Reducing the Euro Zone crisis in Slovakia

The Slovaks Should Lend to Slovakia through Bearer Bonds

Summary:
To fund high budget deficits, Slovakia faces increasing costs of borrowing, and needs
a lower cost of loans. Slovak people should be the lower cost loan source.
Slovakia should print bonds and use these bonds as payment for government wages
and other benefits.
The bonds should be 0% coupon, 1-year, bearer bonds.
The amount of the bonds printed should be equal to the 2010 Slovak deficit.
The government should accept these bonds at par value for taxes and fees.
The acceptance of the bonds should be optional for all others– they are bonds, not
“legal tender”, money. But they can be used like money at any conversion rate agreed
upon – in this respect, like USD in the past, Slovak Bearer Bonds are an alternate
currency.

Handling a budget deficit

Like many democratic governments, that of Slovakia faces the problem of how to pay
for prior promises. Government deficits can be handled in four ways:
1) raise taxes, 2) cut benefits, 3) borrow money, or 4) print money.
Voters dislike taxes, and dislike benefit cuts. Printing money is risky, with Zimbabwe
today, like the Weimar Republic in the past, showing the social collapse with
hyperinflation. In Slovakia’s case, it can’t print money unless it leaves the euro zone,
only the ECB can print Euros.
If not 1), 2), or 4), then Slovakia will have to borrow (3), with the cost of borrowing
measured by the interest rate. That rate for Slovak bonds is not so high now, but is
going higher and could go higher quickly. Slovakia, like Greece and Ireland, would
be better off limiting its borrowing.

Solution 3b) – borrow from the people, the government beneficiaries

• Slovakia should borrow from government workers, and others getting
government money benefits.
• Slovakia should print “Koruna-Bonds”, and should use these bonds to pay
50% of the salaries of government workers, as well as all entitlement
distributions over a minimum wage, and if necessary up to 50% of contracting
costs to non governmental businesses.
• The bonds should have a 1 year maturity (31.12.2011), with a 0% coupon (no
interest). This reduces the interest paid out of the budget.
• The total amount of bearer bonds should be equal to the budget deficit, to be
rapidly distributed within a few months, until the total amount is used.
• These Koruna-Bonds should be accepted by the government at 100% par
value for paying taxes, and all other government fees, but no private business
would be required to accept them at par value.

The Slovak people getting government benefits will loan to the Slovak government,
not the German, French or other taxpayers. Receiving bonds instead of euros is a
small benefit cut, of an uncertain amount.

The Slovak government should use Koruna-Bonds to pay for a part of all its internal
Slovak obligations: salaries, pensions, and payments to Slovak contractors, above the
48577962.doc Tom Grey-12/25/2010 Page 1 of 3
minimum salary per recipient. This proposal is 50% in Euros, 50% in new Koruna-
bonds, until all authorized Koruna-bonds are distributed. With direct deposits, banks
would set up new parallel bank accounts to receive these amounts, a real but minor
bank cost for banks that already allow multiple accounts and alternate currencies, like
USD or GBP; just add Koruna-Bonds. With Government officials paid 50% in bonds,
the shared pain should decrease backlash against the benefit cut.

Koruna-bonds at 0% interest will save money. Since such bonds can replace all
current government borrowing, the interest payment pressure on the Slovak budget
would be nearly eliminated, with little need to borrow from the capital markets. By
cutting spending on interest, the deficit will also be reduced. Directly saving the 3-
6% of interest that otherwise must be paid to borrow is a key advantage; this benefit is
greater than the cost of setting up the Koruna-bond scheme. This scheme can be
repeated next year, if the crisis continues, but can end at any year.

Koruna-Bonds accepted as tax payments, accepted as “money”

Having 100% convertibility when paying the government will encourage more and
earlier payments. Because of this legal value, and the cash like anonymousness, these
bearer bonds will have significant value. Whenever something tradable is widely
accepted as having value, like cigarettes in prison, that value can be the basis of
money.

With payment of taxes possible in bonds, it is likely that a small increase in tax
compliance will be noted, as businesses choose to pay full tax, sooner, with bonds
they’ve received. Most retail companies would be willing to take such bonds with a
conversion exchange rate around 90%, as soon as many government employees have
the Koruna-bonds available.

Big retail chains will likely see that accepting Koruna-Bonds at 90% offers them an
advantage, even at 95%, even at 99%; without needing laws to require this, the market
value will not vary much from the par value. It might well be that some big chains
decide to offer a 100% equality rate of Koruna-Bonds to Euro, as part of a marketing
campaign. In any case, it will converge towards 100% by the 1 year maturity date.

Logistically, Slovak banks would need to have sufficient Koruna-bonds in bearer

bond form, like a new currency, available for withdrawal. ATMs will need to serve
government employee customers with bonds first in withdrawals, to get the bonds into
circulation.

Slovakia borrowing money from Slovaks with such bearer bonds is probably not
covered by current Euro-zone restrictions. This policy reduces tax increases and
reduces nominal cuts, beyond those changes already part of the fiscal adjustments, so
most Slovaks will be pleased. While initial recipients would have some additional
hassle, and perhaps a small discount on the Koruna-Bonds at first, when compared to
a bigger cut of wages in euros, it is much less painful.

It would be a great Teaching Moment about what money is, comparing Euros to
Koruna-Bonds. They will not print Euros, they will print bonds, Slovak bonds.

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After a Year, Through to 2013
Printing Koruna-Bonds does not solve the short-term problem of excess government
expenditures, but it allows the Slovak economy another year to make progress on the
imbalances. Any graph of government revenue and expenses will clearly show the
deficit problem as one of increases in spending. This crisis in excess spending cannot
be solved by any merely financial program. However, in making it clear to those
getting the bonds that it is their benefits which are excessive, such bonds will increase
the knowledge of the crisis among the people getting government payments. It also
allows a year of far less financial pain than immediate spending cuts would cause.

If necessary, perhaps partly due to the need to retire the first issue of bonds, Slovakia
can issue another budget deficit amount of bonds, rolling over their debt, just like
most governments already do. But such a deficit should be far less, so the new bond
issue should be less. This can even continue to and through the 2013 time frame of
the recent bailout fund agreement.

Alternatively, once Koruna-Bonds are in circulation, if the government continues

spending more than it is willing to tax by the issue of these quasi-money bearer bonds,
there might be a greater quantity issue of Koruna-Bonds. This political choice leads
to Slovakia leaving the euro zone. Then their printing of bond money to cover excess
spending will result in a devaluation, making asset owners relatively poorer, but
increasing employment in export industries.

Using Bearer Bonds would also be an option for the Greeks and Irish, as well as
Portugal, Spain, even Italy. Perhaps even Germany and other members to the euro
zone could find it beneficial to introduce domestic bearer bonds to reduce interest
payments. Reduced borrowing by any Euro zone state will also reduce the interest
rates paid by any other Euro zone country because of less demand to borrow euros.

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