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Antti-Juhani Kaijanaho's avatar

I wonder why the Credit Suisse restructuring did not convert the AT1 bonds to equity instead of killing them. My understanding is that at least under EU bank crisis resolution law, it is an available option and should be employed when equity owners are not imposed losses.

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Brian Romanchuk's avatar

I don’t know the logic, but the AT1 holders would have still been largely wiped out anyway. I assume they wanted to throw equity holders a bone.

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Antti-Juhani Kaijanaho's avatar

On further thought, conversion to equity also should not be used before existing equity is wiped out. The principle of no worse off than in liquidation is a key feature of the Basel bank resolution framework.

It seems very weird that Switzerland has not implemented the Basel framework in preexisting law, instead of still relying on ad hoc lawmaking during a crisis. The framework is roughly a decade old, and other jurisdictions have managed to create such legal structures in the mean time.

I wonder how this plays out longer term in relation to Switzerland reputation in banking.

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James E Keenan's avatar

I hope that in a future post you can go more deeply into the "stimulative effect of interest payments when a country's debt/GDP ratio is "high." Most of the MMT literature tends to look askance at the mainstream obsession with that ratio.

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Brian Romanchuk's avatar

The channel is higher interest payments. If the debt/GDP ratio is 30% or less, interest payments are negligible. At 100+% of GDP, interest income is chunky. Mosler emphasises that point. The relatively long duration of gov’t bonds slows down the mechanism, but it will show up as debt is rolled over.

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James E Keenan's avatar

The "interest-income channel" is a topic that has come up repeatedly in our local MMT discussions, where people have cited Mosler's authority in support of the notion that the Fed's interest rate hikes are more likely to be inflation-generating than inflation-retarding. However, we've also noted that (a) it's rich people who receive that interest income; (b) in MMT (and Keynesian economics more generally), the rich are assumed to have a low marginal propensity to consume -- and the wealth effect on spending is thought to be low as well; (c) hence, Mosler's argument is theoretically possible but somewhat unlikely to be demonstrable in reality.

I don't think all the MMT academics are persuaded by Mosler on this point. (I'm not, but then I'm not really an academic.) You might discuss this with your upcoming panelists.

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Brian Romanchuk's avatar

Even if the multiplier is low, assuming it is zero when people like retirees exist seems awkward. Interest payments as a % of GDP are a slow-moving variable, so it’s not going to be easy to do statistical analysis.

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