Default is welcome, but not enough

THE European Central Bank (ECB) lost an important battle last week. It was only a short time before Thursday’s decision to embrace a “transitory, selective default” for Greece that ECB president Jean-Claude Trichet had begun to sound like a broken record at the Bank’s press conference.

“Our message is no credit event, no selective default, no default,” he repeated to an incredulous press pack.

A fortnight later, Europe’s leaders hailed a deal to get private sector bondholders to write-down their holdings to the tune of €135bn by 2020 – that is, to let Athens default.

This default, even if partial, is a substantial dent in Greece’s €350bn debt pile – though less substantial than it looks, given that a chunk of the proceeds will not go to Athens but will be used to buy up triple-A rated bonds as collateral to cut private creditors’ risk.

So why has the rally following this “European Marshall Plan” been so short-lived?

Because the Eurozone is still fraught with risks: even if the targeted 90 per cent of private creditors play their part, it seems unlikely that Greece can do its part to get control of spending. And, most importantly, are Europe’s paymasters prepared to throw enough money down the Athenian plughole to convince markets in the years to come?

The truth is that the fate of the euro is yet be decided, not in Brussels, but in the German polling booth.