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Telegraph
In a slip of the tongue two years ago, Gordon Brown claimed to have “saved the world” by galvanising his fellow leaders into a collective bail-out of the banking system. As is now ever more apparent, all he did was administer a little bit of roadside pain relief. The underlying injuries still fester.
What’s happening in Ireland right now is not, at root, a sovereign debt crisis, but another banking crisis. The reason it has spilled over into a problem of national solvency is that it has overwhelmed the country’s capacity to afford further bail-outs.
By the same token, the reason European policymakers are trying to force a rescue package on a reluctant Brian Cowen, the Irish prime minister, is not because Ireland has run out of money: in fact, its debt is fully funded until the middle of next year. It is because they fear Ireland’s banking crisis will become their own, as bad loans to Irish banks trigger a wave of insolvencies across Europe. They also worry that excessive use by Irish banks of European Central Bank liquidity, as everyone else dashes to get their money out, is undermining the ECB’s integrity, and therefore that of the euro as a whole.
The problem is that you cannot ultimately fix an underlying solvency problem by forcing a country to borrow even more. That only further reduces the chances of the debt ever being repaid. And if markets begin to believe that the countries on the periphery of the eurozone will be permanently underwritten by the rest, it will weaken the creditworthiness of the core: there is already some evidence of this in German bond yields.
In any case, constantly having to bail out the insolvent fringe will eventually become politically unacceptable among those forced to pick up the tab. In Germany, the EU’s bail-out fund is already subject to legal challenge, while in Britain, there is understandable horror at being roped into the Irish rescue. Why should our highly taxed businesses be forced to subsidise super-low rates of corporation tax in Ireland? It’s unfair and objectionable. Small wonder that senior officials at the Bundesbank have come round to the view that strong countries would do better to concentrate on shoring up their own banks against debt defaults in weaker countries, rather than propping up the weaker economies.
Is there any way out of this mess? One thing is for sure: taxpayers can no longer be expected to pay the costs of all this rotten lending. That game of “bail us out or suffer the consequences” has been played for long enough. It’s not just intolerable, but has become a major part of the problem.
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