Euro-nomics; European Safe Bonds (ESBies)

For the past six months, I have been working on the euro crisis with an international group of colleagues. We have now set up a website, where you can learn more about our project.

We have also released a proposal for the creation of European Safe Bonds (ESBies), which is available here.

We provide an overview of the proposal in this WSJ article.

I have also written a broader article for the Irish Times on the desirability of a unified banking system for the euro area.

75 replies on “Euro-nomics; European Safe Bonds (ESBies)”

‘Europe, in spite of the size of its economy and its developed financial markets, and inspite of being home to one of the worlds’ reserve currencies,
does not supply a safe asset that rivals U.S. Treasuries……..
…….What is less appreciated is that this deficiency is at the heart of the current European crisis.’

Spot on.

Hope to catch the rest tomorrow – well done.

I like the idea, and suspect seigniorage style profit could be quite high, as there’d be large demand for the senior bonds.

It certainly solves much of the Ez’s current financial stability problems. As a prospective solution, combined with the retrospective bailout/default, it makes sense.

Also…I can see how it might be attractive a a reserve currency (and thus challenge the Usd), but wonder also if it might make the Euro more viable as a trade currency.

I prefer Marshal Auerback’s much simpler solution to the current debt crisis, which he explained briefly on Vincent Browne’s TV3 program on Thirs 22/9.

Essentially mandate the ECB to create debt free money & issue it to eurozone governments on a per capita basis with the condition that it must be used only to pay down sovereign debt.

We need to get away from the system where all money is created as debt to the free lunch benefit of banks who have profoundly demonstrated they cannot be trusted with such a privilege. To the extent that we no longer have meaningful democracy or sovereignty. Merely rent paying serfs to the financial sector for nothing of utility in return.

With stability in the short term restored we should seek to institute ‘functional finance’ in the eurozone where all net government spending is debt free issuance. If we cannot achieve this then exit the euro at the earliest opportunity.

It’s long past time the economy functioned for the wellbeing of citizens rather than the further enrichment of the already wealthy.

There already is an “ESB.” It’s called the Bund. This new ESB exposes investors to Eurocrat trickery which over the last 10 years has shown that all kinds of things that once couldn’t be one suddenly can be done.

Also, the WSJ graphic illustration shows the Union Jack under the Eurozone (or is it EU?) umbrella.

If there are safe bonds and less safe bonds, the safer being the CDO here, then with the present risk appitite will that not simply suck liquidity from the national less safe bonds rendering the price there less than useful? we are constantly told to not pay much heed to greek bond prices for that reason?

@ Mike

“Essentially mandate the ECB to create debt free money & issue it to eurozone governments on a per capita basis with the condition that it must be used only to pay down sovereign debt.”

Unfortunately your idea, which i’m not necessarily against, exists only in a fantasy universe where the Bundesbank does not exist. You keep banging on about a completely impossible suggestion given the political and socio-economic realities, namely the massive explicit printing of cash.

Busy day in the Irish Times with Paul Krugman writing ‘Europe clings uselessly to the policies of austerity’ and next to Philip Lane’s article I’m pleased to note ‘Film and TV production in Ireland expanded to the value of e388m in 2010.’ A number of new jobs there too.

@ Phillip II

“will that not simply suck liquidity from the national less safe bonds”

I was thinking about that too, and I’d be fairly confident that the group must have thought of it, but I’d be grateful if commentators here could explain why it won’t happen under the scheme.

If you click on the website there’s a Q & A section that may help. EG

“How much can my country (say Italy) borrow from the EDA? How much new debt can it issue? Can we return to the market without the ECB if the proposal is accepted?

“We envision that ultimately 60% of Eurozone sovereign debt could be held by the EDA. This would amount to a steady state size of around 5.5 trillion euros. The system could be phased in gradually, over a five year period. Each six month period, approximately 550 billion euros would be structured. Each country would participate according to the size of its economy. Italy’s weight, for example, would be 17%. That means that each year over a period of five years, the EDA would buy €188 billion of Italian debt. This would meet a substantial share of Italy’s funding needs.”

Is it simply that these bonds are limited in scope, and yes, risk averse investors will buy them up first, , but the investment market is sufficiently large that sovereign debt will also be in demand? Or am I barking up the wrong tree?


George Soros, in The New York Review of Books … well worth a read … also in agreement on a European Banking System – under European Control.

‘To resolve a crisis in which the impossible becomes possible it is necessary to think about the unthinkable. To start with, it is imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland. To prevent a financial meltdown, four sets of measures would have to be taken. First, bank deposits have to be protected. If a euro deposited in a Greek bank would be lost to the depositor, a euro deposited in an Italian bank would then be worth less than one in a German or Dutch bank and there would be a run on the banks of other deficit countries. Second, some banks in the defaulting countries have to be kept functioning in order to keep the economy from breaking down. Third, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Fourth, the government bonds of the other deficit countries would have to be protected from contagion. The last two requirements would apply even if no country defaults.

…. and as the ideas of Walter Hallstein make a comeback – which would at least have the benefit of freeing us poor sefs from Guallist arrogance and Sarkozy_type hubris and idiocy …. Soros continues …

All this would cost money. Under existing arrangements no more money is to be found and no new arrangements are allowed by the German Constitutional Court decision without the authorization of the Bundestag. There is no alternative but to give birth to the missing ingredient: a European treasury with the power to tax and therefore to borrow. This would require a new treaty, transforming the EFSF into a full-fledged treasury.

Which would free us from a repeat of the hubris and arrogant incompetent ideological idiocy of a Mick PD McDowell, Charles Ponzi McCreevey, Pilfering the pockets of the blind Hannafin, and/or a Bowel_Bertie Ahearn ….

Let’s give The Treasury to Axel Weber – and a couple of nukes to Angela Merkel (be wise to take them from Nikki as his malvinas_moment in North Africa will prove to be disastrous); and if she is a good European Girl – perhaps time for a seat on the UN Security Council for Germany.

@Mike Hall
Yes it would be a lot simpler. Print €5 trillion, and give the ECB a new inflation tarket of 3%. & then BAN most of the dodgy rip-off derivatives etc

@Philip Lane
I’d suggest you be careful – or you could find yourself silenced on some Gov board or council or other ……

This is an exceptionally valuable initiative and may represent, one would hope, the first step in dealing with the “crisis of economic competence” identified by Gavyn Davis. The proposals also have the major advantage of combining the technically possible with the politically feasible, notably in being set within the context of the current treaties, the calls from Germany, and Merkel in particular, for major treaty change being no more than another delaying tactic to avoid confronting reality.

The governments and the banks of the EZ must hang together or they will assuredly hang separately. However, the current hints of serious discussion on leveraging the EFSF have caused uproar in Germany, especially given the warning by S & P that the country’s own credit rating might be at risk, and put the outcome of the vote in the Bundestag on Thursday not in doubt as to overall approval but as to whether Merkel can get a government majority.

Merkel’s handling of the crisis is becoming more and more erratic. There was a revealing and little commented on remark by her in the context of her discussions with the Pope during his recent visit to Germany, as reported by Bloomberg.

Sept. 22 (Bloomberg) — German Chancellor Angela Merkel said that she and Pope Benedict XVI discussed the need for policy makers to assert their authority over financial markets for the public good.

“We spoke about the financial markets and the fact that politicians should have the power to make policy for the people and not be driven by the markets, and that this is a very, very big task in today’s times of globalization,” Merkel told reporters in televised remarks after meeting with the pope in Berlin today.

The lady that Merkel seems to have as something of a model, given her decision to give a curious keynote speech in Bruges (as Thatcher did), is associated with the phrase “You can’t buck the markets!”. Merkel evidently thinks that you can. It is an uneven contest, even for a country as economically powerful as the one she leads.

CNBC also had the following item of breaking news.

This indeed is an excellent initiative and we should all be grateful to those who collaborated in this exercise. It’s not a magic bullet but it appears to resolve the ‘joint and several’ fiscal burden that, politically, tends to kill any variation of the Eurobond theme stone dead.

As an aside it also highlights how much ‘good money’ is out there looking for a safe home. In addition to these proposed bonds, there is huge scope for efficient, low cost financing of infrastructure investment if appropriate long-term constracts are in place with effective regulation or if deep, liquid wholesale markets are developed in the commodities and services provided or a combination of both.

(It’s probably only in Ireland, but ‘ESBies’ summons up an image of the very antithesis of this worthy concept.)

The key question, though, is: has this initiative any possibility of securing some traction in the corridors of power? Or will it just boost the number of citations and academic standing of the contributors?


“You keep banging on about a completely impossible suggestion given the political and socio-economic realities, namely the massive explicit printing of cash.”

Hello Pot. This is kettle.

Has “common sense” economics where the banks control the creation of money had any impact on “political and socioeconomic realities” over the last 5 years ?

@ Paul Hunt

The question that you pose is, indeed, the key one. Europe has never advanced on the basis of single great leaps forward but on the basis of small steps by agreeing the necessary treaty changes and then establishing “plans” which were intelligible to all the decision-makers involved and forced upon them, it must be said, by the logic of events. The Delors white papers enabling the establishment of the Single Market and EMU itself are the classic examples. We are now in the same situation post the Lisbon Treaty – which contains all the necessary powers – but, unfortunately, without a president of the Commission of the calibre of Delors.

Nevertheless, I think that your question can be answered in the affirmative because nature abhors a vacuum. Faute de mieux, concerned experts have to step into the breach.

The “safe asset” argument is entirely persuasive – for both creditor and debtor countries – and the CDO structure exists already in a trial version in the EFSF but is clearly not the version that meets the requirements of the current European – and international – crisis. ESBies, to my untutored eye, in terms of their broad description, seem to offer the only credible exit from the current crisis (which does not include ejecting countries from the euro as suggested by Soros).

The key sentence for me is “eliminating the distortions brought about by bad regulation creates value” (page 8). This bad regulation includes the Basel fiction of government bonds everywhere being rated as no-risk in the books of banks. If what the authors propose is to be viewed as magical (their own comment, anticipating criticism), how does one describe this bit of self-delusion? It does, I understand, enable the banks to skimp on capital provisions which is one of the reasons why it is a “rule” that will be difficult to change.

Practitioners of alchemy tried to create gold.

Practitioners of economy tries to create risk-free assets.

Is it evolution or is it just more of the same?

But ok, lets pretend a risk-free asset could be created. Suppose it was created today. Would that creation increase or decrease the availability of risk-capital? Would a decrease of available risk-capital increase or decrease economic growth?


You might kindly point out where Soros ‘suggests’ ‘ejecting’ any EZ country from the Euro.

That CNBC article is rubbish. See Ambrose. Btw, CNBC congratulating itself on talking up markets.

Real world… On Greek swap..
“A completely and thoroughly bankrupt Greece has just crossed some imaginary rubicon where it no longer deems it fit to even lie, and instead will simply not report any data. As Bloomberg reports, Greek FM Evangelos Venizelos, never to be confused with Jenny Craig, spoke to reporters in Athens today and told them that while the figures for the bond swap are optimistic, they are strictly confidential and will not be released by the Greek government. Considering that bond tender offer tabulation takes about 24-72 hours in even the most complicated of bankruptcies, this is a tacit admission that Greece has been unable to even complete the simplest of Greek Bailout 2 prerequisites, which is to get its bondholders to agree to an implicit 21% haircut, which is precisely as Zero Hedge predicted when we observed that German banks have sold their bonds to hedge funds which in turn are now holding Greece hostage in exchange for nuisance value. An irrelevant Venizelos also added that the target is to have all new measures passed October end, that austerity measures votes will be separate from a budget vote, and that Germany is to provide all help to stabilize Greece. We are sure the last will be news to tens of millions of German citizens.”

@ Philip

This seems a sensible solution.

“It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something” – – Franklin D. Roosevelt


It’s easy to criticise Merkel from the comfort of the ditch. 75% of Germans in a recent poll oppose an extension of the EFSF’s powers.

The naive might say that she should try and sell it; at times like this, people don’t listen to politicians.

@ Michael Hennigan

“From the ditch!”?

I, and the rest of the Irish citizenry, are in the middle of the pitch (and covered in mud), a large part of the responsibility for the situation lying with the hesitation waltz of Merkel over the past 18 months. The job of politicians is to lead, and decide, not to be guided by the latest opinion poll. The choice for her now is between saving her coalition or the euro.

Unless the international press – including the German – that I am reading is making things up, I am not alone in holding this opinion.


Delors was trying to drive the Community on from a period of lethargy and Euroschlerosis – and to a considerable extent succeeded. But where we are now is directly related to the approach he applied and which was less successfully applied by his successors. Quite simply, not enough effort was applied to secure democratic legitimacy for what was done – either with the EU Constitution or the design of the Eurozone. The delay in resolving this crisis is directly proportional to this deficiency in democratic legitimacy.

The case advanced by Philip Lane and his colleagues provides a technical fix to diminish the requirement to remedy this deficiency rapidly. It is useful because it might make the process of securing a remedy more tractable; but it should not be used to avoid tackling this deficiency.

However, there is such a cacophony of voices out there that it must be well-nigh impossible for politicians and policy-makers to identify proposals and concepts that would be genuinely useful.

If it were possible it would be a very useful exercise to identify that portion of the dramatis personae which provides policy advice to the main players and have some economic knowledge and credibility. I suspect the number is vanishingly small and that these people are the ‘gate-keepers’ channelling the economic ideas being fed to the decision-makers.


Please, spare your lectures on leadership from your anonymous perch.

It’s so easy for a fractious coalition government to ignore political and public opinion.

Why not go for a €2 or €4trn rescue fund now rather wasting time on Thursday?

Of course all these proposals are easy if you don’t perceive a direct cost yourself? If we were in Finland’s postion, we would be in a rush to support bailouts.

Somehow, I don’t think so; eaten bread is soon forgotten and in mid-2008 despite an economy heading for the cliff, we had the attitude of what do we need those Europeans?

@ Ceterisparibus

The CNBC report struck me also as being rather far-fetched but nevertheless of interest. This link may meet more with your approval.

This sentence is particularly intriguing.

“Banks in most other countries could be recapitalised by their own sovereign, though EFSF money could also be provided if required”.

The letter from a group of very highly rated economists neatly sums up the conundrum facing Merkel. Does she pay for French banks as well as Greek and her own?

Unfortunately, the cost-free solution i.e. in terms of not having to put cash up front, as would be represented by ESBies, is not immediately available. But it is worth recalling that the famous no bailout clause (Article 125 TFEU)includes the two sentences, relating to the responsibilities of the Union and individual member states, stating that its terms are “without prejudice to mutual financial guarantees for the joint execution of a specific project”.

Timorous hide and seek behind supposed legal difficulties is no longer an option.

@ Bond

And what exactly do you think the present leveraged ‘euro-TARP’ excercise is? The only difference is the pretence that we need owe principal & interest to a private banking sector (cartel) that has brought us to the brink of ruin in the first place.

If not while the ruins of a corrupt & flawed system lie before us, when should we make serious examination of it & start the process of moving toward an economic system that functions for society not just the elite few?

We’ve had a few years now. When are the macro economics mainstream going to make some aknowledgement of their part in this mess, either actively or by their aquiescence.

My interest is not in the blame game or to insult people, but there is accountability & responsibility. I’m more than happy to forgive and forget if the mainstream can begin to accept the lie that is ‘TINA’ and make some serious engagement in creating a system that works for the wider public good.

Until such time as that happens, I intend to remind people that perfectly good (indeed infinitely better) alternatives do exist.

Some economists +did+ see this mess coming & had sound methodologies behind their statements. Just none in Ireland.

If we do in fact need to bow to some more powerful forces, let us at least be open & honest about our reasons for doing so. Let the arguments be made, but lets also consider what is going to be best for Ireland not just in the short term, but also its longer term prosperity for those outside the ‘golden circle’.

@ Michael Hennigan & others

What we should be reminding the like of Finland, Germany, Netherlands etc. is that the debts of the PIIGS is purely the other side of the coin of their prosperity.

This isn’t theological economics, but ‘sectoral balances’ – an accounting identity.

It’s high time the beggar-thy-neighbour false (micro) economic narrative was put in the dustbin of history where it belongs.

All the eurozone members need to decide whether we really are in a monetary union, or not, & configure the macro economics accordingly fully recognising the benefits to all.

@Paul Hunt

Delors was trying to drive the Community on from a period of lethargy and Euroschlerosis – and to a considerable extent succeeded. But where we are now is directly related to the approach he applied and which was less successfully applied by his successors. Quite simply, not enough effort was applied to secure democratic legitimacy for what was done – either with the EU Constitution or the design of the Eurozone. The delay in resolving this crisis is directly proportional to this deficiency in democratic legitimacy.


We have a number of proudly undemocratic (cf: “independent”) EU institutions and the decision to plough on with integration without serious attempts at pan European democratic structures has encouraged alienation and not solidarity.

As far as European Safe Bonds go I can not see Germany getting involved in such a blatant competitor to the bund.

It is rather a shame, looking back we got the approach to monetary and fiscal union horribly wrong and should have started with fiscal union lite – something like the ESB and some degree of democratically mandated fiscal union before leaping into the Euro. I suppose that again German monetary dogma would have made that a no go so we were left with the toxic teat of the Eurozone, the ECB and the austerity and poverty pact.

I think the constitutional court chief judge had more than Article 125 in mind.

In the meantime the Squid is suffering austerity sickness…
“Goldman Sachs Draws Up Deeper Cuts Goldman Sachs, bracing for what could be one of its worst quarters since it went public 12 years ago, is preparing to expand its cost-cutting initiative by hundreds of millions of dollars, a move that could lead to additional job losses at the Wall Street bank.

This summer, Goldman said that it would wring out $1.2 billion in costs from its operations by mid-2012 and cut roughly 1,000 jobs, about 3 percent of its work force. But as the market turmoil has weighed on trading and other businesses in recent weeks, Goldman has been revising its plans, potentially raising the cuts by as much as $250 million, to $1.45 billion, according to people briefed on the matter who were not authorized to speak publicly.

Goldman’s cuts, which mirror similar programs at other banks, have already included the drinking cups in its New York headquarters, which were downsized to 10 ounces from 12 ounces.”

The system is just too corrupt – no matter what monetory system you create – the insiders will farm the surplus until there is nothing left.

Very little real capital increasing endeavours are created – we are supposed to be happy when Twits & their twitting jobs come our way and clap ourselfs on the back for effectively plugging ourselfs into the depletion matrix….pathetic really when real service & production jobs are dying in whats left of the real physical world.

Nothing but extreme financial or physical violence ( which is very possible now)will seperate me from cold dense shiny metal.
The entire bond mechanism is a absurdity – its going down but will probally take even this joke of civilisation down with it.

I’ve seen people use the word “solution” here a few times. I’d be careful in using that word. Even the authors don’t claim that, on its own, this proposal solves the Eurozone crisis.

Does your proposal solve the sovereign crisis? If it were adopted, would the Euro problem disappear?

No. We believe it is an element of the solution, but it does not constitute the whole solution. We have two more proposals, for banks and for sovereigns, which we believe would put the Euro on a permanently solid footing.

@ Mike Hall

All the eurozone members need to decide whether we really are in a monetary union, or not, & configure the macro economics accordingly fully recognising the benefits to all.

The challenge is to develop an intermediate credible response.

A fiscal union on the basis of promises from the likes of Berlouscini cannot be cobbled together in a short time span.

Interesting ideas. It also might be useful to bear in mind what a sovereign bond prospectus might look like…
Here is an example..
“The Notes constitute direct, general, unconditional, unsubordinated and, subject to this Condition, unsecured obligations of the Republic. The Notes rank pari passu with all other unsecured and unsubordinated obligations of the Republic .. or issued thereafter without any preference granted by the Republic to one above the other by reason of priority of date of issue, currency of payment, or otherwise. The due and punctual payment of the Notes and the performance of the obligations of the Republic with respect thereto is backed by the full faith and credit of the Republic. So long as any Note remains outstanding, the Republic shall not create or permit to subsist any mortgage, pledge, lien or charge upon any of its present or future revenues, properties or assets to secure any External Indebtedness, unless the Notes shall also be secured by such mortgage, pledge, lien or charge equally and rateably with such External Indebtedness or by such other security as may be approved by …”

So the language is fairly precise it would seem. For a sovereign to have liquid bonds – and especially on the scale needed – I think we need considerable legal certainty and clarity (plus a lot more.. the US benefits from 200 years+ of stable democracy and transparent and stable political institutions, in relative terms).

Structures I’m afraid don’t quite do that, I’m afraid (or won’t be perceived as doing that at first), even with the addition of tranching and potentially the capital guarantee.
I can think of some structures that trade in the market today and that are “super safe”. Yet they still trade cheaper than sovereigns, be that on the back of liquidity, distrust of the structure, whatever. For sure, if there was a few hundred billion in outstanding, perceptions would have to change.
The mechanics of getting there are far from obvious, and would pose possible considerable operational risk in the process. Some element, shall we say, of exchange, might be required, with all that implies. Not easy.

However as Philip Lane point out, the required “joint and several” backing for such euro area bonds requires a degree of fiscal union that does not look politically feasible. Moreover, there are clear moral hazard problems with joint bonds…

If something is considered “too big to fail”, moral hazard becomes more likely. Accountability and diligent decision making is required at the bottom – this is surely rudimentary/common sense.

I’m surprised so many economists are wound up and invested in a system that tolerates recklessness, a system where power (and decision making) flows up and up (to ivory towers). Never mind the implications from a political economy perspective.

We might have saved ourselves and the next generation an awful lot if the central government lacked the resource or was deprived of the discretion to bail out the broken banking system…or maybe if our senate was less dysfunctional – more nationalist, if that’s possible.

It would probably for the best if Ireland and Greece left the Euro, devalued the punt and drachma against the Euro appropriately and re-entering the union the following day. This is the kind of mechanism they need right now and I’m sure France and Germany wouldn’t mind the sight of us burning for our “sins”…irrespective of the role the political interests at the ECB have played in getting us to where we are. I say this as someone who has never borrowed ;o)


Context is everything and we have to view this decline in democratic legitimacy in relation to the mounting Neocon reaction over the last 30 years to the previous 30 years of financial repression and high marginal tax rates. And the damage and infection caused by this reaction will take some time to repair and cure. And I remain convinced that Chancellor Merkel is wedded to an over-riding strategic project for Germany and its neighbouring countries in the context of the major historical shift of economic power from West to East and that she is also keen to repair the damage done by the Neocon inspired lunacy to the core EZ financial system that is required to finance this strategy.

But she is trapped between a desire to do the ‘right thing’ and the over-riding political objective of retaining power. Pres. Sarkozy is confronting the same dilemma – and much sooner.

And we have such a long history of political stupidity (with no shortage of mendacity either) in Europe that there is no guarantee they will make the right call.

And Karl is right to emphasise that what Philip and his colleagues are proposing is no ‘magic bullet’. It is part of a structured package that deserves to secure some traction in the corridors of power. But I fear it won’t.

The question is why would you want the present EU to work at all ?

When you get absurd micro management legislation from on high best left to former nation states while truely effective multinational solutions that can only be found through cooperation of states is the prerogative of a seriously compromised commission and CB.
This obviously absurdly mercantile buy our new BMWs legislation is a case in point.
The EU is a hostile organisation that has been waging covert war on this country since at least 1992 and I would contend before that date.
This experiment is over – at least the post Gaullist vision is over – Brussels & Frankfurt cannot micromanage former Nation states – there will be a reaction – no matter how delayed – its building.

An interesting and educated synopsis of what is needed in the EU. Its nice to see some groups of European University professors getting together and suggesting initiatives. Hopefully we can have more of that.
I would suggest that Dr.Lane send this information by email to all members of the governing council of the ECB.
Also I don’t know if its possible for it to be emailed to finance misisters of the Eurozone, perhaps M.noonans office could help with that.

Its nice to see the Pope pointing out the obviuos, that Merkel has been listening to Philip Lane et al with their fairer proposals, intsead she is listening to the IIE and Ackerman, PIMCO etc with their clearly biased proposals.

Is Merkel’s coalition falling apart …
Germany Chancellor Angela Merkel faces a difficult test on Thursday as parliament considers a bill to broaden the euro backstop fund. Several lawmakers within her Christian Democrats are threatening to revolt, which could accelerate the demise of a coalition that may already be fatally fractured. By SPIEGEL Staff.,1518,788487,00.html

Can anyone understand the reaction of markets today to the non-news. Perhaps Eoin Bond may have some thoughts given the latest from Herr Schauble…

“Papandreou said a decision by European leaders on July 21 to expand the scope and size of the EU’s rescue fund — the European Financial Stability Fund or EFSF — was a “step in the right direction” which would give Greece “breathing space” until urgently-needed reforms starting producing results.

Nevertheless, Germany made it clear that it was opposed to ploughing more money into the 440-billion-euro ($590 billion) EU-IMF fund, not least because that could pull fellow eurozone members into the debt vortex.

“If we increase the figure, I don’t understand how anyone can have such a silly idea. The result will be that other member states will be endangering their triple-A” sovereign debt ratings, Schaeuble said.

“That doesn’t work. It makes no sense.”

Off thread:

Prof Sinn on Chanel 4 just now advocating Greek exit from Euro. (Channel 4+1 approx 8:26) Missed most of clip.

@ All

I do not know that anyone is suggesting that what is proposed is a magic bullet, least of all the authors of the proposal. Its value lies in the rigour of the analysis. If there are holes in it, by all means let them be pointed out.

@ Ceterisparibus

Your comment about the German constitutional court is an interesting one. It is one of 27 such courts in the EU. The countries concerned have given the task of interpreting the law applying to the EU under the treaties that they signed and ratified – by popular referendum in many instances – to the European Court of Justice for the obvious reason that, if it were given to 27 constitutional courts, each would come up with a different opinion. (If the track record of the Irish Supreme Court is any guide, its opinions would not figure among the most trustworthy). The German political establishment has been hiding behind the skirts of its court, which enjoys an unusual level of public confidence for historical reasons, but this does not change the facts of the situation.

The EU, like any democracy, is based on a system of checks and balances and the essential rule is that each element stick to its last and neither try to usurp the role of, or try to pass the parcel to, another as an element of political expediency.

Interestingly, there is emerging evidence that nurse in the case of Germany is getting a bit fed up as the recent “bailout” decision of the court underlines. It pointedly underlines the limits of its own remit and the importance of German politicians facing up to their responsibilities.

Tomorrow is the 60th. anniversary of the establishment of the court and the great and the good have been invited to mark the occasion. Some speeches may be worth following in detail.


My recollection is that a landmark German constitutional court case asserted primacy of the German constitution over all treaties and agreements.

@ Ceterisparibus

The Spiegel article is quite riveting (although some may think it is being a bit harsh on Merkel!).

I think Schaeuble is being disingenuous ahead of the vote on Thursday. What is being increased is the size of the German guarantee, as with that pro rata, of all the other countries not (yet) in a programme. Not a cent has been coughed up (yet) by the creditor countries.

What is at issue is no longer the size of the EFSF but what it is allowed to do. At this stage, I have to withdraw as the technicalities are beyond me. But the ESBies paper does a compare and contrast between the various schemes. I think the outcome hinges on the concept of guarantees (or form of insurance) to allow the funds to be leveraged up. But it also seems obvious to me that the element of ring fencing to Greece will be of primordial importance.

@ CP

month end and quarter end flows (rebalancing of portfolios) make it difficult to know what’s genuine demand and what’s not. First couple of sessions in Oct will tell you what investors really think.

Why do people have to make everything so complicated ?
Sovereign bonds in the past were at the base of the financial inverted pyramid.
In the case of Iberia & Ireland and indeed Greece these bonds were expanded to take losses from private credit money – this destroyed the credibility of this sov paper – this was ECB policey – the effective destruction of sovergin paper to protect shadow bank bonds & large depositors in private commercial banks.

Now we hear the ESF is leveraging this base paper Enron Style.
Give me a break !!!!!!!!!#
This Dork ran to Gold because of this – I assume others will also.
The simple solution is the destruction of large amounts of credit deposits and in this deflationary envoirment the creation of new sovergin money to both counter this and rationally build physical life support and a real capital base.
This complexity is just another form of financial rape.
ENOUGH with this needless concentration of power.
This crisis is being used by the federalists to concentrate power – they are not interested in healing the casualties – just POWER.
We need the rule of local rational law not more Centralisation of Power.
This is a leverage crisis- therefore the leverage must be reduced – not by increasing base debt which now seems not to have a base but by destroying malinvested deposits.

I have not read the full proposal but the idea seems good.

Am I correct is saying the following:

The proposal pools the collateral of European countries.
Then it effectively reduces that collateral by a moving percentage to reflect the overall assessment of the value of pool. The reduction in value of the collateral is effected by splitting the collateral between AAA good with the remainder being risk/high risk.

If my understanding is correct, the total collateral in Europe is therefore progressively reduced over time as the ESBies are issued. Will this have a deleveraging effect on European finance?

Another question I would have is what effect if any this proposal would have on the collapse of interbank lending?

@ Ceterisparibus

Not so! As has often been remarked by German legal scholars critical of their own constitutional court, in relation to where the dividing line between its powers and those of the ECJ lies, it barks but it never actually bites cf.

The problem of where the dividing line lies is common to all national constitutional courts but they, almost without exception, have established a modus vivendi which could be summed up as ” you stay off my flowerbeds (interpretation of basic constitutional freedoms etc.) – and I will stay off yours (interpretation of treaty texts)!”.

The judges of the German court, which are appointed by the Bundestag on the recommendation of an interparty committee and face no form of public suitability hearing, allow themselves a freedom of participation in the political debate which would be unheard of in other European democracies.

@Bond Eoin Bond

Thanks. Yes October will probably be interesting.


I will have to dig out the case I referred to.. but I understand where you are coming from.
Btw. None of our guys face any form of public suitability and are noted for deference to the ECJ.

If you’re outraged by Greece now, wait till you read Michael Lewis’ new book.

“Greece, Mr. Lewis writes, ran up astonishing debts — from high-paying government jobs and generous pensions, as well as waste, bribery and theft — that came to “about $1.2 trillion, or more than a quarter-million dollars for every working Greek.”

In just the last 12 years, he says, “the wage bill of the Greek public sector has doubled, in real terms” with the average government job now paying almost three times the average private sector job. Those who work in jobs classified as “arduous” can retire and start collecting pensions, he adds, “as early as 55 for men and 50 for women”; more than 600 Greek professions have somehow managed “to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”

Stories of Greece’s years-long public sector corruption will no doubt infuriate the public at exactly the right time, as Europe contemplates whether to let Greece default or bail it out.

A complete divorce of the money power from poltical power will be and is a complete disaster.
Of course I am but a Prole who does not believe in the concept of private credit creation and seriously questions the post Napoleonic European “sovergin” Bond market so my thoughts are considered extreme in polite circles.
But this proposal is just another step deeper into bankers hell.
How much blood is enough ?
Although I disagree with Bernard Connolly in many things his words are ringing in my ears.


In similar proposals such as the Blue bonds-Red bonds model. The AAA tranches are bought by risk averse investors such as CBs or Banks for Liquidity buffers. The risky tranches would be bought/traded by long term yield and risk seeking investors such as rich people, pension funds, hedgies, general insurance funds etc.

Same way as fixed income markets of 10 years ago. You want liquidity/capital preservation buy the RFR instrument. You want spread buy the lower tranches.

“Those who work in jobs classified as “arduous” can retire and start collecting pensions, he adds, “as early as 55 for men and 50 for women”; more than 600 Greek professions have somehow managed “to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”
These are not public sector jobs, but nicely unionised ones…yes, private sector jobs freeloading as badly as the public sector ones. But, all the rhetoric will be “lazy Greek public sector workers, grinding the private sector workers of Greece down”…

I have a few questions about the Irish Times article. At least a few of them are probably flawed, sorry about that. I think it’s a very good article and has some interesting suggestions.

“In particular, demand for the national sovereign bonds of weaker member states is quite shallow, since investors can turn to higher-rated alternatives without any currency risk.” Is this a bad thing? Shallow demand is the appropriate response to states which make themselves weak (either by overspending and undertaxing or taking on the debts of private companies). The responsibility should mostly be on these states to become stronger by sorting out their finances and debt/GDP ratio.

“Moreover, the joint fiscal exposures can be limited by designing bank resolution mechanisms that ensure there is a sufficient capital buffer to absorb losses and that can shut down insolvent banks.” Bank resolution mechanisms were already in place before the crisis, i.e. the capital buffer of equity<sub debt<senior debt=deposits. Since we’ve ignored the existing mechanism, why would a slightly different mechanism prevent the no-bondholder-left-behind policy arising again in future? Also, and this may be slightly naive, but does the legal framework already exist to shut down insolvent banks?

“It is vital that banks have access to safe and liquid pan-European bonds, rather than being overexposed to individual national sovereign bonds.” Why do the safe and liquid bonds have to be pan-European? Banks already have access to safe and liquid bunds and the bonds of other reliable states. That some banks have instead chosen to chase higher returns by lending to PIIGS is not due to the absence of safer investments.

“Importantly, this proposal does not require any cross-guarantees of national sovereign bonds, so it does not require the degree of fiscal integration that is barrier to eurobonds.” Who guarantees the ESBies if a weaker country defaults?

“In turn, if European banks were less exposed to national sovereign bonds, the orderly restructuring of excessive sovereign debt levels would be less problematic, in view of the dilution of its impact.” It would certainly be less problematic for the banks, but it may be slightly more problematic for those states which face higher funding costs as a result of the restructuring. So yes, the impact would be diluted in that it would impact on countries which should have no connection to the restructuring, rather than on banks which have chosen to lend to the stricken country.

“Over the medium term, the maintenance of fiscal sustainability requires strong national fiscal frameworks that can ensure that sufficient fiscal surpluses are achieved during good times to provide a buffer against downturns.” But the introduction of these strong national fiscal frameworks would mean there would be no need for the new ESBies.

“Fiscal dynamics would also be improved by structural reforms that can boost long-run growth.” Absolutely, I’d love to see this point expanded on further in national media.


Yes, I understand the principle. I am trying to imagine say, the current market converted to a tranche of Safe Bonds and another of Speculative Bonds. We know where the demand is, so who do we think would want what would currently be regarded as “the crap”?

Many holders in the existing market do so because of the false premise that all bonds were risk free, and yes 10 or 15 years ago we would have laughed at the idea people would think that. If you officially take away that pretence and say it really does apply to this new shiny safe tranche but not to this er, speculative tranche it seems you have a new supply of a new product which will not be able to compete, without a yield premium,with a lot of high quality investment grade corporate bonds.

We know currently the de facto speculative tranches (Italy, Portugal etc) have holders looking for a bid to get out – ie the ECB.

imagine you are holding that Italian crap. You know the only reason it hasn’t gone through the floor is the kindly MrTrichet has decided to buy some for his toxic collection and he wont have to face the consequences.


‘“Those who work in jobs classified as “arduous” can retire and start collecting pensions, he adds, “as early as 55 for men and 50 for women”; ….

Yes – shocking – truly shocking – remind me again – just how many members of the previous two Irish cabinets – who led us into oblivion – are now retired on lavish pensions … I can understand your angst … shokkin truly shokkin … an all dem bankers retired, an regulators retired, and directors retired an all on lavish pensions …. and d’you no what – most of them are re-hired and keepin the pensions and on new boards, and swannin around tribunals and the high courts etc an developers gettin big pensions from NAMA and ……… eegits like us left with the bill … shokkin, truly shokkin … Tis An Oirish Tragedy So Tis …

@Lorenzo2 aka DOCM3

Well – did you find out where Soros was doing any ‘suggestin’ or ‘ejectin’ – or were you simply ‘spinnin’ agin?

@ All

There was one aspect of the proposal for ESBies that was niggling at me and that is the use of the term “safe” as it implies that anything else is “unsafe”. Barroso – or someone in the Commission – has come up with the answer in his State of the Union speech just now by referring to “European Stability Bonds”.

It may also be noted that he opened with a ringing endorsement of Greece remaining in the euro area, no doubt in response to such luminaries as Soros, whose remarks David O’Donnell brought to our attention. (Soros in the FT. “To start with, it is imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland”).

On the austerity versus stimulus debate opening up on another thread, Irish bond spreads are approaching half of the Portuguese level. I wonder what that proves?

One way or the other, it seems that the EU may, once again, succeed in muddling through with Ireland cast currently in the role of the bush in the gap. Whether the quarantine barrier holds or not depends on our own efforts and that it should is in our own interests both in terms of (i) a return to national solvency and (ii) the creation of economic circumstances in our main markets which will allow this to happen.

@ Gavin

re Portugal – “warns” vs actual i’d suggest.

@ All

massive short covering going on in Ireland today, a lot of the shorts (many of whom were long Portugal against Ireland) getting stopped out. Some people now trying to offer Ireland sub 7%, lots of bids in the 7%’s….

@ Gavin Kostick

The only thing that it proves for me is that generalisations in the matter of austerity versus stimulus seem to be out of touch with the reality, at least as perceived by the markets. With all the usual caveats about not being an expert etc., it seems to me to boil down to the old-fashioned question; can the company (country) trade out of its difficulties following drastic cost-cutting measures? The answer they give in the case of Ireland is yes, in the case of Portugal a maybe and, in the case of Greece, a definite no.

One way or the other, it would be quite daft of us to put the markets’ current perception of us in jeopardy. Or for others to allow the difficulties of two badly-run companies (Portugal and Greece) cause the collapse of the entire sector (the Euro Area and the wider EU).

Sept. 28 (Bloomberg) — Former European Central Bank chief economist Otmar Issing, one of the architects of the euro, said Greece’s exit from the 17-nation monetary union is inevitable.

“There is no other way,” Issing told Germany’s Stern in an interview, according to a transcript supplied by the magazine. With Greece’s debt forecast to reach 160 percent of gross domestic product next year, the country needs to renege on at least 50 percent of its obligations and “that can’t happen within the monetary union,” Issing is quoted as saying.

ECB President Jean-Claude Trichet has said the suggestion that a country could leave the euro is “absurd” and insisted that Greece can solve its problems through fiscal reforms. Issing said it’s “too late for that” now and that “the country won’t get back on its feet without a drastic debt restructuring.”

That can’t happen within the euro area because it would be “a license for Greece and other highly-indebted nations to dispose of their problems through a reduction of their debt levels” and result in “the end of the monetary union,” Issing said.

To follow up on the constitutional court issue….the following appears clear…
“Andreas Vosskuhle, head of the constitutional court or Verfassungsgericht, specifically warned this week that Germany is entering treacherous waters.
He said that the improvisation of far-reaching policies to shore up EMU had become “dangerous”, and warned against schemes to circumvent the rule of law with backroom deals. “Germany has a great affinity for the rule of law. People expect the political class to obey the rules.”
“There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people,” he told the Frankfurter Allgemeine.
Dr Vosskuhle reminded politicians that they do not have the legal authority to sign away German constitutional prerogatives.
“The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution),” he said.
He repeated that the Court had set clear boundaries to EU bail-outs in a ruling earlier this month. “Our judgment makes clear that the Bundestag cannot abdicate its fiscal responsibilities to other actors. And no permanent mechanism may be created that entails taking over the liabilities of other states,” he said.”

Now that raises an interesting question…can the Oireachtas abdicate it’s fiscal responsibilities to other actors?

@ Ceterisparibus

Readers who understand German might as well have the full benefit of the views of Vosskuhle as set out in the FAZ.

With all due respects to the learned judge, the real question raised is not the one you pose but rather: what on earth is a sitting judge of the highest court in Germany doing expounding on hypothetical situations affecting the German constitution at a significantly sensitive political moment in Germany’s post-war history?

On your specific point, Article 311 of the TFEU stipulates that:

“The Union shall provide itself with the means necessary to obtain its objectives and carry through its policies.

Without prejudice to other revenue, the budget shall be financed wholly from own resources”.

So-called “traditional own resources” or TOR have been part of the budgetary procedure of the EU since the creation of the common customs area, notably custom dues collected at the Union’s external border which are remitted by the member states to the EU budget. It is true that the so-called VAT resource – calculated on the basis of the overall VAT base in the EU rather than a share of that actually collected – and a balancing contribution based on the GNP of the member states, now makes up the bulk of the budget, and that the overall envelope, the future Multi-annual Financial Framework or MFF, has to be decided by unanimity – and ratified by all member states in accordance with their own constitutional procedures – but to argue that the EU has no revenue raising powers, and that these could not, in any case, be ceded, is clearly at odds with the facts.

I have been reading through the various speeches at the 60th anniversary celebrations of the court and the tone was, as one might expect, rather self-congratulatory with the court being held up as an example for other countries to follow! Not to be left out, the President of the Federal republic weighed in with an attack on the government and a defence of the rights of the Bundestag. One almost begins to feel sorry for Merkel.

The one bright spot is that Vosskuhle, while he did not wave the white flag, at least indicated a truce with regard to the long-running dispute on where the dividing line in competences with the European Court of Justice lies and even suggested a kind of EU wide constitutional court, if my hurried reading of the various contributions is correct.

It is also clear that the new members of the court have the political nous not to allow themselves to be left holding the baby for what might prove to be an historical misstep by Germany in relation to the euro.

The other consideration is the sheer silliness of some of the theorising about democracy in the court’s judgement on the Lisbon Treaty. Its logic would, for example, have implied that the US Senate had no democratic mandate or, for that matter, the German Bundesrat, as the argument advanced was that democracy could only be founded on the principle of one man one vote which is seldom true of federal systems as the second chamber is usually elected by indirect vote. Joschka Fischer eviscerated that judgement in a commentary which I will see if I can find in English.

With respect, the key issue raised by the learned judge appears to be how far the German government may go in incurring liabilities in pursuit of political objectives without consulting with the German people…

“There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary”

He clearly believes that the limits have been reached and mechanisms being mooted now for EFSF leverage and such like would be illegal.

As for our own situation, the government have and continue to abdicate responsibilities for constitutionally mandated functions. I see today they will have to consult outside actors with regard to the sell off of State assets and get permission from them as to deployment of the proceeds.
Perhaps they consider the MOU to be superior to the Irish constitution.

@Minister Noonan, Angela Merkel

‘.. finally the question of how far the German government deliberately kept quiet about the role of our regional banks in the Irish crisis. As so often in life, we shouldn’t assume some kind of master plan behind this: it’s not as if the German government was deliberately trying to damage Ireland. But reality is ignored to an extent. Ireland could have made thinks simple for itself if prime minister Cowen and his cabinet had said: We’ll take on the debts of the Irish banks, but the British, French and German banks’ debt aren’t our problem. The Irish national budget would now be in a much better state. And the truth about the German banks would have come to light over here pretty clearly.’ Joschka Fischer (in link above)

Blind Biddy now reckons Irish citizen_sefs are due around €50 billion of those ESBies in lieu for buying all this time for the German, French and UK banking systems.

DOCM reading Habermas; almost as great a shock as Mairt_een Feldsteen applying for the medical card – all is changed, changed utterly. Spose Lorenzo will now turn up preaching Gramsci ….. or Donal O’Donovan retiring from the Fiscal Council to join the Jesuits in atonement for his Sinns in the IMF …. ass Sinn, Herr Professor SINN is beyond saving, bit like most of his dodgy banks.

@ All

There is one sentence in the ESBies paper that struck me as not quite saying what the authors undoubtedly intend to say and that is the point made in the opening paragraph; “There are many reasons for this state of affairs, most of which fall within the realm of economics”. I do not believe that there exists such a realm, and if it does, it has to be widely defined as the debate on another thread in relation to the importance of economic history underlines. It seems to me that what the discipline of economics can most usefully do is concentrate on an analysis/prediction of the economic impact of human decisions which are, at the level of society, intrinsically political.

The decisions adopted yesterday in the European Parliament on the so-called “six-pack” provide a good example and suggest that the prospect for the emergence of a Europe-wide polity still exists. Despite enormous pressure from the two biggest players (and sinners against the SGP in 2005), the major political formations in the parliament held their ground and succeeded in putting into place a series of legislative measures where the democratic system of checks and balances of the EU prevails. The parliament has a very good brief on the outcome on its website, especially the Q & A document which does not hesitate to point out that the “Deauville deal” has been skewered.

A point that is worthy of particular attention is the fact that “imbalances” are not being defined solely in terms of trade deficits being universally sinful and trade surpluses virtuous. One more in the eye for Merkel’s lopsided view of the world! (For anyone that thinks that she might have stumbled into the precarious political position in which she now finds herself, a reading of her Bruges speech is recommended).

And for anyone tempted to take the wilder comments of Joschka Fischer seriously, it should be recalled that he was Germany’s foreign minister as leader of the Greens in the SPD/Greens coalition under Schroeder from 1998 to 2005 during which the seeds of the political malaise now affecting Germany were planted. One was the decision to allow Greece to join the euro.

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