EUROPEAN leaders have tried to characterise the October writedown of Greek debt as “private-sector involvement”. While the writedown would appear to be a default in all but name, efforts to maintain investor confidence have so far been surprisingly successful. Yesterday, US stocks and Asian stocks rallied amid optimism that European leaders are taking steps to deal with the crisis.
Excessive optimism is nothing new.
Recent history provides plenty of examples of people systematically over-estimating the likelihood of positive outcomes. In 2000, the dot-com bubble pushed the NASDAQ above 5,000 (it currently sits at around 2,500). In 2004, Moody’s held its credit rating for Greece steady after the country admitted that its budget deficit had exceeded the EU’s ceiling of 3% of GDP every year for 8 consecutive years (source: NYT). In 2007, median house prices in the US hit an all time high based on a widely held belief that “house prices always go up”.
Optimism will buy European leaders some much needed time. But it is difficult to see how Europe will managed to quickly or painlessly repay combined public debts which stand at more than €9 trillion. Europe’s enormous debts might be thought of not as a mountain but as a towering house of cards. It was fairly easy to build but now appears almost impossible to deconstruct without knocking the whole thing over.
A house of cards is a fragile arrangement, it will collapse, not only under the burden of one card too many, but by mere want of carefulness.