Euro leaders only have themselves to blame as indecision exacerbates crisis
EURO-area finance ministers last night as good as admitted that their efforts to end the debt crisis have taken a step backwards.
The timing is a disaster, coming as the crisis deepens with Italy being forced to pay a stunning 7.89pc yield yesterday to borrow three-year money. The ministers were to sign off on the details for creating a "big bazooka" bailout scheme that would provide the euro area with €1trillion of firepower to battle the debt crisis.
The plan was to raise a bigger, better bailout facility able to lend money directly to governments, or to banks if needed, and capable of intervening in the secondary debt markets in order to restore financial order.
In other words, a facility big enough and flexible enough to do whatever was needed to restore market confidence in the euro-area. After two years of dithering it would be a game changer -- except it isn't going to happen.
Last night the head of the European bailout facility, Klaus Regling, is understood to have admitted to ministers that the plan won't work.
Market conditions have sharply deteriorated since the plan was announced on October 26 so that raising €1trillion is no longer a viable option.
Politicians will blame the markets but eurozone leaders have only themselves to blame. At every step of the crisis political leaders have been behind the curve -- not because markets are cynical but because investors are terrified.
The latest debacle is the worst case yet because it was the very solutions put forward on October 26 that led directly to the deterioration in investor confidence. Boosting the bailout was only one of three decisions taken in October, but the other two swiftly undermined the plan to beef up the bailout fund. The second part of the October 26 plan was a deal to sign off on a second Greek bailout, including forcing losses of 50pc on banks that loaned money to the Greek government.
The third element was a deal forcing European banks to shore themselves up against the Greek losses by boosting the amount of safe assets they hold. Crucially, risky government bonds could no longer be treated as 100pc safe under the new plan.
Big banks responded to both measures by dumping their government bonds and cutting down on lending.
Credit markets stalled, borrowing costs for Italy and Spain spiked to dangerous new highs. Belgium was damaged, confidence in France plummeted.
Investors are voting with their cash -- pulling investment from the euro-area in a repeat of what happened following the collapse of Lehman Brothers.
The effects are being felt everywhere. In Ireland a plan to sell Irish Life had to be shelved, and an auction of government debt in Germany failed. There is an accelerated risk of recession that needs dramatic action, according to the usually soft spoken Organisation for Economic Cooperation and Development (OECD).
It's the latest in a long-running series of mishaps that now threaten to bring down the euro. If no progress is made today there will be a market sell-off again, piling up pressure for action when euro-area heads of government meet next week.
Until now most observers have believed that if the crunch came then someone -- the Germans or the ECB -- would ultimately arrive to steady the ship by opening their cheque books
That's still the most likely scenario but when you have rescue deals that are making the waves higher and more unpredictable, every day without a solution is a day closer to disaster.