March. 21 (CNBC) —German Chancellor Angela Merkel says Greece does not need any financial help and that EU leaders should not make aid for the indebted country an issue at their summit in Brussels next week
Doesn’t get any clearer than that.
The moral hazard test is on.
If the eurozone uses uses its banks to buy each other’s debt behind the scenes or makes some other arrangements where financing ceases to be an issue, it may trigger a race to the bottom with regards to deficits and the euro, as the game will be ‘the national govt with the largest deficit wins.’ This is not a desired outcome.
But if they don’t move to ease financing imbalances, defaults will have the opposite, deflationary effects, and probably cause a freeze in the entire payments system.
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