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Now over-leveraged sovereigns are the biggest default risk. Banks that have raised capital and shed some bad assets might even be OK, unless their sovereign exposures drag them down. It is the big corporates that raised equity in 2009, cut costs and retained cash that look strongest of all. While corporates have submitted to the discipline of just-in-time production and delivery over the past two decades, Europe’s political leaders have become renowned for their always-behind-the-curve response to the sovereign debt crisis unfolding since spring 2010.
The essence of the policy response for most of that time has been to treat each episode of lenders rebuffing a sovereign or pricing it out of access to new funds as a temporary market dysfunction. Much effort has been expended on devising financing patches to tide over each affected sovereign past this temporary suspension of cash availability until investors return to their senses. The ECB has reluctantly shouldered this burden. In future the EFSF will. It might even become a decent crisis-management body, indeed a new IMF for Europe. But the temporary provision of core Europe’s credit strength to tide over weaker sovereigns struggling to fund at affordable rates is no long-term answer to the questions over European sovereigns’ solvency.
