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All at sea, but the euro won’t founder just yet


The euro crisis continues to rage with no clear signs of how it will be resolved

The euro crisis continues to rage with no clear signs of how it will be resolved

The euro crisis continues to rage with no clear signs of how it will be resolved

The crew is still squabbling, with the occasional mutineer making attempts to seize the rudder, but the Great Ship Euro is beginning to turn.

Slowly, of course. Among other difficulties, no one can agree how far ahead is the iceberg. Is there plenty of time to decide on the proper course, or is collision imminent?

The recent rise in bond yields in both Spain and Italy makes disaster look a lot closer.

A predictable, but desperately unintended, effect of the apparent change of direction towards debt reduction in Greece is that lenders have begun to do their calculations on the basis that Spanish or Italian loans will not be repaid as promised, never mind those of Ireland and Portugal.

Once the bets are placed, it will be hard to convince them to change their minds. And they could be placed within days.

The Italian bond auction may need support from the ECB to ensure success. Success now is already defined as any interest rate below 6%. Any rise above 7% — giving a real, post-inflation rate of 5% — would count as disaster.

Panic might then replace inaction among the governments of the eurozone, but panic runs the risk of doing the wrong thing quickly, which would be worse than doing better things slowly.

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The poor old Titanic might not have sunk had the helmsman run straight into the iceberg. It was the blow to the side that did it.

Until this week, the eurozone looked as if it was turning toward some kind of resolution for Greece but at a speed that would take until September, at least, and a solution that might be likened to a glancing blow, because it would restructure rather than reduce debt.

It took the evident risk to Italy and Spain to persuade them that such a course meant a slow sinking under a flood of debt.

Now the strategy may shift to dealing with matters head-on. This would involve the swapping of Greek debt for bonds issued by an EU institution, along with cheaper loans for Athens and lender guarantees.

Unlike the split-second decision taken by the Titanic officer, the eurozone has had months to debate these options. The remarkable thing is that almost everyone agrees the head-on approach is better. The objections have come from the European Central Bank. Frankfurt may have been obdurate, but it does have a point — a point that is being proved on the markets.

It is assumed that ploughing straight into the berg would not have sunk Titanic. But we'll never know. We do know that there would still have been a collision.

It is not just about reducing the debt burden of Greece — and probably Ireland and Portugal — to manageable levels. But it is also about how to achieve a return to sustainable debt while avoiding a global financial crisis.