July 19, 2011
As European leaders prepare to convene on Thursday in another emergency summit meeting, a new awareness is growing: Greece is effectively insolvent, contagion is spreading to Italy and Spain, and time is running out to shore up confidence in the euro.
Hopes that pledges of new austerity would turn sentiment toward Greece around have proved illusory, and more officials are acknowledging that Greece has to cut its debt, meaning losses for those who hold Greek bonds. But the way forward is immensely complicated, partly because European leaders cannot agree on how much pain to inflict on private-sector bond holders, especially big European banks.
Meanwhile, the European Central Bank continues to demand a response that will not be considered by ratings agencies to be the first default among countries that use the euro, which the bank fears could reduce confidence in the currency’s stability.
It amounts to a game of political and financial chicken, and the markets are becoming fed up with the uncertainty. Investors are now demanding sharply higher interest rates to buy the debt of Italy and Spain — the third- and fourth-largest economies in the euro zone. By doing so they are sending a clear message that Europe has to decide how to absorb the losses necessary to slash Greece’s debt.
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