… Or Maybe the ECB Isn’t the Point at All

Following up on my last, John Dizard takes a different line from Ambrose. What Dizard wants is a sovereign default system, and he wants it now, not in 2013. The starting point is last week’s Eurobungle:

Last week’s crisis in “peripheral” euro area bond markets was the consequence of a series of own goals by the Brussels team. By attempting to postpone critical decisions on bank insolvency resolution, and on euro-area sovereign default procedures, the political leaders and their minions have brought one on.

And Dizard thinks a fix is really urgent. So far, I cleave more to the rolling minicrisis view of European prospects, so I’d love to know more about the background to this forecast, implying a credit crunch that will take in more than Portugal:

Within a month or so, the seize-up in the peripheral bond markets will lead to serious and immediate operating issues for the financial system. So the political leadership has no choice but to clarify how Europe will deal with sovereign default, and banking system insolvency.

Dizard doesn’t think the solution should be to stretch the ECB to fit whatever gaping holes the solvency crisis reveals in Euroinstitutions, a la AEP, but a proper default mechanism. Legal templates for this do exist, but, given the dilatoriness of the Eurocrats and the time pressure, Dizard thinks it better to devolve the legislative task to national governments:

This will likely take the form of a euro group announcement that, while Europe itself can take its time devising default rules, there would be nothing inappropriate about national governments passing legislation to impose “aggregated collective action clauses” on bond issues that are governed by national law.

More good stuff in the article – do go and read the original, if you have a sub. Basically the idea is debt writedowns endorsed by a majority of bondholders, plus some Euro variant on Brady bonds.

If Dizard is right about the urgency, I imagine the chances of this getting put together in time are close to zero.


Originally published at naked capitalism and reproduced here with the author’s permission.