I caught a great interview with David Wessel of the Wall Street Journal and I think it’s worth paraphrasing. You might think that the Eurozone debt crisis has been prolonged because we are trying to figure out a financial solution and we don’t know what the options are that are going to work. In truth, a sovereign debt meltdown is only fixable with three short term solutions and everyone already knows what they are. The question is not HOW do we fix it, but rather who is going to pick up the tab? Is it the creditors, the borrowers, or the tax payers?
The reason for the protracted series of meetings after meetings is that the politics is getting in the way. And while it’s certainly reasonable for each group to defend their position, the longer they delay the inevitable, the worse the overall damage will be. The Greece situation has been in the spotlight for two years now. Had they contained it from the get go, it’s very unlikely we would be talking about Italy right now. And while Italy is magnitudes larger than Greece and therefore seems so much scarier a situation, keep in mind that Greece is not solvent and Italy actually runs a primary surplus budget (which means that before interest payments on their bonds they spend less than their tax revenues). So it’s much bigger, but much different than the Greece situation. (Greece is not solvent and even if you wiped out their debt, they would still run a deficit with a contracting economy that would eventually lead them to the same place.)
So the cause of the hold up for the last two years, and likely the foreseeable future, is everyone trying to figure out who is going to be most stuck getting the shaft. (Hint: it looks like it will be the taxpayers, and mostly German ones.)
Anyone want an over/under on the Eurozone if that happens? :)
The big issue is funding the EFSF so they can bail out Greece/Italy etc. There’s pretty much 3 roads they can travel. 1) Use leverage and create a Lehman situation except countries would go bankrupt instead of companies. 2) Sell bonds to the New Bankers (China, Russia, Brazil, Middle East) who will demand ridiculous concessions in terms of trade and politics (i.e. looking the other way) and 3) Get the ECB to print money like the Fed. I suspect we’ll see a little bit of 2) and a lot of 3) which implies that we’re heading for some crazy inflation at some point. Short and medium term the austerity policies that will emerge at some level from Europe and US (oh yes , forgot about them didn’t you?) which will hold GDP growth and if the West is trudging along, it has to impact China and other Emerging Mkts and we’re seeing the cracks form on the streets of Beijing and Shenzen. Put it together it’s a stagflation world. Tepid growth with rising inflation and stealth inflation. Mix, invest, and serve accordingly.
Cheers