Global crisis threat as states' debts balloon
WELL, now we know what would have happened. Back in the early part of last year, the most frequently asked question here in Ireland was: "Will the IMF (International Monetary Fund) come in? Will the EU/ECB come to the rescue? What will the conditions be?"
Tough budgets and some nifty footwork on the debt markets by the National Treasury Management Agency -- especially last month's €5bn loan from a group of banks -- meant we never got to find the answers. Instead, we are getting them from Greece, plus a few more we did not expect.
Back last February, hardly anyone asked whether a fiscal crisis in Ireland could threaten the credibility of the entire eurozone. No one, to my knowledge, asked if it might prompt a second global credit crisis. Yet that appears now to be a real danger.
Yesterday, the trouble spread to Asia. The difference widened between what people were willing to pay to insure against governments and big companies failing to repay their debt, and what insurers were willing to offer.
The dreaded word "liquidity" was heard again, meaning that it was hard to actually trade in the circumstances. That, as we know from 2008, can be self-reinforcing, as institutions lost confidence in the reliability of others with whom they trade, and hang on to their cash.
One sure sign of such fears is a rise in the US dollar. This is more than paradoxical, since the USA is by far the biggest threat to global debt markets. President Obama's budget, unveiled this week, proposes borrowing of almost $1.6 trillion ($1,600bn) this year, with few ideas on how this gigantic sum can be reduced in future years.
Even so, when the search is one for safety, institutions and companies buy dollars.
One US analyst neatly summed up the situation by saying that the huge risks in the private sector -- mostly caused by bank losses -- had been transferred to governments, as they stepped in both to rescue banking systems and prop up ailing economies.
We know all about that in Ireland. The economic crisis has forced the Government, even after the Budget taxes and cuts, to borrow more than 11pc of output (GDP). Money taken from the national pension fund to re-capitalise the banks is increasing the important figure of net debt.
The NAMA transfer looks like adding another €10bn to that, although the actual figure is open to argument and will not appear on the Exchequer figures.
Benefit of the doubt
For now, debt markets are giving Ireland the benefit of the doubt, but they are taking a much harsher view of Greece and Portugal. One reason is that both countries have pretty much permanent difficulties with their public finances. As a result, total government debt is a good deal higher than Ireland's.
In the current climate, it is not clear how much debt lenders are willing to tolerate. Greek government debt is already 110pc of GDP, and this year's planned deficit would increase that to 120pc. Irish government projections see our national debt peaking below 90pc of GDP in 2013.
That may be optimistic but, whatever the countries' borrowing capacities may be, it is clearly greater for Ireland than Greece. Worse, €25bn of Greek government debt has to be repaid and replaced this year. The cost of that looks like being more than 6pc, but it may not be possible to re-borrow it at all.
That is how countries usually default -- not because they cannot pay the interest on their debts, but because lenders will not provide the funds to replace existing loans as they fall due. Even if markets believed Athens and Brussels that the deficit can be slashed over the next five years, it still might not be enough.
But as Greek tax officials go on strike, and the riot police get ready for more action, too many do not believe it anyway.
Rioting aside, it is worth saying that Ireland exhibits uncomfortably close parallels to countries with perennial public finance problems. There is a mismatch in the political discourse between what is affordable in public spending and what is demanded.
It has been a problem since the 1970s. It is sadly obvious that the rapid growth of the late 1990s resurrected the problem after the painful stability achieved up to 1997.
Ireland is again showing that it can deal with a crisis; it has yet to show that it is prepared to make sure they do not happen.
Had we not dealt with the one last spring, we can assume that, as with Greece, the debt markets would have dried up and the EU Commission would have insisted on swingeing cuts. There is no political appetite to have the IMF assist a eurozone country, although there seem to be no objections for it helping other EU states.
This was more or less the answer one gave to those questions back then. That the spending cuts and tax rises would be much the same whether we accepted them ourselves, or were forced to by the markets and outside authorities. That it is less expensive in terms of interest rates, as well as less humiliating in terms of reputation, to bite the bullet voluntarily.
But there is one great difference between the IMF and the commission. The IMF can provide bridging loans while the markets wait and see what is going to happen. The commission cannot.
Athens must go out to the markets and persuade them that the deal with Brussels, and the careful monitoring of its implementation, is good enough for them to open their chequebooks. At this stage, that looks like a pretty tall order.
If it fails, euro-area governments will be left with a stark choice. Do they let Greece -- a euro member -- ask the IMF for assistance, or do they pony up themselves and keep it in the euro family? If they provide the loans, the euro area will have changed fundamentally, with long-term political consequences which are impossible to gauge.
As Gillian Tett of the 'Financial Times' sees it, the US hedge funds, which would never have much time for Europe, are betting billions that Greece will be forced out of the single currency. Traders in Europe are more cautious, knowing that there is enormous political determination to see that this does not happen.
Determination alone, though, may not be enough. It may have to be backed up with cash. And even if it is, with the government debt genie well and truly out of the bottle, saving Greece may not be the end of the story.