ECB debt underwriting possible without moral hazard, says GLG founder

The European Central Bank could underwrite all existing and future debt of Eurozone sovereigns without creating unacceptable ‘moral hazard’, if it set stringent long-term budget deficit and debt targets per country, according to the co-founder of one of London’s largest hedge funds.

Pierre Lagrange (pictured), co-founder of the GLG Partners boutique now owned by Man Group, said targets linked to ECB guarantees would need to be “tight enough to limit moral hazard but realistic enough that they can be achieved.”

As a result, he says, markets would price into the debt the likelihood of the country reaching its targets within the time frame.

He added Mario Draghi’s ECB could also “consider guaranteeing new short-term debt issued by the sovereigns unconditionally”.

Sovereigns could face a small, 0.5% per annum fee for the guarantee, he suggested.

“This would create an arm’s length transaction, and would be much more affordable than the amounts that the sovereigns will continue to pay if we persist in ploughing the current furrow.”

However, this suggestion would not work for all heavily indebted countries, Lagrange admits, Greece being the notable exception, which should be allowed to leave the euro, in his view.

“Instead of providing futile support to keep Greece inside the euro, we should keep money to help them outside the euro, with a flight path to potentially regain access in five years.” He dubs this is “Merkel Plan”.

In regards to Greece and other indebted Eurozone nations breaching government consolidated gross debt-to-GDP limits set under the Maastricht Treaty, Lagrange noted overreaching the ceiling had been “deemed totally acceptable by all, until Greece blew up in 2010”. He added Germany and France had been above the level for about a decade.


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