Following the influential work of Paul De Grauwe and Yuemei Ji, the idea that bond yield crises in the eurozone reflect liquidity (i.e. multiple equilibia) rather solvency has taken hold. (See, for example, Paul Krugman linking to a post by Joe Weisenthal.) The main evidence is the synchronised fall in yields when the ECB strengthened the LOLR regime with the annoucement of Outright Monetary Transactions (OMT), and also (indirectly) with the LTRO programme. This leads to the view that the tough fiscal adjustment programmes are not required for countries to regain creditworthiness. Here is Joe Weisenthal’s conclusion:
So we can trace the two peaks of Eurozone debt stress directly to two times the ECB intervened. Austerity has had nothing to do with the improvement in borrowing costs.
But is this account too simple? In one sense I would possibly go even further than De Grauwe and Li: in the context of monetary union, vulnerable countries will not be able to avoid the bad equilibrium without a credible LOLR. However, I also think it is important to recognise that what is fitfully emerging is a conditional LOLR. Countries will only get support if they are undergoing required adjustments (OMT description here). The announcement of OMT would then not help a country if investors believed it would not take the actions that would make it eligible. The LOLR and the adjustments are then both necessary to prevent or reverse the slide to a bad equilibrium.
Of course, it could still be argued that the explicit or implicit conditionality is inappropriately demanding (e.g., focusing too much on reductions in the actual deficit as opposed to the structural deficit). But given the regime as it is, the existence of OMT does not obviate the need for fiscal adjustments to steer clear of the bad equilibrium trap.