28 april 2010, greek tragedy

Since 13 february, things have moved on, but not all that much. Sovereign debt is the new bank crisis, with the risk being they fall like dominos. This is not the last run we will see; britons especially should beware. For now though, the market's herding instincts are rounding on greece, where they should be, and portugal and spain, tenuously linked through the euro, where they shouldn't. For the latter countries, the onus is on them to introduce tight measures of the sort ireland did in good time. For greece, it is much too late. The euro has slipped, but the currency markets have not reacted much, and greece's plight would be infinitely worse without that protection. It would by now have seen not an advantageous devaluation but a catastrophic crash. Not least because although now "junk" (or "high yield" as it is euphemistically termed) greek bonds are still being accepted as collateral by the ecb. Surely though even the biggest haircut (i.e. providing less than apparent value to take account of risk) cannot much longer disguise this as a significant subsidy affecting the credibility of the ecb's whole collateral framework. It is still in the balance whether a big-enough package can stave off a full-scale debt restructuring that would particularly hit euro area banks investors. This is caveat emptor v pass now, pay later. In truth, it surely must be pay now, whatever the cost - although the euro area would have been wiser to lay more off earlier on the imf - better to have greek riots aimed at washington than brussels.