EU runs out of road

Last Updated on Tuesday, 30 November 1999 00:00 Monday, 18 July 2011 20:52

By: fanatic

The EU has realised its fudge and delay manner of dealing with the sovereign debt crisis is no longer feasible. After two years of drip drip information and assurances that no-one believed (bar maybe the EU leaders themselves) the crisis could come to a head over the next six months. Spanish and Italian bond rates continue to rise and if those two countries get into serious trouble, their rescue is beyond the means of the EU as it currently stands.

Yields on Italian bonds are near 6 per cent - around the level when Ireland and Greece succumbed to their 'bailouts.' Italy owes €1.9 trillion. The EU rescue fund is a mooted €500 billion. Throw in Spain and the whole framework for tiding countries over quickly becomes swamped.

With that scale of debts, the conversation is quickly moving from one of 'pay all debts' to one of debt write-off. The ECB has been trenchantly against any form of debt write-off and has been one of the main supporters of taxpayers paying off the debts of private banking institutions. It has consistently argued such an approach was necessary to prevent contagion - it even threatened to refuse to accept Greece's bonds in exchange for emergency funding if it engaged in debt write down.

But with the ECB's policy lying in ruins - its policy to prevent contagion has done the opposite and now threatens the future of the EU itself- taxpayers may just about be lucky enough to see being done what should have been done from the very start. For Ireland, that means senior bondholders in banks could be told take a hike. For Greece, sovereign debt write-off is required along with a massive state program of disposals and audit checks on citizens. For Italy and Spain, if they tumble, banks will be told take a hike, leaving the state to purchase their carcass (minus bad debts) on the cheap. Investors are bracing to assume the position.

Capitalism. It's amazing what it can do if its left to function without the meddling of Eurocrats.