Originally published at Financial Times | November 9, 2011
In folklore, a silver bullet is a popular way to slay the monster. In the real world, we are used to hearing policymakers tell us there are no silver bullets for our complex problems. Today it is clear what eurozone leaders need in order to limit damage from Greece’s implosion, recapitalise key banks, and control Italy and Spain’s sovereign debt problems. They need more time. Time is the silver bullet and only one organisation can provide it.
The European Central Bank, now led by Mario Draghi, must accept its role as the lender of last resort in Europe. The ECB could stop the panic engulfing Italian and Spanish government bond markets, and it is the only institution in the world with this power. To do this, it should promise an unlimited liquidity backstop to sovereign bond markets of solvent nations. As long as its support remains reluctant, “limited” and “temporary”, peripheral bond and credit default swap markets will remain vulnerable to weak demand and speculative attack.