For about 48 hours after Greece passed its austerity bill there was calm in Europe, but that was blown to bits as soon as Moody’s made the salient point that if the next bailout package for Greece involved haircuts for Greek bondholders, then the bondholders of every other country would likely see haircuts eventually as well.Since then yields have been spiraling higher in places like Portugal and Italy (the latter, of which is terrifying).
And now it sounds like Europe might be getting nervous about the new strategy. At least the ECB’s pointman on sovereign debt issues, executive boardmember Lorenzo Bini-Smaghi, is.
At aan event today, he said (via Bloomberg): “(while) the attempt to involve private creditors in the financing of the Greek adjustment program (is) generally welcomed by some countries’ taxpayers, (it) can under certain circumstances, in particular in the midst of a financial crisis, lead to outcomes which are even more costly for them.”
Translation: It might be cheaper to just protect the bondholders at all cost, rather than let them bear any cost and risk a contagion.
And the truth is, he might be right about that, but still nobody wants to hear it.