Comments on “Saving the Euro: Self-fulfilling Crisis and the ‘Draghi Put’” by Marcus Miller and Lei Zhang

Abstract

The paper “Saving the Euro: Self-fulfilling Crisis and the ‘Draghi Put’ ” by Marcus Miller and Lei Zhang proposes a possible institutional and financial solution to the debt crisis that the European (EU) has been suffering since 2009. The first part of the paper analyzes the empirical evidence that points to the self-fulfilling character of the debt crisis in Europe. In the second part, the authors analyze a theoretical model (the Calvo model) to gain a better understanding of the self-fulfilling character of a public debt crisis. In the third section, they use the theoretical model to analyze what they call the “Draghi Put”, that is, the intervention by the European Central Bank (ECB) in the secondary sovereign bond markets to put a ceiling on the interest rate hike that occurred in 2012. Finally, they analyze the possibility of implementing an institutional innovation, in the form of creating a European SPV (Special Purpose Vehicle), whose objective is to be an intermediary between sovereign debtors and private investors. The SPV would sell Euro Stability bonds to private investors, whose collateral are the bonds it buys from the different sovereigns, in the form of plain vanilla bonds and Growth and GDP-linked bonds. The idea is that by pooling risk between “lucky” countries and “unlucky” countries, it is possible to avoid multiple equilibria and speculative runs on “unlucky” countries. Furthermore, this pooling may even avoid countries engaging in “self-destructive slimming races” by showing who can implement bolder austerity measures and convince private investors to roll over their debt.