By Warren Mosler
First, the ECB should turn the bonds it buys into “Mosler bonds”, requiring the government of issue to legally state that in the case of non-payment, the bearer can use those bonds for payment of taxes on demand to the government of issue. Moreover, the ECB’s holding Mosler bonds will shift the default option from the issuer to the ECB, as in the case of non-payment, the ECB would have the option to make its holdings available for sale to tax payers of that nation to offset their taxes. Therefore, conversion to Mosler bonds will ensure that the ECB’s holdings of national government debt are ‘money good’ without worrying about external credit ratings. That gives the ECB control over the default process.
Second, I see several substantial reasons Greece should not be allowed to default, which center around why it’s in the best interest of Germany for Greece not to default.
- Sustaining Greece with ECB purchases of Greek debt costs German tax payers nothing.
- The purchases are not inflationary because they are directly tied to reduced Greek spending and increased Greek taxes, which are both deflationary forces for the euro zone.
- Funding Greece facilitates the purchase of German exports to Greece.
- Funding Greece does not reward Greek bad behavior. Instead, it exacts a price from Greece for its bad behavior.
Moreover, with the ECB prospectively owning the majority of Greek debt, and, potentially, Greek Mosler bonds, Greece will be paying interest primarily to the ECB. The funding of Greece by the ECB carries with it austerity measures that will bring the Greek budget into primary balance. That means Greek taxes will be approximately equal to Greek govt expenditures, not including interest, which will then be largely payments to the ECB. So if default is not allowed, the Greek govt. spending will be limited to what it taxes, and additional tax revenues will be required as well to pay interest primarily to the ECB.
But if default is facilitated, Greece will still be required to spend only from tax revenues, but the debt forgiveness will mean substantially lower interest payments to the ECB than otherwise. And while without default, it can be said that the holders of Greek bonds have been bailed out, the euro zone will be considering the following:
- The ECB buys Greek bonds at a discount, indicating holders of those bonds have, on average, taken a loss.
- The EU in general did not consider the purchase of Greek bonds as bad behavior that is rightly punished with a default.
- In fact, it was EU regulation and guidelines that resulted in the initial purchases of Greek bonds by its banking system.
Therefore, I see the main reason Greece will not allowed to default is that not allowing default serves the further purpose of Germany and the EU by every measure I can think of. It sustains the transfer of control of fiscal policy to the ECB. It’s deflationary which helps support the value of the currency. It provides for an ongoing income stream from Greece to the ECB.
Note, however, that not long ago it was not widely recognized as it now is that the ECB can write the check without nominal limit. Before the EU leaders recognized that fundamental of monetary operations, Greek default was serious consideration for financial reasons, as it was believed the funding of Greece and subsequently the rest of the ‘weaker’ euro zone nations would threaten the entire euro zone’s ability to fund itself.
It is the realization that the ECB is the issuer of the currency, and is therefore not revenue constrained, that leads to the conclusion that not allowing Greece to default best serves public purpose.
This post first appeared at “The Center of the Universe” blog site.