Thursday April 17, 2014 Search
Weather | Athens
15o C
11o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
A cheap moratorium on the stigma of eurozone debt

By Thomas Colignatus*

The EU is in a pressure cooker with interest rates that suffer from stigma, i.e. irrational fears of default that become rational and self-fulfilling because higher rates of interest imply a reward. A moratorium is one way to ease the pressure, by temporarily allowing eurozone bonds for 3 percent of GDP per annum to cover deficits. This would buy time to think through a structural solution, as a dash for a fiscal and political federation may be ill-advised given the risk of resentment.

Decision-making in the EU is currently taking place in a pressure-cooker environment, creating the risk of wrong decisions that would only make the situation worse. In the past five years, EU leaders have wandered from one crisis to the other -- created in part by themselves. Now, for example, they recognize that the «voluntary default» on Greek debt was not so wise. Last week, German Chancellor Angela Merkel expressed her preference for a fiscal and political federation, though that carries risks too. The transfer of national sovereignty taking place under the current conditions of austerity and depression in southern Europe, could render the European project a diktat disliked by Europeans instead of a community that everyone welcomes. Historically Europe’s greatest danger is resentment, and such a federation may not be what is needed just now.

Current high rates of interest derive from the stigma and the key problem in the eurozone is that there is no structural mechanism yet to eliminate it and problems with interest rates are too weak an argument for a political federation.

There is a straightforward way to buy precious time to discuss structural reform with some ease: allow eurozone members to borrow 3% of GDP per annum, for the next 10 years, with full backing by the ECB. Since old debt is already in the hands of market counterparts it is not really as relevant, and only new deficits are important for the annual budgets of the member states. With the backing of the ECB the rates of interest in the eurozone could drop to an acceptable low level. Italy, Spain, Portugal and Ireland would be immediately saved and we would get a clearer picture of what can be done about Greece. After those 10 years only 30% of their GDP will be have such backing by the ECB, so that coverage would be limited and the «no bailout» condition still satisfied.

This moratorium would use euro bonds. Proponents of euro bonds generally want them structurally and not just for a moratorium. Earlier I advised against such bonds since they destroy important market information. For the purposes of this moratorium they could, however, form an instrument that everyone understands and that is immediately effective. My own structural analysis leads to the suggestion of a regime ladder, with different stages depending upon the distance from the target of 60% of debt to GDP. However, my structural analysis is only one of the many approaches. The idea of the moratorium is to create more time to evaluate all of them, also using what we have learned about how a crisis can evolve.

There is a moral hazard that some member states would take advantage of such a moratorium and not participate in the creation of a structural solution. It is more likely, however, that the whole of Europe has become more aware of the need for a structural solution. Nevertheless it would be possible to define phases, say one year for job-creation and agenda-setting, and subsequently three periods of three years for other aspects to be developed in full -- say on investments, banks, governance -- and a unanimous decision to be reached on whether there is sufficient progress to continue with the moratorium.

This proposed moratorium would come at a cost for Germany and Holland, as their interest rates are exceptionally low because of fears about southern Europe. Europe as a whole could ask Germany and Holland to accept normal rates of interest again to create this moratorium. Given Chancellor Merkel’s objectives and given that the «no bailout» clause is satisfied, it would be a wise decision and the best news that Europeans have heard since all this started in August 2007.

----------

* Thomas Colignatus is a Dutch econometrician.

ekathimerini.com , Tuesday Jan 31, 2012 (20:08)  
Ukraine is a crisis—but not a Cold War
Transparency of political party funding
Historical baggage
Stopping the madness
Lafazanis denies speculation of rift within SYRIZA party
SYRIZA MP Panayiotis Lafazanis, who leads the man opposition party's so-called Left Platform, on Thursday sought to play down reports of a heated argument with party leader Alexis Tsipras du...
Homemade bomb targets car of deputy Parliament speaker´s wife
A homemade explosive device on Thursday destroyed the car of deputy Parliament Speaker Giorgos Kalantzis's [photo] wife. The vehicle was parked outside the couple's home in Kavala, northern ...
Inside News
Greek current account deficit widens in February
Greece's current account deficit widened slightly in February from the same month last year, according to balance of payments figures released by the central bank on Thursday. The deficit st...
National Bank of Greece plans senior unsecured bond sale
National Bank of Greece SA is planning to sell senior bonds after the government last week returned to capital markets after a four-year exile. The sale will take place after investor calls ...
Inside Business
SOCCER
Greek soccer turns fishier than ever
Soccer in Greece reached new lows in scenes unseen since the national team’s triumph in Euro 2004, as PAOK and Olympiakos served up a cup semifinal with PAOK emerging as the winner and the s...
BASKETBALL
Greens within a whisker of upsetting CSKA Moscow
Panathinaikos came mighty close to snatching home advantage from CSKA Moscow in Game 1 of the Euroleague play-offs on Wednesday, but eventually succumbed to its host in Russia in overtime, w...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Lafazanis denies speculation of rift within SYRIZA party
2. Greek current account deficit widens in February
3. National Bank of Greece plans senior unsecured bond sale
4. Yield on first post-default Greek bond falls to issuance level
5. Homemade bomb targets car of deputy Parliament speaker´s wife
6. Wearing crowns of thorns, cleaning ladies hold protest at Finance Ministry
more news
Today
This Week
1. Ground-breaking Good Friday mass signals thaw in Cyprus
2. Greece startup leaders say they can’t break jobless cycle alone
3. Seven arrested over Toumba violence
4. Mayoral candidates clash over Athens mosque plans
5. Homemade bomb targets car of deputy Parliament speaker's wife
6. Wearing crowns of thorns, cleaning ladies hold protest at Finance Ministry
Today
This Week
1. Bomb explodes outside Bank of Greece
2. Time to take a hard look at debt sustainability, says OECD chief
3. For faith and country
4. CCTV footage from Nigrita Prison shows signs of inmate torture [Video]
5. Car bomb explodes outside Greek Central Bank building, no one hurt [Update]
6. Samaras sees no need for third bailout
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.