Mon Sep 12th, 2011 at 05:45:57 AM EST
With the recent ruling of the German constitutional court, the eurobond idea is entirely out of the window. It seems to me we can either despair at the general idiocy of the crisis management of our elites, or we can try to see what can be salvaged.
Promoted by Colman
Given the ruling, nothing will be done on a political level unless the German parliament gives the green light, which it won't. Even if Frau Merkel would like to be helpful, she is hamstrung by both parliament and the courts.
What remains to us then, if we want to save the euro from collapse? We do have the options of further ECB initiatives, like a massive ECB monetization of periphery sovereign debt to keep rates reasonable, while austerity is pushed hard going forward. This is the solution of saving the euro through depression in the periphery. It's not a pretty picture. It does nothing to resolve the structural problems of our financial system, and carries a massive moral hazard as the casino capitalists who still hold periphery debt will be bailed out by Eurozone taxpayers. On the other hand, with the ECB secondary market purchases of periphery debt, that bail-out has already happened to a considerable degree.
Another option, almost never mentioned but very reasonable and practical in my mind, is the periphery default solution. This means that periphery nations will partially default on their debts and institute haircuts on their bonds. This will not really cause any losses to the banks and others who hold periphery debt, as soon as they cease their make-believe and start marking their bonds to market. The losses have already happened, and the sooner this is realized, the earlier healing and de-zombiefication can begin.
However, as mentioned this solution will realize massive paper losses in certain banks, and this means that they will require injections of fresh equity so as to maintain reasonable leverage and capital coverage ratios. Thankfully, the solution to this issue is very straightforward and requires nothing exotic. Finance 101 works perfectly here. During the 2008 phase of the crisis, three of the four major Swedish banks launched rights issues to strengthen their balance sheets. This is nothing stranger than having the current shareholders pay money into the bank, like a reverse dividend. If they refuse, their share of the banks total ownership is diluted.
But what if there is not enough capital on the private markets to plug what might be very considerable holes in the European banking system? No problem! In the early 90's Swedish banking crisis, this very thing happened. It was resolved by a method commonly used in IPO's, where a large actor (bank, fund or the like) guarantees to buy all the shares not wanted by the market and hold them for a certain amount of time before they can be sold. In the Swedish example, the actor which guaranteed the rights issue of Nordbanken (Nordea) was... the Kingdom of Sweden. Over time, through fusions and divestments, the ownership share has fallen to about 13%. In the event of a national government not being able to back such an investment, emergency credits could be extended either by the ECB, direct ownership stakes could be held by the ECB, or credit could be extended on a bilateral basis.
This means there is a simple national solution to this eurozone-wide problem, which aviods whatever blockages might be thrown up by Brussels or Berlin.
What are your opinions of these ideas? Do you have any other ideas which are not pie-in-the-sky (eurobonds etc), but which actually would have a reasonable chance of working, not only theoretically but politically and practically as well?