Germany Seeks ‘Orderly’ Insolvency Option for Euro Members
(Bloomberg) Germany is proposing that the European Union create the option of an “orderly state insolvency” for countries using the euro, according to a Finance Ministry document. That would set incentives for governments to follow “solid” fiscal policies and for “responsible” behavior by investors, the document said.
This is a very critical issue. Germany doesn’t want to have to write the check for other euro member’s debt.
An ‘orderly state insolvency’ would mean the lenders would lose their investment rather than get bailed out.
The main problem with this is that by making insolvency a viable option, euro members become subject to increased liquidity risk. And, in the case of actual insolvency and legal debt write downs, euro bank assets are written down as well, subjecting them to increased liquidity risk as well.
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“euro bank assets are written down as well, subjecting them to increased liquidity risk as well.”
S*d the banks. They HAVE to take a hair cut, else we’ve fallen for moral hazard, yet again. As to the deflationary effects of weaker banks, make up for it with a payroll tax reduction, or similar. Newly created monetary base is the property of the people, not banks.
As soon as public purpose and commerce are mixed up in the banking system, banks are in a position to say “subsidise our so called commercial functions, else we vandalise our public purpose functions”. Governments fall for it every time.
I suggest banks be split into two types. 1. Strictly public purpose only, paying no interest on deposits and offering full state backing. 2. Fully and only commercial with no state backing whatever. Glass-Steagall failed to distinguish between public purpose and commercial. I suspect it should have.
Agreed.