Thursday, July 21, 2011

"Spit Shake and Pinky Swear"

I don't think Megan McArdle is impressed:

Maybe this works for Greece, although I'm kind of skeptical. The internets seem to think that the deal on privately held bonds represents a roughly 20% haircut on Greek debt. This debt swap solves the problem of the upcoming roll overs, which were going to be catastrophic at the double-digit interest rates that Greece would currently have to pay. But even with longer terms and lower interest payments, the budget gap is still going to be pretty huge. l I'm not sure this plan solves the political problem of cutting domestic spending in order to pay foreign creditors . Nor the economic problem of pegging Greek monetary policy to Germany's.

But even if it maybe kind of works for Greece, what about the rest of the Eurozone periphery? For them, this plan amounts to saying "austerity will continue until morale improves".

The spreads on Spanish, Italian, Irish, and Portuguese bonds are not widening because investors think that Greece needs a debt swap, or because the solons of Brussels haven't made enough announcements about the virtues of budget-cutting. They're widening because there are questions about whether these countries--or Europe--have the economic means or the political will to ensure that investors get paid back.

This plan doesn't answer those questions; aside from what seem to be extremely minor changes to the stabilization fund's intervention rules, it just reiterates that austerity is going to be awesome, and that the rest of the PIIGS spit shake and pinky swear, cross their heart and hope to die, that they won't default on their debt. It does not put an adequate backstop behind Spain and Italy, whose bond yields have been steadily rising; it does not even try. Yet this has always been the real threat to the euro zone, not a Greek default.

She has company in Krugman and Cowen