As Crisis Wrangling Drags On, Stakes Rise for Europe

by Stephen Fidler


Wall Street Journal
January 13, 2012

After any financial crisis, the battle begins about how to share out losses from the resulting collapse in asset prices. The euro zone's debt crisis is no different. At its core, the wrangling in ministerial meetings and summits since Greece's debt problems surfaced two years ago has been about how costs should be distributed.

Unfortunately, the disputes among euro-zone governments have undermined investor confidence in the common currency, and increased the losses that have to be shared around. That makes the stakes over who wins and who loses even greater.

In modern financial crises, most of the disputes over losses are played out in the national political arena. In some, there are other actors such as the International Monetary Fund. The euro zone is unique in the complexity of its fights over who foots the bills, with the burdens being allocated among the private and public sectors of 17 nations.

The dysfunction is nowhere more evident than in current talks over where losses will fall as a result of Greece's excessive debts.

On one side of the table sit representatives of the bondholders, led by Charles Dallara of the Institute of International Finance, a Washington-based lobby group. On the other sit officials of the Greek government, and the troika of the International Monetary Fund, European Central Bank and European Commission. These three aren't in agreement about the most desirable outcome, with the ECB insisting that the resulting deal must be voluntary and the IMF highly skeptical that any voluntary deal will cut Greece's debt sufficiently.

More