Mexican standoff, multiplayer version

12/12/2011 Comments Off on Mexican standoff, multiplayer version

I’m not heartened by the eurozone news. It’ll be great if I’m wrong, but if I had time to sort out a brokerage account I’d be shorting this deal.

It looks like the eurozone leaders’ plan to quiet the market turmoil has been two-fold:

  1. make more rules, and
  2. ask people with deep pockets to set step up.

From what I’ve seen, the rules weren’t the problem. Wikipedia quotes the NY Times saying the Germany and France were breaking the rules in the early 2000s, and they aren’t the countries in trouble. Krugman, here and elsewhere, has pointed out that Spain was running a budget surplus before the crisis. And anyway, rules are made to be broken, uh, renegotiated. So who’s to say they will stick long enough for bond-holders to get paid?

So the ECB now has more money in its ‘warchest’. However, it won’t do anything useful like buying more government bonds to support their prices. This means that the ECB and the peripheral countries are waiting for each other to solve the crisis.

Some have pointed to China. China’s euro reserves are around the same size as the European Stability Mechanism, which is supposed to shore up the euro. China could, theoretically, serve as an additional backstop. Except they have said that they won’t. But China can’t be too precious about this. With those reserves, they have as much stake in seeing the currency saved as France and Germany, and arguably more than Greece. But, like the other creditors, they are holding out to get paid in full. They probably also figure that the core countries have even more to lose, so they will eventuate resolve the crisis.

Shall we play a game?


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