Given the large – and arguably unsustainable – quantum of sovereign debt held by central banks around the world (Federal Reserve, ECB, Bank of England, Bank of Japan, etc.) perhaps there could be a solution whereby the G20+ group of countries meet and agree to a one-off coordinated proportional reduction in debt held by the respective central banks in their own government’s debt.
For example, each central bank would agree to cancel debt held in their own countries sovereign indebtedness representing, say, 25-50% of GDP to offset the increased debt from the Covid global crisis.
This would imply a “loss” for central banks, but if the action was one-off and coordinated between G20 countries, would that ultimately matter?
An alternative to “writing-off” of a portion of sovereign debt held by central banks would be for the debt held by central banks to be repaid with the proceeds of a perpetual zero coupon “Jubilee” suborinated bond issued by the respective sovereign and purchased by their central bank. A modern day alternative to a “war loan” but sold to the central bank, allowing government debt to be repaid with an instrument that has no interest cost and no maturity date.
If the governments wanted to have an option to redeem these bonds in the future, you could include a par call option, for example.
Of course, a perpetual zero coupon subordinated bond sounds rather like issuing equity, but sovereigns don’t usually sell equity to reduce debt – unlike corporates!
If leaders would like to include a fashionable technological element to the solution, the central banks could purchase an “official crypto-currency” issued by their respective sovereign, with the proceeds used to pay a portion of sovereign debt held by central banks.
Unlike the rather dubious unregulated crypto-currencies that have been peddled to retail investors across the globe, this new “official crypto-currency” would have the backing of G20 sovereign nations.
Other issues, such as potential downgrades by rating agencies of G20 sovereigns if such action were considered to be a technical “default” could, of course, be resolved by coordinated legislation.
To be clear, I do not believe that this would work on a unilateral basis. It would need to be coordinated action agreed by the world’s largest economies to ensure that the impact on global markets was largely symmetric, e.g. to mitigate unexpected FX shocks or large movements in sovereign bond yields.
After the coordinated global reduction in sovereign debt held by central banks, there could be scope for a normalisation of interest rates to escape the zero rate trap and bring an end to the need for infinite quantitative easing by central banks.
Let’s all hope that the world recovers from this crisis soon.
Thank you for your time and consideration.
With all due respect to Jeremy Heywood.
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