A fresh idea is being tossed around to handle Greek and other European countries’ debt in the face of economic failure — a way to avoid taxpayers across the bloc constantly getting stuck with the costs of propping up under performing economies.
The idea is being promoted by Ashoka Mody, a former deputy director at the International Monetary Fund, and it hopes to redefine the way the debt restructuring process works for struggling countries. Specifically, his plan would automate losses for private backers of sovereign debt in the scenario that such a nation went over a predetermined amount of debt to GDP. This would give investors the proper foresight and sense of preparedness with their money in the case of a country defaulting, or require emergency funding from the EU, avoiding putting them at odds with countries who have similarly backed their ailing counterparts.
Germany, for one, has refused to consider further alleviation of Greece’s debt obligation to the bloc’s largest economy, creating a tense situation between it and the International Monetary Fund — one of Greece’s three major lenders. The IMF has asked European countries invested in Greece to take another hit on their debt, while at the same time pressuring Greece to reform faster so as to shore up its own debt problem so that they might lend a hand to investors already crushed by investment in Greek debt.
Greece has been absent from capital markets for 3 years, and any return will be better for the country if markets are more clear in possible outcomes, thus helping stem the possibility of unpayable interest rates.
Creative ways to deal with financing in these situations have began cropping up in Europe, where capital requirements a bank must hold against investments continue to increase. CoCo bonds, or contingent convertible bonds, have become a means for banks to both meet requirements and offer payment incentives to their executives, though the European Union is looking more closely at this. Essentially the firm issues the bonds in such a way that they then can be converted into shares of the company in the case of a capital failure.
Mody’s plan also claims to allow countries to adhere more closely to the European Union’s treaty, which has been at the forefront of debates involving the vaunted EU banking union. Germany fears that such a union will make taxpayers obligated for the debt and failing banks of the periphery countries at a time when anti-bailout sentiment is high.
Greece announced a budget surplus of 2.6 billion euros today for the first 7-months of the year, excluding interest payments and entitlement program obligations.