This “dramatic crisis” calls for a united front among policy-makers, says Wirtschaftswoche. Instead, we have “political cacophony”. No wonder leaders failed to build on momentum provided by the European Central Bank (ECB) last week. The ECB waded into the markets, buying up Greek, Portuguese and Irish bonds.
Yields fell back as prices rose, interrupting the relentless recent rise in peripheral borrowing costs that threatens to drown these countries in debt. The ECB also said it would extend unlimited short-term loans early next year. It had hoped to phase out this emergency support for the financial sector.
The political divide
But “we should never underestimate” the lack of agreement among eurozone governments over how to stop the crisis spreading, says Neil Pratley in The Guardian. Two ideas that might just have done the trick were issuing a common euro bond and increasing the size of the €440bn eurozone rescue fund. But earlier this week Germany insisted that the rescue fund is big enough already. Nor does it want a euro bond. It said that would require a substantial rewriting of EU treaties. “Is this the kind of debate you want to have when markets are incredibly nervous?” one official asked. No wonder yields ticked up again early this week.
Euro bond proponents say euro bonds would send a clear signal to the markets of a joint commitment to the single currency. But for Germany they would mean higher interest rates than on German bonds as it would share the bond “with Greece and other fiscal delinquents”, says the FT. The last thing it wants is higher debt costs. Indeed, German bonds already seem to have “lost their halo”, as Richard Barley points out in The Wall Street Journal. Yields have crept up as investors fear that Germany could end up shouldering an ever-greater burden, bailing out poorer states.
ECB won’t produce ‘shock and awe’
The lack of consensus among policy-makers will continue to create uncertainty. In the meantime, bond-buying by the ECB has been on a much smaller scale than other central banks’ market interventions, and the bank is “unwilling to risk its inflation credentials by helping too much”, says James Mackintosh in the FT. So we can’t expect the ECB to match the Fed’s firepower in US bond markets by buying bonds – and thus keeping financing costs down – with huge amounts of printed money.
What’s more, Germany is “clearly reaching the domestic political limits of its willingness to transfer large sums” to the peripheral economies, says Bronwen Maddox in The Times. And the basic problem remains, despite emergency loans: markets have realised that several peripheral states simply “cannot meet their debt obligations”. So “write-downs – and probably write-offs – are inevitable”.
Yet European banks are hugely exposed to government debt and in no shape to take the hit, says Patience Wheatcroft in The Wall Street Journal. That, in turn, is why Europe has put off the inevitable restructuring by handing Greece and Ireland more money.
Does Europe face a meltdown?
So the upshot is that nothing has been solved and the authorities seem powerless to prevent the crisis from spreading. The euro area urgently needs to build a “firewall against contagion”, says John Gieve in The Daily Telegraph. Backing Spain to the hilt may be the best way to do this, as it could yet get on top of its debt load. But if the crisis spreads, “there is a real risk of a run” on the banks. Europe is “on the brink of a meltdown”.