Stock markets soared after the eurozone meeting this week. But the head of the German central bank warned "The envisaged leverage instruments are similar to those which were among the origins of the crisis, because they temporarily masked the risks."
It is clearly far too early to assume that EU leaders have really decided to take the difficult decisons necessary to restore long-term financial health. The key issue remains Italy, where major doubts remain over the government's willingness, as well as ability, to make the major cuts necessary to reduce its borrowing to manageable levels.
Unsurprisingly, international lending to Greek banks has dropped quite sharply over the past 12 months, according to latest data from the BIS (Bank for International Settlements). As the chart shows, it was $111bn at the end of June, compared to $174bn in June 2010, and $182bn in December 2009, when the blog first discussed the problem.
Greece of course continues to borrow the same amounts. Instead, it now borrows from the European Central Bank. This means Eurozone taxpayers are standing directly behind the loans, rather than indirectly when the loans were made by the big commercial banks.
This seems to confirm June's analysis of how the issue will play out:
• Greece will remain in "can't pay, won't pay" mode
• Germany will get even more upset about paying Greece's bills
• Private investors will continue to pass their Greek debt to governments
• The ECB will worry about default, and its own stability if this occurs
The politicians' habit of 'kicking the can down the road' is not solving the key issues. Rather, it is increasing the overall economic cost, and the political risk associated with this.
Meanwhile, European commercial bank loans to the 2 major economies under pressure - Italy and Spain - were $1388bn. This is lower than December 2009's $1753bn, but an increase since December 2010's $1326bn. This perhaps explains investors' underlying nervousness about what happens when the politicians finally have to confront reality.
TUESDAY UPDATE. Greece's decision to hold a referendum on its austerity plan highlights the fragility of the political consensus behind the current eurozone plans.