Euro Bond

I really don't know.

S&P still seems to have some clout, especially if you exclude treasuries.

The investors were caught off guard when S&P downgraded US, so they didn't know what to buy and what to sell, as US-T were the ultimate safe haven (after Gold).

In case of Europe, investors know what to do. Italy, Spain, Ireland, Portugal, and Greece are examples of what happened after downgrades. Gold will of course go ballistic, along with Swissie, JPY, and UST.

If the Euro bonds do crash like those of the above countries, the biggest losers would be Germany and France (they too might get into trouble with financing), and unfortunately, no safe haven would be left in Europe (no bunds).

What can I say? Bad luck Germany once again!

P.S If I were Germany, I'd rather bail out of Eurozone (go back to Mark) or let the other Eurozone countries go bust than issue a Euro bond.
 
If I were to issue a Euro bond:

1) I just wouldn't allow every nation to list its bonds there.
2) Also, not all debt issued by a country can be financed by Euro bonds.
3) The local govts. shouldn't have the ability to issue these bonds (their bonds should be considered equivalent to municipal bonds).
4) A separate government should be created (like the Fed govt.) which will get some fixed % of revenues from each govt, and only this govt. should have the liberty to issue Euro bonds. There should a mandatory limit of 3% on deficit (constitutionally) . This govt. will be elected by the representatives from various countries.
5) The local governments, if they want to stimulate their economies, are at liberty to do so; however, the debt should be similar to a municipal bond, that is Greece will still be responsible for its careless actions.

Finally, Banks/Big Financial institutions can only own these Euro bonds.
 

DominiConnor

Quant Headhunter
If anything S&P have over-rated the stability of a Euro-bond

It's not just the weakness of the weakest member, it is basically saying to the majority of Europeans that no matter how much they spend, or how uncompetitive their economy, the Germans will bail them out.
So it's not the weakest country that you need to model, it is the maddest political party in Europe and trust me, that's pretty bloody mad, but that's not mad enough. It's like Brewster's Millions where you seek out the mosr irresponsible person you know and put them on a reality TV show where they more irresponsible thy are, they more they win.

But even that is not mad enough.
Imagine that the people footing the bill are the racial/faith/cultural group that you most despise and that you realise that you are in effect getting paid for screwing them over.

But mad is not the right term, mad people in my experience are generally honest, their reality may be different to mine, but at least they genuinely believe in the Tea Party/ Homoeopathy/Astrology/Jesus/David Beckham, the Euro is built on lies, Euro bonds will be both mad and dishonest.

Rishab is talking complete bollocks and thus has with great insight shown how such a system might work.

By "work" I mean that Britain would have enough time to build up it's armed forces so that we mightbe able to deter any of fighting from coming our way. The UK has the only properly professional army near Europe, something we may come to be very thankful for.

Euro bonds would lead deterministically to war, and since Germany doesn't have nuclear weapons or the ability to project force it could not hope to win the wars quickly. Greece is a great place to fight a guerilla war and the reason Wellington is seen as Britain greatest general is that he's pretty much the only person ever to win an actual war in Spain where large armies starve and small armies are defeated. Fighting in the Alps is really quite hard work and since most European "armies" are dumb enough to use conscripts a large % of the population have some idea how to fight.

However Britain long ago gave up the ability to invade and conquer even a small European country s0 what we'd have is something like the former Yugoslavia but on a much bigger scale. Even now thriller writers use "Serbian" as a shorthand for calculated evil.
Sebronicia would be a piss poor little thin compared to Europe 5 years after the issuing of such bonds.
 
@ DC

If I am talking bollocks, perhaps you might suggest a better way to make Euro bonds work? if Euro bonds were the only option available to the current crisis. I myself do not favor Euro bonds (from the point of view of Germany, and the basis of current idea posted on Reuters), but I suggested, as naive as I may be, a way to make them work.

I doubt that talking Apocalyptic things is a solution to this problem. If anything, it suggests that we might as well go to war as Euro bonds will anyway cause a war.
 
I agree with you Alexei to some extent. I believe that the rating should be somewhere between the country with the best and the worst rating.

I dunno about you, but I smell rat, as though it doesn't want Euro Bond to work. Perhaps S&P has something to do with the funds/banks that trade CDS for profit. All speculations of course.
 

DominiConnor

Quant Headhunter
Rishab, you've predicted how I suspect that the Eurocrats will try to make it work.

I draw examples from history...
The USA is in effect the result of multiple currency unions, where the currency used by various states/territories/purchases was unified wit the dollar. The states were given no control over currency.
Also the unions took place in a period of pretty much constant and strong growth.

Most importantly it was voluntary, each area joined the USA because it wanted to.

The smaller UK currency union was also voluntary, Scotland trashed it's economy utterly and the English refloated it and again all control of the currency passed to the centre, along with sovereignty.

Neither country was really a democracy then but the move was generally popular and ironically ended fighting that had gone on for at least 2,000 years. The PIGS are tier 1 democracies, they have shit governments because they freely choose to elect them.

So in both cases getting richer trumped historical issues.

So the only plausible framework is a new country, one central government with local governments being kept on a short leash.

The EU and the Euro are popular in Italy because Italians realise that they are congenitally incompetent at choosing governments and want big decisions made by grown ups. The Irish were forced by the EU to stop their police conducting brutal sexual assaults on 14 year old girls to enforce Catholic doctrine and got great big piles of money. The French like the EU because they pretty much tun it and the Germans pay for it.

But...
The Greeks genuinely seem to believe that they have some idea how to run their country in spite of the overwhelming evidence to the contrary, Belgium is an example of how fudge, spin and hope can stop two populations who hate each other from breaking out into violence. Spain is fissile too,
Even pet countries like Ireland want to pretend they are independent and if all real decision making moves to Brussels, a sentiment shared by most Euro zone countries. They simply aren't ready to give up most large scale decision making and concentrate on less glamorous work like making the water drinkable, parking issues in Warsaw, etc.

Unlike the British and American currency unions the new union would have few sweets to give their adopted children.

That's because in spite of all the noise made about government spending cuts and a general whinging the pain felt by the countries that choose not to elect competent people is quite small, nowhere near enough to give up most of sovereignty in the way that Texas or Scotland did.

So the only solution is to let them suffer more.
That's not a satisfactory solution; the necessary level of suffering had to be at the level where the national government loses its ability to function in multiple ways. That's things like the health system collapsing and/or food distribution/water supply, breaking down.
The level of suffering is high because the PIGS already put up with appalling government, so to get to the point where the vast majority say "screw this, let the Germans sort it out".
 

Daniel Duffy

C++ author, trainer
Having one currency is good for businesses and for the consumer. It promotes transparency. I personally would not want to go back to the pre-Euro days. I can elaborate if you wish.

Speaking as someone who has lived on the mainland for some time now ;)

Do you really want to go back to this http://www.sysmod.com/eurocalc/offec-ir.htm
 

Daniel Duffy

C++ author, trainer
It's not a question about someones wanting to go back to that or not. If the countries that constitute 'Europe' have unsound economic fundamentals, the economic laws will put an end to this european story.

Well, some people are talking that way. It's a political problem, not an economic one.
 
Many sensible points here and I agree with Dr Duffy: fundamentally it's politics, not economies.

1- Giving up autonomy to Eurocrats is scary but in terms of globalization we need the macrozone to remain competitive. That's why I can't see isolation/separation doing well or any war. Simply put, we Europeans will become poorer and more redistribution will happen, both internally (towards the PIGS) and externally (towards the BRICs and the emerging countries). I can't see who is going to break that actually (Germany pensioners? To go where to?).

2- As for the UK, if not Europe they will be de facto the 51st American State (as they are actually doing) or aspirationally (and better from many points of view) lead a new sort of Commonwealth. In any case, the Kingdom needs to be part of something bigger or it will be crushed by globalization: devaluation of pound is happening fast and their fundamentals (debt, unemployment, GDP / deficit ratio) are now nearer to Italy than Germany. In addition, there is not a new North Sea to be exploited.

3- Italy is the deciding factor these days and we actually like EU because it makes big decisions for us. We have borrowed time again with the latest mid August humming but the markets are putting us in the line again. Well done, just hit hard enough without killing the baby please.

4- To finish, we are purpotedly forgetting that the real problem is the US debt and that the big game is into its early stage yet. Their financial hubs can kill Euros as a diversive, but the real problem is still theirs: a big, overwhelming pile of debt owned to Mr Jiabao. So it is not European states that will look for a war: it will be actually Mr America, the day He will be told to stop living in the bubble and repay the debt.
 

Abdel

Economist
Many sensible points here and I agree with Dr Duffy: fundamentally it's politics, not economies.

I will have to disagree.

If their economic fundamentals were sound, where are the budget surpluses? France couldn't balance it's budget for the last +10 years!

Where are their trade surpluses?

Just look at the average salary of the population in the EU countries VS the debt accumulated by these countries. You'll clearly see that their low salaries (i.e. low productivity) cain't justify that much debt.
 
If their economic fundamentals were sound, where are the budget surpluses? France couldn't balance it's budget for the last +10 years!

Virtually no country in the Western world can balance its books. Germany might be an exception, maybe Switzerland. All have been resorting to forms of deficit financing to keep their sputtering economies going. This idea of economic fundamentals being sound if and only if there no budgetary deficits is an anachronism.

Where are their trade surpluses?

Everyone can't be running a trade surplus: this should be obvious to you. Germany's trade surplus means someone else's trade deficit.

Just look at the average salary of the population in the EU countries VS the debt accumulated by these countries. You'll clearly see that their low salaries (i.e. low productivity) cain't justify that much debt.

Why not? If Japan can, why not them? And what is the alternative?
 

Abdel

Economist
Virtually no country in the Western world can balance its books. Germany might be an exception, maybe Switzerland. All have been resorting to forms of deficit financing to keep their sputtering economies going

''Keep their sputtering economies going''? Sounds more like the description of a heroin addict who shoot himself up with another dose. Problem is, the debt kept raising and we're near the overdose level.

This doesn't look like economic soudness to me.

This idea of economic fundamentals being sound if and only if there no budgetary deficits is an anachronism.

I never said that the economic fundamentals were solely based on budgetary deficits.

You have to look at a bunch of other factors ( % of the economy in the productive sector - industrial-, average salary of the population vs the debt accumulated by the country, trade surplus/deficit, size of budgetary surplus/deficit, how high are the interest rates, the savings rate of the population, etc.)

Everyone can't be running a trade surplus: this should be obvious to you. Germany's trade surplus means someone else's trade deficit.

Yes but these countries have huge trade deficits, wich shows how unproductive they are.

It is as if, I work as a cashier (salary 20k/year), and thanks to my credit cards, I can live in a 500k house, drive a 200k car etc.

And what you're saying is: hey, it's ok to run those huge personal trade deficits because not everyone can be a lender.

If it was small trade deficits, you'd be right, but we're talking about herendous ones.

Why not? If Japan can, why not them? And what is the alternative?

Well, first of all, Japan has a highest foreign exchange reserve than all of EU countries combined.

Also, Japan population have a higher saving rate than the EU population.

In other words, Japan can afford 'dumb' economic policies.:D
 
''Keep their sputtering economies going''? Sounds more like the description of a heroin addict who shoot himself up with another dose. Problem is, the debt kept raising and we're near the overdose level.

This is what I keep hearing on the mass media with no explanation ever given of what constitutes "too much debt." It's used as an excuse to implement austerity measures. Thus the Fed can cheerfully create roughly $13 trillion of new debt -- and mostly nothing is said.

This doesn't look like economic soudness to me.

But what is the definition of "economic soundness" and which antiquated textbook is it coming from?

Yes but these countries have huge trade deficits, wich shows how unproductive they are.

But it wasn't that much different before either: this has been going on for generations. The difference is that previously the Greek drachma (for example) kept getting devalued against the German mark because of current account deficits. This hasn't been possible under the euro regime, and also what vestiges of industry Greece had has suffered grievously because Greek inflation has been greater than carefully controlled German inflation. But there's no doubt that the existence of the Eurozone serves the interests of the German economy and Nordic economies generally. And their surpluses are generated because of the deficits of Club Med.

It is as if, I work as a cashier (salary 20k/year), and thanks to my credit cards, I can live in a 500k house, drive a 200k car etc.

And what you're saying is: hey, it's ok to run those huge personal trade deficits because not everyone can be a lender.

Don't think they are appropriate metaphors here. Germany's huge export success is because of Club Med's huge deficits. The problem is how Germany can recycle those surpluses. The German taxpayer doesn't want to pick up the tab for an arrangement that suits German banks and industry. Also, the ordinary Greek has not had an affluent life the last ten years -- the property and cinstruction bubble mostly benefited moneyed interests.

Well, first of all, Japan has a highest foreign exchange reserve than all of EU countries combined.

Not relevant. We're talking of the size of Japan's debt overhang -- which is yen-denominated and hence independent of what foreign exchange reserves they hold.

Also, Japan population have a higher saving rate than the EU population.

Again, I don't see the relevance. Ordinary Japanese are holding a larger percentage of Japan's debt than ordinary Greeks are of Greece's debt. So what? The size of Japan's debt as % of GDP is still higher than that of Greece: it's immaterial whether the debt is held by individuals (via pension funds) or banks.
 
Virtually no country in the Western world can balance its books. Germany might be an exception, maybe Switzerland. All have been resorting to forms of deficit financing to keep their sputtering economies going. This idea of economic fundamentals being sound if and only if there no budgetary deficits is an anachronism.

Come to think of it, even an EM like India hasn't had a balanced budget for like 10-15 years. The reason for budget deficits(for most countries) in last 10 years is the high price of commodities and not bad economy. In fact, I can bet that 9 out 10 countries that had budget surpluses in last 10 years is a commodity exporting country.
 
Well, first of all, Japan has a highest foreign exchange reserve than all of EU countries combined.

Also, Japan population have a higher saving rate than the EU population.

And in which currency are those forex reserves? dollars - a depreciating currency. The reserves of EU countries are in gold ( a currency that is actually rising; see the word currency) - an appreciating currency. In a way, Japan's and almost every country's success on planet that holds dollars actually depends on US - the US will ofcourse pay its debts, but what will be the value of that money?. The EU is in a way immune to this.Further, the highest reserves of gold are held by EU, followed by US.

Euro is by the most used currency after dollar, so it doesn't need a dollar. This is like saying that the US doesn't have forex reserves. Its advantage is apparent in this crisis.If any other currency, it would have been trashed badly. As shocking as it might be for Euro critics, it still is 40% higher vs dollar since 2000. Yen is no different.

I also think that the advantage of high forex reserves is debatable, case in point Russian crisis in 2008. Forex reserves are needed by countries in Asia, for their currencies are no where close to being a reserve currency, and most of the time they trade in dollars and euros. The US and the EU can just print them.

Further, Japanese have to have a high savings rate, for they have to pay a debt of 220% of GDP, and have a population whose average age is something like 44-46 years, even older by European standards. Just see how the Japanese bond markets will be pummeled 10-15 years from now, when average age of population would be closer to 60. There will be massive bond market redemption, and as barely anyone outside Japan buys its bonds, financing would be a big headache.
 

Daniel Duffy

C++ author, trainer
This is what I keep hearing on the mass media with no explanation ever given of what constitutes "too much debt." It's used as an excuse to implement austerity measures. Thus the Fed can cheerfully create roughly $13 trillion of new debt -- and mostly nothing is said.

You have hit the nail on tbe head! There are many myths in circulation at the moment.
 
@ Daniel Duffy

Agree. Come to think of it, US has a higher debt/GDP ratio than Spain, and Spain is being thrashed in CDS and bond markets. Spain actually ran lower deficits as a % of GDP in 2008, 2009, and 2010 than the US did.

This is really hypocritical. If Spain is being given this treatment, then the same should be given to the US/UK.
 
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