Tuesday, 18 October 2011

The eurozone crisis: what should policymakers do next?

'Bonjour. Mon nom est Nicolas et mon système bancaire doit être recapitalisé.'
These are the words which may be spoken by President Sarkozy in early November when weeks of talks with Chancellor Merkel of Germany conclude. Their anticipation has provided a fillip to the market because admitting you have a problem is the first step towards recovery.

A confession that banks need to recapitalise will only work though, if it is made in conjunction with a second confession; that Greece will not repay its outstanding debts. Markets expect to hear that from the French premier too and indeed recent comments from the Luxembourg’s prime minister and Eurogroup president, Jean-Claude Juncker suggest a realistic haircut – towards the more severe end of the 50-70 per cent target range investors have been speculating about.

That such a crisis has been allowed to develop is a travesty that has already inflicted serious damage upon Europe and its trading partners. In large part this comes down to the failure of both the debtor, Greece, and the creditors, the European banks, to take that crucial first step.
Greece was strong-armed into rehabilitation by accepting loans from the troika and imposing austerity measures. Absurdly, however, none of this will help while its debt to GDP ratio remains anywhere near 150 per cent.

Full article: Money Observer


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