required. The ECB should simply hold them and create corresponding Euro reserve accounts.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Mar 25th, 2010 at 02:38:03 PM EST
[ Parent ]
Re: Missing an European Treasury (none / 0)
Doesn't that undermine the purpose of the exercise? The market could still extort ridiculous returns for holding bonds.

The market would not exert the same sort of pressure on Euro-bonds, it is completely different to bid for a bond issued by a state with a GDP of 250 000 million € and a budget deficit of 12% from a bond issued by an union with a GDP of 8.4 billion €, a deficit of 6% and a trade surplus. The expectations are totally different and the demand for Euro-bonds should be rife.

The easiest way to muddle through the crisis would be to order the ECB to enforce a maximal level of interest on Eurozone debt.

That would also be the easiest way for a sovereign default within the Eurozone :) with an interest cap troubled states wouldn't find buyers for their bonds to roll-over debt and/or refinance their budgets. And remember that when a state emits debt the ECB does not intervene.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Mar 26th, 2010 at 04:38:00 AM EST
[ Parent ]
Re: Missing an European Treasury (none / 1)
Luis de Sousa:
The market would not exert the same sort of pressure on Euro-bonds,

Ah. A percentage on the interest rate of the centrally emitted bonds.

Luis de Sousa:

That would also be the easiest way for a sovereign default within the Eurozone :) with an interest cap troubled states wouldn't find buyers for their bonds to roll-over debt and/or refinance their budgets.

By enforcing I meant something like this:

billy blog » Blog Archive » Why history matters

Prior to 1982, a tap system operated where the government would set the interest rate and then supply bonds to investors up to demand. Sometimes investors did not take up as much as the Government desired. The extra funds came from contra entries in the RBA-Treasury accounts (the government borrowing from itself!).

by generic on Fri Mar 26th, 2010 at 05:17:42 AM EST
[ Parent ]
Re: Missing an European Treasury (none / 0)
Prior to 1982, a tap system operated where the government would set the interest rate and then supply bonds to investors up to demand. Sometimes investors did not take up as much as the Government desired. The extra funds came from contra entries in the RBA-Treasury accounts (the government borrowing from itself!).

That's kind of comical :). History is important, certainly, but in those days economies in Europe where much more isolated than today. Btw, that's more or less how the PIIGS operated prior to joining the EU.

Imagining such blatant printing today: the currency would naturally depreciate. With low interest rates and a depreciating currency a feedback would rapidly emerge, where ever fewer investors would bid for bonds denominated in ever less valuable currency.

Another option could be the emission of debt denominated in foreign currency to attract foreign investors. But if the local currency depreciated too fast, servicing that debt could become unbearable and a default would ensue.

I just don't see how could anyone use that strategy successfully in today's highly intertwined global economy (apart from the US of course :)).

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Mar 26th, 2010 at 04:41:54 PM EST
[ Parent ]
Re: Missing an European Treasury (4.00 / 3)
This neoliberal story about the feedback loop is excellent, except for not being true.

Indeed, notice how in the following:

With low interest rates and a depreciating currency a feedback would rapidly emerge, where ever fewer investors would bid for bonds denominated in ever less valuable currency.
... there is no transactions demand for a currency in foreign exchange markets. All demand for a currency in that story is speculative game playing by people using financial markets as their casino.

(1) Yes, if the government engages in responsible monetary policy, the currency will naturally depreciate.

Does every currency go into a downward spiral meltdown every time it depreciates? Of course not ... if it did, every foreign exchange market would always be melting down.

Remember how Japan experience a currency meltdown when it put its cash rate at basically 0% ... going from a bit over 100 yen for a dollar or a euro to 1,000 yen for a euro then 10,000 yen for a euro then 100,000 yen for a euro, because setting the cash rate at 0% sets up a feedback loop?

No?

Oops ... an explanation that explains things clearly and simply is a fine thing ... but when it explains clearly and simply effects that do no happen in its cause and effect story ... that's not a real world explanation, its just faith-based bullshit used to justify the system by which the speculative class is allowed to parasite on the productive sectors of the economy.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Mar 26th, 2010 at 06:04:06 PM EST
[ Parent ]

Missing an European Treasury | 13 comments (13 topical, 0 editorial, 0 hidden)
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