The euro crisis
Damned with faint plans
Euro-zone government bonds have not been made safe—and the euro project remains in peril.
THERE were hopes, however faint, that Europe’s leaders might, in the space of a few days, manage to persuade investors that euro-area government bonds were safe assets, not toxic waste, thus putting paid to fears [注1] that the currency zone would disintegrate. The verdict, a week after meetings of the European Central Bank (ECB) and European Union leaders on December 7th-9th, is that they failed.
The new measures that emerged from these meetings fell short of what is required to save the euro, though they may be enough to support the zone’s stricken banks and sovereigns for a while. The bond markets’ initial response is not encouraging. Yields on the ten-year bonds of Italy and Spain, the big euro-zone countries that investors are most wary of, have risen again after falling in the run-up to the summit (see chart).
The euro has also dropped to its lowest level (below $1.30) against the dollar since January. The likeliest trigger for the next stage in a deepening crisis is a blanket downgrade of euro-zone government bonds, which would strip France and even Germany of their prized AAA credit rating.
The gatherings in Frankfurt and Brussels did not deliver the “comprehensive” solution to the euro’s ills that was billed, but optimists point to some modest progress. The ECB lowered its benchmark interest rate from 1.25% to 1%, the second quarter-point cut in as many months, to try to mitigate the coming recession. It agreed to provide unlimited cash to commercial banks for up to three years, at its main interest rate, to replace the medium-term funding that private investors are unwilling to extend. The central bank will now accept higher-risk asset-backed bonds as well as loans as security for cash, and it has lowered its reserve requirements for banks to ease their funding pressures.