The Eurozone Debt Crisis – The Options Now

The Buchheit-Gulati paper is here.

21 replies on “The Eurozone Debt Crisis – The Options Now”

Karl Whelan was raving about this paper on his Forbes blog, but I was distinctly underwhelmed.

– They seem to assume that the Euro crisis would be solved if only market access could be preserved or restored for peripheral nations. The article does not address the fact that in high yields are just a symptom and are due (in Spain and Ireland at least) to overindebtedness, high unemployment and a broken banking system. Almost none of the options they outline (except maybe for 6) would address the underlying causes and lift the states out of their depression.

– It is not clear whether or not they accept the “official diagnosis” that the central problem is “can market access at tolerable interest rate levels be preserved
long enough for the benignant effect of fiscal austerity programs to become
visible to the market?”. The wording seems slightly critical of this diagnosis but they neither refute it nor provide any alternative diagnosis. Does this mean that they think austerity programs are “benignant”?

– They claim there are only 5 options, but completely omit one of the most obvious outcomes, that of Eurozone exit or complete break-up.

I know the authors are lawyers and may hesitate at addressing the underlying economic issues, but one would expect them to at least address the issue of Euro exit/break-up. Maybe they did not do this because they have no experience of such scenarios?

Thanks Philip, nice paper, though the authors don’t differentiate bank from Soverign debt.

If a day comes a few years from now, when we have a closed deficit, high debt mountain, our banks are largely off ECB funding and the world is of the opinion we were bullied in to a bailout. Would it not be usefull to have something like a PN as part of the debt outstanding, ‘supported’ (if I’m not mistaken) by the ‘assets’ of Anglo and a letter from the late B.Leniahn.

Would this not create an option 6 for us:
i.e. Walk away from entire Promissory note arrangement.

@ bazza

I agree!

These guys are stuck with their experience of the “Latin American” debt crisis and have no grasp of the political considerations driving the actions – admittedly, often mistaken – of the European political leaders involved in grappling with the debt crisis within a monetary union.

@ DOCM/Bazza

They called the Greek debt restructure pretty accurately two years ahead of time…


They might of called the Greek restructuring correctly, but all that tells me is that the powers that be are advised by people like Buchheit and Gulati.

The Greek restructuring didn’t solve anything and none of the options put forward in this paper will either.


By far the most important item in the paper was in the footnote on page 8 ..

“4 What this assurance will mean in practice is not yet clear. On October 4, 2012, ECB President Draghi was asked why the ECB would not roll over (that is, restructure) its holdings of Greek government bonds. His answer (as reported by Reuters):

[Rolling over] would qualify as monetary financing. We have said several times that any voluntary restructuring of our holdings would be equivalent — would be monetary financing.”

Monetary financing of a Member State is impermissible under ECB’s charter. How this statement can be squared with the September 6 promise to accept equal treatment with private creditors in the event of a restructuring of OMT-acquired bonds remains to be seen. See link:

I did not see this statement reported at the time but surely this casts enormous doubt as to whether in fact the ECB can in fact be part of any restructuring arrangement were it ever to happen. I’m not entirely sure how that should effect the private investor buying into Greek or Spanish bonds alongsides the ECB when the OMT process starts. It would seem to indicate to private investors that they need to be extremely nimble in getting in with the ECB but being absolutely sure in getting out before the restructuring button is pressed as 100% of the losses it seems will be falling on private investors again despite what the ECB had initially indicated.

re – DOCM & the deteriorating relationship between Britain & europe

The first blow has been struck – Forty french fishermen surrounded their UK conuterparts today in apparent jealousy about scallop-rights.
Mooning, the burnings of rugby jerseys and ‘flickings-of-the-birds’ across the bows were the extent of this mini-trafalgar, but maybe it is symptomatic of bigger things.

I see this paper mostly as some very specialized lawyers (advising the Grrek government on the “private” default PSI) trotting our their warez to potential customers.

Otherwise I am somewhat bored by it.

I ll guess, they try to see with how much getting around conditions they can get away with.

CDS rates are coming down nicely.

If they can borrow enough short term, everybody would be happy.
Just not Soros, he really hates it, that he can not diminish the ESM fire power, and makes noises : -)

Spain will make the necessary cuts, one way or the other, and markets will calm down.

In a certain way this is our good old NATO “flexible response” strategy. We have all kinds of tools available, the immediate use of the big hammer “global thermo nuclear war” is not credible, and of course also not responsible, but slow escalation steps calibrated to what the other side does, are credible. We do not tell exactly, which way we would escalate, and that puts the burden of uncertainty on the attacker.

@ genauer

The comment by ‘Nobby’, in the series of comments after the Alphaville article, is worth a read.

@ genauer

Yes! I linked to it because it seems to me to decipher the tactics the Spanish are employing. I would not, however, agree with the conclusion with regard to Italy (although the evident nervousness of the main participants suggests that this is what is feared).

The Irish Times, our newspaper of record, has a good report from its Berlin correspondence today. See reports under the banner Economy.

Schaeuble is evidently influenced by the experience of the reform of EU competition policy which leaves competition issues for companies below a certain threshold to national supervisors. The argument is made that small banks can be as big a systemic risk as big ones, which is true. But the question really is about the capacity of the sovereign involved to bail them out. The related question is the physical impossibility for the ECB to supervise all the banks in the EA.

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