Sovereign debt bubble thread

[Admiral Yi]

On the other hand an interest rate target is pretty stupid monetary policy too.  Targetting nominal yield will generate inflation, which pushes up nominal yield.

[Admiral Yi]

State spending is part of the GDP calculation. What if all the growth is there and not in the actual economy?

Shouldn't make a difference.  Public sector salaries can be taxed just like private sector salaries.

[Iormlund]

It would be heaven for irresponsible spendrift governments,

Just tie it to reforms. NOT targets. Targets don't make sense in a free-fall situation. Reforms do.

... until a mega-Soros comes by and break the neck of the whole system

Why? What does a mega-soros win by shorting Spanish debt when the ECB can keep printing till the end of days?

[Tamas]

I flat-out ECB guarantee of certain level of bond yields sounds like a bad idea to me.

It would be heaven for irresponsible spendrift governments, until a mega-Soros comes by and break the neck of the whole system

Soros made his money betting against fixed exchange rates.  That's the opposite of what's being discussed here.

Ok, but then, if the ECB guarantees your state, say, no more than 4% yields on your bonds, you end up with the ECB printing money to finance the spending of badly managed budgets, right? How else would they be able to fight speculative worsening of yields without money-printing?

[Admiral Yi]

Ok, but then, if the ECB guarantees your state, say, no more than 4% yields on your bonds, you end up with the ECB printing money to finance the spending of badly managed budgets, right? How else would they be able to fight speculative worsening of yields without money-printing?

It's stupid, just not for the reason you mentioned. 

It boils down to monetizing debt.  Check your Argentinian and Brazilian economic history to see how well that turns out.

[MadImmortalMan]

Belize will miss a coupon payment on about $544 million of bonds and is unlikely to pay creditors during a 30-day grace period that starts today, Finance Secretary Joseph Waight said.

The Central American nation, which owes investors about $23 million today, can't make the payment, Waight said in a phone interview from Belmopan City. The government has been in talks with debt holders about a restructuring, its second since 2007.

"We simply do not have the capacity to make the payment," Waight said. "We are hoping to engage with creditors as quickly as possible."

The price of Belize's so-called superbond due in 2029 fell 0.17 cent to 34.83 cents on the dollar at 11:50 a.m. New York time, according to data compiled by Bloomberg.

Belize has hired the law firm Cleary Gottlieb to advise the government on the restructuring, Waight said. Cleary Gottlieb aided Argentina in its debt restructurings following the country's default on $95 billion of bonds in 2001.

[Iormlund]

You are again getting fixated on debt (not to mention so far non-existent inflation). With the notable exception of Greece, public deficit is not the underlying cause of the crisis. It's a symptom.
Just like a critical patient, we need to stabilize the situation so we can fix the actual causes, then we can fix the deficits. Won't work the other way around.

I work for a few multinationals over here. Strong exporters. Companies like these are behind Spain's export success (~15% growth in the last two years).
You would think investors would take advantage of this success. They are not. They are taking money _out_ of their Spanish subsidiaries despite great performance and ample supply of dirt cheap labour. They only bring money in to meet operating costs. They will rather park money in negative interest Bunds and gilts than invest it in their own productive, growing businesses.

How exactly do your proposals deal with that behaviour?

[MadImmortalMan]

Companies park their money when they don't know what kind of regulatory environment changes and tax hikes they might have to deal with. As long as things are seen as unstable in those areas, you can expect it to continue.

[The Minsky Moment]

Spain is to my mind a fascinating example.  Because at least at the national level, they basically did everything "right".  Fiscal balance was reached and debt maintained at low levels.  State enterprises were privatized.  Spain was one of the few countries in the world to implement a formal system of dynamic provisioning forcing domestic banks to accumulate extra capital during boom periods, and indeed the banking system appeared solid.

None of that prevented Spain from the bearing the full force of the crisis. Because one thing Spain didn't do was meddle in the property market, which driven by the operation of maket forces, developed an enourmous bubble.

Once conclusion to draw from this is that capitalism just doesn't work and we all should move to a Chinese economic model where the government controls sectoral bubbles by administrative measures and its direct control of large blocs of the economy.

Another conclusion - is to recognize that that capitalism is just inherently cyclical and to a certain extent crisis prone, and that accepting that is just the price for the advantages it brings.  That when crises come, they do not like Santa Claus carefully disntinguish between naughty and nice - indeed, if one seriously accepts the basic theoretical roots of capitalist economics, then moral judgments of that sort are analytically useless and counterproductive.  That the proper policy response to crisis is pragmatic not judgmental, and focuses on remedying the deleterious effects on the population at the least cost possible.

[Iormlund]

Tax changes so far: Income, alcohol, tobacco, gas, VAT -> Up. Payroll -> Down.
Plus larger hiring incentives and more flexible labor regulation.

The chances of anti-business regulation popping up short of a revolution are pretty much nil. Not to mention Rajoy has absolute majority and over 3 years before next elections are due.

[Zanza]

If I was the ECB, I would just buy one or two trillion Euros of Greek, Portuguese, Irish and Italian debt from the market and/or recapitalize banks and/or buy bad private debt, write it off so they are at sustainable debt levels (which might be close to zero for Greece, but probably higher for the others) and then institute that interest cap they are talking about. Surely printing money at this point can't be as bad as the consequence of full-scale failure of the Eurozone. Tie it to reforms and wait two or three years if it works. If not, we can use the time to negotiate some kind of orderly Eurozone break-up.

[MadImmortalMan]

If they did it in that size, the Fed and the BOJ and the BofE and every other major currency issuer would have to respond with something similar. And they would.

[Zanza]

So? The external value of the Euro is currently hardly a major concern. It's the internal imbalances that are killing us.

[PJL]

Companies park their money when they don't know what kind of regulatory environment changes and tax hikes they might have to deal with. As long as things are seen as unstable in those areas, you can expect it to continue.

In this present crisis, can-kicking is not the solution to our problem; can-kicking is the problem

[Sheilbh]

I mean, should we all simply accept the fact that if we buy government bonds of any kind, we are taking the chance that whatever state issued those bonds will inevitably default at some point in the future and we're simply gambling that it doesn't happen before we get our money back?

You're not gambling, you're taking a risk. I read a piece about how bonds tend to price the risk of default but normally don't with the risk of inflation (the UK's historical way of dealing with debt).

As to the ECB idea it would only cover reforming countries and the fiscal pact will stop it simply propping up spendthrifts. That's what it's there for.

I think insecurity about currency risk and banking solvency are another good reason. And you don't even have to pay to park their money in bunds or French bonds.