Tuesday, December 13, 2011

Shifting Balance

Richard Koo charts Ireland's balance sheet recession in a fascinating analysis. His solution:
One way to solve this eurozone-specific problem of capital shifts would be to prohibit member nations from selling government bonds to investors from other countries. Allowing only the citizens of a nation to hold that government’s debt would, for example, prevent the investment of Spanish savings in German government debt. Most of the Spanish savings that have been used to buy other countries’ government debt would therefore return to Spain. This would push Spanish government bond yields down to the levels observed in the U.S. and the U.K., thereby helping the Spanish government implement the fiscal stimulus required during a balance sheet recession.

...Ending the eurozone’s crisis will require a two-pronged approach. First, international bodies like the EU and ECB need to declare that member countries experiencing balance sheet recessions must implement and maintain fiscal stimulus to support the economy until private sector balance sheets are repaired. Second, eurozone member nations must declare that in ten years they will prohibit the sale of government debt to anyone other than their own nationals.
Of course, ten years is a long time to wait. Though taking a long time appears to be one of the defining features of a balance sheet recession:


Mind you, a balance sheet recession coupled with a bank bailout just might take even longer to work itself out...

2 comments:

  1. This is a very interesting concept.

    Of course, it flies in the face of the Single Market, although I seem to remember a provision of the treaties which allowed for capital controls to be introduced if it was necessary to safeguard the currency.

    But of course, preventing governments from borrowing outside of the country will not prevent citizens/corporations from borrowing from outside the country. In order for this model to work and give the stability desired, we would have to prevent citizens from borrowing abroad too -they would hardly stand for it.

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  2. You quote Koo as saying:

    "Allowing only the citizens of a nation to hold that government’s debt would, for example, prevent the investment of Spanish savings in German government debt."

    Good luck with that, as they say. Making the rule would be the easy bit. Finding a way to prevent financial types from giving foreigners access, one way or another, to an asset class would be, I would say, impossible.

    It might *inhibit* the process, I will grant that.

    "Most of the Spanish savings that have been used to buy other countries’ government debt would therefore return to Spain."

    You would even better luck with *that*. I fail to see why such an assumption can so breezily be expressed at all.

    Notice that I have not even mentioned the legal issues ? :-)

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