You may have noticed that I have been spending some time writing about repurchases and debt restructures. I started out by mapping where we were, and more recently, where we are. I considered the options ahead and their apparent consequences at each juncture, where it seemed evident that the issue was one of chosing between debt restructuring and debt repurchases.
Then I looked at the different modalities of debt restructuring available and their consequences. After this I moved on to consider how repurchases would work. However, I never really found or provided a discussion of the tradeoffs between one or the other.
It strikes me that there are really only two plans that seem to have a chance of working: 1) coercive par restructure, with low interest rates and extended maturities and 2) debt repurchases. Both have benefits and potential costs. Unsurprisingly, in a crisis that is fuelled by uncertain leadership and slow and noisy decision making, the benefits and the costs seem to be dominated by political considerations.
The repurchase of debt is simple, quick and very soothing to the private sector. It sends the message that the member states are willing to avoid a default, which should create confidence and lower the debt yields. It is politically difficult, in that it may prove electorally damaging to the incumbents in the core, and in that the EFSF needs to be reformed to allow it to intervene in secondary debt markets. Finally, the debt repurchase would have to be a single and substancial event, in order to minimise the need to intervene again and the cost associated with that.
The debt restructuring alternative proposed by Nouriel Roubini is however more muddy, in the opportunities it gives to politicians and rating agencies to make errors of judgement. However, it is electoraly and institutionally simpler. The core doesn’t have to convince its electorate to supports repurchases and the EFSF does not need to be reformed. Nonetheless, there are intergovernmental concerns about the uncertain path of European negotiations, which should temper our enthusiasm for this solution. As I mentioned in the previous post, if the countries start bickering and create uncertainty, all bets are off. Hoever, if it were well done, Mr Roubini’s solution would probably put all of this crisis behind us within two weeks, and with little political bickering.
In a sense, I believe that these are two very plausible solutions, which are not necessarily mutually exclusive. The first appeals to France, while the second to Germany. The question is whether a mix of both plans would benefit from all the advantages or suffer from all of their pitfalls.