When Spanish bond yields spiked to euro-zone record highs last week I wasn’t surprised to hear the president of the European Central Bank (ECB), Mario Draghi, offering reassurances to the market.
What did surprise me was the rally that followed.
It didn’t even take the usual announcement of new emergency measures with to-be-determined details. Apparently all the market needed to hear from Mr. Draghi was:
- “The euro is irreversible.”
- “The ECB will do whatever it takes to preserve the euro and, believe me, it will be enough.”
Last I checked the Troika (The ECB, the IMF and the European Commission) had just arrived in Greece this weekend to confirm that its government had implemented the additional $11.5 billion euros in budget cuts that are tied to Greece’s next bailout payment. Despite this mandate, Greece’s finance minister presented a plan to the Greek coalition government’s leaders to cut only $7.5 billion euros, and in advance of his meetings with the Troika, Greek Prime Minster Antonis Samaras said that “some recessionary elements in the bailout must change if we are to meet those goals.”
But Greece is not exactly in a strong negotiating position these days and the pay masters who control the $240 billion euros set aside for the country’s rescue package aren’t budging on their demands. In particular, Germany has been adamant that Greece must comply with its bailout conditions at all costs and there is widespread speculation that Germany is now resigned to a Greek exit from the euro zone.
While it is tempting, not to mention politically expedient, for the euro zone’s leaders to whisper that contagion from a Grexit can be contained, we’ve already seen this play out in similar circumstances. To cite some recent examples: the U.S. sub-prime meltdown was also supposed to be contained and Spain’s bailout was to be limited to its banks (stay tuned on that one).
I think hindsight will ultimately show that Mr. Draghi should have more accurately said, “The euro is irreversible … until it isn’t.”