Athanasios Orphanides

Government debt markets are about trust. Before the crisis, all eurozone governments enjoyed the benefit of their collective trustworthiness, co-operation and solidarity in the form of favourable financing conditions that contributed to the wellbeing of Europe.

Investor trust in the eurozone has been badly shaken in the past two years. The image of co-operation and solidarity has been shattered. As 2011 came to a close, questions about the survival of the euro that would have been considered taboo earlier began to surface. Following Greece, a number of member states faced difficulties refinancing their debts or lost access to markets altogether, despite the implementation of unprecedented fiscal programmes.

 

Ralph Atkins

UPDATE: Angela Merkel, German chancellor, in Paris has just announced a u-turn: under the new ESM, private sector investors will not be required to bear some losses. The ECB will be pleased. See ft.com for more.

European Central Bank policymakers have become more outspoken in attacking “private sector involvement” in Greece’s bail-out. The plan to persuade banks to take a “haircut” on their Greek bonds was “a terrible mistake,” according to Athanasios Orphanides, Cyprus’s central bank governor and ECB governing council member.

“By forcing the impairment of any state bond we have triggered concern internationally of all state bonds in the eurozone and that’s one of the key reasons we have a problem,” he told his country’s parliament.

I have noted before the ECB’s strong opposition to PSI generally and in Greece’s case specifically. The view from Frankfurt is that it simply undermines investor confidence in the whole eurozone. In other words, if Greece’s difficulties had been better managed earlier, Italy and Spain would not have been caught up in the contagion and the eurozone would not now be facing an existential crisis.

It is the polar opposite view of many economists outside the eurozone -