Sovereign debt bubble thread

[MadImmortalMan]

Mind if I repost that on pdox Minsky?

[The Brain]

Mind if I repost that on pdox Minsky?

Information wants to be free.

[The Minsky Moment]

I don't intend to assert any copyright rights in my anonymous internet postings.   

[The Brain]

I don't intend to assert any copyright rights in my anonymous internet postings.   

Communist.

[Zanza]

Now imagine you are a German central banker or Chancellor and contemplating the possibility of an influx of Italian or Spanish deposits.  Seems real nice for Germany . . . unless of course Italy/Spain ditches the Euro.  Then you have an inflationary disaster scenario on your hands as Spaniards and Italians now have massive Euro denominated claims which can be used to purchase German goods and assets, but in return the German banking system now only has claims on Italian banks that are denominated in depreciated new peseta and lira (assuming they are collectible at all).  Since imposing capital controls would breach EU rules, the only surefire protection against this scenario is if Germany pre-emptively exits the Euro itself before this can all play out.

Germany is probably the biggest beneficiary of the status quo though, so it has very little incentive to destroy that status quo.

[The Minsky Moment]

Germany is probably the biggest beneficiary of the status quo though, so it has very little incentive to destroy that status quo.

it has no incentive to do so, unless it believes that the status quo will be broken anyways, and on terms much less favorable to it than if it is the one dictating the terms of the breakup.  That's what makes this a potential prisoner's dilemma problem.

[Admiral Yi]

If things get tough, the Italians may decide they are better off exiting the Euro and paying off their debt in depreciated lira AND getting the side benefit of an export boom. 

Then you have an inflationary disaster scenario on your hands as Spaniards and Italians now have massive Euro denominated claims which can be used to purchase German goods and assets, but in return the German banking system now only has claims on Italian banks that are denominated in depreciated new peseta and lira (assuming they are collectible at all).

First of all, I don't see how a borrower in an exiting state gets to redenominate its debt.  I can't borrow 100 euros from you and pay you back in baht.

Second of all, it's not as if demand for lira and peseta zone goods and services is going to disappear because of the flight to the center.  A business man in Madrid is not going to drive to the Pyrenees every day to get his breakfast just because he's holding large euro balances offshore.

[Iormlund]

The borrower doesn't get to redenominate its debt. The state will do it for him, just as it will redenominate whatever savings it can get tis hands on.

[Admiral Yi]

The borrower doesn't get to redenominate its debt. The state will do it for him, just as it will redenominate its savings.

I'm not sure that's possible.  You owe me 100 euro, and tomorrow the Spanish government tells me you owe me 100 pesetas?

[Iormlund]

The borrower doesn't get to redenominate its debt. The state will do it for him, just as it will redenominate its savings.

I'm not sure that's possible.  You owe me 100 euro, and tomorrow the Spanish government tells me you owe me 100 pesetas?

If the Spanish goverment doesn't do that, the country goes broke within hours. And I don't mean the central government. I mean everyone. What chances do you think a small business or your average guy has to pay back a loan or mortgage denominated in strong Euros while earning weak New Pesetas?

[Barrister]

The borrower doesn't get to redenominate its debt. The state will do it for him, just as it will redenominate its savings.

I'm not sure that's possible.  You owe me 100 euro, and tomorrow the Spanish government tells me you owe me 100 pesetas?

Of course it's possible.

[Admiral Yi]

If the Spanish goverment doesn't do that, the country goes broke within hours. And I don't mean the central government. I mean everyone. What chances do you think a small business or your average guy has to pay back a loan or mortgage denominated in strong Euros while earning weak New Pesetas?

Less than 1.

Beeb: what do you base your answer on?  I've never heard of this happening before.

[The Minsky Moment]

First of all, I don't see how a borrower in an exiting state gets to redenominate its debt. 

A sovereign borrower gets to if the legislature says so and if the bonds are issued under local law (almost all eurozone bonds are).

Second of all, it's not as if demand for lira and peseta zone goods and services is going to disappear because of the flight to the center.  A business man in Madrid is not going to drive to the Pyrenees every day to get his breakfast just because he's holding large euro balances offshore.

Demand will not disappear, it will just go down by a significant degree.

[Admiral Yi]

Wait a minute, in one of the BeetMasters threads there was something about Hungary unilaterally redenominating Swiss franc mortgages into Hungarian cooties, wasn't there?

[The Minsky Moment]

It gets more complicated if a purely private debt is at issue.

In that case the leglisature can declare the new currency legal tender for all debts effective immediately and with retroactive effect; barring constitutional challenge, that pretty much ends the matter for all purely domestic debt and probably all cross-border transactions under domestic law.

For foreign law cross-border transactions, the creditor can enforce the original terms overseas; but if the debtor has no property outside the exiting country, as a practical matter that judgment will be hard to enforce against him.