GIVING GREECE A 'FREE' HAIRCUT
A Wealth Bond is a debt instrument in which the capital debt is index-linked to the National Average Earnings, NAE, of a particular nation, for example, Greece, Germany, Italy etc.
A case has been made out that this index will largely protect the value of the debt for such things as national pension funds, savings, and so forth - the fund will keep pace in value with the NAE of that particular nation - not precisely but over a longer term, quite well. This is explained in Edward Ingram's 'A Short Tract on Financial Stability' series.
Think of NAE as a unit of that Nation's own wealth.
SUMMARY: Wealth Bonds make an ideal holding for pension funds and banks and even the people of the nation in which the NAE index is denominated. NAE of Greece for Greeks, NAE of Germany for Germans, and so forth.
The relative value in the Bond gets preserved as NAE for that nation rises because the capital value of the Wealth Bond is index-linked to that NAE index.
THE GREEK HAIRCUT ISSUE
Then there is what I suggested to my friend at the ECB regarding Greek debt owed to other nations within the EU. Convert / exchange the whole of the Greek debt into various and different NAE-linked Wealth Bonds, in each nation for each nation that holds Greek Debt.
Create Wealth Bonds denominated in Greek NAE for Greeks and in other National NAE's for other nations.
Most of the debt will be in the NAE of other nations that currently hold that debt or the IMF which also holds a significant amount. Because those other NAE will grow more slowly than the Greek revenues, upon Greek economic recovery, the size of the Greek Debt in terms of Greek GDP and tax revenues will fall. It could fall by as much as 30% if Greek NAE rises by that amount more than the rest of the EU, or if Greek GDP rises that much higher than EU GDP.
The recovery can be triggered by the advent of those Wealth Bonds giving an extended 'postponement of repayments - IF the Greeks take measures to balance their pension and other budgets.
And the Greek economy might also be boosted with a' VAT Punch' as explained in my Short Tract on Financial Stability. They might like to look at the general financing reforms on offer in that tract.
For this to work the Greeks still have to balance their budget at some foreseeable point in the future. Wealth Bonds plus a little more borrowing can defer the need to achieve that right away.
Failing that, a real haircut could be needed but then I have read that there are vulnerable German and other institutions which may be put at risk.
This option looks simpler and more politically acceptable.