- There are no absolutely safe sovereigns — ‘rates analysis’ has to be done
simultaneously with ‘credit analysis’ for all sovereigns, including the G3. - There are likely to be several sovereign debt restructurings in the euro area
(EA) in the next few years. Liquidity support should not stop this; only
permanent bail-outs would. - The sovereign debt crises of the euro area periphery interact with banking
sector weaknesses throughout the EU. Both need to be addressed for a lasting
solution. - Ireland’s financial support package will buy time, but does not address the
fundamental insolvency issues of the consolidated sovereign and banking
system. The Irish case also highlights the need for an EU-wide bank special
resolution regime (SRR). - Portugal is likely to access the EFSF soon.
- The current size of the liquidity facilities looks insufficient to prevent speculative
attacks or even to fund Spain completely for three years. - EA break-up remains extremely unlikely and would be an economic disaster.
EA exit looks irrational for fiscally weak euro area members, such as Greece. - A viable and dynamic EA requires i) a much larger liquidity support facility, ii)
restructuring of the unsecured debt of EU zombie banks and recapitalisation of
the systemically important ones among them, iii) restructuring of the debt of
insolvent EA sovereigns.
These are the conclusions that Citigroup’s Chief Economist Willem Buiter and his team have drawn regarding the ongoing sovereign debt crisis. Their full analysis is well worth reading and is embedded below.