Launch Euro- bonds and then go a bit the Japan way...

Update of April 6th, 2013

I think that launching the Euro-bonds immediately would allow and make it easier to go a bit the Japan and its central bank way.

Maybe we could give it a try...although there are risks of a kind of competitive easing madness.

Here below what I was writing a year ago and before...

The debate on Euro-bonds seems stuck somewhere...A Curious Bull-Bear Stalemate. The European Commission's report on the public consultation on the European Commission Green Paper on the feasibility of introducing Stability Bonds showed only 40 responses sic! Basically nobody cares...?

I still contend that Euro-bonds are bonds to be alive. Unless Euro-bonds are launched pretty soon there will be big problems ahead, particularly for the ECB. The latter is indeed likely to incur big losses if Greece were to exit the Euro. The ECB is already running on nominal and fictitious Euro-bonds buying all EU member states bonds, which have to be sterilised on all operations with repo operations. But the recent ECB longer-term refinancing operations cannot go forever. What if Greece exit the Euro?
Euros can still be printed but operations would be far easier if the Euros are backed by Euro-bonds. If investors are at present more concerned about solvency than liquidity, LTRO by the ECB will not help that much. Full scale quantitative easing will be needed and this is definitely more effective with Euro-bonds, that is monetising EU sovereign debt not national one.

If Euro-bonds were adopted borrowing costs for many countries will be lower (along the same lines of when the Euro was introduced) but net costs for Germany will not necessarily be higher. Even if borrowing costs for Germany will be a bit higher then at present (which can be initially compensated), costs of defaults, Euro exits and ECB losses are far higher for everybody, particularly Germany. The costs of not having Euro-bonds could be far higher than the cost of having them.

On the other hand ,the Euro-zone currency union saved Germany’s major banks from insolvency, and German taxpayers from the burden of a massive bailout.  European bank exposure to the PIGS wasn’t altruistic economic development and cooperation funding; it was very often speculative and without due diligence investment. Moreover Germany relies on the EU for exports, so a stable and not in recession area is on its interest.

One variation on the Euro-bonds idea that has gained traction in recent weeks is something called "project bonds". It's not a big deal as it's exactly what was proposed in 1993 by the European Commission President's Delors.  It will not help as the money involved is too little.

Euro-bonds may not resolve the current crisis but  I think would avoid having a bigger one.
I also expect Euro-bonds “soon”.

This post was written more than two years ago following L'Aquila earthquake in Italy. Here we are again in the Emilia Romagna region...

This post was written more than two years ago following L'Aquila earthquake in Italy. Here we are again in the Emilia Romagna region...

Is an earthquake in Italy really a Black Swan?

An earthquake could normally be characterized as Black Swan to the extent that "first, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable".

Yet in Italy earthquakes are not exactly unpredictable one offs for which there are no precedents and so nothing to learn from. There is a great deal of information in the occurrences of an earthquake.

It appears that geophysicists know they still cannot predict when an earthquake will occur, how much its magnitude will be and where it will strike. We say that economists suffer from the same problem in their predictions: if they say when they cannot tell you how much and vice-versa. If they tell you when and how much they will fail the prediction.

However in the prediction of earthquakes, some empirical laws (e.g. power law) are known to hold, which are remarkably simple. There exist also some interesting approaches based on peculiar properties of precursory phenomena observed within complex seismic time series.

The fact that earthquakes like financial markets could be affected by the Black Swan frequency problem does not impel us to do nothing! Not at all. We can focus more and more on prevention rather than prediction and establish some ground smart rules in order to avoid financial systems to collapse in turmoil and earthquakes to raise the death toll and damages.

The recent earthquake in Italy, along the same lines of the world financial crisis, shows that somebody, particularly in Italy, still have some difficulties in making prevention to work and abide by the rules of, for example, seismic construction. Thus the debate is easily shifted from prevention and regulation to failure of predictions so that nobody is accountable. The same is in fact happening in the financial crisis. Sad similarities and news.

Euro- bonds: what are we waiting for?

The debate on Euro-bonds seems stuck somewhere...A Curious Bull-Bear Stalemate. The European Commission's report on the public consultation on the European Commission Green Paper on the feasibility of introducing Stability Bonds showed only 40 responses sic! Basically nobody cares...?

I still contend that Euro-bonds are bonds to be alive. Unless Euro-bonds are launched pretty soon there will be big problems ahead, particularly for the ECB. The latter is indeed likely to incur big losses if Greece were to exit the Euro. The ECB is already running on nominal and fictitious Euro-bonds buying all EU member states bonds, which have to be sterilised on all operations with repo operations. But the recent ECB longer-term refinancing operations cannot go forever. What if Greece exit the Euro?
Euros can still be printed but operations would be far easier if the Euros are backed by Euro-bonds. If investors are at present more concerned about solvency than liquidity, LTRO by the ECB will not help that much. Full scale quantitative easing will be needed and this is definitely more effective with Euro-bonds, that is monetising EU sovereign debt not national one.

If Euro-bonds were adopted borrowing costs for many countries will be lower (along the same lines of when the Euro was introduced) but net costs for Germany will not necessarily be higher. Even if borrowing costs for Germany will be a bit higher then at present (which can be initially compensated), costs of defaults, Euro exits and ECB losses are far higher for everybody, particularly Germany. The costs of not having Euro-bonds could be far higher than the cost of having them.

On the other hand ,the Euro-zone currency union saved Germany’s major banks from insolvency, and German taxpayers from the burden of a massive bailout.  European bank exposure to the PIGS wasn’t altruistic economic development and cooperation funding; it was very often speculative and without due diligence investment. Moreover Germany relies on the EU for exports, so a stable and not in recession area is on its interest.

One variation on the Euro-bonds idea that has gained traction in recent weeks is something called "project bonds". It's not a big deal as it's exactly what was proposed in 1993 by the European Commission President's Delors.  It will not help as the money involved is too little.

Euro-bonds may not resolve the current crisis but  I think would avoid having a bigger one.
I also expect Euro-bonds “soon”.

It was posted exactly two years ago

It was posted exactly two years ago on

Friday, November 27, 2009

Just a REMINDER, republished exactly the same!

Few days ago, inquiring minds asked Nobel Prize Krugman about debt/GDP ratio comparisons. There is a bizarre school of thought who tend to think that sovereign public debt does not matter or debt can be accumulated for long time without sustainability and solvency problems.
The Dubai crisis is simply reminding us: a) the financial crisis is not over b) any debt needs to be paid back, no matter if it's private or sovereign (or a mix of the two).
In the case of Dubai, Buiter is stressing that the debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. Yet financial markets are reacting as if either private or public (sovereign) debt levels are important. As a matter of fact the financial crisis has shown how private debts of banks and financial institutions become public debt and greatly contribute to its growth.
The volume of activity in sovereign credit default swaps – which measure the cost to insure against bond default has recently increased enormously. Some countries, like Greece, are showing clear sign of Sovereign Credit Deterioration. Bets on rich country bond defaults aim at guessing Which of the “Rich Four” Countries Will Default First?.

Italy is an interesting case as CDS volumes (USD gross notional) and contracts increased both about 48% in one year. Italy has one of the highest debt/GDP ratio of the developed economies and CDS volume is now the highest for an individual country.

So what are CDS and Interest Rates Telling Us? Simply that investors are increasingly worried about debt in the world, particularly industrialized countries and they are hedging long-tail risk.
Although debt as the percentage of GDP is not the only criteria to really assign a viable ranking to the default risk, it's a reminder that investors would like to be paid back sooner or later and all bills have to be paid.
That is why it is so important that you eat debt immediately, on Thanksgiving.
And do not tell people that Dubai is a Black Swan when it's just a roasted turkey as usual.

Euro bonds or Bonds to be alive!

When I published this post about Euro bonds in March 2009 I actually imagined the present situation. Now even the European Commission proposes something along the same lines I sketched them out in my posts. They call it wrongly  Stability Bonds just for cosmetics reasons, to try to be different.
It took the European Commission almost 3 years to understand the situation and table a proposal. It did it collating and collecting material on internet.  Yet the first proposal was made in 1993 by Commission's President Jacques Delors.

The title of the James Bond movie on my post was Never say never again.

Today Spiegel on line International writes: German Resistance to Pooling Debt May Be Shrinking - "Never say never: The German government remains officially opposed to controversial euro bonds. Behind the scenes, however, press reports indicate that some within Chancellor Merkel's government have begun discussing the conditions under which they might accept a pooling of euro-zone debt". 

After several years it's really time to say Never say never again.

Yet you have a Euro pessimist like Nobel Prize Paul Krugman writing that recent higher rates in Germany is to be seen as market "in effect pricing in a real possibility of eurozone collapse".
I think it's easier to think that actually the market is pricing and pushing the launch of Euro-bonds. Against this backdrop German rates will have to be a bit higher...

I still contend that EU bonds are necessary to further EU economic and financial integration as they are Bonds to be alive. Not just stability. I may technically also add they are now necessary to take European Central Bank out of impasse of buying bonds of doubtful value or incurring losses. De facto the ECB is already running on kind of notional EU bonds, at its expenses...

UPDATE: On issues like organisational set-up and conditions for entering the system of Euro-bonds, I think that it should be possible the transformation of EFSF/ESM into a full scale debt management agency where Member States could initially simply opt to transfer common issuance functions to the agency providing collateral (why not gold or revenues?) and guarantees (joint and several). Germany could even opt-out but it will realize immediately that actually competition within EU in issuing government bonds is not necessarily good and could result just in a beggar thy neighbour wrong policy. I do not see the need of treaties changes in such a transformation. Let's also avoid the proliferation of mechanisms, instruments and facilities as money is money and debt is debt.
UPDATE of 27/11/2011: Reading the press a new option to avoid treaties modifications appears and would also simplify the launch of Eurobonds: to sign a mini-stability pact (along the lines of Schengen for immigration and just among those countries willing to do it with opting-out of some) then to also launch euro-bonds with joint and several guarantees of the mini-stability pact signatories. That means that Eurobonds system can be set up on a voluntary basis among those willing to abide by the rules and conditions of the pact.

WHEN THE GOING GETS TOUGH, THE LIES GET GOING

"Market jitters bring difficult choice between truth and lies for politicians, spokespeople".

It's true that WHEN THE GOING GETS TOUGH, THE LIES GET GOING....

 

But how to interpret the words of Jean-Claude Juncker, prime minister of Luxembourg, for whom the threat of immediate market turbulence means the usual norms of transparency don't apply.

He is reported to have said that "When it becomes serious, you have to lie". This about markets reactions to Greece's situation bring us back to other lies I wrote about. Then there are lies and inconvenient truth...

Yet for politicians the usual liar paradox applies: "Everything I say is a lie". 

 

Does it apply to some economists as well?

For the Italians future: "Ordem e Progresso" or stop voting Berlusconi...

WHY ITALIANS ARE STILL VOTING AND/OR SUPPORTING SILVIO, OR JUST 

LAUGHING AT HIS JOKES ?