Monday 25 September 2017

Maeve Dineen: Misguided EU threatening to drag us all over a cliff

THE past few weeks have shown up the chronic problems with the European Union's sclerotic decision-making process. Apologists for Europe's slow-but-sure approach like to argue that Europe always gets there in the end. This is often true, but not this time.

The great financial crisis has shown that the European Commission and European Central Bank are not up to the job. Indeed, they are so unfit for purpose that the top brass still don't understand that we have a solvency problem rather than a less serious liquidity problem here in Ireland, in the other bailout nations and in some major banks in mainland Europe.

We've been here before, of course. Our own officials initially dismissed our banks' problems as simple liquidity problems. So did the US Federal Reserve and the Bank of England. The ECB is in august company when it makes the same mistake. The difference is that the ECB either won't or can't learn.

It is said that fools learn from their own mistakes while wise men learn from other people's. It is time for the ECB to show a little wisdom and admit we are facing a much bigger crisis.

While the debate about liquidity and solvency can seem a little academic at times, it is important because each diagnosis requires a different cure.

I'm not suggesting the ECB listen to the self-interested wailing and gnashing of teeth that comes from Dublin these days; both the Government and the regulators here will need decades before anybody outside Ireland takes anything they say seriously. I'm suggesting instead that the ECB listens to peers elsewhere in the West and considers what is being said.

Bank of England governor Mervyn King is the latest financial heavyweight forced to wade into the debate. US President Barack Obama, US Treasury Secretary Timothy Geithner and IMF acting chief John Lipsky have all warned the EU to get its house in order before its lack of decisiveness drags everyone over the cliff together.

In highly unusual comments last week, Mr King warned the EU that stopgap measures to extend new loans to countries such as Greece, Portugal and Ireland would not solve the eurozone debt crisis because the ECB has made the wrong diagnosis. "An awful lot of people wanted to believe it was a crisis of liquidity. It wasn't, it isn't. And until we accept that, we'll never find an answer to it," he said.

His comments added weight to a Citigroup research note published the same day, which said Greece, Ireland and Portugal are unlikely to look any better in three years' time if the eurozone continues to treat the crisis as one of liquidity.

The markets know who owns Greek or Irish bonds. On top of this, the banks that still hold a big chunk of the bonds are in better shape to absorb losses today than they were last year as they are now stuffed with capital.

The analysts at Citi looked at all three bailed-out count-ries and suggested that for Greece to get back to debt levels in accordance with EU rules, haircuts on bonds could be as steep as 77pc. Interestingly, they could range as high as 65pc for Ire-land and 62pc for Portugal.

To do this, bondholders would have to take far-reaching discounts or "haircuts'' on their bonds, the bank said. This would involve huge defaults by Greece, Ireland and Portugal of possibly over €100bn each.

An orderly restructuring would be risky. But one of the many wonders of this euro crisis is how the impossible turns into the inevitable in a very short time. We are facing the inevitable and the can that is being kicked down the road is getting heavier and louder by the day.

Irish Independent

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