The Disorderly Default in Your Closet Eupdate

Another day, another Greek deal to end them all (more on that soon). Amid the political din, legal and financial complexity, one thing has struck me: the entire enterprise is being justified as a way to avoid "disorderly default." But what exactly is disorderly default--that scary monster in the closet keeping many Eurocrats, foreign bondholders, and Greeks awake at night--and is it really the sole unthinkable alternative to the mess of the past year and, perhaps, some years to come?

Disorderly default, one that comes as a surprise to the markets, leading to contagion, capital flight, bank runs, a crashing collapse of the Euro, and widespread litigation, is surely unappetizing. But the alternative to disorderly default might also be a priced-in default with minimal contagion, a contentious restructuring with lots of litigation, or a slow-bleed near-default, complete with capital flight and bank runs, which destroys trust and political capital, depletes and redistributes resources that might have gone to finance recovery (see Roubini & Setser) ... and ends in default.

Mind you, I am not advocating disorderly default, but rather suggesting that it is of a piece with order, chaos, and other pure, but under-specified alternatives to messy reality. Disorderly default is evil in the same way that pristinely orderly bankruptcy is good. By taking default (orderly or otherwise) off the table early in the crisis, while refusing to finance a credible alternative, the European political leaders may have chosen the worst of all options.

As grandpa used to say, it is much better to be rich and healthy than to be poor and sick.

It's Not Just the Economy Stupid!

“Greeks are protesting new austerity measures” is a common headline these days. It definitely captures some of what protesting Greeks are doing, but certainly leaves a whole lot out of the picture. Many Greeks are protesting not only the deterioration of their standard of living, but equally importantly, what they experience as a political disenfranchisement that has been orchestrated by the government, with the collaboration of the European heads of state. The situation in Greece is going to get much worse not only because of the economy, but also because of the repressive politics that are threatening to ignite Greek society.

To understand the Greek political cauldron you need to put yourself in the shoes of the average salaried Greek and what she has experienced these past two years. Picture this:

Greek Family and Welfare Provision

I have argued previously (here) that the EU/IMF/ECB insistence on “flexibilizing” labor law in Greece overlooked the basic structure of the Greek private market, which consists overwhelmingly of small, family owned and operated businesses, with ultra –flexible wage arrangements (a wife’s labor, especially, is often unremunerated). Add de facto non-enforcement of labor law even in the tiny segment it applied to and the massive informal sector and you end up with one of the most flexible markets, labor cost-wise, in Europe. Moreover, despite the infamous Greek welfare “drones” in the media, Greece does not have a welfare regime comparable to the rest of Europe. In fact, much like in the US, the Greek family internalizes most of the cost of basic services such as education, healthcare, housing. State employment and pensions have for a long time played the role of a substitute for the lack of such a welfare regime, for those of course who could access these jobs, usually on the basis of clientelist relations. The basic structure of state employment included jobs distributed widely among the client base of the governing party, with wages too low as remuneration and too high as welfare, along with privileged wages and perks for a narrow elite group within the public sector. Average wage and pension levels remained well below European levels before the crisis, while consumer prices had skyrocketed and remain among the highest in Europe even today.

All this may help clarify the compounded impact of the austerity measures on the average Greek. Dramatic wage cuts in both the public and the private sector, along with a largely successful program of taxation mainly targeting the salaried and small businesses transformed private sector workers and the average public sector worker into a newly struggling lower middle class or the newly poor-depending where they started from. The tax campaign also led to the closure of tens of thousands of businesses, while consumer prices remained steadily high. During all this, the family has been providing basic welfare except with less capacity to absorb the cost as unemployment skyrockets and the wages of those who have jobs are slashed. According to a friend, the new trend in one small city in northern Greece is for families to take in elderly relations, aunts, uncles, in return for their pension. People in their mid thirties, who had barely made it out of the parental household before the crisis are now moving back in. In Athens, which has been hit the worst, new forms of solidarity are being invented everyday (such as the “social kitchen” advertised here), but redistribution within the family still remains the main shock absorber. Overall capacity for shock absorption, however, may be busting at the seams as can be seen from Sunday’s events.

Austerity Hits Greece

The latest EU bailout installment for Greece requires tough austerity measures. Among the most devastating is the prohibition on the use of Corinthian and Ionic columns. Henceforth, only Doric columns may be utilized. This measure was a compromise among creditor consitiuencies, as Germany had previously demanded that the Greeks be limited to Bauhaus design.

Vee Haf Vays Uf Making You Pay!

Anna Gelpern's Gunboat Diplomacy post pretty much sums out the leaked German term sheet on Greece. I would only note one other thing--the highly idiosyncratic use of "absolute priority." The Germans seem to have taken the language of Chapter 11 and repurposed it, with absolute priority meaning foreign unsecured creditors get paid in full before anyone else sees a cent. Of course, maybe the Germans really do know how to get blood out of a stone.  But in the meantime, I think this is best referred to as Teutonic priority.  

Greek Gunboat Diplomacy Eupdate and More ECB/EFSF

Someone who wanted to be very mean to the Germans just leaked this document, where they manage to come off as both desperate and inept. The proposal purports to address Greek failure to meet program targets by installing an EU overlord, whose job it would be among other things to pay off the foreign bondholders before funding public services in Greece.

The strategy goes back to the days when imperial gunboats took over debtors' customs houses to pay foreign bondholders, but has been considered impolite in creditor country circles for a century or so. Now it is back as an EU institutional innovation. As for the business of "absolute priority" for foreign creditors, the statement is nonsensical on its face: Greece will enact a law that would make creditors feel "de facto" senior. At best, this would be "de jure," and without a shred of credibility. The actual phrase used--"De facto elimination of the possibility of a default"--surely qualifies for an Oscar nomination.

All this innovating does follow a pattern: take a program that does not work, double down on it, and ratchet up enforcement to the point where no one would ever dream of it. Genius.

And further to my last post, it looks like Richard Barley and Felix Salmon took sides on the EFSF swap possibility a couple of days ago, except that they seem to operate on the assumption (which I shared last May) that EFSF would have to take the loss up front. Now I think that the swap would be worth it even if it only captured the discount for Greece. Phase Two happens when it does.

The Crisis of Fake Constraints: Greek Denouement Eupdate

Unless Greece and its creditors reach a deal in the next few days, Greece has no money to pay €15 Billion or so due to its bondholders in March.

From the start, this has been a crisis of fake legal and economic constraints masking very real political constraints. In 2010, Greece could have restructured its debt quicker than most sovereigns in modern memory -- or it might have been bailed out, had Europe chosen to go the route of fiscal transfers. Neither of these paths was taken because the European Central Bank was unwilling to countenance the sin of debt restructuring, but member states with money were unwilling to pay for the appearance of collective virtue.

Now that the restructuring is inevitable and the virtue bill unpayable, the fake constraints are back. The ECB holds about €50 of Greek debt, which must go into the restructuring to get enough debt and cashflow relief. But the central bank would not take losses, and remains allergic to triggering credit default swaps (which is more likely to happen if it sits out). Worse, its votes might be needed to (credibly threaten to) amend Greek bonds using retrofit Collective Action Clauses. (See latest from Gulati-Zettelmeyer here.)

There seems to be a simple fix: swap the Greek bonds held by the ECB for bonds of the European Financial Stability Facility at a price that does not cause ECB losses. Then have the EFSF go into the exchange and vote the bonds if it needs to. At a minimum, this captures for Greece the discount at which the ECB bought its bonds. If Europe is unwilling to see the EFSF take a loss from the ECB's purchase price, Greece could conceivably make up the difference with a special bond issue for the EFSF on terms that reflect the specialness of the vehicle and the circumstances.

Bankruptcy, Backwards

Credit Slips Own Anna Gelpern has a great new article in the Yale Law Journal that very much deserves a plug. It's called "Bankruptcy, Backwards:  The Problem of Quasi-Sovereign Debt." The article deals with the problems of financial distress for quasi-sovereigns, like US states or even to some degree EU member states. As Anna points out, bankruptcy seems to mean all things to all people, and as a result framing discussions of how to deal with quasi-sovereign debt---where there is no bankruptcy regime of any sort--quickly devolves into debates about existing bankruptcy systems, like US Chapter 9, rather than starting from the unique problems of quasi-sovereign debtors and then figuring out what sort of financial restructuring system might make sense.

I highly recommend the article, particularly for those of us who don't regularly deal with sovereign debt issues. There's a strange divide in practice and scholarship between domestic bankruptcy and sovereign debt restructuring. A few people (David Skeel, Steven Schwarcz, Bob Rasmussen, e.g.) have written in both areas, but they remain pretty separate fields. Anna's insights from the sovereign debt field are very useful for domestic bankruptcy scholars, as they help us step back and see the larger picture of what is going on.  

Greek VoluntaryInvolutary DealNoDealDeal: Convolution Eupdate

Will Greece reach a voluntary deal with its creditors to write down its debt by 50% in the coming weeks? Will it default? ... or will its official patrons blink, pay up, and let the creditors off the hook? I hear at least two uber-expert Euro-watchers have taken opposite sides of the bet on that one. I bet nobody wins.

This-Is-It EU Summit Eupdate

A few quick thoughts as the Make-or-Break, Life-or-Death, Now-or-Never EU Summit gets going.

Previews from Merkozy earlier this week got no love, and now that Mr. Draghi has shelved the Big Bazooka idea (HT Hank Paulson), I am not entirely sure what can possibly surprise on the upside. Then again, maybe the dithering is good news--if EU policy makers had really thought this was the abyss, surely they would have done something.

I would not claim summit reading as a specialty. Besides, I am exhausted from trying to unpack decisions that have had the average lifespan of a mayfly. That is why, instead of laboring through substance, this time I will be looking for glaring signs of fecklessness. So far this week I have seen two: Private Sector Involvement and Rule Obsession.

Never Mind Eupdate, Greek Referendum Edition

No more referendum. Still my candidate for the most important moment in this crisis. The possibility of a referendum, and of exiting the Euro, stays on the table -- as well it should. The persistent fog in Europe's Plan A, and the palpable absence of anything resembling Plan B, are chilling.

Eupdate Game-Changer: The Greek Referendum

The Greek authorities' decision to hold a referendum on the new Eurozone rescue package strikes me as the most interesting and potentially consequential development in the crisis in a very long time. Yes, more consequential than last summer's breakthrough and last week's all-nighter.

I may be unduly influenced by the other European referendum experience--Iceland--where the people have now repeatedly rejected the government debt settlement deal, despite substantial improvement in the terms between the two referenda. But with the entire Greek package on the line and much to pick on, I find it hard to imagine a favorable vote. I also wonder about the implications of holding a vote when so much of the package is up in the air. One outcome of a negative vote might be to empower the government to go back and ask for more favorable terms. Even if the ultimate vote is affirmative, the interim  uncertainty must feeze all the Europrocess coming out of last week's summit. And if a better deal emerges after the first one is voted down, would that too be put to a referendum? Much to talk about in Cannes.

Really?

Harrisburg filed its chapter 9 petition via fax?

Some Wild Idea in a Big White Bed

Over at Dealbook, I take a look at the obvious solution to the Greek situation and the chatter regarding a sovereign bankruptcy procedure.

Let's Get the British to Pay!

For those of you following the Greek default "situation," I highly recommend Macro Man's take on the latest plan, which explains why this is not apt to make it very far. In short, it would involve British support for the Euro, which I seem to recall they are not part of. And it would hurt the UK's credit rating. The man at the left is skeptical.

Conference on the Debt Crisis in the Eurozone

If you happen to be in Reykjavik or thereabouts in early October--or scouting the web for papers putting Europe in perspective--this looks like a wonderful conference, not least for bringing economists, finance, policy, and legal types together in one place (and my contribution notwithstanding).

Defies Credulity Eupdate

Bad news: Eupdate is back. The last big fix to the European debt crisis, quietly unraveling since its announcement on July 21, is loudly imploding over collateral.  Turns out that Finland, representing less than 2% of the Eurozone package and 37.876% of the political noise about the package, was promised Euro 500 million in cash collateral for its participation. The side deal makes little sense as an incentive to repay for Greece, or as a source of repayment for Finland. In a world where Greece is willing to default on another European state, Euro 500 million is the least of anyone's worries--the Euro is collapsing, Spain and Italy are going down, bank runs are rampant, etc. The primary purpose of the collateral trick must be political -- to assure Finnish voters that they are not in fact bailing out Greece.

Summer's Over

And I'm back up on Dealbook, this time about the Greek-Finnish fiasco.

Was Indiana Bankrupt?

A friend of mine here in Champaign, Roger Prillaman, told me he was strolling the Indianapolis Canal Walk and saw a historical marker about how the state of Indiana became bankrupt in 1839. The canal walk is a remnant of the Whitewater Canal, an internal improvement of the mid-19th century. As one of the leading bankruptcy attorneys in the area, Roger knew this could not be right, but with all the recent talk about state bankruptcy, we both wondered whether this was a forgotten historical episode.

Bankruptcy Politics and State Bankruptcy

I have a new paper out, Bankrupt Politics and the Politics of Bankruptcy, that examines state bankruptcy proposals and then uses them as a jumping-off point for sketching out a political theory of bankruptcy as a "creditor's armistice," an unstable political bargain, rather than an economic bargain ala Jackson & Baird's "creditor's bargain."  

The paper argues that bankruptcy is unlikely to do much good for the states because states' fiscal woes are akin to business model problems, rather than simple overleverage, and bankruptcy cannot fix business models.  States' business model--US fiscal federalism--is an inherently procyclical business model that is exacerbated by a moral hazard problem in state politics. Bankruptcy can no more fix this bad business model than it can make a buggy whip manufacturer (or a brick-and-mortar bookstore or video store) a viable operation.  

The intensely and patently political nature of the issues raised by state bankruptcy show a major set of deficiencies in contractarian theories of bankruptcy law, which have been developed primarily in the business bankruptcy context.  While others (such as our former co-blogger Elizabeth Warren) have criticized the creditors' bargain for failing to account for all of the stakeholders in bankruptcies, I argue that the inclusion or exclusion of various interests in bankruptcy is itself an essential part of a dynamic system of competing rent-seeking interests.

I don't attempt a formal exposition of an alternative political theory of bankruptcy in this paper--that's for another day--instead, I use this paper to lay out the idea and start linking the sovereign debt, subnational debt, business debt, and consumer debt literatures into a "unified theory" (yeah, I'm going to aim big, why not?) of debt restructuring (as in bankruptcy with a small "b").  The abstract is below the break:

Our D-Word: Ecuador, Not Greece

In the inane and insane case the United States does skip a debt payment, please let us skip the comparisons to Greece. Greece is really out of money and probably should have bitten the D-bullet (restructured, re-profiled, whatever) some time ago. We are not out of money, yet might default anyway--which makes us surreally more like Ecuador circa 2008.  Like Ecuador's recent D-dalliance, a U.S. failure to pay would be purely discretionary, a rare case of unwillingness, not inability, to pay.

Gang of Six and the Housing Market

There aren't a lot of details about the Gang of Six debt proposal, but apparently it includes cutting or eliminating the home mortgage interest deduction. There's a good case to be for eliminating the home mortgage interest deduction. But regardless of whether the deduction should go, I question the timing. Cutting or eliminating the deduction isn't going to help stabilize the housing market.

I worry about major legislative changes via budget deals that haven't had a chance to benefit from a public airing. We require notice and comment periods for regulatory rule-makings. It seems ill-advised to undertake more significant reforms without the benefit of public input. Yes, there's a default clock running, but there's a much simpler and less risky way to avoid that--increase the debt ceiling enough to enable a public debate on the long-term solution.

Balanced Budget Lunacy

The House will be voting tomorrow on a proposed balanced budget amendment to the Constitution that would include a Proposition 13-like supermajority requirement for any tax increases.  It's unlikely to go anywhere, but it's worth discussing, if only because this budget lunacy is becoming half-way respectable.

On its face, what could possibly be objectionable about a balanced budget?  The words "balanced budget" have a very nice ring to them--who could possibly object to fiscal responsibility after all? We certainly don't want an imbalanced budget, do we? 

Actually, there are very good reasons why we should want some budgeting flexibility.  And there are several problems with a federal balanced budget requirement.  

Debt Ceiling Thoughts

From the public signals, it seems as thought the President and Democratic leadership are trying to reach a reasonable deal with the GOP, but are ultimately determined to avoid a default on US debt or ratings downgrade no matter what the price.  They'll agree to huge cuts to Social Security, Medicare, and other parts of the social safety net if that's what it takes to avoid a default.  I sense that part of the GOP gets this and is going to milk them for all they're worth. That means that the Democrat's only hope are what Tom Egan calls the "tassled-loafer" Republicans (others would characterize the GOP split as crazies v. cravens), who are also desperate to avoid a default. 

I'm well aware of the costs of a US default; it will undoubtedly hurt the economy, and not just the financial economy, but the real economy.  It could also affect the distribution of social safety net benefits. But those costs have to be balanced against the costs of gutting the social safety net. The former costs will not be long-term; the latter costs will be more or less permanent. There seems to be surprisingly little discussion about whose ox will get gored under each of these alternatives. 

Opting to gut the social safety net to prevent a default is a choice to protect the upper and middle classes--the wealthy and the employed--and the and screw not just the poor, but retirees and the large segment of the population those who are working jobs that do not pay enough to allow meaningful retirement savings or adequate health care. Put differently, sacrificing the social safety net to avoid a default is opting to favor those who need help the least at the expense of the most vulnerable in society. Not surprisingly, there is doesn't seem to be a voice at the table arguing for preservation of the social safety net as a priority greater than preventing a default.  There is, of course, a reasonable level of trade-off, but I worry that the Administration has gone well beyond that.  We should recognize that this is a serious choice about what we want America to be. 

Form and Substance Eupdate (Updated)

After a month spent reeling from DSK whiplash, Eupdate finds the European landscape little-changed, much noise notwithstanding.

Summarizing: Greece has gone through profound political upheaval to enact austerity measures boosting the nominal credibility of its economic program; German banks have continued quietly to unload Greek debt (unto whom?); European politicians have continued loudly to bang the table about bail-ins; and the European Central Bank has continued stoutly to reject all compromise that might reflect on its mammoth holdings of peripheral debt ... that is to say, all compromise on offer. As Adam pointed out last week, the French bank fig-leaf proposal solves none of the problems at hand, though as Wolfgang Munchau pointed out yesterday, it does apply criminal amounts of structured lipstick to the EU bank-sovereign pig.  (No, not PIIG.)

The one curious thing about this slow-motion train wreck is the extent to which the public sector is embracing crude formalism as its preferred method of treading water, while some private market participants are seizing the substantive high ground. 

Vive l'extension et la prétention!

Who said that the US had a monopoly on extend and pretend?  The French are showing that they know that move and that they can do it with panache.  The French have graciously announced that their banks have agreed to reinvest about 50% (~.7*.67) of their holdings in Greek debt that is maturing soon in new, long term Greek debt. Quelle générosité! The alternative, of course, would have been to demand that the Greeks pay on maturity for all of the debt--which they can't/won't--and that default would have forced the French banks to write down the debt. Instead, the French banks can continue carrying this performing debt.  A gamble on resurrection.

Notice also, that this is pitched as protecting the French banks (or the rest of Europe) from a Portugese default. How so? By signaling that they won't insist on timely repayment in full--this says "we'll cut a deal, thank you very much."  And this deal sends a strong signal that the French will cave in a game of chicken in the next round.  I think dinner in Athens, Lisbon, and Dublin tonight is coq sportif au vin. 

Greece, et al Explained

Over at Alphaville, in a funny little video from the EU Parliament. But as Alphaville notes, who knew sovereign debt restructuring had rules? Somebody should have told Argentina.

Central Bank Drift: Eupdate Extra

Now that everyone agrees that Greece will engage in a figleaf operation to extend maturities without inflicting net present value losses on its creditors, it is worth mulling the institutional implications of any such operation. If a debt exchange takes place as rumored, I am most worried about two things: the cost to Greece of paying higher interest rates to kick the can down the road, and the costs to the international financial system of getting central banks formally involved in a debt restructuring (re-profiling, re-coloring, whatever). The Greece piece is a replay of the Latin American debt crisis of the 1980s: Greek debt stock and borrowing costs grow as uncertainty lingers, while its creditors build up a capital cushion to face up to reality. The central bank piece is more complicated, and perhaps more broadly important. It is the subject of today's Eupdate.

Ways of Treading Water II: Eupdate Greece

A year ago, back when the Greek government debt crisis officially became the Eurozone gestalt crisis, I speculated that Greece would not launch a debt restructuring any time soon.  I hereby officially change course.  There may well be a restructuring, and it will do no one any good.  I am skeptical not because I thought then, or think now, that Greece is solvent.  I had and have no idea, though Greek debt numbers look worrisome by most conventional metrics.  Rather, I am skeptical because the dominant proposal on the table--a lengthening of maturities with no net present value reduction (a "light dusting")--does precisely what EU politicians can do and have done perfectly all by themselves:  Tread Water.

Ways of Treading Water I: Eupdate Portugal

Every so often, I want to blog about something other than the EU debt/banking/ fiscal/political crisis, but the continuing loopiness leaves me little choice but to launch a series:  Welcome to Eupdate.

Two things have happened in the Eurozone since my last pre-Eupdate update:  Portugal has asked for and negotiated a rescue package, and Greek restructuring rumors have gotten out of control.  Both nicely fit into the dominant theme of treading water, but present interesting variations on the theme.  I elaborate on Portugal below; I address Greece in a separate post.

Portugal asked for help when its banks staged a buyer's strike at a government debt auction on April 6.  The timing was awkward, since the government in power has no capacity to make policy commitments pending an election it is likely to lose on June 5.  The day the news broke, headlines blamed greedy banks.  I poked around to see what they had been doing for the past year or so--turns out they were busy loading up on government debt, so much so that the banking system's holdings of said debt doubled since the start of the crisis.  Treading Water 1.

But wait--why the leveling-off in 2010?  A little amateur trawling of the Portuguese central bank website reveals that the leveling-off coincides roughly with the European Central Bank's securities market program.  Treading Water 2.  Sure enough, the day after-the day after, the banks blamed the ECB for refusing to take Portuguese government debt off their hands.

Euroworried, Eurohappy, Euroflummoxed

Europe has fixed its debt and bank problems --  again.  Last week's EU summit produced a term sheet charting the path to a permanent, treaty-based crisis resolution regime, the European Stability Mechanism (term sheet embedded here starting p. 21).  You may recall it all started with revelations about Greece's government debt crisis in late 2009, and proceeded to reverberate around the Euro-periphery, with banking and government debt troubles bubbling up in Ireland, Portugal, Spain ... Italy ... Belgium ...   About a year ago, after much dithering, a one-off program for Greece, and a couple of false starts, Europe came up with an arrangement to finance countries in trouble, effective 2010-2013.  Soon thereafter, the European Financial Stabilization Mechanism and the European Financial Stability Facility deployed in Ireland, in conjunction with the IMF.   This is a fine overview.  Last week's deal establishes a standing successor to this model.   The term sheet is a fascinating study in EU governance (note the respective roles of the member states, the Commission, and the European Central Bank) and potentially an important step on the path to a fiscal union.  I will limit my comments to the legal and legal-sounding tidbits.

Vallejo's Chapter 9 plan

The City of Vallejo has filed its Disclosure Statement and plan in its Chapter 9 bankruptcy case.  The plan proposes paying general unsecured creditors, mostly employees and retirees, about 5 cents on the dollar from a $6 million fund, an amount roughly equivalent to the legal fees paid in the case through December 2010.  Vallejo apparently did not finance capital projects with unsecured general obligation bonds typical of many state and local governments.  Instead it had complex financing using sale and leaseback arrangements with certificates of participation, with certain city revenues earmarked as collateral for the financing, in a kind of factoring or receivables financing deal.  The resulting $50 million or so in non-employee debt was therefore secured, and because of a prepetition default, was held by the bank that insured the deals.  The plan proposes to pay these claims in deferred payments, at a reduced interest rate, represented as a 40% reduction in their present value, i.e. 60 cents on the dollar.  It is hard to say what precedent this will set for other local governments considering a bankruptcy.

What the disclosure statement does not quantify is the savings/cuts in employee wages, health care and pensions resulting from the rejection of the prepetition union contracts and their replacement with new contracts.   Depending on which commentator you read, Vallejo has either impoverished its workers to repay the bank, or missed an opportunity to tackle the greedy unions.  Because the cuts in worker pay and benefits were negotiated as part of an executory contract rejection, the disclosure statement doesn't really spell out in clear terms how losses were allocated among taxpayers, banks and workers.  Of course, the disclosure statement has not been approved yet.

 

Open Mouth, Insert Foot

Japan's debt got downgraded by S&P because it doesn't believe that the Japanese government is serious about taking measures to cut its deficit.  And here's what the Japanese Prime Minister Naota Kan had to say, “I just heard that news.  I am a little ignorant on those kind of matters.  Let me look into it more.” 

Brownie, you're doing a heckuva job.

Even before the downgrade, Japan was just barely skating by--low interest rates make the huge Japanese debt manageable.  If interest rates go up a couple of points, Japan's going to have one serious financial crisis.  

Republicans back Bankruptcy Expansion

For states.  Republicans including Newt Gingrich and Texas Senator John Cornyn are advocating amendments to the Bankruptcy Code to permit states to file for relief from their debts.  Last week's New York Times front-page article gives added heft to this idea, as did Penn law prof David Skeel's article in the Weekly Standard.

Obviously, these Republicans' agenda is to shift credit crisis losses from state taxpayers to public sector union employees, consistent with their efforts to shift auto industry losses to workers in that industry.  Bankruptcy reform for homeowners is anathema, because it shifts losses from middle class people to banks and institutional investors.  It is unclear how bankruptcy for the states could be used to stiff union pension funds without also wreaking havoc with the bond market, and bond investors would normally be a favored Republican constituency.  For this reason, other conservatives are not so crazy about this idea.  Presumably, any legislative proposals for Chapter 9.5 would carefully craft priorities for favored constituencies.

Collective Action Clauses: Das Opium des Volkes

My Soviet roots manifest most acutely around New Year’s (a big holiday in the motherland), which must account for the urge to quote Marx apropos the European financial crisis.  Europe is the lead story of the 2010 Crisis Yearbook.  It holds the promise of radical legal innovation in financial crisis management:  it may yet become the birthplace of the first-ever sovereign bankruptcy regime, and the first-ever initiative to standardize sovereign bond contracts issued under the domestic laws of different states.  But for now, Europe is mired in CACology. 

Pension Insurance for Public Employees?

The New York Times' story about the insolvent pension plan of Pritchard, Alabama notes that while the Pension Benefit Guaranty Corporation (PBGC) partially insures private employers defined-benefit pension plans, it does not insure public employers' defined-benefit pension plans ("government plans" in ERISA-speak).  

This left me wondering why?

Expanding Chapter 9

I wade into the "states in bankruptcy" debate over at Dealbook.

Time Flies

To keep this debt thing in perspective ... Germany is about to pay the last of the debt it took on to finance World War I reparations.  This debt is mostly interest payments to private bondholders.  The reparations came out of the Treaty of Versailles in 1919, but Germany had no money, so it issued bonds in the private capital markets in the 1920s to fund its payments to the Allies.  The bonds defaulted in the 1930s (first crash, then Hitler, then it got really messy), but resumed principal payments under a 1953 agreement.  Interest payments were deferred until reunification, and resumed once the Berlin Wall fell, with the last one due this weekend.  Der Spiegel story here.  How poignant yet deeply screwed up all around.