Eurozone crisis: what have we learned?

by Stephanie Flanders

BBC News
May 23, 2011

People will be debating the lessons of the eurozone crisis for years to come. There's been plenty of that kind of analysis on these pages. But today I thought a shorter time horizon might be in order. Specifically, what have we learned about this crisis in the past few days?

First, we've learned that there isn't going to be a 'soft restructuring' of Greek debt any time soon - probably ever. It will be 'hard' or it will not happen at all.

European officials have been toying with this kind of 're-profiling' idea for several weeks (I discussed it first here on 9 May). This has always seemed a long shot. As I said, if there were an easy way to make investors share the burden of bail-outs without triggering a market panic, you'd think they'd have found it before now.

It turns out, surprise surprise, there isn't one. As Fitch confirmed in its latest downgrade of Greek sovereign debt on Friday, any restructuring of Greek debt - even if it didn't affect the principal - would, in their view, trigger a credit event, and a 'default' rating from the likes of Fitch.

And, lest we were in any doubt, it turns our that such an event would also prompt the European Central Bank (ECB) to stop accepting Greek sovereign debt as collateral for ECB loans to Greek banks. Both the new Bundesbank President J Weidmann and the German member on the ECB board, Jurgen Stark, made that clear last week - apparently with the full support of the ECB President Jean-Claude Trichet.

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