From 'competitive depreciation' to 'competitive miscommunication'
Seoul: They say it's difficult to prevent the next crisis while the last one is still going on. Eurozone leaders have been learning that one the hard way.
In recent days they have almost single-handedly brought on a mini-panic over European sovereign debt which has sent bond yields on the periphery to new highs, and leaves the euro about two cents lower against the dollar than when the leaders got on a plane to Seoul.
The German chancellor talks about the evils of "competitive depreciation". Maybe President Obama should start laying into the Europeans for their "competitive miscommunication" to financial markets.
How did they get here? Cast your mind back to the summer, when the eurozone leaders bailed out Greece, and set up an emergency safety net for other eurozone countries. That is supposed to last for three years. But ministers know that investors will take even more risks next time, if they think governments are always going to bail them out.
To prevent the next crisis, the Germans, in particular, think that anyone buying a eurozone government bond after the three years are up should know they are doing so at their own risk. After all, if investors had been a bit more cautious in lending to Greece, the government probably wouldn't be in the mess it's in now.
It's called moral hazard, and Angela Merkel, reasonably enough, wants to reduce it. After all, Germany was the one that wanted a no-bailout clause written into the Maastricht Treaty when the euro was created. If there are no bailouts, and no exits from the single currency, it follows logically that governments must, in extremis, restructure their debt.
Arguably, it was the refusal to acknowledge this basic logic that allowed the imbalances in the eurozone to become so large. Investors concluded there was not much difference between lending to Greece and lending to Germany.
That is why last month Angela Merkel pressed her fellow leaders to support a mechanism for restructuring - or writing down - sovereign debt, if there's another crisis in the Eurozone down the road.
But that's about preventing a future crisis. To keep a lid on today's one, investors need to keep faith that they're not going to lose money holding on to Irish debt, or that of any other European government.
If you start talking about restructuring debt at some time in the future, investors will naturally worry that you are about to do it next week.
Talking to European officials here in Seoul, it's fair to say they now understand this point better than they did a few weeks ago. Privately, they admit that the whole thing could have been better handled.
But that's not much consolation to Ireland, whose cost of borrowing at one point today rose to 8%. Or to Portugal. In Brussels they remember the painful lesson of Greece - that it's dangerous to get behind the curve. They would be quite happy to mount a rescue package for Ireland. If the Irish government would only ask for one.
The mere existence of that special bailout facility was supposed to give so much reassurance to investors that governments would never actually have to use it. But that was before they started talking about how, and when, they would take that safety net away.
Funny thing about financial markets - it doesn't take much to turn a long-term solution into a short-term fiasco.
You can hear a version of this post on today's edition of PM.