Comments on: Can financial innovations help the eurozone? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: JedGraham Wed, 11 Jan 2012 08:09:16 +0000 Mr. Salmon is certainly correct to point out the danger of pro-cyclicality, but he regrettably (and unconstuctively) assumes that Safeguard bond triggers would have to be designed in a way that is extremely pro-cyclical, which would indeed be self-defeating.

As I note, the triggers built into the bond contracts would have to be designed with the utmost care in consultation with the IMF. The triggers (likely some combination of debt-to-GDP and fiscal balance) could be moving targets and would need to have some degree of flexibility built in based on economic conditions.

The technical challenge of setting appropriate triggers is not a minor one, but nor is it rocket science, and past experience such as the World Bank guarantee program Mr. Salmon references would inform the process.

The importance of the idea of Safeguard bonds is that it changes the discussion from a question of whether it is politically possible to provide an adequate lifeline to at-risk sovereigns to a focus on exactly how such a lifeline can be provided in a way that balances both political and cylical concerns.

Mr. Salmon also is off-base when he casts Safeguard bonds as an “attempt to solve deep economic problems with the application of clever financial ideas.”

Safeguard bonds address urgent political problems, not economic ones, though they could give troubled nations some breathing space to address their economic problems by bringing down interest costs while putting the monetary union on path toward a more workable fiscal union.

Mr. Salmon says casually: “The eurozone might break apart, or it might stay together.” Yes, but Safeguard bonds, by providing an answer to the political question of how the ECB can provide adequate (and somewhat proactive) support to stem the crisis, could avoid the potential of another nasty leg down and would improve the odds of long-run success.

By: TFF Wed, 11 Jan 2012 02:36:47 +0000 I might be understanding it wrong, but the “parallel currency” concept is likely to allow most existing contracts to expire, while NEW contracts are (forcibly) written in the new currency. No?

And honestly, I don’t see any real difference between that arrangement and an immediate breakup. Just more practical if most existing contracts can be left untouched.

By: Dr_Stonewafer Wed, 11 Jan 2012 01:21:37 +0000 Assuming I have grasped the basics of the Safeguard bonds from your article, they seem very dangerously pro-cyclical. The world doesn’t need more hyper-safe reverse co-co sovereign bonds; we need debt markets to shoulder more risk, and the potential for loss, at least if we want to grow / escape a liquidity trap. Over indebted nations need to restructure debt, with the potential for partial default; what they don’t need is ever more austerity and ever-tighter covenants!

By: FifthDecade Wed, 11 Jan 2012 00:58:49 +0000 Yes, we do – and I can get Euros OR Swiss Francs out of mine…

By: KenG_CA Tue, 10 Jan 2012 23:27:38 +0000 Financial innovations? Don’t they have ATMs in Europe already?