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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

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