Any redress when EU members break EU own laws?

Once upon a time there were three little pigs and the time came for them to leave home and seek their fortunes. Before they left, their mother told them " Whatever you do , do it the best that you can because that's the way to get along in the world"



These days we read a lot about PIGS. PIGS is a farmyard acronym used by international bond analysts, academics, and by the international economic press that refer to the economies of Portugal, Italy, Greece, and Spain, especially in regards to matters relating to sovereign debt markets. The "I" originally refered to Italy, but has become a reference also to Ireland (PIIGS or five countries).

We can say that The Five Little Pigs is a retelling of the classic children's story with a new twist: a fifth pig.

Some news and economic organisations have limited or banned the acronym's use due to criticism regarding perceived offensive connotations. It's a fallacy.

Yet, to avoid this kind of negative connotations continuing to write that PIGS cannot fly, I will offer this classic children tale.


Greece: Haven’t we seen this movie before? . In the euro-zone, and elsewhere, accounting (read Ponzi schemes) and legal tricks are now coming home to roost.

Then you have Banks Bet Greece Defaults on Debt They Helped Hide.

It's and old story and déjà vu concerning moral hazard and use of certain derivatives in the market for lemons of sovereign debt.

Let's say that some banks like to gamble... But again I would not blame bankers too much.

I would blame those governments and their officials who set up the scheme and regulation initially and those EU institutions that allowed them to do it. Particularly at EU institution level if you allow to be member of the club somebody who is cheating then you can only claim you did not know it was doing that.

Moreover what kind of redress the EU has in place when its members break its own laws? Nothing, no plans, you just have legal experts studying whether a bail out is possible according to laws that EU members have already broken.

Then you read that Italy Masked Finances Worse Than Greece and you realize that the classic children's story of 3, 4 or 5 little pigs cannot be told forever.

Once upon a time there was a mother pig who had three little pigs.The three little pigs grew so big that their mother said to them, "You are too big to live here any longer. You must go and build houses for yourselves. But take care that the wolf does not catch you."

Too (and too many) PIGS to bail (and to fly)

Inquiring minds have already started to think about the next likely phase of the present crisis, and it appears that all they are finding are new reasons to sell PIGS debts and their currency which is the euro.

Nobel Prize-winning economist Robert Mundell claims Italy is a bigger threat to EU stability than Greece. Italy has about 1.8 trillion euros ($2.5 trillion) in "declared by statistics" public debt. The latter could be magnified by derivative contracts used by Italian municipalities and other swaps deals made in the past.

I still contend that the most effective solution to the present EU sovereign debt crisis would be to issue jointly EU bonds to refinance gradually all the maturing debt of the PIGS. This would not only significantly reduce the cost of financing of PIGS debt, while creating a EU bond market, but it would replace any International Monetary Fund role and/or conditional loans.

If then EU would like to replenish yearly, not in emergency, the European Bond Fund, which mainly will issue EU bonds, a financial transaction tax, or any other Pigouvian tax on the finance industry, could be implemented for the purpose. The same EU annual budget, whose total EU revenue for 2010 amounts to some EUR 141.5 billions could be funded by this type of resources instead of the traditional ones which Member States collect on behalf of the EU and transfer them to the EU budget.

In this way the debt crisis could be turned "easily" and favorably, with the issuance of EU bonds (suggested also recently by George Soros) and a common Pigouvian tax, towards further integration of monetary and fiscal policies within EU.

PIGS cannot fly but Black Swans do

"We believe a transmission mechanism exists between Euro sovereign risks and the global financial system. The possibility of Greece (or another problem country) becoming a systemic threat is a nonzero probability. However, we do feel that central banks across the globe have their eyes wide open at the problem, and this diminishes the probability that such contagion could occur".

OK, now we want to know who is the Mr. Madoff of Greece’s sovereign debt Ponzi scheme as suggested here and here.
Bankers and central bankers are still hanging around in “business as usual mode” always saying “oh no, it’s not my fault, because to the best of my knowledge I do not know what people under my supervision and control are doing…”. EU institutions are not any better as officials do not seem to know their PIGS.

I still contend that the recession is uncovering what auditors (and I add economists/statisticians) could not (or better did not want).
Since foreign banks own some 70% of Greek debt, it appears clear that “market structures helped overcome information asymmetries and sustained the development of Greece sovereign debt”, under very peculiar conditions which can explain the incentives to fraud in the market for lemons of sovereign bonds.

If we are sure that PIGS cannot fly we should also be aware that Black Swan can (with non zero probability).

Too little to fail: or when you do not have ideas you'd better have a plan

It is now quite clear that PIGS cannot learn to fly.

EU leaders showed yesterday that when you do not have ideas you'd better have a plan, a rescue plan in this case. Some said the meeting achieved little more than a political statement, leaving details to be worked out later by EU finance ministers.

Greece appears, like some financial organizations in the financial crisis, too interconnected to fail although it is very little in the euro zone. Moral hazard and systemic risk are again issues at stake. Yet European leaders show no ideas or willingness to cope with them.

Somebody continues to suggest that the IMF should intervene "to provide a properly tranched conditionality-based support package to stave off a refinancing crisis".

I am not convinced that a EU country should go to IMF for help or IMF is really better equipped to deal with a euro zone problem.

I think there is a nice way to get out of this crisis and give a strong signal to markets, particularly speculators. A EU financial transaction tax which would raise a large sum of money painlessly, and would help to limit the sort of speculative attacks against the euro-zone.

Moreover funds collected under a financial transaction tax (a kind of VAT at EU level with a Pigouvian character) could also, via a EU fund, cover the issuance of EU bonds.

The devil is in the details of the above scheme. Euro bond can't solve all problems, like national interest spreads and premia but common, joint and/or coordinated issuance and uses (including recapitalization of banks, European budget, common guarantee funds, EU projects, rescue loans and packages, IMF resources, etc.) could also create an efficient and effective bill or bond euro zone market. Different arrangements could then be studied concerning the issuing institution (single issuer) or coordinated agencies and its guarantees. A bond clearing house, i.e., a vehicle for sharing information to improve fiscal coordination could also be set up under EU umbrella. Some of the technicalities and arrangements would be the same as for the introduction of the Euro as a common currency.

Securitisation of national government bonds should not be construed as a problem.
On the other hand I have noted that we are continuing to build houses of cards and Ponzi schemes as banks are saved by governments which issue new sovereign debt to be sold to banks which are now called again to buy PIGS's sovereign bonds.

Then EU Member States should set up a rescue plan to save a country which sold governments bonds to their banks (70% of Greece sovereign debt is hold by foreign institutions, mainly EU banks) which can earn on the difference between ECB funding and Greek bonds interest rates. On top of that some EU banks, also Greek ones, are reported trading, at the same time, Credit Default Swaps on sovereign bonds which might not held (no insurable interest).

Can we stop this vicious circle and cross-border Ponzi scheme once and for all?

Sovereign debts: markets for lemons and Ponzi schemes

The Greek debt crisis prompts an interesting question: are sovereign debt markets, markets for lemons?


In the case of Greece there is more than just some information asymmetries as national accounts were fudged. Greece is also rattled by some 'hidden debt' controversy.

Since foreign banks own some 70% of Greek debt, it appears clear that "market structures helped overcome information asymmetries and sustained the development of Greece sovereign debt", under very peculiar conditions.

Leading banks known for their reputation helped Greece to place bonds abroad granting it favourable borrowing terms in the euro-zone. They sustained the development of the Greek sovereign debt and now they may be victims of their own underwriting of Greek debt.

The Greek conspiracy theory is interesting. It would appear that bailing out of Greece has the same level of moral hazard and systemic risk implications for the financial markets of Lehman and AIG crisis.

Is history repeating itself as the financial crisis is not over?

Bail out Greece to save its banking counterparts and avoid snowball effects in the financial markets, including the famous Credit Default Swap one?

I still contend that the roll over of sovereign and public debt is a kind of Ponzi scheme not simple hysteria. When enough of government debt clients look to sell or place, at the same time, their bonds and some of their apparently well-performing sovereign assets, also to help offset other losses, the scam collapse and a country may risk the default (via self fulfilling prophecy as well).

Moreover the dumping of government bonds makes the cost of any adjustment higher for a country as fiscal deficit increases just for the higher interest rate to be paid on the debt.

Who are going to buy all governments' securities and continue to lend to governments?

UPDATE February 10th: It appears that history of AIG-Lehman is really repeating itself “occuring first as tragedy, the second time as farce" as the deciding factor about a Greece bail out is "concern that letting Greece fail risked a “Lehman-style” run on Club Med debt, with systemic spill-over across Europe."
I still contend that the best Greek "firewall" is the issue of EU bonds along the lines I suggested at http://mgiannini.blogspot.com/2009/03/my-name-is-bond-european-union-bond.html. Never say never again.
We can work out the details of the issuances but it will help. If only politicians and some economists listened.