The fear of contagion in Europe

"What to do about Greece? So far, much of the debate has split into two camps:

• bail-in-ers, the advocates of coercive (but soft) restructuring of Greek debt, and
• bail-out-ers, those who favour the procrastination of EU-IMF lending plus “voluntary” rollover.

Little of this debate hinges on whether Greece is solvent or not. Everyone agrees that, barring a miraculous rebound in growth, Greece is broke.

It’s the contagion we are struggling against

The argument among in-ers and out-ers hinges on the fear of contagion. Should investors overreact and flee from Spanish and Italian debt, things could get very ugly, very fast. We are talking about widespread European sovereign debt and banking crises. This would force a choice between

• A full-blown monetisation;
• The break-up of the Eurozone..."

at http://www.voxeu.org/index.php?q=node/6722