Ship’s Going Down – Creditors First Into the Boats!
I realize this is not incredibly timely, but I just wanted to dwell on a feature of the Eurozone negotiations last week. Felix Salmon covered this well – the agreement specified that all money, no matter what, would be delivered to private-sector bondholders. This is a terrible idea! Part of it is simply the aspect that it’s usually not a good idea to unilaterally and unconditionally guarantee anything, which is the main reason that Ireland is in the trouble it’s in right now.
More generally, this attitude towards bondholders seems unhealthy. Unfortunately, sovereign defaults are a fact of life and ought to be considered by bond buyers when they buy the products. Ultimately, this looks like governments making decisions for the benefits of their bondholders and each other rather than their citizens. The nature of transnational governance does require that governments look out for each other’s interests and generally put the interests of the Eurozone ahead of the parochial interests of (let’s say) Greece or Germany or anyone else in between. But there has to be a point where even a totally non-cynical observer has to wonder what set of interests are really coming first here.