While a growing number of analysts recognise the likelihood of sovereign-debt defaults across Europe’s periphery in the next few years, the continent’s political and financial elites continue to see restructuring as the third rail of financial options. Despite all signs that the euro may be set on an implosion course, the EU and the European Central Bank (ECB) are in a state of denial.
As we have recently argued – and, in response to our readers, here – the most likely scenario is that Greece and Ireland default on their debts over the next few years, with Portugal soon following, dragging Spain into the circle of the damned. But instead of facing this likely state of affairs, Europe’s top leaders remain obdurate in placing the burden of the crisis entirely on the shoulders of the highly indebted countries’ taxpayers. Every time a eurozone default is mentioned, European political leaders – and the bankers whose money is at risk – come out in force against a serious discussion of the topic, in a short-sighted attempt to keep the sinking bailout ship afloat.
This wall of silence creates a false polarisation between a solution that burdens solely debtors and another that punishes only creditors. It pretends there is no middle ground and, by doing so, prevents a serious discussion on how to design and implement a restructuring plan. But by refusing to explore this middle ground and develop softer options in case bailout packages fail, Europe’s statesmen are increasing the likelihood of a hard, unstructured and unmanaged default by Europe’s peripheral countries, with severe effects for European and global markets, including the possible breakup of the euro.
Even then, it will still be “squeaky bum time in government buildings all over Europe.”
And, to be fair, the President of the Euro Group of finance ministers, Luxembourg’s Prime Minister, Jean-Claude Juncker, has said that “soft restructuring” of Greece’s debts was a possibility. A BBC report notes the response
The European Central Bank’s chief economist Juergen Stark said restructuring the debt would be a “recipe for catastrophe”.
He blamed “vested interests” in the UK and the US for fuelling pressure on Greek financial markets.
Lorenzo Bini Smaghi, a member of the board of the ECB, also rejected the soft restructuring idea, saying it would bring the Greek economy “to its knees” and be bad for the whole eurozone.
Although, via the Wall Street Journal’s Brussels blog [9 May], an EUobserver report suggests Jean-Claude Juncker might not be a reliable witness… [Are any of them? - Ed] You might very well think that…
The audio’s a bit ropey, but here’s the video.
EUOBSERVER / BRUSSELS (20 April) – Eurogroup chief and Prime Minister of Luxembourg Jean-Claude Juncker telling how he “had to lie” in his career in order not to feed market speculations. He was speaking at a conference on economic governance organised by the European Movement.