Auerback/Mosler: Greece CAN Go it Alone

Posted on by

By Marshall Auerback, a fund manager and investment strategist and Warren Mosler, a fund manager and co-founder and Distinguished Research Associate of The Center for Full Employment And Price Stability at the University of Missouri in Kansas City.

Greece can successfully issue and place new debt at low interest rates. The trick is to insert a provision stating that in the event of default, the bearer on demand can use those defaulted securities to pay Greek government taxes. This makes it immediately obvious to investors that those new securities are ‘money good’ and will ultimately redeem for face value for as long as the Greek government levies and enforces taxes. This would not only allow Greece to fund itself at low interest rates, but it would also serve as an example for the rest of the euro zone, and thereby ease the funding pressures on the entire region.

We recognize, of course, that this proposal would also introduce a ‘moral hazard’ issue. This newly found funding freedom, if abused, could be highly inflationary and further weaken the euro. In fact, the reason the ECB is prohibited from buying national government debt is to allow ‘market discipline’ to limit member nation fiscal expansion by the threat of default. When that threat is removed, bad behavior is rewarded, as the country that deficit spends the most wins, in an accelerating and inflationary race to the bottom.
It is comparable to a situation where a nation like the US, for example, did not have national insurance regulation. In this kind of circumstance, the individual states got into a race to the bottom, where the state with the laxest standards stood to attract the most insurance companies, forcing each State to either lower standards or see its tax base flee. And it tends to end badly with AIG style collapses.

Additionally, the ECB or the Economic Council of Finance Ministers (ECOFIN) effectively loses the means to enforce their austerity demands and keep them from being reversed once it’s known they’ve taken the position that it’s too risky to let any one nation fail.

What Europe’s policy makers would like to do is find a way to isolate Greece and mitigate the contagion effect, while maintaining the market discipline that comes from the member nations being the credit sensitive entities they are today; hence, the mooted “shock and awe” proposals now being leaked, which did engender an 8% jump in the Greek stock market on Thursday.

But these proposals don’t really get to the nub of the problem. Any major package weakens the others who have to fund it in the market place, because the other member nations are also revenue dependent, credit sensitive entities. Much like the US States, they do not control central bank operations, and must have good funds in their accounts or their checks will bounce.

The euro zone nations are all still in a bind, and their mandated austerity measures mean they don’t keep up with a world recovery. And Greek financial restructuring that reduces outstanding debt reduces outstanding euro financial assets, strengthening the euro, and further weakening output and employment, while at the same time the legitimization of restructuring risk weakens the credit worthiness of all the member nations.

It does not appear that the markets have fully discounted the ramifications of a Greek default. If you use a Chapter 11 bankruptcy analogy, large parts of the country would be shut down and the “company” (i.e. Greece Inc) could spend only its tax revenues. But the implied spending cuts represent a further substantial cut in aggregate demand and decreased revenues, in a most un-virtuous spiral that ends only with an increase in exports or privation driven revolt.

The ability of Greece to use the funds from the rescue package as a means to extinguish Greek state liabilities would improve their financial ratios and stave off financial collapse, at least on a short term basis, with the side effect of a downward spiral in output and employment, while the sovereign risk concerns are concurrently transmitted to Spain, Portugal, Ireland, Italy, and beyond. Those sovereign difficulties also morph into a full-scale private banking crisis which can quickly extend to bank runs at the branch level.

Our suggestion will rescue Greece and the entire euro zone from the dangers of national government insolvencies, and turn the euro zone policy maker’s attention 180 degrees, back to their traditional role of containing the potential moral hazard issue of excessive deficit spending by the national governments through the Stability and Growth Pact. If the member states ultimately decide that the Stability and Growth Pact ratios need to be changed, that’s their decision. But the SGP represents the euro zone’s “national budget”, precisely designed to prevent the hyperinflationary outcome that the “race to the bottom” could potentially create. At the very least, our proposal will mitigate the deflationary impact of markets disciplining credit sensitive national governments and halting the potential spread of global financial contagion, without being inflationary

Print Friendly, PDF & Email


  1. Swedish Lex

    Interesting thoughts on what could be done within the constraints of the existing Treaty.

    Münchau, in today’s FT, discusses the need to ultimately revise the Treaty to pave the way for a common fiscal policy.

    Treaty changes take forever and the discussions before agreeing on a, sort of, common fiscal mechanism would be extremely difficult.

  2. Abhishek

    I would think that this measure would allow Greeks to continue their free spending ways . Ultimately these “low interest” bonds will default and Greece taxes would go to the bond holders.There would be a huge hue and cry and this “tax option” would not work.I don’t think even if they inserted this tax option , Greece could get low interest rates.

  3. michel

    No, they would not get the bonds away with low interest rates, because what’s at issue is whether the debt load is economically viable. It ain’t. They are going to default. So what difference does it make if you can, at the moment, use your defaulted bonds to pay taxes? When the crunch comes and Greece defaults, you won’t be able to.

    As Wittgenstein said, if you can’t say it, you can’t say it, and you can’t mime it either. Can’t pay, won’t pay.

  4. RebelEconomist

    As usual with these vacuous MMT posts, the devil is in the absent detail. If the Greek government defaults on its debt, it will be because it lacks the revenue to both service that debt and meet its other spending commitments. If in that event Greek debt can be used to pay taxes at face value, then, while default removes the need to raise currency to make interest payments, allowing tax payments to be made in bonds will drive out other currency receipts, so that there will still be a lack of currency for other disbursements. It is not clear, therefore, how your proposal solves Greece’s problem, unless the idea is that the state also pays out in Greek government debt, in which case Greece effectively re-establishes its own currency and secedes from the euro.

    1. Marshall Auerback

      Well, again you miss the crucial point: our tax dollars do not “fund” government spending, which is created at the push of the stroke of an electronic keyboard. So why, then, do we tax? Two reasons:

      For one thing, the public would not give up goods and services to the government in return for otherwise worthless coins or paper notes unless there were good reasons to do so. The primary reason the public accepts what we call “fiat money” is because it has tax liabilities to the government. If the tax system were removed, the government would eventually find that its fiat money would lose its ability to purchase goods and services on the market. In the words of the economist Abba Lerner : “The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.”
      Taxes, then, are what give value to government created currency. But they serve a 2nd purpose.
      If the govt. doesn’t tax because it needs the money to spend, why tax at all?

      The government tgaxes to regulate what economists call ‘aggregate demand’ which is a fancy word for ‘spending power”. In short, that means if the economy is ‘too hot’ raising taxes will cool it down, and if it’s ‘too cold’ cutting taxes will “warm it up”. Taxes aren’t about getting money to spend but rather are about regulating our spending.

      Which brings us to the second point. Again, as Lerner argues: “The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money, and its withdrawaal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.”

      So you look at the impact of government spending, and do not proceed on some vague notion of national solvency, which has no relevance in the US so long as it issues debt in its own free floating non-convertible currency

      1. Kevin de Bruxelles

        With all due respect, you made a proposal for Greece. RebelEconomist critiqued it within the Greek context. But your response to his critique refers him back to the American system!

        Doesn’t your response make his point that Greece would need to have their own currency to make your proposal work?

        Or are you actually saying that the function of tax collection in Greece is the same as in the US even though Greece does not have to power to issue its own currency?

        1. Jeff65


          The proposal turns Greek govt debt into what is essentially fiat currency in the event of a Greek govt default.

          Get it now?

          1. Kevin de Bruxelles

            No I don’t quite get it just yet…

            You say that this proposal would turn “Greek govt debt into what is essentially fiat currency…”

            The key question is whether this newly created “fiat currency” would still be the Euro or whether it would it be a new currency with a different value than the Euro? In other words, does this proposal allow the individual European countries to print their own Euros independent of the ECB or does it just allow them to print “New Drachmas” for example?

            My questions obviously lead to what is really at stake here: is this proposal just a backdoor way to break up the Eurozone? If so why not just be upfront about it?

      2. RebelEconomist

        I agree that taxation provides at least a backstop outlet for fiat money and therefore underpins its value, but I think most people would say that taxation has existed for a lot longer than fiat money, or indeed longer than the sovereign has accepted any obligation to provide any public service other than not slitting your nose or something worse! Whether the government taxes nowadays because it must do so to obtain money having ceded control of the money supply to an independent monetary institution, or because it cares itself for macroeconomic stability, is a bit of a chicken and egg question. Either way, the fact is that, in practice, the potential for monetary financing is constrained in size by the inflation target (although it could be expanded by taking over private sector banks’ monetary role, which raises other issues). That is why I keep writing that you are right in principle, but that you need to provide numbers to show that your proposals could be applied on sufficient scale to make any practical difference.

      3. gordon

        Fiat money, fiat money, fiat money, fiat money, fiat money, fiat money, fiat money….

        I really think that the US should go right back to the gold standard, if only to avoid the enormous amounts of time and effort worrying about how to create a currency. I hate to think about how much ink has been spilled by clever people who just can’t emotionally bear the thought of printing dollar bills.

  5. giulio

    Gosh, what nonsense!

    Greece is solvent if and only if the present value of its future taxes (discounted at their borrowing rates) is no smaller than the present value of government expenditure plus its current stock of debt.

    Changing the label on one category of government debt makes no difference. Greece is already committed (in theory) to exchange its current debt for taxes at maturity. The only problem is that this commitment is not credible if Greece intertemporal budget constraint is not satisfied. Defaulting on part of its outstanding debt makes the constraint going forward less tight, but how the fraction of debt on which Greece does not default is labelled is immaterial.

    1. Marshall Auerback

      Well, I am now officially a consultant to the RAB Gold Fund, and I happily acknowledge that fact. As you point out, it’s out there for everybody to see. No attempt has been made to conceal this. But the article makes clear that we are advocating a policy designed to prevent Greece’s national insolvency as well as upholding some form of fiscal control so that the outcome DOES NOT become inflationary. Where is the conflict of interest? Are you claiming that I should never comment on economic policy because of this perceived conflict?

  6. Ignim Brites

    This entails a market for transferring Greek bonds, euro denominated, to those who have a Greek tax liability. Now why would one go through the trouble of paying euros for Greek bonds to pay Greek taxes unless one one could buy them for less than the face value. So there is a default risk still. And RebelEconomist’s point is well taken. What is the Greek government going to do with these? Is it going to pay its employees with these bonds? Or will it try to roll them over? At which point they will have to accept the default penalty discount since no one is going to belief they will actually pay interest. So in the end, Greece like Illinois and California and New York and New Jersey will just have to restructure its operations, one way or another. But this crisis does suggest something interesting; namely, the tendency of fiat currency regimes to promote political dissolution. What will happen when people begin to think of the financial rescue operations not as a bailout of the big banks, but as a bailout of New York City and its environs. Talk about toxic debt.

  7. Nicholas Weaver

    It also assumes that the greek will want to pay their taxes!

    Greece is notorious for having a citizenship which simply does not pay their taxes, I remember reading one estimate that such tax avoidance costs $30B/yr (or, almost their entire hole!)

  8. Dan Duncan


    I particularly like this gem from the last paragraph: “Our suggestion will rescue Greece and the entire euro zone from the dangers of national government insolvencies…”

    What a ridiculous statement. Auerback and Mosler: Saviors of not only Greece, but the entire Euro-zone!

    I actually do hope the Greeks follow The Auerback/Mosler Plan. Think of the movie plot-lines…

    Bad guys, knowing that suitcases filled with cash are unwieldy go another route. Being financially savvy, and mimicking the exact scenarios from such films as Goldfinger, Wall Street, Heat, as well as the “timeless” Die Hard/Beverly Hills Cop movies…they opt, instead, to steal Bearer Bonds.

    ….So the villains complete a Theseus-like, Mission Impossible excursion through a Modern Labyrinth that’s really more of Techno-Wonder Security Gauntlet.

    They are successful and they get their bonds!

    They are on their way to live a life of sin and luxury in Crete, when they find out that the Greek government defaulted.

    So what do these resourceful criminals do?

    They bring their briefcase filled with Greek Bearer bonds to the Ministry of Revenue to swap them out for tax credits and a life of devoid of any interaction with the beautiful vixens who love their “bad boys”.


    They decide to get 9-5 jobs in order to “reap” the benefits of those credits…only they can’t find any work…because the public sector isn’t hiring because of the Greek Government Default…which wasn’t supposed to happen because of the Auerback/Mosler heroic rescue.

    And from a run-down apt in the heart of smog-ridden Athens, these criminal masterminds exact their revenge by posting stupid, interminable comments replete with references to Greek mythology and sorry movies at the web sites of Auerback and Mosler.

    The End.

  9. Tortoise

    What is proposed is essentially the equivalent of “printing money”. This might work in a totally different context (deflation, idle capacity, competitive economy, the possibility for currency devaluation).

    The best argument against this proposal is that Greece has already done it in a huge way. The result: High inflation (by euro-zone standards) and the economy is competitive no more! The system is called government guarantees to municipalities, state companies, and hospitals.

    Greece is a rich country on the way to the poorhouse. Only way to avoid this outcome is for the government to balance its budget ASAP. This would lead to a deep recession that would lower the cost of doing business and make the economy competitive again. I know, it sounds brutal and old-fashioned. Sorry, there is no other solution within the euro-zone where a country is more like an industrial conglomerate than a sovereign.

    1. Greg

      “Greece is a rich country on the way to the poorhouse. ”

      How can this be. They are rich because of what they have in terms of resources. They are just in a phucked up monetary system and if they get out of it they will still have their stuff, their people and no more debt. Bring back the drachma!!

  10. Chris of Stumptown

    I don’t understand. Mr. Auerback, can you please explain?

    Greece is importing capital from the rest of the Eurozone. Eurozone banks are stuffed to the gills with Greek debt because they purchase high yielding securities, and use them as collateral at the ECB to borrow at a lower rate. They have FAR more debt than they ever would owe to the Greek government.

    So why would it matter to them whether the bond is tender for taxes. In what sense is it “money good” to them? In the sense that there might be someone with a tax liability willing to purchase the note at face value? Really?

    Have you actually considered how well this will fly IRL or is this more like an MMT thought-experiment?

  11. Ray Sawhill

    These MMT postings seem 1) very smart, 2) suspiciously breezy, confident, and circular, and 3) to take place in Cloud Cuckooland.

    I don’t personally go along with the US’s fiat money scheme primarily because the government accepts my tax payments in that currency but because everyone else in the world is going along with the scheme. It seems to work, it seems to be accepted, it isn’t like any of us have a lot of other opportunities, hence I (however reluctantly) too play along. My conclusion from this: Once/if “everyone” loses confidence in the viability our fiat money, the scheme collapses.

    MMT seems to rest on the idea of “it’s money because taxes can be paid in it.” I wouldn’t want to discount the notion that there’s SOME significance there. But basing an entire semi-school of economics — and deriving an apparently infinite number of confident and wide-ranging policy recommendations — on this sets off all kinds of alarm bells in my mind. Of course, maybe I’m just not smart enough to fully understand the genius at work here. But it looks like the latest version of a house of cards to me.

  12. Matt Franko

    If you dont pay the taxes in USD, you dont pass go and you go to JAIL man! Does this ‘seem to work’ for you?


  13. ex-AK

    Last time experiment was done in Russia with regard to communism.

    Whose turn to make an experiment with MMT now?

  14. Ray Sawhill

    Matt — If one day everyone wakes up and decides that our fiat money is a meaningless farce (as one day everyone in the USSR decided that the Soviet Union was a meaningless farce), then it won’t matter if the government demands that I pay my taxes in its currency or not. From this I conclude that the currency’s viability is more dependent on a collective act of faith than it is on the government’s demand that I pay my taxes in dollars. I’m not building a wide-ranging school of economics on my little hunch, though.

  15. michel

    Right now, Greek government issues bonds, can’t get them away. Why? People don’t believe they will be repaid. Why? Because Greece’s debt as a percentage of GDP is too high for it to be plausible that it will raise enough tax revenue to repay interest and principal.

    Not to mention that at the moment they are using the proceeds of the new debt to pay off the interest of the old, usually considered to be a performance in dubious taste.

    So, the authors propose, the Greeks should announce that their new debt can be used to pay taxes. WTF difference does this make? Any saleable instrument can be used to pay taxes, just sell it and use the proceeds.

    Ah, say the authors, the big difference is these new bonds can be used to pay taxes at par.

    That’s a wonderful way of ensuring a second default. The first default happened when they failed to pay interest and or principal on the bonds, at which point they immediately became usable to pay taxes.

    Now all that happens is that tax revenues fall through the floor. Why? Because the bonds are now selling for 0.20 on the dollar, but they are worth 1.00 if tendered in payment of taxes. Great stuff. Now, how do you use that nomimal 1.00 to pay the wages of your civil servants? I guess you issue a whole lot of it, default on it, accept it in payment of taxes, which you raise through the roof, and then you make it legal tender for food and lodging as well. And then you try to buy Japanese cars with it?

    At this point the government realizes that it has no money, and it decides not to accept the bonds at par, but at some discount, lets say at a couple of percent over fair market value, which by then will be zero. So this is the second default.

    At least we have save the Euro, however. But I must have missed that part, tell me again how we did that?

  16. blue monkey

    Greece and Spain won’t pay back. The only thing Germans can do is:
    REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

  17. blue monkey

    Greece and Spain won’t pay back. The only thing Germans can do is:
    REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

Comments are closed.