Brace, brace. Dark times ahead as Greece heads for the exit
European policymakers are about to commit another major blunder in their handling of the eurozone debt crisis, and this time it could well be fatal.
By Jeremy Warner
14 May 2012
Mistakenly, they have convinced themselves that it won’t much matter if Greece leaves, and indeed that it might even help resolve the wider crisis to get rid of this persistent thorn in the flesh.
Bring it on, they mutter callously; it will be a lot worse for them than for us. On one level, this is just bravado. It’s an attempt to put as nonchalant a face as possible on the now apparently inevitable. But they also seem to believe in their validity of their own analysis – that they have indeed used the past two years well, and are now fully prepared for a Greek exit.
Believe it if you will. The ineptitude to date of the eurozone’s crisis response strongly suggests a different conclusion – both that the likely contagion from an exit has been hugely underestimated, and that by prompting a wider breakup, thereby tipping Europe into depression, it may end up as bad for everyone else as it is for Greece.
The Greek problem has been consistently misdiagnosed and mismanaged right from the start. First there was the suggestion a year ago from Angela Merkel and Nicolas Sarkozy that if Greece didn’t buckle under and agree austerity it might be chucked out. Markets reacted logically by selling bonds in any country that looked vulnerable, thereby making it much harder for all periphery governments to fund themselves.
This disastrous admission was compounded by attempts to underpin confidence in the financial system by forcing banks to mark their sovereign debt to market. This destroyed the concept of the “risk free asset”, forcing banks for the first time to apply capital to their sovereign debt exposures. Unsurprisingly, they stopped buying sovereign bonds in the distressed countries, again making it harder for governments to fund themselves.