There is a tendency in looking at the eurozone to focus on the crisis du jour, instead of taking the longer-term view. So let’s step back and take a very long term view of the zone, say twelve months.
What will be happening over those months and what decisions will the actors have to make?
I have spent my career in credit, and the most difficult discussion with bond issuers is always the twelve-month “stress scenario”: Assuming you lose access to the unsecured credit markets today, how will you stay alive for the next year? This requires a spreadsheet depicting all expected outflows and all inflows that do not include borrowing money. No one enjoys this exercise.
So let’s look at the peripheral countries’ cashflow over the next year. Outflows consist of (1) budget deficits; (2) maturing long and short term debt; and (3) deposit outflows (bank runs). Budget deficits are generally getting bigger despite austerity, because government revenues are declining. Deposit outflows can be financed by the ECB, so long as all of the banks are adequately capitalized. If they aren’t, the EU can provide the funds for recapitalization via the EFSF/ESM, as it is now doing with Spain and Greece.