Tag Archives: european crisis

The Wages of…Bailouts

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Having been “protected” from the outcomes of their own economic decisions and given an EU bailout instead, Ireland seems to have become dependent on the largesse of others and incapable of working through their own problems toward their own prosperity.

Here’s what’s going on now, as described by Christoph Pauly of Spiegel Online International [emphasis added].

Ireland’s demands are very precise—and could be costly for the Germans.  At stake are the €31 billion that the country received from the system of European central banks to save two crisis-ridden Irish financial institutions in 2010 [Note: this is the original bailout].  The country is expected to pay this money back in installments over the next 10 years.

Already last year, the Irish pushed long and hard until they were allowed to pay back the first installment with the help of a new loan.  But that was not a long-term solution.  Starting this year, the state will explicitly be liable for the debts of Ireland’s nationalized banks.  This has prompted the Irish to look for a more creative solution this year.  “We would like the payback period for the debts to be extended and the interest rates to be cut to a reasonable level,” European Affairs Minister Lucinda Creighton told SPIEGEL.

… For [ECB President Mario] Draghi, the simplest solution would be for the European Stability Mechanism (ESM), the euro zone’s €700 billion permanent backstop fund, to step into the breach and take over the debt.

Kenny would ideally like to use the ESM as a way of getting European taxpayers to shoulder the risks associated with all the debts of the Irish banking sector.

The “European taxpayer” should no more be in the business of indemnifying the Irish (or the Greeks, or anyone else) from the consequences of their own decisions today than they should have been put on the hook via the first bailout.  However, having been addicted to OPM for their own problems, the Irish government is finding that addiction hard to break.

It’s important to note another factor.  The Irish did not did not want that original bailout, and they did not voluntarily ask for  it.  They were dragged kicking and screaming into it, the money forcibly injected into the veins of their banks.  The dependency of the bailout is no less powerful for that, however.

Apocalypse Now

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…or is it?

Here are some interesting graphs published by Spiegel Online International that show some estimated effects of a departure from the eurozone by Greece, Greece plus Portugal, those two plus Spain, and those three plus Italy.  Frankly I think the latter two departing is unlikely; they’re not is as poor shape, yet, as they’re made out to be.

This is chump change for the seven year period, even including Portugal: it compares to Germany’s 2012 GDP of €2.5 trillion ($3.2 trillion).  Even losing all four would “only” hurt badly, not inflict debilitating damage—and only relatively briefly, at that.  See a graph below for expansion on this point.  Notice, also, that the red bars are losses in growth, not loss of growth.

Here’s that “graph below:”

Look at  that.  A burble in 2014 until we look at all four nations departing.  Then Germany gets a sharp recession.  However, notice that in the most likely scenarios—Greece only and Greece plus Portugal leave—growth goes back positive by 2015, and by 2017 if we throw Spain into the mix.

What do things look like for the rest of the EU, not just Germany, and for the US?

The UK and the US—not members of the eurozone, interestingly—hardly notice the losses.  Germany feels the sting, but as can be seen from the earlier graphs, not so much compared to its overall economy.

In short, a departure of these nations from the eurozone will hurt the remaining, and other nations, a little.  But against this must be balanced both the pain for those nations of continuing the present charade of bailouts and the benefits to Greece (and Portugal, Spain, and Italy) of stopping the bailouts, letting them go bankrupt, and letting them depart the eurozone.  And the affected nations can, with this much warning, mitigate the effects by reducing their holdings of Greek (and Portuguese, Spanish, and Italian) sovereign debt.

Debt Forgiveness and Bankruptcy

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Christine Lagarde, Managing Director of the IMF, insists as Spiegel Online International reports, that

For Greece to recover…creditor countries would have to forgive the government in Athens a large share of its debt.  “Nothing else will work[.]”

After all,

given that Greece will be unable to reach the target [of debt to GDP, originally 120% by 2020] on its own, European creditors have little choice but to forgive a portion of the debt they hold, Lagarde insists.

Additionally,

Senior troika representatives, including ECB Executive Board member Jörg Asmussen, Thomas Wieser, the president of the Euro Working Group, and IMF representative Paul Thompson, are campaigning for a debt haircut, especially among smaller member states.  Their goal is to reduce Greece’s 2020 debt level from the 144 percent of GDP that it would likely be without any kind of debt forgiveness, to just 70 percent.  To achieve the latter number, creditor countries would have to waive half of their claims.

The proposed haircut (of which the just concluded deal is a down payment) is a default, as was the prior haircut forced onto Greece’s many private creditors.  And here we are again.

These worthies are conflating default and forgiveness with bankruptcy, and that’s why we’re here again.

Default must come through a Greek bankruptcy, not through the EU, or the IMF, condoning irresponsibility by saying, “Forget it; consider our erstwhile loans to be grants.”  Forgiveness, which approaches a bankruptcy outcome, doesn’t achieve the new beginning that a bankruptcy would; it merely condones past irresponsibility without an actual write-off and fresh start—albeit with a poorer credit rating.  But what’s the Greek credit rating, functionally, now?  “The situation in Greece is scaring away private investors.”

And all of this shows the original folly of bailing out Greece.  And the similarly original folly of the tactic in the US.

Bailouts

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Spiegel Online International carried a disturbing story Monday on the subject of bailouts.

The proximate item is Greece’s economic strait, and this is what Spiegel is reporting about that.  The current troika—the IMF, the European Commission, and the European Central Bank—are proposing

[a]nother partial default.  That, indeed, would seem to be the conclusion that Greece’s main international creditors have come to.  According to information received by SPIEGEL, representatives of the so-called troika—made up of the European Central Bank, the European Commission and the International Monetary Fund—proposed just such a debt haircut at a meeting last Thursday held in preparation for the next gathering of euro-zone finance ministers.

But half-measures simply prolong the problem and continue Greece’s addiction to handouts while at the same time providing no mechanism for getting the Greeks to self-sufficiency other than leaving them to their own, already failed devices—both those that drove them to this strait and those of the last three years that have had no useful effect.

Worse, though,

This time around, public creditors would be involved, meaning that taxpayer money from those countries which have stood behind Greece would vanish off the books.

But where is the justice in this?  Indeed, where was the justice, originally, in forcing the taxpayers of entirely separate jurisdictions—other nations—to indemnify the Greeks (and the Irish, and by extension, the Spanish, Italians, and Portuguese) against their own foolish decisions?  Indemnify rather than help, since no meaningful accountability mechanisms were applied.

That’s in the past; those innocent taxpayers already are dragooned into the existing bailout.  The primary question remains, though: where is the justice in compounding that prior error by extending it, by forcing responsible taxpayers to pay for continuing this folly?  And how does this enabling help the Greeks (and Spanish, Italians, and Portuguese; although these three already are attempting preemptive measures so as to avoid their own humiliation)?

Indeed,

Athens has only introduced 60 percent of the reforms [already] demanded by the European Union.

Yet,

The troika has already agreed to give Greece two extra years to meet its austerity goals, a delay that will likely result in a need for up to €30 billion in additional aid, according to the ECB and European Commission.  The IMF believes the funding gap will be closer to €38 billion.

Thus, the EU and the IMF know they’re proposing throwing money down a rat hole, and they’re proposing that anyway.  It’s true enough that cutting the Greeks off from further bailout moves will jeopardize the taxpayers’ money already committed.  However, it’s the nature of bankruptcy—which the Greeks will be better off going through—that such debts get written off and the creditors lose out.  But that’s the only way to stanch the bleeding here.  There’s no useful purpose in committing additional taxpayer funds to this failed effort.

Take careful note of the similarities to our own situation.  Failures here, too, says the current administration, need to be propped up with taxpayer money and, in our case, favored investors protected from the consequences of their decisions.

This is Stupid

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Spiegel Online International is describing another European hare-brained scheme in the mill for “bailing out” Greece.

Greece’s lenders are reportedly considering further relief in the form of a partial debt haircut for the crisis-wracked country, the Financial Times Deutschland reported on Friday.

…

Martin Blessing, chairman of Germany’s second-largest bank, Commerzbank, has also said a second debt haircut is likely.  “In the end we will see another debt haircut for Greece, in which all creditors will take part,” he said on Thursday in Frankfurt.

And

And though a second debt haircut would be tantamount to bankruptcy for Greece, it would also enable Athens to tackle the extreme debt that has so far hindered economic recovery.

And in a blatant case of demanding this be done with OPM (at least from the IMF’s perspective; the IMF wholeheartedly approves this second bailout),

[T]he IMF is pushing for debt restructuring from public lenders, who currently hold over two-thirds of the country’s total debt of some €330 billion [$426 billion], according to the newspaper.  However, neither the IMF nor the ECB would take part in such a debt haircut, placing the burden on the euro-zone members, the paper added.

I have a couple of questions.  Wasn’t the first haircut, functionally, a Greek bankruptcy?

Second, if you’re not going to hold the Greeks accountable and responsible for their obligations and commitments, why bother at all?  Why not just forgive the entire debt, and let them resume their profligate ways?  You’ll only bail them outprop them up again, next time, anyway.

In the end, here’s the IMF (and ECB, but at least this organization has honorably committed its own creditors’ money) saying, “Debt.  Very dangerous.  You go first.”  Still, the burden, as the IMF and ECB suggest, should be wholly within the euro zone, or rather (say I) more particularly, it should rest entirely with the private investors who loaned their money to Greece—the private holders of Greek sovereign debt.  Europe’s taxpayers should not be—should not have been—put on the hook any further than they already were from the moment it became known that the Greek government was unable to repay its debt.  Indeed, those taxpayers should not have been put further onto the hook from the moment it became known that the Greek government had lied about its financials in order to gain admittance to the euro zone.

Here’s an alternative thought—work with me on this; it’s an idea of responsibility—how about not bailing them out, again?  Instead, let them go bankrupt, and thereby free them to start over.