Charles Wyplosz was one of many economists who thought the May 2010 deal for Greece was the start of the slippery slope. Here is his latest take on the crisis.
Year: 2012
In early 2009, the Irish domestic banks had three critical problems: insolvency, distress, and a liquidity crisis. Only one of these problems, the liquidity crisis, was solved successfully at an acceptable cost, via ECB liquidity provision. This massive liquidity provision was one key motivation for the Financial Measures Programme (FMP), which lays out a plan the banks must follow to become liquidity self-financing. Now, through no fault of the Irish banks but because of the continuing financial crisis, the liquidity target plan in the FMP is looking much too optimistic and needs some adjustment.
- 1. The loan-to-deposits target date should be changed from 2013 to (end-of) 2015.
- 2. The ECB should make clear that their liquidity assistance to Irish banks is for a longer period than originally envisioned.
Without these adjustments, the Irish domestic banks will be incentivised to continue to starve the domestic economy of credit over the next few years.
Bergljot Barkbu, Jesmin Rahman and Rodrigo Valdés provide some policy recommendations in this new IMF SDN here.
Wolfgang Munchau writes in the FT that Chancellor Merkel has rejected any proposal that might actually resolve the eurozone crisis. He notes the incentives for Spain, Greece and Italy to default and exit.