We are back in the throws of the eurozone crisis. Greece’s debt has been downgraded again, Italy is facing new scrutiny about its growth prospects, and poor results for the ruling Socialist party in Spain’s local elections are adding to market jitters.
The torrent of events sound about the same as they did a year ago. So why are markets suddenly making another fuss? One reason is the European Central Bank, which, in an attempt to preserve its flawless reputation, is bringing down the eurozone’s in the process.
After weeks of debate about whether to “reprofile” Greece’s debt, the ECB has now strongly warned against it, saying it would stop accepting Greek bonds as collateral for ECB loans to Greek banks. The warnings come on the heels of a report out from Der Spiegel about the ECB’s iffy balance sheet, which is at risk because of several hundred billion euros worth of shifty asset-backed securities it accepted from debt-riddled countries like Greece, Portugal, and Spain as collateral for loans.
The ECB was right to oppose a “reprofiling” of Greece’s debt. The proposal to extend the terms of Greece’s loans was an attempt to make investors share the costs of Greek profligacy without prompting a market panic. That may have bought some time, but it wouldn’t change the fact that Greece’s debt is ultimately unsustainable.
But what’s bothering markets most isn’t so much the ECB’s stance; it’s the lack of coordination. The ECB’s bold statement in the midst of disagreements between other European leaders on “reprofiling” only emphasizes how divided Europe still is, and how far that puts them from finding a solution. As the BBC’s Stephanie Flanders writes:
Whether it’s about Greece, ‘soft restructuring’, or the chances of Ireland extracting softer terms for its emergency borrowing, Europe has been producing its usual cacophony of voices in the past few days, none of them saying quite the same thing. As ever, the eurozone could do itself a huge favour by simply learning to speak with one voice.
By staking out its turf in public, the ECB appears desperate to preserve its reputation as an independent central bank. But any gains to its cred on monetary policy will no doubt be overshadowed by growing doubts about the eurozone’s ability to manage the crisis as a whole.