The bureaucrats in the EU are losing their already tenuous grip on the situation. Despite assurances that senior bondholders will not take 'haircuts' on their investments (not on lending before 2013 anyway) markets are imposing their own form of ruthless discipline.
For years the concept of risk was ignored. For years countries like Greece, Ireland and Portugal could borrow on terms almost identical to Germany, despite massive differences in economic structures. Now, at a time when EU officials are desperately trying to convince markets that risk still doesn't matter – that you can still have reward without risk – the markets are not buying it. This puts mounting pressure on the European Central Bank (ECB) to 'do something'. It meets on Thursday to discuss monetary policy. Bond investors will be sweating on the bank to open the liquidity floodgates and buy up peripheral European debt big time. Whether it will do this is questionable. But even if it does, such action would only push the problem a few months down the track. We're dealing with a problem of solvency here, not a liquidity problem. Such problems cannot be dealt with by temporarily monetizing debt.
