Euro crisis: of morality and bankers

[marmar]

Euro crisis: of morality and bankers
It's a sign of how bad things have got in the euro crisis that a not-entirely terrible bond auction counts as good news

guardian.co.uk, Thursday 19 April 2012 17.28 EDT


It's a sign of how bad things have got in the euro crisis that a not-entirely terrible bond auction counts as good news. So it was , on Thursday when the Spanish government went to the financial markets to raise money for two-year and 10-year loans – and found takers for both. "Relief at demand for Spanish debt" ran one headline, which was a reasonable summary of market reaction. Yet hardly anyone thinks the panic has abated for more than a minute: not at all. For a start, the interest rate Madrid now has to pay on its 10-year loans has jumped, from 5.403% to 5.743%. This isn't quite as steep as the 6% that Spanish IOUs were fetching this week, but the difference is obviously not great. According to Moody's, borrowing costs above 5.7% "significantly raise the chance of default" for Mariano Rajoy's government. If that's right, then Europe's fifth-largest economy – and the rest of the eurozone – is teetering on the brink of disaster.

That's the trouble with this crisis: even the comparatively good news turns out to be deeply worrying. And the anxiety is hardly quelled by the responses from policy-makers. On the upside, this week's IMF meeting has seen nations slowly but surely giving cash to boost the eurozone rescue fund. On the downside, very few serious investors have much confidence that the rescue fund will be especially effective in the event of Madrid needing a bailout. European officials point to Mr Rajoy's resolve to make painful budget cuts; but all the evidence is that the spending squeeze is ruining the outlook for Spain's economy and its unemployed (especially the 50% of under-25s out of work) – without convincing financiers that the country is a decent credit risk.

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The implication is clear: rather than devote efforts to ruining the lives of southern Europeans, a far more effective way to deal with the continent's crisis would be to restructure the banks, then rein them in for good. The alternative is to trust in austerity for the public and generously allow the banks to "deleverage" and shrink their balance sheets at their own pace. This is exactly the policy that has turned a Greek tragedy into an existential threat to the entire euro. ....................(more)

The complete piece is at: http://www.guardian.co.uk/commentisfree/2012/apr/19/euro-crisis-spanish-bond-auction