The Eurozone’s Fork in the Road

BUENOS AIRES – Many observers have recently declared that the eurozone debt crisis is practically resolved, or at least on hold for a few years. The falling yields at the Italian government’s last bond auctions in 2011 suggested a significant reduction in the perceived sovereign-default risk. Since Italian bonds are regarded as the bellwether of the crisis, many interpret this is a sign that the European debt market is normalizing.

The “solution” to the crisis was putatively facilitated by the European Central Bank’s decision to lend unlimited funds to commercial banks for three-year terms at very low rates. But a central bank would normally do even more to fulfill its role as lender of last resort. So why all the renewed optimism?