The Mosler Plan for Greece

By Warren Mosler

The Mosler Plan, as previously posted on this website, is now making the rounds in Europe as an alternative to the French Plan that is currently under serious consideration:

Abstract:

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The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms.

The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government.

By eliminating the risk of loss, Greece will be able to independently fund all required financial obligations in the market place for the foreseeable future. The immediate benefits are both reduced interest costs that substantially contribute to deficit reduction, and the elimination of the need for the funding assistance from the European Union and the IMF.

Introduction- Restoring National Sovereignty:

Current institutional arrangements have resulted in Greece being faced with escalating interest costs when it attempts to fund itself in the market place, to the point where timely funding is not currently available without external assistance. This requirement for external assistance to avoid default has further resulted in a loss of sovereignty, with the EU and IMF offering funding only on their approval of deficit reduction plans by the Greek government that meet specific requirements. Compliance with these demands from the EU and IMF not only include tax increases, spending cuts, and privatizations, but also include aggressive time lines for achieving their deficit reduction goals. It is also understood by all parties that the immediate near term consequences of these imposed austerity measures will include further slowing of the economy, and rising unemployment.

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Greece will restore national sovereignty, and regain control of the process of full compliance with the general EU requirements for all member nations, only when it restores its financial independence. Financial independence will allow Greece to again be master of its own destiny, on an equal basis with the other EU members. And the lower interest rate that result(s) from this proposed bond issue will itself be a substantial down payment on the required deficit reduction, easing the requirements for tax increases, spending cuts, and privatizations.

While this proposal restores Greek national sovereignty, and eases funding burdens, we recognize that it is only the first step in restoring the Greek economy. Even with funding independence and low interest rates the Greek government still faces a monumental task in bringing Greece into full compliance with EU requirements and restoring economic output and employment. However, it should also be recognized that financial independence and low cost funding are the critical first steps to long term success.

The Bond Issue- No Risk of Financial Loss:

Market based funding at the lowest possible interest rates requires investors who understand there is no ultimate risk of financial loss, and that the promise to pay principal and interest by the issuer is credible. To be credible, a borrower must have the means to meet all contractual euro obligations on a timely basis. For Greece this has meant investors must have the confidence that Greece can generate sufficient revenues through taxing and borrowing to repay its debts.

The credit worthiness of any loan begins with the default provisions. While there may be unconditional promises to pay, investors nonetheless value what their rights are in the event the borrower does not pay. Corporate debt often includes rights to specific collateral, priorities in specific revenues, and other credit enhancing support.

The new proposed Greek bond issue, with its provision that in the event of default the bonds can be used at face value, plus interest, for the payment of taxes by the bearer on demand, gives the bond holder absolute assurance that full maturity value in euro can always be achieved. And with this absolute assurance that these new securities are necessarily ‘money good’ the ability to refinance is established which dramatically reduces the risk of the default provisions actually being triggered. And, again, should there be a default event, the investor will still get full value for his investment as the entire euro value of the defaulted securities can be used at any time for the payment of Greek taxes. So while this discussion concerns the case of default, the removal of the risk of loss means there will always be demand for them at near risk free market interest rates, and that the default discussion is, for all practical purposes, hypothetical.

These new Greek government bonds will be of particular interest to banks, which, again, encourages bank ownership, which makes default that much more remote a possibility. This is because, in the case of default, a bank holding any of these defaulted securities will be able to use them for payment of taxes on behalf of bank clients (using that bank for payment of their taxes). Under these circumstances, a bank depositor client making payment of euro would, in effect, simultaneously buy the defaulted securities from the bank and use them to pay the Greek government taxes due. Again, the fact that the bank would be fully paid for its defaulted securities in the process of depositors paying their taxes means there will be no default in the first place, as these favorable consequences mean there will be continuous demand for new securities of this type at competitive market interest rates, to facilitate all Greek refinancing requirements.

The new ‘money good’ Greek bonds will be attractive to all global investors, both private and public. This will include international banks, insurance companies, pension funds, and other private investors, as well as sovereign wealth funds and foreign central banks which are accumulating euro reserves.

Fiscal Responsibility:

As a member in good standing of the European Union, Greece, like all the member nations, is required to be in full compliance of all EU requirements. Therefore, while this proposal will restore national sovereignty, financial independence, and lower interest rates for Greece, austerity measures will continue to be required to bring Greece into EU compliance. However, Greece will gain substantial flexibility with regard to timing and other specific detail, and will be able to work to achieve its goals in an organized, orderly manner, without the continued pressures of default risk and without the specific terms and conditions currently being demanded by the EU and the IMF. Nor will the ECB be required to buy Greek bonds in the market place, obviating those demands as well.

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10 Comments
  1. Blankfiend says

    How would this proposal be attractive to entities who are not liable for taxation by the Greek government?

  2. Alan Avans says

    Here’s your answer,Blankfiend:

    “…the fact that the bank would be fully paid for its defaulted securities in the process of depositors paying their taxes means there will be no default in the first place, as these favorable consequences mean there will be continuous demand for new securities of this type at competitive market interest rates, to facilitate all Greek refinancing requirements.”

    I’m sure Mr. Mosler will be more than happy to expand upon this feature of his program. In my opinion, it’s really nifty and awesome. Reminds me of some of the covered bond programs in the Nordic countries. Denmark has a mortgage bond program that is over 200 years old. This program has operated free of defaults over the entire period of its existence. One of it’s most interesting features is that borrowers may make mortgage payments with units of the bond issue.

  3. David Lazarus says

    This looks like socialising bank losses. Hardly practical when Greece has far too much debt to start with. It suspect that they will be principally used to take control of state assets for next to nothing. If bonds are worth next to nothing because of the risk of default then the optimal solution is to buy high risk default bonds for cents on the euro, convert to these Mosler Bonds at par, then use to buy state assets like airports docks etc for effectively cents on the euro. So end result is that Greece will have been asset stripped and there is no additional revenue.

  4. gac says

    The Mosler plan strikes me as effectively giving lenders a “lien” on Greek tax revenues in the event of default. This would be a nice feature for the lenders to have, but the austerity it would impose on government spending would be drastic. If the government then responded to the shortfall in tax revenue by floating more debt to fund its spending, wouldn’t this be analogous to printing money? If so, how does this game end? Seems to me that at some point, the Mosler bonds would cease having any further appeal to lenders.

  5. john haskell says

    So… if the Greek government issues a new kind of bond that is senior to all of the currently existing debt, the new super-senior debt would trade at a low yield. Well thank you Mr Mosler, I had not thought of that.

    And what will happen to the old debt? Hm. The fact of the matter is that the existing debt is supposed to be paid with euros, which incidentally are already accepted in payment of tax liabilities not only in Greece but in a number of other countries as well.
    So those old bondholders will get nothing and the Greek government, instead of collecting taxes in euros, will collect bonds that they had just issued. Which will be a problem unless they can persuade retirees, doctors, policemen etc to accept bonds in lieu of euros… the system crashes pretty quickly.

  6. Dan Lemnaru says

    By definition, because these Mosler-bonds could be used to pay your taxes, they become money – in this case, effectively, they would be euros. I think that any other euro user country would be very concerned about this kind of practice, because in effect Greece would be printing euros, exporting its necessary inflation (to which it would have probably appealed, had it not been for the ECB enforced straightjacket) onto other eurozone members. So, the ECB and Germany will definitely have something to say about this.

    While this type of inflationary policy could indeed work for Greece itself, international (mostly intra-eurozone) pressure will probably stop this from ever happening.

    After all, in the long run, we can imagine a world where Greece issues close to the 350B worth of euros of these Mosler-bonds, money that it needs to pay off its debt as it comes to maturity – basically needs to be rolled over. What we will have then is a monetary system with 350B new euros printed by the Greeks. Once this starts, how do you stop Ireland, Portugal or any other eurozone country from doing the same? How does the ECB enforce its monetary policies then?

    In the even longer run, these bonds could become functionally different currencies, because you could not pay Irish taxes with Greek Mosler bonds (so they will definitely have different prices in the market), floated around the (continually devalued) euro, based on some notion of perceived risk (the individual country’s taxes to Mosler-bonds ratio seems like a fair bet). So, perhaps such bonds could be a rather elegant solution to the problem of undoing the monetary union in a somewhat orderly fashion?

  7. Edward Harrison says

    The essence of this plan is in giving the bonds value inside the Greek economy by allowing their face value to be used to expunge Greek tax liabilities. That is what gives fiat money value. So in essence, Greece would be creating a de facto currency. Still they have a funding shortfall so they will need to fund that euro shortfall by going to market and reduce it by cutting the deficit.

    I am sceptical that these bonds would receive the level of interest from investors that Warren believes they will. As I see it, this helps their liquidity constraints but they still have the solvency issues to deal with since the government does not create the national currency. Unless these bonds will be accepted internationally (Greece funds its deficit externally), deficit spending and issuing these bonds will not be as good as ‘printing money.’

    This does alleviate liquidity (and with general acceptance, solvency) issues. But, as Warren points out, even if the bonds are widely accepted, the Greeks still have the stability and growth pact criteria to meet.

    1. David Lazarus says

      I still do not see how these cannot be abused by the banks. Banks have spent a fortune to destroy what regulation was in place and to stop its reintroduction. They will definitely use this as an opportunity to asset strip Greece of key assets. This is just another theft from the greeks. Greece’s problem is debt and failing to deal with the debt burden is only going to benefit the holders of the bonds who will then demand greek assets as compensation where as now if Greece refused to pay they get nothing. It skews the incentives for the bankers to block a proper debt restructuring.

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