Europe’s plan for saving Greece seems to revolve around the belief that jawboning alone can save the struggling nation from its debt problem.
WSJ: European Central Bank president Jean-Claude Trichet Sunday stressed that the commitment European governments made this week over crisis-hit Greece was strong enough to him, and declined to say the countries should do more to help Athens tackle its financial woes.
The pledge “is enough for me,” Trichet said on French radio station RTL, when insistently pressed to say if Euro-zone governments shouldn’t have come with a true financial support to Greece.
The thinking of European leaders appears as follows — implicitly guarantee Greek debt without providing a hard guarantee, then hope that Greece’s cost of funds comes down in the market place as bond investors feel safer buying Greek debt. As cost of funds eases, Greece should hopefully then be able to manage its debt, if it also follows through with financial austerity measures. Thus crisis can be averted without having to do anything more than jawbone support.
Problem is, this confidence game only works as long as markets don’t call the bluff.
Because deep down, nobody wants to explicitly guarantee Greek debt, else they would have already done it. That’s because such an action would open up an enormous can of worms European leaders would rather not deal with, or at the very least would rather leave for someone else to confront in the future.
This is especially the case because other weak European nations are at risk of falling into their own financial predicaments. Thus to guarantee Greece is to guarantee Spain, Italy, Portugal, etc.
Thus European leaders are trying to instill as much confidence with their empty words as possible, in order to compensate for the lack of any specific financial support so far.
NYT: “When President Sarkozy, Mrs. Merkel, Silvio Berlusconi in Italy and President Zapatero in Spain, in his capacity as president of the European Union, sign the same document, it’s serious,” Mr. Trichet said in an hourlong interview on France’s LCI Television, referring to the communiqué issued last Thursday in Brussels in which European leaders vowed to stand by Greece.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.