http://africanheraldexpress.com/blog6/2010/12/13/debt-the-story-of-greece-and-nigeria/
Debt: The story of Greece and Nigeria
December 13, 2010
*By Tunji Ajibade*
Europe is in debt. It has been for a while. Now it is a crisis, and it
deepens as time passes. One nation started it. Greece. That southern European
nation has since spread the flu. Ireland caught it. Some other nations in that
continent show symptoms too. Some worse than others. There is something about a
disciplined economy; if one in its building blocks slides, the set-up tumbles.
Confusion follows. And it is easy to note, because all things are captured in
specific data and accurate statistics. A reason the illness in Europe is easy
to notice. Compare that to the system in developing nations where economic
indices are tenuous, mere conjectures - and there it becomes easy for
economists to talk of resilience. That, when the system has virtually
collapsed. In some other climes, what happened to the economy such as Nigeria's
would have led to the declaration of nation emergency. Recent events here give
reasons to take a look across the Mediterranean - at Europe.
What has become known as 2010 Euro Crisis is out of the failure by
governments of some European countries to pay back their debt in full. Now
when lenders suspect that a government may fail to pay its debt, they ask for
payment of higher interest rate on loans. This compensates for the risk if the
nation eventually defaults. Governments face this kind of debt when they
finance through short-term bonds. This creates discrepancies between their
short-term bond financing and the long-term asset value of their tax base.
Equally, they may be vulnerable if they are unable to issue bonds in their own
currency. In addition, a decrease in the value of their own currency makes it
costly for them to pay back their foreign-denominated bonds. This kind of
debt, referred to as sovereign debt crisis, has a peculiar challenge for
lenders. Since it is sovereign, a government controls its own affairs;
therefore it can hardly be obliged to pay back what it owes. Well, the standard
treatment is that in such a situation, the government in question is excluded
from access to more credits. It can expect some of its overseas assets to be
seized also, while there can be political pressure from its bondholders at home
to pay up. One outcome is that concerns over such treatment make governments do
all they can to avoid defaulting on the whole value of their debts. They rather
negotiate with their bondholders to agree on a delay or partial reduction of
their debt payments. This is done through the process of debt restructuring.
When fears were initially expressed about rising government deficits and
debt levels and the downgrading of debts owed by governments in Europe, the
financial markets were alarmed. Greece has been a major reason for such fear
much longer. And this is the story of Greece. In the eurozone during the 2000s,
the country's economy was one of the fastest growing. The government of Greece
ran large structural deficits capitalizing on its strong economy and falling
bond yields. Since the restoration of democracy in the country in 1974,
Greece's civilian government made accumulation of large public deficits a
habit. It wanted to bring neglected sections of its population into the
economic mainstream. Each government ever since has provided public sector
jobs, pensions, and other social benefits by running large deficits until the
global financial crisis of 2008 mortally wounded its revenues. Tourism and
shipping, the country's largest industries were badly affected with revenues
plummeting to as low as 15% in 2009.
From that point, concern about the country has to do with the rising cost
of financing government debt. The Eurozone countries and the International
Monetary Fund decided to loan funds to Greece in May 2010. It was conditional,
meaning the country has to implement some austerity measures that is
distasteful to its citizens. But Greece was not alone in that continent where
debt accumulation is at issue. Many other countries also have troubles because
they owe too much to outsiders. Some however have been able to take steps
internal not to expose themselves to the Greek situation. The British
Conservative party government, for instance, came down hard when it arrived
office following the last general election. But the situation went out of
control in Portugal, Italy, Spain and Ireland, the last of which recently
received packages similar to Greece's. In the same month that Greece got a
rescue package, Europe's Finance Ministers sat. Their purposes was to create a
rescue package in the region of a trillion dollars which they called European
Financial Stability Facility. It is exactly for what its names announces, a
fund meant to ensure financial stability across Europe.
This sounds easy, smooth even, as a solution to a major crisis. But as
experts have noted, Europe has just created a permanent facility that will take
care of sovereign debt on a permanent basis, meaning this kind of debt has come
to stay, meaning some governments may choose to ignore the red lights and
engage in reckless spending. This has implications and it is a reason the
question should be asked: How did Europe walk into this mess? It is known that
in Greece, for instance, there has been a lack of effective monitoring of
government deficits. That country also failed to enforce the rules as to what
level governments can accumulate debt. Specifically, the country used
accounting tricks over the years to hide its growing indebtedness. In the case
of Spain, irresponsible budget behaviour wasn't at issue; global recession
caused its government's budget to collapse. The thing is: if an indebted
country has its own currency, it could devalue and stimulate exports. This
would have the effect of offsetting negative effects from raising taxes or
cutting spending to address the deficit problem. Unfortunately, the peculiarity
of the use of a single currency in the Eurozone does not allow for each
indebted country to use independent monetary policy, one factor that has
aggravated the crisis.
It is significant to note that when experts thought up solution to the
Eurozone problem or any of such problem around the world, preventing sovereign
debt crisis from happening in the first place was the number one
recommendation. The other solution is about what to do when it has actually
happened. Option such as establishing a bail out or insurance fund with the
contributions for individual countries are available in the case of prevention.
But then this is inseparable from such country's compliance with the rules
regarding permissible debt loads. The ability to accurately measure debt loads
is a factor for success here. In this instance also, there is need for
penalties when countries fail to comply with requirements for avoiding the
crisis situation, including sticking to reporting rules which ensures that
compliance is accurately assessed. These are not exhaustive, but there is no
doubt that a nation such as Nigeria needs to comply with them if it would not
go into another round of debt, the kind that takes more than necessary share of
national resources in loan financing. In a situation where the federal
government appears bent on borrowing to finance activities that institutions
such as the Central Bank of Nigeria say will harm the nation's economy, it is
important to take a look at Greece, the woes of other Eurozone nations, and
rein in reckless accumulation of debts.
Ajibade, a Consultant Writer, lives in Abuja [email protected]
[Non-text portions of this message have been removed]
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