March 30, 2012
Okay, that may not be a very high bar, but the real issue is whether Ireland and other debt-troubled countries get around the straight-jacket being imposed by the ECB. Philip Pilkington and Warren Mosler have a plan that might do the trick: tax-backed bonds.
The idea is that a country like Ireland or Greece could issue bonds which, in the event of default, could be used to pay taxes in the issuing country. This means that if Greece issued a 10,000 euro bond, and suddenly found itself unable to meet an interest payment, the holder of the bond could then sell it to a person or corporation who owed Greece taxes. It would be worth 10,000 euros as a tax payment, so the holder of the bond would then presumably be able to sell it for pretty close to 10,000 euros.
This should ensure that Greece has a ready market for its bonds at a fairly low interest rate. As long as the Greek government is able to collect taxes, there will be demand for these bonds.
Of course what this implies is that the bonds are being used effectively as currency. Given the concerns of the people putting together the euro, they certainly should have outlawed this sort of move. After all, if larger euro zone countries went this route, they could issue huge amounts of tax-backed bonds. This could lead to much stronger growth but, horrors of horrors, it could make it difficult to keep inflation down to the sacred 2.0 percent target (moment of silence, please).
It would be remarkable if the euro designers did not write rules that prohibited member states from going this route. But hey, these folks missed the huge asset bubbles in the housing market that collapsed and sank the world economy, so clearly they are not the sharpest tools in the shed.
It would be great if the debt-troubled eurozone countries explored this tax-backed bond option. If it can be done, it should be.