Greek Debt Crisis: Greece should borrow directly from its citizens

Trying to please the Markets will not work.  In a democracy public debt (in the domestic currency) is formally and institutionally the obligation of the nation to its citizens guaranteed by the very same citizens. The “citizen-creditor” is both the lender and the obligor.

That is why the Bank of International Settlement, [BIS] which formulates the standards of Capital Adequacy of Financial Institutions (Basel) authorizes the regulators in any country that abides by the BIS standards, to qualify its government obligations as risk-free. Thus banks and insurance companies do not have to allocate capital against exposure to their own government. Hence the stability and much of the profits of financial institution depend on government debt. 

The “Markets”- a risk to stability

During the Eurozone crisis, due to the “Markets” ownership of Greece’s government debt in its own domestic currency, it was downgraded to “Junk”. Coupled with the regulatory regime of the Eurozone, such downgrading creates a situation where a bank in one of the Eurozone countries that holds his own government bonds  regard them as risk-free, like any other country,  and  may even collapse because of the downgrading  . The absurd may even be greater since the Government that will need to bail out such a bank, is the very same government whose downgrading brought down the bank in the first place.   Such a situation poses a threat to the stability of the banking system. It would be in total violation of the existing Basel framework and will make the implementation of the new framework (Basel III) difficult If not impossible.

The citizens should reclaim control of Public Debt.

The citizens in the democratic countries need to shake-off the “Markets” control of their sovereign debt.

It is very likely that the prolonged recession may require governments to reach decision of unprecedented importance. For example, opting for a continued assistance to the unemployed and maintaining at least minimally decent living standards, in order to preserve the social fabric of a society, is a choice of no lesser importance than, for example, going to war. Both choices may involve passing a significant debt burden to future generations. These are not purely economic dilemmas. Such decisions should be debated and decided within the political discourse in the appropriate democratic institutions and not within the boardrooms of rating agencies or under a constant threat from the “Markets”.

It’s easy said and (fairly) easy done.

A country can borrow directly from its citizens in the same way that it collects taxes from them. Such borrowing may be voluntary or mandatory.

Mandatory borrowing is a practice adopted by governments from time to time, especially at times of emergency. France is currently preparing a major State Loan (Emprunt d’État) called Le Grand Emprunt. The   borrowed funds will be used for “investment in the future”.  Among the center-right UMP ruling party there are those who advocate making such loan mandatory (obligatoire).They hope that it may preempt the likely political pressure to raise taxes on the wealthy.

Greece too can and should be able to borrow directly from its citizens.

Now that the Eurozone countries provide Greece with protection from the “Markets” for at least two years, it should organize a State Loan whose purpose will be to repurchase the tradable sovereign bonds from the concerned “Markets”. Such a loan will not increase the overall level of Greece’s public debt and will help it regain its sovereignty over its fiscal affairs and its status and respect among its fellow Eurozone members.

I doubt very much if at the current yields there will be many sellers of Greek government debt. As soon as the “Markets” realize that Greece can manage without them, their assessment of Greece risk profile will suddenly change.  They are in the business of sovereign debt because it is very profitable. In my assessment they will fight to retain their share of that business.

2010-08-05  »  ehud

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