The State will be reluctant to Monetise the debt

Given the choice, the State will default on its debt

In the event of Bank Nationalisation, the liabilities of the banking sector are officially transferred to the State. This means that, in effect, depositors now hold Treasuries instead of bank deposits.


http://www.nowandfutures.com/us_argentina.html

By then there will be so many Treasuries outstanding it will become obvious that not all of them can be repaid... Then people will want to know the value of their Treasuries and refuse to receive more Treasuries in return. They will become curious to know if they can, in fact be redeemed for cash.

At this point, the Government will be very reluctant to redeem the Treasuries for cash (since that would be to relinquish power to the Treasury-holders). If it is politically possible for them to do so, the State will refuse.

They might well plead that, reluctantly they are of the view that there is a greater need elsewhere than to bail out relatively well-off Treasury-holders.

At this point the banking system has unquestionably failed.

To what extent is the State willing to print money in order to restore the banking system to its previous status? It might be sensible to conclude that, as friendly as they are to one-another at this stage in the cycle, at a later date the State may desert the banking system in the hour of need.

21st February 2009