I Swear: Cyprus Was The Last European Crisis
It appears that the donor peoples of the eurozone have shifted from the stance of “we will do whatever it takes to keep the ship afloat” to the stance of “creditors of bad credits should expect to incur losses”. The donor peoples lack the intellectual coherence to fully understand what they have just decided, but clearly they are much more comfortable with their new stance. It feels better. It seems more just. It is consistent with the Protestant Work Ethic, as opposed to Mediterranean Immorality.
The Year Ahead 2018
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That’s fine; we can all live with that. But it does contradict the previous assertion that “we will do whatever it takes to keep the ship afloat”. It means that the North no longer underwrites the creditors of the South. The Troika, the EFSF/ESM, the ECB, the OMT--those are all now inoperative, obsolete, no longer available. Instead, make your own decisions, and live with the consequences; we’re out of here.
Remember all those bromides from Jean-Claude Juncker, Ollie Rehn, Manuel Barroso, Herman Van Rompuy, Mario Draghi, Jean-Claude Trichet---am I forgetting anyone? Remember all those words about what was “unthinkable” and “not under discussion”? Well, forget it. No longer applies. All that is now not only thinkable, but policy. Keep up with the times!
Yes, bond spreads are quiescent, and there have been no runs on southern banks. That certainly proves that the new policy is a success--markets are now more mature and able to engage in fine distinctions between good banks and bad banks, and between good countries and bad countries. Cyprus was a bad country--but the only one! All the others are good--until they turn bad. The markets will have no trouble keeping up with this economic dynamism.
So here is my prediction: none of the PIIGSSC* will have any more fiscal or banking problems; that’s all in the past. The recaps are done; they refinancings have been put to bed; the markets are wide open for their debt and that of their banks and corporates. Smooth sailing ahead.
And, if I’m wrong and there is another “crisis”, it won’t really be a crisis at all, because the creditors will absorb the entire loss, even if the credit is Italy or Spain.
*The PIIGSSC: Portugal, Ireland, Italy, Greece, Spain, Slovenia, Cyprus.