The eurozone has headed down many blind alleys in its search for a solution to the sovereign debt crisis. The latest cul-de-sac is the effort to include private investors in a second round of financing planned for Greece, while avoiding a credit event. If the bond market volatility of the past few days suggests anything, it is that contriving such a scenario is impossible. Policymakers should accept that, for Greece, it is too late for a voluntary bail-in of private investors.
About €60bn of Greek debt maturing between now and mid-2014 is held by private investors, mainly European banks and insurance companies. A proposal led by French banks to roll this over and offer Greece €30bn of new financing now appears to be doomed. Investors holding Greek debt have no incentive to participate voluntarily in any rollover and risk a haircut of 50 per cent. Any effort to bail them in would merely create delays the eurozone cannot afford.
If policymakers needed reminding that time is running out, the volatility of Italian markets late last week offered a reminder. The yield on Italian 10-year bonds has risen by 65 basis points since the beginning of June and, at 5.27 per cent, is at its highest for nine years and only about 40 basis points lower than the yield on equivalent Spanish bonds. Shares of UniCredit, one of Italy’s most systemically important banks, have fallen 20 per cent since July 1.
