Tuesday, August 7, 2012
A lifeline is thrown to the periphery
August 7, 2012
One of the main reasons why the measures taken in the eurozone over the last two years have failed to address the crisis is that the decisions were often taken too late. Countries in financial difficulties only sought support when market conditions had deteriorated to a point of no return. Two factors explain their reluctance to request financial assistance from the EU or International Monetary Fund.
The first is political. By asking for external support a government implicitly recognises its incapacity to act autonomously. It has to accept the terms of an adjustment programme designed by a supranational institution and monitored by a group of inspectors (the Troika) that visits regularly. All these constraints impose a domestic political cost on the government.
The second factor is financial. When countries request financial assistance, interest rates on government bonds often rise. The preferred creditor status of the funds provided by supranational institutions discourage private creditors. As a result, the country’s access to financial markets remains impaired for a relatively long time.
These disadvantages explain why countries have applied for assistance only when they had no alternative. This has exacerbated tensions in the financial markets, both before and after countries began an adjustment programme, with huge contagion effects across the eurozone.
Posted by Yulie Foka-Kavalieraki at 8:59 PM