In Economisch Kort deze week de analyse van Daniel Lacalle over het voorstel om staatsschulden binnen de EU te verminderen door ze weg te strepen.

Op zijn eigen blog legt Lacalle het ook anders uit:

wegstrepen van schulden is een erkenning van insolvabiliteit

Economist Thomas Piketty, creator of some of the most absurd proposals embraced by the extreme left, has published an article in which he demands a cancellation of government debt in the hands of the European Central Bank “in exchange for greater public investment” … which, by the way, would be paid with more issuance of public debt. Fascinating.

Luís de Guindos, vice president of the ECB, has settled the controversy with two pieces of evidence. “Cancelling the debt (in the ECB balance sheet) is illegal and also does not make economic sense,” he explained to Reuters on February 4th, 2020. The first part is obvious. It is prohibited by the bylaws of the European Central Bank. I will explain the lack of economic logic here.

A debt write-off or cancellation is the evidence of the issuer’s insolvency. If, as Piketty repeats, the solvency and credit credibility of the Eurozone is not at stake, why ask for a cancellation? If, in addition, as Piketty and other defenders of massive state indebtedness maintain, deficits are not a problem and increasing debt is not a concern because it creates reserves, why cancel it?

Let us not forget that many of the parties that have embraced Piketty’s idea in Europe, Podemos (Spaanse leftie-liberalen), Syriza (Griekse leftie-liberalen) and other European radical parties, filed a proposal to exit the euro in 2016 that they have never subsequently eliminated or rejected. The Podemos MEPs presented a resolution in Strasbourg for the European Union to prepare the mechanisms for the “orderly dissolution of the euro system”. They also proposed to establish “the mechanisms that would allow a country integrated in the single currency to abandon it to adopt another currency.”

So basically, radical parties in Europe demand that the ECB forgives their debt and prints more while keeping the option of leaving the euro. Call that baking the cake and eating it.

Most Eurozone states finance themselves today at negative rates or extremely low yields. It would be a mistake to think that these low interest yields are the consequence of good government fiscal policy. If the Eurozone has low interest rates and low yields it is because European taxpayers keep it solvent. Mostly thanks to Germany’s financial solvency. European taxpayers uphold the credibility of the euro as a currency and with this the ECB can carry out expansionary policies.

Piketty opens a dangerous option: Direct monetization of all and any government spending Argentina-style. And does so ignoring that the euro is the only global reserve currency with redenomination risk and that its credibility is maintained only because of the widespread confidence in the euro area’s commitment to repay its debts.

A euro bond is an asset for many investors globally only because it is supposed to be of the lowest risk. Opening the pandora box of cancellations means its status as an asset disappears.

What we read in Piketty’s column are typical fallacious populist arguments. Debt reliefs and defaults exist, of course: They are evidence of an issuer’s insolvency. What does not exist is a debt relief to spend more and get even more in debt, which is what they propose, which leads to constant monetization and cancellations that ultimately undermine the solidity of the euro. What Piketty asks for is the direct monetization by the ECB of all and any public spending without limits or differentiation. That is, to copy Argentina.

Neither the US nor Japan nor the UK think of such nonsense. Because they know they would lose their status as a global reserve.

The European Central Bank has already bought 100% of most euro area member states net issuances and around 30% of their outstanding debt. What did you buy it with? With the creditworthiness of the economic agents of the entire euro area. This is essential to understand why debt is not a simple accounting note and the ECB cannot cancel it at will.

The European Central Bank can borrow thanks to the strength of the savings and economy of the member countries of the eurozone.

When the ECB buys euro area sovereign bonds, for the central bank our debt it is a maximum quality and lowest risk asset that has value if member states meet their credit commitments and are reliable debtors. If the ECB were to remove this debt from its balance sheet, it would destroy its assets, and with it the confidence in their viability as well as its ability to remain a leading central bank.

Cancelling the debt in the hands of the ECB would destroy its global position as a lender and guarantor of last resort, because it shows the world’s investors that its assets (the debt of the countries it has bought) are not high quality and low risk, but insolvent. Any investor can understand that what seems “one-off” now will recur in the future, judging by the massive deficit-spending policies that parties that follow Piketty endorse, destroying the credibility of the euro and the ECB. Do you think that when this “one-off cancellation” ends most countries would not ask for more two years later?

Verder lezen? Dat kan hier, op het blog van Daniel Lacalle, die in het vervolg nopgh uitlegt wat de kenmerken van schuld en de structuur van economische zekerheid achter fiatgeld is, aan de hand van het voorstel schulden weg te strepen.

---