27 JUN 2011
Mervyn King delivered some harsh truths on Friday. The Bank of England governor warned that stop-gap measures to extend yet more loans to Greece wouldn’t solve the eurozone debt crisis.
By Liam Halligan | The Telegraph
“Right through this episode, from the very start,” said King, “an awful lot of people wanted to believe it was a crisis of liquidity. It wasn’t and it isn’t. It was a crisis based on solvency, not liquidity. And until we accept that, we will never solve it”.
The European Central Bank, the International Monetary Fund and eurozone governments are in talks to extend yet more money to Greece, in a bid to prevent holders of Greek sovereign bonds enduring losses. The fear is that such a default could spark a “euroquake” – another Lehman moment, this time emanating from Europe.
Greek debt is over 150pc of GDP, its annual deficit is massive and the market has imposed interest rates on Greek borrowing exceeding 25pc. Whatever the eurozone finance ministers tell themselves – odds-on future IMF supremo Christine Lagarde among them – Greek default is inevitable. The only issue is how.
“Providing liquidity, can only be used to buy time,” as King correctly observed last week. “Simply the belief, 'oh we can just lend a bit more’, will never be an answer to a problem which is essentially about solvency.”
Will default happen in a reasonably orderly fashion – with “haircuts” being imposed on creditors, as payments are cut and spread over a longer period? Or will the market force its own chaotic resolution by pulling the rug out from under Greece, possibly causing a fiscal crash in other countries too – including Spain, which has bigger debts that Greece, Portugal and Ireland combined?
Read entire article