Maastricht madhouse fuels EMU-wide contagion from Greece

Image via Wikipedia

By Ambrose Evans-Pritchard

The relief rally fizzled shortly after Greece folded its bad poker hand and invoked aid. Bond risk as measured by Markit's 5-year credit default swaps jumped to fresh records of 280 for Portugal and 177 for Spain. Irish CDS contracts rose 13 points to 185.

This was an entirely logical response to the twisted events that are unfolding. The rescue obliges countries in trouble to go deeper into trouble. Portugal must come up with €774m as its share of the EU's initial €30bn package. Ireland must find €491m, Spain €3.7bn.

Yields on 10-year Portuguese bonds hit 4.94pc, a whisker shy of the 5pc rate that Lisbon must relend to Greece. Meanwhile,
safe-haven Germany can borrow at just over 3pc. The bail-out cost falls hardest on those that can least afford it. It deepens the North-South divide that lies at the root of Europe's crisis.

In a rational world, Brussels would tap the EU's AAA rating to issue cheap "Barroso Bunds" to cover rescue costs. But we are not in a such a world. We are in the Maastricht madhouse, a currency union without a treasury, ruled by the "no bail-out" clause of Article 125 of the EU Treaties. Europe is at last paying the price for fudging the true implications of EMU 19 years ago in that Medieval city on the Maas, gambling that it would one day be able to lead Germany by the nose into a debt union.

Chancellor Angela Merkel continues to equivocate, demanding "very strict conditions". Dissent is growing louder in her coalition ranks. Both Free Democrats and Bavarian Social Christians have said it is time to break the taboo and ask whether Greece should "step outside" EMU. Werner Langen, the leader of Christian Democrat MEPs, said the bail-out appears to breach Germany's constitution.

Maastricht madhouse fuels EMU-wide contagion from Greece

Related articles by Zemanta

• Economists Optimistic on Portugal (online.wsj.com)