Archive for July, 2015

Greece Bearer Bonds can still help

Posted on July 8, 2015. Filed under: Uncategorized |

Back in 2012 I suggested that Greece issue Bearer Bonds in order to help reduce the external debt held by non-Greeks on the increasing Greek debt.

I didn’t win the Wolfson prize then.  But it’s still the right idea.

Greece should issue and print Bearer Bonds, 1 year, 0% interest bonds, convertible to Euros in 1 Aug 2016, and issue them in the amount of 100% of their budget deficit plus 10% of their outstanding debt.

Gov’t pensions and salaries would be paid in part euros and part bonds, initially up to 50% bonds.
Greek banks would be required to open a free separate bond account for all depositors.
The bearer bonds would be treated as a separate currency, until Aug 2016, where the bond deposits would be redeemed and converted into Euros*.

No business would be forced to accept them as payment (NOT legal tender), altho they would be allowed to.
Greeks & businesses could pay taxes with the bearer bonds at par (100%)
The Greek central bank should redeem them at 50% of par in euros for bonds  — and investigate tax payments of any person or business which redeems “large amounts”.

It would be expected to slightly increase the total amount of taxes collected (possibly a huge increase).

The idea is to have a Euro based “Bond currency” where the people who are loaning money to the Greek Gov’t become the Greek people, especially those who are receiving money from the gov’t.

With bearer bonds returning a little stability to the Greek economy, there should be room for more greek investment into new local businesses and job creation.

***Job creation in the private sector is the most important macro issue. Debt and monetary issues need some resolution so that the economic actors can focus on getting the Greek economy growing.

*in July, 2016, there may be a new issue of 2-year, 0% interest, bearer bonds, 100% of budget deficit (maybe 0? due to taxes paid in bonds with reduced gov’t spending) plus 20% of outstanding debt (including not yet redeemed 1 year bonds).

(revised update above)

Not taking more definitive action years ago has helped make the current crises more painful and chaotic.

Also this is something all the Euro countries, including Slovakia, Germany, and the other PIGS, and even the UK, could begin doing to some extent or a great extent.  Very low cost to do this while interest rates are low.

Points and Figures has a discussion about this.

The Greeks are (majority) socialists.  They have run out … of other people’s money.
They will not pay their debts.
They will default — like a homeowner who stops paying mortgages.
What will happen next?

If you owe the bank a million dollars, you have a problem.
If you owe the bank a billion dollars, the bank has a problem.

In 2010, the private bank lenders to Greece were mostly bailed out (the early bailout did NOT go to help the Greeks; but neither was there “needed” reform.)
Now it’s EU gov’t structures / IMF (semi-gov’t) holders of debt.
What happens when, no longer if, the Greeks stop paying?

Many homeowners have lost homes who didn’t pay.
Many banks have made continuation deals to avoid taking over houses and writing off loans.

There’s no “science”, this is a unique default — but the biggest fear of the EU is that if Greece doesn’t repay debts but stays in the Eurozone, other big PIGS will want the same.

While nobody knows what will happen, one scenario I advocate that I haven’t seen discussed is Greek printing bearer bonds, 0% interest, due in 1 year, and using them to borrow from those getting pensions and other gov’t salaries.  With Greece accepting the bonds at 100% par value in tax payments, but not requiring private folk to accept them as “money” — the ECB doesn’t allow Greece to print “money”.
Bearer bonds are not money if stores don’t have to accept them as legal tender, but they’re pretty close.  They’re bonds, just like IMF already has, sort of.

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