I knew that the Eurozone wouldn’t head into July without providing more drama.
From, Fresh fears over European bank sector (FT):
Fears rose over the health of the European banking system on Tuesday as interbank rates jumped to nine-month highs amid worries that the European Central Bank may be reducing emergency financial support to financial institutions too soon.
From, Greece Spreads Widen, Spanish Liquidity Issues (Calculated Risk):
The 10-year Greece-to-German bond spread has widened to over 800 bps today. This is the highest level since the the EU / ECB policy response when the spread peaked at just under 1000 bps.
And from Eric Posner (Chicago) and Mitu Gulati (Duke), a timely op-ed in the FT:
Greece joined the eurozone in 2001. But why should the market have cared that Greece entered the eurozone when its finances did not improve?
The answer is probably that the market believed that either eurozone countries would discipline Greece’s financial excesses or bail out Greece if they failed. If so, the irony is palpable. Greece (like most other eurozone countries) did not comply with a treaty provision requiring financial discipline but was allowed into the eurozone anyway. Investors must have reasoned that if the treaty provision governing financial discipline could be ignored, then the treaty provision banning bail-outs could be ignored as well. And they were right. But if the treaty could be ignored, then why would entering a treaty make a difference to Greece’s creditworthiness in the first place? . . .
[goes on to discuss ECB policies that enabled wealth transfers disguised as cheap credit and enabled by implicit government guarantees.]
The rest is history. The parallel between the Greek debt crisis and the subprime crisis is striking. Trashy debt is alchemised to gold through manipulations driven by a political agenda. In the case of subprime debt, this took the form of collateralised debt obligations consisting of government-supported mortgage-backed securities. In the case of Greek bonds, it was European Monetary Union. Subprime debt, long believed to be risky, magically becomes almost as safe as Treasury bonds. Greece, which has spent half its existence as an independent nation in default, magically becomes almost as creditworthy as Germany. In both cases, investors expected to be bailed out, and were. In both cases, politically motivated wealth transfers were disguised as cheap credit. In both cases, taxpayers who resisted cash transfers to low-income groups found out later that they had to pay for what they did not want because the alternative was financial Armageddon.