Friday, March 5, 2010

What Moral Hazard?

"Any deal by European officials to guarantee the debt of Greece and other troubled nations might keep the crisis from worsening, but it raises another big problem: moral hazard. ... One of the strengths of the euro was the idea that when a country joined the European Union it was a one-way trip that came with strict fiscal responsibilities. A loan-backstop program could change that perception. ... If a loan bailout became necessary and was imposed with the kind of harsh measures that would eliminate moral hazard, it could do significant damage to local economies, especially already-fragile banks. ... Given signs that the troubles in Greece and other Mediterranean countries were beginning to infect markets in the relatively healthy core of Europe, the lack of a debt-guarantee program could set the marets tight back on the path to contagion. ... In the short run, a guarantee plan plan is seen by many as a positive for the euro. Amid fears that the problems in Greece would spread, investors had been pulling money out of European financial markets and buying US dollar or yen. ... 'A bailout implies "moral hazard",' analysts at BNP Paribas wrote last week. 'Lack of market-driven discipline due to the [European Monetary Union] umbrella' has certainly been one of the factors contributing to the buildup of imbalances in Greece and elsewhere. Bailing out Greece would give a signal to other countries, limiting the incentives to undergo the needed adjustments as they gain fiscal "impunity".' ... 'It's a Catch-22,' says David Gilmore, economist as Foreign Exchange Analytics. The recent declines in the euro 'are doing wonders for European competitiveness at a time whne they are crawling out of recession.' ... Others, hoiwever, say that hthe currenct circumstance, the benfits of a bailout won't necessarily come with the unwanted baggage", Tom Lauricella at the WSJ, 11 February 2010:

Why not bail out Greece? The US bailed out the Vampire Squid (VS)? Is Greece less impoortant to the EU than VS to the US? Guarantees have cost? Really now?

1 comment:

Anonymous said...

Joe Stiglitz has argued that the EU has to bail out Greece for "political unity".

I guess that is why Paulson and his cronies bailed out the squid... so they could keep extracting rents from all governments.

Politically unified indeed.

Unified by our subservience to the global banking elite.