Brady Bonds For The Eurozone, Starting With Ireland

By Peter Boone and Simon Johnson. This post comprises the opening paragraphs of a longer article available for free and without advertizing at Project Syndicate.

Today’s conventional view of the eurozone is that the crisis is over – the intense, often existential concern earlier this year about the common currency’s future has been assuaged, and everything now is back under control.

This is completely at odds with the facts. European bond markets are again delivering a chilling message to global policymakers. With bonds of “peripheral” eurozone nations continuing to fall in value, the risk of Irish, Greek, and Portuguese sovereign defaults is higher than ever.

This comes despite the combined bailout package that the European Union, International Monetary Fund, and European Central Bank created for Greece in May, and despite the ECB’s continuing program of buying peripheral EU countries’ bonds. Heading into its annual meetings in a few weeks (followed by the G-20 summit in Seoul in November), the IMF is bowing to pressure to drop ever-larger sums into the EU with ever-fewer conditions.

Indeed, official rhetoric has turned once again to trying to persuade markets to ignore reality. Patrick Honohan, the governor of Ireland’s central bank, has labeled the interest rates on Irish government bonds “ridiculous” (meaning ridiculously high), and IMF researchers argue that default in Ireland and Greece is “unnecessary, undesirable, and unlikely.”

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Read the rest of this article, with links to sources, at Project Syndicate: click here (or just use this address: http://www.project-syndicate.org/commentary/johnson12/English).  It’s free and no advertizing is involved; more about Project Syndicate here.

28 responses to “Brady Bonds For The Eurozone, Starting With Ireland

  1. Indeed, official rhetoric has turned once again to trying to persuade markets to ignore reality.

    These clowns think the markets are reality.

  2. Prof. Johnson –

    According to the Wikipedia entry on Brady Bonds, they were issued “after many of those countries defaulted on their debt in the 1980′s”.

    Is that what you are advocating here? If not, how is your proposal different from simply having the EU guarantee the debt of its weaker members?

    Related question: Has there ever been a time in history when sovereign default was inconceivable? (Other than now, I mean. Ha, ha.)

  3. The problem is getting the investors to take their haircut — and like it. Too many Lords of Finance are still living in a world where they expect Reality to conform to their desires. (Central Bankers are, after all, still Bankers).

  4. Newsflash: Warren was NOT appointed to head new consumer agency. She will be an advisor. She should decline the offer.

  5. Agreed! Arrrrrgh!

  6. Bayard Waterbury

    This is scary news for the world economy, and a bogus use of OCM (not OPM) that is Other Countries’ Money. What will that eventually do to world currency values, and won’t it have a substantial detrimental effect on the value of the Euro around the globe? This is hard to understand, and I liken it to what happened here in the late ’08 and early ’09, in that we did “selective” bailouts and absurd (MTM) changes to permit the huge banks to survive the chaos they created, and probably for identical reasons, meaning that those who would have taken the greatest haircuts are the ones wielding the greatest influence (as in Goldman and friends getting 100% of their money and not having to sacrifice at all). As a matter of fact, we can also deduce that the US government and banks are quite complicit in the proposed (non) cure, as they still stand to lose substantially unless their overseas “interests” are protected. In fact, I would guess that many banks here not only will save by this strategy, but figure that it will create massive opportunities for their arbitrage experts in both currencies and commodities, not to mention European stocks. The virus is spreading globally and, as usual, Simon and Peter are offering rational alternatives that will be ignored.

  7. Bayard Waterbury

    Actually, the Lords of Finance, as you refer to them (accurately), are still living in a world which they substantially control. Of course, all houses of cards eventually fall, especially those which rely on pure smoke and mirrors (and cajolery which won’t work).

  8. Bayard Waterbury

    OMG!! Well, this is the last nail in BHO’s coffin. I wish I could renounce my citizenship. We are well and thoroughly boffed and left to die. She was our last hope for sanity. Death to the President and all who rule this country for the benefit of the top 1%. We are now colonists in our own country.

  9. Bayard Waterbury

    PS: I just read the entire ABC News story from Jake Tapper. It appears to be less innocuous than we may think, and in fact may be a back door approach that was carefully considered. Read it yourselves and decide (maybe I’m dreaming, but based upon Corker’s response, maybe not).

    http://blogs.abcnews.com/politicalpunch/2010/09/exclusive-president-obama-to-this-week-name-elizabeth-warren-to-special-advisory-role-to-white-house.html

  10. In reference to the EU Stabilization Fund, it appears that Germany will have first dibs. See

    http://www.nytimes.com/2010/09/07/business/global/07bizbriefs-GERMANBANKSM_BRF.html?_r=1

  11. I don’t think anyone, including Democrats consider that “Inconceivable”. People tend to go into a condition of denial. Some countries ( maybe even America now) go into a certain condition of denial. I might also add that public awareness (not just powerful members of government) on chances of default have improved vastly since Renaissance Florence or Victorian Britain. Just because toothless members of the Tea Party don’t want to read the data on Reagan….

    http://www.huffingtonpost.com/hale-stewart/ronald-reagan-fiscal-disa_b_82370.html

    …. and prefer to listen to the Liar standing on top of an empty hole, pointing and yelling “Goldmine!!!”,

    http://www.businessinsider.com/everything-you-need-to-know-about-the-glenn-beck-goldline-scheme-2010-7

    This politicians’ mistake. It’s their opportunity.

    Just ask Dan Maes, the Tea Party’s lead candidate for Governor of Colorado. He can tell you how great it is to have an illiterate electorate.

    http://www.latimes.com/news/nationworld/nation/la-na-colorado-governor-20100915,0,7136605.story

  12. Was not the “success” of Brady Bonds effectively contingent on ability to increase systemic leverage outside Latin America (via Ponzi finance creating new revenue streams papering over those gone bad), while at the same time radically devaluing vis-a-vis the U.S. dollar the exchange rate value of Latin American currencies (effectively extorting more real wealth for the “honor” of still appearing solvent)?

    Likewise, has not confidence in current financial structures been dealt a fatal blow, such that no scheme venturing to perpetuate these can succeed?

    Finally, how can there be any talk of “restructuring” while the sham leading to such a sorry state of affairs is left unaddressed? Seems to me there is a considerable sum claimed Ireland’s liability that in truth was put in place contrary to sound banking practice.

  13. CORRECTION: I should have said in the above comment “This isn’t politicians’ mistake”. Sorry

  14. This is just a desperate ploy by BHO, now that he calculates he has nothing to lose. She will report to Timmy and serve as window dressing. Come November, BHO and Team Donkey will get a preview of voter anger. BHO will get his walking papers soon enough.

    http://www.nytimes.com/2010/09/16/business/16consumer.html?partner=rss&emc=rss

  15. “unnecessary, undesirable, and unlikely.”
    What else would you expect from a creditor? Undesirable for whom? As long as the net inflow into Greece, for example, is positive, they should be willing to play the deny-delay game along with their creditors. But it would be foolish of them not to renege on the debt when the net flow turns negative. Spain is in similar circumstances. And what about Iceland. Talk about a silly case of denial.

    WWII resulted in such massive stimulus that it not only eliminated unemployment and the dirth of AD, it created excess demand and inflation (70% over the war years) that erased much of the over-indebtedness of individual borrowers (the problem that created GD1). The result was a dramatic flattening in the distribution of wealth. I doubt our current episode will end as quickly as GD1, unless we have a similar massive bout of stimulus. Japan’s example is probably much more instructive about what to expect from the current episode.

  16. Of course, that’s why the Republican’s insisted CFPB stay inside the Federal Reserve. That way the big bankers have power over the very entity (CFPB) which is there to protect consumers.

    And all TARP was, was a welfare program for large banks to refurbish their reserves. Only a small small percentage went out for loans or new investment. That’s why all this bullsh_t about QE never does anything.

    And “QE2″ will do nothing (other than prop up overvalued garbage stocks). QE doesn’t help the man on the street at all, QE just goes towards more bank and hedge fund corruption. And if Larry Summers was anything more than a bureaucrat who was booted from Harvard, he would have told President Obama a long time ago that QE does nothing to help the working man on the street (or the man hunting for a job).

  17. You’ve every right to be outraged. Obama has absolutely ZERO leadership qualities. He is the consummate politician, however. But the scam is now running on borrowed time. I talked to someone the other day who supported Obama, and he said that he has never felt more demoralized and betrayed.

  18. If it’s true that,”Investors naturally respond to unsustainable debt by selling bonds until interest rates become “ridiculous.” Those high interest rates strangle businesses and households, causing further economic collapse and making debt ever more unsustainable.” it means our political system is a fraud. Why would we enable our strangulation?

  19. Actually, the real story about quantitative easing, or any other central bank policy that might make a difference, is that ultimately they would also lead to higher inflation — higher, that is, than the ~0% we are experiencing now. A little inflation (2% is the number recommended by Simon Johnson and others), and a long-term central bank commitment to it, would do a lot toward getting economies growing again, without the potentially destructive effects of really high inflation.

    But while a little inflation would make most people’s lives a little better (or at least the same), there is one group who it would hurt — Bankers. Since central bankers are still bankers, we should not expect them to do something that is going to hurt them or their peer group.

  20. Re: @ TC___Kick the can…don’t question our expertise? Yes indeed – analogous too Haiti, and their hundred plus years of French Rule once freed of bondage to inescapeable lifetime debt! Go ahead – take all our natural resources, and shamelessly squander our very slim chance for a future? How wonderful it has worked out for the Haitian people, and their “Beach-Front Property” now being bought up for pennies on the Euro. Yes indeed…they’ll make excellent servants (slaves,..funny how things go in circles?) for the vacationing “Oligarchy”. PS. The Dominican Repubublic will have it’s work cut out in the years to come competing for Ocean Front Resort occupancy – but never fear Uncle Sam will just build a “Bigger Naval Base Presence” in the name of “Terrible Hugo” to the South? Is this what we want for Ireland – another ill-gotten (potato famine) corporate implosion predicated upon the “Failure to Co-operate” to move into the 21st century?

  21. I still believe that instead of creating EU “Brady Bonds” it would make more sense to have EU issuance of EU bonds. It’s easier and it will work with the same prionciple: Member States issuances are collateralized with EU bonds.

    http://mgiannini.blogspot.com/2010/03/stronger-case-of-eu-bonds-common.html

  22. Sorry for all the references…but – “Exporting Inflation” ,hangs and fits my curiousity like a christmas tree sock on a fireplace mantel…so comfy? Excuse my arrogant tone…but would someone other than Simon Johnson please answer my query ? How does the “Brady Bunch” help the rich, and wealthy in a world that’s just maxed-out? Ref: http://www.onemint.com/2009/01/19/how-does-the-united-states-export-inflation/

  23. Let me reiterate…the “Federal Reserve / Central Bank System” loaths “Gold and Silver”, period! It destroys the wealth of America’s hegemony facilitated by its “Fiat Currency” in which the “TBTF’s” have enriched (exporting inflation) themselves for ~appox. half-a-century. Gold is priced once daily by the *”Bank of England”* everyday at tea time ,seven days a week, fifty-two weeks/year, annually. The correlation between hard (gold, silver…oh,and by the way rationing ends for Silver Eagles by Numismatic News) assets, and fiat currency run in opposition to each other for obvious reasons. What has been going on behind the scenes in a stealthy kinda way is foreign central banks selling their US Dollars and buying gold, thus shoring up their indigeous currency, and central bank reserves. Remember…they have to be careful not to be overly zealous in this endevor too keep the price down on this “precious yellow throwback” while constantly accumulating at an alarming rate. There is quiet (not sure how quiet?) talk that the “Gulf Oil Cartels” are soon to abandon the US Dollar as the world’s premiere currency in the “basket of trash” weighted fiat currency? The Euro, and Gold will be considered the de-facto currency in the near future for purchasing payment via “The Oil Cartel’s Black Gold”! Please don’t act surprised, for the writings been on the wall for years, and the can that used to be kicked-down-the-road by america’s politicians has now been recycled into a “Tin Cup”. Currently every major central bank in the world is accumulating gold for their duel-primary currency…that’s to say China, Russia,India, Brazil, the Gulf States, Venezuela, Japan, Australia, Canada,,Thailand,( merging markets,etc.) Indonesia, and most “All of Europe”. It seems the only country that hasn’t figured it out is…The United States” ,and it’s partner in crime…”Jolly ole * England*”…strange indeed? I wouldn’t be a bit surprised if gold doesn’t hit $1500 USD by the end of the year (JMHO?). Let me acknowledge that the foreign central banks cannot stop buying US Debt…but they can at lesser rates in which they’ve been doing for the past year. This is a warning shot across america’s soverneigty bow, and should be at least spoken loudly and clearly too the Financial Wizard’s running the show…that we are dangerously tittering on the precipice of financial collapse as a once “Great Nation”! Noteworthy: read “Third World America?” Thankyou Simon, and James and never stop digging for “America’s Sake”! PS. Basel III means nothing with the financial tsunami to hit our shores if we don’t become “Pro-Actively Fiscal Solvent”!

  24. such issuing of bonds won’t help anyway…