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Italy and the Euro Zone - Don't buy the cow to get the milk!

What a lack of insight by commentators and politicians. Everyone talks about buying the bonds of Italy and other PIIGS, maybe even France, or see de facto if not de jure default as the only other possibility.

The IMF, ECB and Germany don't need to buy the bonds of italy or any other country. You don't need to buy the cow to get the milk!

All they need to do is subisdise the interest during the period of adjustment. While ever the countries such as Italy and Spain adjust, the interest subsidy gets paid. If they stop austerity, the interest subsidy stops. External supervision of tax collection functions including audit and assets betterment approaches in addition to harmonisation of benefits might be a precondition.

They could also choose to buy the bonds if they wished, with a view to a capital gain in say 4 years time as market rates fell as Italy and others came into line with their obligations regarding budgets as members of the Eurozone.

The interest rate subsidy would buy 3 or 4 years of adjustment for only say 8%or 10% of iItaly's renewing and additional debt while Italy adjusts its balances. Look at the maturities and new debt requirements. The same deal could be offered to Greece, Portugal and Ireland for little additional cost. During that time the oversupply of houses in the US and some other countries would diminsih, meaning the US would likely be enjoying higher growth and that would help stabilise the  global economies.

This is a much lower risk strategy, involving a lot less Euros and could be done/supported by the IMF as most member countries have a degree of risk from an Italian default. There is less moral hazard from this approach as the countries which rorted the system still have to undergo painful adjustment.

If Italy falls over in 4 years time it should be much less of a problem provided all countries have worked on reduction of private and public debt, their Net International Investment Position and bank recapitalisation over that 4 years.

This would be a far more gradual and less expensive adjustment than a bailout or a default.

It will still leave trade/current account imbalances within the Euro zone to be dealt with, but gradualism is, in my opinion, far better than huge global crisis when so many countries have significant stresses.

there will still be reward for risk for bond investors, there will still be pain for countries that borrow too much, there will still be a bias against expended debt and there will be no/little moral hazard. It's just that the pain of high interest rates and austerity and a high likelihood of massive external shock for many countries will be replaced by minor adjustment for many countries over a longer period and austerity in those that borrowed too much.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I have about 95% of my liquid investment pool in an index fund which tracks the Australian all Ordinaries