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Greece Can Go it Alone

More from Mosler and Auerbach on a potential solution for Greece that might also work for Ireland when the time comes…

Greece can successfully issue and place new debt at low interest rates. The trick is to insert a provision stating that in the event of default, the bearer on demand can use those defaulted securities to pay Greek government taxes. This makes it immediately obvious to investors that those new securities are ‘money good’ and will ultimately redeem for face value for as long as the Greek government levies and enforces taxes. This would not only allow Greece to fund itself at low interest rates, but it would also serve as an example for the rest of the euro zone, and thereby ease the funding pressures on the entire region…

..The ability of Greece to use the funds from the rescue package as a means to extinguish Greek state liabilities would improve their financial ratios and stave off financial collapse, at least on a short term basis, with the side effect of a downward spiral in output and employment, while the sovereign risk concerns are concurrently transmitted to Spain, Portugal, Ireland, Italy, and beyond. Those sovereign difficulties also morph into a full-scale private banking crisis which can quickly extend to bank runs at the branch level (my emphasis).

Our suggestion will rescue Greece and the entire euro zone from the dangers of national government insolvencies, and turn the euro zone policy maker’s attention 180 degrees, back to their traditional role of containing the potential moral hazard issue of excessive deficit spending by the national governments through the Stability and Growth Pact. If the member states ultimately decide that the Stability and Growth Pact ratios need to be changed, that’s their decision. But the SGP represents the euro zone’s “national budget”, precisely designed to prevent the hyperinflationary outcome that the “race to the bottom” could potentially create. At the very least, our proposal will mitigate the deflationary impact of markets disciplining credit sensitive national governments and halting the potential spread of global financial contagion, without being inflationary.

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Continuing the Discussion

  1. Proposed Bank of England Act – Smart Taxes Network linked to this post on May 19, 2010

    […] to government but an arms’ length entity. The outcome is broadly similar to that proposed by Auerbach and Mosley – governments get to spend money without borrowing.  Here is a […]

  2. Smart Taxes Network linked to this post on October 20, 2010

    […] way! Check out again Auerback and Mosler proposals for the Eurozone Deficit Terrorism and  their ruse for Greece. It does require a little imagination and dare we say it, […]

  3. Why Let Pension Funds Buy High return irish Bonds? – Smart Taxes Network linked to this post on November 1, 2010

    […] Irish taxes.  That virtually eliminates the default risk. Read Marshall Auerback and Warren Mosler ‘Greece Can Go It alone’ along same lines.  Irish pension funds should not invest outside Ireland and especially not get […]