Debt crisis bail-outs: Who gets what?

Far be it from bondholders or banks that caused the debt crisis to be punished for their sins, German 'Wise Men' push for wealth seizure to fund EMU bail-outs.

By Jeffrey Frankel: Any solution to the euro crisis must meet two objectives. One is short run and the other is long run, and they tend to conflict.

PAUL KRUGMAN reminds us that the problems of southern Europe are not caused by past profligacy. He is right in some sense. It is true that according to any off-the-shelf definition of the government budget, a number of these countries (though certainly not all) were doing fine: running surpluses and reducing the debt burden. Yet it isn't clear that a static, cash-basis accounting concept of the government budget is the most reasonable.

The next few months will be critical for high-stakes negotiations underway in Cyprus, where exposure to the Greek financial crisis and domestic economic troubles have left the government teetering on the brink of default and banks running dangerously short of capital.  

Japan's central bank becomes the latest to ease monetary policy by launching a surprise 10 trillion yen (£80bn) boost to its money printing programme, as speculation continues over a full Spanish bail-out.

Spain may ask European authorities to use leftover funds from its €100bn bank bail-out to buy sovereign debt, according to reports.

About six weeks ago, there was some seriously gleeful backslapping going on in Europe. A perception took hold that Europe's leaders, employing promises of bail-outs, budget austerity programs and Eurozone reform, had managed to stem the debt crisis that ravaged through the continent in the first half of 2010.

This is an unedited version of my article for Sunday Times, March 24.This week, euro area leaders have added yet another term to the already rich vocabulary engendered by the financial crisis. If only a few days ago the world was divided into too-big-to-fail (e.g. Irish pillar banks and Spain) and too-big-to-bail (e.g. Italy) institutions and economies, today we also have too-small-to-fail and too-small-to-bail economy, Cyprus.