Inevitable, while delayed, remains inevitable

THE Financial Times' Jennifer Hughes writes:

In an interview with the Financial Times, George Papaconstantinou said Greece needed more time to convince international investors of its commitment to reform its finances.

Separately, Wolfgang Schauble, Germany’s finance minister, told Die Welt newspaper that, if a study already under way showed Greece’s debt levels were unsustainable, “further measures” would have to be taken.

When asked what those could be, he ruled out any involuntary restructuring before 2013, but warned investors could face losses after that point.

The comments were enough to reverse a recent rally in eurozone sovereign debt.

Indeed they were. Both Greece and Portugal saw yields on their debt rise to new crisis highs. Irish and Spanish yields also leapt. Just last week, The Economist argued (again):

[T]he debts of Greece, Ireland and Portugal are unpayable and must be restructured. With all three countries now being “rescued”, the politicians at Europe’s core should start work immediately on an orderly restructuring of their debt. That will require a boldness that Europe’s policymakers have lacked. But it is a prerequisite for drawing a line under the European debt mess.

European delay is understandable but very risky. It wouldn't be quite so disturbing if general scepticism about the state of Greece, Ireland, and Portugal didn't inevitably lead markets to question the status of much larger economies like Spain and Italy. Ideally, the euro zone would craft a restructuring plan that took care to draw a thick line around the three clearly insolvent countries. My worry is that instead Europe will ease into restructuring, trying first to negotiate a limited Greek default, then a more comprehensive Greek restructuring, then on to Ireland, and so on. Again, this is understandable. One doesn't want to restructure any more debt than is absolutely necessary. But if Europe continues to fail to convince markets that it understands the scope of the problem, then its reluctance to act boldly now may create the need for a massive, and perhaps impossibly demanding, intervention later.

http://www.ft.com/