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Home Publications Blogs CEPR Blog Can Ireland Outsmart the European Central Bank?

Can Ireland Outsmart the European Central Bank?

Written by Dean Baker   
Friday, 30 March 2012 11:50

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.

Tags: eurozone | global economy | ireland

Comments (5)Add Comment
written by Kevin Donoghue, March 30, 2012 1:25
Maybe the issue of tax-backed bonds is legal, but the ECB might retaliate by refusing to accept any bonds issued by the offending government as collateral. In Ireland's case at least, that would nuke the banks.
written by Eiresans, March 30, 2012 3:00
& the ECB really wants to nuke the banks? They'd be over a barrel
written by Kevin Donoghue, March 30, 2012 3:42

If the Irish government was willing to face down the ECB it would have done it before now. Paying off the unguaranteed debt of the defunct Anglo-Irish Bank was hugely unpopular. But the ECB insisted. So while you're right that their threats to nuke the banks don't look credible, their bluff will probabaly not be called unless one of the larger countries gets into serious trouble.
written by Eiresans, March 30, 2012 4:42
I take your point, there are severe deficits in political will at play. Perhaps Mariano Rajoy can swim further against his economic instincts & strongarm the centre, forcing a change in policy, & maybe providing a fellow Christian Democrat's inspiration for people like Enda. This should probably be addressed more to Spain or Italy.

Still, Phil Pilkington was over on nakedcapitalism saying he was in talks with an Irish opposition party, I'm thinking Shinners, about raising the issue. http://www.nakedcapitalism.com...ozone.html
Not the Shinners,,,
written by Philip Pilkington, March 31, 2012 7:04

It's FF. But shhh... Not sure how far this will get.

I think the ECB might like the bonds. It would ensure that their balance sheet were much stronger and that much of the risk in the Eurozone banks also dissipated. They would still have all the pre-crisis mechanisms (and then some) in place to 'deal with' budget deficits. (SGP, new fiscal pact etc.).

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