The permanent crisis-management fund will only make permanent crisis more likely.

Nov 30, 2010
WSJ

European Union finance ministers agreed late Sunday on more than just an €85 billion bailout for Ireland. They also turned the currency union into a de-facto debt union by choosing to turn May’s €750 billion rescue fund into a permanent feature of the euro zone. What’s more, they promised that no sovereign creditor would face a haircut on their debt holdings until 2013, and that’s at the very earliest.

Taxpayers from the more fiscally responsible countries, particularly Germany, will be on the hook for the budget failures of Greece, Ireland and any other country that may still require saving. This violation of the euro zone’s own rules forbidding bailouts is not likely to improve fiscal discipline in those countries traditionally lacking it.

While laying the foundation for future reckless spending, the finance ministers did not solve the immediate problem they like to call “contagion.” The word suggests that Portugal, Spain, Belgium and Italy are innocent victims of some inexplicable financial flu that has put pressure on their bonds. But it was their own economic policies that got them into trouble in the first place.

Not surprisingly, the patients are not responding to treatment. Yield spreads of 10-year Portuguese, Spanish, Belgian and Italian government bonds over benchmark German debt all widened yesterday, hitting euro-era records for Italy and Spain. Even German debt came under pressure yesterday, with Bund yields rising as investors began to worry about the bailout burden on Europe’s paymaster.

Realizing that its funds are not unlimited, Germany wanted Sunday’s agreement to lay out a path for private bondholders to share the burden of future bailouts. But France insisted that private-sector participation in any future sovereign debt restructuring would not be automatic. The EU agreement speaks of a “case by case” evaluation, meaning it will be subject to the political considerations of the moment.

Read more at: http://online.wsj.com/article/SB10001424052748704584804575644440134459422.html?mod=WSJ_Opinion_AboveLEFTTop

No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment