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For Europe - a possible way forward

Jul 11 2015 13:14
* Edward Ingram

THIS IS an edited version of a letter Edward Ingram sent to a "friend" in the ECB - The European Central Bank. It not only addresses the Greek situation. It addresses the world situation:

Please note that I have been mulling over what might best help the Greek negotiations and this morning a difficulty that I was concerned about seems to have melted away. IT IS MORE THAN A BREAKTHROUGH for the ECB as I realised as I began to deal with the issues in detail.


- An invisible haircut, seen only by Greece.
- A faster Greek recovery and ability to repay
- An end to rescheduling and ever more bail out money
- A revolution in Financial Stability-Building for the rest of the world
- A huge boost to public confidence in world financial stability moving world economic recovery one step closer as they begin to understand how this works and start using the same concepts... Worth thinking about.


Economists say that they prefer to call my Wealth Bonds Floating Rate Notes, FRNs. Wealth Bonds would not be linked to LIBOR, but to an index of National Average Earnings, NAE. The capital value would be linked to an index of NAE. The name Wealth Bonds has been adopted for political appeal and for public understanding. They preserve wealth. (See the WEALTH BOND CONCEPT below.)


For Greek debt, so as to enable any visible haircut to be reduced, or eliminated, the interest rate coupon would be fixed at little or nothing. The idea is to preserve the current value of the debt, or in the event of a haircut, look at its starting value because the interest rate is currently very high. Take away all of the interest paid so far and maybe add back that part, which preserves wealth. This will be politically OK.

The appeal of the bonds is that a case can be made that they will protect the value of the debt as seen by each lender (Germany, Italy etc and their citizens), because the index will be their own national index of NAE. So from their viewpoint the wealth lent will be preserved. Different lenders, Germany, France, etc will have different indices. This will be politically OK for each nation.

The appeal to the Greeks is that once their NAE begins to rise faster than those of the other nations, this will be a negative rate of interest - it will melt away some of the value of the debt. It is an invisible haircut, only visible to Greeks.

By making the interest coupon zero or nothing, the Greek recovery will  be accelerated. Indexation to NAE is automated re-scheduling - no more emergency re-scheduling meetings to bother European leaders.

A review of when the capital must start to be repaid will take place after a negotiated number of years and/or after a sufficient economic recovery has been made by Greece.

I suggest that the IMF index be made up of a mix of the indices adopted by the major European nations and the same for the ECB, and for private investors in Greek Bonds.

It would be helpful if Greeks stopped retiring in their 'adolescent' years and made a full contribution to Greece and of course if the Greek Government collected taxes. VAT is easy to collect but will hit the poor whereas it is the wealthy that needs to pay. But those issues are beside the point of this memo.


Grandpa. 100 years ago Grandpa was wealthy and he set aside half a lifetime's earnings, around 20 NAE to be inherited by his grandchildren. Today those grandchildren stand to inherit only 1 NAE because Grandpa made the mistake of index-linking the debt to the wrong index. He chose the prices index, which rose an average of 3% p.a. less quickly than NAE.


- Pension funds have to try to keep pace with NAE and annuities try to do do  the same. They cannot do this because there are no Floating Rate Notes linked to NAE.

- Borrowers also have a problem because if their debt is in fixed interest and their incomes start to fall nationally, (including government borrowers), the debts get harder to repay. With wealth bonds everyone is in the same boat - borrowers and wealthy lenders. There should be no complaints except that new borrowing will cost a premium until NAE starts to rise again. Why? Because cash is better. It rises in value when NAE falls. A little inflation is better.

- Wealth Bonds, (FRNs linked to NAE), can also be used to calibrate the level of risk in unit trusts and any other managed funds. The greater the content of Wealth Bonds in the fund the lower the investment risk. As people get older they have more savings and those savings need more protection. The market for wealth bonds is potentially huge.


* Edward Ingram is a leading thinker on the world stage of  macro-economic design and has written a series of essays for Fin24.

Related essays:

- Ripping the economic canvas
- Why banking is so risky

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edward ingram  |  greece  |  greek debt crisis



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