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What should Spain do? | 70 comments (70 topical, editorial, 0 hidden)
On bailouts (4.00 / 6)
First, there's the question of whom would be bailed out in the event of a Greek, or Iberian, bailout:

And in the case that Greece is bailed out, and total destruction of aggregate demand is demanded (Am I not cute with this retruecanos?), what should Portugal and Spain do when they request the same thing from two economies which are very close to recovery if they are only left alone?

It's not Greece that would be bailed out.  It's the Greek state's creditors that would benefit from EU generosity in that regard.  Greece and its citizens (at least those who aren't also among its creditors), would be bailed out if the Greek state simply defaulted on their loans, as many states have done in the past and will continue to do. The issue before the EU is whether EU citizens, as members of a group, should be forced to divert their resources to the people who lent money to Greece instead of just transferring the a portion of Greece's debt -- and the resources which it has claims for -- to the Greek state.  

A fair amount of research has been done on what happens to states that default on their debt, and the answer is: not much.  As economists William Buiter, Rogoff, and Reinhardt have said, it takes 3-5 years for a defaulting country to have their debt securities listed as investment grade again.  Markets always forget and forget quickly.

However, in the 3-5 year wait until borrowing opens up again, fiscal austerity can be quite severe for some people in defaulting countries, so are there alternatives to "TINA?" One alternative that hasn't gotten much play is frequently used by US state and local governments and could conceivably be employed by Greece, Portugal, Spain, or anyone else, but preferably in an improved and expanded way: Revenue Anticipation Warrants or Notes.  

As employed in the US, they are basically IOUs, and California, somewhat controversially, employed them last year to continue government functions when it had no cash on hand to pay anyone. It used them previously in the 1980's too, and are frequently used by many local governments throughout the US. They are interest bearing securities (for CA rated A-, investment grade) that mature within a short time period, but would be greatly improved if they were issued with no interest commitment or maturity date.  Rather their value would be guaranteed by being able to use them to pay taxes due to the state.  That is, they could become credit issues instead of debt issues as they are currently used in the US.

Such a policy device could provide any EMU country a means of regaining the power to implement a monetary policy to escape debt, and used responsibly (which means only in intermittent surprises, not ongoing means of financing government) such a device could result in sufficient net transfers of sovereign wealth from creditors to the state such that state consumption and social welfare is maintained and smoothed while fiscal adjustments are made to a more financially sustainable path.

by santiago on Wed Apr 28th, 2010 at 04:13:09 PM EST
Re: On bailouts (4.00 / 4)
In fact, California has been using RANs since 1992. Originally it was a stopgap forced by a cash crisis brought on by the recession (CA tried to pay state workers with IOUs, which the courts rejected). But it worked out so well that the state began using them as a matter of routine finance, particularly to cover expenses between November and April (when income tax revenues come in).

And the world will live as one
by Montereyan (robert at calitics dot com) on Wed Apr 28th, 2010 at 05:03:40 PM EST
[ Parent ]
Re: On bailouts (4.00 / 2)
I think its actually earlier than that even -- used in the relatively fiscally conservative administration of George Deukmejian (R), I believe.
by santiago on Wed Apr 28th, 2010 at 05:42:21 PM EST
[ Parent ]
Re: Sovereign Equity (4.00 / 7)
Such an issue of credit instruments is exactly the sort of 'Sovereign Equity' I have been advocating for some time, and which the FT referred to in an editorial on 15th March. In the case of Spain, and other countries like Portugal and Ireland, suffering from unsustainable debt in the aftermath of a property bubble, I suggest that these governments issue redeemable Units of Sovereign Equity within a suitable framework.

These Units would then be used to acquire distressed properties from banks, or indeed from individuals who wished to participate, and these properties would then be held by a custodian within a suitable corporate partnership framework. Affordable rentals would be set, and the properties let, thereby creating a 'Rental Pool' which would be divided proportionally among the Unit holders, and service providers who operate the system.

Occupiers would be free to acquire Units simply by paying rental in advance and converting the advance payment to Units at the market price. They could also be credited with 'Sweat Equity' Units in return for maintenance to an agreed standard.

Even if Investors wishing to sell Units were unable to find other financial Investors to buy them, if the rate of return demanded rose, the Unit price would fall until Occupiers acquired Units for redemption against their rental obligation.

The outcome for banks would be better than any debt-based solution, while the rental would equally be more affordable than that necessary to cover debt financing. The reason for this happy outcome is of course the absence of capital repayment and compound interest in this quasi-Equity solution.

In this way, Units based on property rentals would come to replace existing €-denominated debt and would essentially be geographically based national currencies. This is not an entirely new idea except in its 'polarity' as a credit instruument, rather than an intermediated debt instrument such as that advocated by John Law in 1705, who then rather spoilt the implementation in France...... :-)


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Apr 28th, 2010 at 05:05:24 PM EST
[ Parent ]
Re: Sovereign Equity (4.00 / 5)
Yes, you're exactly right. I should have cited you.
by santiago on Wed Apr 28th, 2010 at 05:43:17 PM EST
[ Parent ]
If you do a really big default (4.00 / 2)
then it frees up quite a bit of money...

Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu Apr 29th, 2010 at 05:16:15 AM EST
[ Parent ]
Re: If you do a really big default (3.80 / 5)
There is a huge debt overhang and the question is how this will be reduced. What fraction of the debt will be defaulted on, and what fraction will be inflated away?

The financial sector already got to offload a lot of its debt on the public finances through the bailouts of 2008-9. Now it's time for the public finances to offload their debt on...

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu Apr 29th, 2010 at 05:36:17 AM EST
[ Parent ]
Re: On bailouts (4.00 / 2)
El-Erian from Pimco thinks that the creditors will have to enter the picture at some point. The ridiculous 20% yields are pie-in-the-sky for whoever bought them.

Since none of this Greek debt was initially sold for more than 5.9% or 6.2%, I suspect the payout to creditors will not be much beyond that.

So, the idea is to prevent a Greek default by making the creditors whole, as long as by whole it means the creditors don't lose money. The idea that people will be paid at market rates from IMF funds is perhaps fantastical.

by Upstate NY on Thu Apr 29th, 2010 at 11:03:02 AM EST
[ Parent ]
one solution (none / 0)
would be for Greece to buy its debt on the secondary markets at current distressed prices.

The current >10% yields simply mean that holders of past bonds sold them for much less than their face value, thus providing the new buyers with a higher yield. That means that past buyers of the bond have already taken losses by selling at less than their official value.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Apr 29th, 2010 at 04:26:48 PM EST
[ Parent ]
Re: one solution (none / 0)
Is this really the case?

Are we really talking about bailing out an indirect bet?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Apr 29th, 2010 at 04:44:12 PM EST
[ Parent ]
Re: one solution (none / 0)
Greece needs cash to roll over maturing debt, let alone buy back the rest of it.

Buying the debt in the secondary market is what the ECB should have quietly been doing since February.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu Apr 29th, 2010 at 05:09:19 PM EST
[ Parent ]

What should Spain do? | 70 comments (70 topical, 0 editorial, 0 hidden)
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