The EU is once again weighing the possibility that the best method to prevent the debt crisis in the region from growing further is to buy the sovereign paper of troubled nations at a discount. The plan would be ingenious if the paper eventually increased in value, but very few economists believe that the recovery in nations like Greece will allow that to happen.
The EuroGroup released a statement that said the group is committed to solving the debt problems in the region, but it did not say how.
Ministers reaffirmed their absolute commitment to safeguard financial stability in the euro area. To this end, Ministers stand ready to adopt further measures that will improve the euro area’s systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate.
Whether credit rating agencies will say that any of these potential plans could trigger defaults cannot be known. That means a solution to the debt crisis may be no closer now than it was three months ago when the Greek sovereign debt crisis deepened.
There are too many plans on the table now, and that, as much as anything else, may keep any single one of them from approval. French banks tried to engineer an extension of maturities of some Greek bonds. Credit agencies said that the move would be tantamount to default, and the plan was killed. Eurozone ministers more recently said a partial default on Greece’s obligation might allow the southern European nation to restart its economy without all of the terrible debt load it carries. The idea got little support because any default could trigger further concerns about the viability of Portugal’s and Spain’s obligations.
The entire crisis worsened recently when Moody’s and S&P warned that Italy might have debt service problems. Italy’s debt as a portion of GDP is higher than any country in the region save Greece. Finance ministers now believe the only permanent solution to the overall debt crisis is to raise the amount of the region’s total bailout fund by several hundred billion dollars. Much of this money would have to come from France, Germany and the IMF. A large part of the German population has already voiced objections to its contributions to a bailout, which makes more aid unlikely.
It is probably natural in a great crisis that dozens of proposed solutions are offered. Many are rejected quickly. Others last for days or weeks or until they are ruined by credit rating comments. It also only takes one negative “vote” from Germany, the EU’s de facto bank, to end discussion on a plan to address the region’s deep troubles systematically.
Out of the present solutions there may not be a single one that works. That means the process to address the region’s financial debacle is likely to drag on until a catastrophe forces the hands of those who have the capital to stanch the bleeding.
Douglas A. McIntyre
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