Trichet bonds will solve the European debt crisis

by Nicholas Economides and Roy C. Smith


Greek Economists for Reform
February 1, 2011

I propose the creation of a new type of long-term sovereign bonds (“Trichet Bonds”) by Greece and other EU countries with significant debt problems. These bonds will be of significantly higher quality than present ones because they will have ECB bonds of similar duration as collateral of their principal. Trichet bonds will provide a comprehensive and effective solution to the EU debt crisis relieving indebted countries of the acute debt crisis without cost to tax payers. They will work as follows: (1) Greece exchanges its old bonds with Trichet bonds. (2) The old bonds are exchanged at market prices, now at 30% below par. Thus, the Greek debt (except the 110 special loan of the EU, ECB and IMF) is reduced from 200 billion to 140 billion. (3) Trichet bonds are issued as 30-year bonds at interest rate 5% and principal 140 billion that has as collateral 30-year ECB bonds. The interest cost to Greece is 7 billion annually, that is, 2.8% of the Gross National Product (GNP). (4) Greece buys 30-year ECB bonds of 140 billion par value. Their present value is 50 billion (interest 3.5%). Financing for this can be done from the reserves of Greece at the ECB or Greece can borrow from the ECB for the interest at cost of 1.5 to 1.75 billion annually, that is, 0.6-0.7% of GNP. This cost could also be covered from the European Stability Facility. (5) There is no subsidy from European taxpayers. Greece saves interest cost 14.5 billion annually and avoids bankruptcy.

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