Expert says lower bailout interest rate will let states run up debts
Lowering the interest rate on bailout loans for Ireland or Greece will ultimately only allow "spendthrift" governments to keep ramping up their debts, one of Europe's top bond strategists has said.
Ciaran O'Hagan, a senior bond strategist with Societe General in Paris, said such measures could be "counter-productive" and could even frighten investors.
Mr O'Hagan, an Irishman who is familiar with Ireland's budgetary strategy, said even an expansion of Europe's rescue fund -- the European Financial Stability Facility (EFSF) -- was not a "game changer".
"Most of the propositions do little or nothing for fiscal rectitude. An EFSF extension is not a game changer. Nor is cutting the interest charged on Ireland/Greek loans and extending their maturity. In fact, measures that allow spendthrifts to further increase their indebtedness are counter-productive," he said.
"EU governments, in their collective wisdom, do not seem to share that view, however. Any fresh EU support for spendthrift sovereigns we hope will still be offered on an all-or-nothing basis, like for Ireland."
He added: "One or two countries might want a modest loan, maybe for their banks or for capital spending, thus avoiding tough fiscal conditions.
"Such 'solutions' will frighten investors even more. A modest loan of a few billion to a government just might have a short-term advantage. It would be difficult, though, to offer more liquidity and not add to moral hazard at the same time."
Mr O'Hagan said that European governments were trying to restructure some sovereign debt starting in 2013.
"They want to get laws in place over the next two years for restructuring in 2013. However, to stay on course, they might need to buy time this month with more ad-hoc measures," he said.
"A comprehensive and sufficient solution for us is that the big-spending governments cut their budget deficits substantially [like Latvia had to do]."
The periphery of the eurozone had yet to see measures even approaching what was tried in Latvia, added Mr O'Hagan.