Is ‘kicking the can’ further down the road still an option?
Ewald Nowotny, who is also head of the Austria's central bank, said: "It is our own responsibility, our own decision. We have proved this in the case of Ireland, Greece and Portugal, with regard to what kind of collateral we accept. So there is a certain case for independence. But of course, not with regard to rating agencies but with regard to our own statutes, there are limitations."
Nowotny and Trichet may be divided on how far the ECB should be involved, but they agree that a full Greek default must be avoided. Nowotny said: "That would have very grave consequences, especially with regard to the ECB and the ability of the ECB to accept Greek collateral," he said.
A number of analysts have noted that the EU governments are in the position of the US government at the time of the Lehmans crisis, a parallel that has also been noted in EU policy-making circles. After the US government allowed Lehman Brothers to collapse in September 2008, Ray Dalio, founder of $80bn hedge fund Bridgewater Associates, wrote: "So, now we sit and wait to see if they have some hidden trick up their sleeves, or if they really are as reckless as they seem."
Commenting on the current crisis in The New Yorker magazine, Dalio noted that heavily indebted EU countries do not have the option of printing money and so are destined to undergo a ‘classic depression'. He expects other heavily indebted countries, including the United States, to eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. As to the timing, he says: "I think late 2012 or early 2013 is going to be another very difficult period."
The recent deal to avoid an immediate debt default by Greece didn't alter Dalio's pessimistic view. "People concentrate on the particular thing of the moment, and they forget the larger underlying forces," he said. "That's what got us into the debt crisis."
Sels concludes that the situation is not yet out of control. "In our view, the euro will survive, and longer term the European economy will emerge from the current crises in much better shape as debt loads are reduced and structural economic reforms are made that should enable to the economy to return to decent levels of growth.
"The bad news surrounding Europe looks to be priced into risk assets, the potential good news is not. This is why we believe that holding onto, and not selling out of, risk assets is the best course of action, although it may take time for markets to be willing to look at the good news as much as they look at the bad."