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A Workshop of the EU Center of Excellence
Can the Modest Proposal Save Europe?
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Kunibert Raffer
http://homepage.univie.ac.at/kunibert.raffer
NO!!!
On the other hand, full agreement on
Not just a sovereign debt crisis (“triple crisis“)
Need for debt reduction (“haircut“)
Restructuring at no [or little, KR] cost to taxpers
Recapitalising of banks not for free (equity; control
rights, influence on decisions)
“ Real“ or credible stress tests
Centrally financed recovery programme(s)
Structural imbalances exist
BUT
 “ Tranche transfer“ - creditors must agree - why
should bonds “ be registered by the ECB“?
 How can “ECB” take “on its books forthwith a
tranche of the sovereign debt of all member states
equal in face value”, covering that by own e-bonds
without creditors allowing this to happen (as in the
different case of NAMA)?
 Can the ECB really deny liquidity if banks refuse
cuts?
 What about constitutional rights (property, taking)?
 Why only banks that were lured into Greek
instruments by regulators (Basel’s original sin)?
Hedge funds, e.g., fully bailed out?
“US Treasury bonds are not guaranteed by California or Delaware.
President Roosevelt did not ask for such a guarantee in expanding
them to finance the New Deal. Nor did he seek to buy out their
State debt.“
Stuart Holland
Eurobonds (however construed) economically & politically highly
problematic
 bailing out speculators & investors →
INSTITUTIONALISING the PREDATOR STATE
 interest rate: 1st EFSF bonds too high, 0.5% higher than
Bunds, €5B sold, subscriptions: €44B; FAZ (29 Jan 2011):
“Saving Europe and Profiting from It”
 burden on still solvent states (Maastricht!!)
 politically: guarantors demand control (EU “Ministry of
Finance” - removing most essential democratic right from
elected MPs: voting on the budget)
Solidarity with the Greek?
“Vulture funds stand to make a fortune from a second Greek
bailout after buying hundreds of millions of euros of distressed
sovereign debt in the past few months.”
The Telegraph, Philip Aldrick, 25 June 2011
Robert Marquardt, founder of Signet, a fund of hedge funds:
Greek crisis "certainly a great chance to make money".
(ibid)
Solving sovereign insolvency
using time tested tools
Insolvency proceedings for the last debtors still denied it –
establishing formal insolvency proceedings for sovereigns
What’s Good for the United States is Good for the World
The RAFFER PROPOSAL
© JKG
Impartial decision making and respecting the Rule of
Law
Solving the problem of sovereignty
Protecting debtors and democracy
Right to be Heard (which may be seen as part of
debtor protection)
Fair and equal treatment of all creditors
Improved sustainability
 Optional but very much advised: tax deductible loan
loss reserves
Impartial Decision Making: The Very
Cornerstone of the Rule of Law and
Good Economics
“The reason why no court, whether located in a creditor or
debtor country should chair the procedures is self-evident: its
impartiality is not guaranteed. … The international practice of a
court of arbitrators, like in the case of Germany [by London
Accord KR], evades all these problems.”
Raffer (1990; cf 1989)
“A special court would be required to handle such cases. The
Court of Justice of the European Union is the natural institution
for this purpose and a special chamber could be created within it
for that purpose.”
Gianviti, Krueger et al (2010)
Respecting Sovereignty
§904, Chapter 9, Title 11, USC
Limitation on Jurisdiction and Powers of Court:
“Notwithstanding any power of the court, unless the debtor
consents or the plan so provides, the court may not, by any stay,
order, or decree, in the case or otherwise, interfere with (1) any of the political and governmental powers of the debtor
(2) any of the property or revenues of the debtor; or
(3) the debtor's use or enjoyment of any income-producing
property.”
 Court's jurisdiction depends on municipality's volition, cannot
be extended beyond - similar to international arbitration
 Municipality presents plan, DIP financing - NO trustee
 Only electorate can hold politicians responsible (voting them
out of office)
Protecting Debtors and Democracy
"The notion that a city has unlimited taxing power is, of course,
an illusion. A city cannot be taken over and operated for the
benefit of its creditors, nor can its creditors take over the taxing
power."
US Supreme Court in re City of Asbury Park
Participation of the municipality's inhabitants guaranteed:
1) The affected population has a right to be heard (special
taxpayers affected by the plan) – internationally: per
representationem only
2) Electoral approval necessary under nonbankruptcy law in
order to carry out provisions of the plan must be obtained
before confirmation of the plan pursuant to §943(b)(6)
3) Further participation by parliaments or electorate easily
integrated (e.g. parliaments nominating arbitrators)
Fair and equal treatment of all creditors
Raffer Proposal: NO preference ladder! Equal haircuts
Basel regulatory norms pushed banks into euro-zone government
papers summarily anointed AAA by big rating agencies. Greek
instruments had capital weights of zero: regulatory original sin,
brilliant example of policy-encouraged/caused crashes (cf. Asian
Crisis)
EU-bail-out caused increase in Greek debts since crisis broke,
fuelled crisis by encouraging speculation against other eurocountries, signalling speculators that they would be bailed out
at taxpayers’ cost; invitation to go on speculating
Abusive lending (© Juan Pablo Bohoslavsky 2006): loans prolonging
crises, increasing/causing damages to bona fide creditors
arguably even subordination of abusive public credit
Improved Sustainability
would emerge from facts presented and discussed openly and by
all affected (ideally: arbitrators just rubberstamp plan agreed on)
Optional but very much advised:
tax deductible loan loss reserves
Built-in stabiliser, less expensive – under ideal conditions no
costs to Treasury/Ministry of Finance - than present bail-outs,
enabling creditors to “digest” losses without systemic
catastrophes (cf. Raffer 1991 , 2005, 2010)
No Alternative to State Insolvency
“Debt (net of collateral required for PSI) would peak at 186 percent
of GDP in 2013 and decline only to 152 percent of GDP by end-2020
and to 130 percent of GDP by end-2030. … Greece would not return
to the market until 2021 … cumulatively official additional
financing needs (beyond what remains in the present program, and
including the eventual rollover of existing official loans) could
amount to some €252 billion from the present through to 2020.”
Leaked STRICTLY CONFIDENTIAL Troika report (EU-Com, ECB, IMF)
“Greece: Debt Sustainability Analysis” 21 Oct 2011, pp.2-3 (consequences
under “more likely policy and macroeconomic” assumptions & “ambitious
combination of official support and private sector involvement”)
‘There is an "unequivocal commitment" that haircuts will be
confined to Greece alone. If you believe that, I have some oceanfront property to sell you in Alsace.’
A. Evans-Pritchard, Telegraph 25 October 2011
Thank You Very Much
Muchas Gracias
Kunibert Raffer
http://homepage.univie.ac.at/Kunibert.Raffer
© K. Raffer 2011