Thursday, March 31, 2011

No need to panic

It's been a while since I blogged about banks and the financial crisis. I guess I ran out of things to say. However, the crisis is still very much with us, as Ireland's further bank bailout today confirms.

The Eurozone is stuck in a very deep hole. On the one hand, some member countries are being asked to perform feats of deflation which are possible only in undemocratic countries, or in the Baltics (don't ask me why the Baltics have this masochistic tendency). On the other, the ECB is bound by statute and culture to raise interest rates at its next meeting because.... I don't know, I guess some lady saw it in the tea leaves. Or maybe the framers of EMU couldn't imagine a world in which 2.6% inflation is not a catastrophe. Anyway, this will provoke more banking losses and more bailouts.

The way this all unfolds is beautifully outlined by Edward Harrison in a blog post here. And if you enjoyed his account as much as I did, read his take on this at the end of last year. He presents three possible outcomes: sovereign defaults in the pseudo-PIGS, monetization of the debt (presumably also involving ritual suicide of the board of the ECB), or the dissolution of the Eurozone (Argentina all over again, but with awkward questions about how you leave the Euro without everybody moving their money to Germany overnight).

Harrison suggests monetization as the most efficient way of distributing losses. But how do you persuade Angela Merkel to sign up to a solution that will finish her political career with immediate effect?