Does Jean-Claude Trichet want the euro to survive?
The eminent economist Joseph Stiglitz has written a powerful and lucid article on the eurozone crisis.
And he sounds as frustrated as I am by Jean-Claude Trichet and the argument of the head of the European Central Bank that, on no account, must eurozone bondholders be told to write down the value of their investments.
“The European Central Bank should realise that a restructuring – even if it entails a ‘credit event’ as determined by some American rating agencies – means that Greek bonds are safer than they were before. If they were acceptable as collateral before, they should be more acceptable after. Put bluntly, to not accept Greek bonds is to end Greece’s membership in the euro, with all the consequences thereto. The ECB must recognise too that for citizens of many countries, a deal without shared sacrifice of the private sector – meaning debt reduction – is politically unacceptable.”
He makes a crucial point. Greece cannot possibly hope to pay its debts if they spiral to 170 per cent of GDP. So a restructuring would be in the real interests of bond holders: they would take a hit now in order to avoid a bigger hit (in the form of a total default) later on.
So why is Trichet resisting this? If one was being kind, one would say that he’s concerned about financial contagion as bond holders across the board start to panic about credit risk. If one was being unkind, one would say it’s because he’s locked into the austerity-will-work/protect-creditors-at-all-costs mindset. Either way, he needs to wake up and recognise what everyone else recognises: Greece needs some debt forgiveness. The panic can be contained if policymakers are decisive enough.
Stiglitz makes an even more powerful point. He says that if Trichet refuses to accept restructured Greek bonds as collateral for ECB lending he will effectively force Greece out of the single currency.
Is that really how Trichet wants to end his leadership of the ECB?Tagged in: European Central Bank, greece, Jean-Claude Trichet, joseph stiglitz
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