Friday, February 06, 2015

(n+1)-ésima vez

Greece – a Varoufakis Conversion, por Chris Cook (Pieria):

So it is that Greek finance minister Yanis Varoufakis has already tabled a proposal for two new types of debt, one linked to GDP for the IMF and holders of Greek sovereign debt, and the other of perpetual debt, which would replace Greek debt held by the ECB and which would be repaid as and when Greece is in a position to do so. (...)

The Proposal

Firstly, Greece would dedicate an agreed proportion of tax income to long term funding. Let us say 5% of Greek tax income and an initial allocation of €12bn.

Greece then issues stock (undated credit instruments) at a discount, each of which is returnable in payment for €1.00 of Greece's taxes. This new issuance would then be allocated between the different creditors in a way reflecting the repayment date and interest rate of Greek liabilities.

From then on Greece would use 5% of its tax income to buy back this stock for cancellation, and the faster the growth of Greek GDP and taxation, the faster would be the rate of return of the stock. (...)

“This Innovation Will Never Work”

Well, actually UK sovereigns funded their expenditure in precisely this way for centuries, and the evidence of that remains in the English language to this day. The phrase 'tax return' refers to the annual accounting event at which the tax credit instrument (tax prepaid at a discount) was returned to the Exchequer for accounting and cancellation.

The phrase 'rate of return' was literally the rate over time at which an undated credit instrument could be returned to the issuer for cancellation against value supplied by the issuer. Finally, the 'stock' was the name given to that half of a split wooden tally stick accounting record which was given to the creditor, while the issuer retained the 'counter-stock'. (...)

The consolidation of existing liabilities is not a new concept either, and the most relevant example (albeit the UK was anything but in economic distress at the time) is the way that UK Chancellor George Goschen consolidated all existing annuities (these liabilities were not misrepresented as debt in those days) into a single class in 1888.

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