Wednesday, August 07, 2013

The euro is still in crisis and the clock is ticking

"The debt problem cannot be avoided or hoped away. When debt is unsustainable it will not be sustained. The only question is how and when the crisis comes." So write Pierre Pâris and Charles Wyplosz in To end the Eurozone crisis, bury the debt forever VOX 08/06/2013

They note that appearances have deceived some observers:

The Eurozone’s debt crisis is getting worse despite appearances to the contrary.

Eurozone bond rate spreads have narrowed – leading some to think that the crisis is fading.1 Yet the narrowing is not due to an improvement in fundamentals. It happened after the ECB announced its Outright Monetary Transactions (OMT) programme. Mario Draghi's, "Whatever it takes", did the trick; investors believe the ECB could and would counter rising spreads in the medium term.
And they remind us how much of a failure German Chancellor Angela Merkel's austerity policies at been even in reducing unsustainable sovereign debt burdens:

If public debt seemed likely to be unsustainable in 2008, the likelihood is even higher now. Strikingly, this holds even for Greece, in spite of the restructuring of its public debt in 2011, which was large enough to bankrupt the Cypriot banking system. Put differently, not only the initial problem has not been solved, it has also been made worse.

There can be no surprise here. Budget stabilisation cannot work during a recession ...[my emphasis]
They advocate having the ECB buy up the unsustainable portions of the sovereign debt from countries like Greece and Portugal and converting them into eurobonds or the functional equivalent. The call this "debt monetisation." This would put the ECB in the position of lender of last resort, a role national central banks play for most currencies and a central bank function that any currency needs.

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