Thursday 18 January 2018

Euro debt crisis faces reality check

With markets viewing Greek default as now inevitable, the ECB itself could go bust, writes Colm McCarthy

ALMOST three years of prevarication and sticking-plaster solutions to the European banking crisis look to have a date with reality over the next few weeks.

The Greeks cannot, or will not, pay back the enormous sovereign debt which has been contracted. This is the verdict of the markets, in which Greek sovereign debt trades at a huge discount and is now virtually uninsurable against default. Whether the Greeks cannot, or will not, meet the debt is irrelevant. The markets reckon the debts are not going to get repaid on schedule one way or the other, and have been unwilling to lend to Greece for over a year.

The deal in May 2010, a €110bn loan package from the EU and IMF, was too little given the scale of the Greek problems, and was criticised as inadequate at the time. In the year since, the Greek fiscal position has been revealed to be even worse than thought, and the Greek government has been dragging its heels on fiscal reform. But even if Greece had complied fully with the May 2010 deal, it would probably be coming apart around now because it did not address the core issue of solvency. Lending more to an insolvent entity, which commercial lenders will not touch, is an evasion rather than a solution. Greece needed debt relief in May 2010, not just liquidity. It also needed reform, and there appears to have been a serious failure of Greek political leadership.

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