As always, the financial press move from one catastrophe to the next without so much as a backward glance. Apparently, the topic of the week is Greece's budget deficit. Even for people who havent been keeping an eye on Greece it should be plain to see that deficits dont come about over a couple of weeks but are the result of years of fiscal mismanagement. Germany is putting on a special show of being the disciplinarian among the EU nations indicating that it will not help Greece until it shows some resolve in tightening fiscal policy. The german chancellor, Angela Merkel's tough line approach has made her popular with Germans but is ineffective to say the least because it comes too late. If Greece is not able to repay its debt in april there will be one of two choices - allow default or provide a rescue package. Years of profligate fiscal policies cannot be cured by a few months of prudence.
On a different note, the only sensible comment made over this issue came from the french finance minister, Christine Lagarde, who said that trade of financial instruments like the CDS that allow speculative bets against sovereign debt should be curbed. Dont get me wrong, I am all for free markets and instruments like the CDS help control the formation of asset bubbles as they are indicators of borrower credibility. However, in bear markets these bets are overdone and only serve to cause widespread panic. Not to mention they increase pressure on the finances of an already struggling nation by pushing yields higher making refinancing more expensive, thereby, creating a vicious cycle that eventually leads to widening of the budget deficit.
