Tuesday, December 6, 2011
The word has come down from on high in Europe. Merkozy have decided:
1. Henceforth, after Greece, there will be no more haircuts administered to creditors of sovereign debt. All obligations will be paid in full, no matter what interest rate has to be paid or how onerous the debt service program has become.
2. Every country will be subjected to hard limits on its budget deficit and must even show progress toward reducing debt-to-GDP to 60% if it is now above that target.
There are problems with each of these taken alone, but has anyone noticed that, under predictable circumstances, they contradict each other? You can explain this as a quid pro quo for the two main players in the Eurozone, but sometimes political agreements also have to make sense.