"The underlying problem in the euro zone is that Portugal, Ireland, Italy, Greece, and Spain are locked into a currency which means they are uncompetitive in trade terms while they are also running large budget deficits. To get out of this they need large wage and price cuts to restore competitiveness, and they need to make fiscal cuts to get budget balances back at sustainable levels.
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The decision by the European Central Bank (ECB) to intervene in the markets is very important. That will help keep markets liquid – but the ECB will probably not buy a lot of debt.
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The European Central Bank intervention and this package raise enormous moral hazard issues. The ECB’s management was forced into this kicking and screaming. It was only when they realized that the whole euro zone financial system was at risk of collapse that they threw the kitchen sink at the problem. This can now go two ways: either they tighten fiscal policy across the eurozone, and introduce much more rigorous and enforced rules on deficits and profligate credit through banks, or, they let a system persist which is another “doomsday machine” that will live again to grow, and could one day topple them.
To ultimately get out of this mess, the euro zone needs to grow fast enough to allow nations to grow out of debt. The global backdrop here is very positive in the short term. The jobs numbers in the US last week and strong numbers out of core northern Europe suggest the world can grow. No doubt the ECB and the Fed will use the eurozone scare to justify longer loose policies. "
http://baselinescenario.com/2010/05/10/eurozone-the-kitchen-sink-goes-in-now-it%E2%80%99s-all-about-solvency/#more-7453An excellent article overall, but there are still some mysterious things going on. I don't see how this panic materialized and got so big so quickly when the problems have been festering for years and not a lot of new info came out in the last month or so.
