Posted by: cjenscook | 11/25/2011

Euro Stock…..€ is for Equity

Debt which cannot be repaid, will not be repaid, and my proposal to the ECB is simple: forget debt and issue Stock instead.

For several hundred years, sovereigns financed and funded themselves and their nations by issuing IOUs, often in the form of split wooden tally sticks. The creditor was given the ‘Stock’ as a receipt and as a credit token redeemable in payment of taxes, while the Sovereign retained the counter-stock or foil.

From 1660 onwards, the UK began to issue interest-bearing redeemable Stock. These credit instruments paid interest periodically to the holder and became very popular with long term investors, representing the lowest risk and most solid income stream available.

Several classes of such Stock were issued and in 1752 these were consolidated into what became known as Consolidated Stock or Consols. Further issues were made and in 1888 these were all brought together by Chancellor Goschen’s Conversion as the redeemable 2.5% Consols which remain in existence to this day, since unless long term ‘risk free’ rates fall below 2.5% the Treasury will not redeem them.

The point is that even though Consols are said to be part of the National Debt there is – unlike with virtually all other Treasury Gilt-Edged Stock (‘gilts’) – no dated debt obligation to repay them, although the government has the right, as though these were 2.5% redeemable preference shares in UK Plc.

Which is, of course pretty much exactly what they would be if the UK were a ‘Joint Stock Company’ where the collective Stock had been divided up into £1.00 shares.

Euro Stock
My proposal for a temporary resolution of the € crisis – pending a transition to a sustainable basis for the € of which more anon – is for the ECB to announce that it will issue a few trillion € in Stock.

Technically, the proceeds of this ECB Stock are used to buy Stock issued by EU Treasuries which in turn enables them to buy back their unsustainable debt. The outcome is simply that the ECB would exchange Stock for EU debt at the market price of the debt.

The ECB would apply a coupon of (say) 2.0% pa and this would have several outcomes:

(a) EU nations’ funding costs would be slashed, which in turn would mean that this modest return would be more likely to be paid; more secure; and lower risk, justifying the lower return;

(b) The intractable issue of the massive overhang of € short term sovereign debt refinancing would become irrelevant;

(c) There would be a single pool of liquidity at periodic Stock Exchange auctions on the ECB web-site, instead of a pool of debt fragmented by rate of interest; issuer, date and trading platform;

(d) Sovereign credit default swaps – which are distinctly problematic anyway – would be dispatched to the dustbin of history where they belong

Qualitative Easing
So, in true Bulldog Drummond style, when that master of derring do was completely and irretrievably in the s…t………

……“with a leap and a bound he was free”.

An issue of ECB Stock would enable what is essentially a debt/equity swap which affects the quality rather than the quantity of credit. This Qualitative Easing gives a short/medium term breathing space for the transition to a sustainable long term basis for the €.

But that is another story……..



  1. The trouble is that the ECB does not enjoy the political status of a real central bank. And the Euro is not a national currency unit. The creation of both these entities was premature.

    • Correct.

      The € was always a political project aimed at a Federal Europe. Back to the drawing board, I think.

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