Euro reality check should lead to rally

by John Dizard

Financial Times
January 22, 2012

The euro area leadership has been making significant progress in recent days, moving from collective self-delusion to the much less dangerous state of empty posturing. No, really, this is good news, and should lead shortly to a significant rally in risk assets, including the euro itself.

The balloon of self-delusion, that is, that Europe could make up its own rules and then tell the rest of the world what they were, came up against a needle held by the International Monetary Fund representatives of Europe’s ex-colonies in Latin America and Asia. You would not think that international bureaucrats in Washington would ever be a reality check, but that is how it played out. In the end, the European leadership realised that it simply could not socialise the continent’s sovereign and banking risks by charging them to the rest of the world’s credit card.

There will still be tiresome circular arguments going on inside European governing councils, chancellery walls, inner sanctums, etc, but the time of complete policy paralysis is past. In the case of Greece, for example, there is much more willingness by the eurocracy to learn from the recent history of emerging market crises.

The most important recent advance is the euro area leadership’s private acceptance that the European Central Bank will have to book losses on its holdings of Greek government bonds. Its pretensions to a sort of IMF-like preferred creditor status are being downplayed. This won’t all come out in a televised confession, of course, at least not immediately.

More