It seems that our idea of a multilateral negotiation for reducing the total size of state debt and bank losses is catching on. Here is what Gerald Holtman wrote in the FT today:
The problem is that if you force investors to shoulder some of the losses you cannot move one country at a time. A deal for Irish banks that left bank bondholders with a loss would result in flight from the securities of other European financial institutions. Instead, a Europe-wide solution is needed. This process would see a new Europe-wide stress test. A European bail-out fund would supply a proportion of the shortfall needed in each bank, in return for equity in the financial institution concerned, diluting equity holders. The remaining shortfall would be met by debt restructuring at the expense of creditors. With the whole deal worked out and announced as a package, uncertainty would be minimised. It would be too late for investors to flee and there would be nowhere in Europe to flee to. The ECB can provide liquidity to maintain the situation while the deal is being worked out. Contagion could spread to other banks outside the EU, so countries like Switzerland and Norway should be offered the option of participating.
While it is heartening to see that thinking is moving in the right direction, Holtman’s piece does not go far enough. Europe needs not only this type of wholesale debt-loss restructuring but, in addtion, it needs part of the remaining debt to be moved on to EU bonds and it needs a massive investment spree by the EIB. For the complete artile. click here which you can then compare and contrast to our proposal.
