- Jun 6, 2007
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European Union Leaders on the sovereign debt problem look like their playing a "whack the mole" game where they come up with a solution and the problem just rears its ugly head in another manner, the real terrible thing about this scenario is that as they perpetuate this cycle it holds their own and the American people in a deep swamp and as common wisdom knows people drown in such circumstances. What European and world leaders need to start doing on this sovereign debt issue is face important problems that they've heretofore not found the wherewithal to address, namely in part the following.
World governments need to stop and outlaw speculative derivatives. Derivatives are simply insurance contracts and they are fine when they protect a bond holder or loan owner from the debtor defaulting on the debt and they are fine when they protect a business that uses a commodity or currency from a dramatic change in the price of these items but they are super harmful to a society when they are used by investors to just speculate when they are essentially used as betting contracts. What speculative contracts bring to a society is that instead of the societal cost of a loan default being the amount of the loan it is often two, five and greater times that depending on the extent of the speculative contracts that are outstanding on that debt, when it comes to commodity and currency speculative contracts the same type of magnified economic costs results and the crux of the problem is that financial institutions have to pay the claims on these speculative contracts which can result in large losses for financial institutions hurting their stock holders often pensioners, employees with layoffs, customers with less lending and communities with weakened and/or dysfunctional financial institutions. Back in the fall of 2008 when the worlds stock market were on the verge of collapse, credit markets were seizing and regulators were fighting back a run on the banking system and American politicians were fighting over the only offered solution, TARP, world leaders were highly critical of America, German Chancellor Andrea Merkel condemned America for its casino capitalism other leaders referenced America's recklessness, over-leveraging, greed etc. and chastised America to fix the problem. There couldn't be a more perfect example of reckless and casino capitalism than speculative derivatives which are essentially betting contracts, they don't provide capital for a business that provides a good or service they don't provide credit for a person to buy a home or credit for a government entity to build a school, bridge a hospital or the like they are a blight on society; a political leader cannot legitimately claim to be against irresponsible capitalism and for speculative derivatives the merits of the issue are so compelling. It was reported in the media that Greece's outstanding debt is 350 billion Euros and their current GDP is 210 billion Euros so let's say the rescue plan for Greece was to reduce their debt level to 80% of GDP, a reasonable plan, which would mean having all the bond holders except the IMF take a 182 billion Euros loss [around $250 billion] (of course there would be creditor off-limit penalties and fiscal control penalties on Greece if this path was chosen) one would think European Union leaders would implement this plan quickly and permanently pull the world markets out of the Greek debt quicksand it is in. Consider the BP Oil accident in the Gulf of Mexico last year will costs around $100 billion dollars consider the Tsunami floods that hit Japan this year with the community's damaged, the lost world-wide manufacturing, the nuclear plant accident and clean-up, etc. the costs will be around $200 billion these incidents have only been blips on the world financial markets. But the problem is much more complicated than just the Greek debt load Greece can't afford there is the issue of all the speculative derivative contracts on the Greek debt which if Greece were permitted to partially default on its debt would make all these speculative derivative contracts payable which would mean a lot of solid socially important banks to various countries would lose huge amounts of money paying off to these speculators and domestic economies would be stabilized. All signs are and always will point to the lesson that speculative derivatives are super bad for the world economy and should be made against the law; it's going to happen the only issue is when and this is a perfect opportunity with the European Union Debt crisis for the world's major leaders to call for this legal ban which will give the world meaningful help to get this problem under control!
Another issue the European Union leaders need to face is a dual issue which is that the European Union and for that matter practically all the willing countries in the world are not going to be able to put forth a fund large enough to buy bonds from European sovereigns who need help selling their sovereign bonds at affordable interest rates. The European Union will have to force its member countries that can't sell their nation's bonds to force their own wealthy people, pensions and non-financial wealthy businesses to buy their bonds coupled with the European Central Banks buying some with domestic citizens and businesses buying the lions share. Bailout funds to ordinary citizens in countries that aren't in trouble that are contributing to the fund engenders in them that they are paying for the abusive irresponsible spending of the people in the country getting help from the fund and it seems unfair plus the amount of money a European Union bailout fund would need to put the whole union's sovereign debt problem to sleep permanently is at least two and a half trillion dollars which if the union got universal cooperation would put all the European Union countries at grave risk of be stuck paying that onerous debt and that is just unfair and impractical to expect European Union countries to sign on to such an arrangement. The twenty percent leverage idea of a fund is pipe-dream where the fund promises investors if they buy a sovereign's debt the fund will absorb the first twenty percent of losses on a default because as reported in the media sovereign debt investors know when a sovereign defaults its not a little default it's a big one where this twenty percent insurance won't practically protect against foreseeable loss and why would an investor buy new bonds from a sovereign with only twenty percent protection when they can buy that same sovereign's debt for much less than eighty cents on the dollar so they could protect themselves much better from economic loss. The European Union looking for help from the Chinese for your fund is a very bad idea, ageless wisdom says you don't make a deal with the devil its always a bad idea and the Chinese are the devil there going to want arm sales, access to buying your heritage businesses and natural resources, freedom to export their goods to your country regardless of trade deficits all the price for contributing and it isn't worth it. Forcing union countries that have debt problems to force their own people and businesses to buy their own debt is right because its their country their responsible for its funding moreover if its their savings, assets, and capital on the line they will use their power to stop wasteful and excessive government spending and make sure they are raising revenue through taxes the way they should. Lastly, the role of a central bank, in part, is that you are the last levy to save your jurisdictions economy, specifically you deflate your jurisdiction's currency to save your jurisdictions economy in layman's speak you print money if your jurisdiction's economy needs it; if in trouble European Union countries government are making the effort to cut and raise revenue and citizens and businesses are making a good effort to buy the sovereigns bonds the central bank has to do its share and buy bonds and if that entails printing money and devaluing the Euro "so be it!" that what it means to be part of the union you shoulder some of the load, remember, if member countries were on the job they would never let a fellow country get so over leveraged there should be triggers when when a countries leverage gets so high banks can't buy their debt if it gets higher businesses and pension funds can't buy it make it so the shut-off of pool of bond buyers gets them to stop the leverage.
The media and world officials have castigated Prime Minister Papandreou for his call Monday for a referendum on the European Bailout plan for his country Greece. This man should not be berated by world leaders but emulated for he has the character to stand up for what is right even though it is not popular. Since the deal was announced his people have expressed great displeasure, a poll over the weekend reported 58% of his citizens were against it. All his critics act like these developments don't matter which is insane the Prime Minister is going to have to have Greece's Parliament pass austere legislation numerous times over the ensuing years for the plan to succeed which is going to cause great hardship on ordinary Greeks. If news reports are true about life in Greece ordinary Greeks are experiencing a Great Recession as it stands now there is no chance the Prime Minister can garnish Parliaments support to implement the bailout deal the Greek public will exert too much opposing pressure on parliament members. A prime minister with character would take the issue to his people through a referendum this will make it clear to them that there will be negative consequences either way and they can choose the countries course in a democratic manner. This is the only fair way and the only viable way a Prime Minister doing the right thing for his people and the world would conclude this. People that want to see this Greek debt problem resolved optimally and with finality for everyone in the world will want this referendum held in January. This will give governments throughout the world time to pass laws outlawing speculative derivaties which will mitigate the economic harm of a Greek default, if that can't be accomplished it will give world governments time to identify important financial institutions that will be significantly hurt by a Greek default so they can be injected with capital. Further this bailout deal stinks for the Greek people after the 100 billion Euro debt haircut their still going to be left with around 250 billion Euros of debt in the past twelve months they borrowed 40 billion Euros common sense would indicate even after this debt haircut there still going to have to borrow tens of billions of Euros a year and how long do you thing this will be permitted so they will be forced to cut billions of Euros from government expenditures and with a population of only eleven million the pain won't be spread thinly. Maybe during this time up to the referendum vote the powers to be will put together a livable deal for the Greek people so there so much impetus on the Greek people to reject the deal and choose the default path!
As one may gather this writer believes that a distressed sovereign country's own people and to a minor degree the ECB should loan such a sovereign money as needed. Nevertheless, there is a need for a European Union stabilization fund but the only purpose of this fund should be for recapitalizing financial institutions in the European Union. It goes without saying that a country can't create jobs and can't increase the standard of living of their workers without that country's businesses coming into existence and growing and that can't happen without that country having a healthy banking industry that can lend money to businesses as needed. This Eurpean Union Debt crisis has the potential to leave a lot of European Union banks in a skin and bone state if alive at all it was reported in the media that French banks alone are exposed to 600 billion Euros of debt from debt distressed European Union countries. European Union leaders have directed their financial instituion to raise a $100 billion Euros from private investment, many critics say this is too little new equity this makes sense with the amount of distressed sovereign debt at issue. This stabilization fund if it is handled competently should not lose much money if any at all. Theoretically, it should be as fiscally sound as the U.S. Tarp fund which wouldn't have lost any money at all if portions of it weren't used to try to entice banks to modify home mortgages and the selling of government ownership in financial wasn't accelerated for political reasons. I think the American people could be persuaded to loan this fund $300 billion dollars because its low risk, America caused the recession which is a major cause of Europe's economic problems which is not so resilient as the U.S. economy, preservation of the Euro is very important to America's economic interest for European countries are a major customers and if the Euro dies a lot of these countries sovereign curriencies will have small value compared to the U.S. dollare therefore U.S. products and services will be much more expensive and therefore often not bought plus American businesses will have to deal with the added cost of managing currencies, hedging fluctuations for instance which would be a sginifcant added cost. World-wide European Union leaders could raise sufficient money for such a fund on that compelling theme it will provide vital help and this fragile time to preserve the Euro. Two brief thoughts, the treasury officials that ran Tarp did a good job of weeding out financial institutions that weren't good risks from getting money this stabilization should make it a priority to have such a professional non-political staff and to that end the fund should probably have a board composed of appointees from the biggest donor countries no matter whether their European Union countries or not. Secondly, the goal is to capitalize financial institurions not change ownereship so on the matter of the stock warrants taken for loaning these financial institutions money plenty of time and every opportuntiy should be given to allow these financial institurions to buy these warrants back at fair market value of course and for the money loaned through preferred stock don't give onerous interest rates make the coupon like three percent!
World governments need to stop and outlaw speculative derivatives. Derivatives are simply insurance contracts and they are fine when they protect a bond holder or loan owner from the debtor defaulting on the debt and they are fine when they protect a business that uses a commodity or currency from a dramatic change in the price of these items but they are super harmful to a society when they are used by investors to just speculate when they are essentially used as betting contracts. What speculative contracts bring to a society is that instead of the societal cost of a loan default being the amount of the loan it is often two, five and greater times that depending on the extent of the speculative contracts that are outstanding on that debt, when it comes to commodity and currency speculative contracts the same type of magnified economic costs results and the crux of the problem is that financial institutions have to pay the claims on these speculative contracts which can result in large losses for financial institutions hurting their stock holders often pensioners, employees with layoffs, customers with less lending and communities with weakened and/or dysfunctional financial institutions. Back in the fall of 2008 when the worlds stock market were on the verge of collapse, credit markets were seizing and regulators were fighting back a run on the banking system and American politicians were fighting over the only offered solution, TARP, world leaders were highly critical of America, German Chancellor Andrea Merkel condemned America for its casino capitalism other leaders referenced America's recklessness, over-leveraging, greed etc. and chastised America to fix the problem. There couldn't be a more perfect example of reckless and casino capitalism than speculative derivatives which are essentially betting contracts, they don't provide capital for a business that provides a good or service they don't provide credit for a person to buy a home or credit for a government entity to build a school, bridge a hospital or the like they are a blight on society; a political leader cannot legitimately claim to be against irresponsible capitalism and for speculative derivatives the merits of the issue are so compelling. It was reported in the media that Greece's outstanding debt is 350 billion Euros and their current GDP is 210 billion Euros so let's say the rescue plan for Greece was to reduce their debt level to 80% of GDP, a reasonable plan, which would mean having all the bond holders except the IMF take a 182 billion Euros loss [around $250 billion] (of course there would be creditor off-limit penalties and fiscal control penalties on Greece if this path was chosen) one would think European Union leaders would implement this plan quickly and permanently pull the world markets out of the Greek debt quicksand it is in. Consider the BP Oil accident in the Gulf of Mexico last year will costs around $100 billion dollars consider the Tsunami floods that hit Japan this year with the community's damaged, the lost world-wide manufacturing, the nuclear plant accident and clean-up, etc. the costs will be around $200 billion these incidents have only been blips on the world financial markets. But the problem is much more complicated than just the Greek debt load Greece can't afford there is the issue of all the speculative derivative contracts on the Greek debt which if Greece were permitted to partially default on its debt would make all these speculative derivative contracts payable which would mean a lot of solid socially important banks to various countries would lose huge amounts of money paying off to these speculators and domestic economies would be stabilized. All signs are and always will point to the lesson that speculative derivatives are super bad for the world economy and should be made against the law; it's going to happen the only issue is when and this is a perfect opportunity with the European Union Debt crisis for the world's major leaders to call for this legal ban which will give the world meaningful help to get this problem under control!
Another issue the European Union leaders need to face is a dual issue which is that the European Union and for that matter practically all the willing countries in the world are not going to be able to put forth a fund large enough to buy bonds from European sovereigns who need help selling their sovereign bonds at affordable interest rates. The European Union will have to force its member countries that can't sell their nation's bonds to force their own wealthy people, pensions and non-financial wealthy businesses to buy their bonds coupled with the European Central Banks buying some with domestic citizens and businesses buying the lions share. Bailout funds to ordinary citizens in countries that aren't in trouble that are contributing to the fund engenders in them that they are paying for the abusive irresponsible spending of the people in the country getting help from the fund and it seems unfair plus the amount of money a European Union bailout fund would need to put the whole union's sovereign debt problem to sleep permanently is at least two and a half trillion dollars which if the union got universal cooperation would put all the European Union countries at grave risk of be stuck paying that onerous debt and that is just unfair and impractical to expect European Union countries to sign on to such an arrangement. The twenty percent leverage idea of a fund is pipe-dream where the fund promises investors if they buy a sovereign's debt the fund will absorb the first twenty percent of losses on a default because as reported in the media sovereign debt investors know when a sovereign defaults its not a little default it's a big one where this twenty percent insurance won't practically protect against foreseeable loss and why would an investor buy new bonds from a sovereign with only twenty percent protection when they can buy that same sovereign's debt for much less than eighty cents on the dollar so they could protect themselves much better from economic loss. The European Union looking for help from the Chinese for your fund is a very bad idea, ageless wisdom says you don't make a deal with the devil its always a bad idea and the Chinese are the devil there going to want arm sales, access to buying your heritage businesses and natural resources, freedom to export their goods to your country regardless of trade deficits all the price for contributing and it isn't worth it. Forcing union countries that have debt problems to force their own people and businesses to buy their own debt is right because its their country their responsible for its funding moreover if its their savings, assets, and capital on the line they will use their power to stop wasteful and excessive government spending and make sure they are raising revenue through taxes the way they should. Lastly, the role of a central bank, in part, is that you are the last levy to save your jurisdictions economy, specifically you deflate your jurisdiction's currency to save your jurisdictions economy in layman's speak you print money if your jurisdiction's economy needs it; if in trouble European Union countries government are making the effort to cut and raise revenue and citizens and businesses are making a good effort to buy the sovereigns bonds the central bank has to do its share and buy bonds and if that entails printing money and devaluing the Euro "so be it!" that what it means to be part of the union you shoulder some of the load, remember, if member countries were on the job they would never let a fellow country get so over leveraged there should be triggers when when a countries leverage gets so high banks can't buy their debt if it gets higher businesses and pension funds can't buy it make it so the shut-off of pool of bond buyers gets them to stop the leverage.
The media and world officials have castigated Prime Minister Papandreou for his call Monday for a referendum on the European Bailout plan for his country Greece. This man should not be berated by world leaders but emulated for he has the character to stand up for what is right even though it is not popular. Since the deal was announced his people have expressed great displeasure, a poll over the weekend reported 58% of his citizens were against it. All his critics act like these developments don't matter which is insane the Prime Minister is going to have to have Greece's Parliament pass austere legislation numerous times over the ensuing years for the plan to succeed which is going to cause great hardship on ordinary Greeks. If news reports are true about life in Greece ordinary Greeks are experiencing a Great Recession as it stands now there is no chance the Prime Minister can garnish Parliaments support to implement the bailout deal the Greek public will exert too much opposing pressure on parliament members. A prime minister with character would take the issue to his people through a referendum this will make it clear to them that there will be negative consequences either way and they can choose the countries course in a democratic manner. This is the only fair way and the only viable way a Prime Minister doing the right thing for his people and the world would conclude this. People that want to see this Greek debt problem resolved optimally and with finality for everyone in the world will want this referendum held in January. This will give governments throughout the world time to pass laws outlawing speculative derivaties which will mitigate the economic harm of a Greek default, if that can't be accomplished it will give world governments time to identify important financial institutions that will be significantly hurt by a Greek default so they can be injected with capital. Further this bailout deal stinks for the Greek people after the 100 billion Euro debt haircut their still going to be left with around 250 billion Euros of debt in the past twelve months they borrowed 40 billion Euros common sense would indicate even after this debt haircut there still going to have to borrow tens of billions of Euros a year and how long do you thing this will be permitted so they will be forced to cut billions of Euros from government expenditures and with a population of only eleven million the pain won't be spread thinly. Maybe during this time up to the referendum vote the powers to be will put together a livable deal for the Greek people so there so much impetus on the Greek people to reject the deal and choose the default path!
As one may gather this writer believes that a distressed sovereign country's own people and to a minor degree the ECB should loan such a sovereign money as needed. Nevertheless, there is a need for a European Union stabilization fund but the only purpose of this fund should be for recapitalizing financial institutions in the European Union. It goes without saying that a country can't create jobs and can't increase the standard of living of their workers without that country's businesses coming into existence and growing and that can't happen without that country having a healthy banking industry that can lend money to businesses as needed. This Eurpean Union Debt crisis has the potential to leave a lot of European Union banks in a skin and bone state if alive at all it was reported in the media that French banks alone are exposed to 600 billion Euros of debt from debt distressed European Union countries. European Union leaders have directed their financial instituion to raise a $100 billion Euros from private investment, many critics say this is too little new equity this makes sense with the amount of distressed sovereign debt at issue. This stabilization fund if it is handled competently should not lose much money if any at all. Theoretically, it should be as fiscally sound as the U.S. Tarp fund which wouldn't have lost any money at all if portions of it weren't used to try to entice banks to modify home mortgages and the selling of government ownership in financial wasn't accelerated for political reasons. I think the American people could be persuaded to loan this fund $300 billion dollars because its low risk, America caused the recession which is a major cause of Europe's economic problems which is not so resilient as the U.S. economy, preservation of the Euro is very important to America's economic interest for European countries are a major customers and if the Euro dies a lot of these countries sovereign curriencies will have small value compared to the U.S. dollare therefore U.S. products and services will be much more expensive and therefore often not bought plus American businesses will have to deal with the added cost of managing currencies, hedging fluctuations for instance which would be a sginifcant added cost. World-wide European Union leaders could raise sufficient money for such a fund on that compelling theme it will provide vital help and this fragile time to preserve the Euro. Two brief thoughts, the treasury officials that ran Tarp did a good job of weeding out financial institutions that weren't good risks from getting money this stabilization should make it a priority to have such a professional non-political staff and to that end the fund should probably have a board composed of appointees from the biggest donor countries no matter whether their European Union countries or not. Secondly, the goal is to capitalize financial institurions not change ownereship so on the matter of the stock warrants taken for loaning these financial institutions money plenty of time and every opportuntiy should be given to allow these financial institurions to buy these warrants back at fair market value of course and for the money loaned through preferred stock don't give onerous interest rates make the coupon like three percent!
