July 18, 2011
European markets opened the week badly. Equities were down again; some indexes are approaching official bear-market territory. Yields on peripheral debt continue to rise; for a brief spell, the yields on both Spanish and Italian 10-year debt topped 6%, bringing both worrisomely close to the threshold of an insolvency death spiral. Against this backdrop, European leaders are preparing to meet this Thursday for an emergency summit. But the Financial Times reports:
Ms Merkel has warned that she will only attend an emergency summit on the eurozone financial crisis in Brussels on Thursday if there is going to be an agreement on a new rescue plan for Greece.
Guarantee her the results, or she won't come. Meanwhile, the European Central Bank is reiterating its position that it will not accept Greek debt that is considered to be in default as collateral for loans. The threat leaves euro-zone governments in a tricky position. If they do not push to restructure Greek debt, then taxpayers will face higher costs to bail out the Greek government. If they do restructure Greek debt and the ECB makes good on its threat, then a run on the Greek banking system is likely unless euro-zone taxpayers provide direct financial support to the banks. The ECB's position creates a situation where no matter what the outcome on debt default a political solution committing the euro zone to fiscal transfers will be necessary. Whether the ECB is seeking that by design or merely passing the euro is a different question.
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