Tuesday, 23 August 2011

Guaranteed Lender of Last Resort

Tom McDonnell: The often useful VOXEU resource has produced a number of constructive pieces on the debt crisis in the last week or so.

Paul DeGrauwe does a good job of describing the inherent fragility of the Eurozone as currently designed. His main proposal is the establishment of a guaranteed lender of last resort for government bonds. The ECB being the natural candidate to take on this role.

Charles Wyplosz argues there are really just two possibilities to solve the crisis. The first possibility, echoing DeGrauwe, is to make the ECB perform the function of a guaranteed lender of last resort. In this scenario the ECB would simply guarantee the rollover of maturing sovereign debt at face value. The second possibility is to pursue one of the many variations of the Eurobond option that currently has Merkel and the Bundesbank wailing against the dying of the light. Audio version of Wyplosz is here.

Stefano Micossi argues here that fiscal union is inevitable and urges using the ECB to purchase distressed sovereign debt. Micossi also emphasises the importance of using the EFSF to issue union-bonds backed by the joint guarantee of all Eurozone member states.


SlĂ­ Eile said...

@Tom Another contribution by Gros at
http://www.voxeu.org/index.php?q=node/6899 is very sceptical about Eurobonds. He cites WB data -http://info.worldbank.org/governance/wgi/index.asp
The governance indicators presented reflect the statistical 'compilation of responses on the quality of governance given by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries, as reported by a number of survey institutes, think tanks, non-governmental organizations, and international organizations.'
In fact, Nordic countries come top on governance and Portugal, Spain, Italy towards bottom of EU list. Ireland is in the middle much the same as Germany on most of the six key indicators. convergence will be extremely difficult. Gros has a point.

Tom McDonnell said...

Gros does indeed have a point. It also raises fundamental questions about the wisdom of setting up a currency union between such divergent economies in the first place.

I am less convinced by his point that the assumption of low yields cannot be used as a rationale for Eurobonds because it cannot be tested empirically in advance.

I am also less convinced by the point that multiple equilibria isn't a problem just because markets were in fact right to 'panic' in the case of Greece.

For me the moral hazard question and the 'potential' implications for democracy and sovereignty are the strongest arguments I have seen used against Eurobonds.