The blue bond/red bond proposal

The model by Mr. Delpla and Mr. von Weizsäcker , for instance, would let countries put some of their debt — equal to no more than 60 percent of gross domestic product — into so-called blue bonds issued by all members. These would presumably carry a very low interest rate.

The rest — the red bonds — would remain the responsibility of individual countries and would probably carry much higher interest rates.

Countries would need approval from a central committee to issue blue bonds, and could do it only if they followed responsible economic and budgetary policies. Germany would effectively have veto power.

“If you behave well, you have access to blue debt,” Mr. Delpla said. “If you start to behave like Berlusconi, you will not have access to blue debt, and the price of red debt will go up.” He was referring to the former Italian prime minister, Silvio Berlusconi, whose policies were blamed for much of Italy’s current economic and debt woes.

Thus Spain and Italy would still feel acute pressure to improve the way their economies function and to get better control of public spending. One big advantage of the proposal, Mr. Delpla said, is that it could be put into action quickly without a major restructuring of the European Union.

That is from Paul Geitner, here is more.  What are the problems with this?:

1. GDP figures will be manipulated, to allow for the issuance of more guaranteed debt.

2. The key is guaranteeing the banks and their deposits, at reasonable cross-border cost.  This doesn’t accomplish that.

3. Presumably a country has to pay back its joint bonds first, otherwise it is too easy to pass the buck on those and just pay back the national bonds.  That makes the purely national bonds subordinated debt and may raise rather than lower their risk.  Real private sector lending is already becoming subordinate to an unworkable degree, given all the “first in line” public lenders involved.

4. Germany still ends up with its finger on the “send you (and me) to doom” trigger, which already isn’t working out in the Greek situation.  If Spain or Italy is approaching insolvency, can the Germans really withdraw credit?  Didn’t the ECB just lend over a trillion euros, starting December 2012?  How well is that going?  Is Germany finding it easy to say “nichts mehr!”, or is the pressure for ever-greater bailouts integration?  Why should the Germans let themselves be led further down that gangplank?  Why not just call the plan “Germany commits to no more bailouts, not ever, ever again” and cross your fingers behind your back?

What else?