Friday, 28 September 2012

Spanish Debt - an alternative solution

Given the overwhelming consensus view that Spain will have to go cap-in-hand to the ECB/EU/Troika and ask for a bailout one has to ask if there really is no alternative for EU member states that find themselves in a tight spot. Is it really necessary to impose the costs of any restructuring on the weakest members of society? Why not just impose a unilateral debt restructuring and let the creditors - domestic and foreign - carry a much larger burden of any restructuring? There is no reason why a country choosing to go down that route could not remain in the Eurozone, if anything such a radical measure would make it easier to remain in the Eurozone. Capital flight would be reduced as there would be less fear that an exit from the Eurozone would be imposed in order to solve the debt crisis.

Thursday, 6 September 2012

Euro in the last chance saloon

Today's 'surprise' announcement by the figurehead of the ECB, Mario Draghi, that the Euro would be defended with another dose of a highly addictive drug, i.e. paper money in hitherto unimaginable amounts, also amounts to the end of any rational economic policy in the Eurozone. Trying to patch up a wrongly designed currency zone with more and more desperate measures may buy time, even quite a long time, before the next - and terminal - crisis erupts. Banking union, fiscal union etc may all happen - without a shred of democratic legitimacy - but in the end there is no guarantee that no member state of the Eurozone will not some day give notice of its intention to quit - and leave all its obligations behind. This Damocles's sword will from now on always hang over the heads of all investors that have a financial stake in the Eurozone. Like our warning back in 2005 when we argued that investors were deluded to buy Italian government bonds that yielded a tiny spread versus German paper this warning may also sound premature - the Commentariat will certainly pour scorn on it - but investors ignore it at their peril.