Daily Kipper- und Wipperzeit Update
By Arnold Kling
Arguably it’s now a question of who stares down whom. If you do not doubt German resolve, bet on the ECB and lend money to Italy fairly cheaply. If you fear that Italy suffers from its own version of the great stagnation, and doesn’t have good enough political institutions to make decent reforms (and now the hammer of the private capital markets is partially removed), maybe the ECB will cry uncle at some point and give up. Knowing that, confidence will not return and the speculators will continue to pounce. We’ll see soon enough what the markets think.
Read the whole thing. Peter Oborne is even more distressed.
I am in the skeptical camp. My line is that as long as you have bad debt that is priced at par, you have an active crisis. To the extent that the ECB is trying to keep the price of weak-country debt close to par, it is not offering a credible solution. Uncertainty will prevail in the markets.
On the other hand, if it were to set prices that were far below par but which it is willing and able to pay, then it can remove the uncertainty. The resolution to the original Kipper- und Wipperzeit did that, where the new bank would weigh the debased coins issued under the previous regime and set prices based on those weights. The Brady Bonds did that for the Latin American debt crisis. If you ask me, somebody needs to produce a Brady Bond sort of resolution to the European debt crisis. It will be ugly, and some European banks will be insolvent, which in turn will require re-pricing some of their liabilities (presumably not their deposits) and shutting some of them down. But keeping the crisis fires burning will be even uglier.