A Euro Proposal: ECB-Funded, IMF Bailout Bonds

This post was written by

Colm McCarthy and many other commentators want the ECB to print euros to whatever extent is necessary in order to keep essentially-solvent Euro states from being unable to finance their deficits. Colm argues that this ECB-provided unlimited funding back-up can prevent an inefficient coordination-game outcome in which investors flee Euro bond markets … because other investors are doing likewise. Once the unshakeable resolve and money-printing firepower of the ECB is demonstrated clearly, the Euro crisis will diminish, in Colm’s view. Many other commentators, e.g, Gavyn Davies, Mervyn King, numerous Germans, argue that this money-printing solution will just generate an indirect subsidy of wasteful Euro governments by prudent ones, with Euro-wide inflation or eventual ECB capital losses serving as the income-transfer mechanism.
There is some talk in today’s papers of a Eurobond system linked to closer EU control over national finances. The EU’s record for governance of this type of national fiscal oversight is not good, and the core nations are rightly sceptical.
Why not a combination policy? The IMF agrees to run sovereign bailout programmes for any Euro countries as needed, with funding provided via IMF-issued, ECB-purchased bonds. The ECB gets a decent, non-exorbitant yield on all new Euros issued, and the IMF has access to an unlimited supply of Euro funding as needed. The guarantee from the IMF-ECB that Italy, Spain and France could be brought within this bailout process as needed, with no funding limits, would probably eliminate the need to bail them out at all (via the same “good equilibrium” mechanism that Colm suggests). To make it credible this programme would need to be ready to activate as needed without exception. Recalcitrant Euro governments who failed IMF programme criteria would be booted from their bailout programmes in the normal way.

46 Responses to “A Euro Proposal: ECB-Funded, IMF Bailout Bonds”

  1. seafóid Says:

    “Recalcitrant Euro governments who failed IMF programme criteria would be booted from their bailout programmes in the normal way.”

    Bailout programmes would of course need to be recalibrated to allow for the fact that synchronised austerity is a new olympic sport and that exporting for growth is a non runner in such a context.

  2. The Dork of Cork Says:

    How can Euro states be solvent if they do not have a CB that will print ?
    Commercial banks can print credit , why can states not print money ?
    The ECBs “Intellectual” fiscal position is only rational when or if it defaults on deposits & Bank Bonds on a large scale.
    You are now dealing with a wildly synthetic world market with no link to any grounded mechanism or basis for trade.
    In fact world trade as currently structured is the most absurd creation in the history of mankind creating huge externalties.
    And now you want the IMF in again to do its church morality thingy – I can see churches full of SDRs before this is all over.
    And of course the subsequent destruction of the remaining sov bits of western states.
    Its all wildly Orwellian.

  3. The Dork of Cork Says:

    How can states relocalize commerce if they cannot print or indeed default on deposits ?
    Under the austerity proposals in vogue now States would merely atrophy as Industries leave and set up shop elsewhere as happened in a dramatic fashion in America post 1980.
    However bank credit which replaced fiscal spending back then needs surplus energy units to drag from the future – we cannot now repeat the US / UK IMF inspired credit decapitalisation experiment which began in the late 60s.
    Unless we want to live in a really really …..really interesting world.
    Maybe our Banking betters want us to live in that interesting world.
    Maybe.

  4. DOCM Says:

    This idea has bee floating around in some limited market and media commentary all last week. This Reuters blog identifies the basic legal texts.

    http://blogs.reuters.com/breakingviews/2011/11/21/imf-could-unlock-ecbs-war-chest/

    In fact, as everything else has been ruled out, and neither of the leveraging mechanisms for the EFSF seem any longer feasible, one wonders if it may not in fact emerge as the eventual solution.

    It may be noted that it was on Germany’s insistence that the |IMF got involved in the first place. Apart from confirming the unwillingness of Germany to be the ultimate LOLR for the euro, continued IMF involvement also ensures UK participation.

  5. Gavin Kostick Says:

    @ Gregory Connor

    Some brief thoughts:

    * It’s a ‘more debt’ solution. More debt solutions aren’t doing so well.
    * It is a problem that EZ bailout countries are hearing three voices, and it would be better to just have one (eg Iceland).
    * Also, of the three voices, the IMF does seem to be the most pragmatic at the moment and more rounded as to how it views the success of its programmes. However, as far as I get you, the IMF would end up owing the ECB money, and it’s hard to imagine, going from recent events the ECB resisting telling the IMF what to do. I’m not sure I want the IMF to be even slightly susceptible to ECB influence.

  6. John McHale Says:

    Gregory,

    Interesting idea. I agree with the basic multiple equilibria diagnosis and the critical need for a lender of last resort to states that lack their own their own currency. But this solution involves the broader IMF membership bearing the risk. One could argue that this risk is small given the multiple equilibria feature of the crisis you identify. But liquidity crises arise when you move into a range where there are doubts about solvency. What makes you think that the broader IMF membership — the US, UK, China, Brazil, etc. — would be willing to shoulder this risk if the stonger euro zone members are not?

  7. Gavin Kostick Says:

    Sorry – just thought of a quick for example:

    IMF called in for bailout of EZ country with banking collapse.

    IMF suggests sharing bank losses as per Iceland.

    IMF asks ECB for the cash.

    Then what?

  8. Gregory Connor Says:

    @DOCM

    Thanks for the link – I knew that IMF involvement was mooted but had not seen it stated so plainly as in the article you linked. This needs to be pushed more aggressively in my opinion — it is a good proposal but goes againt the natural turf-protection interests of some EU special interests who might attempt to block progress.

    @John McHale

    I was tempted to add the feature that the bonds are issued as limited-recourse – the ECB can only claim against the programme-country repayments (with IMF seniority) not against other IMF income. Would that improve the proposal, or make the Germans nervous?

  9. colm mccarthy Says:

    Gregory,

    if the Eurozone was a single country and a member of the IMF, it would not need IMF assistance on any of the normal criteria. It’s almost a reserve currency, no BOP deficit etc. Why should the IMF intermediate between the EZ and itself? We know the answer, because the EZ is not a proper monetary union, but why is that the Fund’s problem? I bet they are sorry they got dragged into this at all.

  10. DOCM Says:

    @ Gregory Connor

    Paradoxically, the less aggressively it is pushed, the more likely it is to be adopted.

    Coincidentally, there is a full rehearsal of the arguments for and against ECB intervention in the piece by Soros/Bofinger in the FT and the reply by Raoul Ruperel of the euro-ceptic Open Europe.

    http://blogs.ft.com/the-a-list/2011/11/21/the-ecb-must-step-in-to-save-the-eurozone/#axzz1eRcHrCC7

    The thesis defended by Colm McCarthy has much to support it from an economic point of view, as far as I can judge, but it is not realistic politically.

  11. seafóid Says:

    Any bailout has to have a fighting chance of success if the boxwallahs in charge of these proposed birds want the market to buy them. Greece’s various bailouts and the Irish bailout were not designed in this way and were instead structured to allow capital to flee intact with anything else secondary. Ireland’s post bailout bond yields are testament to this. The sov bondholders paid off the bank bondholders . It won’t be possible to pull that stunt off a second time. At the end of the day it all comes down to who will pay for the debt mess. So far it’s sovs and taxpayers.

  12. David O'Donnell Says:

    @gregory connor

    I view any move to use the ECB to Loan dosh to the IMF so that it can then be loaned back to EZ Sovereigns as fatal for the EU Project.

    Off thread:

    Any opinion on Geithner’s CDS_trigger VETO? Close to your parish I believe … and I would welcome any enlightenment …

  13. Gregory Connor Says:

    It is in the public interest of the IMF, acting on behalf of advanced economics both in and outside Europe, to help ease the Euro crisis. So the IMF should be willing on that basis to participate in this type of solution. Perhaps the the IMF should have some “skin in the game” in terms of the contractual division of potential bond losses, but most of that risk should be borne by the ECB acting on behalf of the Eurozone. Hopefully IMF loss participation will be enough to satisfy the “core” countries that the programme is not just a hidden income transfer; rather, it is a reliably-managed IMF programme for sovereign recoveries.

    It is likely that the IMF can provide better fiscal oversight than the EU, although the IMF’s record is not untarnished. The EU’s record in this regard (remember the SGP?) is far worse, and the potential for political-infighting etc. makes the EU an inferior choice. Clearly if there is going to be an ECB-funded reverse-tap (using Colm McCarthy’s term) it needs to be tied to a strict and reliable programme of fiscal oversight. Incidentally, this proposal leaves the secondary bond markets alone to sort themselves out, as in the case of Ireland. Deficit and debt rollover funding is done directly via the IMF mechanism; the primary bond markets is not called upon, and secondary market yields are of no consequence. So there is no “reverse tap” in terms of forcing secondary market yields down — these secondary market yields cease having any fiscal consequences.

  14. PR Guy Says:

    As always, you can see some glimmers of hope in ideas. This one being no exception but is it a ‘fit for purpose’ answer and does it have the backing of the fragrant Christine (one would think so)? It’s likely to upset someone in Europe though and they will drag their heels until collapse is imminent and the ECB fires up the printing presses (and Germany leaves the Euro).

    @seafóid

    “At the end of the day it all comes down to who will pay for the debt mess. So far it’s sovs and taxpayers.”

    I thought the starting point was, “How do we get the sovs and taxpayers to pay for this and what mechanism could we use?”

  15. David O'Donnell Says:

    @gregory connor

    … and the great unspoken on all of this?

    Massive SOCIALIZATION OF Financial System losses on the lumpen indentured European Citizenry.

  16. zhou_enlai Says:

    IMF programmes depend on the IMF only providing a small portion of the funds and other parties agreeing to provide funds to the borrower at the same time on condition the borrower sticks to the fund.

    Therefore, what might be more realistic and effective is for the ECB to print money to fund countries but inly if they are part of an IMF programme and they are stickin gto it. The ECB should relinquish all control and input into the programme other than to decide whether to put their money in or not.

    The ECB has been behaving as if it is a “little bit pregnant”. It has blocked IMF resolution of national debt along terms the IMF would design and it has blocked bank resolution. It has bullied and asked tax-payers to put their necks on the line as part of the greater project to achieve a no default scenario. At the same time it is saying it won’t bail countries out and countries must pay the price for their errors (i.e. have the threat of default hanging over them and their creditors).

    The ECB is trying to create a world, at great expense to Irish taxpayers, where there is no banking default or default events in order to maintain market confidence. At the same time the ECB wants to brandish the default stick at countries. This contradiction at the heart of ECB policy and posturing is very damaging.

  17. seafóid Says:

    “I bet they are sorry they got dragged into this at all.”

    I imagine for the IMF it is like one of those dream sequences where you go to a meeting in a suit and everyone else is wearing pyjamas.

  18. george Says:

    “indirect subsidy of wasteful Euro governments by prudent ones”

    Which ones were the wasteful ones, and which were the prudent ones? And are there countries that do not fall into either categories.

  19. The Dork of Cork Says:

    The ECB wants fully privatised money – ok fair enough , but is not following the logic of this course.
    If it wants commerce to increase wealth (which I for one seriously doubt given its indifferent attitude during the credit inflation and now money deflation phase) then it must destroy debt so that enough medium of exchange is available to sustain commercial activity.
    Otherwise the entire continent will atrophy.
    Their belief there is enough Euros to pay the current outstanding M3 debt is a very sick joke.
    Getting a CB to dictate strategic economic policey is not their function , in a ideal world where CBs do not bail out their little sisters their only function is to maintain just enough money in the system to sustain optimum commercial activity.

    However what they are effectivally doing is depreciating Human & Physical capital so that the stock of outstanding credit money retains value – they have made no effort to reduce the stock of money via a bank bond for equity scheme that would sustain their mandate of low inflation but have made every effort to persuade us to depreciate real physical items to sustain their sickness.

    Indeed why are we having this debate – the ECB is the sickest of all CBs , Hibernia should be running towards the BoE now.

  20. DOCM Says:

    @ Gregory Connor

    “It is in the public interest of the IMF, acting on behalf of advanced economics both in and outside Europe, to help ease the Euro crisis. So the IMF should be willing on that basis to participate in this type of solution”.

    Of course, I agree with this view (with the qualification that the IMF acts in the interests of all economies).

    There seems to be a widespread tendency to attribute monolithic characteristics to international institutions. The countries of the EU are the dominant force, after the US, in the IMF. In short, the IMF, EU and EZ are different forums with differing mandates but with a big overlap of membership. The institutions are incapabale of having views that are entirely independent of the countries that make them up.

    The Commissioner from Luxembourg launched a kite some days ago about the EZ being represented with one seat at the IMF and was, of course, immediately shot down by Schaeuble who pointed out that only countries could be represented in the IMF. He could have added that Germany is represented by the Bundesbank and he is the alternate member. This is an added consideration to be borne in mind.

  21. DOCM Says:

    @ All

    On the subject, the topic of the day, Spain, herewith a link to a fairly recent IMF paper on the truly disastrous state of the Spanish labour market. This is of long standing and is not caused by the present crisis. This is the kind of domestic problem requiring structural reform which is in the hands of the country concerned and which Germany insists, correctly, must be left there.

    http://www.imf.org/external/pubs/ft/wp/2011/wp1111.pdf

  22. David O'Donnell Says:

    Ballyhea says NEIN!

    http://www.presseurop.eu/en/content/article/1198841-irish-village-says-no-banks

  23. David O'Donnell Says:

    @Colm McCarthy

    http://www.presseurop.eu/en/content/cartoon/1199101-emergency-aid

  24. Ludwig Heinrich Edler Says:

    What is an “essentially-solvent” euro-state?

    Is that sort of like an insolvent euro-state, which we will politically designate to be solvent so we can inflation tax the productive sectors of the EU’s economy in order to bail out their loser banks?

    No one wants to confront the scale of the monetary bubble we have created so now we resort to semantics like “essentially-solvent”. As if it matters whether Christine Lagarde decides to bury her head in the sand in Washington, Paris or Frankfurt….it’s the same printing press and the same group of nodding heads.

    I hate to flog a dead horse —- oh, sorry, I mean provide pedal stimulus to an “essentially animate” equus ferus…ah, I give up. Good night.

  25. Mickey Hickey Says:

    My tendency in this case is to agree with the others.
    For the ECB to print money and distribute it to the PIIGS would have the same effect as distributing corn syrup and bacon fat to the chronically obese. Without reform initiated and implemented by the dysfunctional economies any type of QE relief will simply delay the inevitable.

    The ECB has enabled our Gov’t to drag its feet and go deeper into debt each month instead of dealing in a timely fashion with the silos of privilege that permeate our economy and impede progress. The evidence is highly visible at all levels of society from the minimum wage to exorbitant professional fees and everywhere in between. At the local level it involves shutting out Tesco by a council in receipt of “campaign contributions” from the competition. There are a few hundred good books yet to be written on this subject alone.

  26. David O'Donnell Says:

    Der Spiegel contemplates a Deutsche Downgrade …

    http://www.spiegel.de/international/europe/0,1518,799059,00.html#ref=nlint

  27. Livonian Says:

    @Gregory@all re Colm et al

    I do not want to sound alarmist or cynical, but do these proposals (and various others that are floating around the European body politic) not bring the words :”stable-horse-bolted” to mind?

    Watching events unfold this month (including the “small matter” of transfer of power in two EU 15 states) and how quickly this contagion is spreading into Belgium, Spain and “eying up” France I no longer think Europe has two more years to fix this but at best 12-14 weeks.

    Two more years would have given Ireland the chance to analyse properly whether we should stay in the EuroZone or leave amicably.

    I do not think 12-14 weeks gives Ireland (or any other member state)the luxury of choice.

    It looks like by “bringing” forward some of the “adjustments” in the December 6th budget the Irish Government may have realised that a different kind of “bail out”, ahead of “implosion”, may be our only option.

    There is absolutely no way any version (or combination) of these various proposals can work within a limited time frame of 12-14 weeks. Politics simply will not allow it.

    That is why (harsh as it may be) IMHO the upcoming budget “adjustments” need to be implemented but without damaging the fragile national social fabric and why the “Croke Park”agreement “may be a distant memory by next February.

    Public Service members may be better off reflecting on and asking their union reps who this “agreement” actually benefited instead of “lashing” out at government or branding constructive criticism as “Public Service” bashing.

    Ireland should realise that we are lucky we have a general election behind us and at least three more years of coalition. History may actually record this government as the “second emergency” government.

    Ireland`s diplomatic efforts have to be directed towards preserving the European Union and, if necessary, helping the Euro Zone dissolve in an orderly and amicable manner over a 12-18 month time frame.

    One way for Ireland to “lead by example” may be to “openly” discuss an amicable and structured departure which may not need a referendum as historical precedent demonstrates that we have done this twice since 1978.

    However close inspection of the Irish constitution (I am not a lawyer) may well indicate that we may need a referendum to “stay in the Euro Zone” if our Economy and security are endangered by external factors. It is not hard to imagine that the current uncertainty in the EZ is placing our economy (and possibly securty) at peril.

    Some kind ERM is probably now Europes best and only option. Naturally some small continental countries may opt to use a new DM in the same way as Kosovo uses the Euro if their electorates support it.

    This could allow separate countries to print/not print, renegotiate national debt and develop at a socio-economic pace which suits individual countries within the EU.

    Ireland preserved the Euro currency(at great domestic cost and in the face of, not always correct, pan-European criticism) for three years but now we should prioritise a democratic European Union over everything else.

    Despite Irelandś huge sacrifice Germany and France did not (or could not) use this 3 year “life line” to preserve the EuroZone.

    IMHO an amicable orderly dissoution ,which gives enough time to establish an alternative ERM type arrangement, stands a better chance of ensuring that these countries continue to be considered as “friends and partners” to all members of a wiser European Union. :)

  28. David O'Donnell Says:

    The View from Berlin – Left Right and Centre & Kerry!

    Left-leaning daily Die Tageszeitung writes:

    “The euro bond is on the agenda again because of a fundamental euro crisis development in recent weeks: The panic on the financial markets reached key countries like France and Austria, which are now also battling interest rate increases of their own. The derogatory differentiation between the deadbeat southern countries and the ostensibly reliable northern countries doesn’t work any longer. The euro-zone countries are all sitting in the same boat — and they should be rowing together.”

    “The idea of a euro bond is doubly convincing. Investors would no longer be able to pick out individual member states and demand such astronomical interest rates. Additionally, a gigantic market for euro government bonds — one comparable with that of the US bond market — would emerge. This enormous liquidity would push interest rates down, as US experience shows.”

    “But one problem remains. Euro bonds can’t be implemented ad hoc. The euro crisis is intensifying too quickly, leaving just one authority to step in — the European Central Bank. In the coming weeks it must signal that it will buy up unlimited government bonds, otherwise the euro will collapse.”

    http://www.spiegel.de/international/europe/0,1518,799253,00.html#ref=nlint

  29. ObsessiveMathsFreak Says:

    This proposal would be a calamity should it be implemented.

    The process of banking coup d’etats across the western world would be institutionalised, with any government that refuses to impose austerity to pay bondholders being ousted and replaced with technocrats and cryptofacists and the first sign of trouble.

    What are the odds on this country being run by the likes of Charlie McCreevy, Micheal McDowell, or even Bertie Ahern in the event of the Government trying to get out from under the EU/IMF? Personally, I rather give up the ATMs than what remains of the republic.

  30. colm brazel Says:

    Let me let Colm McCarthy and Gregory into a little secret, there is no Santa Clause!

    When the problem is a house is built on quicksand, the ‘bailout’ solution is not to keep building with more debt, that only makes the problem worse and the solution even more difficult.

    Unfortunately, the debt problems of the EMU are so severe that only a resolution that will topple the euro, is possible.

    Hopefully out of the wreckage wisdom will be found to tackle the lawlessness of the financial markets and investment banks playing naked short selling as they make money on the mess.

    Perhaps in years to come the G20 could agree on a gold pegged World Currency(WU) that countries could gradually buy into.

    Meanwhile its difficult to see how Euro bonds or QE through EFSF China’s Hu Jintao can come about, as Jintao has declined that invite from Santa, Klaus Regling.

    Hopefully the Merkozy will keep supporting the party though:) If they succeed it will bring about a EUSSR type state socialism run by the Bundestag as it tries to catch up with the FED.

    Interesting times!

  31. BeeCeeTee Says:

    @Gregory,
    Just wondering whether, when you propose that the IMF run sovereign bailout programmes as required, you mean normal IMF bailouts or the corrupted form of bailout that is now being implemented in the EU. Under a normal IMF bailout, haircuts on Greek, Irish and Portugese sovereign and bank debt could be so large as to significantly damage the creditworthiness of France and maybe even Germany. If you mean corrupted bailouts a la troika, then nein, danke.

    The case of Spain raises a couple of interesting questions. Because its bank losses are being kept reasonably well hidden, while the sovereign appears liable, we really don’t know what its effective debt/GDP ratio is. What if it turns out to be clearly insolvent? Just as important, if it is marginally solvent in the sense that it can pay its creditors the cost of decades of grinding austerity, is it morally acceptable to feed it the liquidity required to avoid the catharsis of a default? Spain’s sky-high youth unemployment is already driving Spanish society into deep trouble.

  32. John McHale Says:

    Antonio Fatas has a useful short post on the solvency vs. liquidity vs. question:

    http://fatasmihov.blogspot.com/2011/11/solvency-or-liquidity-r-g.html

  33. Gregory Connor Says:

    @Colm McCarthy

    I suspect that the IMF will want (as an institution) to be deeply involved in solving the Euro mess. They probably assess their institutional competence more highly than outsiders, and certainly feel that they will do it better than EU institutions. It raises their profile and status, and fits well with their mandate. So I do not think that they would shy away.

    It would be better if the EU could solve its own problem, but it cannot. Like a dysfunctional corporation or institution, the EU needs to bring in a trusted outsider to manage temporarily. The IMF is not perfect but it is the best available. It would make it difficult for the Germans to refuse to agree to the plan since it is more difficult (much more difficult) to turn down an IMF-sanctioned programme.

    @Elder – essentially-solvent means solvent in the good equilibrium but not in all possible bad equilibriums (e.g. a collapse of confidence and negative growth could lead to insolvency).

  34. BeeCeeTee Says:

    Antonio Fatas’ useful post reads like spin. Its calculations ignore concerns about the Spanish sovereign’s exposure to banking losses.

    A postscript about a Paul Krugman article drives this point home. It says that PK “cannot understand how interest rates for Austrian government debt remain so high giving its low debt, low unemployment and a current account surplus”. In fact, contrary to what Fatas asserts, Krugman cites market worries about bank exposure as one of the possible explanations. As the Austrian banking system had €199bn exposure to CEE countries as of 2008, and as concerns about Austrian banking’s CEE exposure are still commonplace, I think Krugman’s speculation is probably at least partially right.

  35. DOCM Says:

    @ All

    A useful resumé and a very likely an accurate statement of what is likely to happen.

    http://www.fxstreet.com/fundamental/analysis-reports/research-euroland/2011/11/22/

  36. Joseph Ryan Says:

    @DOCM
    re IMF paper on Spanish Unemployment. (Your link)
    Florence Jaumotte of the IMF
    http://www.imf.org/external/pubs/ft/wp/2011/wp1111.pdf

    If I were Juan Carlos, King of Spain, I would formally complain that the IMF staff who produced that paper had no idea of what they were talking about.
    On a most serious subject affecting millions of people we get the usual solutions,. Wage flexibility, reducing unemployment benefits, lowering the tax wedge etc with endless comparisons with other countries.
    Most seriously we get a surprise at the volatility of Spanish employment in response to economic downturns and a puzzlement as to why this should be so.
    Nowhere, nowhere do I see any reference to Spain’s dependence on the volatile tourist business or to the seasonality of that business as a reason for the high number of temporary workers.

    I am sure the IMF pay their staff well. Could they not at least try to acquaint themselves with the basic economic and social aspect of the country before launching into the usual tried and very untrusted standard solution set of wage reductions, wage flexibility etc.

    What is it with these people?

    PS.
    I mean no offence to your goodself and thank you for posting the article. I was genuinely interested in why Spain has such high unemployment and how Spanish people survive in such circumstances and what solutions might be helpful in addressing the issue.

    Even before opening the article, I was aware that the seasonality and volatility of the Spanish tourist industry would be a factor in the problem. Clearly I was wrong.
    The IMF know better.

  37. Mike Hall Says:

    Somewhat tangential to the topic, but I think a lot more relevant than some ludicrous contortion to add pretence that a properly functioning central bank is not required…

    Warren Mosler

    ‘A Credible Eurozone Exit Strategy’

    http://www.nakedcapitalism.com/2011/11/moslerpilkington-a-credible-eurozone-exit-plan.html

    As it says in the article, even if (as likely) the euro mess lumbers on with either ad hoc ECB bond buying or a bigger-can-kick ‘backstop’ role, ignoring the diammetrically wrong austerity policy will bring us right back to economic death poste haste.

    Nor can any sane person, imo, have much faith that the fundamental flaws of the EMU will be dealt with satisfactorily by the economics advisers or even more ignorant politicians of Europe.

    I suspect we’ll need a ‘punt nua’ some time soon. This looks like a plan to introduce it.

  38. BeeCeeTee Says:

    @DOCM,
    There’s a good chance that paper reflects what the ECB will attempt to do, but I don’t think it is an accurate assessment of what will happen.

    Every ECB bond purchase has two effects that operate in different directions.

    The immediate effect in the market is to push bond prices up and yields down. Once that has worked through, its effect is gone and it becomes necessary to do the same again next week to repeat the effect.

    However, each purchase also reduces the net present value of expected cashflows from other bonds in the market by a little. The ECB is likely to receive preferred creditor status in the event of a default or composition with creditors, so the more bonds it holds the lower the cashflow expectation of other bond holders. This effect is permanent (or at least lasts while the bonds remain in official hands), and accumulates over time.

    As time goes by private holdings of FIBSA bonds will become increasingly toxic, so the volume of bond purchases required for the ECB to hold the line will increase.

    My guess is that if the ECB adopts this strategy, it will eventually have to choose between abandoning it or keeping going until it is the sole major holder of debt from at least some of the FIBSA countries.

  39. David O'Donnell Says:

    @Bertrams Time

    Gregory Connor: “It is in the public interest of the IMF, acting on behalf of advanced economics both in and outside Europe, to help ease the Euro crisis. So the IMF should be willing on that basis to participate in this type of solution”.

    DOCM: “Of course, I agree with this view (with the qualification that the IMF acts in the interests of all economies).”

    I sense a citizen_centric DeConstruction coming on – difficult to resist – but I’ll leave it to readers with a spare 30 seconds to figure it out!

  40. grumpy Says:

    @Colm, Gregory

    “if the Eurozone was a single country and a member of the IMF, it would not need IMF assistance on any of the normal criteria. It’s almost a reserve currency, no BOP deficit etc. Why should the IMF intermediate between the EZ and itself?”

    I think this is a view more easily taken from a small state in the EZ than from a large one. A German or Brit might view the EZ as nothing more than a collection of separate, sovereign countries. Within that the larger, more converged countries kind of share a currency, whilst the rest, to varying degrees, more or less use a foreign one. Looked at like this, the idea the IMF would not have been involved looks odd, and to some, the idea the IMF would not be involved looks like another of those ridiculous French delusions of ‘European’ grandeur.

  41. disgruntled observer Says:

    @ Mike Hall,

    I posted that link on the stark prognosis thread. I was surprised no-one followed up. Glad to see it here.

    My two cents: It’s a very simple and elegant idea. And it doesn’t require the IMF, ECB or BoE to implement. Quite ingenious actually, and far better than the nonsense advocated above.

    http://www.nakedcapitalism.com/2011/11/moslerpilkington-a-credible-eurozone-exit-plan.html

  42. Ceterisparibus Says:

    What is likely to happen…

    “Jens Weidmann, president of the German Bundesbank and an ECB policymaker,
    said it was not the central bank’s job to finance public budgets. He told reporters that adopting a policy of quantitative easing – as in Britain and America – would be like drinking sea water to kill the thirst. “Whoever believes that the current crisis can be overcome by giving up crucial principles of stability orientation, pushing current legislation aside, is wrong.””

    NEIN.

  43. Chris Says:

    Jean Claude Tricket identified the need for a common EU treasury in order to finance and control weaker pehiperies. Sarkozy and Merkel are on the case. Hopefully any such treasury can be set up properly with fair decision making processes and appiontments.
    In the case of Q.E by the ECB, JCT is right, a common Eurozone treasury is needed first for the ECB to buy bonds from. This treasury would be able to make sure that those countries stay in line by delaying funding. It would have the power to collect taxes and would include fiscal transfers.
    In the meantime having the IMF play the role of a federal treasury is a nice idea.
    The ECB would not go for it though as it can currently dictate its own terms making sure the financial system is looked after.
    People are starting to realise the power of the ECB in all matters financial.
    Joe Stiglitz pointed out a long time ago that the biggest threat to EU integration is the ECB’s charter and decision making structure which show its favoritism for core countries over periphery and finance over workers.

  44. Gavin Kostick Says:

    “IMF beefs up lending tools, launches liquidity line”

    http://www.reuters.com/article/2011/11/22/imf-credit-idUSN9E7LI01U20111122

  45. DOCM Says:

    @ All

    I think that these exchanges go to the very heart of the matter. Two philosophies are at odds with one another and the view one takes is coloured by the view one has of the euro. In my opinion, the description by grumpy above is the correct one. What is interesting with regard to the most recent developments is that one philosophy, the Anglo-Saxon one, has finally begun to accept that the other, the German one, is not going to concede.

    The quarrel is being put to one. It is politically impossible for either side to accept defeat. It has become a question of finding a middle ground with regard to what practical actions can be taken. The decision by the IMF, as noted by Gavin Kostick above, is but the most recent example.

    The Danske Bank note also draws attention to the considerable armoury that the ECB has with regard to conventional measures.

  46. DOCM Says:

    @ All

    A piece by Martin Wolf which touches all the bases.

    http://www.ft.com/intl/cms/s/0/4dc988ca-14fd-11e1-a2a6-00144feabdc0.html#axzz1eSqFdP3C

    Nessa Childers on RTE at the weekend said that the citizenry of Ireland were on a raft and some were looking for extra rations. Indeed, some did not even appreciate that they were on a raft. This would include certain citizens whizzing along in the bus lane in luxury foreign vehicles supplied by the Irish motor “industry”.

Leave a Reply