#AI #Grok: What is your initial reaction to the following way for a Eurozone sovereign to restructure its debt?

I asked Grok:

"A way for way too indebted Eurozone sovereign, unable to service its debts without imposing severe sufferings on its inhabitants, is to abandon the euro and offer in payment, to all of its creditors, long term bonds denominated in their old currency at a very low interest rate, and which shall immediately come due, if any of its new public indebtedness exceeds e.g., 30% of GDP."

In a very brief way, keep it to about 200 words, what is your initial reaction to that?

 

Grok answered:

This proposal is a bold, unilateral debt restructuring tactic that echoes historical defaults like Argentina's but tailored to the Eurozone's constraints. By exiting the euro and issuing long-term, low-interest bonds in a depreciated national currency (e.g., a "new drachma" for Greece), the sovereign could effectively haircut debts through inflation and devaluation, easing servicing without immediate austerity. The clawback clause—accelerating repayment if new debt tops 30% of GDP—adds a fiscal discipline mechanism, potentially restoring creditor confidence by signaling commitment to restraint.

 

However, it's fraught with risks: Eurozone treaties prohibit currency exits without broader fallout, inviting legal battles, capital controls, and ECB retaliation. Creditors (often foreign banks and funds) would suffer massive losses, possibly triggering systemic contagion. Domestically, hyperinflation, bank runs, and social unrest could ensue, exacerbating the "severe sufferings" it aims to avoid. Politically, it's a nuclear option—feasible only in extremis, like a Grexit scenario, but likely to isolate the country further from EU support.

 

Overall, ingenious in theory for desperate cases, but practically a high-stakes gamble that could backfire spectacularly. Better pursued via negotiated relief than shock therapy.

 

I asked: What if many other Eurozone sovereigns in similar situation would also jump to take up that idea?

 

Grok answered:

If multiple Eurozone sovereigns—such as Italy (debt-to-GDP 140%), Greece (160%), Spain (110%), and Portugal (100%)—simultaneously adopted this exit strategy amid 2025's elevated debt levels (euro area average 87.4% of GDP ) and ECB warnings of fiscal risks, it would likely trigger a full monetary union collapse.A domino effect would ensue: Mass devaluations of new national currencies could inflate away debts but spark hyperinflation, bank runs, and capital flight across the bloc. Creditors, facing trillions in losses on euro-denominated bonds, would dump assets, freezing credit markets and causing systemic bank failures. The ECB's balance sheet, bloated from past interventions, might implode without unified fiscal backing.

 

Politically, it could fracture the EU: Northern states like Germany might impose barriers or exit themselves, while southern unrest boils over. Globally, this would rival 2008, slashing trade, spiking unemployment, and risking recession—Eurozone GDP is ~$15T. The 30% GDP debt cap clause offers illusory discipline, easily bypassed in chaos.In essence, a collective "Grexit-plus" would be economic Armageddon, far worse than isolated cases, potentially ending the euro experiment and reshaping global finance. 

 

Negotiated reforms remain preferable to this suicidal pact.

 

I asked: What type of “Negotiated reforms” do you envision and with whom should it be negotiated?

Grok answered: 

Negotiated reforms for indebted Eurozone sovereigns should build on the EU's new economic governance framework, effective since April 2024, emphasizing sustainable debt paths and growth-oriented policies. Key types include:

 

Fiscal consolidation with flexibility: Implementing net expenditure rules and medium-term fiscal-structural plans to reduce debt below 60% GDP (or stabilize high-debt ratios), while allowing buffers for investments in green/digital transitions and resilience. 

 

Structural reforms: Labor market liberalization, pension adjustments, and productivity-boosting measures to enhance growth potential, often conditioned on EU funding access.

 

Debt relief tools: Extended maturities and grace periods via the European Stability Mechanism (ESM), or innovative instruments like GDP-linked bonds and Eurobonds ("blue bonds") for joint issuance up to 25% of euro area GDP, promoting fiscal integration without full mutualization. 

 

Negotiations should occur multilaterally through the Eurogroup (eurozone finance ministers) for peer review of budgetary plans, the European Commission for assessments and enforcement, and the European Council for high-level political buy-in. The ECB would coordinate monetary support, while bilateral talks with creditor nations (e.g., Germany, France) ensure consensus. For external legitimacy, involve the IMF in debt sustainability analyses, especially for countries like Greece or Italy. This collaborative approach, as seen in 2025 budgetary discussions, avoids contagion while fostering unity.

 I asked: Do the Eurozone authorities have sufficient credibility to pull this off?

 

The Eurozone authorities—primarily the European Commission, ECB, Eurogroup, and European Council—have garnered moderate credibility in implementing the new economic governance framework, but it's insufficient to guarantee unhindered success in pulling off comprehensive negotiated reforms for indebted sovereigns as of August 2025. 

 

On the positive side, the framework's entry into force in April 2024, coupled with the approval of initial Medium-Term Fiscal Structural Plans (MTFSPs) in early 2025, demonstrates procedural progress and coordinated fiscal stances. Eurogroup statements highlight stabilizing debt at ~90% of GDP, near-target inflation, and growth acceleration, bolstering perceptions of effective debt management. The ECB's role in monetary support and the European Fiscal Board's assessments further enhance institutional legitimacy. 

 

However, challenges undermine full credibility: Analyses criticize lax enforcement, with high-debt countries like Italy exploiting flexibilities for loosening rather than consolidation, risking moral hazard and austerity entrenchment. Political divergences among member states, limited investment carve-outs, and geopolitical pressures could erode trust if compliance falters. Historical ECB interventions during crises have empowered it but also sparked credibility debates over fiscal dominance. In sum, while foundational steps build optimism, sustained credibility hinges on rigorous enforcement and growth outcomes—early signs are promising, but vulnerabilities persist, potentially requiring IMF involvement for added assurance. 

 

I said: Thanks! Enough for today.

 

It answered: You're welcome! Feel free to dive back in anytime—I'm here whenever you're ready. Have a great day!

PS. One of the main difficulties lies in that the Euro adoption did not include one word about what any of the Eurozone sovereigns had to do in order to leave the Euro.

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here my many other questions to ChatGPT and Grok on bank regulations

#AI #ChatGPT: What is your initial reaction to the following way for a Eurozone sovereign to restructure its debt?

I asked ChatGPT:

"A way for way too indebted Eurozone sovereign, unable to service its debts without imposing severe sufferings on its inhabitants, is to abandon the euro and offer in payment, to all of its creditors, long term bonds denominated in their old currency at a very low interest rate, and which shall immediately come due, if any of its new public indebtedness exceeds e.g., 30% of GDP.

In a very brief way, keep it to about 200 words, what is your initial reaction to that?"

ChatGPT answered:

"Your proposal is intriguing because it combines three strong elements: restructuring, national monetary autonomy, and a hard rule to reassure creditors.

Exiting the euro would restore the debtor country’s ability to issue in its own currency, which allows regaining monetary flexibility. Converting outstanding debts into long-term local-currency bonds at very low rates effectively forces a deep restructuring—creditors accept real losses up front but gain protection from future fiscal excess through the trigger clause. The automatic maturity acceleration if new debt exceeds 30% of GDP is clever: it ties the government’s hands and signals seriousness about discipline, while offering creditors a credible enforcement mechanism.

But there are heavy challenges. The legal mechanics of redenominating euro liabilities could spark endless litigation, especially with foreign-law bonds. Creditors may fear the trigger clause could itself generate instability, encouraging speculative attacks to test fiscal limits. Domestically, abandoning the euro risks bank runs, capital flight, and collapse in confidence—requiring capital controls and strong political resolve. And in the wider Eurozone, such a precedent might invite contagion, making the ECB and EU institutions resist fiercely.

So: conceptually elegant, but politically and operationally very hard to execute without huge disruption.

Would you like me to sketch how creditors might realistically respond?"

I said: If briefly. please do

ChatGPT said:

Most creditors would see your plan as a forced restructuring, but reactions would differ:

Official creditors (IMF, EU institutions) might resist, since accepting redenomination weakens the euro project and sets a precedent. They’d likely push for continued euro membership and conditional relief instead.

Private creditors (banks, funds) would likely accept if the alternative is outright default. The long-term, low-rate bonds give them a claim, and the 30% debt cap provides some assurance of discipline—though they’d price in currency devaluation risks.

Vulture/distressed funds could litigate, especially if contracts are under foreign law, but many might buy in at a discount and gamble on eventual recovery.

In short: reluctant acceptance from private markets, legal challenges from holdouts, and strong opposition from official Eurozone actors.

I said:

What if many other Eurozone sovereigns in similar situation would also jump to take up that idea?

ChatGPT said:

If several Eurozone sovereigns were to adopt this strategy simultaneously, the effects would be profound:

Markets: Confidence in the euro would collapse, since investors would anticipate mass redenominations and restructurings. Euro-denominated sovereign debt could rapidly lose its safe-haven status.

Banking systems: Banks heavily exposed to sovereign bonds would face sudden losses, forcing recapitalizations or nationalizations. Cross-border exposures would spread the crisis.

Political cohesion: The euro project itself would be at risk. A wave of exits and unilateral restructurings could trigger fragmentation, pushing surviving members either to deepen integration or let the eurozone unravel.

Creditors’ stance: If many governments acted together, creditors would have less bargaining power. Faced with a “take-it-or-leave-it” collective restructuring, many investors might accept, since litigating multiple countries at once would be impractical.

In short: one country doing it is disruptive but survivable; many doing it would likely mark the effective end of the euro as a common currency, unless the core (Germany, France, the Netherlands) rushed to create a tighter fiscal union around themselves.

Would you like me to sketch what kind of new monetary order could realistically emerge if that domino effect happened?

I said: Another day. Thanks

ChatGPT said: Anytime — I’ll be ready when you want to revisit it. Thanks!

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here my many other questions to ChatGPT and Grok on bank regulations

If I had been elected a first time EU parliamentarian

If I was a newly elected first time European Union parliamentarian, the following is what I would ask in order to leave a clean historical record of my presence there:

Fellow parliamentarians: I have heard rumors that even though all the Eurozone sovereigns take on debt denominated in a currency that de facto is not their own domestic printable one; their debts, for the purpose of the risk weighted bank capital requirements, have been assigned a 0% risk weight by European authorities. Is this true or not?

If true does that 0% risk weight, when compared to a 100% risk weight of us European citizens not translate into a subsidy of the Eurozone sovereigns’ bank borrowings or in fact of all Europe's sovereigns?

If so does that not distort the allocation of bank credit in the sense that the sovereigns might get too much credit and the citizens, like European entrepreneurs, get too little? And if so would that not signify some regulators, behind our backs, have imposed an unabridged statism on our European Union?

And if so, does that not mean that some Eurozone sovereign could run up so much debt they would be seriously tempted to abandon the euro and thereby perhaps endanger our European Union?

Finally, was Greece awarded such a 0% risk weight? If so was this monumental fault by EU authorities taken in consideration when restructuring its debts? And if not, does that not show a basic lack of solidarity with a EU member?

Who should answer these questions? The European Commission?

Oops... it seems that it was the European Parliament through a "Council on prudential requirements for credit institutions and investment firms" that concocted the  idea.

PS. In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:

"The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognises the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion which, in my view, is long overdue. Mario Draghi, ESRB Chair"

So Mario Draghi, as president of the European Central Bank since 2011, what have you done about it, or is it your intention to leave that very hot potato to your successor?

PS. In that ESRB report there are references to "domestic" currency but not to the fact that the euro is not really a domestic currency of any of the eurozone sovereigns. 

A brief comment on Joseph E. Stiglitz “The EURO: How a common currency threatens the future of Europe”

Professor Stiglitz correctly describes many of the challenges the Euro poses, most of which were known from get-go twenty years ago, like the problem derived from having fixed exchange rates within the Eurozone.

In the introduction to the paperback edition, Stiglitz also briefly brings forward something that should have been understood but seems to have been much ignored. That is that although the Euro is for most purposes the domestic currency in the Eurozone, it is de facto not a truly domestic currency for any of its sovereigns, since none of these have the right to individually print the Euros it wants or needs. Without that right, the Eurozone’s sovereigns’ debts are all, de facto, denominated in a quasi-foreign currency.

But what the book does not mention, is what came afterwards, I do not know exactly where and when; something that here and there is referred to, in hush voices, as Sovereign Debt Privileges. These translate into that the EU authorities (European Commission?), for the purpose of the risk weighted capital requirements for banks, assigned all Eurozone nations an insane 0% risk weight. 

That distortion in favor of Eurozone’s sovereign’s accesses to bank credit has impeded the markets from sending the correct market signals with respect to the interest rates for each sovereign.

One of the consequences of this has been the tragedy of Greece. Especially since Greece was then forced up to pay up basically on its own for this EU mistake, so as to bail out German, French and other Eurozone banks. What a Banana Union!

As for Professors Stiglitz opinions on Brexit I might resume those I my own words as “If there's a Remain there might not be a EU in which to remain”, something that would be very sad as EU was, and still can be, a very beautiful dream.

But let me be clear. I do not hold the EU authorities as solely responsible for the consequences of their 0% risk weighing of the Eurozone Sovereigns. Already in 2011, in a post titled “Who did the Eurozone in?” I argued that the extraordinary low risk weights that the Basel Committee assigned to sovereign debt when compared to what it assigned to the private sectors would end in tears. (And that goes not only for the Eurozone)

Three tweets on the Greek Tragedy

What if Alexis Tsipras and Yanis Varoufakis, while negotiating the debt of Greece with the Troika of the European Commission, the European Central Bank and the IMF, had brought up EU’s “Sovereign Debt Privileges”, and then argued: 

Though our debt is in a currency that de facto is not a domestic printable one, you assigned Greece 0% risk weight. That meant European banks could lend to us against zero capital. You expected our governments to resist the temptations of too easy credit 

http://blogs.reuters.com/hugo-dixon/2013/10/07/bundesbank-right-to-focus-on-doom-loop/

And now you want our children and grandchildren to pay for all the need of bailing out your banks? Have you no shame? 

Shall we take you to court? Shall we inform your constituency about your insane 0% risk weighting of Greece? Or shall we renegotiate?

https://teawithft.blogspot.com/2018/09/in-case-of-greece-eu-violated.html

Here’s the moment it struck me that if Brexit falls apart, there might not be a EU for Britain to remain in.

It’s now twenty years since the Euro was introduced, more in order to strengthen a union than the result of a union. As I wrote in an Op-Ed at that time, it brought on important challenges to its 19 sovereigns. First it meant giving up the escape valve of being able to adjust their currency to their individual economic needs and realities, and second, much less noticed, also by me, was that they would hence be taking on debts in a currency that de facto was not denominated in their own domestic (printable) currency.

To face those challenges required the Eurozone to extend much more the Euro mutuality to other areas, like to monetary and fiscal policies. In that respect there’s no doubt that way to little has been done.

For more than a decade I thought the Eurozone applied Basel Committee’s Basel II standardized credit rating dependent risk weights in order to set the capital requirements for banks, when lending to sovereigns. I never approved of that because I considered those risk weight way too statist, tilting bank-lending way too much in favor of the sovereign and against the citizen... and that should do the Eurozone in. 

But then, by mid 2017, I found out that it was all so much worse. EU authorities, most probably the European Commission, I really do not know who and when, assigned all Eurozone sovereigns a 0% risk weight, even though none of these can print euros on their own.

I could not believe it. That meant that European banks could hold sovereign debt, of for instance Greece, against no capital at all. How could something crazy like that happen? That basically doomed the Euro. What would have happened with USA if it had done the same thing with its 50 states?

How on earth can it now get out of that corner it has been painted into, especially when Europeans sing their national anthems with so much more emotion than EU’s anthem, Beethoven’s Schiller’s “Ode to Joy”

And that’s the moment it struck me that if Brexit falls apart, there might not be a EU for Britain to remain in.

My November 1998 Op-Ed "Burning the bridges in Europe"

PS. When Greece fell into the trap then EU authorities had it sign a Versailles type treaty.

Burning the bridges in Europe

In just a few weeks, on the 1st of January 1999, eleven European countries will forsake the right to issue their own currency and accept the circulation within their boundaries of a common currency, the Euro. 

Monetary policy related to the Euro will be set by a European Central Bank. One fact that struck me as curious is that in all the abundant legislation that regulates this process, there is no mention whatsoever of how to manage the withdrawal or future regret of any of the union’s members.

The absence of alternatives in this case evidently represents a burning of the bridges, but this may be necessary to achieve credibility. There is no turning back and there is no doubt that this is a truly historical moment. As participants in a globalized world in which Europe has an important role, we must naturally wish all members luck, no matter what worries we might secretly harbor.

Until 1971, all money used throughout the history of humanity was backed in one way or another by something physical to which a real value was attributed. Sometimes the backing was direct, pearls for example, while in other cases it was indirect such as the right to exchange bills for a certain quantity of gold.

This physical backing in itself did not necessarily mean it consisted of something of fixed value. The value of a pearl, for example, is in itself subjective. 

The promise to exchange bills for gold did not guarantee anything either, since this promise could easily be voided by fraud. Whatever the backing was, however, it did at least offer the holder of the money the illusion that it was supported by something concrete.

In 1971, the United States formally abandoned the gold standard and the direct backing, however imaginary, disappeared. Since the Dollar is a legal currency, it could always be used to repay Dollar denominated debt. 

Today, however, in spite of the fact that the Dollars may have lost some of their purchasing power, a holder of excess Dollars can only hope that the Government of the United States will exchange his old bills for new ones of the same tenor.

This apparently precarious situation must be the raison d’etre of the motto printed clearly on the bills which states “In God We Trust”.

Since 1971, the real value of the Dollar as an element of exchange, has lost some of its value due to inflation. 

Today, we would need many more Dollars to buy the same houses, cars, movie tickets and gold than we would have needed in 1971. In spite of the above, with few exceptions such as the end of the ‘70s during which inflation increased dramatically, few would dare qualify the United States’ elimination of the gold standard as a failure.

The world’s economies have managed to increase international commerce drastically and with it, sustain a healthy growth rate. Many analysts would explain this phenomenon by saying that the discipline exacted by the gold standard represented a brake on international commerce. The growth rate registered in commerce after 1971 was the result of the release of this brake. 

Other more critical analysts sustain the thesis that, due to the fact that we have abandoned the discipline required by the gold standard, the world has accumulated gigantic accounts payable, which we may be coming due very soon.

I personally swing back and forth between amazement of the fact that the world has accepted such a fragile system and satisfaction that it actually has done so.

The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. 

The Dollar is backed by a solidly unified political entity, i.e. the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. 

Exchange rates, while not perfect, are escape valves. By eliminating this valve, European [Eurozone] nations must make their economic adjustments in real terms. 

This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.

What worries me most is the timing. The world is facing the possibility of a global recession. This will require very flexible economic and monetary policies. 

The fact that the search for initial credibility for the Euro is based on trying to assure markets around the world that the new currency will be guided by a philosophy closer to that of Bonn (soon to be Berlin) than that of Rome, probably goes against the best interests of the world.

Published in Daily Journal, Caracas, November 19, 1998

20 years later: Let’s face it. Americans dream they are American. Few if no Europeans, dream they are Europeans.

PS. A new English Language Empire?

PS. What I did not know when I wrote this article was that EU authorities (EC), for the purpose of their (crazy) risk weighted capital requirements for banks decided, in a “good-will” gesture, to assign a sovereign debt privilege of a 0% risk weight to all European sovereigns like Greece. That of course, by removing market credit constraints, would make the Euro challenges so much more explosive especially considering that the Euro is de facto not a domestic (printable) currency of any Eurozone nation. Shamefully EU authorities responsible for that have not acknowledge their mistake, and made Greece have to walk the plank for it.

IT IS NOW A TICKING BOMB!