10/22/2012

Buying up Greek government debt

It has been suggested that the Eurozone might look at the possibility of loaning the Greek government an amount as high as 10 billion euros via the ESM or otherwise  to purchase Greek government debt at a discount in the market and retire it. This could reduce Greek debt by approximately 20 billion plus accruable interest if this exercise is carried out at today's market rates close to 35% of face for 10 year maturities. The benefit would of course be greater for longer maturities as it would trade at a greater discount.

There have been some sounding comments by various bloggers as to whether owners of Greek debt may be willing to part with their holdings at these depressingly low prices and of course many others acknowledging it would be mere stupidity and that under this spectrum it is futile as no one will sell at these levels. 

Prices of Greek government bonds are determined on a daily basis by continuously changing market dynamics at bond dealing rooms at banks & other financial intermediaries. The current price ( if its 35% of face for 10 year instruments) is therefore a price at which willing buyers and sellers exchange these as of this writing. The fact the EZ may pre-announce the possibility of such a program implies that market expectations automatically will shift & improve and thus market participants may only now be willing to sell their holdings at continually higher prices automatically lowering yields and improving Greece's borrowing costs. As prices rise the Greek government pays more for its own debt that it buys and thus the bond holders also receive more so the effective government gain is reduced but equally Greece's position in the market improves. 

It is therefore nonsensical to suggest, as some have, that there will be no sellers simply because prices will rise to the level that sellers will become willing. There is of course the possibility of prices rising by such an amount as to make the whole exercise futile, but then the Greek government would have benefited by considerably lowering its debt yields without having spent one penny.

This is a measure long overdue.   

10/01/2012

My comments on Krugman's post http://krugman.blogs.nytimes.com/2012/10/01/euro-counterfactuals-wonkish/?smid=tw-NytimesKrugman&seid=auto#comments


Capital flows from the core to the periphery induced by low interest rates, low inflationary expectations, a misconception of a globalised & perpetually growing world economy, all unquestionably contributed to the worsening of the trade imbalances in the periphery. What the euro achieved was to significantly worsen the trade imbalances which periphery countries were already experiencing. The chart below is a case in point for Spain. The same would apply for the rest of the GIPSIIS.
Historical Data Chart

 

On the devaluation front if wages were the instrumental factor affecting trade imbalances I would agree but it is a lot more than this. Each country has its own comparative advantages and it must thus allocate resources to highlight these advantaged sectors. This way it creates import substitution and also advances its export sector. In countries such as Greece were the inefficient and corrupt government sector still controls a large share of GDP, efforts should be directed at privatising as a source of efficiency, as a way to reduce debt  as well as an injection of much needed scarce capital. Finally a protagonist role must also be played by the surplus countries whose economies benefited the most by the euro. They must increase local consumption through government and or private initiative so as to absorb increased imports from the periphery and contribute to rebalancing. The consequential loss of domestic sales can be made up by the fruits of their new investments in the productive process in the periphery. Even more to their liking if their investments are centred in export oriented industries they will do what they have been doing so successfully at home knowing that their effort stabilises their existence.