Friday, November 26, 2010

The Best Hope for the Survival of the EU

It is the non-survival of the Eurozone, according to “Worthwhile Canadian Initiative: A mainly Canadian economics blog here .


“If a firm defaults, you can: arrange a takeover; close it down and sell off its assets; write down its; or convert its debt into equity. If a country defaults the first and second options are unlikely. Most commentators are talking about debt write-downs.

A debt write-down raises a number of questions. How big a write-down? Would it be the same for Greece as for Ireland? Should private debts all be written down by the same amount, and by the same amount as sovereign debt? Who decides? How long will it take to decide? How many countries and banks go bust while they are trying to decide? It would be a very nasty argument.

A better option would be to convert the country’s debt into equity. That is essentially what happens when Ireland (say) re-issues the Punt, and converts its Euro debt into Punt debt. (For “Ireland” read “Greece”, Portugal, Spain, Italy, whoever” throughout).

Sure, the law says that it has to pay Euro debt in Euros, not in Punts.But the law also says the debt must be paid in full. And if we are talking about write-downs, we have already admitted that the law will be broken.”

My comment: good food for thought!

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