Here is a picture worth a thousand words.
Update: further to my post yesterday, here is another piece on the fate of the eurozone by someone who has had a PIGS eye view of the crisis.
Month: June 2011
The FT carries has an op-ed with an interesting proposal for resolving the eurzone crisis. (A shorter version of the article appeared following the Roubini piece that Kevin linked to yesterday.)
The essence of the proposal is a selective Greek default, with preferential treatment given to official creditors. Whatever the merits of such selectivity, the proposal does offer a way for Ireland (and Portugal) to differentiate itself from Greece. This is done through the use of explicit triggers before invoking restructuring under the ESM.
[C]ontagion to Ireland and Portugal can be avoided through the introduction of an ESM clause that allows debt restructuring only when the debt/GDP ratio and debt servicing/GDP ratios exceed 110 per cent and 6 per cent respectively, levels that neither Ireland nor Portugal are expected to breach. The markets recognise that Greece is different.
The proposed debt/GDP ratio looks too low based on current projections. It would probably need to be in the vicinity of 130 per cent to allow for adverse shocks. But an explicit trigger set at reasonable level would give confidence to markets that a country following its programme would not be forced to impose a restructuring as a condition of any future programme. (However, the preference given to official creditors would make a restructuring very costly for non-official creditors in the event that the trigger was breeched.) The threat of restructuring is now making it almost impossible for Ireland to regain market access. The proposal offers a way of both resolving the Greek crisis and avoiding rolling contagion through policy precedent.
Nouriel Roubini’s post is a useful complement to the piece by Wolfgang Münchau that John linked to earlier. In truth, I don’t think anyone really knows what is going to happen to the eurozone, and Wolfgang is admirably frank about the fact that he is just describing one possible scenario. But an increasing number of people are now arguing that eurozone politicians aren’t going to be able to fudge the unfudgeable forever. If that is the case, the Irish people may have some momentous choices to make in the not-too-distant future.
Wolfgang Münchau concludes his two-part series on the end game for the eurozone crisis: see here.
Update — A couple of complementary articles from the Irish Times: John McManus argues perceptively that Europe is already well on the way to a transfer union (see here); Dan O’Brien does not pull his punches in an assessment of Greece’s structural problems (see here).