A Workshop of the EU Center of Excellence Can the Modest Proposal Save Europe? Comments Kunibert Raffer

NO!!!  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 On the other hand, full agreement on

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: 1 st 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 “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) “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)

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 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) Abusive lending (© Juan Pablo Bohoslavsky 2006) : loans prolonging crises, increasing/causing damages to bona fide creditors arguably even subordination of abusive public credit Raffer Proposal: NO preference ladder! Equal haircuts EU-bail-out caused increase in Greek debts since crisis broke, fuelled crisis by encouraging speculation against other euro- countries, signalling speculators that they would be bailed out at taxpayers’ cost; invitation to go on speculating

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 … 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 ocean- front property to sell you in Alsace.’ A. Evans-Pritchard, Telegraph 25 October 2011

Thank You Very Much Muchas Gracias Kunibert Raffer © K. Raffer 2011