How to Save the Euro

Wall Street Journal
Editorial
July 13, 2011

The recent bear raid on Italian bank stocks and government bonds makes plain that fixing Greek finances won't halt the contagion that Brussels and Frankfurt fear so much. If Europe wants to save the euro, it is going to need to act more boldly.

Nobody outside the European Central Bank believes any longer that Greece can avoid restructuring its debt, and hefty haircuts for bondholders are likely to be part of that if a restructuring is going to do any good. The chief obstacle to getting on with it is the ECB, which continues to insist that it would be forced to blow up the Greek banking system if the government defaults.

This is nonsense. The ECB has already torn up all previous rules it had about what constituted "acceptable" collateral from Greek banks and is doing the same for Portugal, which was downgraded to junk status by Moody's last week. Despite all of ECB President Jean-Claude Trichet's protests last week, the central bank has the power to accept old Greek socks as collateral—and it probably would if it came to that.

Denying Greek banks access to the euro zone's lender-of-last-resort would push Greece out of the single currency overnight, and the ECB lacks the political legitimacy to make such a decision. Sending Greece packing, moreover, would likely prove bad, not good, for Europe's financial stability, as it would simply spark a new round of speculation and betting about who would be next.

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