It has been 20 years since Bob Geldof and Bono urged us to “drop the debt” for the world’s poorest countries – and now the call has gone out for a Covid-era write-off for the wealthy eurozone.
Back in the day, campaigners gave a huge push to write-offs for so-called heavily-indebted poor countries. Now 150 economists have signed a letter urging the European Central Bank (ECB) to take a similar approach with its share of the bonds of the heavily-indebted but rich countries of the eurozone.
The call has been met with a ‘no’ from Ireland’s Philip Lane and a ‘non’ from ECB head Christine Lagarde, who says it falls foul of a ban on monetary financing of deficits by the central bank and that a write-off would be “unthinkable”.
Burning bondholders was ‘unthinkable’ at the ECB back in the days of the financial crisis. Back then, ECB orthodoxy said profligate PIIGS, including Ireland, could be dealt with by a dose of EU, ECB and IMF-inspired austerity and ruled out debt write downs.
The pandemic has pushed Italy’s debt close to 160pc of GDP while France and Spain are nosing 120pc. There is zero chance these debt levels will get anywhere near the EU’s 60pc limit without austerity.
The kind of debts that we see are likely to persist for decades and potentially have a very large impact on economic growth.
The ECB now holds €2.9trn of eurozone debt, a quarter of the total, and there’s a good argument to be made that the central bank long ago overstepped its mandate to move into the realm of fiscal support for governments when it started up its bond-buying programme.
It has been financing most of eurozone bond issuance since the pandemic began, Ireland’s included. To insist – as Ms Lagarde does – that a debt write-off in Europe is unthinkable is to ignore a history going back to ancient Greece. Between 1820-2012, there were 251 sovereign defaults, and a write-off for Greece – holder of the world record for debt defaults – as recently as 2012.
Getting the ECB to burn itself is far easier than forcing losses on private investors and savers. As things stand, when bonds held by the central bank are repaid by borrowers like the Irish government the money is simply cancelled. Writing off the debt, or simply rolling it over indefinitely would not generate a loss other than on paper.
It would prompt a political backlash. There are already worrying signs that eurozone countries are reverting to their Stability and Growth Pact mindset. Europe's post Covid spending plans of just €420bn from national governments plus EU funds are stingy compared with $1.9trn in the US.
That level of government spending combined with the ECB’s cash injections is simply not enough to to plug the hole in private demand.
Unless the shadow of debt is lifted from the eurozone, we risk another decade of lost growth and unemployment.
The ECB itself has nowhere to go with monetary policy. If the stagnant growth pattern we saw before Covid persists, even deeper cuts to interest rates are more likely to destabilise the eurozone economy than to help.
Once the ECB indicates it is going to taper its bond purchases, bond yields will rise just as they did in the US in 2013, making debts unsustainable, resulting in defaults driven by markets.
It took four years for the ECB to get to the stage of “whatever it takes” in 2012. It needs to be a lot more nimble this time round.
Maybe its time for Geldof and Bono to serenade Ms Lagarde.