If you’re in any doubt of the seriousness of the Greek sovereign debt crisis, read Mohamed El-Erian in the FT. A banking crisis has fuelled a sovereign debt crisis, which could in turn spark another banking crisis (with the whole caboodle, as I have argued, part of a sustained episode of financial instability that stretches back to the 1990s):
A number of things have to happen very fast over the next few days to have some chance of salvaging the situation. At the very minimum, the government in Greece must come up with a credible multi-year adjustment plan that, critically, has the support of Greek society; EU members must come up with sizeable funds that can be quickly released and which are underpinned by the relevant approval of national parliaments; and the IMF must secure sufficient assurances from Greece (in the form of clear policy actions) and the EU (in the form of unambiguous financing assurances) to lead and co-ordinate the process.
This is a daunting challenge. The numbers involved are large and getting larger; the socio-political stakes are high and getting higher; and the official sector has yet to prove itself effective at crisis management.
Meanwhile, the disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.
Election or no election, the UK simply cannot afford to sit on the sidelines while this crisis runs out of the control. Alistair Darling needs to stop giving speeches to activists in Scotland and get back to work at the Treasury.
Lord Adonis stopped campaigning as soon as Eyjafjallajökull erupted. Darling must do the same as the UK faces contagion from Eurozone turmoil.
