Nearly two years after Europe’s sovereign debt crisis erupted, market and political uncertainty are worse than ever. Fear about states’ ability to service their debts is now set on a self-reinforcing course which, absent a radical shift in market psychology, could hit the very core of the eurozone. What is needed is nothing short of moving voters and markets from a mood of self-fulfilling pessimism to one of confidence in the future. So far leaders have failed at this task.
It is better to take time to agree a policy that will work than to rush through an ill-considered response. Leaders should bear in mind at Wednesday’s scheduled summit that Europe cannot afford another half-baked solution dressed up as the real thing.
So far the signs are mixed at best. Most promising is evidence that politicians accept that the rescue plan for Athens must capture more of the market discount priced into Greek sovereign bonds. A supposed 21 per cent net present value haircut accepted by private banks was never sufficient – and did not even amount to a loss compared to the bonds’ market value. The 60 per cent cut now being mooted comes closer to realising current market discounts.