Financial Times
May 23, 2011
Mutually assured destruction is a bad basis for diplomacy as the world found out in every cold war standoff. Sadly, a financial rerun is being staged by Greece and the European Central Bank.
Greece has already tried its MAD argument on Europe, pointing out last year that the eurozone had to keep providing support to avoid contagion from its default. The idea is growing in Europe that a way out of this impasse is a limited default via voluntary extension of bond maturities. Presumably Europe’s banks would be leant on to take part.
This could help Greece deal with €54bn of maturities over the next two years without the nuclear option of a full default. The banks could continue the accounting fiction that the bonds in their hold-to-maturity book have not fallen in value.
The ECB is having none of it. Such a move, officials insist, would make Greek debt ineligible as collateral for loans. Quite why, given rules were waived to keep accepting Greek and Irish bonds, is hard to understand. But the impact is clear: the Greek banking system would collapse, Greece would default and its exit from the euro would be plausible.
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