A commenter on Marginal Revolution quoted the ECB's actual release, which included:
"The objective of this programme is to address the malfunctioning of securities markets."
Pause... Does that ring a bell with anyone? TARP? "Firesale prices?" Bernanke: September 23, 2008:
"banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down."
Europe is making the same assumption that our Fed and Treasury made back in late 2008 - that the market was screwing up and not properly recognizing valuations. Why is it that when assets aren't priced as governments wish they were priced that it means the securities markets are malfunctioning? As I commented on Marginal Revolution: we, in the USA, already watched this show - and guess what - it wasn't malfunctioning securities markets at all! It wasn't temporarily depressed prices (LIQUIDITY PROBLEM) - it was that the assets really weren't worth as much as people previously thought (SOLVENCY PROBLEM!). Really - we did EXACTLY this in the US, but didn't learn anything from it, apparently. Just ask Fannie Mae.
Greece's debt isn't mispriced due to a malfunctioning securities market or because evil speculators are manipulating it. It's priced as it is because Greece is insolvent and people KNOW that.
Marginal Revolution commenter MoneyDemandBlog notes:
"Greece is Europe's Freddie Mac. Both are insolvent entities with a strong implicit guarantee. Both will require new regular subsidies needed to preserve the fiction of going concern."
That's a good starting analogy - but it's even worse than that. At least in the US some people will want to prolong the farce of Fannie and Freddie under the guise of propping up housing prices. Europe, however, is likely to fall into a sort of Tragedy of the Commons problem, where when the other nations see that they are paying for Greece's excesses, they aren't going to like it very much. The "responsible" Germans won't want to subsidize the fact that, as a friend of mine put it last week:
"The Greeks would rather kill each other in the streets than work and pay taxes."
We may see something similar here in the US when our states that are in over their fiscal heads have to figure out what to do. Bailouts from our government may result in a wildfire-like spreading of moral hazard, where no state feels they need to balance their budget, and everyone expects handouts from Uncle Sugar...
extend and pretend... wait and see.