That morning after feeling again (when the buy-back scheme proves ever so unattractive in the day's unforgiving light)

26/01/2011 by

The rumour of a buy back of the Greek debt began with an email sent by German daily Die Zeit. My last post explained why this idea ought to be treated with contempt. Soon after, Die Zeit  Online featured an article by Mark Schieritz that makes the same point. Here is a summary of his argument:

The idea was that the EFSF lends Greece  sufficient money, and at a reasonably low interest loan, for the purposes of buying its own bonds in the secondary market. The attraction of the idea rests on the observation that these bonds are currently trading at 70% of face value. But, if the EFSF loan is sufficiently large to allow Greece to make this purchase, it will constitute a significant net wealth transfer from the eurozone (on whose behalf the EFSF borrows) to Greece. By itself, such a transfer would improve Greece’s image in the bond market, it would boost demand for its bonds and, thus, their the price will rise. In the limit, as Greece’s debt burden diminishes, they would start trading at face value again. We might as well have the eurozone or the ECB buy up all Greek bonds forthwith, without the shenanigans involving the toxic eurobonds pawned currently to the global financial makrets by the ECB.

Economists (despite our otherwise legendary incompetence) understand the reflexivity involved in interventions whose purpose it is to use the market for the purposes of public policy. When it comes to debt reduction, all the best laid plans will lay in ruins if they are confined to the use of market operations. What is necessary here is a political intervention by which part of the debt will be written off and another part will be re-synthesised using the ECB’s capacity to reduce interest rates on behalf of the eurozone periphery. (Permit me to insist, once more, on peddling the Modest Proposal as a simple three-step plan for accomplihsing this.) Germany may not like the idea but if it is serious about a debt reduction plan for countries like Greece, it has no viable alternative.

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