Mosler Bonds: Isolate Default Cost to the Defaulter – Prevent Default

by Warren Mosler

The proposal is simple: The ECB should turn the bonds it buys into Mosler bonds, which provide the feature requiring the government of issue to legally state that, in the case of non payment, the bearer on demand can use those bonds for payment of taxes to the government of issue.

With the ECB holding Mosler bonds the default option will shift from the issuer to the ECB,as in the case of non payment, andthe ECB would have the option to make it’s holdings available for sale to tax payers of that nation.  This would allow taxpayers to offset their taxes.  Therefore, conversion to Mosler bonds will ensure that the ECB’s holdings of national government debt are ‘money good’ without regard to external credit ratings, and give the ECB control over the default process.This process makes sense because (from the EU’s point of view) I see several substantial reasons Greece should not be allowed to default, which center around why it’s in the best interest of Germany for Greece not to default.  Sustaining Greece with ECB purchases of Greek debt costs German tax payers nothing.

• The ECB buys Greek bonds at a discount, indicating holders of those bonds have, on average, taken a loss.

• The EU in general did not consider the purchase of Greek bonds as bad behavior that is rightly punished with a default.

• In fact, it was EU regulation and guidelines that resulted in the initial purchases of Greek bonds by its banking system.

• It sustains the transfer of control of fiscal policy to the ECB.

• It’s deflationary which helps support the value of the currency.

• It provides for an ongoing income stream from Greece to the ECB.