Economist
October 3, 2011
So here we go again. It is Monday morning, the news from Greece is bad again (the country is going to miss its 2011 deficit target), there are more worries about European banks and equity markets are falling sharply (the Dax is currently more than 3% down).
The echoes of 2008 seem to be getting louder. We have a debate over whether to mount a financial rescue with a dispute between those who worry about moral hazard and those who fear the consequences of a bankruptcy. Greece has just been substituted for Lehman in this equation. One solution is for a massive transfer of funds from northern Europe to the south but politicians in the former region fear this will be about as popular as the bank bailout proved with US voters. So they are pursuing other technocratic options to prop up the system. One is to use the democratically unaccountable vehicle of the central bank; to have the ECB buy unlimited amounts of government bonds (just as the Fed pursued two rounds of QE). The second is to gear up the European Financial Stability Facility and have it buy the bonds; there is a nice piece by Wolfgang Munchau in the FT today comparing this with the subprime CDOs of ill-repute.
These approaches are, of course, another way of transferring debt up the chain, since northern European governments stand behind both the ECB and the EFSF. This is still "the bailout that dare not speak its name". And it is the end of a long process under which debtors (originally US homeowners) failed to repay their debts threatening the solvency of banks, which had to be rescued by governments, some of which had their own solvency threatened, necessitating their rescue by bigger governments.
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