Eurozone crisis: Let them go bust

17 November 2010
Der Standard Vienna

But they are bust already. Empty shops in Dublin, November 2010
But they are bust already. Empty shops in Dublin, November 2010

Greece is building new mountains of debt. Ireland is expecting to go to the wall. Europe’s taxpayers fear they’ll have to club together again for another bailout. Things can’t go on like this, fumes Der Standard. Investors have got to pay their fair share of state and bank bailouts.

Josef Pröll is a good actor. On Tuesday the finance minister put on quite a one-man show playing the stern creditor upbraiding his debtors. Greece has fallen behind on the retrenchment schedule that was hammered out with the EU and the International Monetary Fund: Athens is running up more debts than allowed under the terms of the bailout deal.

Pröll threatened to withhold the next aid instalment for Greece. That’s what creditors generally do in normal cases, whether they’re dealing with states or banks. They badger and browbeat, though at the end of the day they usually extend the deadline: better a battered debtor than a dead one.

Irish bonds on a par with Pakistan and Venezuela

Unfortunately, however, the debt crisis in the eurozone is no longer a normal case, as Pröll knows all too well. Based on the latest updates to his deficit figures, Greek debt now comes to nearly 130% of its GDP. By 2015 Greece will have to repay debts of €140 billion, plus €90 billion in interest. And all that against the backdrop of a shrinking economy. One needn’t be a prophet to predict that this probably won’t work.

And this isn’t the only looming bankruptcy on the eurozone’s horizon. Ireland is also teetering on the brink. In the wake of its bank bailouts, the country’s debt ratio is due to soar to 150% of GDP by 2016. The markets are rating Irish bonds on a par with those of Pakistan and Venezuela. Irish economists are reckoning with default, with or without a bailout. Under these premises, policymakers can’t do much for now but buy time, so Pröll’s act is not unreasonable.

Liquidation for states

But the eurozone had better brace itself for the next wave of bankruptcies. And that means roping creditors in to share the cost of bankruptcies. Now that sounds simple, but it would mean breaking with current practice. First the banks were going under, till the taxpayers fished them out. Then the states got into hot water. And once again the taxpayers – from other countries –had to leap to their rescue.

That has got to stop. The G20 are already trying to come up with a workable model for international bank liquidation. The same is needed for states. In regular bankruptcy proceedings in a market economy, some of the debts simply get written off. Those who invest unwisely may lose their money, that’s the way it is.

We will probably never see some of our money again

Ironically enough, it was the Irish who most vehemently opposed Germany’s pitch for a law to cover state bankruptcies. In all likelihood, Ireland would have been among the main beneficiaries of such a scheme. But the very debate drove Irish interest charges up and knocked the nation further off-balance. And yet, much as we empathise, when should the matter be debated if not now? The debt crisis is going to last. How do we know the market won’t panic exactly the same way two years from now? It’s a shame Berlin backpedalled and is now saying creditors won’t be tapped in state defaults till some time in the distant future.

Well, that’s not enough. The charade can’t go on forever. Moreover, politicians will at some point have to begin admitting that we, too, as Greece’s creditors, will probably never see some of our money again. That’s a bitter pill, but nothing compared to what lies ahead for the Irish and the Greeks.

Translated from the German by Eric Rosencrantz

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