ECB statutory limits and German elections, not economics, prevented an early cheap bailout.

Evidence

The ideal policy back in 2009 would have cost around 50 billion euros. It would have required either the ECB, or Germany as its major creditor, to buy the secondary-market Greek debt that was subject to near-term rollover risk, bury it somewhere deep in its balance sheet, and walk away. Why didn’t they do so? One answer lies in German politics. There was a regional election coming up in Germany, and it was politically easier to blame the Greeks for being feckless than it was to explain to the German public that the ECB needed to bail them out for reasons of systemic risk. The other answer lies in the ECB statutes that forbid one country to bail out another for fear of generating moral hazard. Such bailouts are, except in exceptional circumstances (the treaty in question mentions natural disasters) not allowed. Remember, the ECB only has one problem, price inflation, and one tool, the rate of interest. As such, the ECB was completely unable, and the Germans were completely unwilling to take responsibility. As a consequence, investors began to price in the risk of contagion as increasingly likely, and the yields on all periphery bonds began to rise, which is why Portugal, Ireland, Spain, and Italy got lumped together with Greece. The PIIGS collective was born in the fires of contagion risk. Unfortunately, while the collective acronym is attractive, the problem is that Ireland, Spain, Portugal, and Italy are nothing like Greece. — Mark Blyth, Austerity, 180

Categorization

• XREF: The ECB’s single-mandate focus on price inflation connects to the broader austerity literature on central-bank design and the German ordoliberal tradition this book explores. — connects to: The ECB is legally barred from financing government deficits or debt — Clara E. Mattei, The Capital Order: How Economists…, 1739
• ADDENDUM: The ‘moral hazard’ justification for refusing bailouts connects to the sacrifice article’s theme — institutions justify refusing help by framing rescue as corrosive to responsibility.
• SEED: A useful angle: how a single statutory clause (the anti-bailout and moral-hazard rule) plus ordinary election timing produced a decade-long crisis — the hidden political costs of institutional rules.

Broader Connections

• The ECB is legally barred from financing government deficits or debt #expands (0.85) — Clara E. Mattei, The Capital Order, 1739