Recently, August 16, we wrote both Mrs. Lagarde head IMF and Dr. J. Weidmann, head of the German Bundesbank the following suggestion for solving the Eurocrises.
Flaws in weaving
Very often weavers intentionally add a flaw to their work as a sign of humility; they recognize only God as perfect and do not wish to appear vain or to be the target of envy. The Maastricht Treaty however goes too far in this. It includes a flaw in the proposed solution for the support of the Euro, which denies both the fundamentals of short and long term funding as well as the potential for local manipulation.
The Euro area consists of 17 Member states, each having their own cultural habits, climate, level of prosperity and economic development. The first flaw in this weave is the presumption that the average European actually exists. Indeed a single interest rate in the Euro area is not favorable for the economic development and competitive edge of the area, nor for the individual Member states or for the Euro area as a whole. It eliminates the influence of those local forces that are necessary to accelerate or restrain local developments. The second flaw in weave is the fact that Member states may borrow from the Capital markets and not from the ECB. The third flaw is the ability for banks in the Euro area to lend money to other banks in the area.
Heterogeneity
What is the reason for existence of the Euro area? The creation of a single-currency economic zone. Fair enough. But lending money to the weaker economies at the same interest rate which the ECB applies to the stronger Member states, appears to be an anti-market mechanism. The consequences are dramatic and we must regain control. How? The first condition is that Member states can only borrow money from the ECB and no longer from the Capital markets. In order to fund these loans, the ECB will issue Eurobonds. Let’s call them ‘OK-Euro Golden Bonds’ while distinguishing four risk classes: AAA, AA, A and BBB.
Differentiation
Each Member state in the Euro area can only borrow money from the ECB in accordance with its borrowing capacity, which depends on its level of public debt (public debt versus GNP). We distinguish four tiers, inspired by the organic Fibonacci-sequence: the first level applies to Member states having a public debt ratio of maximum 61.8%, the second level of 85.4%, the third level of 100% and the fourth level more than 100%. Obviously for every level a different interest rate must apply. Let’s assume that the first level group can borrow against Euribor, actually 1%. Still inspired by the Fibonacci-principle the following interest rates apply: the second level at 6.18%, the third level at 8.54% and the fourth level with a minimum rate of 10%. This can be analyzed as follows:
Debt x Million At 1% int. At 6,18% int. At 8,54% int. At 10% int.
Belgium 377.314 229.070 87.497 54.076 6.672
Germany 2.111.985 1.599.606 512.379 0 0
Estonia 1.069 1.069 0 0 0
Ireland 174.252 99.257 37.913 23.431 13.651
Greece 280.427 130.901 50.000 30.902 68.624
Spain 774.549 663.936 110.613 0 0
France 1.789.393 1.239.805 473.563 76.025 0
Italy 1.946.212 975.527 372.618 230.291 367.776
Cyprus 13.228 10.959 2.269 0 0
Luxemburg 8.997 8.997 0 0 0
Malta 4.831 3.981 850 0 0
Netherlands 402.084 372.008 30.076 0 0
Austria 222.562 187.144 35.418 0 0
Portugal 189.979 105.115 40.150 24.814 19.899
Slovenia 17.030 17.030 0 0 0
Slovakia 32.358 32.358 0 0 0
Finland 93.320 93.320 0 0 0
Total 8.439.590 5.770.083 1.753.346 439.539 476.622
LEVEL 1 LEVEL II LEVEL III LEVEL IV
I wonder how this table will look when it is applied to the 2013 budgets.
Impact
Abandoning the single interest rate weave, the following more realistic interest rates will have to be paid :
Table 2) Interest division per level, per country and per GNP
Country Int.AAA Int.AA Int.A Int.BBB Total Int.per country In% GNP
Belgium 2.291 5.408 4.619 667 12.984 3.44% 3.50%
Germany 15.996 31.667 0 0 47.663 2.26% 1.84%
Estonia 11 0 0 0 11 1.00% 0.07%
Ireland 993 2.343 2.001 1.365 6.702 3.85% 4.17%
Greece 1.309 3.090 2.639 6.862 13.901 4.96% 6.56%
Spain 6.639 6.836 0 0 13.476 1.74% 1.25%
France 12.398 29.268 6.493 0 48.159 2.69% 2.40%
Italy 9.755 23.029 19.669 36.778 89.231 4.58% 5.65%
Cyprus 110 140 0 0 250 1.89% 1.41%
Luxemburg 90 0 0 0 90 1.00% 0.21%
Malta 40 53 0 0 93 1.91% 1.43%
Netherlands 3.720 1.859 0 0 5.579 1.39% 0.93%
Austria 1.871 2.189 0 0 4.060 1.82% 1.34%
Portugal 1.051 2.481 2.119 1.990 7.642 4.02% 4.49%
Slovenia 170 0 0 0 170 1.00% 0.48%
Slovakia 324 0 0 0 324 1.00% 0.46%
Finland 933 0 0 0 933 1.00% 0.49%
Total 57.701 108.363 37.541 47.662 251.267 2.98% 2.66%
avg. avg.
SALES PRICE
TO A COUNTRY 1% 6,18% 8,54% 10%
COMPENSATION
TO AN INVESTOR 0,5% 5,68% 8,04% 9,5%
Summary
- Banks should only be allowed to lend money either directly to the private sector or to local governments and otherwise only to the ECB, in such case being compensated at the AAA interest rate.
- Member states pay their interest rates to the ECB in accordance with the above mentioned tiers of the debt-GNP ratio.
- Both the ECB and all Member states should will thus have the opportunity to accelerate or to restrain local developments.
- The related funding can be obtained via the above BBB-bonds at the interest rate, now indicated as 10 percent, however this percentage can be modified in accordance with the ECB.
- The proposed system is flexible, robust and transparent.
- It respects the solidarity of the Euro area and adjusts the flaws in the Maastricht weaving.
The tables can be obtained in Excel via www.ok-score.eu
The OK-Score Institute is the first BENELUX rating agency established in 2003 in Rotterdam in the Netherlands.
W.D. Okkerse CEO
OK-Score Institute
Weena 737
3013AM Rotterdam
www.ok-score.nl
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