The New York Times / November 22, 2010 In European Debt Crisis, Some Call Default Better Option
By LANDON THOMAS Jr. DUBLIN — Ireland has finally taken its medicine, accepting the financial rescue package European officials have been pushing for several weeks. But even as Europe moved to avert this latest debt crisis, economists and policy experts are increasingly debating whether it would be better, and fairer, for the Continent’s weakest economies to default on payments to lenders. Many experts now say that bailouts only delay the inevitable. Instead of further wounding their economies with drastic budget-slashing, the specialists assert, governments should immediately start talks with bondholders and force them to accept a loss on their investments. The risk, of course, is an investor panic that would seize financial markets at a time when the global economy remains on tenterhooks. But an organized restructuring of debt that would reduce the amount of money troubled countries owed, especially in conjunction with a financial aid package, might provide a quicker path to recovery and avoid the trauma of a forced default down the road, some economists argue. To be sure, it is easier to propound solutions from the comfort of a policy research institution as opposed to actually making a decision when more than one country’s financial future is at stake — the broader euro zone could be affected as well. “Policy makers face the same dilemma as in any crisis with respect to haircutting bonds, and the real-life decisions are always extremely difficult,” said Robert E. Rubin, the former Treasury secretary [and Goldman-Sachs capo], who faced just such a quandary in 1994, when he helped arrange a $47 billion rescue package for the Mexican government as it teetered on the verge of default. “Holding bondholders harmless contributes to moral hazard and increases risks elsewhere,” Mr. Rubin added. “But imposing bond haircuts can make future market access expensive or impossible for an extended time and can create serious contagion effects elsewhere.” The term “haircuts” refers to the loss an investor takes when a borrower fails to pay back its loans. One signal that the policy pendulum may be swinging away from bondholders came this month when the German chancellor, Angela Merkel, supported by President Nicolas Sarkozy of France, tried to convince other European leaders that bondholders needed to accept some of the risk in future bailouts. The move spurred a bond market rout, and Ms. Merkel had to retreat. But her argument has taken hold in the debate over how best to handle debt crises as Europe turns its attention from Ireland — which will receive $109 billion to $123 billion in loan as part of the rescue package — to the shaky economies of Portugal and Spain. Proponents of a default say that Argentina and Russia, in 2002 and 1998, found life after a debt restructuring. Both reneged on their foreign loans and, after devaluing their currencies, were able to recover. Even so, any talk of default — or a debt restructuring, the term that bankers and technocrats prefer — remains anathema in capitals like Athens and Dublin. Their leaders fear that they would be put in a financial penalty box and denied fresh access to funds. Complicating matters is that, unlike Argentina and Russia, Ireland and other troubled European countries that use the euro as a common currency cannot devalue their currencies; thus, they lack this tool to help nurse their economies back to good health by improving their competitive position and increasing exports. In Ireland, which has an external debt 10 times the size of the economy and bank losses that jeopardized the country’s solvency, there is little sympathy for those who lent to the country’s faltering banks. “The people who provided the funds to these banks should take the consequences,” said Peter Mathews, a banking consultant in Dublin. Mr. Mathews estimates that making senior bondholders take an appropriate loss on their bank holdings of 18 billion euros would save the country about 15 billion euros. Those who favor restructuring say it is only fair that lenders absorb losses and share the pain. A loss of this amount for lenders would be roughly the same as the government is planning to extract from its citizens over the next four years in the form of spending cuts and tax increases so as to bring its deficit down to 3 percent of gross domestic product, from 32 percent. “There is just no escaping debt restructuring for Greece and Ireland,” said Kenneth S. Rogoff, a Harvard professor and expert on sovereign debt crises. But if it is inevitable — as many financial analysts and mainstream economists like Mr. Rogoff and Nouriel Roubini are now saying — why not do it now? That is not easily done, says Mr. Rogoff, who was a senior economist at the International Monetary Fund when Argentina defaulted. He points to the fact that the I.M.F. executive board, which has authority to approve all aid disbursements, is controlled by the main creditor banking nations like the United States, Britain, Germany and France, whose investors stand to lose the most in a default. “The I.M.F. never comes in and says, ‘We will give you money but you have to restructure,’ ” he continued. “Restructuring only happens at the end of a failed program.” This year, the monetary fund made clear its position on default when it issued a staff paper defiantly titled: “Default in Today’s Advanced Economies: Unnecessary, Undesirable and Unlikely.” Authors of the report say the views are their own and not the fund’s. Yet, in arguing that indebted economies like Greece and Ireland will not follow in the path of Argentina, they echo a view that the monetary fund has long embraced. Unlike Argentina before it went belly up, Greece and Ireland have large primary deficits, which means that even without paying interest on their debt they still spend more than they collect in taxes. The deficit is about 10 percent of G.D.P. in each case. So abandoning their debt obligations would not eliminate the need for cash, which would become all the more acute because their default would deny them access to international debt markets. The authors also take on what they call the “soak-the-rich argument.” In the case of Argentina and Russia, for example, the debtors were largely banks in the United States. In the euro zone, more than 2 trillion euros in sovereign debt belonging to Greece, Ireland, Spain and Portugal is held largely by German, French, British banks and, in the case of Greece, local banks and pension funds. So the investor pain would be felt throughout Europe, and could well ignite a systemic panic as banks across the Continent suddenly found themselves with big losses. Here in Ireland, people are doubtful that default is the answer. “Ireland is in the business of paying back its debts,” the Prime Minister Brian Cowen said as he campaigned on tiny Arranmore Island off Ireland’s north coast over the weekend. By Monday, Mr. Cowen had become the first political casualty of the sovereign debt crisis, agreeing to step down once a series of fiscal packages and budgets were in place next month. Still his view that Ireland pays its debts was echoed by many of the recession-weary Irish citizens. “I think we are past the stage of forcing a haircut on the bondholders,” said John Joe Duffy, the island’s parish priest. “We don’t want to create more panic — we just want confidence to return.” -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
