A year after the rescue of Greece, the Eurozone is still on life support. This column argues that Europe’s policymakers have got their strategy desperately wrong.
In the run up to the crisis meetings of May 2010, EU leaders witnessed a rapid loss of market confidence in government bonds. This loss of confidence not only affected bonds issued by the Greek government but also by several other Eurozone members. The default insurance premium on government bonds picked up rapidly for several countries, indicating that the market had revised its expectations about these governments’ ability and/or willingness to honour their outstanding debt.Country leaders reacted. Over the second weekend of May, they constructed what is known as the €750 billion rescue device. It consisted of the European Financial Stability Facility and additional guarantees provided through the IMF. In hindsight, some policymakers admit that the initial idea was that a European promise of support of this size would be sufficient to re-establish confidence among market participants. The hope may have been that market participants return to their prior expectations about government bonds, namely that holding these bonds was perfectly safe and that the bonds of different Eurozone members were almost perfect substitutes.A failed policy
Now, one year later, it is clear that the plan has gone spectacularly wrong. In addition to the €110 billion rescue package for Greece, the governments of Portugal and Ireland had to be rescued. These countries have received considerable financial aid from the rescue facility while other countries such as Spain or Italy are candidates that may follow. Markets most definitely did not return to their old expectations. Indeed the insurance premiums for many of the relevant countries – including the ones rescued – are higher in May 2011 than they were in May 2010.Officially, Greece was supposed to return to the private capital market after a period of no more than three years. But rather than an improvement in credit worthiness during the last 12 months, we have seen a process of deterioration. Rather than preparing for a return to the private capital markets, Greece has entered into debt renegotiations about prolonging the help and easing the debt burden further. There is seemingly almost a consensus that Greece cannot reach a financially healthy situation without either a partial devaluation of its debt in the process of a default followed by a debt restructuring, or massive foreign transfers.
by Kai A Konrad & Holger Zschäpitz
Vox
A year after the rescue of Greece, the Eurozone is still on life support. This column argues that Europe’s policymakers have got their strategy desperately wrong.
In the run up to the crisis meetings of May 2010, EU leaders witnessed a rapid loss of market confidence in government bonds. This loss of confidence not only affected bonds issued by the Greek government but also by several other Eurozone members. The default insurance premium on government bonds picked up rapidly for several countries, indicating that the market had revised its expectations about these governments’ ability and/or willingness to honour their outstanding debt.
Country leaders reacted. Over the second weekend of May, they constructed what is known as the €750 billion rescue device. It consisted of the European Financial Stability Facility and additional guarantees provided through the IMF. In hindsight, some policymakers admit that the initial idea was that a European promise of support of this size would be sufficient to re-establish confidence among market participants. The hope may have been that market participants return to their prior expectations about government bonds, namely that holding these bonds was perfectly safe and that the bonds of different Eurozone members were almost perfect substitutes.
A failed policy
Now, one year later, it is clear that the plan has gone spectacularly wrong. In addition to the €110 billion rescue package for Greece, the governments of Portugal and Ireland had to be rescued. These countries have received considerable financial aid from the rescue facility while other countries such as Spain or Italy are candidates that may follow. Markets most definitely did not return to their old expectations. Indeed the insurance premiums for many of the relevant countries – including the ones rescued – are higher in May 2011 than they were in May 2010.
Officially, Greece was supposed to return to the private capital market after a period of no more than three years. But rather than an improvement in credit worthiness during the last 12 months, we have seen a process of deterioration. Rather than preparing for a return to the private capital markets, Greece has entered into debt renegotiations about prolonging the help and easing the debt burden further. There is seemingly almost a consensus that Greece cannot reach a financially healthy situation without either a partial devaluation of its debt in the process of a default followed by a debt restructuring, or massive foreign transfers.
by Kai A Konrad & Holger Zschäpitz
Vox
