Mar 11th 2010 | From The Economist print edition
NOW that Greece has given in to pressure from its peers for a more austere budget, the euro zone’s policy brass suddenly seems more sympathetic towards its most troubled member. On reflection, perhaps the fault with Greece’s parlous public finances lay not just with its budgetary profligacy but also elsewhere: in the absence of a central euro-zone authority for helping out cash-strapped countries; or with the credit-rating agencies that had unhelpfully downgraded Greek government bonds; or with the amoral speculators who had bet against those bonds and helped drive up borrowing costs.
It was mildly surprising that some of the messages of support came from Germany, where fiscal indiscipline is least tolerated. On March 7th the finance minister, Wolfgang Schäuble, floated the idea of a European Monetary Fund (EMF) to act as a lender of last resort to euro-zone countries that could not raise funds in capital markets on tolerable terms. He offered few details about how an EMF would be financed or how it would operate. It would not be a “competitor” to the IMF, based in Washington, DC, though it would seek to police the fiscal policies of lax member countries.
Cynics suggested this was a ploy to talk down Greece’s borrowing costs—a pledge of concrete action made in the knowledge that agreement on such a body could not be brokered quickly, if at all. The idea was swiftly drenched in cold water. The German chancellor, Angela Merkel, said an EMF could not be set up without a change to the EU treaty, a daunting task. Axel Weber, the head of Germany’s central bank, dismissed the idea as a “sideshow”. The French finance minister, Christine Lagarde, said it was not an “absolute priority”.
Progress on such a scheme is always likely to stall because euro-zone countries are reluctant to cede any control of their public finances. That makes agreement on financing a common fund tricky. It also means it is hard to punish countries that run slack fiscal policies. In any case, a safety net big enough to persuade investors that all euro-zone sovereign bonds were safe would leave lax countries with little incentive to control their budgets.
If harmony on a bail-out fund is elusive, ministers have found something on which they can all agree: the dastardly role played in Greece’s recent troubles by “speculators”. They are accused of buying credit-default swaps (CDSs), a form of insurance against default, in order to drive up Greece’s borrowing costs and then to profit from the ensuing panic. France and Germany have echoed calls for a ban on the so-called “naked” trading of sovereign CDSs, where investors do not hold the bonds they have bought insurance on, and asked the European Commission to look into the matter. The possibility that gyrations in Greek bond yields could be explained by uncertainty about its public finances is, oddly, ignored.
The rating-agency issue is more grounded in reality. From next year bonds will again only be eligible as collateral at the European Central Bank if they are rated A- or above by at least one of the three big rating firms. If Greece loses its remaining A rating from Moody’s, its bonds will be less prized by banks, raising its borrowing costs. But as Mr Weber says, the ECB could choose to lend against lower-rated bonds on more punitive terms. This at least is a real problem with a sensible solution.