Financial Times
June 19, 2011
As the EMU bloc stagggers towards a messy deal on Greek debt this week, it is worth thinking afresh whether the present strategy of “kicking the can down the road” still has anything to commend it. Increasingly, the chosen route of procrastination and obfuscation looks like the worst of all possible worlds. Instead of buying time, which was the original intention, the strategy is maximising the risk of a disorderly blow-up which would do much greater damage than the intrinsic scale of the original problem should merit.
The hallmark of Europe’s response to the debt crisis has been a refusal to admit openly to the loss of solvency which has occurred. Every intervention so far has pretended that the crisis is one of liquidity, which can be solved by making loans to the troubled banks and governments in question.
This has had certain short term advantages. Since, in theory, there has been no permanent transfer of fiscal resources from the core to the periphery, the strategy has been just about acceptable to the electorates of the creditor nations. And since there has been no open admission of default or debt restructuring by any of the troubled nations, the banking sector has not been forced to write down debt and raise more capital.
If this gamble worked, it might delay a final resolution of the problem to a time when it could be more easily absorbed in the European banking sector. Delaying tactics of this sort have worked before, in periods after severe financial shocks.
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